Part 3
SCHMIDT OFFSHORE REPORT
In this issue:
Latest Offshore News
Features - Offshore Trusts of Onshore Residents by Nathaniel Litmann
In Spain It Hardly Ever Rains by David Treitel
UK Non-domiciliaries Warning
Banking Confidentiality Post 911 by Peter Ward
Why the OECD Will Fail by Peter Smith
Ask the Experts
Editorial Comments
Editorial Board and Contact Information
NEWS
Nauru Struck Off Tax Haven Blacklist
Nauru, one of the smallest tax havens in the world, has been struck off the OECD list of renegade tax havens. Nauru’s government said last June that they were revoking 139 offshore banking licences in a bid to avoid the threat of international financial sanctions. However, the tiny coral island in the South Pacific still has around 400 banks, even though there is only one main road!
Australia May Sell Financial Intelligence Software
About every four seconds Australia’s financial intelligence watchdog, Austrac, receives details of a transaction involving money either leaving or entering the country, thus adding to a vast bank of information being used to track billions of dollars flowing around the world. Indeed, Austrac’s ground-breaking work on money laundering has become a template for other countries, to such an extent that the Australian Tax Office may now sell their information technology to regulators in the US and Europe.
Austrac’s database of suspicious transactions, cross-border currency transactions and cash transactions to the value of more than A$10,000 is so sophisticated that they can account for every dollar flowing out of Australia and into a tax haven. This information is now being used to identify citizens who may be taking advantage of offshore structures to evade Australian tax. It is believed that Germany, Ireland, the UK and the US are all particularly interested in the Australian system.
Irish Revenue To Step Up Powers On Non-resident Tax Exiles
According to an article in the Irish Independent, the Revenue Commissioners in the Republic of Ireland are examining ways of making sure that people who claim non-resident status for tax purposes are, in fact, out of the country as much as they claim they are. The Large Cases Division of the Revenue Commissioners, which deals with the biggest corporations and the wealthiest individuals in the country, are putting together recommendations on how best to monitor the situation in relation to Irish nationals who are resident abroad for tax purposes. Sean Moriarty, head of the Revenue’s Large Cases Division, told the Irish Independent, “We will have to attempt to find some way where evidence would be provided for absence from the country and see what checks we can conduct. This may involve some method of monitoring the comings and goings of individuals in and out of the country.”
As it currently stands, Ireland, like all EU member states, does not monitor the movements of its citizens. However, such a move might be welcomed by other revenue authorities as an excuse to adopt a similar regime.
Switzerland Fails to Agree Savings Tax
European Union finance ministers are angry at the failure of Switzerland to conclude a deal that would pave the way for a new EU Savings Tax. Switzerland agreed in principle last year to levy a withholding tax on the savings of EU citizens in Swiss banks but is now holding back on finalising a deal. It is believed they hope to extract concessions from the EU on other issues.
Finance ministers have set themselves a June deadline to decide whether to implement the EU Savings Tax from 1 January 2005 and need assurances from third countries – including Switzerland – that they will apply equivalent measures. The EU Savings Tax is intended to make it less attractive for EU citizens to put their money into offshore tax havens and to crack down on tax evasion and fraud.
For the Swiss the real issue is the Schengen Agreement – the proposed legislation allowing the elimination of border controls between participating European countries. Although Schengen is primarily concerned with cooperation between justice departments and police forces in signatory countries, Article 51, which deals with automatic reciprocal information rights, is seen as a potential threat to the hallowed principle of banking secrecy.
Ireland Signs Deals With Tax Havens
The Irish Revenue Commissioners has signed Tax Information Exchange (TIE) agreements with four of the world’s largest offshore tax havens: the Cayman Islands, the Isle of Man, Jersey and Guernsey. It is intended to attempt to roll these agreements out to 30 more tax havens in the future.
The Irish Revenue Commissioners have also announced that they are monitoring the use of online offshore gambling websites, which they believe may be being used to send cash abroad.
Inland Revenue To Quiz BAE On Secret Vault
The Guardian newspaper, in London, has published details of a secret vault in Switzerland where BAE, Britain’s largest arms company, is alleged to have hidden filing cabinets full of evidence of covert payments to foreign politicians. Allegations of corruption surrounding BAE’s arms sales around the world have been frequently made, but this is the first concrete information that the firm, a large British public company with intimate relations with the Blair Government, may be deliberately concealing evidence outside the jurisdiction of its own legal authorities, exploiting Switzerland’s secrecy rules.
In 2002, the British Government ratified an international anti-corruption convention, which made it illegal to bribe foreign public officials. It is believed that the filing cabinets and safes containing the information held in Switzerland were transported there in 1997 using staff from BAE’s site-maintenance company. It is reported that both the Inland Revenue and the Serious Fraud Office will be interviewing BAE about the report.
Jersey Plans Income Tax Hike
Jersey, a UK Crown Dependency, currently has a budget deficit that it hopes to abolish by introducing sales tax and removing income-tax allowances for well-off households with an income of more than £80,000 a year. One reason why the tax increases are necessary is that Jersey is proposing to introduce a zero corporate-rate tax in order to maintain a competitive edge in the highly competitive offshore-finance industry.
Oxford Economic Research Associates, a consulting firm, have warned Jersey’s lawmakers that if the tax burden on well-off residents is increased too much it could prompt an exodus to another low-tax jurisdiction. However, Jersey’s finance industry is built on a regime that offers businesses and high-net-worth individuals the chance to set up companies that have tax-exempt status.
EU Plans To Target Offshore Havens
In the wake of the Parmalat collapse, Frits Bolkestein, Europe’s Single Market Commissioner, has stated that tax havens, credit-rating agencies and companies’ special-purpose vehicles all face the prospect of greater regulation. Mr Bolkestein said in February that “the role and regulatory control on offshore centres needs to be tightened”, adding that proposals on money laundering due in June would play a “significant role”.
The EU remain locked in talks with four European tax havens about sharing information on savings, ahead of the June deadline to endorse new legislation. The four tax havens involved are Liechtenstein, Andorra, San Marino and Monaco. All of them are refusing to share information or introduce withholding taxes.
The stalemate comes after the UK’s position on the EU Savings Tax directive was bolstered by the conditional commitment last week from the Cayman Islands to comply with its terms. The Caymans, a leading tax haven, had been the only UK-dependent territory holding out against the directive because of fears its financial-services industry would be damaged.
US Government Contractors Slammed For Use Of Tax Havens
According to a report by congressional auditors released in March, 59 of the top 100 publicly traded US federal contractors have set up subsidiaries in offshore tax havens. The study, carried out by the General Accounting Office, found some of the biggest federal contractors in the Government’s 2001 fiscal year had dozens of subsidiaries in countries that impose no taxes, or nominal taxes, on corporate income. Senator Carl Levin, one of the two senators who requested the report, has called for further investigation. “Tax dodging is going on,” he claimed, “and it must be stopped.”
