Tax Research UK

The Lawyer magazine has published an article by David Harvey, who is chief executive of the Society of Trust and Estate Practitioners Worldwide. The likely bias in his opinion can be surmised from their name. He wrote:

The reality is that trusts are open to official scrutiny and are thus neither ’secret’ nor ’anonymous’. Trusts are subject to strict anti-money laundering regulations and information is available to governments on the source, owners and beneficiaries of trust funds. This information is shared, when appropriate, with other countries under terms of tax information exchange agreements (TIEAs).

This, very politely, is balderdash. It’s for good reason that the Swiss protest that a trust located in one jurisdiction owning a company located in another that banks in a third is now, and has always been for all practical purposes impenetrable and creates effective banking secrecy.

I do not believe STEP do not know that.

So why spin a story that is so very obviously misleading? Do they think they fool anyone? Or is it just self-reassurance? 

Richard Murphy Trusts

The Swiss French-language daily Le Matin is carrying an interview with Myret Zaki, author of a new book titled "Swiss Banking Secrecy is Dead: Long Live Tax Evasion!" (French only)

Setting aside the chauvinistic and insular tone, there are several interesting issues raised in the article that we’d draw your attention to.

Firstly, Ms Zaki is right to complain that the war on banking secrecy is uneven because nothing is being done about trusts. As we have observed, time and again, trusts are a major building block used in the construction of sophisticated tax evasion structures, and, of course, many other types of crimes hide behind the secrecy they offer. To tackle banking secrecy without also tackling trusts, foundations, shell companies, and so on, is incoherent and places Anglo-American secrecy jurisdictions at a distinct advantage. From where we sit, in London, it seems quite understandable when people in Zurich, Vienna and the Grand Duchy, put two and two together and arrive at a plot by the Americans and British to assert their dominance.

Second, we’re intrigued by Ms Zaki’s estimate of the global market for tax evading capital. In 2005 we estimated the scale of this market at USD11,500 billion, and rising fast. In her book, Ms Zaki estimates the market at USD13,500 billion. We’d like to know more about the basis of this estimate, but its sounds broadly plausible and amplifies our concerns that the tide still hasn’t turned in the battle against illicit financial flows and tax evasion.

Third, asked to comment on the recent suggestion by Swiss Finance Minister Hans-Rudolf Merz that Switzerland should consider moving towards automatic information exchange with the EU countries, Ms Zaki baulks and describes this as a step too far. Au contraire: this is long overdue, and further delays will simply magnify concern that Swiss banks are engaged in supporting tax evasion across Europe and beyond the continent’s frontiers.

Implicit throughout the interview is the idea that Swiss banks can only compete in the global markets on the basis of the advantage that banking secrecy laws provide. In other words, without the provision of secrecy services Swiss banks lack a competitive edge. They therefore depend for their survival on their usefulness to tax evaders.

Ms Zaki reflects an important strand of thinking in Switzerland and similar secrecy jurisdictions. But rather than defending the indefensible and seeking to protect a totally unsatisfactory status quo, she - and others who think like her - should be pushing the Swiss government to use its powerful diplomatic weight, not least with the OECD and the United Nations Tax Committee, to push for measures requiring full transparency of trusts, shell companies and all the other devices used by the secrecy jurisdictions operating under the wings of the UK and USA. And yes, to also make automatic information exchange the global standard for cooperation. This is only coherent way forward.

Hat tip: The above is by John Christensen of Tax Justice Network, reproduced with permission as I wholeheartedly agree with it.

Richard Murphy Switzerland, Trusts

Trusts, NGOs under ambit of money-laundering law .

India is to extend its money laundering laws:

Charitable trusts, whether temples, churches or mosques, non-government organisations (NGOs), educational institutions or societies, if registered as non-profit organisations (NPOs), will not only have to disclose the source of their funds, but also be scrutinised for large monetary transactions.

