Your Guide to the G20 Blitz on Tax Havens

By Ali Hussain

Sunday Times 
April 5, 2009

The crackdown on tax evaders intensified last week with G20 leaders promising to stop the rich from salting away vast sums in offshore havens. Pressure is mounting as more countries declare their intention to share information with foreign governments that suspect citizens of tax evasion. Stalwarts of tax secrecy such as Switzerland, Liechtenstein and Monaco have all said they will adopt tax-sharing principles set out by the Organisation for Economic Co-operation and Development (OECD). Tens of thousands of British people have offshore accounts — many of them offered by high-street banks and building societies such as Nationwide and Alliance & Leicester in the Isle of Man. This is usually for entirely legitimate reasons — perhaps because they have worked abroad or intend to retire overseas.

Offshore accounts may also pay higher interest than their onshore equivalents, and this is paid gross — although you are required to declare it every year. HM Revenue and Customs (HMRC) is negotiating an “offshore disclosure facility” (OFD) with Liechtenstein, where it would close the accounts of UK residents who have not paid their tax and who did not come forward voluntarily. It intends to extend this to countries such as Jersey, Switzerland and Monaco. Not all countries have agreed to share information, however. Some “die-hard tax evaders” are expected to move money to countries such as Panama or Samoa, which have not agreed to share information.

Here we explain where we are with offshore tax.

What’s the problem?

People have until recently held money in offshore accounts and not declared their income to the taxman. However, with the onset of the credit crunch, and taxpayers having to bail out banks — many of them with offshore interests — tax evasion has risen on the political agenda. HMRC says offshore tax evasion costs British taxpayers £900m to £1.5 billion every year, although the Tax Justice Network, a campaigning group, estimates that the figure is more like £18.5 billion.

What is a tax haven?

Jersey, Guernsey, the Isle of Man, the Cayman Islands, Monaco and the Bahamas are attractive places to keep money because taxes are lower, or non-existent. Monaco does not levy personal income tax; the Cayman Islands do not have capital gains tax (CGT); and the Bahamas do not charge CGT or income and inheritance tax. Many of these tax havens previously refused to share banking information with other governments unless some form of criminal activity was involved.

What has been done about it?

The OECD set out a framework for sharing tax information in 2000. Most OECD members and a few non-OECD countries agreed in principle that information should be available on request where it is foreseeably relevant to the domestic laws of a treaty partner. However, Andorra, Monaco and Liechtenstein failed to agree with OECD standards and Austria, Belgium, Luxembourg and Switzerland had reservations. So what’s happened now?

In recent weeks many previously reluctant countries have agreed to adopt the OECD standards after they were threatened with blacklisting. Austria, Andorra, Belgium, Luxembourg and Switzerland withdrew their reservations while Hong Kong, China, Monaco, and Singapore agreed to adopt the standards this year.

Is the OECD framework legally binding?

No. Countries that adopt the standards must then sign a tax information sharing agreement (TIEA). These are bilateral agreements that enshrine the OECD principles into law. Britain has signed TIEA agreements with Jersey, Guernsey, British Virgin Islands, Isle of Man and Bermuda. It is in the process of signing an agreement with Liechtenstein. None of these agreements has yet been ratified, though.

Didn’t EU states share information?

A separate agreement called the European Savings Directive was signed in June 2003 (adopted in 2005) and applied to all European Union countries. This allowed the automatic sharing of relevant tax information between member states. So Spain could seek details of a tax evader in Britain and vice versa. However, some EU countries — Austria, Belgium and Luxembourg — said they would like time to adjust. They chose instead to allow account holders to either pay a “withholding tax” or declare their income to the authorities in their home countries. By paying the withholding tax, their details would remain anonymous. Jersey, the Isle of Man and Guernsey, which are not part of the EU, also adopted this policy. Withholding tax was deducted at source at a rate of 15%, rising to 20% in July 2008 and then 35% by 2011. The idea is that, as the rate increases, it becomes less worthwhile to hold money offshore or not declare it to the relevant authorities. UK residents still have to declare how much tax is owed to HMRC, although their withholding tax payment will be taken into consideration under double taxation rules. For higher-rate taxpayers who have paid 20% in withholding tax, the onus is on them to pay the additional 20%. Paying the withholding tax, but not declaring, would be breaking the law.

If I pay the withholding tax will my details be automatically shared under this latest agreement?

No. TIEA agreements stipulate that HMRC must first name an individual and give reason to an offshore jurisdiction why details should be disclosed. This means someone with interests in these jurisdictions could potentially evade tax. However, HMRC says it has a number of ways to work out who hasn’t paid enough tax.

What is the offshore disclosure facility?

This was opened in spring 2007 and applied to those with offshore accounts in five high-street banks that had offshore offices. People had until November of that year to declare their tax liability and to pay it, with a 10% fine. More than £400m was raised in this way. Those who failed to step forward will be subject to a criminal investigation — if HMRC knows who they are. A spokesman for HMRC said a number of investigations were under way.

Will there be another disclosure facility?

The government has already indicated it will offer a new OFD this year. Details have yet to emerge. If the experiment with Liechtenstein works, HMRC says it will adopt that as the new model — in other words, people could have their accounts closed if they do not come forward voluntarily.

Are there legitimate reasons for holding money offshore?

There are, but mainly for those defined as non-domiciled — someone claiming a link with another country, such as birth.

What if I’m domiciled in the UK?

If you are UK resident, you can benefit from an offshore account by not having to pay tax at source. You have to declare your gains in a tax return at the end of January, but you benefit from gross interest rolling up until that point. This is not always cheap, however, as you may need to pay management fees to service an offshore account.

Are there places still off limits to HMRC?

Some countries, including Panama and Samoa, have not agreed to share any information with foreign authorities, leading to fears that some people might simply shift their money to these jurisdictions to avoid tax. Mike Warburton, of Grant Thornton, the tax adviser, said: “You don’t have to be a rocket scientist to work out that if pressure is being applied in certain areas, individuals intent on avoiding tax will move their money elsewhere.” Tax experts are admitting that they are receiving e-mails from lawyers in Panama who are touting for business and boasting: “We are now the only tax haven.” Panama Law (panamalaw.org ) will set up an account in Panama through its UK office.

Offshore accounts explained

If you are a UK resident and domiciled here, you can hold an offshore account, but you must declare the interest to the Revenue every year. People take out offshore accounts because the interest is paid gross; to get gross interest onshore you have to fill in form R85. Savers also benefit from a “gross roll-up” (earning interest on gross interest). Offshore accounts can also be useful if you are a UK resident who works abroad for extended periods, or who intends to retire abroad. Jersey, the Isle of Man and Guernsey now subscribe to the “withholding tax” regime, where 20% tax is automatically deducted in return for your details remaining anonymous. Higher-rate taxpayers are still liable to pay the remaining 20% through their tax return, however. Under the new proposals being negotiated by the Revenue, overseas jurisdictions could close the accounts of people suspected of not having paid tax and or having failed to declare liabilities voluntarily.