Part 4
THE SCHMIDT OFFSHORE REPORT
Vol 1, no 4 - June/July 2004
CONTENTS
NEWS
- Property partnerships head south
- Switzerland banking secrecy survives
- Ernst & Young named but not ashamed
- ATMs – money launderer’s dream
- Tyco vote to stay in Bermuda
- Al-Fayed faces tax investigation
- Australian Tax Office target tax havens
- Maltese confidentiality rules to be watered down
- FATF remove Ukraine and Egypt from non-cooperative list
- Isle of Man prohibits bearer shares
- Bahamas issued guidance on unidentified customers
- UK legal privilege attacked
TIPS
- UK investors can still benefit from foreign structures
- Cast-iron confidentiality
- Protecting your assets
- UK-resident non-domiciliaries
- You don’t have to be rich to take advantage of Swiss residency
- Great Britain: the ultimate offshore tax haven
- Making a British exit
- The US as tax haven
FEATURE ARTICLES
- HOW THEY GET TO KNOW YOU
- LEAVING LAS VEGAS… AND THE REST OF AMERICA AS WELL
This month’s issue of The Schmidt Offshore Report has five separate elements: my editorial, a news section, feature articles, tax tips and warnings, and answers to readers’ questions. I would like to emphasise that all correspondence is treated in the strictest confidence and that if you wish to write to me anonymously I will publish the response in the next available issue of the newsletter.
In 1877, William Gladstone, prime minister of Great Britain, wrote a letter to the Inland Revenue commending it on its exemplary record:
“I find continually increasing reason to admire the sound and enlightened spirit of the department,” he wrote, adding that he was unable to recall “a single instance of either rashness or slackness”.
Gladstone’s letter is framed in the reception area of the Inland Revenue’s offices at London’s Somerset House. No other prime minister in the last 127 years seems to have shared Gladstone’s enthusiasm for the Inland Revenue. Indeed, no other framed letters are on view. It isn’t just that the Inland Revenue are unpopular with taxpayers. The department has struggled with a run of negative publicity on tax-credit failures, national-insurance errors and a bungled property deal. A series of embarrassing management errors have contributed to the view that an overhaul is necessary.
Perhaps the worst mistake was the sale of the Revenue Buildings to a company based in an offshore tax haven. Not only did the deal undermine the drive against tax avoidance but officials failed to inform ministers until after it was signed. In April last year, the Revenue angered hundreds of thousands of people by failing to make prompt payments of tax credits to them. Then, in June, they revealed they had not swiftly alerted ministers to a fiasco over national-insurance contributions. Millions now face catch-up payments or lower state pensions because of the failure to send out reminders for six years.
There were problems with their online system for self-assessment, which had to be taken offline for a month after taxpayers discovered that they could see the tax affairs of others. And, in November, the Revenue had their tax-credit accounts qualified by the National Audit Office after a report revealed overpayments of £2 billion. Customs have also come under fire after a huge fraud investigation went badly wrong, costing as much as £2 billion in evaded excise duty.
What’s the relevance of this to offshore tax planning? The Inland Revenue are in turmoil at the moment. This offers determined and unhappy British taxpayers a number of clear benefits. First of all, there is an increasing chance that the Inland Revenue are less likely to spot a piece of tax planning that falls into the ‘grey area’. Secondly, since the Revenue frequently get it wrong, those taxpayers willing to pay for good professional advice have a greater chance of defeating the taxman if challenged.
As explained elsewhere in this issue of The Schmidt Offshore Report, the UK is one of the world’s most advantageous tax havens for non-domiciled individuals and companies. If you are domiciled in the UK (and even if you are resident), there are still plenty of opportunities for international/offshore tax planning. Yes, the offshore environment has changed, and changed for the worse. But all this change has left the tax authorities stretched and confused. Maybe it is a good thing that Tony Blair hasn’t written to the Inland Revenue to say how much he admires their sound and enlightened spirit!
You should never be afraid to challenge the tax authorities in the country in which you reside, if you are sure of your facts. Let me give you an example.
We recently received a letter from a UK-domiciled international-aid worker who had left the UK in the early 1990s to work for various organisations including the Red Cross, Oxfam, Christian Aid and the United Nations. She worked on a contract basis – each contract lasting between six months and two years – with periods of unemployment in between. During these periods of unemployment, she frequently came back to the UK where she stayed with her parents or friends. When she originally left the UK to take up the first of these contracts, she’d completed a P85 and considered herself, therefore, to be non-resident. Certainly, she had never spent more than the permitted 90 days per year in the UK.
Despite the fact that it was clear she was not resident in the UK, the Inland Revenue had refused to repay tax deducted on a PAYE basis from some of her earnings. The Inland Revenue’s argument was that the taxpayer did not leave the UK for the purpose of “a single employment contract exceeding one year and spanning a complete tax year”. Her UK accountant – believe it or not – agreed with the Inland Revenue! However, we urged the reader to stand firm with the Inland Revenue, arming her with the necessary ammunition with which to fight back. In particular we pointed out that:
• her pattern of life established over a number of years indicates that she spends the bulk of her time abroad
• the ‘days test’ was met in full with visits being fewer than 183 days in any tax year and averaging fewer than 91 days a tax year
• the Inland Revenue’s own manual on the subject states that temporary breaks in employment will be disregarded providing the days test is not broken.
Once the Inland Revenue had acknowledged that the taxpayer was not resident, then there could be no liability for UK income tax and thus the full amount of the PAYE tax had to be repaid.
Looking for a really different offshore centre? Then why not consider relocating yourself and/or your business to Svalbard?
Svalbard – the ice-packed archipelago in the high Arctic, around 500 miles north of the Norwegian mainland and less than 600 miles from the North Pole – is about to become one of the world’s best-connected business locations.
