The UK’s tax authorities, HM Revenue & Customs re-assure now investors that there is absolutely nothing wrong in having savings in an offshore account. Indeed if an individual is resident, but not domiciled, in the UK, he can, by keeping the interest abroad, increase the return on the investment because maybe will no pay taxes at all But still now it look the contrary.
It appears likely that the UK HM Revenue & Customs will be able to acquire the confidential offshore bank documents of many thousands of UK residents. The Special Commission in charge of the issue made 4 decisions. The first, decision came in December 2005 when the Special Commissioners authorized the issue of a notice to an un-named financial institution (now understood to be a High Street bank) requiring it to provide HMRC with documents detailing UK customers who held credit cards associated with offshore bank accounts. At the hearing held prior to the issue of the notice, HMRC estimated that the notice would affect 75,000 of the bank’s customers, approximately 15,000 of whom would be subject to tax investigations. The UK tax authorities adapted techniques first used by the US IRS, for example, demonstrating that information which would identify the “unknown cases” was in the ‘power or possession’ of the financial institution, and that it would not be too onerous for the institution to supply this information.
The Special Commission approved the issue of three notices to the same High Street bank and its private banking and trust subsidiaries. The notices seek copy bank statements and certain other documents containing details of the bank’s customers’ offshore bank accounts. The Special Commission held that as the UK bank held information from its offshore subsidiaries on computer systems in the UK, the information requested was in the UK bank’s “possession or power”. Importantly, the Special Commission considered that the bank’s duty of confidentiality to its customers did not alter its duty under the law to provide documents it possessed when requested under a notice. Given that HMRC estimated that the notice would give them access to information which would lead to tax investigations yielding a total of £1.5 billion, the notice will clearly affect many thousands of the bank’s customers.
Alongside the two bank decisions, HMRC have used the same method to counteract tax evasion via “offshore” share-trades. There were two Special Commission decisions involving two investment banks. A group of London share traders had made profits, which were taxable in the UK, on shares traded through a British Virgin Islands company, but had failed to make a full return of these profits to the Inland Revenue. The British Virgin Islands company’s share trades had been settled through one UK investment bank (which was acting as prime broker) with the deals being conducted through the other UK investment bank.
Both investment banks had, as part of their “Know-Your-Customer” procedures, kept a record of the UK individuals who were authorized to act on behalf of the British Virgin Islands company. HMRC had, through their investigations, established that, by obtaining these details, they could identify and therefore investigate those who had evaded UK taxation in this way. It is now standard, for example, for a bank’s internet banking customers to allow the bank, and its offshore subsidiaries, to access, store, or outsource data management to either the UK or overseas. Similarly, regulatory changes, such as the Anti Money Laundering directives have changed processes concerning information held by banks. HMRC discovered that more information is held, and is accessible in the UK, than ever before.
In an announcement re “Offshore Assets” on its website on 10 May, HMRC stated:“Following recent media publicity it is apparent that some customers or their representatives wish to contact HMRC to make disclosures in respect of assets held offshore, where there may be unpaid duties. HMRC is anxious to facilitate such approaches, and have set up a single point of contact to handle your queries.” Given the level of publicity, the UK HMRC announced the re-structuring of its investigation offices, in part to deal with the volume of cases it will be undertaking as a result of these notices. While HMRC are expected to settle the vast majority of these cases civilly, recovering the tax, interest, and penalties, the fact remains that some cases may be investigated with a view to criminal prosecution.
The success of the HMRC in these latest cases is part of the anti-money laundering drive inspired by the Organization for Economic Cooperation and Development (OCDE). This was given focus at the meeting of G7 Finance Ministers at Gleneagles in 1998 which led to moves to outlaw bank secrecy, to require financial institutions to be more deep in knowing the source, and the identity of the beneficial owners, of funds deposited with them and to encourage authorities to exchange information with each other. The fruition of these initiatives is very well known in the “know your client” requirements to which banks and other professionals must now adhere, the implementation on 1 July 2005 of the European Union Savings Tax Directive and the prohibition on the use of numbered bank accounts The fact that there is still some way to go in achieving universal compliance in implementing these measures is high-lighted in a recently published survey by the OECD entitled “Tax cooperation: towards a level playing field”.
A further step in the cementing of international co-operation in the drive against avoidance and evasion took place in April 2004 with the signature of a memorandum of understanding by Australia, Canada, the USA and the UK establishing the Joint International Tax Shelter Information Centre. The stated purpose of JITSIC is to:
· Provide support to the parties through the identification and understanding of abusive tax schemes and those who promote them.
· Share expertise, best practices and experience in tax administration to combat abusive schemes.
· Exchange information on abusive tax schemes, in general, and on specific schemes, their promoters, and investors consistent with the provisions of bilateral tax conventions.
· Enable the parties to better address abusive tax schemes promoted by firms and individuals who operate without regard to national borders.
The participating countries have each appointed trained and experienced personnel to the HQ in Washington DC and an Executive Steering group meets periodically to oversee and evaluate the work of JITSIC.
Another international initiative to combat avoidance is the Tax Haven Working Group comprising the JITSIC countries along with Japan, France and Germany. This forum aims to improve the capacity of each country to deal with the risks posed to their tax systems by tax havens. Members bilaterally exchange information, share research and information on schemes encountered and strategies adopted and conduct joint training sessions. The group also seeks to deal with offshore compliance issues arising from the use of tax havens and issues occasional international alerts on areas which might give rise to problems, such as:
- Credit and debit cards;
- Captive insurance;
- Offshore trusts and partnerships;
- Withholding tax.
Further evidence on the theme of international cooperation is the meeting of tax inspectors from around the globe in Auckland over three days in April 2004 to share strategies and experiences in tackling international tax evasion and avoidance schemes. The meeting was organized by the OECD , and more than 60 international tax specialists from 27 OECD and major non-OECD economies with expertise in the areas of international compliance, exchange of information and international tax audits, participated in the meeting. The increasing use of cross-border tax evasion and avoidance schemes was identified as a major challenge for all tax administrations.
Such practices, it is believed, can be detected and deterred through effective exchange of information between tax authorities. It would appear that offshore investors should anticipate a continuing tightening of the regime. And the recently reported spectacular success of the Irish Revenue Commissioners in tackling abuse through the use of single premium insurance policies almost certainly heralds similar action by HMRC. Although there are some indicatives to make the Irish islands a tax have, similar to Andorra. We do not think that the European Commission will allow this.