Offshore tax - no place to hide
Ian Harper assesses the impact on offshore centres of tightening legislation on exchange of tax information.
What impact will increasing pressure from tax authorities for greater transparency have on offshore financial centres?
Will actions such as the OECD's Common Reporting Standard for automatic information exchange (signed in October by 51 separate tax jurisdictions) kill off tax evasion once and for all?
According to Neil Whyte, tax partner at BDO, the OECD's global standard is a very good step in the right direction: "The net is tightening and clearly the less motivated evader will be discouraged and the amount of evasion will decrease. Unfortunately, others will not be put off and will simply look for other 'leakage countries' in which to park their funds."
"It will be a key driver in eradicating tax evasion, which is illegal and extremely damaging," adds Derek Scott, head of tax investigations with KPMG in the UK.
Chris Lallemand, national tax consultant at Smith & Williamson, notes that while many financial centres have indicated their commitment to adopt the OECD's standard, one notable exception is the US, which will be using its own Foreign Account Tax Compliance Act (FATCA) legislation and agreements.
He warns: "Dealing with countries that do not adopt (OECD) standards may result in harsher penalties for non-compliance on tax being levied by certain jurisdictions"
The UK, for example, is proposing to further categorise 'offshore penalties' according to whether there are appropriate exchange of information provisions."
In Jersey, Geoff Cook, CEO of Jersey Finance, says: "Creating a single international standard that seeks to enhance transparency and clamps down on harmful activity is something we fully endorse."
In nearby Guernsey, home to the Channel Islands Securities Exchange, Patricia White, MD of Legis Fund Services, says: "The success of the OECD's global standard is dependent on the level of co-operation received from jurisdictions around the world and their ability to collate and disseminate the information requirements. Proactive jurisdictions like the Channel Islands have preparations in place in anticipation of this regulation."
However, Patricia White adds that: "Those looking to evade tax will continue to avoid reputable jurisdictions such as the Channel Islands... and instead will increasingly seek remote jurisdictions with a lighter touch or indeed no regulation at all."
Regarding the UK, Peter Young, tax partner with Johnston Carmichael, says: "Expert opinion is that a determined and well-advised individual may still be able to escape the tax authorities, partly because HMRC rarely uses the full range of prosecution powers at its disposal. HMRC could make more use of its existing powers."
During July, the OECD said more than half a million taxpayers had already taken advantage of voluntary disclosure programmes offering reduced penalties to taxpayers admitting to secret offshore accounts.
Can we now expect more people to take advantage of these arrangements?
Peter Young says there's been a significant take-up of such voluntary disclosure schemes: "The best known is the Liechtenstein Disclosure Facility (LDF) which has raised over £1bn. According to tax investigation experts, we continue to see people coming forward with many more taxpayers likely to opt for an LDF-type arrangement. A wide range of people have made LDF disclosures since its introduction in 2009, particularly those who have inherited overseas assets whose existence had not been reported previously to HMRC."
BDO's Neil Whyte says: "I believe more taxpayers will take advantage of the disclosure arrangements. However it's important that they remain open to allow them to do so. For instance the LDF has already been extended from March 2015 to 5 April 2016 and once this closes a great incentive in this area will have ceased."
However, Chris Lallemand warns that: "HMRC has already started restricting access to some of the more favourable terms of the LDF. As more information flows through to Revenue authorities, the availability of the features of the disclosure facilities may be further restricted."
Patricia White says: "Offshore jurisdictions completed a process of notifying all account holders of voluntary disclosure programmes at the time which has yielded minimal results relative to the numbers of accounts held globally. The implication is that the majority by far are already making the appropriate disclosures."
But is the offshore finance sector itself doing enough to increase transparency and curb tax evasion?
Derek Scott points out that the offshore finance sector is not a homogeneous one: "The UK with the Crown Dependencies [the Channel Islands and Isle of Man] for example have engaged constructively on information exchange and indeed have taken a lead in this area with the first data being exchanged in 2016." Geoff Cook says: "We can only speak for Jersey, and yes, Jersey can demonstrate a transparent and co-operative regime that more than meets international standards having signed FATCA-style agreements with the US and UK, and committed to G8, G20, and OECD standards of co-operation."
Jon Meeten, head of tax with KPMG in Scotland, agrees. He says: "Different jurisdictions are at a more advanced stage already, and I expect all other financial centres will adapt. Indeed, it's essential that they move with the times or they will be left behind in the international drive to transparency."
