THE SCHMIDT OFFSHORE REPORT Issue 2 Editor’s note This issue of the ‘Offshore Report’ was prepared by myself and David Treitel LLP – our leading expert on offshore tax planning. My section covers various news items, information about ‘safe’ offshore havens, some general advice on opening offshore bank accounts and information on the best way to find a reliable, honest and confidential offshore professional advisor. David looks at offshore life insurance, the ‘Portugal Problem’, his top 25 offshore havens and various other items. In one or two places, we each give our own opinion on current news items. I would like to take this opportunity to remind readers that our ‘Ask the Experts’ service is both free and confidential. All queries are answered, and, if you wish to remain anonymous, simply send your question unsigned to me, care of our publisher’s office: The Editor Schmidt Tax Report Wentworth Publishing 17 Fleet Street London EC4Y 1AA email: wentworth@online.rednet.co.uk Offshore news Update on the Exchange of Banking Information As we receive a large number of letters about bank confidentiality within the EU, I thought a brief summary of the current state of play might be of value. The European Directive on the Taxation of Savings now has 12 signatories. Basically, it is a way of stopping EU citizens from opening confidential bank accounts in other EU countries and receiving their interest gross. It will work in two ways: - by the application of withholding tax on interest at the country of source - by exchange of information between different countries The directive is to be put in place by 1 January 2005 The 12 countries agreed to exchange information with other countries on request. Austria, Belgium and Luxembourg will not exchange information on customers but will levy withholding tax until at least 2012. Switzerland will levy a withholding tax on accounts owned by EU citizens but will not disclose their identity. Huge pressure (including the threat of sanctions) is being placed on Switzerland to give up its banking secrecy. But, for the time being, the Swiss are standing firm. If you are a UK resident with an account in any of the 12 signatories, the UK Government can – at any time – request information about those accounts as and when they want. The Inland Revenue have asked all interested parties (financial institutions, accountants etc.) to make suggestions and proposals regarding the way in which financial information will be gathered and exchanged. It is not clear to how far back tax authorities will be able to go when requesting information. However, there are rumours that they will be able to ask for data that is up to ten years old – and even older. I cannot overstate sufficiently the need for anyone to whom confidentiality is important who has a non-resident bank account anywhere in Europe to take action now. The window of opportunity is closing rapidly. Invasion of privacy Two distressing moves effectively reducing the level of privacy enjoyed by UK citizens have been taken by the UK Government. First, it looks increasingly as if identity cards for every UK citizen will be introduced by the Government sooner rather than later – possibly in the next Queen’s Speech (at the time of going to press this is still in the future). Tony Blair has publicly endorsed the proposals, and so it is largely viewed as only being a matter of time. Secondly, the Office of Fair Trading have been granted extensive powers to spy on telephone and Internet records, direct undercover informants and track suspects’ movements. Worryingly, if they come across information in the course of their work that relates to an individual’s tax affairs, they could be obliged to pass it on to the Inland Revenue or other tax authority. Warning regarding offshore structures The Offshore Arrangements Project is a new initiative where the Inland Revenue are undertaking risk assessments of specific offshore arrangements where it is perceived that evasion may result in a substantial loss of revenue to the Exchequer. Or, to put it in plain English, UK companies whose shares are held in total or in part by an offshore company or trust can expect to be investigated. The Inland Revenue are also going to look at all property dealings where the vendor or purchaser is not based in the UK. Each area of the Revenue has appointed one Inspector as an offshore consultant to co-ordinate the identification of the highest-risk cases. Bank secrecy: a thing of the past? Greater and greater pressure is being put on offshore jurisdictions to put an end to banking secrecy and exchange customer information. Within Europe the last bastions of bank confidentiality are Lichtenstein and Switzerland. The others, from the Isle of Man to Malta, and from Andorra to Cyprus, are either exploded or will be exploded in the near future. In the Caribbean the UK and the US are gradually achieving the same result. Whilst in the Far East a combination of factors – from Chinese control of Hong Kong to Australia’s anti-tax haven policy – is making life difficult. So, if banking secrecy is important to you, what can you do? More to the point, where can you go? The answer to this depends on a number of questions, including: - Why do you want banking secrecy in the first place? - How much money is at stake? - What do you want to do with the money – both in the short and long term? - How much access to the money is required? - How much risk are you willing to take? If you want bank confidentiality for purely personal reasons – for instance to keep assets away from a member of your family –you have a much wider range of possibilities. There will be no exchange of information between tax authorities in relation to what is, basically, a civil matter. On the other hand, if you wish to keep your funds 100% secret for some other reason of your own, the situation is a little tougher. Thanks to the ‘know your customer’ rules, every financial institution must hold legitimate proof of who you are. Indeed, when I went to open a bank account in Malta recently, I was required to bring a reference from my UK bankers as well as a copy of my passport. Your choices are probably as follows: - Choose a respectable and secure jurisdiction – such as the BVI – and risk disclosing your identity in full. - Choose Switzerland and hope they remain steadfast. - Use a nominee. This could be a professional advisor or it could be someone who you trust who lives in a third jurisdiction, for instance I know an Australian citizen with a UK home who got his UK gardener to open an account in Cyprus using an address in Spain. Complicated but, possibly, effective. - Mask your identity. - Use a more complicated offshore structure, such as an offshore company and/or offshore trusts. - Choose a less well-policed jurisdiction where fewer questions will be asked and less ‘know your customer’ information sought but where the risk might be greater. - Use multiple accounts in multiple jurisdictions so that you stay ‘under the radar’. - Leave your money with professional advisors, such as solicitors’ client accounts. I know one American who has lawyers in about a dozen countries holding small sums for him. In each case they believe he is planning to buy a home in that particular country. - Open an ordinary account in a country where it is unlikely information will be exchanged with the UK authorities, because it will appear that you are resident there. For example, you might go to Ireland (into the eye of the storm and all that) and open accounts in various credit unions. - Give up bank accounts completely and hold your offshore wealth in some other form – gold, for instance, or stamps. Clearly, if a great deal of cash is at stake, it is worth setting up an offshore structure. It must be remarked, though, that, if you wish to make frequent transactions using your offshore account, you must accept that the chances of maintaining confidentiality will be reduced. Also, remember that, while some of the more exotic locations – from former USSR countries to small islands in the Pacific Ocean – may offer better confidentiality, they are (a) riskier and (b) eventually likely to come under severe pressure (I would not rule out, in the current world political climate, invasion) to close down or modify their offshore operations. I must stress that my assumption is that it is not the UK tax authorities you wish to hide your money from. This is tax evasion and against the law. We do not, as regular readers will be aware, condone such practices. Finding a reliable offshore advisor ‘Can you’, I am frequently asked, ‘recommend someone to set up and manage my offshore structure?’ My answer is always, ‘Sorry, but no.’ Why? Because, if I make an introduction and the person I am introducing turns out to be evading tax, breaking the law or – just as worrying – a time waster, the professional advisor I have suggested is going to blame me. Not that good professional advisors aren’t cautious before taking a new client on. They will want to satisfy themselves that their prospective client isn’t a criminal or terrorist or that they aren’t – in some other way – likely to cause trouble. In some jurisdictions they won’t take on anyone they believe may be involved in tax evasion in their place of residence… in others, they couldn’t care a fig about such matters. I suppose the real point I am making is that it is actually far harder to persuade a reputable and reliable professional advisor to take you on than it is to find possible advisors in the first place. With this in mind, I would start by making the following suggestion: Pull together evidence of who you are and what you do. Get, for instance, a general ‘to whom it may concern’ bank reference, copies of other bank statements in your name, evidence of who employs you and other relevant back-up paperwork. Be able to prove that you are who you say you are. I would never, ever recommend appointing an advisor without going to meet them first. If you have no personal contacts, the best approach is to: - choose your jurisdiction - visit in person and leave enough time – at least a week to a fortnight - contact local professional institutes, chambers of commerce and so forth for recommendations or go to a local branch of an international network - don’t forget libraries, magazines and even the Yellow Pages can all be good places to identify possible firms I would always recommend an initial telephone call to ascertain if the firm/individual is interested in your business before making an appointment to meet. Don’t forget to ask for information about their confidentiality policy and also their fees. Don’t appoint anyone at your first meeting. Finally, although I won’t make personal recommendations, I will always be happy to make more specific suggestions to any reader who cares to contact me. Nathaniel Litmann November 2003 This issue of the Schmidt ‘Offshore Report’ discusses five highly topical items. 