THE SCHMIDT OFFSHORE REPORT
(Vol 2, no 6)

Contents

News

Features

NEWS

UK non-residents should heed the case of Mr Barrett

Lee Barrett, the former manager of pop singer Sade and other well-known musicians, has lost his argument to be treated as non-resident for UK tax purposes for a single year. The reasons why he lost can be summarised as follows:

  • He was not deemed to have ever left the country, because his home and settled home-life remained in the UK.
  • He couldn’t demonstrate that he had taken full-time employment overseas – one indication that the UK was not his residence for the year in question.
  • He came back to the UK on a number of occasions during the year that he claimed to be non-resident.
  • There was evidence that he had used his ATM card and other credit cards in the UK on dates when he claimed to be abroad.

One interesting feature of the case was that HM Revenue & Customs (HMRC) did not try and find out from airlines or UK Immigration what Mr Barrett’s movements had actually been. The onus was entirely on him to prove he had been elsewhere. It is to be noted that the case centred around 1998/99. This was the year before the more rigorous border checks introduced after the 9/11 terrorist attacks in the US.

Threatened CGT crackdown worries foreigners in UK

At the end of the recent Pre-Budget Report were some cryptic comments about “anomalies” that needed to be corrected in relation to wealthy foreigners living in the UK. The fear is that family trusts will be exposed to new capital-gains-tax (CGT) charges. It is believed many wealthy foreigners may be making plans to leave the country on the basis of these comments. The proposed anti-avoidance measures are supposed to ensure that trusts cannot be used to give gains from UK-based assets the same tax advantages as offshore gains. Moreover, the Treasury wants to ensure that overseas income and gains really are taxed when they are brought into the UK. This is a radical change from the current regime in which ultra-wealthy individuals can use trusts to avoid tax on the sale of UK assets and rarely pay any CGT on the capital they bring into the country.

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Jersey pleases some, offends others

Until recently, Jersey was regularly criticised for its harmful tax practices. The World Bank and other international organisations demanded an end to tax breaks for non-residents and called for the disclosure of information to tackle tax evasion, money laundering, terrorist financing and weaknesses in the global financial system. As a result, the island changed its tax system, strengthened its regulation and cooperated with its erstwhile critics. Recent international inspections have given Jersey high marks for its reforms and transparency, on occasion rating its compliance with global standards higher than in some of the island’s onshore persecutors.

Now US-based financial think-tank Tax Analysis has accused Jersey of helping the international super-rich to hide assets worth $491 billion in order to “illegally avoid tax”. This staggering figure – nearly five times the annual global aid budget – will heighten concern that the UK Government is failing to crack down effectively on international tax evasion. It has also emerged that Swiss bankers are increasingly using Jersey to help their clients avoid the withholding tax levied on Swiss corporate dividends. It is thought that up to $78 billion of so-called Swiss fiduciary deposits are funnelled from their banks to Jersey in this way.

The disappearing offshore amnesty

HMRC’s acting chairman, Dave Hartnett, in an interview with the Independent on Sunday, announced that tens of thousands of people known to have money in offshore accounts are to be offered a fresh partial amnesty, provided they own up to the tax they owe. He explained that, in the new year, HMRC would officially request that as many as 150 banks and other financial institutions pass them details of customers’ offshore accounts. Following on from earlier legal rulings, these banks are unlikely to have any option but to comply with HMRC’s request. Hartnett then claimed that armed with this data HMRC would offer the taxpayers a “disclosure arrangement”, in other words a partial amnesty. He stated that terms will be “similar” to those offered in June to 100,000 people with accounts held in offshore branches of seven of the UK’s biggest high-street banks.

The following day, Hartnett seemed to backtrack – stating that bank customers should not count on another facility along the lines of the first one. Meanwhile, the Financial Times reported that a final decision had not been made.

It is to be noted that around 64,000 taxpayers took HMRC up on the first amnesty, disclosing that they had money offshore on which there could be tax to pay. Some 20,000 taxpayers have so far paid in full and, as a result, HMRC has collected £120 million. This figure is far short of the HMRC’s Special Commissioners’ estimate of £2 billion of unpaid tax held in offshore accounts.

Good news for KPMG executives

A US Federal Court has dismissed a criminal indictment against 13 former KPMG executives accused of selling fraudulent tax shelters due to prosecutors violating their rights to counsel by putting undue pressure on KPMG not to pay their defence costs. The decision is a severe blow to the Government’s investigation.

