Trusts for commercial purposes

Tax havens are most often associated with tax evasion and the rich, but as the panellists at the Frontline debate on the 4th January confirmed, the work of most offshore financial centres is as a hub of global financial settlements. The leading offshore financial haven for this type of business is the Cayman Islands which is the fourth/fifth largest in the world; the first being the UK.

Professor Ronan Palan said that the demand for commercial settlements offshore is huge; $25 trillion. One fifth of this goes through London. However, if included in the London’s figures are its Crown dependencies, dependent territories and former colonies, which would include, Cyprus, Hong Kong, Singapore, Mauritius, Jersey, Guernsey etc, this figure would rise to one third.

So what is so special about the UK and its satellite offshore jurisdictions to attract such huge settlement sums? It is the trust which is the linchpin for global settlements of all types and sizes.

A trust is a tripartite legal concept. A gift is made by a settlor to another person, a trustee, which places an obligation on that person to hold and manage the gift not for its benefit, but for the benefit of a third party, the beneficiary. Take for example a pension. Contributions are received by the pension provider as trustee to hold and manage for the pensioner, when he or she retires from work. Very often the pension fund is held offshore – why? Because offshore it does not pay tax on accumulated profits.

There are numerous commercial uses for trusts offshore. If a contract, provides for payment to be made, but not until the happening of an event and if the event does not happen then payment will be made to another person. It is convenient for the payment to be held in trust offshore pending the happening ornot of the event.

Professor Anastasia Nesvetailova pointed out that the use of trusts is not only a tool in the global settlements commercial kit box, but is also useful in preserving privacy and saving tax. If Company A is negotiating with Company B on an investment to which both parties are committed, both companies can transfer monies for the investment into a trust. The investor is then the trustee which is investing for the benefit of undisclosed investors, Company A and B.

Interposing a trust in a low tax jurisdiction such as Ireland or Cyprus can save significant tax. In my note in September I wrote about the taxation of Apple. Although a US company, its headquarters are based in Ireland and it has negotiated with the Irish tax authorities to pay only a proportion of the 12% Irish tax rate, paying the balance to an offshore financial jurisdiction with a zero rate of tax. Is this kleptocracy? No, just another face of capitalism.

The third panellist was John Christensen the founder of the Tax Justice Movement. He called the UK duplicitous in arguing for offshore transparency while tolerating low or zero rates of taxation in its satellite jurisdictions. But is the UK able to interfere with the tax rates imposed by a sovereign state? Having observed the UK and its dealings with offshore jurisdictions, I can say with confidence, that it has little power over its Crown or dependent territories let alone former colonies. Each of them sets their own rates of taxation for individuals, trusts or companies resident in its territory.

Furthermore, directors of companies, such as Apple are under an obligation to make the maximum return for their shareholders, which includes paying the least tax possible. The only justification for companies paying more tax than they strictly need to, is to keep customer loyalty.

The other goal which John expressed a desire to see was for a public register of persons with significant influence over companies. This is something to which I am opposed. Article 8 of the European Convention of Human Rights makes it clear that privacy is a human right, which is echoed in Article 12 of the Universal Declaration of Human Rights. Whereas, I can understand the logic behind the worldwide exchange of financial information so that governments can check that their residents are paying the correct amount of tax on their offshore funds, I can see no good reason for making a register of persons with significant influence over corporate entities public.

Furthermore, it would act as a disincentive for some very knowledgeable and experienced people from taking up an influential office if they knew that to do so would become public knowledge.

If you have a comment on any of the above, I would be delighted to hear from you or if you would like to meet with Caroline or any of her team please contact Svetlana on 020 3740 7423 or e mail on svetlana@garnhamfos.com

Caroline’s book ‘When you are Super Rich, who can you Trust’, can be bought from Amazon or ordered directly from Svetlana.

The Frontline Debate

Last week, I was invited by a friend to listen to a debate at the Frontline Club in Paddington of which he is a member on Kleptocracy. The debate was to centre on the role of the UK as an ‘enabler’.

