Part 9
THE SCHMIDT OFFSHORE REPORT
(Vol 1, no 9)
Contents
USA update by David Goodman
Nevada competes for national and international tax-planning business
Florida launches international insurance haven
PCAOB attack accountancy firms
Pasquantino starts to bite
UK update by Christopher Curtis
Offshore fishing expedition
E-tailers to be investigated
Anti-money-laundering rules to be reformed
EU update by Jurg Langer
New bank transfer rules
Exchange of information D-day
Will the ‘wrappers’ escape?
Rest-of-the-world update by Mary Nolan
Russian tax amnesty
Bank licences revoked
Belize now stable
Isle of Man ‘Zero Day’ fast approaching
It is very difficult not to feel a certain amount of glee at the way in which the Organisation for Economic Cooperation and Development’s (OECD) ‘harmful tax practices’ initiative appears to be failing. Why is it in such trouble? Its problems can be traced back to its launch in 1998. The OECD’s original plan was to force offshore financial centres to exchange information on request relating to civil and criminal tax matters with OECD members. Thirty-three different offshore financial-service centres were pressured into participating. They were incentivised by the thought that all OECD member states would also be forced to exchange tax information. At the same time, the low-tax jurisdictions being forced to participate were warned that failure to cooperate would result in their being included in the OECD’s National Tax Blacklist.
Interestingly, the OECD’s National Tax Blacklist has just come under attack by two Australian academics, Jason Sharman of the University of Sydney and Gregory Rawlings of the Australian National University. They have pointed out that such blacklists suffer from inherent problems. In particular, they tend to become out of date as tax laws change quickly and – more distressingly – such blacklists are often not drawn up and maintained in line with consistently applied objective standards. The evidence for this latter claim comes from anomalies contained in lists that cast doubt upon the whole. For instance, the OECD have blacklisted a non-existent place (Patau), regions that are mere expressions of geography rather than fiscal/legal entities (the Pacific Islands), islands that do not have a separate fiscal existence (Christmas and Cocos Islands, St Helena and Ascension Island) and confused different places with similar names (Vanua, Lebu and Vanuatu).
Further doubts are cast on the reliability of the OECD blacklist and other blacklists if there is a tendency for individual mistakes to be duplicated on several different lists. This suggests that tax authorities are simply cutting and pasting from foreign lists and have not conducted independent research on the jurisdictions they are singling out for unfavourable treatment. Anyway, the inaccurate blacklists are one of the main reasons why the 33 participating offshore jurisdictions are fed up with the OECD. Another reason is the fact that very few of the OECD member states have participated in the exchange of information, which means that there has not been a level playing field. The truth of the matter is that high-tax jurisdictions have been putting enormous pressure on weaker and smaller states both directly and with the help of the OECD. Now some of these smaller and weaker states are beginning to stand up for themselves and fight back.
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One of the nastiest bits of tax legislation introduced by the UK Government in recent years has been that of the requirement for advance reporting of certain types of transactions. Basically, the object is to identify what the HMRC consider to be unacceptable tax avoidance. Taxpayers must provide the title of any arrangements they intend to enter into along with an explanation of each element in the arrangements from which the expected tax advantage arises and the statutory provisions relevant to those elements of the arrangements from which the expected tax advantage arises. The taxpayer must then send a form containing this and other information to the Avoidance Intelligence Unit.
Essentially, HMRC are asking you to inform on yourself within five days of instituting any tax plan. Well, perhaps not any tax plan but the list of the type of tax plans that need to be reported is getting longer and longer. Clearly, many of the tax-planning arrangements caught by the legislation will involve some sort of offshore element. UK-resident readers planning to enter into any new piece of tax planning would be well advised to visit the HMRC website and to discuss whether they need to report the plan to the HMRC with their professional advisors.
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In John Le Carré’s novel The Night Manager, the baddie, a drug baron, employs someone to take legal responsibility for all the transactions he engages in. This is the person who acts as the ‘client’ and is named as the beneficial owner of the offshore bank accounts, offshore companies and offshore trusts that the drug baron uses to run his nefarious business. Obviously, he guards the person who signs all the legal documents closely, offering him a life of considerable luxury in exchange for his signing services.
Is the idea of having a false beneficial owner far-fetched? Apparently not. I recently met an American entrepreneur who told me that his entire offshore structure was actually in the name of a Cuban doctor. In exchange for a monthly stipend, the doctor signed whatever was asked of him and also attended such meetings with banks and trust companies as were required. For a few thousand dollars a year, the entrepreneur had found a way around the anti-money-laundering and ‘know your client’ rules.
