Bad news or good news first?

In July 2005 if a German resident, Heinrich earned interest on his French bank account, the French bank was obliged to notify the German tax authorities under the Savings Directive that Heinrich had a bank account in France. Why then if the Savings Directive is already in place has it been necessary to implement the automatic exchange of information? Surely this Directive was sufficient for all Governments to get the information they needed to stamp out the tax evasion of their residents?

The Directive however, failed to live up to its ambitious plans, for a number of reasons.  For example; Austria and Luxembourg were granted exemptions. Instead of exchanging information on the identity of account holders both countries were allowed to preserve the anonymity of their clients and apply a withholding tax of 35% on all interest earned on the account of non- EU residents. But, it backfired.

Francois, for example is French, but has a bank account in Austria. Austria deducted 35% against interest earned by Francois and paid three quarters to the French tax authorities. Francois pays the top rate of tax in France which is 45% which is 10% higher than the amount deducted in Austria. Francois is liable to pay an extra 10% tax in France and should declare it. However, if he does not, the French tax authorities do not know that Francois has a bank account in Austria, so they cannot they cannot check that he has paid the right amount of tax.

Exemptions from the general rule are already beginning to creep into the Common Reporting Standard for the automatic exchange of information.

Some countries such as the Bahamas and Switzerland have seized on the legitimate concern recognised by the OECD that some countries in which wealthy individuals live do not have the necessary security and confidentiality measures in place to protect the privacy of the information exchanged. In situations such as this the jurisdiction collating the information need not exchange it.  

Bahamas has refused to sign the multi-lateral convention for this reason and will only sign bi-lateral agreements with countries it considers to be safe. It has not for example signed many agreements with S American countries in which it has a significant number of account holders. Switzerland has adopted a similar approach, and has identified only a handful of jurisdictions which it considers to have adequate security measures in place. As a result, both the Bahamas and Switzerland have a competitive advantage over other financial centres.

The second loophole in the Savings Directive, was the fact that the Directive only applied to accounts owned by individuals, not accounts held by entities such as a company, trust or foundation. If Francois did not wish to pay the 35% on his Austrian bank account, all he had to do is to transfer his account to a British Virgin Island company. Austria would not then look behind this company and declare Francois as the shareholder and disclose these details to the French government. In the UK, if there are five or fewer shareholder which control a company the tax authorities can tax the shareholder on the income of the company and I am sure France has similar anti avoidance rules. Therefore is Francois doesnot declare the income arising in his offshore company which holds the Austrian account, he is evading tax.

In 2004 before the Directive was implemented 50% of accounts in Switzerland were held by offshore companies, whereas by the end of the 2005 60% were owned by offshore companies – an increase of 10%.

The possible reason why this percentage was not higher was the example made by the US of Credit Suisse, UBS and other Swiss banks in response to legislation which proceeded FATCA, known as the qualified intermediary rules. Banks were obliged under these rules to provide data to the US IRS only if their clients held American securities. To avoid this rule, the American Securities were transferred to an offshore company. The Swiss banks keen to assist their clients promoted the ownership of their accounts through offshore companies. The IRS did not like this conspiracy to evade its rules and sued the Swiss banks for defrauding the US IRS. Credit Suisse was fined $2.6billion.

The CRS automatic exchange of information has similar loopholes. Income on investments held in a discretionary trust do not need to be reported until such time as paid out to a beneficiary. Discretionary trusts do not have similar anti avoidance rules as companies an are therefore much more useful. Income can therefore be accumulated without any reporting to the country where the beneficiaries reside, until such time as they receive the income. Furthermore, there are ways in which distributions can be made without the need to report as income.

However, it is now unlikely that a financial institution with reporting obligations will advise their clients on what they can do to plan for fear of being sued.

Wealthy families are beginning to realise this and are now looking for planning from independent advisers; whether on the structuring to preserve privacy, protect their assets from spurious litigious claims, provide for their heirs or legally mitigate their tax obligations.

There are numerous ways in which people can plan, mainly because there is nothing to stop wealthy families taking advantage of companies and trusts in jurisdictions which want to attract business to their shores.

If you would like to find out more, or you would like to book a meeting with Caroline or one of her team, please email svetlana@garnhamfos.com or phone 020 3740 7423.

You can buy Caroline’s book ‘Who can you trust when you are super rich?’ from Amazon or direct from Svetlana.

The good news about Trump

Last week, while away skiing with leading Simmons & Simmons partners, I read Zucman’s book the ‘Hidden Wealth of Nations – the Scourge of Tax Havens’.

Zucman is a young French economist. His thesis is that the world would be a better place if tax havens were abolished.  He supports his propositions with calculations.  

Wealth hidden in tax havens he says is equivalent to eight percent of global financial assets, totalling $7.6 trillion. Eighty per cent of it is not reported and therefore taxes are not paid on this money, he says.  Zucman estimates that $125billion is lost in income tax, $55billion in inheritance taxes and $10 billion in wealth taxes.

