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Tax evasion: Tightening the noose
Questions over whether new rules to flush out evaders and squeeze havens will work
Overlooking white sands and turquoise water, One Cable Beach is the latest oceanfront condominium to be built on the sun-drenched coastline of the Bahamas. Yet its top selling point is not the natural beauty of its surroundings. Instead it is the financial privacy it offers investors trying to escape from a looming crackdown on tax evasion.
Jason Kinsale, the developer, says almost two-thirds of his customers, especially from Europe and Canada, are attracted by the residence rights. They allow property buyers to tell their banks they are tax resident in the Bahamas. “It is a big driver. People don’t like to pay tax in their home country.”
The goal should be to make the Bahamas “the Monaco of the Caribbean”, says Ryan Pinder, former minister of financial services on the islands. He told MPs in the summer that offering tax residency to wealthy people would create a lifeline for the Bahamian economy at a time when the global crackdown on evasion was eroding its conventional offshore business.
But time is running out for investors wanting to dodge a transparency drive designed to squeeze tax evaders out of existence. By the end of the year countries from Albania to Vanuatu will have instructed financial services companies to begin collecting details of bank balances, interest, dividends and income from insurance products earned by clients living overseas.
The data will start criss-crossing the world from September, eventually ending up at the tax authority of the investor’s home country — potentially triggering investigations.
This global move is forcing a decisive break with the longstanding commitment of dozens of tax havens to protect the privacy of their clients. The islands, small states and principalities that built their prosperity on secrecy have all been forced to open up.
>€55bn Has been clawed back by governments in unpaid tax with France recovering an estimated €6.3bn
The US made the first move: its 2010 Foreign Account Tax Compliance Act has forced foreign banks to start handing over their clients’ data or face a 30 per cent tax. More than 100 other countries from China to the Cook Islands have followed suit, promising to exchange bank information through a system known as the Common Reporting Standard.
Under both Fatca and the CRS, information will be automatically transferred, representing a step change over previous transparency efforts that required investigators to have good reason to request tax information from other governments. After years when successive clampdowns resembled a game of cat and mouse between tax authorities and evaders, the latest initiatives have been hailed as a breakthrough, albeit one weakened by the US adoption of a different system to the rest of the world.
The transparency drive has had a big impact on the funds — estimated to be nearly $10tn — held offshore. As former bastions of secrecy from Switzerland to Panama bow to international pressure, billions of dollars are moving around the world in search of safer havens just as the options are shrinking.
The Central Bank of the Bahamas reported in May that the pressure for global tax transparency had caused a “significant strategic shift from offshore to onshore wealth management” in many territories including its own.
An estimate from the Boston Consulting Group attached a number to that belief, saying that offshore wealth held by investors in developed nations — North America, western Europe and Japan — declined by 3 per cent in 2015.
Much of this will have been repatriated using tax amnesties that have raised tens of billions of dollars for governments across the world. From Indonesia to Italy, France and Fiji, at least €55bn have been clawed back. The Service de Traitement des Declarations Rectificatives (STDR), France’s tax regularisation programme initiated in 2013, has recovered an estimated €6.3bn from some 19,000 taxpayers.
The fear of exposure is persuading millions of people to come clean. But not everyone is prepared to do so. Philip Marcovici, a tax lawyer who advised Liechtenstein on its early move to lift its bank secrecy measures, says some are deterred by fears that information will fall into the hands of corrupt officials and hackers leading to kidnap, ransom and identity theft.
But the fallout from the Panama Papers, the leaked documents that exposed illicit aspects of offshore finance in April, has intensified demand for greater transparency. France, for instance, responded by setting up a public register of trusts. It was soon suspended following a legal challenge by an 89-year-old American woman, as the judge ruled the register could have disclosed the beneficiaries of her estate.
Countries will exchange bank information through the Common Reporting Standard system from December 31
Howard Sharp, Jersey’s former solicitor general, believes more legal challenges are likely. One reason for that, he says, is that the automatic exchange of information involves “picking up vast amounts of data and simply providing it to a range of public bodies without any real filtering process”.
In the meantime, people are looking for other ways round the rules. Arthur VanDesande, a retired senior special agent for the US Internal Revenue Service, says investors are buying and storing expensive assets, such as diamonds and art, rather than holding cash, partly due to low interest rates but also the evasion crackdown.