When a switch is flicked this autumn, two under-sea fibre optic cables will deliver ultra-fast Internet access to the 1,700 people in Svalbard’s chief settlement, Longyearbyen. The twin cables run 800 miles along the bed of the Arctic Ocean a depth reaching almost 10,000 feet. That makes them some of the deepest-ploughed cables in the world and the only known undersea cables beneath ice.
The project’s US$50 million tab is being paid for by the Norwegian Space Centre. Why? At 78 degrees north, Svalbard’s proximity to the North Pole makes it ideal for collecting satellite data: from Svalbard’s satellite station it is possible to view all 14 daily circuits of polar orbiting satellites.
However, local leaders hope that their newfound connectivity will make Svalbard a prime business destination. Telenor Svalbard, the local telecom supplier, plan to pipe high-speed Internet access, up to 30 digital TV stations and movies on demand to 980 homes around the island. Business customers will be able to buy bandwidths of up to 155 megabits a second (when you consider that the average bandwidth in many parts of the world is about 1 megabit, you can see how this is obviously enormously fast). There are other perks to setting a business up in Svalbard. Relocating workers will be able to enjoy the Northern Lights, free national parks and plenty of fantastic scenery. Then there is the fact that, thanks to a 1920 treaty which gave more than 40 countries equal rights to exploit Svalbard’s resources, the archipelago has its own income-tax laws, and corporations pay a flat rate of 10%.
Jesting aside for someone interested in setting up an international Internet-based business, Svalbard can offer some great IT and tax benefits.
I am indebted to Ian Peel, a reader in Gibraltar, for writing to me about the actual effect of the various campaigns against so-called harmful tax competition. Ian has been studying how various countries responded to the EU’s and OECD’s efforts to get rid of harmful tax competition. He started by looking at what had happened in Ireland. Very early on, the Irish Government – realising that their Dublin and Shannon tax-free schemes would be destroyed if the EU and OECD had their way – took the ingenious step of slashing all corporate tax to 12.5%. By having a generally low tax for everybody, they met the EU/OECD requirement that there be a generalised rate without exceptions.
Other countries have followed the Irish lead. Cyprus now has a generalised low corporate tax regime of 10%, though in reality this can actually be avoided by all non-resident companies, and Malta, Gibraltar, Estonia, Aruba and the Netherlands Antilles have all (or are all about to) also adopt a general low rate of corporation tax. I also believe that Jersey, Guernsey and the Isle of Man will do the same. In some of these countries, corporate income tax will be zero percent and, because it applies to both onshore and offshore companies. neither the EU nor the OECD will be able to complain.
When the EU and OECD started their war on offshore financial centres, what they obviously intended was to drive them out of business. Instead, they have actually strengthened the hand of many such jurisdictions, who have simply wiped out corporate tax completely or dropped it to a very low rate. These jurisdictions are replacing the loss of revenue by increasing VAT, property taxes and employment charges, which may be bad news for local residents but is good news for the offshore industry as a whole.
The corporate-tax environment is, of course, only part of the story for the 47 jurisdictions originally under attack by the OECD. Another requirement was that the jurisdiction should offer effective exchange of information and transparency. This, of course, poses a problem for those to whom confidentiality is key. However, as discussed in the last issue of The Schmidt Offshore Report (and elsewhere in this issue) there are ways of ensuring absolute confidentiality is maintained.
Property partnerships head south
From July, UK-based limited partnerships will have to pay 4% stamp duty on transactions. As a result, property funds are shifting billions of pounds out of the UK to Jersey where no such stamp duty charges will be levied. It is estimated that almost all of the £17 billion of UK property owned by limited partnerships is now likely to end up offshore. Among the groups making the move to Jersey are Morley Fund Management (£2.5 billion), Legal & General (£2 billion) and Aberdeen Property Investors (£700 million). Lend Lease, the Australian company which own Bluewater, one of the UK’s biggest shopping centres, confirmed they were setting up an offshore scheme too.
Switzerland banking secrecy survives
The EU and Switzerland have overcome the main hurdle in their deadlocked negotiations over a deal on savings tax after the EU agreed to allow Switzerland to maintain banking secrecy. The deal allows EU member state and former offshore banking having Luxembourg to maintain the same level of secrecy enjoyed by Switzerland, which is not part of the EU. Tax evasion is not, of course, a crime in Switzerland, and as a result the Swiss Government have strongly resisted pressure put on them to exchange information with EU tax authorities.
Ernst & Young named but not ashamed
The British Inland Revenue and Customs and Excise are both embroiled in litigation with companies that have used avoidance schemes devised by Ernst & Young. Amongst the big four accounting firms, Ernst & Young have distinguished themselves as the most aggressive promoters of “abusive” tax-avoidance schemes, according to Whitehall officials. Aidan O’Carroll, UK head of tax at Ernst & Young, recently told the Financial Times, “We are not into selling abusive tax schemes.” He said business and the government did not always agree on the boundary between acceptable and unacceptable tax avoidance, but he pledged that his firm would abide by the new disclosure requirements on avoidance schemes.
ATMs – money launderer’s dream
Thailand is rapidly becoming the centre of sophisticated money-laundering schemes due to the strict banking secrecy laws that keep debit-card transactions concealed. An anonymous Plus, Cirrus or Maestro debit card can be used globally at ATMs as well as to facilitate purchases. As one leading forensic accountant put it: “Lax controls, ease of access, virtual anonymity and difficulty in monitoring a vast number of daily transactions makes the use of automated teller machines a natural for anyone who wished to hide cash transactions.” A report in the Washington Post suggests that US citizens are travelling to countries where less-rigorous background checks are made on new account customers, depositing cash, applying for credit cards and prepaid bearer debit cards and then withdrawing the cash at other locations as and when it suits them. By keeping the size of each individual transaction down, they are avoiding detection.
The suspicious activity reports (SARs) filed in the US indicate three common patterns of cash transaction structuring:
1. Customers in the US make multiple cash deposits and withdrawals on the same day. These transactions will sometimes take place at a single ATM or at multiple locations.