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As mentioned elsewhere in this edition of TheTSR Offshore Report, life-assurance products are becoming increasingly popular with UK residents seeking to avoid the exchange of information that is going to arise as a result of the EU Savings Directive. One way in which life-assurance products are being used is as ‘wrappers’. Another is via the purchase of one or more single-premium (or high-regular-premium) policies. Someone with offshore money uses cash to purchase insurance policies from one or more insurance companies. Different options are then available. At a later date, for instance, the beneficial ownership of the policy can be transferred to a third party.
Another option is that the policy can be surrendered at an appropriate moment providing the beneficiary with a cheque from the insurance company that can be banked without attracting suspicion. Another way in which an insurance policy can be used is as security against which a bank loan may be obtained perhaps to buy a property or make some other investment. One of the reasons why insurance products are so ideal for the purposes of tax evasion is the fact that (a) insurance companies are less suspicious than, say, banks and have lower standards when it comes to ‘know your customer’ rules and (b) as it currently stands the HMRC have no way of gaining information about insurance-products sales.
Nevertheless, readers tempted to use insurance policies as an alternative to bank accounts would be well advised to remember that the Irish tax authorities have taken draconian action against Irish residents purchasing single-premium policies via offshore insurance companies. Indeed, to date, they have recovered €351 million in unpaid tax and fines from this source. They were, however, helped by the fact that they were able to obtain a list of Irish residents who had purchased such products from Irish-based financial institutions.
Over the last decade, international tax planning has become increasingly popular within the United States. Once the preserve of major corporations and the super rich, there has been a sort of ‘trickle down’ effect whereby small- to medium-size businesses and high-net-worth individuals have started to use offshore vehicles to reduce their domestic tax bills. As the US Government and the Internal Revenue Service (IRS) are vehemently against any sort of international tax planning, the result has been a slow but substantial attempt to put an end to all offshore activities.
The federal and state tax system, however, is so complicated that despite the strenuous efforts of the tax authorities new tax-planning opportunities appear to be opening up almost every day. The last couple of months are very typical of what has been going on for the last few years. On one hand, we see the big four accountancy firms – especially KPMG – being threatened with closure by the tax authorities for selling aggressive tax-avoidance strategies to their clients. On the other hand, individual states such as Nevada and Miami are launching exciting new tax-planning products. Here is a summary of the main news stories.
Nevada competes for national and international tax-planning business
Nevada, one of the poorest states in America, has launched itself as a national and international tax haven. It is now possible to set up a corporate tax shelter in Nevada for under $400. All that is required to form a shell company is to fill out a few simple forms and file them with the Nevada Secretary of State. It is then possible to shift income from elsewhere in America (California has been particularly vulnerable) to enjoy very substantial tax savings. Nevada is well known for its corporate secrecy laws.
The state has never cooperated with the IRS, something that the office of the Nevada Secretary of State highlights in a pamphlet entitled ‘Why Incorporate in Nevada?’. This pamphlet actually goes so far as to say: “stockholders, directors and officers need not live nor hold meetings in Nevada, or even be US citizens. Minimal reporting and disclosure is required.” Once money has been transferred to Nevada, there are few restrictions on what you may do with it.
Not surprisingly, other state governments are complaining. Worst hit is probably California, where tax officials believe they are losing tens of millions of dollars of tax money every year.
Florida launches international insurance haven
Florida has set itself up in direct competition with Bermuda by passing legislation that allows offshore companies to sell international life-insurance and annuity products to non-US residents. In addition to allowing foreign insurance companies and foreign consumers to purchase insurance products, the legislation also offers significant tax advantages. There will be no tax on either the income or capital gains made within the insurance products sold. As insurance becomes an increasingly popular way of holding offshore funds in a confidential and tax-free way, Florida’s move into this market is likely to see a lot of business flow into the state. Interestingly, there are no plans to increase the number of regulators looking after the offshore insurance companies that are likely to set up shop under the new insurance rules.
PCAOB attack accountancy firms
The Public Company Accounting Oversight Board (PCAOB) have launched a concerted attack on US accountancy firms over the way in which they have sold tax shelters to both corporate and private clients. A new set of rules, which will come into effect in 2006, sets out to address the “proliferation of what the PCAOB believes to be abusive tax shelters that emerged during the economic boom of the 1990s. One of the accountancy firms hardest hit is KPMG.
In September, the practice paid $456 million to the Government in order to avoid criminal prosecution for selling tax shelters to corporate and private clients. At the same time, nine former partners of KPMG were charged by the Department of Justice for selling such tax shelters (sale that resulted in a direct loss to the US Treasury in excess of $1.9 billion). Other firms in the Department of Justice’s sights would appear to include Deutsche Bank, Ernst & Young and Deloitte.