1. offshore life insurance 2. the Portugal Problem 3. the top 25 tax havens 4. offshore banking (Irish and UK issues) 5. Singapore – the new tax haven? Life insurance goes offshore What’s new? It was always said that one of the main reasons for the success of Marks & Spencer’s foods in the 1980s was the use of the label ‘new!!’ on almost every product. Most financial advisors are always looking for some equally ‘new’ product to sell to you over the next few months. Rumours are flying around the United Kingdom life insurance industry at the moment that life insurance is the next big product, because the £1,000-a-year limit on insurance Individual Savings Accounts (ISAs) may be raised to £7,000 a year in next April’s Budget, matching the current maximum shares component. If this goes through, UK life insurance companies will be able to sell decent-sized unit-linked and with-profits ISAs to UK residents from 6 April 2004. Basically, the current limit is seen as too low, making it uncommercial for many insurers to enter the market. Because the onshore tax-free limit is relatively small, we have long been advocates of the offshore life insurance industry. Let’s remind ourselves why. The UK tax scene is certainly extremely positive (but only if you are a tax advisor – because, thanks to the Chancellor’s munificence, a record 31 million people will pay tax in the UK this year, up by 1.3 million from last year. Many of us resist the generosity of the Chancellor by designing our planning so that we pay less tax. What is unique about offshore? The life insurance industry is just one of the tools that we tax planners like to employ, because it is designed around a set of financial instruments that are probably more tax favoured globally than almost any other investment you might consider. Most countries provide tax-free roll-up within life insurance policies, while tax-free distributions (typically after a qualifying period) are commonly permitted. Some jurisdictions still grant tax deductions on premiums paid (just as the UK used to do), although the deduction is usually limited to small amounts for the purpose of basic family income protection. In a few countries, funds can be accumulated in a policy and then withdrawn, tax-free, after a specified period. In many countries, life insurance comes with asset or creditor protection that may apply not only to the policyholder but also to the beneficiaries. In some countries, life insurance receives exemption from taxes on death (such as estate or inheritance taxes). Effectively, life insurance can present a unique set of value propositions for purposes of wealth accumulation, wealth preservation and wealth transfer. Domestic (onshore) life insurance policies tend to have to be compliant with ever-increasing burdens of regulations defining management and investment possibilities within a policy. These rules typically proscribe the types of investments in which insurance companies can invest their assets, the types of investments they are permitted to offer you, what reserves they have to offer on their life insurance policies, the mortality assumptions they have to make in calculating the risk on their insurance policies and the commissions they have to pay to those who market their insurance products. International life policies are generally not subject to these burdens and can therefore offer greater flexibility and access to investment types and funds that quite simply won’t be available within onshore insurance contracts. Pure life insurance death benefits are tax-free in most countries. However, life insurance is also frequently used as a tax-efficient wrapper to shelter accumulated growth on investments during life, mainly for the benefit of the insured. For example, in the UK, single-premium portfolio bonds are often used to gain gross roll-up. In Germany, 12-year endowment contracts are popular, while in the United States deferred variable annuities and modified endowment contracts are becoming increasingly fashionable weapons in the tax planner’s armoury in designing tax-efficient schemes. So what is the UK position? So what happens (you may well ask) if you want to invest offshore (or you are a non-UK person coming to the UK who has already invested in a tax-favoured product elsewhere)? Broadly speaking, offshore bonds are taxed in the UK in the same way as onshore bonds, in that tax-deferred withdrawals can be made by UK residents up to 5% per annum of the original investment up to a maximum of 100% of the original amount invested. So, for example, an investor can withdraw nothing for six years and then take 30% in year six without incurring an immediate tax liability. Along with these fairly straightforward rules, bonds have the advantage that they always give rise to an income-tax liability for an investor, not a capital gains tax liability. This enables offshore insurance bonds to be used as wrappers for a range of investment funds, while these funds can be switched without incurring UK tax liabilities until final encashment. This would not be the case with funds that would be liable to UK capital gains tax. This unique ability makes offshore pooled insurance funds ideal for such things as school-fees planning and designing tax-efficient investments for UK residents who expect to depart from the UK but may not be absent for the complete five years required to escape from UK capital gains tax. In deciding how useful offshore bonds can be for your particular circumstances, it helps to build into the thought process that any annual ‘income’ in excess of 5% taken on a bond will be liable to UK taxation at your