Hosting the evening was award winning investigative journalist and author of two books on Russian history and politics, Oliver Bullough. He was joined on the platform by Professor Ronan Palan one of the world’s ‘leading academic experts on tax havens’, Professor Anastasia Nesvetailova who specialises in the way the finance industry uses offshore jurisdictions and John Christensen founder of Tax Justice Network, leading campaigner against tax havens and fierce advocate of a public register of the beneficial ownership companies.

Kleptocracy, for those scratching their heads, means a government with corrupt rulers, that use their powers to exploit the people and natural resources of their own territory in order to extend their own personal wealth and political power.

When first invited, I expected the debate to focus on case studies of how ‘politically exposed persons’ steal from their country and spend it in the UK – but no, the focus was on how ‘big corporations hide their profits from tax’.

Why the shift from crooks to companies? The truth is that the OECD initiatives are working. Financial institutions worldwide, have a high duty of due diligence towards any ‘politically exposed person’ and if any transaction is thought to be suspicious it has to be reported and if not the financial institution would face fierce fines and penalties.

Criminals, in which I include evaders of tax, are now rightly concerned that they can run – but they can no longer hide – the worlds finance industry has ganged up on them. What is their way out? My fear is that these criminals will find ways to avoid this worldwide watchdog by going underground and what better place to start than through the use of a virtual currency created from a computer code – Bitcoin. Somewhat riskier, but outside of the obligations of the financial industry - but that is a topic for future discussion.

London is without doubt the centre for global corporate settlements stage because of its expertise and knowledge of derivatives. Anastasia gave an example taken from an article on fixed/variable interest rate swaps. This could possibly have taken more of the audience with her had she accompanied it by an example; such as the following.

A cash rich company, ABC Limited negotiates a low fixed rate interest loan, because there is little risk of the company defaulting. Another company XYZ Limited is a municipal bus company which makes no profit, and can therefore only borrow on a high variable interest rate. The companies through their bankers agree to swap their interest rate obligations. ABC Limited can then deduct the high interest rates of XYZ against its profits and XYZ gets a lower rate of interest which is fixed. Both companies win, the only loser is HMRC.

But derivative transactions are not limited to interest rate swaps. As my host my friend, a former ship finance specialist explained; XYZ limited a municipal bus company, it needs to buy buses to replace its ageing fleet, but it is not a profitable business, so can never set off its tax breaks for investing in plant and machinery against profits. It therefore onward sells its contracts for the acquisition of buses to ABC Limited which can use the tax breaks on the investment in buses for a fee. Both companies benefit, the only loser is HMRC.

As Anastasia admitted, although academics may have only in the past ten yearswoken up to the role played by derivatives, derivative transactions have been around for decades. My first task as a junior lawyer in the 80’s in the commercial department of Allen & Overy was to analyze the VAT consequences of an interest rate swap.

These derivative transactions do not however thrive on kleptocracy or even a thriving offshore industry, but capitalism, where big profits can be made by eager bankers keen to match a need with a demand and make money. London has been the world leader in this form of capitalism, but derivative trading does not explain why the former colonies and satellite territories of London play such a key role in the world’s financial settlements.

The secret as John Christenson pointed out lies in the invention of the trust by the UK, in the times of Richard the Lionheart, and the role this legal concept plays in big corporate transactions. I will highlight next week together with my views on why I do not think this country needs a public register of the beneficial ownership of companies.

If you have any comments or would like to meet Caroline or any one of her team to discuss one or more concerns of the UHNW community, please contact Svetlana on svetlana@garnhamfos.com or call her on 020 3740 7423.

Please also contact us if you would like to buy a copy of Caroline’s book ‘Who can you trust when you are Super Rich?

What rights do we have over our financial information?

I would like to start off by saying Happy New Year to all my readers! May 2017 be a happy, healthy and prosperous one!