The use of offshore tax havens by huge US multinationals has become a hot issue in the run-up to the next presidential elections. John Kerry, the US presidential aspirant, has attacked a number of companies – including Tyco, MCI, Accenture (born out of Anderson Consulting) and Ingersoll-Rand – for using Bermuda as their international headquarters.
As a result, the Bermudan authorities are struggling to convince the outside world that their jurisdiction is not a money-laundering haven. Deborah Middleton, chief executive of the Bermuda International Business Association, says the country’s best bet is to be aggressive in explaining that it has nothing to hide. The island, unlike some other offshore destinations, is not on any international watchdog’s blacklist, she says. “We’ve been working hard at building a pristine reputation for the last 40 years, and we’ve struggled continually with this image that we’re in the Caribbean, that we’re a tax haven, and so at one time we ducked our heads below the parapet. Actually, we have nothing to be ashamed of.”
Note: another report by a Senate Committee claims that Deutsche Bank lent billions of dollars to enable companies to construct transactions for the sole purpose of avoiding taxes. In recent years, it is estimated that large US-based accountancy firms earned US$1 billion in fees from selling tax-avoidance schemes, which – in turn – were responsible for the US Treasury losing US$85 billion of tax revenues.
Heat Increases For Irish Taxpayers
The Irish Revenue Commissioners have written to the state’s ten major banks asking them to instruct their customers with accounts or policies in offshore locations to come forward to the tax authorities before the end of May. Under powers introduced in this year’s Finance Bill, the Revenue will be able to apply to the High Court for an order requiring any financial institution to make records available for inspection. The first such orders are expected to be sought in early summer, depending on the outcome of the voluntary-disclosure process.
The Revenue have declined to speculate on how much will be recovered by the investigation. But an earlier investigation into the tax affairs of customers at the Bank of Ireland Trust Company in Jersey netted more than €100 million in unpaid taxes from just 254 people. In a related development, a number of customers of the Trust are preparing to take legal action against the bank, claiming it exposed them to excessive tax liabilities.
The Revenue Commissioners have applied for other powers, which may be contained in next year’s Finance Bill. These include:
• the right to question people in police custody about their tax affairs
• access to phone records of suspected tax dodgers
• full details of interest and financial gains paid to customers automatically going from banks to the revenue
• the right to access other information from financial institutions
Marshall Islands Will Continue To Offer Bearer Shares
Although the Marshall Islands-formed International Business Corporations have come under intense scrutiny from the international banking community, it is unlikely that the use of bearer shares will be regulated.
Speaking at a wealth management forum organised by the Surex Group in February, Melissa Hurst, managing partner of International Registries Inc., said that secrecy was not necessarily associated with being dishonest. Europeans in particular had quickly realised the need for easily portable assets. Shares could be managed from another jurisdiction, and “this alleviates concerns over what happens to the family, or more importantly the family fortune, should the patriarch or matriarch suddenly be seized or killed in his or her home jurisdiction.”
Marshall Islands corporations have been used extensively to hold assets and for trading with or in countries where satisfactory local commercial or corporate law is deficient or absent.
The Marshall Islands “provides maximum confidentiality, allowing for voluntary filings and bearer shares”, said Miss Hurst.
OECD Chairman Stands Down
Gabriel Maklouf, Chairman of the Organisation for Economic Cooperation and Development’s (OECD) Fiscal Affairs Committee has stood down as Chairman. A former tax inspector, he infuriated tax havens in 2000 by naming and shaming those that would not assist in the OECD’s efforts to crack down on tax evasion by their own citizens. The Financial Times reported that Mr Maklouf is standing down at a moment of huge uncertainty over whether the crackdown on tax evasion will succeed or fail.
Tax havens are angry that, while they’ve agreed to fall into line, Switzerland and three other OECD member countries (see stories elsewhere in this issue) are baulking at one central element of the initiative that threatens their long-standing systems of banking secrecy. Austria, Belgium, Luxemburg and Switzerland will not support a deadline of 2006 for the cross-border exchange of banking information, which would enable tax authorities in other OECD member countries to verify the liabilities of citizens who place funds outside their home states.
If the dispute is not resolved, the tax havens may back away from their commitments to exchange banking information from 2006. Without their cooperation, the crackdown on evasion will flounder. That in turn would knock a big hole in the efforts of OECD member countries to shore up their sources of revenue.
The OECD’s main problem is that the tax havens are insisting on a “level playing field” over transparency. The havens fear that, if they start to exchange information on civil tax matters before, say, Switzerland does, their financial industries will move elsewhere. The OECD’s main challenge is to bring Hong Kong, Singapore and other Asian financial centres into the OECD’s tax project. This is where much international business is expected to migrate if European, Middle Eastern and Caribbean offshore centres are forced to exchange information.
British Virgin Islands Get Thumbs Up From IMF
An International Monetary Fund (IMF) review of tax havens has given the British Virgin Islands overall good marks for their offshore regulatory and anti-money-laundering mechanisms. The report, based on an assessment carried out in 2002, commended the British Caribbean’s territories’ information-sharing and cooperation, calling it “excellent in all areas”. However, the Washington-based organisation did recommend more on-site evaluations of banks and trust companies, more regulation of the Government-owned development bank and stricter rules in the mutual-fund and insurance sectors.
The IMF review of the BVI is one of a series of assessments by the organisation focusing on offshore financial centres worldwide. Last year, the IMF released similar reviews of Jersey, the Isle of Man, Guernsey, Montserrat and Anguilla.
Malta To Challenge Dublin And Luxemburg
As Malta gears up to become the smallest EU member, the Maltese prime minister has unveiled plans to turn Malta into a financial-services centre to challenge Dublin and Luxemburg. The widespread use of the English language and laws, double-taxation agreements with 34 countries and a generous fiscal regime for foreign companies have already resulted in a flourishing financial-services sector that employs more than 5,000 people, accounts for 12% of GDP and has resulted in more than €16 billion (US$19.84 billion) of assets.
IRS Target 400,000 US Taxpayers
The Internal Revenue Service (IRS) of the United States have so far linked more than 400,000 American taxpayers to tax-evasion schemes using offshore financial-services centres. More than two-thirds of these taxpayers had established bank accounts in offshore tax havens and are using debit and credit cards to access money that has never been taxed.
Many of the schemes are, according to a report in the Washington Post, simplistic to say the least. For example, one dentist set up a sham company in the Cayman Islands to lease the dentist’s equipment for a fee that corresponded almost exactly with his profits. The dentist paid his leasing bill, thus shifting all of his income overseas without paying any tax on it, and then used the debit card to access the cash at will.