marginal tax rate for that year. When a bond is cashed in, investors are liable to income tax on the total gain at their top rate, less any tax already paid on withdrawals over 5% per year. This gives you the ability to cash in and pay, say after retirement, when you are likely to be in a lower tax band. It is, of course, feasible to structure an entirely tax-free investment. So, for example, the 2003/2004 UK personal allowance is £4,615. Combined with the 5% allowance, this means that a single-premium investment of £92,300 can provide an ‘income’ of £9,230 (i.e. 10% a year) without any immediate liability to tax. Who should go offshore? This example, while mathematically interesting, is only a small example of the market for these kinds of investment structures. The ideal clients for wealth managers and private banks have long been high-net-worth individuals looking for long-term investments. With offshore bonds, the larger the sum invested and the longer it is invested for, the greater the impact that tax-efficient growth will have on the sum invested. This is why offshore bonds have traditionally attracted investments from the very wealthy. Many such people share a general aversion to paying unnecessary tax on their savings and have been targeted by numerous investment advisors over the years who try to sell offshore products purely because of their tax advantages (occasionally ignoring other golden rules of investing, such as checking out investor protection schemes). So, for example, if you are thinking about buying into offshore insurance bonds, it is important to make certain that you are only offered investments in pooled funds, because the UK tax system is rather strict about allowing investors absolute choices over the kinds of offshore investments they hold in tax-deferred insurance bonds. If the investor can select and make choices, the danger is one of tax at a penal rate on a deemed 15% growth under the ‘personal portfolio bond’ rules. Where does this take us? Onshore insurance bonds can restrict investment choice and impose unwelcome taxes. If onshore unit-linked and with-profits ISAs become more available next year, they will be sold to all of us purely because of their shiny ‘new’ tax-free label. However, in choosing investments, it is also vital that you investigate fund choices and whether the product gives you the ability to invest in a range of more sophisticated investments, such as hedge funds. An offshore portfolio bond, with access to a range of pooled asset funds offering virtually tax-free growth until the bond is cashed in, could provide an ideal solution for many of our needs. The Portugal Problem Where the sunshine is? I write this piece just as the sky darkens, after several days of drizzle/showers/trouble on the railways because of the wrong kind of rain and just generally dreary inclementness (is that actually a word?). Well, surely there is a simple solution: move to a country not so far from home that you can’t visit the relatives but where sunshine is plentiful and the cost of living is that bit lower. For many of us who harbour a dream of working or retiring abroad, Portugal has become that destination of choice. Cut-price airfares have made the journey from London to Faro cheaper than a train ticket from London to Edinburgh. The Algarve has improved its infrastructure with such things as the opening of the A22 motorway extension. Satellite TV and the Internet have enabled people to work from homes in the Algarve just as if they were in the UK. And tax goes up – again! Unfortunately for those of us just about to make the move, property prices have risen dramatically in recent years (to the delight of those already there). Yet, unfortunately for many of those already there, this growth in prices comes with a mixed blessing in the form of increasing tax bills. Using an offshore company has traditionally been viewed as one of the most tax-efficient ways of owing property overseas. Why? Well, for a start companies pay corporation tax, whereas those who own property direct have to pay UK income tax on rental income and capital gains tax on profits made on disposal. Corporation tax is generally lower. In addition, many Brits who purchase properties in countries such as France, Spain and Portugal have used offshore companies to avoid problems with local taxes and succession laws. Unfortunately, such companies have come under greater attack over recent years. For example, you probably already know that the UK Inland Revenue have been arguing for the last four years that UK residents who live rent-free in properties owned by offshore companies should be treated as “shadow directors”, so should be taxed on the benefit of the occupation of their property. This argument was strengthened by the 1999 cases of Dimsey and Allen who were found guilty of fraud after Allen was found to be a shadow director. Now the Revenue are using this judgment to argue that all UK shareholders in offshore companies are potentially liable to UK tax to the extent that they gain tax-free benefit from occupation of property owned by a company. If you were taxed on this basis, it would cost about £4,000 for a £250,000 property. So what is new in Portugal? If you are one of the substantial body of UK residents who own homes in Portugal through offshore companies, you will also come under threat from tax changes soon to be imposed by the Portuguese Government. These changes are part of a crackdown aimed particularly at companies registered in counties of low