Fee boost expected from uncertainty in offshore centres

Jersey: tax haven

Tax accountants are set to earn a considerable amount of new fees following the publication of new tax haven lists, a change in UK residency rules and growing uncertainty in the investment community.

Accountants have of late been advising commercial and personal clients about the effect that growing international demands for tax transparency will have on assets located in offshore jurisdictions. Note the way some companies have been reassessing where they might shift their headquarters owing to a combination of economic forces and some countries’ fresh appetite for drawing up broader tax compliance strategies.

Dublin and Luxembourg have been popular choices but the Irish economy is in meltdown and Luxembourg was named as committed but non-compliant in the latest international tax ‘grey list’. ‘Companies and individuals want certainty more than anything else in their tax affairs,’ notes one senior tax accountant. ‘The present climate means that many are looking at all their options afresh.’

Kevin Phillips, of Baker Tilly, says: ‘Companies need to be aware that transparency requires them to be able to demonstrate that they have management and operations in the head office jurisdiction. If, for example, a company wants to relocate its HQ to the British Virgin Islands for tax purposes and its directors all live in the UK, then it might be seen as tax evasion by HMRC.’

On 2 April at the conclusion of the G20 summit in London, the Organisation for Economic Cooperation and Development published a series of lists naming jurisdictions that were compliant (or non-compliant) with its tax standard on transparency and exchange of information.

What effectively became known as the ‘white list’ included Jersey, Guernsey and the Isle of Man. This meant that as far as the OECD was concerned those three jurisdictions ­ often labelled tax havens ­ were now bracketed in the same league as other compliant nations such as the UK, the US and Russia.

It was bad news for Switzerland, Bermuda, Cayman and BVI. All four centres were included on the grey list and the last three were nominated as tax havens.

Switzerland protested furiously and the finance industry in Bermuda lashed out at the Isle of Man. The government of the Cayman Islands ­ uncharacteristically ­ took the designation phlegmatically and said that the OECD was reviewing its eight unilateral information exchange treaties. The model for the tax informational exchange agreement designed by the Paris-based OECD is bilateral.

Tax accountants expect some reshuffling of the lists at the next review in the summer. Already the four blacklisted centres ­ Costa Rica, Malaysia, the Philippines and Uruguay ­ have made formal pledges to adopt the OECD TIEA approach. This means that there are now only white and grey lists.

Bermuda and Cayman are confident that they will be off the grey list and in the white list by summer. The absolute deadline date for many of these centres is the next G20 meeting in November when the prospect of sanctions against non-compliant regimes will be raised.

UK accountants say that the character of their business ­ advising high net worth individuals and companies on tax efficiency ­ has not changed. They put forward different long-term interpretations. One said that in a decade most offshore centres will have vanished because their principal purposes are tax avoidance and banking secrecy. Most believe, however, that offshore centres will change their focus of business and will, therefore, survive.

Heather Taylor, a tax investigations senior manager at Grant Thornton, says: ‘There will always be a demand for tax efficiency ­ whether it is companies or individuals. We, as a firm, have taken the view that tax evasion is entirely unacceptable and I believe that standpoint is widely held across the profession. However, tax planning is another matter. We help our clients to work within the scope of law to find appropriate and attractive tax planning approaches.

‘We believe that the business model for some of the offshore centres is changing to one that is compliant with international standards. The Isle of Man and the Channel Islands are notable examples of this trend.’

Andrew Penman, of Smith & Williamson, says: ‘There have been previous assaults on offshore financial centres and they have adapted to new political and market circumstances. Our advice is consistent with what it has been over lengthy period and the latest G20 and OECD initiatives have not caused us to alter that view. Evasion is wrong but tax planning is prudent and legitimate. It will take some time for changes to work their way through so the immediate publication of the lists does not change the quality or nature of the advice.

‘There is a desire among some clients ­ for wholly valid reasons ­ to be circumspect about their financial affairs. I have two clients who arrived here in the late 1940s from the Czech Republic.

‘They were escaping from communism. They do not want to evade tax, but they believe strongly that their personal financial affairs are their own business.’

In concert with the publication with the OECD lists, HMRC in the UK is stepping up its direct action against account holders. It will soon begin a second offshore disclosure programme aimed at account holders in secondary banks. Moreover, it has dramatically overhauled its rules on residency with the aim of making the definition of residence more of an art than a science.

Taylor says: ‘For the last 20 years, we have operated a set of quantitative rules ­ number of days spent in the UK ­ to define residence.

Now, HMRC6 says this is a qualitative exercise. Ultimately, the inspector will determine if someone is resident based on a range of factors. Clients are concerned that the advent of HMRC6 and the increased pressure on offshore jurisdictions will combine to create uncertainty.’

In the last few weeks, there has been a volley of tax agreements between offshore centres and OECD states. Clients are asking how that will affect their portfolios and whether some jurisdictions are safer than others.

The Liechtenstein amnesty announced by HMRC in April is a good example. Service providers in the better-regulated offshore centres are already preparing themselves to target users of Liechtenstein foundations and Luxembourg 1929 holding companies.

Structures available in the Channel Islands will seek to offer similar benefits to these two products, but with the added safeguard that the new location will be in a jurisdiction regarded more warmly by the international community.