Although the IRS believe that they are losing up to US$40 billion in unrealised taxes per year, efforts to shift resources to the problem have slowed considerably. Despite quadrupling the staff targeting such schemes from 267 workers to 1,020, additional resources are still required.
Last year, the IRS disclosed that 60% of identified tax debts are not pursued, 75% of taxpayers who did not file a tax return are not pursued and 79% of identified taxpayers who use abusive devices, such as offshore accounts, are not pursued either.
Offshore Trusts For Onshore Residents
By Nathaniel Litmann
Despite aggressive anti-avoidance legislation in the world’s wealthiest (and most taxed) jurisdictions, the popularity of offshore trusts remains undiminished. In this article, I will consider why taxpayers in developed countries are utilising offshore trusts now more than ever before. Specifically, I will consider the situation in the UK, where some of the strictest anti-trust regulations have been passed.
Why offshore trusts are so attractive
Depending on where the trust is established and who established it, these offshore vehicles can be used to:
• shelter income from tax
• shelter capital gains from tax
• shelter deceased estates from tax
With regard to inheritance tax (IHT), death duties, offshore trusts may or may not be effective. For instance, for UK domiciliaries, an offshore trust will not be effective, since IHT is linked to your domicile, not your residence. A trust can only be an IHT shelter if the settlor is non-domiciled when he puts funds into the settlement.
Why offshore trusts work
The effectiveness of offshore trusts rests on the fact that they are considered – legally – to be separate fiscal entities. Being located offshore (in other words non-resident), they fall outside the ambit of onshore tax authorities.
Once an asset (anything from property to a stream of income) belongs to a trust, it is extremely difficult to retrieve it without the trustees’ authority. Trustees are only obliged to follow the rulings of overseas courts where such rulings are upheld by courts in the country where the trust is established. Put in plain English, if tax evasion is not illegal in the country where a trust is established, the fact that the assets in the trust may be the result of tax evasion elsewhere will be irrelevant. It is for this reason that tax authorities have focused much of their attention on the people who have established a trust or who stand to benefit from it.
There are various types of offshore trust, of which the three types listed below are most popular.
Discretionary trusts: a discretionary trust is so called because it is at the total discretion of the trustees as to who they will distribute any income or assets to. Put another way, nothing held by the trust belongs to the beneficiaries unless the trustees choose to distribute it to them. The benefit of this is that a potential beneficiary of the trust need not declare any interest in the trust’s assets to the tax authorities of the country in which they are resident. The one disadvantage of a discretionary trust is that whoever establishes the trust clearly needs to believe that the trustees will act in accordance with his wishes. Any attempt to restrict the discretion of trustees is likely to nullify the value of the trust as a tax-planning vehicle. Those setting up trusts must limit themselves to providing trustees with a confidential “letter of wish”. In practice, professional, qualified trustees in well-regulated offshore financial centres can be totally relied upon.
Accumulation and maintenance trusts: as the name implies, the purpose of an accumulation and maintenance trust is to preserve assets over the long term. It is in the nature of such trusts to name the beneficiaries.
Long-term trusts: where you want to set up an accumulation and maintenance trust but you are unsure who the beneficiaries will be, you need to set up what is referred to as a long-term trust. This would be appropriate, for instance, where you wanted to benefit all your grandchildren both born and unborn.
Anti-avoidance legislation
Trusts can fail to achieve their desired tax-saving purpose for various reasons. Many countries (such as Australia, New Zealand and the United States) tax their residents on worldwide income. In the case of Americans, this is true wherever they are resident. So, even if the trust succeeds in sheltering the assets placed in it from income, capital gains or other wealth taxes, there may be no way for the intended beneficiaries to receive the money legally without paying tax on it. This situation is worsened by the fact that in many countries around the world anti-avoidance legislation has been passed to circumvent the use of offshore trusts as tax shelters. Such anti-avoidance legislation is almost always framed so as to attribute both income and gains to the original settlor of the trust.
As regular readers of this newsletter will be aware, a trust’s settlor is the person who establishes it. More to the point, he is the person who will have originally transferred assets into the trust. By attributing both income and gains in an offshore trust to the original settlor, revenue authorities in high-tax jurisdictions hope to make such trusts ineffective. Such legislation tends to extend not only to the settlor but also to their spouses, children and even grandchildren. There is often what legislators refer to as “power to enjoy”. In other words, if a settlor or transferer (somebody who transfers assets into a trust) has any way of enjoying the benefits of those assets, he may be taxed on them regardless of whether they actually exercise that power.
Getting round the obstacles
In fact, it is often – legally – possible for offshore trusts to be used as tax shelters despite anti- avoidance legislation. Advice must be taken on a case-by-case basis, but below I will explain how it might be done in the UK.
Assuming that you are a UK domiciliary, there are three instances where it is still possible for an appropriately structured offshore trust to work as a shelter for income and gains:
1. settlements where the settlor is dead
2. settlements where all defined persons within the meaning of the 1992 Taxation of Chargeable Gains Act, section 86, are excluded
3. children’s and grandchildren’s settlements designed as an income shelter
The required qualification regarding dead settlors is obvious! However, it must also be remembered that under UK tax legislation it is possible to set up a trust using one’s will.
“Settlements where defined persons are all excluded are difficult to achieve now that the gains of grandchildren’s settlements can be attributed to the settlor. But settlements are sometimes made by remote relations or friends of the beneficiaries, and these still operate as a shelter of both income and gains.” As Giles Clarke suggests in Offshore Tax Planning (tenth edition), the loophole here is to use “remote relations or friends” both to establish the trust and – where relevant – to transfer assets into the trust. An important context in which such a comment may be considered is to hold shares in a newly formed private company, or other growth assets. The sum required for the settlement may be modest, and the promoter may be able to persuade a friend or distant relative to contribute the necessary funds. Where the friend or relative genuinely makes the settlement out of his own resources, he is the sole settlor for income and capital gains tax (CGT) purposes, and the sole transferer so far as the Inland Revenue are concerned. Note that a person is deemed to be a settlor under the settlement code if he made or entered into the settlement directly or indirectly, if he directly or indirectly provided funds or if he made reciprocal arrangements for another person to make the settlement. In other words, it has to be a genuine arm’s-length arrangement.
Where company shares are settled, a difficulty is often that the promoter is working for the company and building it up. It is feared that this makes him a settlor, as happened in the 1989 court case Butler vs. Wildin. However, the promoter is unlikely to be a settlor if he is remunerated on a proper commercial basis and the risk and cost of financing the company is borne by the company and the settlement. It must be remembered that it is not the provision of services but of funds which makes a person a settlor.