Pasquantino starts to bite
Earlier this year, two brothers by the name of Pasquantino were prosecuted successfully for wire fraud. The case is interesting because what they were doing was buying whisky in Maryland and driving it across the border into Canada without paying Canadian import duty. That they should be convicted of wire fraud for using the telephone and other means of communication to evade tax – and not a US tax, at that, but a foreign tax – is very interesting. It is the first time the US courts have ever enforced the tax laws of a foreign country. The result of the decision is that US citizens may now be found guilty of wire fraud for using communications – mail, telephone, the Internet or anything else – to deprive a foreign country of taxes because those taxes are ‘property’ within the meaning of the wire-fraud law.
As one leading expert, Bruce Zagaris, recently wrote: “this decision will give concern to accountants, lawyers, bankers, real estate brokers and securities dealers who hope to advise on foreign laws, especially those in countries that have significant tax crimes. These advisors inevitably use US wires for giving the advice. This may encourage some foreign revenue authorities to begin chasing after tax advisors.”
UK update by Christopher Curtis
The two main UK offshore tax stories this month are indicative of the general level of uncertainty that exists with regard to international financial transactions in this country. On one hand, it has been mooted that the anti-money-laundering laws should be substantially altered in order to make life considerably easier for those who have to administer them (at the moment they are considered almost unworkable). It is felt that the ‘know your customer’ regulations are far too prescriptive, and an overhaul is now planned. At the same time, the Inland Revenue have launched a massive fishing expedition against residents who they suspect of using offshore vehicles to evade tax.
Offshore fishing
HM Revenue and Customs, in what many believe to be a ‘fishing expedition’, have written to 500 UK-resident taxpayers warning them about false disclosure on offshore accounts. Those receiving the letters have 30 days to reply with an explanation of why there is no tax liability arising from accounts held in Jersey, Guernsey or the Isle of Man. As a result of the EU Savings Directive and recent extended exchange-of-information agreements, HMRC now have access to considerably more information about UK-resident taxpayers using offshore banks.
It is not known what criteria HMRC have used in deciding which taxpayers to contact. However, they recently forced banks in the Channel Islands to disclose details of British people using offshore debit or credit cards. An HMRC spokesman said: “Offshore accounts are legitimate investment vehicles as long as people meet their obligations to declare the interest that arises in their tax returns. However, we very often find them associated with serious tax evasion.”
An increasing number of offshore banks offer credit-card facilities to their customers. Of course, this allows these customers to access their offshore funds anywhere in the world – including the UK. In attacking such customers, HMRC know they have a high chance of finding tax evaders. This is because several other countries have used the same technique. In the United States, the IRS targeted American taxpayers who used credit cards issued by offshore banks and recovered $155 million during the first phase of what is bound to be an ongoing campaign. Australia has done much the same thing. In August 2005, the Australian Tax Office wrote to 3,600 people suspected of using foreign credit cards issued by banks in international financial-services centres. It is too early to say what the results of this exercise will be. However, the Revenue Commissioners in Ireland say that they have now recovered €2 billion as a result of investigations into offshore tax evasion.
E-tailers to be investigated
The National Audit Office (NAO) have launched an investigation into the way that many e-commerce companies lessen their tax bills by operating out of low-tax jurisdictions. In particular, they have online gaming firms and mail-order companies in their sights. The problem that the NAO and, indeed, HM Revenue and Customs is likely to face is that there is nothing illegal in setting up e-commerce businesses in offshore locations. Indeed, the Gibraltar-registered Party Gaming, an online gaming operator, recently listed itself on the FTSE 100. The Treasury have estimated that £80 million wee being lost from retailers selling CDs, DVDs and other products valued at under £18 from the Channel Islands. This is because under EU rules such products can be sold VAT-free.
Anti-money-laundering rules to be reformed
The Financial Services Authority (FSA) are planning to overhaul their anti-money-laundering rules and, in particular, to dramatically reform the current ‘know your customer’ regulations. The overall idea is to move from a prescriptive to a principles-based approach. FSA chairman Callum McCarthy said: “We are determined to be more rigorous about the costs and burdens that regulation imposes on firms. We are also simplifying our requirements and the way we express them, which will help all firms but particularly smaller ones who do not have access to expert advice.” What this effectively means is that banks and other financial-services firms will no longer need to demand from their customers the same proof of identity.
It is generally thought by commentators that the FSA are making this move because the current anti-money-laundering rules have proven unworkable.
EU international tax-planning news has, for most of this year, been dominated by the new Savings Directive. While this is still a hot story, it is not the only story.