2. Daily withdrawals are made using a combination of transactions, each less than $10,000 but aggregating to more than $10,000. For example, a cheque worth $9,500 is cashed and then $500 is withdrawn from an ATM.
3. More than one-third of SARs involve international activity. Funds are deposited as cash or wired into accounts in the US from other countries. Over a short period, they are subsequently withdrawn from ATMs in different countries – usually those with a high risk of money laundering or drug trafficking. The situation is made more complicated by the growing trend for independent service operators. This is where ATMs are not bank owned but are operated as separate businesses run by independent operators.
Technically, the US and other governments are concerned about this because of the potential use of ATMs to fund terrorism. However, the truth is they know that ATMs are now being used by those wishing to evade tax and – for the time being – there appears to be very little they can do about it.
Tyco vote to stay in Bermuda
Tyco shareholders have voted to maintain the US-based conglomerate’s incorporation in Bermuda, in spite of increased American political pressure on companies located in tax havens. In results announced at their annual shareholders meeting, Tyco said 93% of the shares voting were cast in favour of keeping its Bermuda incorporation. By doing so, Tyco remains a high profile target for increasing criticism of US companies seeking favourable tax status offshore. As reported in the last issue of The Schmidt Offshore Report, many members of the US Congress have called for restrictions on government contracts with companies that have changed incorporation to tax havens. Interestingly, Tyco’s announcement caused the shares to rise a dramatic 5%!
Al-Fayed faces tax investigation
A Scottish court has given the go-ahead for a major tax investigation of Mohamed Al-Fayed and his business empire, including Harrods and Fulham Football Club. Mr Fayed had complained that Inland Revenue plans to sift through his financial affairs relating to two years in the late 1990s were unreasonable and an abuse of their powers. Lord Reed said that tax officials could be criticised for a number of shortcomings in the case, but he ruled that their decision to launch a comprehensive enquiry into Mr Fayed had been free of political interference and was made in good faith.
In a judgment issued at the Court of Session, Lord Reed said that Mr Fayed worked as a director of major companies but did not appear to be paid a salary. He lived in expensive accommodation (two flats in Park Lane and a castle in Scotland) but did not appear to own or rent it. “The private aircraft, the yachts, the horses, the domestic staff and other trappings of wealth are similarly provided by a variety of companies, most of which are located offshore, in such jurisdictions as Lichtenstein and Jersey,” he added. The natural inference from the evidence he had heard, Lord Reed said, was that a great deal of ingenuity had gone into creating networks of offshore companies, trusts and other entities to minimise liability to tax.
“In the face of such opaque and sophisticated arrangements, it is important that the Revenue should be able to ensure UK tax liabilities are accurately assessed and accounted for,” Lord Reed added. The Fayed family’s tax position will be investigated by the Large Business Office, in Glasgow, and the Special Compliance Office, in Edinburgh.
Australian Tax Office target tax havens
The Australian Tax Office (ATO) have set up a special task force to tackle abusive arrangements between Australian taxpayers and 38 OECD-listed tax havens. They said the task force also had a focus on Switzerland because of bank-secrecy issues. The type of schemes coming in for special attention are those that seek to create deductions in Australia, avoid tax on tax-haven income or provide access to tax-haven funds on which no Australian tax has been paid. The ATO have published a special guide to assist taxpayers to understand what is legal and illegal in their dealings with tax havens.
Maltese confidentiality rules to be watered down
Now that Malta is part of the EU, the Maltese Financial Services Authority are introducing legislation designed to remove the confidentiality of those involved in establishing trusts. Beneficiaries of trusts represented by nominees will now have to disclose their identities. At the same time, the nominee-company regime is to be changed. Proposed amendments will eliminate ring-fencing whereby beneficial owners can hide behind nominees.
Malta still operates one of the most favourable tax packages for those wishing to claim residence. For an annual cost of less than £10,000 a year, an individual can meet all of his obligations to worldwide tax. As a resident of Malta, there is no need to spend a minimum amount of time in the country during the year. This compares favourably with many other tax havens.
FATF remove Ukraine and Egypt from non-cooperative list
The Financial Action Task Force (FATS) have removed the Ukraine and Egypt from their list of non-cooperative countries and territories, following substantial reforms.
Isle of Man prohibits bearer shares
On 1st April 2004, the Isle of Man’s Government enacted legislation that prevents companies from issuing new bearer shares. The rights attaching to any existing bearer shares will not be extinguished but can only be exercised by the company registering the holder of the bearer share as a registered shareholder. From the same date, Isle of Man companies will be required to make a declaration of accounts as part of their annual return.
Bahamas issued guidance on unidentified customers
The Central Bank of the Bahamas have issued a guideline to banks and trusts on submitting information on customers they have not properly identified under the anti-money-laundering rules. Where a bank or trust company has not identified the beneficial owner the Central Bank have the power to freeze the customer’s accounts until verification of identity has taken place.
UK legal privilege attacked
The UK’s Court of Appeal upheld the decision that legal privilege did not apply to communications between solicitors and their clients when the dominant purpose was not the obtaining of advice and assistance in relation to legal rights and obligations. The relevant case (Three Rivers District Council and Others vs. Governor and Company of the Bank of England) is complicated and only relevant in so far as any individual using a UK solicitor should ascertain at the earliest possible moment that the information he provides will be privileged.
UK investors can still benefit from foreign structures
In general, UK-based offshore investors face tighter anti-money-laundering regulations, fewer tax breaks and less investor protection than they would generally find at home. Nevertheless, according to a recent article in the Financial Times, some tax advantages to offshore wealth management remain, as well as a greater choice of investment vehicles.
