Offshore Financial Centres Face New Challenges


Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Offshore Financial Centres (OFCs) have been under increasing pressure over recent years to rid themselves of the ?tax haven? label. There has been an international drive for them to become fina

Offshore Financial Centres (OFCs) have been under increasing pressure over recent years to rid themselves of the ?tax haven? label. There has been an international drive for them to become financially transparent and stop enabling individuals and businesses to hide interest income and capital from their local tax authorities.

Now, in the face of the economic crisis, pressure on the OFCs is intensifying as governments need to increase their tax revenue. Various centres have also had to defend their reputation as banks have collapsed and poor depositor protection has come to light.

At its meeting in London in April the G20 group of nations, comprising 19 of the world?s largest economies and the European Union, is expected to announce measures to toughen up on ?secrecy jurisdictions?.

Many eyes are focussed on US President Barack Obama, who before his election had vowed to crack down on abusive tax havens that “peddle secrecy” and “cloak tax evasion and other misconduct.” He aimed to target at least 34 OFCs where US citizens held investments, including the Channel Islands, Isle of Man, Switzerland, Singapore, Cayman Islands, British Virgin Islands, Bermuda, the Bahamas, Hong Kong, Costa Rica and Belize.

At the time of writing Obama has not yet revealed any initiatives on OFCs but it is likely to come at any time soon. In the grip of a struggling US economy Obama, along with many other world leaders, is intent on forcing OFCs to clean up their practices so that billions of unpaid tax can be paid into depleted government coffers.

The US Treasury claims it loses up to $100 billion in revenue from tax evasion through the use of OFCs. Last year the US put pressure on Swiss bank UBS when it issued a court summons for the bank to disclose the names of 19,000 wealthy US citizens who had cached large sums of money in offshore accounts (only 1,000 had declared their accounts to the US authorities). Tax on approximately $18 billion lodged in Switzerland was at stake. In response UBS announced it was closing down all private bank accounts held by US residents.

Switzerland is protective of its confidentiality laws, where it is illegal to reveal details of bank accounts unless tax fraud is involved. UBS denied any misconduct.

The US Subcommittee was also informed of accusations that Liechtenstein?s LGT Group were part of a collusion in the region?s ?culture of secrecy and deception? in helping US account holders avoid paying tax.

Liechtenstein was the centre of a tax evasion scandal in early 2008 when data stolen by a former employee of LGT Treuhand AG was offered for sale. The UK reportedly paid ?100,000 to the informant for details of 100 UK taxpayers contained in the data, with a potential loss of ?100 million in unpaid taxes.

Germany paid the informant between ?4 million and ?5 million for a list of 750 – 1,000 names. Several other countries, including Spain and France, also obtained information of tax evaders.

Liechtenstein has since announced its willingness for co-operation and transparency and in December signed a tax information exchange agreement with the US.

The UK has been concentrating on drives to claim back unpaid taxes from offshore income. In 2007 it launched its Offshore Disclosure Facility (ODF) and obtained details of 400,000 offshore bank account holders from five UK high street banks. Approximately 45,000 disclosed unpaid tax by the deadline date from which ?450 million in revenue was reclaimed. The ODF capped penalties to 10%. HM Revenue & Customs (HMRC) then announced its intention to target 25 banks with offshore branches.

A new ODF is planned by HMRC for 2009 to target 300 banks with offshore branches. Penalties are likely to be capped at 20% -30%.

In his Pre-Budget Report in November, UK Chancellor of the Exchequer, Alistair Darling, announced a review of banks in the Isle of Man and Channel Islands following the collapse of the Icelandic banks Kaupthing Singer & Friedlander in the Isle of Man and Landisbank in Guernsey. Darling said that these jurisdictions “attract banking customers with lower tax rates without contributing to the UK Exchequer”. He added, “At times of stress, depositors need to know who is going to compensate them. The British taxpayer cannot be expected to be the guarantor of the last resort.”

The failed banks highlighted the vulnerability of savers? money in offshore bank accounts and the fact that some OFCs have no bank deposit protection scheme. Jersey currently has no compensation scheme although the government has said it would guarantee residents? savings until a deposit protection scheme is drawn up. Guernsey only announced a scheme at the end of November, protecting retail deposits up to ?50,000 per person per licensed bank. The maximum amount of compensation is capped at ?100 million in any five year period. The Isle of Man?s Depositor Compensation Scheme was a mere ?15,000 until October when it was raised to ?50,000 – but there is no legislation in place as to when compensation would be paid.

Landsbanki Guernsey depositors were awarded a part-payment equivalent to 30p in the ?1 and will have to fight for the remainder of their hard earned cash. Customers of Kaupthing?s Isle of Man?s branch are still awaiting news of the liquidation of the bank. A provisional hearing set for 29th January was postponed until 19th February to allow for the slow wind down of the bank and for Treasury plans to be finalised that would pay back customers in staged payments over three years as an alternative to the bank?s liquidation.

Perhaps the future of OFCs has been summed up by the deputy director at the Organisation for Economic Cooperation and Development, Grace Perez-Navarro, who recently said: ?The pressure on tax havens has intensified from almost every source. Those not willing to implement moves towards greater transparency and effective exchange of tax information will suffer as countries take measures to protect their tax bases.?

It is not just the OFCs that will suffer under the increased scrutiny, but individuals who still have undeclared offshore bank accounts? accounts with limited depositor protection. This may be the time to review your financial and tax planning arrangements to make sure they are fully compliant and safe from institutional failure.

Given the pressures on the offshore centres it is surprising that many investors choose to keep their investments in them, when there are perfectly legitimate tax efficient shelters to use. These shelters protect investors from tax and enable their funds to grow without it. They are highly tax efficient when you choose to take money from them and keep you on the right side of the taxman.

You need to take advice on these shelters from an experience and regulated company such as Blevins Franks.

by David Franks, Chief Executive, Blevins Franks

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.