New bank transfer rules
Anybody with an account held in an EU jurisdiction – or planning to transfer money to or from an account in an EU jurisdiction – would be well advised to take note of the new EC rules for bank transfers. It is claimed that these new rules are part of the fight against terrorists’ financial networks. However, many accountants believe that they are, in fact, an attempt to broaden the pool of financial information available to the tax-gathering authorities. Basically, the Commission want banks in the EU to register the name, address and account number of everybody making a money transfer in the EU. This would include all transfers made from outside the EU into the EU and vice versa. The Commission plan to publish a list of those countries slow to put the agreements in place. While the draft legislation has not yet been passed, it is anticipated that it will be in place within six months.
Exchange-of-information D-day
Next year (2006) will be the first year in which information gathered under the EU Savings Directive will be swapped between the different participating countries. For instance, the first reports from the banks and other financial institutions in Ireland to the Revenue Commissioners will be due by 31st March. These reports will list all the customers to whom Irish financial institutions are resident in other EU jurisdictions. Readers are reminded that the Savings Tax Scheme not only covers EU countries but also extends to ten dependent and associated territories of the UK and the Netherlands – Aruba, Anguilla, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks and Caicos islands. The EU have also entered into agreements with Andorra, Lichtenstein, Monaco, San Marino and Switzerland, under which these countries will apply a withholding tax on interest payments to residents of EU member states and also exchange information on request with these countries on tax fraud.
Will the ‘wrappers’ escape?
EU legislators are believed to be considering a change in the Savings Tax Directive in order to catch offshore insurance-bond ‘wrappers’ and differed interest accounts, both of which escape the Savings Directive’s strictures. Basically, under the EU Tax Savings Directive, individuals with cash on deposit offshore must either pay a withholding tax or give the appropriate offshore tax authorities access to information about the value of their savings, possibly giving rise to a tax charge. Tens of millions of pounds have already flowed out of so-called tax havens to countries not affected by the Directive, such as Singapore and Hong Kong. In particular, life-assurance companies have experienced a huge uptake of interest in offshore insurance bonds. This is because such bonds are exempt from the Directive because all the assets in the bonds are technically held by the life company running it rather than by individuals.
Interest in the bond is rolled up gross so there is no need to tell the Inland Revenue until the bond is cashed in. Readers considering using such vehicles as homes for their offshore cash would be well advised to pick a jurisdiction that is unlikely to be caught at a future date by the EU Savings Directive. Assuming, of course, that confidentiality is important.
Rest-of-the-world update by Mary Nolan
Russian tax amnesty
The finance minister of Russia, Alexei Kudrin, has announced a tax amnesty designed to encourage Russian citizens to bring home money currently deposited in offshore tax havens. The slogan being used to launch the amnesty is “100% peace of mind for 30% tax”. In order to demonstrate that the Russian Government can use the stick as well as the carrot, just before the amnesty was announced the Government launched a series of tax raids and arrests.
Bank licences revoked
The Government of St Vincent and the Grenadines have revoked the licences of the Horizon International Bank Limited, Trans Global Bank Limited and Triton Capital Bank Limited. At the same time, Amco Bank have surrendered their banking licence and gone into voluntary liquidation.
Belize now stable
Said Musa, the prime minister of Belize, has made a national address to the people claiming that the country is now on the road to recovery after several months of strikes, demonstrations and civil unrest. It is certainly true that despite extensive civil disobedience the rule of law and democracy do appear to have maintained the upper hand. Belize is, without doubt, in the middle of a severe economic recession. As it currently stands, the country is running at an overall deficit of £40 million or about 4% of GDP. The Belizean prime minister’s confidence coupled with the end of civil unrest is good news for the country’s offshore financial-services business. During the summer, it very much looked as if Belize would be losing out on this valuable contribution to its balance of payments as investors and offshore companies established in the country moved to more politically stable jurisdictions.
Isle of Man ‘Zero Day’ fast approaching
Tax on the Isle of Man is set to be reduced dramatically from 6th April, a date which is being called ‘Zero Day’. Companies will pay zero corporation tax, while banks and property companies will be taxed at 10%, lower than most European states. Zero company tax has long been a fixture on the island. But now the Manx Government plan a tax break for wealthy individuals with a ‘tax cap’ for high earners, which was first announced by the treasury minister, Alan Bell, in his budget this spring. Whether this will also apply from next April is yet to be decided.
High earners are considerably better off on the island than in the UK, even without the ‘cap’. The current top personal tax rate is 18%, against 40% in the UK. There is no capital gains or inheritance tax. Overseas investors receive income and dividends from Manx financial firms free of any local or withholding tax. Behind the tax plans is the Manx Government’s wish to encourage more entrepreneurs onto the island. Compared with the Channel Islands, property is cheaper and gaining residency is relatively simple. The island’s company registry currently shows close to 31,000 companies on its books, and the new zero-tax regime is expected to encourage more incorporations.
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 2005. 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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