Tuesday, 24 June 2008

Europe's tax dodgers in the dock


The Times December 7, 1973
Europe's tax dodgers in the dock by Oliver Stanley

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Now, the outlook for all international tax havens has become uncertain, and prospects for United Kingdom tax haven investors, individual and corporate, are bleak. It is per- haps fair to say that the end of the tax-free world is at hand. It is not the moral wrath of the political left that tax avoiders need fear, but a more powerful adversary---the EEC, which, earlier this year, issued a first report recommending joint Community action against tax avoidance and all tax haven countries both in and out of the Community. Since that report, the EEC has come down in favour of the imputation system of corporation tax, as against the old classical system, one reason being that imputation will help discourage the setting up of fictitious tax avoidance corporations. The EEC report and inter national reactions to it served as a useful peg on which to hang the worldwide Associated Business Programmes conference in Amsterdam during November. Herr Gert Sass, the German head of the tax harmonization division of the EEC, opened the proceedings in the role of leading counsel for the prosecution. The substance of his case was that "letter-box" companies- that is, artificial holding companies set up in tax-free zones-distort capital markets. Then, the prisoners in the dock (from Switzerland, Luxembourg and Jersey) all earnestly pleaded their innocence. Not a single one of these countries should be regarded as a tax haven, and they should never have been charged with the offence, said their advocates. Mr Colin Powell, Economic: Adviser to the States of Jersey, went so far as to concede that Jersey was "a low tax area", but it was not a haven. It was, above all, respectable. In the face of all this special pleading, it was difficult for the distinguished international lawyers and accountants present to reach any verdict, other than "not proven ".

I remember back in the 1970s, the days of the "Sark Lark", and also in Jersey - where a plate with a company name would be accompanied by "nominee directors" of the company, who were not the ultimate beneficial owners. Even up to 1998, the Edwards report commissioned by Jack Straw noted that total Directorships held by Sark residents (pop 575) may have been around 15,000 or more, and 3 residents appeared to hold between 1600 and 3000 Directorships each.

Changes in Jersey Company Law (following recommendations by Edwards) sealed the fate of that by making directors legally responsible for the company and decisions and activities, and tying control down to location more strictly, and I remember noting that the practice vanished with rapidity. I am sure that was the correct and responsible thing for Jersey to do.

One question arises though: would the Island authorities been motivated to change the law internally? Would it be good practice for them to take the initiative in every five years (for example) seeking an independent assessment of practices which might, in hindsight, be regarded as morally bankrupt?

After all, as Edwards noted "Although formally Directors, some of these nominee Directors are Directors of so many companies that they could not credibly discharge the proper duties of a Director with respect to all of them, especially in cases where they have no professional or technical support. "

It is interesting to note how the European Union - then the EEC was making moves towards greater transparency and harmonisation. Personally, I think the idea of harmonisation is one of those ideas which - like a single European currency - may be fine in principle, but does not work well in practice. VAT rates and tax regimes differ across Europe, and as these are geared to the spending patterns and finances of national economies. The European central bank is at the moment fudging the issue on countries which stray outside of its initial (supposed) strict limits on borrowing and deficits.

The 1973 article goes on to comment with almost prophetic insight that:

The only conclusion was that the attitudes of governments towards tax havens will vary according to the economic interest of a country and its sense of competitiveness with other countries. That seemed incontestable. It is the principle of fair economic competition which has moved the EEC towards a tax haven clampdown In particular, it is the use of letter-box companies in Luxembourg and Gibraltar, where preferential tax treatments are offered, which the EEC considers an abuse.

That is why, the report continues, the Community would need to take action against all tax haven countries. On the other hand, the Amsterdam conference was told that life in the EEC moves slowly, and anyway there are undoubtedly problems of classification which will impede progress.

It then moves to the crux of the matter. What is a "tax haven"?

Tax havens are notoriously difficult to define. Like mirages, they tend to move farther away as you approach. Even tax avoidance is a confusing concept. Clearly it does not mean "evasion," breaking the law by fraud or default. On the other hand it is not entirely innocent, and the infamous judicial dictum to the effect that everyone is free to prevent the depletion of his wealth by the Revenue has become dated and is no longer (pace Mr Colin Powell) accepted by the courts in Britain.