Last week I met Josh for a cup of coffee. He wanted to know what information about his sensitive financial information would be exchanged as from next year. He has an account in Switzerland, held by a Swiss Private Bank – would this bank be disclosing his account details to the tax authorities of his home country? The answer is YES.

In order to tackle offshore tax evasion and other forms of non-compliance, OECD countries will as from 2017 be introducing a Common Standard of Reporting. Josh and his family are and have always been fully tax compliant, they are however worried as to the confidentiality of their financial information. If it starts being exchanged globally in whose hands will it end up?

Under domestic Swiss legislation the Swiss Private Bank will need to report on Josh’s account; balance and payments made or credited to the Swiss tax authorities. These will then be automatically exchanged with the tax authorities of the country of Josh’s residence.

Josh asked what address will Swiss Private Bank use as his residence? He has been moving quite a bit over the past few years. I said that it would use the address it had on file for its anti-money laundering purposes or it may ask him to self-certify if unsure or it would do some research. This did not give Josh much reassurance. He has been living in Brazil, Dubai and Nigeria in recent years, and is now living in the UK.

He asked if he would be less exposed as a beneficiary of a trust. His uncle had set up a trust for Josh and his family more than a decade ago. The Trustee is a professional trust company in Cayman which I will call Trustee Co. its money is managed by Swiss Private Bank, and Josh’s father Randip is the Protector. Josh’s uncle died some years ago.

In short, if Josh is a discretionary beneficiary of a trust, he is less exposed, but the people who are ‘in control’ of the trust are more exposed. Those ‘in control’ of the trust for CRS purposes include the settlor, the protector, the fixed interest beneficiaries and others deemed to be in control.

Josh wanted to know which entities would be reporting what, to whom and when in 2017.

In this situation the ‘Reportable Financial Institution’ is the Swiss Private Bank.  Trustee Co is a ‘passive Non-Financial Entity’.

The details of the Report to be made by the Swiss Private Bank –  to be made to the Swiss tax authorities, which must include the details of the account to the tax authorities of the countries in which the following are resident, the

·      Settlor, Josh’s uncle – regardless as to whether he is alive or dead, date of birth, and death, address and tax identification number

·      Trustee – and if there was more than one then each and every one – name and address

·      names and details of any fixed interest beneficiaries,

·      names and address of any Protector Randip, Josh’s father and any other Controlling person.

Josh is named as a beneficiary, but does not have a fixed interest. Whether the Swiss Private Bank will need to report the details of Josh and his family will depend upon whether the Swiss Private Bank has an agreement in place with Trustee Co as to whether it will be informed of any distribution made to Josh or anyone else in any one year. If no distributions are to be made, Josh and his family can keep private their connection with the trust fund.

Although Josh and his family can in this situation remain relatively private, the details of the account balance and payments made will be reported to the tax authorities of the country of residence of each ‘Controlling Person; settlor, trustee, fixed interest beneficiary and Protector. Some such ‘Controlling Persons’ may feel somewhat uncomfortable about this information being presented to the tax authorities in which they live, especially if their ‘control’ is more illusory than real.

Josh asked what safeguards there were as to the confidentiality of this information.

The ‘confidentiality of taxpayer information is a fundamental cornerstone to tax information exchange. …. Tax payers have a legal right to expect that sensitive financial information remains confidential’ so the OECD handbook states.

‘The systems and procedures should include appropriate policies in relation to employees (such as background checks and training), restricting access to sensitive documents, systems to protect the data (such as identifying those with access and having audit trails to monitor access), restrictions on transmitting the data and appropriate information disposal policies. Regular risk assessments should also be completed and confidentiality policies updated as necessary.’

Provisions are also included such that if one authority has reason to believe that there has been a breach of its safeguards, it must immediately notify its partner and if it fails to comply or is lax in its safeguard provisions, it can be suspended from further exchanges of information. There is no mention however, of any right of compensation to those people who may be adversely affected, no right of appeal, and no right to be notified!