The change has been done by an amendment to the Prevention of Money Laundering Act (PMLA) 2002, notified in the Official Gazette on November 12, to bring NPOs under the purview of the law. Earlier, the entities that fell under the ambit of the law included only chit fund companies, banking companies, financial institutions and housing finance companies.

I warmly applaud this. NGOs should be on the record, as should be other charitable bodies. They get special status, they must account for it. But the extension to trusts is especially welcome: they are a perfect conduit for abuse. Nothing less than full public registers of trusts with accounts on public record will do.

And for those who argue this is an invasion of privacy I have a simple response: no one asked anyone to form a trust. It is done to secure advantage. Advantage carries responsibility, in this case the duty to report.

Richard Murphy Trusts

A commentator on this blog said recently:

The JFSC does know how many trusts are in Jersey. Just because this information is not made public what is the big deal?

He later added:

Every regulated entity must supply complete details of every client for compliance and licensing requirements and this includes Trusts. Believe me. They know what Trusts are in existence.

I challenged him, saying:

Please prove it. Chapter and verse. Details of what is provided. Precisely. And what statute and regulation requires it. And what details of the client have to be given, precisely. But I stress: chapter and verse. With reference to actual regulation, and documents.

To which his response has been:

With all due respect, but what authority do you have over Jersey to provide you with any proof? I know that the JFSC has a listing of all clients and it is part of the licence requirement and thats that.

This transparency argument is flawed, it is simply an untruth.

Which I find extraordinary. I am told the transparency argument is flawed, and yet all I am doing here is asking for a reference to regulation that proves this person’s case, and I am denied that evidence.

So let me weight the evidence of the respective arguments. First, I have been told repeatedly by people in Jersey that the Jersey authorities do not know how many trusts are in the island because there is no register of trusts and no obligation for their existence to be reported. For example, there is no requirement that they submit a tax return.

Second, I know of no regulatory authority with regard to money laundering in the world that requires a registered person to submit their client list to that regulatory authority. Why should they?

Third, I will reasonably presume from the failure to produce the evidence that I requested that there is no documentation that does actually require submission of this client list.

In that case, I stand by my argument. No one anywhere has any idea how many trusts there are in Jersey, and whether as a result they are regulated or not. What we do know is that not one of those trusts is required to produce accounts for any form of public inspection, and so long as they are for the benefit of nonresidents, not one has to submit a tax return anywhere, least of all in Jersey.

In that case I think my argument about transparency is proven.

I think I’ve proven something else as well: those who bluster from the Channel Islands and the Isle of Man on this blog are just blustering. There is no substance to their argument.

Richard Murphy Jersey, Trusts

The Budget notes say (page 246) that:

Transfer of Assets Abroad

27. Anti-avoidance legislation designed to prevent individuals from avoiding

income tax by transferring assets abroad will be amended to ensure these

anti-avoidance provisions apply to non domiciled individuals. The

remittance basis will apply to remittance basis users.

This is a massive change. It effectively says that once a non-domiciled person is resident here they can no longer set up non-resident trusts to avoid UK tax.

Very good news!

Richard Murphy Domicile, Tax Havens, Trusts

I note that the FT has reported that:

The plan for a $75bn superfund to buy assets from cash-strapped structured investment vehicles appears to be gaining support among sceptical institutions, amid concern that SIVs might start dumping bank debt.

The planned superfund, which is being put together by Citigroup, Bank of America and JPMorgan Chase with the backing of the US Treasury, would buy assets from SIVs that are facing funding problems.

It’s a nice idea, but let’s contextualise this (without getting back into the debate on the difference between SPVs and SIVs which adds little here). Northern Rock has currently borrowed about £20 billion form the Bank of England - near enough $40 billion, therefore. How can $75 billion prop up the rest of the market in that case if any serious run were to occur?

It is obvious that the SIV / SPV scenario has created a crisis which we might get through with little harm, if we are very lucky. But it’s equally obvious that the markets cannot be allowed to create such a situation again.