For an investor who is resident in the UK as well as UK-domiciled, there are no tax advantages to having assets managed offshore. This is because UK residents are taxed on their worldwide income and gains and thus will be taxed on any money brought into the UK. This said, canny investors can use offshore structures to take advantage of rules that mean gains on an investment held offshore are only taxed when the investment is cashed in. This is one of the reasons for the otherwise baffling popularity of offshore insurance bonds, which provide a ‘wrapper’ for investments whose gains roll up within the bond.
Tax-free withdrawals can be made at prescribed intervals, and gains are taxed only on the encashment of the bond. This may have advantages for lower-net-worth individuals who move from being higher-rate tax to lower-rate taxpayers, for example on retirement. Other tax advantages for the UK-resident and -domiciled investor offshore have been gradually whittled away, with legislation passed in 1991 and 1998 effectively ending the regime of paying tax on a deferred basis for offshore trusts.
Cast-iron confidentiality
Investors looking for a totally confidential, portable, liquid and potentially profitable home for their money could do worse than consider the benefits offered by precious metals. With a hesitant recovery in the US economy, a poor economic climate in Europe, not to mention benign inflation, now is not the time you would expect to see many commodity prices moving up sharply. Yet that is precisely what they have been doing, driven by economic growth in China, demand for spread betting in precious metals and hedging against stock-market portfolios.
Investors focusing on the prospect for a revival in some of their old stock-market favourites or at the upper apocalyptic end of the spectrum on prospects for gold may have missed a trick, according to an article in Investors Chronicle. It is alternative metals, precious or otherwise, that have been making the running in the past six months. So much so that one argument for buying gold now is that it has been lagging sharply behind advance in the price of silver and platinum. Consider the following:
• Silver hit an eight-year low in 2001 at US$4.15 an ounce. It is currently close to double this figure.
• Platinum’s low was around US$420 an ounce – it now stands at US$900.
• Aluminium is up from US$1,250 per tonne to US$1,750 a tonne during the same period.
• Copper has trebled in price, nickel has quadrupled in price and even lead has doubled in price in the last three years.
Of the different precious metals you could choose to invest in, the most practical are really gold and platinum. It is worth bearing in mind:
• gold bought for investment purposes does not attract VAT in the UK or the rest of the EU
• buying any other ‘white metal’ for investment does
• if you are buying bars or bullion coins, you should do so offshore to avoid VAT
• bars tend to be cheaper weight for weight, but many investors prefer coins because of their size, particularly in the case of metals like platinum that have a heavy weight price
• white metals are available as coins, like the Platinum American Eagle, the Canadian Maple Leaf and the Isle of Man Noble.
If you are buying precious metals in relatively small quantities, there is no reason why you shouldn’t transport them yourself. An anonymous businessman recently told Le Figaro, in France, that he simply mixed coins in with his own loose change and placed them in the little plastic tray supplied when you pass through the metal detectors at airports!
Protecting your assets
Originally, it was American citizens who started to use Asset Protection Vehicles in order to protect their assets from litigious creditors and – in some instances – the effects of divorce or separation. The most popular Asset Protection Vehicle was that of an offshore trust. A side benefit of this was potential tax savings. Now, of course, it isn’t only US citizens who fear litigious creditors. High-net-worth individuals in and out of business are increasingly concerned about the loss of assets as a result of factors beyond their control.
An offshore asset-protection trust may not, however, be the best way to protect one’s assets. This is because courts all over the world will frequently look through the trust – especially where they may be some question of what is referred to as “fraudulent transfer” – no matter how unjust this is. Offshore asset-protection trusts have also come into the firing line from the IRS, who now demand that taxpayers, trustees and other professionals provide them with all sorts of additional information relating to these vehicles.
Happily, there is a solution.
To quote Charles Cain, a leading expert in this field, “Go back to first principles. We need to park assets offshore into an entity which is both transparent for tax purposes and which provides substantial asset-protection capability. We now know that the trust is subject to many difficulties, but these do not afflict limited-liability companies (LLCs). A properly designed LLC can provide tax transparency, as well as powerful asset protection features, which are not vulnerable to the shifting sands of trust law.”
Cain is particularly keen on Isle of Man LLCs. He points out that no US court can have jurisdiction over an Isle of Man-based LLC. Only the Isle of Man’s courts have jurisdiction. An order made by a US court requiring the US client to instruct the overseas trustee to instruct the LLC to distribute the assets will not be enforced in the Isle of Man. The only circumstances under which the Isle of Man might consider distributing the assets of an LLC to anyone other than the nominated beneficiaries is if, at the time of establishment, the settlor was insolvent, unable to meet all his known and ascertainable creditors or had some intent to defraud creditors. In other words, unless you were a fraudster, an LLC will make an ideal asset-protection planning tool.
UK-resident non-domiciliaries
If you are UK-resident but not UK-domiciled, you should consider establishing a new capital gains tax (CGT) base cost for overseas assets in advance of any change in the UK’s domicile rules. A particularly suitable method would be to transfer the assets into an offshore trust or, where they are already in trust, distribute them into another new trust. The trust route has the advantage that the gain realised is a deemed gain which is impossible to remit to the United Kingdom.
Shares in United Kingdom private companies could become foreign situs assets by means of converting them into bearer warrants. There is stamp duty on issue and there are drafting issues to watch; in particular it is essential to ensure ease of marketability. The bearer document should then be physically taken overseas.
You don’t have to be rich to take advantage of Swiss residency
It is generally assumed that in order to take advantage of the favourable tax climate offered by Switzerland you have to be super rich. While this used to be true, EU nationals can now move to Switzerland with relative ease and take advantage of some extremely low tax rates. How can this be? The situation arises out of a series of bilateral agreements that were signed between Switzerland and the European Union and which came into effect on 1st June 2002. Under these agreements, there is freedom of movement for Swiss citizens to live anywhere in the EU and for EU citizens to work and live anywhere in Switzerland. There are no age restrictions – you can be as young or as old as you like – and the only two requirements which must be satisfied are (1) that the applicant has sufficient financial resources to enable him and his dependents to live in Switzerland without the possible need of resorting to the Swiss social security system (this is normally demonstrated by a letter couched in general terms from the foreign or the Swiss bank of the applicant) and (2) proof that the health-insurance policy of the applicant extends to and fully covers medical expenses in Switzerland. That said, if you wish to live in Switzerland, you must not carry on a salaried, remunerated activity in Switzerland.