Zucman’s mentor Thomas Picketty, is also French. Picketty is a strong advocate of taxing the wealthy more heavily. Anyone with income in excess of $500,000 should be taxed at 80% and those with income above $200,000 should be taxed at rates of between 50 and 60%.

Zucman admits that most of this money may be ‘hidden’ in trust. If he is correct then his assumptions as to ‘lost’ taxes, is a nonsense. Income arising in a discretionary trust is taxable in the country in which the trust is resident. If that country does not impose a tax, then tax is not ‘lost’ it is simply not payable to a high tax jurisdiction!

In France wealthy families emigrated from their beloved France, because of their dislike of the harsh tax imposed under the Hollande regime, and in particular its wealth tax. The payment of these taxes were not lost to the French Government, it is simply that fewer people lived in France on whom the Government could levy their punitive taxes.

Tax havens, Zucman says, are a danger to the world economy and growing. In the five years from 2010 to 2015, wealth in tax havens, he says, grew by twenty-five percent. However, what Zucman fails to understand is that as governments tighten the net around the ultra-high net worth community, the incentive to look for other ways to avoid the pressure increases.

Governments of the world are now united in their endeavour to stamp out tax evasion through the erosion of privacy. However, what they fail to recognise is that the more ferocious they become the greater is the incentive for the rich to create sophisticated trust structures to avoid it - legally.  

Zucman takes the view that the new rules on the automatic exchange of information will not work, because the penalties for the tax payer and financial institutions is not high enough. The fine paid by Credit Suisse for encouraging their American clients to set up structures to avoid paying US tax, may have hurt – but, he says, was not enough to make these financial institutions stop doing what their clients want. Possibly true. Financial institutions – like their clients will learn where the new line is drawn – and not step over it.

The automatic exchange of information has undoubtedly stamped out tax evasion, but this does not stop wealthy families from finding other ways to do what they want, which are legal. Until a country’s sovereignty can be curbed and all governments set the same taxes in the same way and at the same rate, people will always choose one tax system over another for their own benefit.   

Take the Argentinian tax amnesty. It is widely known that Argentines have not been declaring tax on monies held offshore. They have however now been frightened into declaring what they own offshore through the threat of transparency. $120 billion out of an estimated $400billion offshore has been declared and tax paid. But, imposing an amnesty under threat of criminal prosecution, will not make the Argentines change, it will only serve to increase their desire to use more sophisticated structures to achieve what formerly they were doing illegally.

And what is the good news about Trump? The US is the only country which is keen to stamp out tax evasion but only for US tax payers. For non US taxpayers, it is a privacy haven. For our clients we can maintain privacy, maximise Investment flexibility and minimise tax consequences. Billions of dollars are tumbling into the US coffers which makes it the new Switzerland.

As a business man Trump welcomes this gravy train and as a rich man he understands why. He won’t do anything to stop it – if he did his slogan ‘make America great again’ may not come true – much to the annoyance of the likes of Zucman and Picketty.

If you would like to find out more about how to protect your assets and privacy, or other offshore planning issues please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com. Caroline has been a thought leader in regards to privacy for UHNW clients for the past year and at GFOS we have the culture of care embedded in our DNA. 

If you would like to purchase Caroline's book 'When you are Super rich who can you trust' please do so from the website our contact Svetlana direct.

Garnham FOS only works with clients who are tax compliant. 

Understanding the mind-set of a philanthropist

Last week I received an invitation to a charity dinner and auction, on the back of the invitation was a list of twenty-five patrons. The tickets were £400 each or £4,000 for a table. Who goes to these dinners and why? Is it to assist the charity, eat a nice dinner, or meet people they may otherwise not get to meet?

Of course, the dinner is about meeting like-minded people.

I have a client Martha, who overnight became unexpectedly very rich. She and her husband, up until that moment, had led quiet lives, in the north of England socialising with people of similar wealth. Now she was able to fly on a private plane to New York for dinner, charter a yacht in the Caribbean and buy real diamonds and furs – but she had no-one to share this good fortune with. None of her friends were able to do what she could do, now she was supremely rich.

She started to go to these dinners, first as a guest of her bank, and then she got to know one or two people on the committee and was invited to become a patron and joined the committee.

Within two years, she had a completely new set of friends. People from whom she could learn, how to invest, what to watch out for, who to engage and how to spend her new found riches.

Charities also understand that there are very few places that the rich can ‘splash their cash’.  Bidding in a charity auction is a good way to display wealth – because it is ‘going to a good cause’.

The charity is also a winner, because it receives money without conditions. It can spend it on its office, website, staff, newsletters, travel, hotels, postage and packing.

Charities between them raise more than £80billion a year and employ more than one million staff. This industry is greater than the car, aerospace, or chemical industries.

There are a total of 195,289 registered charities in England and Wales, and there are probably an additional 200,000 charities which are not registered, because they have income of less than £5,000 a year, or they are a Church of England parish, or part of the armed forces.