Settlements made by friends or distant relatives achieve the ultimate in sheltering if the friend or relative making the settlement has neither an actual nor a deemed domicile for IHT purposes. In this event, the settlement is excluded property and so free of IHT. But here, too, whatever is settled must be genuinely provided out of the resources of the non- domiciliary, for if it’s not, and there is some reciprocal or indirect arrangement with a UK domiciliary, the latter will be treated as settlor and the settlement will not be excluded property. Those intending to evade rather than avoid British tax will doubtless, clearly, make sure that any reciprocal or indirect arrangement is kept totally confidential.
Finally, children’s or grandchildren’s offshore settlement is still a perfectly effective shelter of foreign income. In some cases, a trust of this sort may come to operate as a CGT shelter, notably should the settlor die or emigrate. It may also happen if at some stage the capital is appointed away from the children and grandchildren.
Benefiting from an offshore trust
So far as UK residents are concerned, if sheltering can be achieved through use of an offshore trust, the objective should almost certainly be to retain the income and gains in the trust and thereby build up a tax-free asset. Clarke remarks that “sheltering does not really justify the expense and complexity involved if the capital is likely to be distributed to UK resident beneficiaries.” The reason for this is that distributions from offshore trusts to UK beneficiaries are taxable. Furthermore, with regards to CGT, the tax is not just the basic- or higher-rate tax but that tax increased by notional interest in respect of the period since the gain allocated to the payment accrued to the trust. Put in plain English, the meter is on from the moment the trust received the original asset involved. If the gain is more than six years old, the overall rate of tax is 64%, the highest in the UK tax code.
The one instance where money can be taken from an offshore trust without any UK tax liability is where the beneficiary becomes non-resident. Non-residence avoids all tax on distributions and, in the case of capital gains, washes out an equivalent amount of trust gains. However, to avoid tax on capital gains, it’s necessary to be non-resident for at least five complete tax years and gains are not washed out if the trust has fallen foul of the rules relating to trustee borrowing.
A reality check
The reality of the situation is this. Wealthy people structure their trusts using third parties to ensure that they are neither the settlor nor the transferer. Furthermore, they often benefit from the trust even while resident through the use of offshore property, offshore credit cards and the receipt of other assets (such as cash or valuables). In some instances, they will simply be bending the rules; in others, they will clearly be evading them.
In conclusion
The UK has some of the most stringent anti-avoidance legislation with regard to offshore trusts of any country in the world. And yet, it is still possible for UK domiciliaries to take full advantage of offshore trust. By the same token, in my experience it is possible for the citizens of almost every country in the world to utilise trusts, providing they plan properly and are mindful of the tax rules of the country in which they are resident.
It’s fundamental to any sort of tax planning that those involved disclose all relevant liabilities on their tax returns, and that all reasonable information requested by their tax authorities is also supplied. It should not be forgotten that the tax authorities of many countries now have wide information-gathering powers. So far as UK residents/domiciliaries are concerned, there is a compliance obligation to make a return to the Inland Revenue within three months if he has been involved in establishing a non-resident settlement. If assets are settled, a CGT disposal may have to be notified, and, if the value transferred to a discretionary settlement involves a chargeable transfer or more than £10,000, an account has to be delivered to the Capital Taxes Office. Perhaps, most important of all, professional advisors are also obliged to report non-resident settlements to the Inland Revenue.
In Spain It Hardly Rains At All
By David Treitel LLP
An excellent example of a new opportunity that is entirely legal and would fit many of our plans is the new tax incentive for expats becoming tax resident in Spain. Indeed, Spain has featured near the top of our list of favourite tax-planning jurisdictions for a long time now. Conversely, it has been common for many years for Spanish citizens to claim to be resident in the UK for tax purposes so as to take advantage of the remittance basis of taxation. Most such people continued to have incomes in Spain but were able to benefit from the 25% flat non-resident rate instead of graduated rates of tax, which could be as high as 45%.
Luckily, Spain is now offering a similar deal to any of us Brits who want to go to work there. With effect from 1 January 2004, a new tax rule came into force in Spain that allows an employee assigned to Spain to choose to be subject to tax as a non-resident, rather than as a resident taxpayer. This election is subject to various conditions being met and must be made during the year when the employee becomes tax resident in Spain. If such an election is made, the individual will be subject to a flat 25% tax rate (for employment income) instead of the progressive, resident tax scale, which is capped at 45%. The election applies to the first year of residence and the following five consecutive years.
What is happening is that new tax residents in Spain in 2004 and later years now have the opportunity to choose to be subject to tax according to the non-resident tax rules instead of the tax rules for residents. The declared purpose behind the new rule is to offer an incentive to executives of foreign companies to relocate to Spain. There are two main conditions that will need to be observed. First, the individual in question must not have been tax resident in Spain at any time during the last ten years prior to moving to Spain. Secondly, it is required that the assignment arises out of a contractual agreement.
While this rule was designed to be of relevance to multinational companies who wish to motivate middle-range and high-earning employees to work in Spain, it could potentially benefit a far wider range of people. For example, planning on moving to Spain might now involve setting up a UK company, just so that you have an employer in the UK. Your own company could then second you to Spain and pay you a salary so that you benefit from a top tax rate of no more than 25%.
Do remember that before this change there were no special provisions under Spanish income-tax law dealing with expatriates who became Spanish-tax-resident individuals. (Broadly speaking, Spanish residents are those who have their centre of economic interest in Spain or stay in Spain for more than 183 days during a calendar year.) Residents are typically subject to tax on their worldwide income for the entire calendar year at a progressive tax rate up to 45%. Non-tax residents of Spain are those who do not have their centre of economic interests in Spain and who stay in Spain for a period not exceeding 183 days. Non-residents remain subject to tax at a flat tax rate of 25% on Spanish-source income only. While many will have got away with non-disclosure in Spain in the past, this is becoming less and less practical and because of the new anti-money-laundering rules in the UK, probably not possible to continue doing.
It is common knowledge that the UK’s Inland Revenue are stepping up their ability to obtain records on any one of us who might be designing our affairs to minimise our tax liabilities. During January 2004 both The Times and the Daily Telegraph reported that the Inland Revenue were building a database of what the Daily Telegraph described as “more than 60,000 wealthy foreigners living in the UK”.
To be precise, what is going on is that the Inland Revenue have written to some 6,500 employers to tell them that the Inland Revenue are setting up a special unit at five chosen tax offices to deal with the tax affairs for all expatriate employees. The idea is certainly not new. Tax offices have had specialist expatriate tax units for many years. Historically, this meant a greater likelihood of each local tax office understanding the nuances of residence, domicile, dual contracts or other specialised tax planning. Going forward with this work being centralised, we can expect far more investigations on the tax-planning techniques used by those coming to work in the UK. Expect far greater likelihood of being audited if you are claiming non-UK domicile, using dual contracts, using tax-treaty planning, claiming detached duty, claiming double-tax relief for foreign tax or have housing provided under a lease premium.