The current EEC view seems, not surprisingly, close to a French concept, that tax avoidance is "un abus de droit", an abuse of rights, and in its more flagrant forms should be treated as evasion. Just where the dividing line is to be drawn is not clear and varies from case to case. Of course, there are perfectly innocent types of tax avoidance such as giving up beer and cigarettes; it is principally a question of motive. If tax avoidance is the sole aim of a specific financial structure, or transaction; then that is abusive. If there is a bona fide commercial purpose, then any incidental tax mitigation achieved is excusable. As it happens, this test is the one used in the principal piece of United Kingdom anti-tax avoidance law-Section 478, dating from 1936. To that extent we are for once already in step.

Jersey is clearly making headway. For a start, looking back at the situation in 1973, the brass plate companies are gone. Then there are already two Tax Information Exchange Agreements (TIEA), one with the United States, and a large number of others in the pipeline. Despite some critics of Jersey (such as Richard Murphy) saying that this changes nothing, you have only to look at the people who stash money in tax havens just because they are havens. Those people, such as the pundits at the Sovereign Society (and many others, for example Barber Financial Associates), are sounding a very different note. They say that:

"However, I can confirm that the "Tax Information Exchange Agreement" (TIEA) between the United States and Guernsey authorizes the IRS to accompany Guernsey tax officials in tax examinations (Article 6(2)). (The U.S.-Jersey TIEA has similar provisions.) And while wholesale electronic surveillance of offshore services providers may not be occurring, a local court may authorize surveillance against any target. "

This is an important reason why The Sovereign Society recommends offshore jurisdictions that impose strict controls on the disclosure of financial (or other) information to foreign authorities. In Austria, for instance, there's no Tax Information Exchange Agreement in effect. If the IRS wants to learn about your Austrian bank account, IRS agents can't simply accompany an Austrian tax inspector to the bank, and surreptitiously examine the records. Instead, IRS agents must present evidence a crime has been committed, with that evidence confirmed by Austrian officials. Similar laws are in effect in Switzerland, Liechtenstein and Panama.

The website "Escape Artist" - again for investors wishing for the old fashioned "tax haven", notes that:

If you read the press releases from the offshore jurisdictions that signed TIEAs, you'll come away believing that they may be invoked only in the event of probable cause of tax fraud by a particular taxpayer. But that's not what most of the treaties actually say. Instead, most TIEAs state that any information "foreseeably relevant or material to United States federal tax administration and enforcement with respect to the person identified" for investigation must be turned over to the IRS.

Not "probable cause" of a criminal or even civil tax offense. Not even "reasonable suspicion." Merely "foreseeably relevant." U.S. courts have interpreted this authority as permitting TIEA information requests "even if the United States has no tax interest and no claim for U.S. taxes are potentially due and owing." In other words, fishing expeditions into offshore accounts are explicitly permitted.

Now that you know about TIEAs, you'll understand why The Sovereign Society generally recommends jurisdictions that haven't signed such agreements, e.g., Austria, Liechtenstein and Panama. (Switzerland has consented to a TIEA-like addition to the U.S.-Swiss tax treaty, but its terms are far more restrictive than typical TIEAs.) While pressure continues on these countries, and others, such as the United Arab Emirates, to ratify TIEAs, these jurisdictions have the diplomatic and financial clout to avoid being intimidated by the U.S.

Jersey is about to establish a Tax Information Exchange Agreement with Finland, Sweden, Norway, Denmark, the Faroe Islands, Greenland and Iceland. The OEDC has commented on these agreements, saying

"The trend towards greater transparency and tax cooperation continues as more and more countries and jurisdictions implement the OECD standards."

"Recent events have put international tax evasion in the spotlight, demonstrating the pressing need for action to tackle tax compliance issues in an increasingly borderless world. These agreements will better equip their signatories to address all forms of tax abuses."








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