Once resident in Switzerland you can take advantage of something called the forfait fiscal – or lump-sum – system. As the leading expert Richard Pease comments: “Under the lump-sum arrangement, the foreigner is taxed on his deemed expenditure in Switzerland and that includes the cost of his living accommodation, clothing, travel, food, insurance premiums and general overheads. But in no event can the sum be less than the amount which is equal to five times the rental value of the apartment or house in which he or she lives.”
Let’s look at a practical example. Let’s say that you are renting an apartment for SwFr30,000 a year. Five times that is SwFr150,000, and that would be considered your deemed income regardless of what your true income may be. There would be no necessity to declare your real income. On a SwFr150,000 income typically the total tax bill would be less than one-third –SwFr40,000 – in other words, in the region of £20,000 a year. Of course, if you can find somewhere to rent for less than your tax bill, this figure would be even lower.
There are a few things to be careful of. To begin with citizens from certain countries – notably Denmark, Sweden, Canada, the US, Germany, Belgium, Italy, Austria and Norway, all have restrictive provisions in varying terms. For example, if you move to Switzerland from Sweden, you can’t take advantage of the lump-sum systems for three years.
Those familiar with the volatile nature of tax-incentive programmes designed to encourage emigration will want to know if the lump-sum tax arrangement is here to stay. Richard Pease believes it is. Indeed, he says: “In recent years, it has been extended because, under the tax-harmonisation programme that we have in Switzerland, which seeks to introduce a certain conformity in terms of taxing periods and rules of deduction between the cantons, the ability of each and every canton to offer the lump-sum basis was firmly enshrined.”
Great Britain: the ultimate offshore tax haven
If you are not UK-resident and, in particular, if you are not UK-domiciled, do not overlook the benefit of using the UK as part of a tax-efficient offshore structure. Why is it so good? Because the UK is viewed by the rest of the world as a high-tax country. Bluntly, the UK isn’t viewed as an offshore financial centre and it doesn’t appear (nor has it ever appeared) on anybody’s blacklist. The real value of a UK offshore entity is that it adds genuine respectability to any offshore structure. An Australian company, for example, might refuse to deal with anybody based in a known offshore centre such as the British Virgin Islands. You can be certain, however, that they would have no qualms about dealing with a company based in London.
What sort of vehicle should one use? The accountant Milton Grundy suggests something called a limited-liability partnership. Such a partnership would have a UK address and registered number but would be transparent for tax purposes. Providing that one of the partners is non-resident and that the partnership income has a non-UK source, there would be no UK tax liability.
Making a British exit
If you are a British citizen (or if you have been resident in the UK for any length of time) and you wish to become non-resident, it is important to ensure you go about it in the right way. Here are some different steps you should consider taking that will help to strengthen your claim for non-residence:
1. Don’t come back too often. You are at greatest risk during the tax year in which you emigrate – and in the year afterwards. Ideally, you should try not to return to the UK between your departure and the following fifth of April. If you do so, the Inland Revenue may not accept that you have left the country permanently until after the last such visit.
2. Get rid of your home. You should definitely consider selling your UK home before leaving the country, especially as (providing it has been your principle private residence) you shouldn’t have to pay any CGT. As an alternative to selling it, you may consider renting it. However, care needs to be taken with this as the taxman could argue that keeping property in the UK casts doubt on your intention to leave the country permanently. This is particularly dangerous where there is a short-term lease, for example under four years, as the Inland Revenue could then argue that possession would be obtained within three years of departure.
3. Show a firm intention to break with the UK. If you wish to visit the UK during your first full tax year abroad, it wouldn’t be fatal to your emigration claim, but any visits should be as few as possible and for short periods. If you were to visit for up to three months (as you are theoretically able to do without being classified as UK-resident under the 90 day test), this is likely to cast doubt on whether you really intended to live permanently abroad. The Inland Revenue could argue that you should be regarded as UK ordinarily resident and the subject of UK CGT on disposals of your worldwide assets. One way to get around this is to keep a record of the reasons for the visits to the UK, as these can demonstrate that any visits were unconnected with your ongoing lifestyle.
4. Buy or rent a property in another country as soon as possible. This will have an impact on your ordinary residence status as it will show a permanent intention to move abroad.
5. Don’t forget your spouse. If you are married and your spouse does not emigrate with you, this will make it even harder to prove that you are non-resident. Leaving a family in the UK while moving abroad – unless you can show that you have become separated – rings very loud alarm bells with the taxman.
So how does the taxman decide on residence status? When you leave the country, you will provisionally be treated as ceasing to be resident and ordinarily resident in the UK from the day of departure – providing you can produce evidence to show that you intend to live permanently abroad for at least three years. It is very important that you can produce evidence of the day of departure, since the Inland Revenue will normally treat you as remaining UK-resident and ordinarily resident if you cannot.
Remember, the big advantage of being non-resident and not ordinarily resident is that you are only liable to UK income tax on UK-source income. You will be exempt from UK CGT on all assets whether situated in the UK or overseas except for assets used in a UK trade. You won’t, of course, escape inheritance tax until you have proved that you are no longer domiciled in the UK. For a definition of UK domicile, please see earlier copies of The Schmidt Offshore Report.