Just as significantly, if the Inland Revenue can find a way of identifying non-UK nationals coming to work here, this will mean that they can create a complete database of such people which can be used to check information received from overseas about non-UK income and to pass similar details of UK income back to tax officials in other countries. The number of people entitled to claim non-UK domicile is certainly far greater than the 60,000 or so that the Treasury are currently estimating. If the tax opportunities were taken up by all UK residents who were born outside of the UK, or had a parent who was not originally from these islands, there are doubtless over a million of us who might benefit.
A Treasury paper published with the April 2003 Budget said that Revenue records showed that 16,000 individuals declared foreign earnings totalling £800 million, which were not liable to tax because they were not remitted to Britain. This figure is again doubtless far lower than actual numbers; so this latest campaign certainly squares with current UK Government policy.
The non-UK domicile rules remain enormously attractive tax-planning tools. While Gordon Brown has not changed these as yet, the topic is still said to under review. So setting up offshore trusts for non-UK domiciliaries remains good practice in case a change happens in Budget 2004 or Budget 2005. Certainly, if your heart is set on leaving the UK, arguing your are non-UK domiciled may be a sound step while these tax opportunities are still on offer.
Banking Confidentiality Post 911
By Peter Ward
I have been asked to write an article explaining how individuals can achieve banking confidentiality in the current environment.
My qualifications for writing such an article are twofold. First of all, prior to my retirement, I specialised in the marketing of financial services. In this position, I was frequently involved in promoting offshore banking facilities for such institutions as the Bank of Ireland, National Westminster Bank and Nationwide Building Society. Secondly, I am an expat who has been resident in Australia, Ireland, the Isle of Man, Malta and the US.
As I have first-hand experience of opening offshore bank accounts since the so-called ‘War on Terror’ began, I shall use these as real-life case histories.
Why confidentiality is important
As any professional involved in the offshore banking industry will tell you, a surprisingly small percentage of accounts belong to people actively engaged in tax evasion. In my experience of interviewing customers on behalf of financial institutions, the reasons for their wanting to open an account in an offshore location are many and varied, including a genuine desire for privacy, issues concerned with inheritance, divorce or other familial concerns, the location of a business’ interests, no longer working in the country of residence, concerns about the political stability of the country of residence, tax saving and threats to confidentiality.
Before one can address the issue of how to achieve banking confidentiality, it’s important to understand the different threats to your privacy. These can be summarised as follows:
International money-laundering regulations: these regulations have been forced on every country in the world, regardless of its tax policy. They are designed to help catch criminals and in particular those involved in organised crime. They apply not only to banks but to anyone providing services involving a financial transaction. In other words, they include accountants, company-formation agents, insurance-company representatives and lawyers. The main feature of the money-laundering regulations are that any institution or individual involved in providing services must “know their customer”, i.e. they must reassure themselves as to the correct identity and probity of their clients.
Exchange of information between revenue authorities: this is a relatively new but growing trend. It involves written agreements between governments to exchange information about their citizens, residents and – in the case of financial services – the customers of financial institutions located within their jurisdictions. It has had two affects. First of all, in the case of wealthier nations, tax authorities now regularly exchange information about their taxpayers. For instance, the Australian Government have an agreement with the Inland Revenue to answer questions about taxpayers located in each other’s countries. Secondly, wealthier nations are demanding that offshore tax havens force financial institutions located within their jurisdiction to release information about non-resident accounts. The volume and nature of this information varies from country to country, depending on the agreement in place. The EU and OECD are both pressing for greater exchange of information, and, although many of the tax havens are resisting, ultimately this may be to no avail.
Anti-terrorist regulations: following the attack on the World Trade Center, the US and other countries are trying to track down the source of terrorist funds. To help them, they have enacted extensive legislation that they are forcing tax havens to comply with.
The customers themselves: in many instances, those using offshore bank accounts and other financial services tell their wives, partners, colleagues, children, friends and – in my experience – even strangers! Also they do unbelievably foolish things such as setting up ineffective offshore structures and opening bank accounts over the Internet. As a result, one of the greatest threats to many offshore banking customers’ confidentiality is themselves!
From the service provider’s perspective
It is important to bear in mind that the money-laundering, anti-terrorist and information-exchange regulations apply to anyone involved in handling money, assets, offshore structures or any other sort of financial transaction. Into this list one must include both the institution and the individuals working for those institutions. The regulations apply whether the institution and/or the individual is located onshore”(i.e. in a high-tax jurisdiction such as the EU) or in a tax haven. So, when I speak of ‘service providers’, what I really mean is:
• the directors, managers and staff of banks, insurance companies and other financial-service providers
• accountants
• company-formation agents
• nominee directors and professional trustees
• lawyers
These individuals face a dilemma. On the one hand, they want your business and realise that they need to provide a first-class service to gain it. In most offshore locations, tax evasion by a foreigner is not a criminal offence. Under the circumstances, the individuals don’t particularly care if your money comes as a result of dubious tax practices at home. By the same token, they are unlikely to be concerned if your offshore banking is the result of some other non-criminal reason, such as a desire to keep your wealth away from an estranged spouse or children. On the other hand, they don’t want to break the law. Penalties – even in tax havens – are severe and can result in disqualification, fines and imprisonment.
As a result, even in the most relaxed (I’m tempted to say corrupt) fiscal environments, you will find any reputable service provider is going to insist on knowing who the beneficial owner of any money actually is. In other words, they’re going to want to look behind any nominee arrangements or offshore structures. Put in plain English:
• Service providers are going to make more checks – and more thorough checks at that. The days of opening accounts with insufficient identity or in false names are long gone.
• Service providers won’t hesitate to report you to the relevant authorities if they suspect – for a moment – that your assets are the result of criminal activities or are connected with terrorism.
• The same service providers will certainly turn you in if it is in their best interest.
Three vital things to remember
Given what you now know about the service providers, it’s imperative that you offer them no reason to:
1. doubt your identity or integrity
2. believe your wealth comes from a dubious source
3. provide details of your personal affairs to a third party
A real case history
Having worked both for financial institutions and been a customer, I know that many people wishing to use offshore financial services make themselves vulnerable because they do not plan properly. If you desire banking confidentiality, what should be uppermost in your mind is the need to reassure whoever you are going to have a business relationship with that you are – to put it bluntly – on the level.
