Offshore tax havens: crackdown

The UK government is halfway through a sweeping crackdown on UK citizens hiding their money in offshore bank accounts and the French and German governments have urged the nations in the Organisation of Economic Cooperation and Development (OECD) to get tough with offshore tax havens.

In the US, Barack Obama has also talked about the need to clampdown on offshore tax centres, which have been estimated to cost the US government at least $50bn a year in lost
tax revenues.

Offshore tax centres, buoyed by globalised finance and cross-border tax planning, have seen rapid growth over the past few decades. The big accounting firms have done well out of the expansion and expanded their offshore tax advice practices.

But is the offshore tax boom coming to an end? Some experts predict that the latest crackdowns by governments and tax authorities will undermine offshore tax centres and see their influence wane.

Beginning of the End?

Richard Murphy, an offshore tax expert and director of Tax Research LLP, is a vocal critic of offshore tax havens. He reckons these tax havens and their advisory services will be caught in a pincer movement between the current economic crisis and further crackdowns from governments.

‘The one plus side of the credit crunch is that it may give rise to the death throes of the tax havens,’ says Murphy. ‘No one who values free markets or who believes in democratic government should mourn their passing. They threaten the existence of both.

‘Barack Obama has said he will close down tax havens. It is clear that the French have the same objective. The major countries in the world now realise that tax havens exist to undermine their regulatory regimes and for no other purpose.’

The big accounting firms will come under increasing pressure to reduce their offshore tax practices, he adds. ‘You cannot expect places like the UK to license your activities, to offer you consulting contracts and to then go out of your way to destroy the UK government’s revenue stream.’

Prem Sikka, professor of accounting at the University of Essex, also predicts tough times ahead for offshore tax havens. ‘My feeling is that the offshore world is increasingly going to be squeezed and that their secrecy is going to be eroded,’ he says. He adds that tax havens will face growing pressure to become more open from governments and trading blocs like the European Union.

‘Lots of countries are facing budgetary deficits and there is a limit on how much tax they can levy on individuals. [Governments] will hone in on tax avoidance and there is no way offshore centres can avoid this.’

New opportunities

Tax experts are predictably more optimistic about the future of offshore tax centres. Government crackdowns on offshore tax avoidance schemes have made planning more difficult, they admit, but new rules open up new business opportunities.

Paul Hotchkiss, director, tax, at KPMG in the Isle of Man, says: ‘The offshore environment has been changing over the years. It adapts new solutions when legislative regimes come into play. An example of this is Protected Cell companies [investment schemes introduced in Guernsey in 1997]. They have been used for funds but now they are being used for Capital Gains Tax planning.’

Recent changes to tax rules on non-domiciled UK residents also have the potential to increase demand for offshore advisory services.

Keeping pace with changing rules isn’t easy, but for tax advisers in offshore centres it can mean that day-to-day work is more varied.

‘Every day is different,’ says Hotchkiss. ‘It’s probably less restrictive than working in a larger practice where you may need to focus on one narrower area.’

‘You have to be adaptable and assimilate a wide range of knowledge and store this and find it. Very often you just can’t do it all but you have to know where to look.’

But how do the big accounting firms respond to criticism that they are undermining governments and regulators by working with offshore tax havens?

Behind closed doors

Firms are reluctant to speak on the record but privately argue that they work within complicated tax rules to offer rich individuals or multinational companies a chance to plan their finances more effectively, thereby minimising their tax bills.

Tax experts stress that there is a crucial difference between giving advice on legal tax avoidance and illegal tax evasion ­ often involving money laundering ­ which has given offshore centres a bad reputation.

One senior tax partner at a Big Four accounting firm, who asks not to be named, plays down the importance of offshore practices to Big Four accounting firms, saying his firm’s offshore practice is about the same size as its Bristol office.

Growth in offshore financial centres has slowed slightly over the past few years, he says. But he adds that rich investors and multinational companies will continue to use offshore centres for investment advice and to help them pay less tax.

The partner adds that there is room for governments to work more closely with accountants to crackdown on illegal offshore tax activity while allowing tax planning.

‘It’s not as if offshore [finance centres] are bad and onshore good. Of course the list of people evading tax in Liechtenstein bank accounts is absolutely appalling but offshore centres are an easy target,’ he says. ‘Plenty of people in the UK avoid paying tax.’

A new life abroad?

Fancy swapping a rainy commute into work for a stroll along a pristine beach?

For accountants with the right qualifications and experience, working in an offshore financial centre could prove a smart career move as well as a lifestyle change.

David Angel, director of Michael Page Offshore, part of recruitment consultancy Michael Page International, says there is good demand for chartered and certified accountants in offshore tax havens.

The most common accounting job vacancies in offshore centres pay the equivalent of around £40,000-£60,000 per year, he says.

Accountants in offshore centres could work in a range of organisations, ranging from an accounting or law firm to a bank or insurance company. Promotion prospects offshore are often good, as the operations are usually smaller than the UK, meaning competition for promotion is usually less fierce.

'I have seen some rapid career progression of accountants [in offshore centres],' says Angel.
'Twenty years ago going to [work] in the Cayman Islands was seen as a bit of a jolly but now it's seen as a legitimate move to gain international experience.'

Accountants with experience in small offshore financial centres are also highly sought after by financial institutions in countries such as Dubai, Singapore and Switzerland, adds Angel.