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The taxman cometh offshore

Initiatives from the Organisation for Economic Co-operation and Development, the G20 and various national governments have been portrayed in the business press as an assault on low-tax jurisdictions.

It has been suggested that taxpayers with offshore investments cannot afford to ‘lie low’ for much longer as the regulatory noose tightens.

But we’ve heard this before. The question is: Will governments back off after legislating, granting amnesties and demanding identity disclosures? Or, in economic hardship times, will these cash-strapped governments become energised still further as they see offshore regulation as a means of trawling for increased revenues without having to fear backlash from their electorates?

Whether individual national government intent on this issue is materialising into global or regional action (particularly within the European Union) is also ripe for discussion; as well as what restructuring and new tax planning can be adopted for clients in what may become a more transparent offshore age."

National offshore initiatives

One of the more structured national initiatives targeting offshore is being promoted by the UK government where Her Majesty’s Revenue & Customs (HMRC) is warning: “This will be the last opportunity of its kind." In its sights are taxpayers with offshore investments who, it believes, may not be disclosing, in full, income from abroad. They now have an NDO – a New Disclosure Opportunity.

The NDO 'carrot' is a low penalty rate of 10% of the tax not declared (unless the taxpayer is shown to have ignored 2007 Offshore Disclosure Facility (ODF) warnings, where the penalty will be 20%).

Ignore the new scheme, says the government, and you run the risk of prosecution and heavier penalties.

The UK government has added muscle to its threat by, using groundbreaking legal procedures, obtaining details of interest arising offshore to British account holders of 300 financial institutions.

Its previous ODF campaign, which ran until November 2007, raised about £450 million (USD 750m) from 45,000 individuals – lower than the HMRC had hoped.

Spurred on by economic necessity, the UK government is now pinpointing these 300 banks and building societies (savings organisations) in the UK with offshore operations, and has been aided by the signing of agreements between the UK and other countries allowing exchange of information.

The HMRC’s controversial purchase of information on Liechtenstein accounts resulted in investigations into hundreds of UK taxpayers. It has also carried out raids on several London safety deposit facilities.

HMRC set a deadline for individuals to notify their intention to disclose online under the NDO scheme at the end of November 2009. The disclosure itself then has to be made by the middle of March 2010. A disclosure has to include a calculation of all taxes, interest and penalties payable, together with details of all offshore bank accounts and assets held offshore since April 2008. Prosecution will be avoided unless tax evasion is connected with a serious crime beyond taxation. 

Meanwhile, in Italy, a tax amnesty on money illegally held abroad, valid till mid-December 2009, is a desperate attempt by the government to attract capital home in a time of economic crisis, not least to boost tax revenue.

The Scudo-Fiscale (fiscal shield) programme allows citizens to bring money from offshore tax havens while remaining anonymous and avoiding sanctions for past tax evasion. All they have to do is move their money to an Italian account within two months and pay a 5% fee.

But critics say the plan is the latest in a long line of amnesties that have created a culture of tax evasion for wealthy Italians.

"The idea, in theory, is to give people a last chance," says Paolo Guerrieri, who teaches international economics at La Sapienza University, Rome. "But, in practice, this is an incitement to tax evasion. Here in Italy these kinds of 'emergency measures' are so frequent that people know they can just wait for the next amnesty. It’s an insult to honest citizens."

However, whether in the UK, Italy or any other global jurisdiction, those who have avoided tax illegally through offshore investments may have an extra incentive to take advantage of an amnesty this time: the Swiss have relaxed their banking secrecy rules, and the odds are being heightened that tax evaders may be disclosed.

During the G20 summit in March 2009, Swiss authorities agreed to cooperate more with other nations in tracking down tax evasion. The move followed pressure from the US and European countries worried about the impact of tax evasion on their economies.

Most European nations need extra cash now, Guerrieri says, but Italy’s situation is unique: "We're openly surrendering the possibility to build a sound fiscal system [in exchange] for an immediate profit. And eventually we’ll pay the price. No wonder Italy has one of the highest tax evasion rates in the continent." 

Italian capital held illegally abroad is estimated at about 300 billion euros (USD 450 billion), according to government figures. At least one-third of that money is thought to be in Swiss banks.

The Italian government expects 100 billion euros (USD 150 billion) abroad to re-enter Italy through its amnesty, which would mean an extra 5 billion euros (USD 7.5 billion) of tax income for the state. 

Demand for wealth management 

The upsurge of government regulations, designed to flush out a minority engaged in evasion, has brought about increased demand from tax-compliant individuals looking to manage their assets internationally, says STEP (Society of Trust and Estate Practitioners), which has canvassed views of its members – lawyers, accountants and bankers worldwide. Their clients are feeling victimised and want their personal data to be better protected "from corrupt institutions and careless governments", says STEP director of policy Keith Johnston. "They want compliant confidentiality."