Josh’s family had to flee a country with 100 days’ notice when he was young. He is therefore uncomfortable with sensitive financial information circumnavigating the globe. Because of  Josh’s experience, he may be in the minority. Other tax compliant families may be less fearful; if they have nothing to hide, what was there to worry about?  

Privacy is however for many little to do with tax compliance, it is a fear of what people could do with sensitive private financial information. Josh like many others are willing to pay a relatively small fee to keep their offshore assets off the reporting radar. It is a price worth paying to enable him, his family and trusted advisers to sleep easily at night.

Please let me know your views, do you think Josh is overreacting, or do you think that today, Governments can be trusted to keep your sensitive financial information private and confidential.

Ifyou would like to know more or to book an appointment with Caroline or one of her team, please contact Svetlana on svetlana@garnhamfos.com or on 020 3740 7422.

End of Year Panic or Procrastination

A few years ago I was advising a very wealthy family, who I will call Abdullah, about wealth structuring and succession. He was in good health as was his wife and children, and so he wanted to take his time to get his structure right. I told him to start with a simple structure and then amend it as circumstances changed. He procrastinated for several years as he explored and researched the ideal arrangement for himself and his family.

His wife’s uncle Mohammed treated Abdullah like a son and had brought him into his business together with his own two sons. In due course, Abdullah left his uncle in law’s business to set up on his own, because there was too much friction between Abdullah and his cousins in law. Having left his uncle in law’s business Mohammed went from strength to strength keeping in close touch with Mohammed as he continued to learn how to manage and run a business.

Much to everyone’s surprise, Mohammed had a surprise heart attack and died. Abdullah was upset, but did not have any expectations of an inheritance for himself, so after he had grieved and paid his respects went back to work.

Unbeknown to Abdullah however, his cousins in law, were very disappointed with the size of their father’s estate compared to what they perceived to be the extent of Abdullah’s estate and started to investigate. They soon came to believe that Abdullah had defrauded his uncle in law over many years and wanted their fair share of his estate. They made a claim for fraud in New York and then took the judgement to Cayman Islands where his world-wide assets were held. Here the court froze Abdullah’s assets and world-wide litigation –  began.  It took Abdullah just under three years to recover his assets, which were then subject to a relatively small payment to his cousins’ in law; dwarfed by huge legal costs, and a family divided forever.

Ironically, if Abdullah had put his Cayman holding companies into trust when I first advised him to do so, it is unlikely that his cousins in law would have been able to bring a claim against his assets.

By making a trust Abdullah would have made a gift of his assets to his trustee and therefore those assets would be and unavailable for creditors; outside his estate. Technically the assets would no longer be the assets of Abdullah. The trustee could be a company created by him to act as a trustee- a private trustee company, so he could stay, albeit indirectly, in control of his assets.

However, Cayman does not wish to attract unscrupulous credit dodgers and therefore has, like many other jurisdictions – such as the Bahamas, built in an intention provision to any person setting up a trust in Cayman. If Abdullah had set up a trust, what was his intention for doing so – was it to dodge his legitimate creditors? Within six years of setting up the trust, the gift could therefore be set aside and the assets returned to Abdullah and available for creditors if they could prove this intention. There are many other jurisdictions where the time limit is two years, rather than six.

As advisor to Mohammed I knew that in setting up a trust he was not be trying to dodge his creditors. He did not believe he had any legitimate creditors. He simply wanted to preserve and protect his assets for his children and against unwanted litigation either from within his close family following his death, or from unrelated third parties. It had never crossed his mind that a claim could come from his wife’s side of the family, and during his lifetime.

Setting up a trust to protect and preserve the family wealth must therefore be viewed in the way most people view insurance. Insurance is not a superstitious activity to ward off unexpected accidents, it is to provide protection should something bad happen which was not expected. However, setting up a trust is doing something much more than can be achieved through insurance. For insurance to be effective Abdullah’s claim had to be something which could have been anticipated; an insurable risk. However, Abdullah is unlikely to have included a claim made by his cousins in law as an insurable risk, because this possibility was not anticipated and therefore it unlikely be an insurable risk.