taxation. The Portuguese Government blacklist includes countries commonly favoured by British taxpayers, including Gibraltar, the Isle of Man and the British Virgin Islands. As part of these reforms, the Portuguese Government are planning on replacing the much-discredited SISA (transfer tax) and Contribuiao Autarquica (the equivalent of council tax) with two new taxes: an Imposto Municipal sobre Transmissoes (IMT) (municipal transactions tax) and an Imposto sobre Imoveis (municipal property tax). The SISA was charged on any property transaction worth at least €61,000 (£44,000). The tax increased in stages to a maximum of 10% on properties valued at more than €170,000 (£120,000). The SISA will be replaced by the IMT next January. Under the new regime, individual property owners will pay tax on property transactions worth more than €80,000 (£57,000), with a maximum of 6% on properties worth €500,000 (£357,000) and above. The new local authority tax will range between 0.2% and 0.8%, depending on the property’s value, age and location. Apart from the new rates, the main difference between the old and new systems is the way in which the property is valued. SISA is charged on the declared value. It has long been the custom for purchasers to under declare the value, thus cutting their own tax bill and, more often than not, the vendor’s capital gains tax bill at the same time. IMT will be charged on the actual transfer value, which may make it prohibitively expensive to switch from corporate to individual ownership to avoid the higher rate of annual tax charge due to be levied on offshore companies. This is because capital gains tax will be charged on the difference between the present value of the property and the declared value at the time it was first purchased, which is quite likely to have been artificially low. Offshore companies – all change With effect from 1 January 2004, the Reformia do Patrimonio will introduce the payment of a 5% annual charge on the value of Portuguese real estate owned by offshore companies. So for a €250,000 home, there will be an annual €12,500 tax bill. This applies even if the ultimate beneficial owner is resident in a tax-treaty jurisdiction, such as the United Kingdom. Offshore companies that are blacklisted for the purposes of the 5% tax are those incorporated in places such as Gibraltar, the Isle of Man and the British Virgin Islands. The only exemptions are offshore companies based in Malta, Delaware and New Zealand. Those caught in this trap have three options. First, they can sell up. Alternatively, many advisors are suggesting transferring the property to one of the three exclusion zones, which will involve setting up new trust and company structures with associated expenses. Finally, if faced with these rules you could pay the purchase tax to bring the company onshore, which might cost 10% of the property’s value. Delaware seems to be the most popular of the three offshore jurisdictions, and many properties are currently being transferred to Delaware Limited Liability Companies. Unfortunately, doing so carries continuing issues and costs in the filing of Delaware company returns, annual US tax returns and the drawback that not only may the Dimsey and Allen principle be applied but that the Delaware company might inadvertently become UK resident if managed and controlled in the UK. What to do for the best Despite the downsides, are there any good reasons to hold a property in an offshore company? Well, for instance, a company enables you to transfer shares in the company to members of your family without the hassles involved in conveyancing. This can save on both the legal fees and transfer taxes normally associated with a conveyance of title. Transferring shares rather than the property itself can also save on capital gains tax. Furthermore, if there is a need for speed, the transfer of shares may be undertaken more swiftly than transferring property ownership. Using a company can also avoid the need to pay local wealth taxes, capital gains taxes, purchase tax and so on. This is because you can sell your shares to a new owner while leaving the title to the property unchanged. When ownership is transferred from one individual to another, capital gains tax is charged at 25% in France, up to 33% in Portugal and 35% for non-residents in Spain. UK taxpayers who live in an overseas property full-time lose their main-residence CGT exemption if it is owned by a company. But one of the main reasons that you still might hold overseas property in a company is to enable you to organise transfers of inheritances. Local property inheritance laws, such as compulsory heirship, can be enforced locally, overriding provisions in a will made in the UK. In France, for instance, various family members have specific rights to a share of your property. However, these compulsory-inheritance rules apply only to bricks and mortar. You are able to leave shares to whomsoever you wish. There are plenty of consultants around who will play on these advantages to persuade the unwary that a new company structure, say in Malta or Delaware, make re-incorporation elsewhere offshore the best solution. For many of us, however, particularly those who have just the one holiday home in Portugal, the right answer now could be to scrap the offshore company, swallow the tax and have the property registered in our own names. The rain will still stay warmer than back home and life will be simpler from a tax perspective. The 25 top tax havens Where should you go? Just