“A lot of people [are] willing to take the risk of purchasing $3m, $4m or $5m of stones and sticking them in a safe-deposit box.” Items too big to store in safe- deposit boxes can be stashed in the super secure vaults being set up in many large cities, he adds.
Bending the rules
Individuals with more conventional investments can often also get around the rules. Peter Cotorceanu, an international tax lawyer, describes himself as “an information exchange avoidance expert”. He likens his job to “three-dimensional chess”, as he devises structures that avoid different layers of reporting rules put in place by Fatca, CRS and registers showing the ultimate owners of companies and trusts.
He says the scope for dodging the rules depends on whether a client is a US citizen, and so caught by Fatca, or not. “To avoid Fatca is virtually impossible. To avoid CRS not so much.”
The reason is simple: there are likely to be big gaps in the CRS networks, at least initially. While all countries must meet certain standards on data protection, some are choosing to impose extra hurdles that will limit the number of countries that can receive the data.
Switzerland, for example, is selecting exchange partners according to whether they offer taxpayers “sufficient scope for regularisation” — leniency for disclosing undeclared accounts — and are willing to discuss market access for the financial services industry.
These gaps have big implications for emerging nations — especially in Africa, where Gabriel Zucman, a Berkeley economist, estimates that as much as 30 per cent of financial wealth is held offshore.
Andres Knobel, a Buenos Aires-based consultant for the campaign group the Tax Justice Network, says developing countries need transparency more than anyone else. “The alternative, of ensuring secrecy, is exactly what tax havens want. They know they had to concede to the US and the EU but they want to protect the secrecy for the elites in developing countries.”
In some territories affected by CRS, such as Europe, there are ploys to get round the new reporting rules. Some individuals are looking to take advantage of the different measures applying to information exchange in the US. Trusts on offer in US states such as South Dakota are a popular route to escape the new secrecy rules. Simply by appointing a local trustee and a foreign “protector” — an individual to direct the trustees — trusts can avoid scrutiny under US and international rules.
Pre-election speculation that these tactics would backfire if a Democratic administration in Washington agreed to join the CRS has evaporated with the election of Donald Trump. Indeed, some experts think a Trump administration may repeal Fatca, the introduction of which was strongly opposed by the Republican party.
Mr Marcovici says the US provides a “gaping” loophole in the international tax rules. While Fatca provides the US with extensive information about its citizens’ foreign accounts, the information provided by the US to other countries is more limited.
The room for manoeuvre, however, is narrowing for those determined to evade tax, he says: “It is so clear the world is moving to transparency that in this last gasp of secrecy to rely on loopholes is a very dangerous thing”.
Dangers lie ahead as governments gain more information about the wealth of their citizens, he adds. “Will it tempt them [the authorities] to grab more? The answer is yes. We are in a world with populist politicians and the more they know the more dangerous it is.”
Is held in offshore funds, according to the Boston Consulting Group, which estimates that the total rose
3 per cent in 2015
The ability of governments to increase taxes on the rich depends in large part on how easily those individuals can move their money to avoid it. A paper by the Paris-based OECD on how governments design their tax systems concluded that automatic exchange of information “can be expected to reduce the mobility of capital” and so make it easier for governments to tax wealth and capital income.
The OECD, which designed CRS, conceded however that for some moving country would remain an option.
But moving is no longer straightforward. A growing number of countries including the US, Canada, France, the Netherlands and Japan impose exit taxes when people leave. Moreover people sometimes find it hard to convince the authorities where they once lived that they have genuinely moved.
Christian Kalin, chairman of Henley, a residency planning firm, believes the automatic exchange of tax data will increase the number of people moving for tax purposes. “The future will not only be more transparent but it will also be more mobile.”
Some countries offering low tax rates to attract wealthy residents do not insist they have to live there. Indeed, the lack of any physical presence requirements are quietly advertised as a ruse to circumvent reporting under the CRS.
Pascal Saint-Amans, the top tax official at the OECD, says the residence-by-investment schemes offered by governments such as Malta, Cyprus and some in the Caribbean will not undermine the transparency drive. “We are working on this. It will not survive long.”
Faking a relocation will not work, says Mr Marcovici. “A lot of people think it’s enough to have the right to live in the Bahamas. It’s not enough, you have to actually live there. You have to choose somewhere you actually want to be.”
Investors anxious about the exposure of their tax affairs face a stark decision, he adds. “More than ever [before] you only have two choices: play by the rules of your country or get out of your country.”