Offshore Bank Accounts and Tax Planning ? A Changed Landscape – Part 2


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In Part 1 I covered the latest Organisation of Economic Co-operation and Development?s (OECD) commitment to heap further pressure on tax havens and help revenue bodies unlock substantial sums o

In Part 1 I covered the latest Organisation of Economic Co-operation and Development?s (OECD) commitment to heap further pressure on tax havens and help revenue bodies unlock substantial sums of money, as well as how the UK?s HM Revenue & Customs (HMRC) is stepping up a gear in its tax evasion crackdown.

In Part 2 I look at the future for offshore centres and advise on how all of this could affect you.

Swiss banks close US accounts

In a sign of new world we live in, Swiss bank UBS announced that it was closing all offshore accounts of its US clients in January. The decision came after the US authorities accused the bank of helping clients hide around $18 billion of untaxed American money in undeclared accounts.

Then in April it was reported that Credit Suisse had also begun closing the offshore accounts of its US clients who have not declared their funds to the US tax authorities.

It has become unacceptable, at the highest level in banks, to hide tax evaders? monies. Banks in offshore centres now appear keen to protect their reputation and avoid falling foul of the tax authorities even if, in some cases, it means closing client accounts.

We have also heard report ? unconfirmed at the time of writing – that some banks in offshore centres like Monaco have begun moving accounts belonging to non-residents to a branch within the account holder?s country of residence.

What does the future hold for offshore centres?

?It is not inconceivable to think that the number of offshore financial centres could fall by half in the next few years? ? warned Geoff Cook, chief executive of Jersey Finance which represents the Island?s financial services industry.

Offshore financial centres (OFCs) are being forced to sign Tax Information Exchange Agreements or face possible sanctions from G20 countries.

The next stage is likely to be a concerted push for automatic exchange of information. Information on all bank accounts and interest earnings would be reported to the owner?s home tax authority – not only those with suspicions of tax evasion.

In the Isle of Man, a Treasury working party is already considering whether it should introduce automatic exchange of information. Treasury Minister, Allan Bell, said there are clear signs that the international agenda is moving towards automatic exchange of information.

Under the terms of the EU Savings Tax Directive, the jurisdiction?s financial institutions currently deduct a 20% withholding tax on interest payments (except where the account holders have opted for exchange of information). In two years? time this tax rate will increase to 35%.

Bell observed, ?That?s quite a big jump and there is a debate of whether we need to continue with a withholding tax of 35%, which is quite punitive, or move towards the automatic exchange of tax information?.

Are you affected?

If the Isle of Man, and any other jurisdiction, moves away from the withholding tax to automatic exchange of information, this would cause serious problems for those currently paying the withholding tax and not reporting the interest income to their home tax authorities (as they are obliged to do, even though tax is deducted at source). The authorities would want to know where the funds suddenly came from and could investigate previous years.

Many people will face a dilemma regardless. The 35% tax may be much higher than they are required to pay under their own country?s tax rates – but if they suddenly start to declare the account to pay their local tax rate, it may trigger an investigation.

With OFCs succumbing to international pressure, banks in Switzerland, Luxembourg, Channel Islands and elsewhere will now report suspicions of the account owner not declaring it in his home country.

Your bank manager cannot inform you if the bank is making a report on you ? if you ask him he will have to deny it, even if it is true. Under money laundering regulations it would be a crime to tip you off.

In any case, some bank managers genuinely do not realise that their own head office are providing this information direct to the tax authorities.

The CIA also tracks all payments in Europe through SWIFT ? Europe?s bank computerised clearing system for payments and receipts – and passes information on to overseas tax authorities.

Big brother is watching and the days of banking secrecy are clearly over.

Tax authorities around Europe are losing many millions in unpaid tax to offshore bank accounts and are calling for even tighter regulations and co-operation to prevent this happening. Last year the German authorities were happy to pay ?2 million for a computer disk of all bank accounts at the Bank of Liechtenstein ? knowing that once they have finished prosecuting they would have easily recouped the cost. They also sold the disk to other European tax authorities.

The sooner those who need to regularise their affairs do so, the better ? there are three important reasons why:

1. They will significantly reduce the penalties by coming clean voluntarily.

2. They can invest the monies in a legitimate tax shelter. Undisclosed bank accounts do not make sense any more? there is much safer tax planning available.

3. What happens if they die? Will their spouse/children be able to handle the risks and possible tax investigation?

While reports suggest that a number of investors have started to move their money out of offshore centres like Monaco, Switzerland, British offshore islands etc into more far flung jurisdictions, it is hard to see the merit of moving large amounts of money into jurisdictions with little or no regulation or investor protection.

Why risk all of your capital to hide it from the taxman? Especially when there are tax protected investments which legitimately avoid tax without having to hide it.

In my view it is only a matter of time before everyone who is evading tax will get caught. Burying their head in the sand will only make the situation worse in terms of penalties etc when caught.

The best and only policy is to come clean as soon as possible, pay your tax due to date and ensure that your wealth is held in the most tax efficient legitimate shelter going forward. In fact many people who are evading tax would not need to take this very risky option if they were aware of the right way to go about protecting their assets from tax.

It is essential, when dealing with such important matters, to seek advice from a financial adviser like Blevins Franks who is up-to-date and experienced in this area and knowledgeable in tax regulations both in the UK (if you are a British national) and your current country of residence.

By David Franks, Chief Executive, Blevins Franks

3rd June 2009

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; individuals should seek personalised advice.