as we tend to favour the Channel Islands and the Isle of Man, Americans tend to like using Caribbean tax havens, while Australians and New Zealanders have a thing about the South Pacific. As part of the research for writing this article, I looked back at two of the major reference works on offshore tax. Tolley’s Tax Havens published in the summer of 2000 and Marshall Langer’s The Tax Exile Report written in 1996. It is surprising how quickly the choice of tax havens changes. Since these were published, we now have to contend with the forthcoming implementation of the EU savings tax directive, which certainly shifts the landscape away from some of the traditional safe havens. Neither of these reference books covers the more recent tax havens, such as Singapore, Macau and Labuan. I am frequently asked where to invest, site a company or locate a trust. There is, of course, no right or wrong answer; so, if you live, for example, in the Cayman Islands, you may locate your funds there just for convenience or conversely locate them elsewhere in order to minimise political risk. Most commentators today would suggest that the number and quality of tax havens is reducing as regulations designed to fight money laundering are tightening. There is certainly no definitive list, but my current favourite 25 are listed here. This list is a partial selection; so it doesn’t include Ireland, Campione, Dominica, Canada, Israel, Uruguay and Monaco, all of which have attractions. You decide which suits you best! The establishment 1) Switzerland: Still the premier place to stash wealth, despite controversies over secrecy laws. 2) London: This may surprise you, but London is still Europe’s financial capital, where private banking for the very rich first started in the seventeenth century and where there are more foreign banks than in any other city in the world. And, of course, such things as bank interest and capital gains are tax-free for non-UK residents. 3) New York: America’s financial centre, and the financial capital of what is frequently called the world’s largest tax haven, just because there is no tax at all on the investment income of non-US residents. 4) Singapore: This is not a traditional tax haven but for long a stable regional banking centre attractive to wealthy Malaysians and Thais. In recent years, for example, many Indonesian Chinese tycoons have also set up trusts for their families (first and second) in Singapore. Singapore is already benefiting from strict information-exchange rules elsewhere. 5) Hong Kong: This was the traditional major Asian base for fund management and private banking and still has substantial assets under management. It benefits from a low 16.5% tax on corporate profits but has suffered with the Asian financial crisis and fear of Chinese political ambitions. Asian newcomers 6) Mauritius: This Indian Ocean island has recently been attracting Indian money. 7) Macau: Became a special administrative region of China two years after Hong Kong. The city has been improving infrastructure, including a new airport, and hopes to become a global corporate centre with its recent Macau Offshore Companies (MOC) legislation. 8) Labuan: The Malaysian island has become a fully autonomous offshore centre. It is hoping to become a centre for Islamic financial products. Former Finance Minister Zainuddin, a close friend of former Malaysian PM Mahathir, heads the Labuan Development Authority. What’s missing? A track record; Labuan opened only in 1989. 9) Bangkok: Thailand set up the Bangkok International Banking Facility scheme to promote its capital as an offshore banking centre. In 1994, Singapore’s United Overseas Bank upgraded its representative office there to the status of an offshore branch. But Bangkok is unlikely to give Singapore a run for its money anytime soon. 10) South Pacific: The Cook Islands have long been an offshore home for New Zealand money. No income and capital gains taxes in Vanuatu, but, like the Cooks and Nauru, they may be too remote for most. The Euro havens 11) Luxembourg: Has the advantage over non-EU member Switzerland in attracting funds from high-tax neighbours. Consistently the favourite location for wealthy Germans, Dutch, Belgians and French to keep all of their investments. Unfortunately, the EU savings agreement will impose either a withholding tax or information exchange shortly. 12) Channel Islands: Highly popular and home to some of the world’s leading offshore trust and banking expertise. Money is, however, already flowing out in advance of the EU’s imposition of either a withholding tax or mandatory exchange of information. 13) Isle of Man: The Isle of Man has had investor protection for longer than the Channel Islands. However, it is also committed to a withholding tax or mandatory exchange of information so is also losing favour. Caribbean locations 14) Bermuda: Seen as an alternative for American and Asian wealth. No taxes on income, profits and capital gains. The world’s largest offshore insurance market but some doubts over moves towards political independence from British rule. 15) Miami: A major offshore centre for private banking clients in Latin America and favourite second home for Brits, but tainted by drug money. 16) Cayman Islands: One of the larger and more stable offshore regimes, historically had reputation for money-laundering problems. No taxes on income, profits and capital gains and allows trusts with perpetuity of 150 years. 