They are regulated by the Charity Commission which is woefully underfunded. The commission has a budget of £23.3 million of which it spent £21.2million, roughly half in real terms since 2008, and this budget has been frozen to 2020. Despite the fact that the number of charities continues to increase year on year, last year it reduced its staff by 10% from 317 to 285 in the year to 31st March 2016.

There are 1,939 charities focused on children, 591 looking for a cure for cancer and 354 charities for birds. Two decades ago there were seventy charities operating in Ethiopia, today the figure is close to 5,000.

The sensible thing to do would be to consolidate these charities to get economies of scale and save on office, staff, fundraising and other overheads. But running a charity, like making donations, is in the majority of cases, a right brain activity. It is primarily driven by emotional intelligence – not logical, strategic thinking. For this reason, there is unlikely to be any great consolidation of resources and neither will they be made to do so. The Charity Commission does not have the resources nor political voice to do so.

The most that can be hoped for is for more philanthropists to take a more active interest in the charities they donate to and demand to see a more business-like approach to the running of a charity, before making a donation. Most wealthy people would not dream of investing without a thorough review of the company in which it is investing and yet give scant regard to the charity to which it is making gifts.

If you would like to become a more effective philanthropist, we can assist, and if not we can point you to experts who can. Contact Svetlana on 020 3740 7423 or  svetlana@garnhamfos.com to book an appointment with Caroline or one of her team.

 You can buy Caroline’s book ‘When you are Super Rich who can you Trust?’ from Amazon or direct from Svetlana.

How hard can it be?

Tolstoy wrote a short book in 1884 about philanthropy ‘What then must we do?’ He felt inner turmoil; his life was idle luxury,  different clothes for different functions, seasons and times of the day; hunting, winter, town, country, morning, and dinner, whereas the poor had nothing to wear, but the ill-fitting clothes in which they stoodwith scant regard if it were cold or hot.

He was particularly moved by the streams of people who made their way to Lyapin House, a night lodging, where these people slept as best they could. Tolstoy’s description of the conditions in which these people lived and in particular the stench with which they had to put up with, is moving.

We have all been similarly moved; the vacant stare of the child whose parents have gone missing in a civilian bombing or the distended belly of a starving child, who has not eaten in days and has no energy to wave off the flies which crowd his eyes.

Tolstoy’s wanted to help. He wanted his money to make a difference to those most in need. Much to his surprise his money could help very few, it would be spent quickly, alcohol, gambling pursuit of fanciful notions and then gone.

Tolstoy looked at ways to provide gainful employment. He took pity on a poor boy and invited him to work in his kitchen, thinking he would be grateful of the opportunity; the boy was gone within a week. he preferred to lead elephants in a parade rather than be at the beck and call of Tolstoy and his family.

Feeling impotent to help, but tormented by his privileged life, Tolstoy decided to share all he had with the poor, and to share in their labour. However, this idea did not go down well with his wife. She raged against him and even appealed to the Tzar; Tolstoy was deranged, he should not be allowed to make such gifts.

A compromise was reached, such that he would give his estate  (which he had largely inherited from his father) to his wife and nine children as if he were dead. He gave up smoking and alcohol, wore peasant’s clothes and worked on the land, much to his wife’s chagrin.

It may be tempting to smile at history. But, the guilt of Tolstoy is not uncommon among wealthy people today. Many rich people feel the isolated by their wealth, forced to live with others who have and divided from those who have not, but do not know how they can make a difference.

Charities feed on this guilt. They offer the rich plentiful the opportunities to ‘gawp, give and go away’. They parade benefactors of their charity at fancy functions or show videos of the poor and destitute over charity dinners or anywhere else where these folk can learn how their money can make a difference.

What I find distressing is that less effort is spent saying thank you or in keeping donors appraised as to how their funds were spent; how many mosquito nets were used to save lives and how many were used as fishing nets, what proportion of the funds raised were used to help the victims of tsunami and what percentage was used for to build hotels, how much of the food bought got to the victims of famine and how much was left to rot on the side of the road.

As Machievelli accurately observed in the Prince, if a ruler wishes to influence his subjects in a foreign country he or his ambassador needs to live among them.  This is what Tolstoy understood when he gave away his fortune to live and work amongst the poor.

Giving, to be effective, must incorporate good governance; people on the ground who are held to account to monitor, check and understand the people for whom the money the money is raised. Sadly spending money on infrastructure is often seen as wasteful, ‘feathering your own but without good governance money raised is in danger of being wasted at best or worse misappropriated.

When I set up ARK, (Absolute Return for Kids) for hedge fund managers included in the documentation was good governance; checks and balances. They work and are operated with rigour and discipline.  Just as shareholders at an AGM hold the directors to account as to how they are running their business. So should donors should demand to know how and how much of their money is getting through to the cause, and if the results are good, not then to baulk at the costs of doing so.

If you would like to arrange to meet with Caroline or one of her team, please call Svetlana on 020 3740 7423 or write to  svetlana@garnhamfos.com.

You can also contact Svetlana to buy Caroline’s book, ‘When you are Super Rich who can you Trust?’ or buy it direct from Amazon.

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.