We’ll only trust trusts when we can trust they’re on record

Posted on July 9 2012

Over 99% of the blogs on Tax Research UK have been written by me. That's 8,400 of them over six years at a rate of more than 3.8 a day, no days off allowed. But sometimes an issue requires a blog from someone else. The issue of the interaction of the European Union Savings Tax Directive and the Tax Justice Network demand for a central register of trusts in each jurisdiction is one such matter. As such I reproduce here, with his permission, Mark Morris' blog on why central registers of trusts are vital to blocking tax evasion:

Summary: The EU Savings Tax Directive amendments will force all jurisdictions within the directive's territory to establish a central register of trusts containing the name,format of structure, manager details, and as bare minimum residence of settlor and residence of immediate beneficiaries if available. This will affect all types of entities and legal arrangements viz. foundations, companies, establishments, trusts (including those without identifiable beneficiaries such as discretionary, blind, STAR or VISTA, etc).
       
 No Central Register of Trusts Equates to Banking Secrecy:
Up until now, no offshore territory keeps a central register of trusts. It has been easy for tax havens to justify why no such database is required because offshore trusts are not subject to tax or required to submit accounts. Furthermore, many offshore trustees manage trusts established in tax havens established in a different territory, e.g. Luxembourg trustees managing Panama trusts or Swiss trustees managing Bahamas trusts. However, what happens when these trustees are suddenly subject to a tax?
The most significant amendment to the EU Savings Tax Directive is that responsibility for applying the tax on entities and legal arrangements have been redacted from the banks and given to the management of these structures if management is within the savings tax territory. Managers of these structures are known as Paying Agents Upon Receipt.

Generally, there is no central register of trusts in an offshore country. The obvious question is then how can the State ensure these Paying Agents Upon Receipt (trustees and councils) carry out their duties of applying the tax?

  • If a bank account in held another EUSD territory:
    The bank or insurance company as economic operator must inform the tax authorities where the management are located of the payment details. If bank is located in a transitional period territory, e.g. Switzerland, the entity / arrangement does not agree on its information being disclosed, then the bank must withhold 35% tax irrespective of the beneficial owner residence. (eg Russians etc.)
  • If bank account held within same territory:
    There is no notification of payment details to tax authorities from economic operator. So how will tax authorities know a payment was made?.
  • If bank account held in outside the EUSD territory:
    Obviously there is no notification of payment details to tax authorities from banks outside the EUSD territory. So how will tax authorities know a payment was made?

The EUSD amendment mandates that States implement procedures to ensure the tax is applied. Viz:
Directive 2003/48/EC is amended as follows:

Article 1 is amended as follows:

  • Paragraph 2 is replaced by the following:


"Member States shall take the necessary measures to ensure that the tasks necessary for the implementation of this Directive are carried out by Paying Agents and other economic operators established or, where relevant, having their place of effective management within their territory, irrespective of the place of establishment of the debtor of the claim, producing the interest payment.”

NO OTHER ALTERNATIVE:
The ONLY way a State can ensure Paying Agents Upon Receipt in their territory do undertake their obligations of the savings tax directive is an audit through a central register of such entities and arrangements, a.k.a. register of trusts. This newly established list must detail, at a minimum, the residency of immediate beneficiaries and settlor. This applies to foreign law trusts administered by resident trustees.

The full impact on Paying Agents Upon Receipts is explained in detail here. It remains to be seen whether this register will be open to scrutiny beyond fiscal authorities. However the establishment of a central register will not be a popular move due to obvious unforeseen consequences of the existence of such a database.

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