For many people, the term ?offshore banking? has been synonymous with paying less tax?. or no tax at all. While there are practical reasons for expatriates to have an offshore bank account, it?s
For many people, the term ?offshore banking? has been synonymous with paying less tax?. or no tax at all. While there are practical reasons for expatriates to have an offshore bank account, it?s fair to say that for many the tax side of things was the key attraction.
Who would have thought that the time would come when, for many people, keeping money offshore would result in them paying more tax? Well, that time has arrived.
Under the Savings Tax Directive – which applies to everyone who is resident in an EU country – many offshore centres still apply a withholding tax (also known as a ?retention tax?). If you have a bank account in one of these jurisdictions and have not elected for disclosure of information to the taxman of the country in which you are living, then any offshore interest attributed to you (whether you withdraw it or not) is liable to a withholding tax.
Several offshore centres have stated that they will cease to apply the retention tax and will instead declare the income to your country of residence. In any case, this income should be declared in your country of residence, and failure to do so can be considered to be tax evasion, a criminal offence in many countries.
The withholding tax rate increased from 20% to 35% on 1st July, which means people who are paying the retention tax have just had a tax hike of 75%!
Since in a large number of countries the general tax rates are lower than this, we are now at a stage where many investors would pay less tax by declaring their offshore interest rather than not doing so.
In Spain your worldwide interest earnings are added to your other savings income (including capital gains) and taxed at a fixed 19% on the first ?6,000 and 21% on income over that amount. This means that if your offshore interest has the withholding tax deducted from it, you are now paying 67% or 84% more tax than the Spanish tax rates on the same income ? but no reimbursement is due in Spain for the extra tax you have paid.
In Portugal, interest derived within the country is taxed at a flat rate of 20%, while overseas interest is taxed at 21.5%. This means that if your offshore interest has the withholding tax deducted from it, you are now paying 63% or 75% more tax on it than the Portuguese rates that would be charged on the same income – but no reimbursement is due in Portugal for the extra tax you have paid.
In Cyprus interest income is subject to the defence contribution at a fixed rate of just 10%, so if anyone is paying the withholding tax, they are paying 250% more tax than they need to! No reimbursement is due in Cyprus for the extra tax you have paid. Since 2003 Cyprus residents have had to declare all worldwide income, and not only income remitted to Cyprus.
Savers in France suffer higher tax rates than many other European countries, but even here the offshore withholding tax rate can be higher. French bank interest is subject to a final and fixed withholding tax of 19%, plus 12.3% social charges. Bank interest received from any EU country can also receive the same treatment, though if you do not elect for it the usual scale rates would apply (plus 12.3% social charges). Interest derived from outside the EU (so including the Isle of Man and Channel Islands) is subject to tax at the scale rates (up to 43%) plus 12.3% social charges.
For whatever reason, some investors will still not want to request their bank to apply the automatic exchange of information regime instead of the withholding tax one. Not that they will have a choice where offshore financial centres have decided to exchange information ? for example, Guernsey.
There are also many people who have an EU address but are fiscally nomadic, i.e. they move between countries and do not spend enough time in one country to be tax resident there. In this case they do not have a local tax office and cannot avoid withholding tax at 35%.
The question is whether it is possible to legitimately not pay tax locally in your country of residence and also not be liable to 35% withholding tax?
The answer is yes ? currently the withholding tax of 35% only applies to assets which are held in your own name. Secondly, there are investment structures which legitimately protect you from local taxation in many EU countries. These structures can also protect you if you are a fiscal nomad.
Tax planning has however become a bit of a minefield over recent years, so it is important that you take professional advice from a firm which specialises in local and international tax planning such as Blevins Franks if you wish to successfully shield your assets from tax.
The ultimate goal of the Savings Tax Directive is for all EU countries, their dependant territories and also non EU European jurisdictions and offshore financial centres to automatically exchange information on all interest earnings by EU residents. For the time being, however, some countries are still able to apply the withholding tax regime. In this case clients can elect for disclosure of information instead.
Countries applying the withholding tax: Andorra; Austria; British Virgin Islands; Jersey; Liechtenstein; Luxembourg; Monaco; San Marino; Switzerland;Turks & Caicos.
Countries applying automatic exchange of information only: All EU member states (except Austria and Luxembourg); Anguilla; Aruba; Belgium (since January 2010); Cayman Islands; Gibraltar; Isle of Man (since July 2011); Guernsey (since January-July 2011); Montserrat; Netherland Antilles.
The fact that the Isle of Man and Guernsey have dropped the withholding tax option and now disclose information on all bank accounts is a significant change ? they have firmly closed the door on banking secrecy.
When making the announcement back in June 2009, Isle of Treasury Minister Allan Bell acknowledged: ?The global financial crisis has delivered a demand to all countries large and small to engage further in international tax co-operation and align their policies with international benchmark standards.?
I expect that eventually other jurisdictions will have to follow suit. It may take a while for countries like Switzerland to agree to automatic exchange of information, but in the meantime they have taken steps to make it easier for foreign governments to get round banking secrecy when investigating specific cases of tax evasion.
It was Lord Clyde who laid down the maxim that, ?no man is under any obligation, moral or otherwise, to set out his financial affairs in a way that enables the Inland Revenue to place the largest possible shovel into his store?. If you don?t want to pay more tax than you have to, seek advice on the tax planning opportunities available to you.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
By Bill Blevins, Managing Director, Blevins Franks
27th June 2011