Let the tsunami begin

Jack is a M&A specialist who works for ABC bank in London. He is paid a salary on which tax is deducted monthly under PAYE. His sister is a facilitator in Dubai, matching investors with investments and as and when Jack introduces a client who invests with her, she pays him commission. His first ‘deal’ was in 2002 on which he received a six figure sum.

In 2002, the world was very different. Jack saw this commission as his ‘rainy day’ money and put it in LPT Bank in Dubai. He did not disclose it in his tax return. His sister paid him further commission in 2010 and again in 2015. He had ‘got away’ with not paying tax in 2002, so did not see why he needed to declare it in 2010 or 2015

Jack is evading tax.

There is an amnesty in the UK called the Worldwide Disclosure Facility which runs until 30 September 2018, but it is hardly attractive. If Jack were to disclose voluntarily the commission earned in 2002, 2010 and 2015, he can expect to pay the full tax due for those years, plus a minimum penalty of 30%, but this could go as high as 200% plus interest. Furthermore, there is no guarantee that HMRC will not press for a criminal prosecution which would no doubt lose Jack his job with ABC Bank.

Although the amnesty is hardly attractive, it will be better than if HMRC were to find out that Jack had been receiving commission from Dubai on which he has paid no tax.

As from September 2018, Dubai, as part of the United Arab Emirates will collate all financial information including all the details of bank accounts held by LPT Bank and will send the details of Jack’s account to HMRC. Armed with this information HMRC will investigate Jack’s Dubai account. This is what CRS is designed to do.

Let’s now suppose that Jack was born in Hong Kong to parents who lived most of their lives in Asia. Although Jack went to school in the UK, he only came to live in the UK when he got married in 2001, 16 years ago. Before then he was living and working in Hong Kong. Jack has always considered himself non UK domiciled and was under the misapprehension that provided he did not bring the commission into the UK he was not liable to tax.

The truth is that non doms, who wish to benefit from the ‘remittance basis of tax’ must claim it, it is not automatic. Furthermore, the benefit is now only available to those who pay for it annually, which is £30,000 if you have lived in the UK for 7 of the previous 9 years, £60,000 if you have lived in the UK for 12 out of the previous 14 years and £90,000 if you have lived in the UK for 17 out of the previous 20 years. Furthermore, if Jack wants to benefit from the remittance basis of tax he would lose his annual personal allowance which is deducted from his tax payable by his employer ABC Bank

Before voluntarily disclosing his commission to the tax authorities Jack should first work out whether he would be better off as a UK or non UK domiciled person.

HMRC may not accept that his parents, at the time of Jack’s birth were non UK domiciled, since they were both born in the UK and in 2015 returned to the UK. Therefore, if, on doing his calculations he believes he will pay less tax as a non UK domiciled person, but the tax saving is only marginal, he should factor in the added time and cost it will take to argue his non domicile position with HMRC – which could take as long as 4-5 years.

Jack is tempted to take the monies out of Dubai and put them into his UK bank account, to avoid Dubai disclosing it to HMRC. But Jack should not assume that his bank in the UK will accept a sizeable sum of money without asking questions.  – If Jack does not give his bank a sensible answer as to the source of funds, it will file a suspicious transaction report – at which time all hell will let lose.

Jack like so many people around the world need to face up to the reality that authorities now have the information they need to tackle tax evaders and to say that you thought you were tax compliant –is no defence. If you have monies in the following countries your financial details will be exchanged as soon as September 2017

Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, 23 Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom.

And in the following countries from September 2018

Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu.

The time to act is NOW.

Get in touch with us for a Free preliminary consultation.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

The case of Pablo from Argentina

Pablo is a resident in Argentina, he is rich and successful through his enterprises in renewable energy and industry. He has always lived in Argentina and is married to a second wife who is also in love with the country. They have two children Mateo and Valeria in school in Buenos Aires.

In the mid noughties Pablo sold part of his energy enterprise and transferred the proceeds into trust in the Bahamas. He appointed a professional trustee recommended to him by a friend and sought comfort that the professional trustee would do as he wanted by appointing a friend in S America as his Protector, by reserving powers to himself to remove the Protector and replace with another in the trust, and in writing a detailed Letter of Wishes in which he told his trustee how he wanted the Trustees to invest the monies, and how and when to distribute to his five children, three from a previous relationship.

In 2016 the Argentine Government introduced an amnesty. His advisor Manuel strongly advised him to disclose all his assets offshore including the BVI shares he had sold to give him immunity from prosecution for tax evasion by paying the tax and a 10% fine.

Manuel came to me three months ago ‘What is Pablo to do? He has declared everything under the amnesty, but despite this the trustees of his trust in the Bahamas are collating the details of his financial assets held in trust, together with the names and addresses of Pablo as settlor, his friend as Protector, and his children as beneficiaries. Pablo has already disclosed all his offshore assets and is fully tax compliant, why can’t they leave him alone?’