STEP’s two surveys (Offshore Evolution: The STEP Membership Perspective, building on a parent report, Offshore Evolution: Transparency and Solutions in Cross Border Wealth Structuring: see: highlight the growing need for professional advisers who have the capability to give tax advice on a global, not just local, basis.

"Much more sophisticated advice is needed to manage the complexity of tax issues wherever a client may have assets or connections," says STEP. "Clients want home country compliance and international tax neutrality to avoid additional layers of tax."

Three key trends are identified:

Economic conditions will mean tax competition between countries will increase and the distinction between offshore and onshore will fade.

Investors and their advisors will choose jurisdictions for tax neutrality, so that investors from several jurisdictions are not subject to the additional layers of tax that sometimes arise in a cross-border context.

"All this requires much more sophisticated tax and regulatory advice where integration is key," says STEP. "This means bringing together the advice from country A and country B to achieve the best outcome overall."

Modernising practices are integrating trust and estate planning into a wider wealth management business. Trustees are adopting best practices in investment management and enhancing compliance processes to reduce risk.

Products and services are being combined together to create new revenue opportunities for wealth-structuring professionals. New strategies are being added to the toolbox and existing strategies are being combined in new ways to create customised solutions in higher-value structures.

Offshore investment needs

Ongoing consultation and advice is fundamental to offshore investment – and even more so now that governments are targeting offshore, says UHY’s offshore trust and fiduciary member firm, The Louvre Group.

Louvre is a privately-owned trust and fiduciary company that has been established for more than 35 years and employs over 65 staff in ‘white-listed’, offshore jurisdictions – it has six strategically placed, interactive offices in Guernsey, Geneva, London, Hong Kong, Dubai and the Cayman Islands.

The group provides trust, fiduciary and fund services for international, private and corporate clients.

"Offshore markets have changed significantly over the past two or three years," says Louvre director Geoff Trebert. "Clients' needs have become much more complex and international. Traditional private and company structures and trusts, although still required, are no longer always appropriate: clients need effective solutions to highly complex issues.

"We have applied our core skills and knowledge to providing a range of new services, including QROPS (Qualifying Recognised Overseas Pensions Schemes) and EBTs (Employee Benefit Trusts), to clients who have global interests and wish to preserve and grow their wealth in these challenging economic times."

QROPS and EBTs have been combined in an innovative approach by Louvre on behalf of high-net-worth clients. EBTs are a useful vehicle whilst the client is working, and QROPS comes into its own when retirement planning is on the agenda. Combining the two, for one client in a lifetime solution, is an area that Louvre is deploying more frequently. 

What was known as 'A-Day' ('Appointed-Day') – 6 April 2006 – produced radical changes in respect of the rules governing transfers from the UK-registered pension schemes to offshore pension schemes. Individuals are now able to transfer their UK pension funds to an overseas pension scheme, provided it is a 'Qualifying Recognised Overseas Pension Scheme', and it is registered with HMRC.

The scheme is available for UK residents planning to leave the UK, already living overseas, or internationally mobile employees who plan to live overseas. Its benefits include the ability to receive transfers from UK-approved pension schemes, with no need to purchase an annuity. The plan also provides flexibility in taking benefits and managing investments, potentially reducing exposure to UK taxes.

Employee Benefit Trusts (EBT) are another growth area. An EBT is a trust set up by an employer for the benefit of employees (including directors) and former employees, their spouses and dependants. Such trusts may be established within or outside the UK under UK or foreign law. An EBT is normally funded by an initial contribution (usually nominal) plus a series of periodic contributions. Such contributions are at the discretion of the employing company.

As well as receiving contributions from the sponsoring company, EBT trustees are usually empowered to augment trust funds by borrowing from the employer or from third parties (banks, etc) and by accumulating income. 

EBTs are used for various purposes, including where an unquoted company wants to make share ownership more meaningful for its employees, warehouse shares for future distribution to employees, or facilitate exit strategies for company owners who wish to transfer ownership to employees over a period of time – rather than just sell the business on the open market. EBTs can also be used in respect of private share plans.

"We always think strategically for our clients when managing their wealth, and using a variety of structures at different times of the client’s life-cycle is a crucial part of our service," says Trebert.

"A typical example of this was where a UK-based client had, for a number of years, been a member of an EBT which was administered by us. On retirement the client decided he wanted to relocate to South Africa. Benefits that were in the EBT were used to acquire several business interests in South Africa for which Louvre provided the company administration and directors.

"Our company administration and management experience means that the client could enjoy his retirement at the same time as knowing his finances would be managed for his family to enjoy. In addition, we also transferred five of his UK-based pensions into the Louvre QROPS."