Geoff Cook argues that Jersey will continue to thrive and prosper, but adds this may not be the case for some IFCs [international financial centres]. He says: "Some banks in Hong Kong are refusing to open accounts for structures based in certain IFCs."
Patricia White adds: "Sophisticated finance jurisdictions such as the Channel Islands, Luxembourg and the Cayman Islands have adapted to the growing number of cross-jurisdictional and cross-functional regulatory requirements, taking a universal approach to compliance and risk management. The plethora of international regulation adopted in recent years is costly and conceivably acts as an obstacle to new business flows. However, as well-established finance centres, these jurisdictions are well positioned and flexible to adapt to international regulation."
Meanwhile, the UK's HMRC is planning tougher penalties for those suspected of hiding assets offshore and failing to pay tax. These include a new "strict liability" criminal offence – meaning that the prosecution would not have to prove any criminal intent – of failing to declare taxable offshore income and gains, and possibly suspending the current 20-year time limit for assessments.
Neil Whyte comments: "It will certainly weigh heavily on most. However, the hardened avoiders – which could include criminal elements – will continue to park funds in offshore accounts."
John Meeten adds, however "we believe the underlying message of the strict liability charge is more about encouraging responsibility and those with tax liabilities to come forward and engage, which we support, rather than creating a huge number of prosecutions. There will always be a hard core criminal element and it is absolutely right that the authorities crack down firmly."
Chris Lallemand thinks HMRC is going too far, though: "An automatic criminal offence for not paying tax in respect of assets held offshore without any assessment of intention is a step too far in a tax system as complex, and with many areas of assessment depending on judgement, as the current UK system. Extending the current 20-year time limit may result in a situation where an accused taxpayer will find it very difficult to produce the evidence required to demonstrate what went on more than 20 years ago, so one would have to question whether this proposal is proportionate."
Charlotte Barbour, head of taxation (private clients and small business) at ICAS agrees: "I doubt if they will be as effective as HMRC might wish. There are probably two categories of people to consider in relation to evasion and offshore assets/income. There are those who genuinely believe that they do not need to disclose their offshore assets, so it would be helpful if HMRC increased awareness among the tax-paying population of potential tax obligations, for example, when someone owns a property overseas. The other category is thought to be the serious evaders, and with such folk there is a need for HMRC to convince people that they will be caught. So, more consistent and active policing by HMRC would assist rather than simply the threat of a new penalty."
But why - other than secrecy - do UK citizens use offshore accounts?
Geoff Cook insists it's wrong to suggest that investors, in the UK and elsewhere, are seeking secrecy: "In Jersey, for example, there are no bank secrecy laws in any case... the customary laws that Jersey applies to protect the confidentiality of client affairs are similar to those in many onshore centres."
Patricia White adds: "There are many reasons for conducting your business through reputable offshore jurisdictions, including access to highly qualified and experienced finance professionals and good standards of corporate governance."
Derek Scott notes that some UK resident, UK domiciled taxpayers continue to hold assets overseas and pay tax on income and gains as it arises: "UK resident, non-UK domiciled taxpayers can claim the remittance basis and pay the £30k/£50k annual charge that this requires. Broadly, taxpayers in this category only pay income and gains when this is remitted or brought to the UK. Many 'non-doms' in this situation will have accumulated their wealth overseas and before having any connection with the UK. It makes sense for such individuals to hold assets overseas in accordance with UK tax law."
Johnston Carmichael's Peter Young says: "There can be perfectly legitimate reasons for UK taxpayers to hold overseas bank accounts. More and more people own foreign holiday homes, and having a local bank account may be the best way to manage the maintenance costs."
So, does all this mean that international tax evasion will become a thing of the past?
Nigel Brown, senior tax manager at Grant Thornton UK, concludes: "Much depends on how HMRC makes use of all the new data that will imminently be at its disposal. Clearly, information locked away in files and not acted upon will hardly dissuade the most determined tax evaders. If, however, HMRC executes its plans as intended, then we may well see a significant increase in tax revenues.
"We are told that HMRC has already invested in 2,500 extra staff who will join specialist teams with access to cutting edge technology in its fight against tax evasion. The necessary resources, therefore, are seemingly in place or soon will be."
He adds: "Until information exchange really takes effect in 2016, the disclosure facilities will still be available. Surely, therefore, the best advice has to be to come forward now and make your disclosure to HMRC before it is too late."