One constant requirement is to live within the laws of their home country and hence to satisfy their tax obligations. This has always been the case. However, over 2009 it became clear that, in most western countries, the tax compliance obligation is becoming more onerous and the consequences of getting it wrong are becoming more severe.
A major driver of this change has been the global credit crisis which has decimated the tax take of industrialised countries while increasing calls on the public purse. To help bridge the consequent ‘tax gap’ tax regimes have focused on international companies and international individuals, who can both engage in cross-border tax planning. Since the phrase ‘tax planning’ implies doing something rather sensible, the activity is increasingly referred to by the tax authorities as ‘tax avoidance’ with the implication it is at best socially reprehensible if not actually criminal.
Last year saw a surge of state initiatives designed to target those who live in one country but hold assets in another. At the same time, significant political pressure has been put on those smaller states which have developed a reputation as financial centres to reduce their previous commitment to client confidentiality and to sign information exchange agreements.
liechtenstein Disclosure Facility
Perhaps the best known of these has been the agreement signed between the UK and Liechtenstein. Liechtenstein has agreed with the British authorities to ensure that by 2015 all Liechtenstein accounts and interests (such as partnerships, trusts, foundations and companies) linked to UK residents will be UK tax compliant. The UK has agreed that, under the terms of the Liechtenstein Disclosure Facility (LDF), anyone making a disclosure to the UK revenue authorities with ‘relevant property’ in Liechtenstein will be given special treatment, both in terms of how far back the revenue authority will look and in terms of financial penalties.
Under an accompanying Memorandum of Understanding, the UK authorities clarify that the terms of the LDF are also available to those who create a Liechtenstein connection post the date of the agreement. It is ironic there are now voices of protest being raised in the UK revenue authority that the consequences of this are that people are achieving significantly better settlement deals than they would otherwise have done and the agreement should be revisited.
For tax the world outlook at the beginning of 2010 is significantly different to the outlook even two years previously. How bright is the future? Most commentators accept the sentiments of a former US President: “It’s the economy, stupid.” Restricted economic activity will lead to restricted tax take in industrialised countries. Social pressures will lead to looking to increase the tax take. This is likely to increase the focus on those who have cross-border financial interests.
Worldwide approach of revenue authorities
The UK is the latest OECD country to set up a High Net Worth Unit, with membership being based on world-wide assets rather than economic activity within the country of residence. Such units wish to build up a world-wide picture of the HNWI membership: personal income and gains world-wide; any links to corporate structures; any links, as founder or as beneficiary, to trusts or foundations. The taxpayer will be put under pressure to provide information on a ‘cooperative compliance’ basis rather than, as has historically been the case, on the basis of relevance to one’s UK tax affairs.
The revenue authorities will then trawl through these affairs to see whether any challenge can be mounted. Such is the increasing complexity of tax regimes, and their lack of certainty, it is not unusual for the taxpayer to believe himself to be tax compliant only to discover he is in fact open to challenge.
In choosing targets for challenge, in addition to local risk assessments, tax regimes have access to a wide range of sources. Over the past year there have been various routes taken by different fiscal regimes to force financial institutions to disclose information on customers. Fiscal regimes will also routinely exchange information which they think may be of relevance to colleagues
in different states. A particular source of such ’cross-state’ information will often be where the beneficiary of a particular trust or foundation provides information to his home country but such information has potential relevance to beneficiaries in different countries.
For those charged with protecting the interests of international families, these changing circumstances raise various issues.
A starting point must be a consideration of which family members are most exposed to challenge. Unfortunately the answer can depend on matching a detailed fact pattern to complex legislation and developing case law.
How likely is a challenge? Given the increasing exchange of information within and between states and the increasing sophistication of computer systems to analyse data and make links, the answer must be that fiscal regimes are getting better at identifying taxpayers who have cross border links and who are thus, by definition, perceived as high risk and worthy of challenge.
In the event of a successful challenge, what would be the consequences? States usually have the power to go back a number of years; in the UK the authority can go back 20 years, longer for certain taxes such as death duties. Interest will then be applied to any additional tax liability. If evasion is suspected, criminal prosecution will be considered. If a civil route is followed, financial penalties can be up to 100% of tax. In the UK, for understatement of tax linked to offshore accounts, there is a proposal to raise potential penalties to 200% of the tax due.
Pre-emptive measures by tax payers
What practical steps can be taken?
Where there is uncertainty as to exposure of a challenge, given the potentially severe consequences, a pre-emptive review is worthwhile. Apart from providing increased certainty, such an exercise can identify weaknesses and strengthen defences against future challenge.
Where there is knowledge of exposure, then there is the option of gaining the advantages of a voluntary disclosure. The advantages of this depend on the fiscal regime in point and the disclosure offers available. At present for those resident in UK, the LDF offers significant advantages including the possibility of ‘opting in’ and a guarantee of no criminal prosecution as well as the opportunity to minimize tax liability.
Those concerned with family wealth should act now - reviewing domestic and global arrangements. Now is the time to “put the house in order.”