UAE signs new tax treaty with Spain

UAE, which has been developing its role as an offshore tax jurisdiction, has agreed a new tax treaty with Spain. While this may be of help to some Spanish/EU residents, it is to be noted that one clause allows for the exchange of information.

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OECD countries slammed for regulatory standards

The Commonwealth Secretariat published a report that concluded many OECD member states have regulatory standards no better, and sometimes worse, than many offshore financial centres classified as tax havens. Deficiencies include mechanisms for tax information exchange and for identifying beneficial owners of companies or trusts. The Secretariat highlighted a number of examples:

  • Many US states, including Delaware and Nevada, do not require companies to provide ‘beneficial ownership’ information.
  • Many industrialised countries, including the UK, permit the use of bearer shares, which reduce transparency.
  • Switzerland limits the exchange of tax information to cases of fraud.
  • Hong Kong and Singapore limit information exchange to cases where they have a domestic interest.

Gibraltar rejects the 0–10% tax system

Gibraltar has decided not to follow the Isle of Man and Guernsey, which have both opted for so-called ‘0–10% tax systems’ – whereby the only companies to pay tax are those involved in financial services, which pay 10%. Instead, it is going to introduce a flat low-tax regime.

US Senate demands Cayman investigation

A US Senate Committee has demanded that an investigation be made into the activities of a law firm located in a building called Ugland House, which is located in the Cayman Islands and is reputed to be the registered office of over 12,000 companies.

The Cayman Portfolio of Finance & Economics responded by saying: “The Cayman Islands financial services industry operates on the principle that the presence – not the absence – of effective laws and regulations has contributed to our growth as an institutionally focused, specialised financial services centre over the past 40 years. The law enforcement, regulatory and tax information exchange channels between the Cayman Islands and the US – some dating back more than 20 years – offer no protection for Americans who are seeking to evade their tax obligations.”

French tax rates slashed by Sarkozy

President Sarkozy’s flagship tax package will exempt overtime pay from income tax and lower social charges levied on overtime on both employers and workers. The cap on the amount of direct tax that can be levied on income will also be lowered to 50% from the current 60%. Tax relief of up to 20% of mortgage interest rate repayments will be offered during the first five years of the loan. There will also be tax breaks to those paying the wealth tax known as the ISF (Impôt de Solidarité sur la Fortune).

BVI to make transfer of bearer shares simpler

The British Virgin Islands Financial Services Commission is to simplify the process by which bearer share companies are turned into non-bearer share companies. At the same time, the compliance date has been brought forward by one year to 31st December 2009. On 31st December 2009, the memorandum of every BVI International Business Company will be automatically amended to prohibit the issue of bearer shares, unless a company specifically elects that this deeming provision should not apply.

Liberia and Marshall Islands given OECD approval

Liberia and the Marshall Islands have both been removed from the OECD list of Uncooperative Tax Havens, following a commitment by their Governments to implement a programme to improve transparency and establish effective exchange of information in tax matters. Only three jurisdictions now remain on the OECD blacklist: Andorra, Liechtenstein and Monaco.

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FEATURES

This issue of TSR Offshore covers a range of subjects from choosing a tax-efficient home to retire to, to using life insurance policies to save tax, and from Swiss trusts to the taxation of non-domiciles. I will start, however, with a few words about Panama.

Not just famous for hats

When a British man presumed dead for the last five years reappeared very much alive, it was discovered by the media that the place where he had been hiding was Panama. The result? A series of rather biased articles about the Central American country of which the one I am about to quote from (sent to me online, so I am not entirely sure where it appeared) is the least sensational. As a regular visitor to Panama, I can vouch for its many attractions – both from a tax perspective and in terms of quality of lifestyle. Here is the article:

“For Britons looking to start a new life, the lure of Panama extends beyond the 300-plus sunny days a year in the wisp of a country that lies at the crossroads between North and South America. Once considered the world’s premier tax haven, Panama still has much to offer those looking for a retirement below the radar. After a swift military action by the United States in 1989 to remove former ally Manuel Noriega from power, the country has worked to rebuild its reputation as a safe haven for business, trusts and shipping interests. With political stability restored, Panama once again attracts foreigners with sizeable bank balances.

“A senior tax adviser resident recently said the country’s financial advisors pride themselves on their discretion. ‘One of the things you will find with the Panamanian accountants and lawyers who will set up companies, trust and accounts is that they take great pride in the fact their affairs remain confidential.’ The adviser said if authorities in the UK wanted to trace or access money sent to Panama, they would not have an easy time of it. ‘The UK authorities would have difficulty tracing money into Panamanian trusts, companies and accounts.’”