Pablo had been drawn to the Bahamas, because of its expressed eagerness to serve the needs of the UHNW international community, and he was delighted when it took a stand against the OECD with a bilateral approach to the automatic exchange of information. Under this agreement the Bahamas would only exchange financial information with those countries with which it had an agreement and not with all the countries which had signed up under a multi-lateral agreement.

The OECD, in May 2017, paid a visit to the Bahamas where they made it clear that they don't want the Bahamas picking a different route from everyone else. Did the Bahamas want to be black listed by the OECD or would it like to reconsider signing a multi-lateral agreement?

Of course, the Bahamas has the sovereign right to make whatever legislative decisions it thinks are in the best interests of its country but if in doing so it jeopardises the well-being of other businesses which trade with OECD countries, it needed to think again. The OECD is fully aware of its power and is not afraid to use it whether against a jurisdiction like the Bahamas, financial institutions or wealthy families; even though in doing so it may be in breach of fundamental human rights.

The UN Declaration of Human Rights, the International Covenant on Civil and Political Rights and in many other international and regional treaties, the right to privacy is a human right which Governments are expected to respect. Privacy, it is believed, underpins human dignity and other key values such as freedom of association and freedom of speech. It has become one of the most important human rights issues of the modern age.

The drive to stamp out tax evasion has clearly become an obsession with tax authorities across the globe. 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 in the pursuit of more taxes. 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.

This blindly ignores the fact that tax authorities in their obsession to raise more taxes resort to declaring black is white and white is black – which is exactly what human rights to privacy are designed to protect.

Pablo is justifiably angry, he has done everything he can to be compliant; but does not want to wait in the hope that he will not be found out. He wants to do something now to ensure that his trust is bottom of the pile on the tax authorities’ hit list.

For the past thirty years I have been working with some of the wealthiest families in S America, Africa, Europe, Russia, Australia and Asia. They want robust structures which they can understand and which give them control, transparency and protection.  Protectors, reserved powers and Letters of Wishes do not withstand the slightest puff of dispute so our structures do not include them.

Now, with the introduction of CRS our structures are a must have for every wealthy settlor who fears for his privacy, security and the well-being of himself and his family

Get an independent trust review by contacting us.

Plan for Privacy

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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 contact@garnhamfos.com or call 020 3740 7420

It drives me mad!

Before I set off on a business trip last week, I had some meetings with a client and his trustees which made my blood run cold. The obligations imposed on trustees by the OECD in their eagerness to raise more taxes are unreasonable and the consequent erosion of privacy unjustified.

Trevor left the UK in the mid-eighties and has not returned to live in the UK since. In the early nineties a close business colleague Atif, settled a large sum of money on him and a slightly lesser sum on his three children. The trustees have now to account to their governing body in Jersey as to who is the settlor which it will then exchange with the tax authorities in Trevor’s country of residence – which is Hong Kong.

In order to satisfy these reporting obligations, the Trustees have to dig deep into the facts leading to the creation and funding of the trusts, they need to analyse the original trust deeds, which were declarations by the trustees with no mention of the identity of the settlor and the sequence of transactions and entities through which the funds were transferred from Atif to the trustees.

Luckily the trustees had not changed since inception, but since I drafted the documents I had moved firms and the trustees needed to recover my files from my former firm. It also became necessary for the trustees to travel to London to talk to me, and to meet with Trevor on his visit from Hong Kong to London, to work out exactly what had happened twenty years ago. This involved weeks and weeks of work, which was all billed to Trevor’s children’s trust fund.

At the end of this exercise and at vast cost, it appeared most likely that Atif was the settlor of Trevor’s trust, but that Trevor was the settlor of the trust for his children, even if at first glance Atif was the settlor of both trusts.

If, however, Trevor was UK domiciled at the time he set up the trust for his children the trustees would need to make a report to HMRC and declare his liability to Inheritance Tax and the subsequent ten yearly charges. 

On a quick calculation the cost of the tax, the work done to date, fines penalties and the cost of an investigation with the UK HMRC would wipe out Trevor’s children’s trust and it may also be necessary to claw back some distributions made so that the children could buy homes to live in.

At the time Trevor allegedly funded the trust for his children, he had severed all ties with the UK and was living in Singapore. However, two years later his job took him to Hong Kong where he subsequently settled. The question then arose as to whether he had formed the necessary intention to settle in Singapore which would give rise to a domicile of choice there or whether, his later move to Hong Kong was evidence to disprove this.

Trevor came to see me and we went out to lunch. ‘What can I do to stop this legal gravy train?’.

I told him the only way the trustees could get comfortable with their obligations to the Jersey authorities was to get an opinion from a leading QC.  ‘What if the opinion goes the wrong way’ asked Trevor. I told him bluntly that ‘We cannot determine the outcome of leading Counsel’s opinion, but we can give the best interpretation of the facts as set out in the instructions’.

Luckily, I told Trevor, there has been a recent case on domicile which it could be very useful. It was re Gulliver. The case, heard this year, decided that each year must be looked at separately; subsequent events should not determine the settlor’s domicile at the time of funding the trust.