17) Netherlands Antilles: Home of billionaire George Soros’s Quantum Fund and branch offices of more than 50 international banks including ABN AMRO and Deutsche Bank. Has unique agreement with Netherlands allowing dividends to be paid to Netherlands Antilles parent company without payment of Dutch withholding tax. 18) US Virgin Islands: The only US tax-free haven but subject to the reach of US courts, regulators and tax authorities. 19) British Virgin Islands: Generous tax provisions and relaxed regulations mean that the BVI have become the location of choice for many international business companies (IBCs) to register. The Mediterranean 20) Gibraltar: A relatively straightforward location for individual or corporate residence. However, it faces uncertainty over long-term status of sovereignty. 21) Cyprus: One of the favourite locations for Russian offshore banking business. However, the division into Greek and Turkish areas leads to uncertainty. 22) Malta: Provides access to high-level international tax planning and has advantages such as ability to transfer in accumulated UK pension funds. However, closeness to the EU may pose disadvantages. 23) Libya: Promises big tax breaks and anonymity, following the lifting of trade sanctions in September 2003 so may prove a viable location, but how many of us would trust Qaddafi with our money? The Middle East 24) Bahrain: Has grown rapidly and has the advantage of not being subject to the EU savings directive. 25) Dubai: Has demonstrated meteoric rise as a global destination of choice for business and tourism, but how long will it last? Offshore gets investigated The Irish experience If you believe everything you read, traditional tax havens such as the Cook Islands (favoured because it allows trusts to exist in perpetuity) should have all withered away by now what with attacks by the OECD, EU and numerous tax authorities. Tax havens, nonetheless, are still flourishing largely because international travellers, companies, trusts and capital can move more quickly than ever before. Of course, along with business and inheritance planning, offshore tax havens were historically used to assist in tax evasion. Doubtless there still are many who keep money offshore believing it is safe from tax authorities. The recent Irish experience presents further evidence that two things are coming true. First, tax evasion offshore is less easy than ever before and, secondly, governments everywhere see catching offshore tax evaders as a revenue raiser. Who lost out in Ireland? Over recent months, it has been well publicised that the Irish Revenue Commissioners wrote to 3,000 Irish Permanent customers who had deposits in the Isle of Man, and at the same time obtained a settlement of €110 million from clients of Bank of Ireland’s operation in Jersey. Some of the aspects to this recent phase in the Irish Revenue Commissioners’ investigation are fascinating. The €110 million came directly from clients of Bank of Ireland’s trust business in Jersey. Because these individuals just placed the funds in Jersey, the bank was not accused of being involved in facilitating the evasion. It was seen as just having taken deposits of their money. A total of €110 million suggests that the Irish Exchequer got paid tax of around €35 million and the rest in interest and penalties. Of the 254 who made settlements, one person paid €7.1 million and 27 paid €1 million to €2 million. The 3,000 Irish Permanent account holders, due to have received letters during October, may well not all be evading tax. Still, this next phase in the trawl could yield millions more for the Irish Government. The Irish Revenue Commissioners are on record as stating that they will continue to systematically apply for high-court orders to obtain records of customer transactions from Irish financial institutions as part of their investigation into monies transferred to offshore locations to evade tax. How did they find out? In the Irish Permanent case, the Irish Revenue Commissioners were granted an order to examine documents showing cheques lodged and money transferred to Irish Permanent’s Isle of Man bank through Bank of Ireland branches. Bank of Ireland were involved because they acted as an agent clearing cheques for Irish Permanent customers. The method used by the Irish Revenue Commissioners is certainly pretty interesting. Indeed, it is similar to the way that the American tax authorities got hold of some three million credit cards’ records from the Caribbean last year by taking court action against Visa International in Miami. Similarly, because the Revenue Commissioners do not have the power to inspect the books and records of Irish banks outside the Republic, they used their powers to access records that would show transactions to offshore locations. Once they had obtained access to details concerning customers of Irish Permanent Isle of Man, it notified the bank that it would set up a formal investigation into the bank and its customers. The Irish Permanent Isle of Man in turn wrote to about 3,000 customers to inform them that their details may have been handed over to the Irish Revenue and advising them to voluntarily disclose any tax liabilities ahead of a formal investigation. The Irish Revenue Commissioners have also begun discussions with Anglo-Irish Bank about monies lodged by Irish residents in the Isle of Man. The Revenue have signalled that their trawl will be widened to all subsidiaries of Irish financial institutions based in the Channel Islands, some of which also do business in the UK. These include Allied Irish Bank, Irish