To maintain secrecy, the Government allows numbered bank accounts with no names attached and sets fines of £5,000 and up to six months in jail for anyone who discloses banking information. The only exception is for suspected drug smugglers.

As for lifestyle, websites abound with advice on moving to Panama, while estate agents offer luxury apartments for as little as £30,000. The country has also become a centre for medical tourism, thanks to the large English-speaking population and state-of-the-art facilities.

Despite a reputation for lax enforcement on tax matters, Panama is not popular with most UK-based investors looking for an offshore tax shelter, primarily because of the distance from the UK. While the nation of 3.3 million does have income tax, it is only payable on locally earned money, meaning expats can import as much cash as they want tax-free.

Other advantages for those looking to relocate include import duty exemptions for bringing in possessions, including an allowance to import one car a year duty-free. The country has a dedicated ‘Retire to Panama’ programme that invites expats over the age of 45 to live in the country as long as they can demonstrate a monthly income of just £200 and a further £35 for dependent family members.

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Speaking of retirement…

I regularly receive letters from subscribers wanting to retire overseas not to a tax haven but to a country they have fallen in love with or have connections with. Sometimes, such a move will work in their favour from a tax perspective; sometimes, it will not. Some countries welcome retirees; some don’t. Below, I have summarised the situation for a few of the countries I have been asked about recently. If you would like information about any particular jurisdiction, my initial advice would be to:

  • talk to their embassy or consulate. Most have information packs. Many have information on their websites. Some will have a list of legal/tax/immigration experts they refer prospective retirees to in the UK.
  • (at risk of stating the obvious) check online. There are innumerable websites offering free information. Of course, one has to treat everything one reads with a degree of caution since it is often not possible to differentiate between what is and what is not true. But it is a good starting point. I find the sites run by the big accountancy practices (or indeed any accountancy practice) tend to offer the best advice.
  • go to one of the online booksellers – Amazon is the best – and search for books on the subject. It is extraordinary how many specialist titles there are out there. I found one recently on retiring to Bolivia!
  • write to or email me. I may have relevant research information.

Here, then, are a few practical examples:

Australia

Many people are unaware that Australia has something called the Retirement Visa Programme – a means for retired business and professional people with significant assets to live and invest their money in Australia, whose presence will be at no cost to the taxpayer. Technically, it only gives temporary residence in Australia. It requires sponsorship from a State or Territory government in Australia, in addition to an investment to be made in that sponsoring State or Territory government treasury bond. You must be at least 55 years of age with no other dependants except a spouse, have sufficient assets to ensure self-support in Australia, have private health insurance for the duration of the visa and you must renew the visa every four years. How rich do you have to be? Assets of between A$500,000 and A$750,000 and a minimum net income stream of between A$50,000 and $65,000 – depending on where you want to live.

Basically, if you can continue to meet ongoing financial requirements, you can stay. The tax treatment you would receive is complicated – but you should be aware that Australia taxes on worldwide income not just on Australian income. Let’s imagine that you have about £2 million invested outside Australia bringing you in an income of £50,000 and capital gain of £50,000 plus a house in Australia worth £300,000 and a foreign pension of £100,000 a year. With pre-immigration planning, you can get your tax bill on all of this down to – wait for it – £23,000 a year or less, depending on how your foreign pension is paid. Plus, there is no inheritance tax (IHT) in Australia for retirees.

Mauritius

In 2006, the Mauritian Government decided that it needed to attract retirees. So it created some of the most favourable immigration/tax rules in the world to make this possible. Basically:

  • you only need to send US$40,000 a year to the country for three years
  • your tax liability can be kept to 15% of worldwide investment income
  • earned income is only taxable when you remit it to Mauritius, meaning that you can (basically) arrange your affairs so that you pay 15% on funds remitted to Mauritius and no more
  • there are plenty of double taxation agreements, including a favourable one with the UK
  • there is no CGT
  • if you buy property worth at least £250,000, you can (pretty well much) become a permanent resident
  • there is a property tax but it is relatively low
  • the Government will give approval to move there in just three days.

Thailand

If, like me, you have enjoyed fantastic beach holidays in Thailand, looked wistfully at the low property prices in the agents’ windows, thought how far the pound goes and been delighted by the welcome offered to visitors, well, you may have wondered what it would be like to retire there and (perhaps) how difficult it would be.