Setting up a trust, is therefore a sensible precaution to take if you have wealth likely to exceed the needs of your immediate family, but it needs to be done with care, and by a professional who has had experience of what could happen beyond that which may happen.

If you would like to book an appointment with Caroline or any of her team she can be contacted through svetlana@garnhamfos.com or call 020 374 7423

Protection, Control and Privacy

Jose is resident in Argentina. In 2002 his father died while residing in Spain and left Jose an account in Switzerland of $120 million. He did not declare it in Argentina, because he was not sure he could trust the Government at that time (The Hostile world from an Argentine perspective), but can he trust them now?

In May 2016 Mauricio Macri, the new President, offered Argentine residents a tax amnesty if they declared their offshore assets before 31st March 2017. Those who declare will pay a penalty of between 0 – 15%, in addition to the tax, but will escape criminal prosecution. Jose is not alone in having an account offshore; it is estimated that a whopping $500billion is owned by Argentine residents outside the country on which tax has not been paid, but if he declares now, will the Government change its mind later and go after him for more taxes?

Chile had an amnesty this year. For those who declared, no interest or penalties were payable. It raised CLP 160billion in extra revenue, ten times more than expected. However, Chile sacrificed CLP41.5billion ($62.3 million) in interest and penalties to do so.

There are numerous countries who have offered or who are about to offer tax amnesties; Belgium, Germany, Greece, Italy, Russia and coming soon is Brazil. For many, however the issue is much more complex than non-payment of tax or even whether to trust the Government of their country; in short they are suspicious of anyone who has or could have details of their private wealth.

Jose came to see me last week having read my Note ‘A Hostile World from an Argentine Perspective’. If he were to put his inheritance into trust would he not be losing control of his assets? The monies in trust would no longer be Jose’s, what was to stop them absconding with his money?

‘It depends who the trustee is.’ I told him ‘There are many trustees who are regulated and professional with an excellent track record, alternatively you can set up your own private trustee company provided it is in a suitable jurisdiction which will regulate it. This is often called a PTC.’

Jose can then appoint the people he trusts to be Directors of his PTC who will take the decisions on the trust assets and its distribution to his family. Jose will however need to take care as to who owns the PTC, because this person or entity will determine which Directors of his PTC can be removed and who is to replace them.  I recommend an Executive Entity to hold the PTC. This is an entity I created through specific legislation in the Bahamas which is designed for this task [https://en.wikipedia.org/wiki/Bahamas_Executive_Entity ]. It gets around any problem of succession if someone in power dies unexpectedly. It also enables a wayward or difficult Director to be removed and replaced where necessary.

The only major snag with a PTC, is that as from September 2017 its Directors will be treated as people of significant influence and will be reported to the country of Jose’s residence; Argentina. Most people Jose knows and trusts do not want their privacy compromised in this manner. Even if the PTC will not have to report, the bank where it holds an account will need to do so with effect from 1st January 2017.

Jose came to Garnham FOS because he read its book ‘When you are Super Rich who can you Trust’. He did his homework, Garnham FOS is independent, does not provide trustee services, has advised many of the wealthiest people in the world for more than two decades and has an excellent track record.

It was also one of the first independent advisors two decades ago to look for an effective and efficient solution on how to incorporate corporate governance principles into family wealth holding structures thereby maintaining control for the family and is now focussed on delivering for its clients privacy protection.   

If you would like to contact Caroline or any one of her team, please contact svetlana@garnhamfos.com or call her on 020 3740 7423.

(Caroline’s book ‘When you are Super Rich who can you Trust’ can be bought on Amazon or on our website where the rest of Caroline’s weekly blogs can be read on www.garnhamfos.com. )