The US as tax haven
In the same way that the UK is a tax haven to everyone in the world except the British, so America can be a tax haven to everyone in the world except the Americans. This will be the subject of a full-length feature in the forthcoming issue of The Schmidt Offshore Report. Meanwhile, if you are American, you might be interested to know that how much tax you pay is considerably more dependent on where you like than you might have imagined
The most wealth friendly state is Wyoming and the worst is Rhode Island according to Bloomberg’s. In a recent survey, the magazine pointed out that an identical set of tax parameters produced a bill of US$7,259 in Wyoming and US$56,419 in Rhode island.
FEATURE ARTICLES
Dr Anthony Ingams explains how financial institutions, accountants, lawyers and all the other individuals and organisations who need to ‘know their client’ set about the process.
I was recently forwarded the list of online resources detailed below by an accountant friend. I am afraid to say I don’t know who compiled the original list so I am unable to credit them. I presume it must have originated in a firm of accountants or, possibly, a bank. Essentially, it sets out all the different places an offshore professional advisor should look if they wish to discover more about a prospective client or customer. Clearly, if you are using an offshore vehicle – or planning to – it is in your interest to know how much your service providers can discover about you without your realising it. Therefore, I strongly recommend doing a search on yourself.
• If the information you find is incorrect, you can set about correcting it.
• If the information you find is correct but you feel it may put people off doing business with you, at least you will have been forewarned and can take precautionary steps.
I am extremely grateful for this research and am sorry I can’t credit its author.
Know Your Customer Online Resources
The following list is not comprehensive of all online sources for due diligence information providers but is intended to provide a sampling of such sources. It is not an endorsement of any source or company.
Search Engines – Employ text-matching techniques at no cost to the user to find pages over the World Wide Web that are both important and relevant to a user’s search:
www.google.com
www.yahoo.com
www.lycos.com
www.altavista.com
Karnak
URL: www.karnak.com
Description: Internet search engine that continuously searches for your search terms even when you are not connected to the Internet and notifies you by email when new items are found. Automatically filters out dead links. Ideal for monitoring subjects.
Cost: $
Research Databases – United States
AutoTrack XP by ChoicePoint (US)
URL: http://atxp.dbt-online.com/
Description: AutoTrack XP cross-references an enormous amount of data: addresses, driving licences, property deed transfers, corporate information and much more – and unifies it into a single report. Not available to the general public, only to attorneys, private investigators and other professionals.
Cost: $
PACER (US)
URL: http://p.acer.p.sc.uscourts.gov/
Description: Electronic public access that allows users to obtain case and docket information from Federal Appellate, District and Bankruptcy courts. Exceptional value for money. Established by the US Government.
Cost: $
CourtLink (US)
URL: www.courtlink.com
Description: Online access to federal and state court records. Considerably more expensive than PACER but far more sophisticated. Email alerts about new case filings. Automatic case tracking. Owned by LexisNexis.
Cost: $
Federal Bureau of Investigation (US)
URL: http://www.fbi.gov/search.htm
Description: Search press releases and most-wanted criminal lists, including suspected terrorists, money launders and drug smugglers. The site includes those who have been arrested for crimes, as well as those wanted for them. Many entries contain photographs of those wanted for crimes.
Cost: Free
Department of Justice (US)
URL: http://search.usdoj.gov/compass
Description: Search a database containing numerous details of various federal criminal law enforcement actions, including indictments, convictions and sentencing.
Cost: Free
Office of Foreign Assets Control (US)
URL: http://www.ustreas.gov/offices/enforcement/ofac/actions/index.html
Description: Warnings about Specially Designated Nationals and Blocked Persons and Country Sanctions, considered one of the most important databases for US financial institutions to check when screening clients.
Securities Regulators (US)
URL: http://soswy.state.wy.us/sos/security.htm
Description: Links to securities regulators in many of the 50 US states.
Cost: Free
Criminal-Records (US)
URL: http://www.criminal-records.com
Description: Criminal record searches in the Unites States and worldwide. Links to search facilities for birth records, asset searches, phone-number traces, adoption registries, deaths, marriages, divorces, licence plates, driving records and military records.
Cost: $
Securities and Exchange Commission (US)
URL: http://www.sec.gov/cgi-bin/txt-srch-sec
Description: Search the SEC’s database, including litigation releases and enforcement actions.
Cost: Free
Bureau of Prisons (US)
URL: www.bop.gov
Description: Database of people incarcerated in a federal prison, including where they are being held and their scheduled release date.
Cost: Free
Check Velocity (US)
URL: http://www.checkvelocity.com/
Description: Cross checks customers’ data against more than one billion aggregated records and government databases
Research Databases – Global or Regional
WorldCompliance (US, Europe, Asia, South America and Australia)
Description: Regulatory warning, government sanctions, civil and criminal actions, professional disciplinary proceedings in more than 180 regulatory agencies and proprietary information, including all investigative articles published in Offshore Alert, whose publisher is also the CEO of WorldCompliance.
Cost: $
Factiva (Americas, Europe, Australia and Asia)
URL: www.factiva.com
Description: News and business information, public records, legal records, detailed company information. Covers over 8,000 publications from 118 countries in 22 languages. Owned by Dow Jones and Reuters and one of the leading providers of information around the world.
Cost: $
Interpol (Global)
URL: www.interpol.int/Public/Wanted/Search/Form.asp
Description: International police organisation searchable database containing pictures and information about people wanted for a range of crimes, including terrorism, money laundering, fraud, forgery and many other categories.
Cost: Free
LexisNexis
URL: www.lexisnexis.com
Description: Massive database of thousands of full-text newspapers, journals, magazines, newsletters, news wires, broadcast transcripts and other news sources.
Cost: $
Latin American Network Information Center (Latin America and Caribbean)
Description: The Latin American Network Information Center at the Teresa Lozano Long Institute of Latin American Studies, College of Liberal Arts, the University of Texas at Austin, provides links to information sources in Latin America and the
Caribbean.