To answer the second question first: there is a special scheme and it couldn’t be easier or (candidly) less expensive. You need to have about £13,000 in capital and a monthly income of around £1,000. Oh, and you should be aged over 50. That’s it.

What about tax? With pre-immigration planning, it is possible to live in the country tax-free. There is no CGT or IHT in the country at present.

What is it like living there? Well, as you will be aware, Muslim insurgents have been waging a war against the Thai Government since 2004 and so one should avoid the three southernmost provinces of Pattani, Narathiwat and Yala for the time being. That said, there are large expat communities living in the country and their numbers have been growing rather than shrinking.

Canada

It isn’t easy to retire to Canada, because they don’t have a special retirement programme. On the other hand, there are plenty of ways in which you can emigrate there. The easiest of these is probably the Business Immigration Program, which seeks to attract experienced business people to Canada who will support the development of a strong and prosperous Canadian economy.

Business immigrants are expected to make a C$400,000 investment or to own and manage businesses in Canada. Canada has three classes of business immigrants:

  • investors
  • entrepreneurs
  • the self-employed.

We have covered this in previous issues of TSR Offshore and so I won’t repeat it all again. You can also apply to emigrate there if you have skills that Canada needs. What about tax? With pre-immigration planning using a pre-immigration trust, it is possible to avoid all income and CGT on worldwide income and assets for five years. After that, you have to pay tax at the full Canadian rates (which are high), but, if you leave before the five years are up, you can escape tax completely.

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Swiss trusts… surely not?

If, like me, you were raised on the idea that what one established was a Lichtenstein foundation operated using, say, a Swiss bank or professional adviser, the idea of establishing a Swiss trust may come as a surprise. This was because under Swiss law trusts were not actually recognised; although there was a legal equivalent, it was far less flexible. In 1985, however, the Swiss federal Government signed up to the Hague Convention on Trusts and last year (2006) finally ratified it. (Those used to the Swiss way of doing things will see nothing strange in a 21-year wait between the two dates.) The result? It is legal to establish trusts in Switzerland or, if you so wish, to make a trust resident there. How will Swiss trusts be taxed? For the most part, at the canton (regional) level. This is likely to lead to some major discrepancies and, potentially, some tax-planning opportunities. Watch this space.

Life assurance as a tax-planning tool

I have covered this topic before, but it so intrigues me I can’t resist coming back to it – especially now the rules regarding CGT are about to change. As many readers will be aware, there has, for many years, been much (in tax terms) to be said for holding a single-premium offshore life policy. One of the main benefits is that you can withdraw 5% of the capital tax-free every year; another is that you can defer tax. However, on the downside, any gains in the policy have been chargeable to income tax. Now, however, there is the possibility of having gains charged to CGT. How? By holding the policy through a non-UK-resident company. The result? The shares in this company make it valuable. In the past, this meant 40% tax on any gain in year one falling to 24% after a decade. In the future, it could mean a flat 18% no matter how long the assets are held.

Taxation of non-domiciles

First the Conservative Party suggests a flat £25,000 charge being made to non-domiciles resident in the UK. Then the Labour Chancellor announces a remarkably similar move – only the amount is £30,000 – in his Pre-Budget Report. As you may be aware from media reports, much has been made of the fact that the Chancellor seems to be borrowing ideas from his opposite number. Whatever, as my children say. The point is, is this a fair tax? Will it raise money for the Treasury? On the face of it, it is a fair tax. If you are a wealthy foreigner living in the UK and enjoying all sorts of tax benefits – benefits which amount to letting you live close to tax-free – surely it is not unreasonable to be asked to cough up £30,000 after seven years of residence? On the other hand, there is the argument that the tax will drive away such foreigners with disastrous results for the UK economy. My own view is that it is fair but am sorry to see it being introduced, because I do think that it may affect how many rich foreigners come to the UK and spend their money – not because of the £30,000 they have to pay out but because they fear that this will prove to be the thin end of the wedge.

It is our intention to be as accurate in fact, detail, analysis and comment as possible. However, publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The Schmidt Offshore Report is sold on this understanding. The Schmidt Offshore Report is commissioned and published by Wentworth Publishing Ltd, 17 Fleet Street, London EC4Y 1AA. Email: wentworth@online.rednet.co.uk Tel: 020 7353 6606. © Wentworth Publishing Ltd 2007. All rights strictly reserved. This publication may not be lent, hired, reproduced (in any way whatsoever) or re-sold. This information is authorised for personal consumption only.

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