I said to Trevor that the costs of engaging a lawyer to draw up the instructions was a glimmer of hope to save his children’s trust fund – there was no other way. Trevor finally agreed.

‘Trevor is lucky’ said the lawyer engaged to draw up the instructions to leading Counsel ‘He has experienced and pragmatic trustees able to see what can be done to act in the best interests of Trevor’s children. Most trustees, however, live in fear of their governing body taking away their license and will declare everything regardless of the consequences.’

We live in difficult times – but we shouldn’t lose our sense of responsibility – do you agree?

Contact us to get an independent trust review.

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Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Warnings!

Last week, I had the pleasure of talking to ‘Jack’ who has the inside track as to what is going to be the approach of HMRC (and probably every other Government signed up to CRS) to the receipt of information about trusts which is about to start going into their hands. It is Armageddon for the offshore trust industry.

Pablo is a prime target. Eight years ago he sold his beef production business in Argentina, for a nine figure sum and transferred it into a trust in the Cayman Islands. He appointed a professional trustee, ABC Limited and his brother Horacio as a Protector.

During the set up procedure which he worked on with lawyers in Argentina and fiduciaries in Switzerland ‘Cresta’, the topic of most discussion was what powers should be reserved in the Trust Deed to his brother, Horacio.

A letter was written to Pablo by Cresta copied into Horacio and the trustees, ABC Limited which said

‘There are a number of reasons why you may wish to appoint a Protector

·      It is comforting to you to know that Horacio is specifically appointed to ensure that the trustee is administering the trust in an appropriate manner,

·      Horacio has detailed personal knowledge of you and your family as you are very close and is a resident of Argentina, so he is fully aware of the politics and culture of the country, which may not be fully understood by your professional trustee in Cayman;

·      Horacio will be the main channel of communication between the trustee and beneficiaries and between the trustee and beneficiaries, and between the trustee and settlor, and can mediate in potential disputes

·      Horacio can also keep the trustees in check to ensure that they are mindful of the Pablo’s wishes and act accordingly’

Pablo responded, in writing to say

‘ABC Limited was recommended to me by my lawyer in Argentina. I have met the CEO, Juan, on a business trip to Buenos Aires. He is a good man, but I am not ready to entrust my life’s work to him to do with as he pleases, without being able to get my money back if I need to. I will not give anyone carte blanche over my money!’

After much correspondence about the role and powers of the Protector, Pablo writes

‘I can see the benefits of a trust, for tax mitigation, succession, asset protection and privacy, but I am not prepared to have these benefits at the cost of losing control over my money. I will only consider setting up a trust if either I or Horacio are given power to instruct the trustees to invest and distribute the funds’

Cresta replied the ‘benefits of the trust are only available if the trustee has full discretionary power over your assets’.

There then follows three months’ silence, after which Cresta reminds Pablo that he has  not come to a decision. During this time Argentina take a turn for the worse for wealthy families living in Argentina and so the correspondence recommences.

Pablo finally agrees to set up a trust; under which Horacio is given a power of veto over the decisions of ABC Limited and a positive power to remove the trustee and appoint a new one.

As soon as the trust is set up, Pablo stays in regular touch with his trustees telling them what he wants done. To begin with, he copies in Horacio, but after a few years stops. ABC Limited does not always do what Pablo requests, however, on the whole, Pablo makes sensible decisions so they conform to most of it; but from the correspondence Horacio is clearly not the driving force Pablo is.

In the not too distant future, ABC Limited will need to disclose to the Cayman tax authorities all persons of ‘significant influence’ over the trust; Pablo, as the settlor, Horacio the Protector, and all the names of his family – his wife and three children. Although in practice and in law, no-one other than the ABC Limited has ‘significant influence’, the tax authorities want to know the identity of everyone involved.

The Cayman tax authorities will then, again – eventually, report all these details to the tax authorities in Argentina.

Armed with this extensive and detailed personal information, Argentina will not immediately approach Pablo or Horacio, they will first take away any defence which Pablo may have by going straight to ABC Limited.  ‘We have reason to believe [because of the existence of a Protector – Horacio] that Pablo’s trust is a sham, and would like to investigate the set up and ongoing correspondence to see whether this is an avenue to pursue’.

ABC Limited will then be obliged to disclose its correspondence with Cresta and Pablo which will include the above. Armed with this information it will insist that Pablo’s trust is a sham and put in a tax demand accordingly. Pablo will then need to dispute the tax demand, but is now at a substantial disadvantage given that the Argentine tax authorities have all the sensitive information it needs to make such demands.

If Pablo capitulates, he will have to pay the tax as if the trust had never existed, but he can demand the return of all the fees paid by the trust fund to ABC Limited. Given that Pablo’s trust is its most significant ABC Limited will, as a result, be put out of business.

If you, as a settlor or a trustee want to avoid this, there are solutions, but you must act now to make sure our trust is not on top of your local tax authority’s pile.

Contact us to get an independent trust review.

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Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be pre-ordered from Svetlana  and her book ‘Winning Business from Private Clients’ can be bought direct from the website.