Cost: Free
SearchSystems.Net
URL: http://www.searchsystems.net/
Description: Free searchable public-record databases, covering the United States, Canada, Africa, Asia, Australia, Central America, the Caribbean, Europe, the Middle East, New Zealand, the Pacific Islands and South America.
Cost: Free
World Regulatory Agencies
URL: http://www.centralbanking.co.uk/links/index.htm
Description: Links to Central Bank, Financial Regulatory Agencies, Ministries of Finance, international financial institutions and other research facilities from around the world.
Cost: Free
Companies House – United Kingdom
URL: www.companieshouse.gov.uk
Description: Details of companies registered in England and Wales, including directors, officers, financial statements and other information. Some free searches, including disqualified directors, but most products are paid for.
Cost: Free/$
ICC Commercial Crime Bureau
URL: http://www.iccwbo.org/index_ccs.asp
Description: In addition to offering due diligence and investigative services, it has divisions that maintain international Cheque Fraud Registry to identify patterns in cheque fraud and confidential due diligence database to enable members to protect themselves against fraud. Members may have CCB Database searches, searched of public records, for example telephone directories, address databases, business directories, company registries, regulatory directories, the Internet, domain registration, newspaper websites etc., in addition to searches of private-data sources and verification of any financial instrument. They have representatives in 130 countries worldwide.
SEDAR (Canada)
URL: http://www.sedar.com/search/search en.htm
Description: Allows users to search databases of Canadian public-company and mutual-fund documents by industry.
Cost: Free
The Lubrinco Group
Description: Provides financial investigation and due diligence consulting relating to Anti-money-laundering and financial-fraud issues (including the USA Patriot Act and
prior legislation)
Description: Seeks to educate users by describing typical fraudulent behaviour on how you can manage your risk of financial fraud. Contains searchable lists of names of persons and entities alleged to be involved with fraudulent activities.
GlobalKYC.com (Malaysian Corporation)
URL: http://www.globalkyc.com/
Description: Contains lists drawn from government departments and international organisations in many countries.
Silkscreen Consulting
URL: http://www.countermoneylaundering.com/
Description: Specialises in counter-money-laundering strategies, board and senior-manager level training, seminars and workshops and the development of systems and manuals.
Risk Values (Located in England)
URL: http://www.riskvalues.com/
Description: Tool to help those in the financial services identify those account holders and applicants for business who may display personality traits that indicate the potential to enter into or use an account relationship for the purposes of funding terrorism, money laundering or fraud. Aims at forewarning financial-services businesses that an account holder is worthy of special caution.
KYC News Inc.
URL: http://www.kycnews.com/products.asp
Description: Services include exclusive investigative news about offshore finance published monthly. Focuses on exposing fraudulent businesses before their collapse, a weekly news update sent by email which contains breaking financial news and links to documents such as lawsuits, court docket sheets and dubious prospectuses, daily news headlines on white-collar crime from international media sources, searchable archive of articles, including all of those published in Offshore Alert and Inside Bermuda since February 1997.
The Diligizer
URL: www.thediligizer.com
Description: Blacklist contains the names of individuals who are defendants in lawsuits or who have had judgments and/or cease-and-desist orders against them, or who have been indicted, arrested and/or incarcerated/jailed, normally as a result of participation in fraudulent investment transactions.
Goldhaven
URL: http://www.goldhaven.com/due.htm
Description: List compiled to assist in the gathering of information on a potential investment, individual or company before entering into a business arrangement.
Free Internet Due Diligence Message Boards: intended to be a place where people can exchange information relevant to financial due diligence.
KYC News Message Board
URL: www.kycnews.com/message board.asp
Due Diligence Board
URL: http://pub122.ezboard.com/duediligenceboard
The Diligizer Board
URL: http://pub17.ezboard.com/fdiligizerduediligence
Goldhaven
URL: www.goldhaven.com
Quatloos
Investigator Firms and Companies
UK Investigators
URL: http://www.privteinvestigators.com/
Description: Network of UK private investigators offering a worldwide service at short notice, across the UK, the US, Italy, Spain, Germany, France, Mainland China, Hong Kong, Thailand, India and Russia. Offer free consultations.
Intellequest Investigations
URL: http://www.investigatorsworldwde.com/
Description: Services include security consulting, fraud investigations, asset investigations, due diligence investigations and background investigations in all 50 US states.
Detective Agency Stern
URL: http://www.investigators-germany.de/
Description: Agency based in Frankfurt, Germany, that offers asset searches, background checks, bank-account searches and due diligence for international investigations.
Peter Smith, International Investigator
URL: http://www.uk-private-investigators.com/
Description: Has an International Operations Division that has investigators fluent in German and French and that specialises in checking the credentials and records of companies and individuals on an international basis.
Private Eye International
URL: http://www.pi-international.com/
Description: Network of investigators in the US, Canada, Australia, China, Egypt, Finland, France, Germany, Greece, Israel, Italy, Lebanon, Jordan, the Philippines, Puerto Rico, Russia, Singapore, Sweden, Switzerland and the UK.
Financial Examinations & Evaluations, Inc.
Description: Specialises in comprehensive financial investigations, corporate security, and computer forensic investigations. Practitioners of due diligence, executive protection, computer forensics and corporate counter-intelligence.
Kroll
URL: http://www.krollworldwide.com/
Description: Provides intelligence that protects business ventures, minimises financial losses, increases profits, preserves proprietary data and corporate reputations, and produce successful outcomes in litigation. Services include investigative due diligence, asset searches, vendor-integrity screening and competitive intelligence.
NFC Global, Inc.
URL: http://www.nfcglobal.com/
Description: Provides products and services focused on combating fraud and reducing risk. Highly trained and experienced staff of investigators and research analysts provides service in due diligence and investigations.
Carratu International Pic
One of the UK’s premier corporate investigation companies offering a comprehensive portfolio of investigative services.
