This will backfire!

Article 8 of the European Convention on Human Rights says ‘Everyone has the right to respect, for his private and family life, his home and his correspondence’. The Article then goes on to qualify this right with the safeguard inter alia that this right is subject to ‘the economic well-being of the country’.

The OECD initiative on the automatic exchange of information, known as the Common Reporting Standard (CRS) under which all financial institutions must disclose automatically the financial information owned by non-residents to the local tax authority in which the owner lives, is possibly in breach of this Article. Increasing numbers of people including many in the EU are concerned by the disproportionate nature of CRS, which will adversely affect many innocent people. They argue that information should not be automatically exchanged; there needs to be an evaluation to determine whether there is a reasonable risk that tax is being evaded, before information is exchanged.

The EU Data Protection Supervisor on the 8th July 2015 issued the following strongly worded opinion

‘The exchange of information … on an annual basis, confirms our view that the information exchange is independent of the detection of any actual risk of tax evasion thus questioning the proportionality of the measure itself’.

If this notion was upheld in the European Court of Justice, there would be a good chance that the Directive would be overruled as unlawful; in breach of Article 8.

On 21st October 2016 the French Constitutional Court made a start. It struck down the French Public Register of trusts as being in breach of the fundamental respect for private and family life.

In the UK, however, HMRC has given only lip service to the risk. On 23rd January 2017, HMRC conceded that ‘in some cases, the activities or background of the individual [whose privacy is being compromised] may mean that supplying data to the other jurisdictions will place them at risk’ and that information would need to be redacted.

Exactly how HMRC hope to be able to assess the danger and know what information should be redacted and what not, remains a mystery. Given the enormity of the task, I cannot see this statement providing any sort of comfort to those affected and concerned and does not address the fundamental principle as to proportionality.

The drive to stamp out tax evasion has clearly become an obsession with tax authorities. They hate offshore structures; they see them only as devises to evade tax and therefore the loss of privacy is a small price to pay for the well-being of the country. They do not see CRS as disproportionate to the mischief. It is merely putting other jurisdictions in a position of knowledge so that they can then independently evaluate the risk of tax evasion. But is this obsession fair and reasonable given that privacy and freedom is a human right?

Public opinion has moved on since tax evasion first came on the radar. People were shocked and staggered at the sheer quantity of personal information held by the National Security Agency uncovered and made public by Snowden in 2013 on normal people; their correspondence, purchasing habits and acquaintances. This for most is of academic interest only, but when personal, private information starts to be used by tax authorities keen to distort the facts to collect more taxes, there could be an outcry.

We already know that, tax authorities on receipt of information under CRS, have been told to

A         look at how much money is in an offshore trust structure, and then

B         look at whether there is in place a Protector.

The existence of a Protector in a sizeable trust is, tax authorities are told, ‘prima facie’ evidence of a sham – and therefore tax evasion. Is this correct? Does the existence of a Protector provide sufficient evidence to warrant a tax investigation into the existence or otherwise of a trust and tax evasion or is this an unacceptable breach of privacy?  

If it is prima facie evidence of a sham, then tax authorities are justified in approaching trustees for more information, to enable them to concoct a case for sham and issue a tax demand on the Settlor as if the trust had not existed. Whether or not this premise is justified needs to be determined by the European Court of Justice, but until this is decided Settlors of offshore trusts with Protectors can look forward to eight or more years of investigation and then litigation if they refuse to capitulate to the demands of their tax authorities.

In my opinion it is only a matter of time before the UHNW community take a class action to the European Court of Justice to have the OECD Directive set aside. However, this is a long way off and in the meantime – if you or your clients wish to be protected from the erosion of privacy and costly investigations and litigation, please contact Svetlana to find out more about our Protection Solutions.

If you would like to comment or reach out to us, please write to us at or call 020 3740 7420