I can illustrate this point best by describing my experiences opening a bank account in Malta. The account was opened with a reputable bank to which I was introduced by an accountant. You may be amused to know that the accountant had only known me for one hour before he made the introduction. However, it was clear that his reference counted for a great deal with the bank itself. He trusted me; therefore they trusted me. I think it is also relevant to mention that I went to open the bank account wearing a suit and tie and carrying an expensive leather briefcase. Bankers are conventional by nature, and they feel more confident with other conventional people. Without being asked, I offered the bank manager the following items:
• two bank references: one from an Australian bank and one from an isle of man bank (both were dated within the previous three months and both were addressed to “to whom it may concern”; neither, as a matter of record, mentioned my address but detailed my name, place and date of birth
• my British passport
• a letter from the UK police (easily obtained) saying that I had no criminal record
• a letter from an Australian accountant stating what my annual income was, and also my profession
• further evidence of my good standing included newspaper articles about me
This may seem a little over the top. However, as a result, the bank manager was clearly convinced that I was who I said I was and that I wasn’t involved in anything nefarious. As a result, he agreed to the following terms:
• the account would not be in my exact name
• all correspondence would go to the local accountant’s address, and there would be no reference on file to the fact that I lived overseas
You may be interested to know that I opened the account as a local account in Maltese lire.
I made no reference to how I would be depositing future funds into the account, but as I was leaving the manager said that if I needed to deposit cash – even large sums – it would not be a problem. When I asked how this worked, given international money-laundering regulations, he explained that a lot of their customers came from Middle East countries with exchange controls in place. Therefore, the bank was used to large cash sums being deposited by customers in good standing.
You may wonder why it was that I wasn’t concerned about giving the bank so much evidence as to my true identity if what I wished to do was preserve my own confidentiality. Knowing how banks work, I’m counting on the following factors to work in my favour:
• it is not a non-resident account, but a local account; therefore, if anyone asks for access to and/or a list of offshore accounts, details will not come up
• if a request comes in asking if there is an account at that financial institution in my name, it won’t be found
• because all correspondence goes to the accountant, I will have a fair warning of any undue interest
I am non-resident and operate my life strictly by the rules. My tax is up to date in my country of residence, and I don’t have anyone else (such as angry wife, creditors or ex- partner) chasing me. The fact is I just value my confidentiality. But imagine for a moment that my situation was different.
• If the tax authorities from any of the countries where I’ve been resident in the past get in touch with this bank, I’m unlikely to be identified either by my name or by the account address.
• If anybody else, such as a former wife (of which I have many ...) were by some quirk of fate to get a court order forcing the bank to say whether I had an account there, it’s unlikely, again, that the bank would give me away.
• If – again under circumstances that are hard to imagine – a government intelligence organisation were to ask about suspicious accounts – again, it is extremely unlikely that my name or account would be targeted. The bank know who I am.
You’ll notice that I use the word ‘unlikely’ in relation to all the above circumstances. There are no guarantees with my approach. However, I’ve eliminated the major risks by the following methods:
• I’ve reassured my service provider – in this case my bank
• I haven’t opened an account in my own name
• I haven’t made it an offshore account, which is likely to attract more attention
• I haven’t opened the account in a major currency such as euros or US dollars
• I haven’t provided an overseas address
• I’ve opened the account in person and not through an intermediary or (worst of all) by post
I should mention one other thing relating to this account. I knew when I opened it that I would not be using it for any sort of transaction likely to attract unwanted attention. As it happens, deposits will be made either by electronic transfer or – where convenient – using cash. I am retired from my main line of work, although I still have an earned income. It is not vast and the sums likely to go through the account are not sufficiently large to attract the interest of the bank’s own compliance team or external regulators. Bank accounts with relatively small balances are never as interesting as bank accounts with really large balances.
Towards total security
Suppose that you want more of a guarantee regarding confidentiality. Opening my account in Malta didn’t involve me in very much effort. I just had to arrange for some letters and turn up. In exchange, I put in place arrangements which – so far as I’m concerned – are sufficient for my needs. If you want more confidentiality than this, you’re going to have to accept a higher degree of risk to your assets or make a greater effort.
What do I mean by risk? Well, there’s no doubt that, if you go to one of the less-well-regulated jurisdictions and use the services of less-scrupulous financial institutions, you will find that the ‘know your customer’ rules are less strict. I wouldn’t do this, because any service provider that isn’t properly regulated or located in a reputable tax haven is – in my opinion – unsuitable for my needs. This leaves the alternative of putting in more effort. Here you have two further choices: (a) you can put more layers between your genuine identity and your money or (b) you can create a new identity for yourself.
Both these topics will be the subject of articles already commissioned by the ‘Schmidt Offshore Report’ to run later this year. Both approaches have the benefit of substantially increasing your privacy. However, both approaches are – if they’re to be effective – expensive. For instance, if you want to use reliable professional advisors to act as your nominee, you will have to choose – with great care – the nature and location of those advisors. Even finding them will be expensive. In an odd way, obtaining a second passport is likely to be considerably cheaper.
A few words about second passports
Regrettably, second passports have a somewhat tarnished image in many people’s eyes. Dubious second-passport schemes operated by developing countries (often in Africa or Central/Southern America), where corrupt officials will sell the right to citizenship, mean that many people don’t give this option the consideration it deserves. In fact, if the amount of money at stake is sufficiently high it is certainly well worth considering getting a second passport from a ‘blue-chip’ jurisdiction. Options to include are Canada, Greece, Ireland, Israel and New Zealand. All of these countries – and others – offer more opportunity than you might expect.
In conclusion
I shall be pleased to answer any subscriber’s letter relating to this crucial subject. As with any query addressed to the ‘Schmidt Offshore Report’, you can send your letter in anonymously and we will post the answer in the next available issue of the newsletter. Please indicate on your letter whether you are a reader of Schmidt Tax Report and/or the ‘Schmidt Offshore Report’, since they are sold separately.
Despite what the regulators would lead us to believe, in my experience there are still plenty of ways of ensuring a very high degree of bank confidentiality.
A word of warning
Many service providers advertise confidential bank accounts in offshore locations. Such service providers may be perfectly reputable, but I would urge caution. Using a third party to arrange a bank account increases, in my opinion, your risk of exposure.
I hope it doesn’t need to be stressed that any service provider you find over the Internet should be treated with caution. Deal only with the long-established, well-known, reputable companies.
Why The OECD Will Fail
By Peter Smith FCA ATII
Despite protests, the Organisation for Economic Cooperation and Development (OECD) is attempting to clamp down on tax havens. Fronting for about 30 high-tax governments, the Paris-based organisation has been leaning on jurisdictions like the Cayman Islands, Bermuda and the Isle of Man.