LEAVING LAS VEGAS… AND THE REST OF AMERICA AS WELL
Because US citizens and residents are subject to worldwide US income tax on all income from whatever source derived and because US citizens and domiciliaries are subject to worldwide US estate and gift tax – regardless of the location of the property or the place of the gift – a growing number of Americans are reaching the conclusion that they wish to leave the country and renounce their citizenship. Once they have left for good, they are only subject to US income tax on their US-based income. The same is true of capital gains, estate tax and gift tax. In other words, by becoming what the Americans call NRA (Non-resident alien), you can escape the US tax net on everything except your US assets. Furthermore, although there are rules that require “tax-motivated expatriates” to report themselves as such, there is very little to stop US citizens from upping, leaving and taking all their possessions with them without suffering any thought of penalty or additional tax charge.
Now, however, it looks increasingly likely that new legislation will be introduced designed to apply an exit tax to US citizens renouncing their citizenship. The nature of the American legislature means that there are not one, but two, proposals under consideration. The first is being considered by the Senate. It is called the ‘Jump Start Our Business Strengths’ (Jobs) Act and it treats the surrender or loss of US-residence status as a taxable event. The first $600,000 of gain would not be taxed, and exceptions would be made for dual nationals or those who act on turning 18 but, otherwise, the new NRA would have to cough up. Furthermore, non-compliance with US tax law and reporting would mean that the individual could no longer re-enter the US.
The second option, the ‘American Jobs Creation Act’, is in front of the House of Representatives. This is an altogether more complicated piece of law. It doesn’t propose an exit tax, but it assumes that anyone with a tax bill running to more than $120,000 a year or a net worth of over $2 million must be leaving the country for tax reasons. Such individuals would be taxed. Furthermore, any returning former citizen or resident would become resident in the US for tax purposes if they spend more than 30 days a year there. No allowance would be made for double-tax treaties either.
So, what will happen? Will either of these pieces of legislation ever become enacted? My personal view is that sooner or later the US will clamp down on those citizens who wish to leave. If you are worried that this might happen sooner rather than later – and if it is your ultimate intention to leave America for good – it might be wise to act now while both the representatives and senators are arguing between them. This is doubly true since the American legislature has a habit of making tax legislation retrospective.
Philip Canon
Q. I have been advised to use a Delaware limited-liability company or corporation for my international business transactions. I am not an American citizen nor am I resident there. Can you please explain the advantages to me?
A. The key benefits offered by a Delaware LLC are that they provide shareholder anonymity and no requirement for filing financial data. Furthermore, it is unlikely that data will ever be provided to a third party unless bound to do so by the American courts. There are more than 400,000 corporations established in Delaware, and a Delaware LLC competes directly with the international business companies (IBCs) found in most offshore tax havens. Where the LLC is established by a non-US person for a non-US activity it is free from any US tax reporting exposures or filing requirements. It is interesting to note that no changes to these rules are currently anticipated. Perhaps most surprisingly of all, Delaware law does not require the local corporate service provider to obtain beneficial ownership information on establishment of the company, only the name of the person requesting the company is required. Since in many cases the customer will be a company-formation agent located in another country, no data will ever be collected in the US regarding the beneficial owners. Perhaps it isn’t surprising that Delaware describes itself as “the incorporating capital of the world”. Given that a Delaware LLC can be formed in about an hour for less than $100 and that its corporate registry stays open until midnight seven days a week, the claim is probably perfectly justifiable.
If you are looking for a totally confidential offshore vehicle then, as it currently stands, Delaware clearly has its advantages. No changes to the current rules have been proposed, though – presumably sooner or later – the federal Government will seek to apply the same sorts of restrictions that they wish to impose on offshore tax havens.
Q. I’ve heard that if you are a writer, painter, artist, film-maker or some other type of creative person you don’t have to pay tax in Ireland. Is this true? How do I get to qualify? Is there anything to stop me passing someone else’s work off as my own?
A. As the law currently stands (and from time to time it looks as if the Government may change it), those involved in a recognised form of creative endeavour do not have to pay tax on their earnings from that endeavour. In other words, if you write a novel, any money you receive from selling the rights to that novel is yours tax-free. Interest earned on, say, a bank deposit would – however – be liable to Irish tax.
The regulations were introduced by Charlie Haughey as a way of attracting creative people to Ireland and in order to encourage the arts. A special department within the Irish Revenue Commissioners deals with applications for eligibility. Advance rulings are possible and – if you are considering on moving to Ireland on the basis of this tax law – totally desirable. The Revenue Commissioners will supply you with a list of the sorts of things that would make you eligible. You should note that non-fiction writing – such as journalism or an autobiography – are excluded.
You ask if you could get someone else to do the work for you and pass it off as your own. This would be against Irish law. Providing, however, the work was of sufficiently high standard and the person supplying it to you didn’t grass you up, I dare say you could get away with it. Bear in mind, however, that the Revenue Commissioners use outside, independent experts to assess the value of the creative work being submitted. They will also look for other evidence that you are serious about what you do. For instance, if you are an artist, they will look for proof of exhibitions held, catalogues and reviews in the media and so forth.
It is worth mentioning that as a new resident to Ireland there are other tax benefits you could take advantage of. If you arrange your affairs properly, the first three years of your residency would be virtually tax-free anyway since you will only be taxed on a remittance basis, that is to say on money that you actually bring into Ireland and not your worldwide income.
It is our intention to be as accurate in fact, detail, analysis and comment as possible. However, publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The Schmidt Offshore Report is sold on this understanding. The Schmidt Offshore Report is commissioned and published by Wentworth Publishing Ltd, 17 Fleet Street, London EC4Y 1AA. Email: wentworth@online.rednet.co.uk Tel: 020 7353 6606. © Wentworth Publishing Ltd 2004. All rights strictly reserved. This publication may not be lent, hired, reproduced (in any way whatsoever) or re-sold. This information is authorised for personal consumption only.
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