Nationwide and First Active. ‘Offshore Arrangements Project’ Simultaneously, the UK Inland Revenue publication ‘Working Together’ (issue 14, dated September 2003) announced the launch of the so-called ‘Offshore Arrangements Project’ as a new initiative where the Inland Revenue are undertaking risk assessment of specific offshore arrangements where it is perceived that evasion may result in a substantial loss of revenue to the UK Exchequer. It is trying to identify UK companies whose shares are held, in whole or in part, by companies or trusts in offshore financial centres. Those companies will be subject to profiling and risk assessment to identify those that represent the highest risk. The Revenue will also seek to identify all transactions in UK land and property where either vendor or purchaser is a non-UK company or individual. These transactions will also be subject to risk assessment. Each area of the Revenue has appointed one Inspector as an offshore consultant to co-ordinate the identification of the highest-risk cases and their subsequent investigation. The consultant will be trained and charged with raising awareness of the issues and existing guidance and instructions in these areas, identifying the highest-risk cases and seeking technical advice and assistance from relevant specialists when required. Where evasion is identified, enquiries will be undertaken in accordance with current codes of practice. The more serious cases will be referred to the Special Compliance Office. The road to Singapore Is Singapore the new Switzerland? The world’s major private banks increasingly regard Singapore as the Asia-Pacific wealth industry’s version of Switzerland. Battered by burgeoning regulation, growing numbers of us Europeans have shifted accounts to the city state. Singapore has stated that it intends to become a specialist wealth-management centre. It intends to attract high-net-worth individuals, boutique fund managers and private-banking operations. Consequently, several international banks and fund managers are relocating there. For example, Towry Law International, owned by Australian asset manager AMP, will move its south-east Asian headquarters there over the next few months. UBS has set up a wealth management centre there, while Credit Suisse last year set up its first global private banking office in Singapore, with a staff of 200 from 18 nations. With some $120 billion under management, Singapore looks a promising centre both for regional and global private banking. More than 25 private banks, including the world’s top ten, now work out of Singapore to manage private wealth in countries like Thailand, Indonesia, Malaysia and India. Participants in Singapore’s aim to be a regional investment hub include not just UBS and Credit Suisse but also other European players such as HSBC, Deutsche Bank, BNP Paribas, ABN Amro, Barclays, Societe Generale, Coutts and Dresdner. US banks active in Singapore’s wealth management market include Citigroup, JP Morgan Chase, Merrill Lynch and Goldman Sachs. Local players include DBS and UOB, and a few boutique funds, but foreign companies dominate the market. The bulk of European-style private banking in Singapore remains in the hands of foreign banks. The Singapore Government have chosen this route on the basis that such institutions will have access to global resources and infrastructure and so resulting in economies of scale and wider choices of products and services. Most banks divide their Asian operations into three parts. North Asia, excluding Japan, is generally controlled from Hong Kong, while the south and south-east Asian markets are increasingly covered from Singapore. Japan is the third, and entirely independent, territory in management terms. What makes it attractive? Singapore’s wealth market grew 10% on a year-on-year basis between 1998 and 2003. Indeed, unexpectedly, the Asian economic and currency crisis of 1997 appears to have provided a boost to Singapore’s banking. The background here, and why it looks fairly safe as an offshore location, is that Singapore seems to have demonstrated political stability, what is perceived to be a strong regulatory framework and a decent infrastructure. Another important, but much less discussed, reason is that the wealthy in the relatively unstable political economies of neighbouring countries like Indonesia and Thailand have very few opportunities to safely park their riches. Singapore provides them with a viable alternative for investments, particularly during times of currency devaluation. Should we move our money there? This is, of course, the crunch question. For those of us that live in Europe, the past year or so has started to see substantial transfers of accounts held in Swiss, Luxembourg and other more local banks to Singapore. The city is believed to be a major beneficiary of the changes taking place in the banking business in Switzerland and Luxembourg, particularly the pressures on banking secrecy. It also remains outside of the OECD and the EU savings directive. Even when Nick Leeson took Barings under in Singapore, the fact that Barings was part of a global brand meant that few investors lost out. We’d have no problems in having money in Singapore, providing, as ever, you are duly diligent. Just bear in mind that the chocolates are still better in Switzerland! This Schmidt ‘Offshore Report’ was co-prepared by David Treitel LLP. David is with Buzzacott Livingstone Ltd in London and can be contacted on 020 7556 1416 or by email at treiteld@ustax.co.uk.