Secret funds abroad? It may be time to own up

Tuesday, July 07, 2009 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax, HNWIs, offshore, Sue Knight, HNWI, compliance, tax havens, disclosure, Protect Your Wealth, OECD, amnesty, super tax

The new OECD report on high net worth individuals (HNWIs) makes interesting bedtime reading. The 90-page report titled Engaging with High Net Worth Individuals on Tax provides a real insight into tax administrations’ struggle with offshore tax evasion. 

It notes that, globally, trillion of dollars are held offshore and governments around the world are losing billions of tax dollars every year because taxpayers fail to report vast sums hidden abroad. It is not surprising, therefore, that at the G20 summit on 2 April 2009, it was agreed to take action against non-cooperative jurisdictions, including ‘tax havens’, and to stand ready to deploy sanctions to protect public finances and financial systems. 

No more safe havens
One of the conclusions of the report is that over the past few months the international tax environment has changed dramatically towards greater transparency and exchange of information for tax purposes, and there is likely to be an increasing number of HNWIs considering voluntary disclosure of income or assets hidden abroad. It suggests that in the foreseeable future there will be no more safe havens for money on which tax has been evaded, so times are changing fast. 

Opportunity for disclosure in autumn 2009
The time required for exchange of information agreements and other mechanisms to come into force offers a unique opportunity for HNWIs to voluntarily disclose their income and assets, rather than waiting for HM Revenue and Customs (HMRC) to find them out. Indeed, there is to be a second disclosure opportunity in the UK in the autumn. This will be another chance for those who have offshore income or gains that should have been disclosed on UK tax returns to come forward and face a capped penalty, the details of which are still to be announced.

If it’s anything like the previous offshore disclosure facility, which reportedly enabled HMRC to recover more than £400 million in unpaid taxes, then we might expect interest on any unpaid tax, a fixed penalty of 10% of the unpaid tax and confirmation that no criminal prosecutions will be brought where unprompted full and complete disclosures are made. 

HNWIs with undisclosed income and gains can use the new disclosure opportunity to take advantage of any capped penalty and to bring their financial affairs up to date before HMRC, using their increasing information gathering techniques, make their own discovery. 

Legitimate non-tax reasons for holdings abroad
While that might all sound rather bleak, the report does recognise that there is nothing objectionable in tax planning per se, provided that it is done within the spirit of the law. It even goes on to say that it is important to note that offshore structures holding private wealth or collective investments, including those held via entities in no or nominal tax jurisdictions, can have legitimate non-tax reasons and should not be automatically equated with aggressive tax planning or tax evasion. 

Other ways to reduce HNWI tax liabilities
Eric Williams’ article “Stand by for super tax” in Bespoke issue 1 looks at the proposed changes to tax rates for HNWIs, which are likely to give rise to some very high effective tax rates. 

High rates of taxation were cited in the report as a key reason for tax evasion along with encouraging some HNWIs to move to a new jurisdiction with lower tax rates. I would argue that these are extreme measures, which are not necessary as there are a number of legitimate ways in which to reduce a HNWI’s tax liabilities, providing appropriate advice is taken.