If the junta of high-tax governments has its way, not only will there be no place left to run, but also, by eliminating what tax havens offer, these governments will have eliminated tax competition, and with it the imperative to down-size their fiefdoms.
It was in a paper entitled ‘Promoting Fair Tax Competition’ that the OECD built their case against tax havens. Their starting point was that laws regulating how people use their rightful capital are not just laws. They acknowledged that property owners ought to be allowed to do that which they do naturally, namely invest their capital where it will yield the best returns. But according to the report this must be done “without impeding the aim of national governments to meet the legitimate expectations of their citizens”. Freedom to make economic decisions must be tempered by the OECD governments’ ongoing confiscatory agenda. Hell-bent on forcing low- or no-tax nations to suspend their financial privacy laws and on impelling these countries, through the threat of sanctions, to provide information to foreign tax collectors, the OECD has set about framing tax havens’ practices as harmful, if not criminal. With the aid of the media, tax havens have been depicted as cauldrons of counterfeiting and money laundering – a strange accusation coming from governments whose national banks regularly inflate the money supply (and dilute the value of people’s assets).
To be guilty of harmful tax practices, say the OECD, the country must be an area of no or nominally effective tax rates. The OECD further suggest that a haven transgresses when it is bereft of “transparency” and “effective exchange of information”. By demanding information exchange when this defies a tax haven’s own laws, the OECD disregard the comity of nations in international law – the courtesy by which one nation respects and recognises the laws of another.
So what would the OECD do if they can’t get the so-called tax havens to fully cooperate? Basically, the OECD plan to place a banking embargo on their banks, preventing them from doing any banking with OECD countries. This is a bold, aggressive move that would put an end to the ancient principle of English liberty that a “man’s castle is beyond the surveillance of the king”.
In many respects, a tax haven is a kind of economic sanctuary. People can bring their wealth to a tax haven and avoid government confiscations by tax or exchange controls or just plain confiscations like those of Castro and other totalitarian rulers. These oppressive acts by their governments are as much an evil to them as political oppression.
In fact, exchange control is one of the most damaging economic tools a government can use. Consider the case of Jamaica, where exchange controls have contributed to the former British colony’s failure to grow. In the 1960s, Jamaica became independent and issued a new currency, the Jamaican dollar, worth US$1.20. At the same time, it introduced exchange controls meaning that all Jamaicans were locked into the Jamaican dollar. No one could own foreign currency without the central bank’s permission. After 30 years of exchange controls, the value of the Jamaican is no longer $1.20, but 2 cents. The Jamaican dollar has lost more than 99% of its value. In fact, nowadays it costs roughly 50 Jamaican dollars for just one American dollar. Not surprisingly, there was a mass exodus of money from the country to the Cayman Islands on small single-engined Cessna aeroplanes that picked up bundles of Jamaican dollars and flew them the 250 miles across the ocean.
In my opinion, you cannot fault people for taking whatever steps they can to protect their wealth from plunder by governments. It is as instinctive as resisting a robber. Indeed, the robbery label has been applied to taxation that borders on plunder since the days of the Roman Empire, whose tax system is often called, by both modern and ancient historians, “organised robbery”.
I agree completely that it’s a citizen’s duty to pay tax. However, taxpayers through history have made it clear that they have a patriotic duty not to pay, but to resist an unfair tax – for there is an iron law in history that when governments tax too much, or unfairly, taxpayers will respond in some way for relief. It may be violence, as in the American Revolution, or it may be fraud, as in the notorious evasion of the “Royal Fifth” by Spanish galleons in the sixteenth and seventeenth centuries, or it may be flight to avoid taxes – today, flight to the havens.
It is also worth remembering that the ancient Greeks’ solution to tax evasion was to make the rates so low that evasion was not worth the trouble. This is a solution that has been proposed many times since. In the 1920s, Andrew Mellon, US Secretary of the Treasury, tried to put through a constitutional amendment that would put a cap on tax rates. Studies at the Treasury indicated that a 25% tax rate would produce the most revenue. In the 1960s, Enoch Powell suggested it with his famous Morecambe Budget. The fact is that most governments have forgotten that the best way to end the use of tax havens for tax avoidance is to reduce the level of tax they charge their citizens.
Anyway, I don’t believe the OECD will succeed. To start with, money owes no allegiance except to safety and profits. The transparency project will cripple many tax havens. To this extent, the OECD will succeed – but the money will not end up in the tax coffers of the OECD nations as hoped but will disappear elsewhere.
People know financial privacy is an absolutely essential key to protecting their wealth, and havens that join in the OECD’s transparency game can say goodbye to their tax-haven business. Already, in the Caribbean havens, many European banks are cutting staff, and one major Swiss bank in Cayman has shut down. Business is certain to move to the financial centres that will protect privacy.
My guess is that Switzerland is likely to be the recipient of many of the accounts that have taken flight. While a member of the OECD, they will not play their game. In fact, they can’t. Banking privacy in Switzerland is unlike the privacy laws in the tax havens of recent origin: their privacy laws were enacted to bring in business. Furthermore, Swiss banking-privacy laws can only be repealed by a national referendum. There’s no doubt that such a referendum would not be approved by the Swiss voters. If Hitler, with panzer divisions at the border, couldn’t penetrate Swiss banking secrecy, how can the OECD believe that they can? Money that does not go to Switzerland is likely to go to other well-regulated, secure states –for instance Singapore, Thailand or Malaysia. It is not, in my opinion, impossible that even China will put herself forward as a tax haven in the future.
Q – I’ve been told that if I want to transfer money around the world without leaving a trail I should use something called Hawala. What is this? And is it legal?
A – We must stress that Hawala is neither legal nor appropriate for the transfer of money. Hawala is the Arabic word for ‘trust’, and it is one of the oldest and least sophisticated method of money laundering in the world. It works like this. Imagine there is someone in Delhi who wants to transfer a million US dollars in cash to, say, Cairo. The person concerned gives the cash to the Hawala dealer in Cairo, who contacts his associate dealer in Delhi, who contacts his associate dealer in Cairo with a telephone call. The Cairo dealer agrees to remit the sum, less commission, to the first person’s associate. A ‘debit’ is created in the Cairo dealer’s ‘phantom’ books – which entitles him to have a similar deal in the other direction.
The transfer is based on trust between the two Hawala dealers and the third party. Clearly, there’s no need to provide a name or identification on either side. The Hawala dealer’s receipt is a mere handshake and a code word. Records of such transactions will only be kept until the deal is completed. Then they’re destroyed. No cash moves across a jurisdiction or through an electronic transfer system.
Q – What is money laundering and its common processes?
A – Money laundering is the process whereby illegal funds are moved through the banking system in an attempt to disguise their origin and ownership. It’s achieved by the use of three basic steps:
1. Placement: this is the insertion of the proceeds of illegal activities into financial systems without attracting the attention of financial institutions and government authorities. Money launderers may accomplish this by dividing their tainted cash into smaller sums and executing transactions that fall beneath banks’ regulatory reporting levels.
2. Layering: this is the process of generating a series of transactions to distance the proceeds from the illegal source and to conceal the audit trail. Common layering techniques include outbound electronic fund transfers, usually directly or subsequently into a ‘banking-secrecy haven’ or a jurisdiction with lax record-keeping and reporting requirements, and withdraws already placed deposits in the form of highly liquid monetary instruments such as money orders or travellers cheques.
3. Integration: the final money-laundering stage is the unnoticed reinsertion of successfully laundered, untraceable proceeds into an economy. This is accomplished through a variety of spending, investing and lending techniques and cross-border, seemingly legitimate transactions.
Many of the well-known money-laundering schemes such as the Hawala (see above) and Chinese networks in Asia, the black-market peso exchange in Latin America, the VAT carousel scheme, and other evolving courier systems in Europe, all follow, in broad terms, the above three-step process.
Q – I am looking for somewhere to retire abroad that will offer me a low-tax environment. Someone has suggested Ceuta and Melilla. Where are they? How do I discover more?
A – Ceuta and Melilla are two small enclaves on the coast of Morocco but which actually belong to Spain. Indeed, the cities are Spanish and therefore part of the EU. On the other hand, although Spanish taxes apply, the last time I enquired, they applied at only half the rate imposed in Spain. In other words, the two enclaves are not pure tax havens. Nevertheless, a 50% discount on Spanish tax, plus the fact that both cities are completely duty-free ports (there’s no VAT), clearly make them very attractive. For an EU citizen, a residential address is what will get you the tax break, not your physical presence. If you want to find them on the map, look directly south across the Straits of Gibraltar. The city of Melilla lies to the east, jutting out on a large cape. Both places are fairly inaccessible. You can fly to Melilla from Malaga, but in the case of Ceuta you have to drive up to nine hours from Tangier.
Anyway, if you would like more information, we suggest you contact an accountant specialising in Spanish tax or the Spanish Embassy.
Q – What’s to stop a non-resident friend of mine setting up an online casino and privately offering to refund 95% of losses to select ‘gamblers’ in the form of cash, money orders or cheques drawn on an offshore bank?
A – Well, of course, the answer is that there’s nothing to stop your friend offering such a service. Providing he’s not resident in any country that views this as illegal, he isn’t breaking the law. However, depending on where he locates his online casino – and the countries in which his ‘gamblers’ are resident, he may be doing something illegal. For instance, if he was in Ireland and offering services to British tax residents, we think it’s pretty likely he would be considered to be offering an illegal, tax-evasion service. Furthermore, under exchange-of-information powers, it would be pretty easy for the Inland Revenue to catch up with him. On the other hand, if he was based in a less-well-regulated, distant, non-EU related territory, it’s unlikely he’d run into any trouble.
From the way you’ve framed your question, we slightly wonder if you are considering becoming one of his ‘gamblers’? There is, of course, nothing to stop you transferring your wealth in this way. Providing you pay tax on the money you’re using to gamble, you’re not breaking any law. On the other hand, if you haven’t paid tax on the money you would be using to gamble, you would be guilty of tax evasion. Would you be caught? The answer is probably linked to the amount of money involved and whether your financial transactions are likely to come under close scrutiny. It’s the sort of thing you could probably get away with for a relatively small amount of money over a short period of time.
This is, by the way, an increasingly popular way for American-based criminals to launder their cash.
The most distressing trend for those of us involved in international tax planning is, of course, the trend towards “information exchange”. A recent example that would make me smile if it didn’t make me cry was an announcement made by the US Treasury that, beginning on 1 January 2006, “the Bahamas will be considered part of the North America area for purposes of determining whether US taxpayers may deduct expenses incurred in attending conferences and the like in the Bahamas”. This note is buried in an information-exchange agreement between the United States and the Bahamas and was effective from 1 January 2004 for criminal matters, and will be effective from 1 January 2006 in connection with civil-tax matters.
On a similar basis (as reported in this issue), the Irish finance minister signed a new bill at the end of last year that incorporates the provisions of the European Savings Tax Directive into Irish law. Although the directive will not become fully effective until 1 January 2005, the European Communities (taxation of savings income in the form of interest payments) regulations will require domestic Irish banks to establish the identity of the beneficial owners of all new bank accounts opened in Ireland from 1 January 2004. Irish banks will then be obliged to pass on details of savings income for taxation purposes to the Irish Revenue Commissioners, who will themselves pass it on to the tax authorities of the EU member state where the customer resides.
None of these developments is unexpected. Next year sees the full introduction of the European Union Savings Tax Directive. As the ‘Schmidt Offshore Report’ previously mentioned, this obliges European Union nations to exchange information automatically on interest payments received in one member country on accounts held by a resident in another. So, for example, until recently most of us thought that you could move to Spain, put your assets in a non-resident account in Belgium, France or back home in the UK, and the Spanish tax authorities would be none the wiser. Soon that will just not be remotely sensible.
Indeed, anyone who contacts a UK-based advisor with this kind of structure after 1 March 2004 will be affected by the Proceeds of Crime Act (2002), and the Money Laundering Regulations (2003). These require that British financial advisors report any suspicion of tax evasion to the UK’s National Criminal Intelligence Service. Furthermore, they can’t tell any of their clients that they’ve reported them.
The planning behind this draconian legislation is that the game should be up for anyone who thinks that non-disclosure is the sensible route to avoiding tax.
I’ve stressed it before, and I must emphasise it again, when an accountant or someone else involved with a financial transaction knows or suspects that a client or contact possesses, conceals or deals with to their benefit any property arising partly or wholly from what is called “criminal conduct”, the professional concerned must report their suspicions to the National Criminal Intelligence Service or risk a prison sentence for not doing so. The reason I highlight this yet again is that criminal conduct is conduct that constitutes an offence in any part of the UK, or would do so if it were committed here. So, failure to pay tax anywhere in the world would be defined as a criminal offence. Indeed, if your accountant knows or suspects that you’ve not paid your wealth tax in Spain, your VAT in France or, indeed, income tax in America, your accountant will have to file a report. Broadly speaking, there is no professional privilege in the UK for accountants’ working papers, so it’s no longer advisable to approach a UK accountant if there’s a possibility that even inadvertently you have evaded tax, even abroad.
Schmidt Offshore Report Editorial Board: David Treitel LLP, Nathaniel Litmann, Alan Pink FCA ATII, Peter Smith FCA ATII, Peter Ward.
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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