In the 1930s massive regulatory change took place in the USA as a response to the 1929 crash. Whether or not we have a crash now the same response is appropriate.

So why aren’t politicians saying this, now, here as well as there?

There’s another question too. Why are these companies willing to bear this risk? Don’t they simply create the moral hazard that others will now be encouraged to take risk at their expense? Since this is almost inevitable, why don’t they seek regulatory control instead? Isn’t it the case that all the evidence suggests that this is the answer?

Richard Murphy Bonds, Economics, Tax Havens, Trusts

A promoter of offshore schemes in the USA looks very likely to go to jail. As Smartpros.com reports:

David Alan Struckman, co-founder of the “Institute of Global Prosperity” — an organization that sold audiotapes, CD’s and tickets to offshore seminars on “wealth-building” strategies — was found guilty in a federal court of tax evasion and conspiracy to defraud the United States.

As the report notes:

Struckman concealed the income earned from the sale of these products through the use of bogus trusts, nominee entities and related offshore bank accounts. He transferred funds from the offshore bank accounts back into the United States through wire transfers and the use of debit cards.

Eileen Mayer, Chief, Internal Revenue Service Criminal Investigation Division said:

Trusts established to hide the true ownership of assets and income for the purpose of committing tax evasion isn’t tax planning; it’s criminal activity.

That seems to sum things up pretty well.

Richard Murphy Tax Havens, Trusts

The Revenue have lost what has been called the Arctic Systems case in the House of Lords.

This case dealt with a husband and wife who co-own a company. They paid themselves very modest salaries and then split the remaining net income of the company (which was high in relation to salaries and also in relation to sales since this was a consulting business) between them as dividends. The problems were twofold:

1) As the House of Lords found, the Jones arranged their company in this way with the intent of saving tax. They said part of the income Mrs Jones received was gifted to her by her husband. It just so happened that the Revenue lost the case because there was an exemption in the law that allowed this to happen.

2) As a result of tis gift, and the fact that dividends rather salaries were paid, less tax was received by the Revenue from this company than might otherwise have been the case.

Now, as a matter of fact I think the House of Lords made the right decision in this case based on current legislation. It had been stated in parliament that the settlement legislation which was the basis of the Revenue’s claim would not be used for this purpose. As I believe in purposive legislation applied in accordance with the stated will of parliament it has to be right that litigation in contravention of the will of parliament should fail.

But, let’s move on. The government has announced that now it has lost it will introduce legislation to ensure that “income splitting” as they call the practice undertaken by the Jones (and several hundred thousand other couples, I suspect) is outlawed. This is going to be immensely unpopular. It’s also the right thing to do. They are quite right: this can be a straightforward abuse of the tax system. That happens when there really is a gift and low salaries exacerbate its value. I know it will make me unpopular, but since I believe in tax compliance, which means that the right amount of tax is paid at the right time in the right place, then this comment has to follow.

But, and I stress this very strongly, when the economic reality is that the partners do really contribute to the company, even if unequally, then they should be entitled to the return it generates, having allowed for reasonable (and no more) compensation for the time each has expended. If this is not the basis of new legislation then the law will not tax the economic substance of the transaction. That would be wrong. The economic substance of a transaction must match the taxation charge raised on it if tax is to be fair, which the Revenue say is their objective. This will challenge the Revenue, but anything less than this will harm small business in the UK. And that makes no sense.

Serious consultation, clear guidelines and ways of determining what is, and is not acceptable which are binding on all parties (assuming the truth is told) will be essential to make this work. The Revenue are trying to work in partnership with large business: they have to now show they can do the same with small business as well. Will they rise to the challenge? I hope so.

Richard Murphy Tax avoidance, Trusts

I had to laugh at a report in the Jersey Evening Post on 2 July. It was reported (but not on the web) that:

Jersey’s trust industry has not been sufficiently recognised for its high standards, according to Julie Coward, who chairs the Jersey Association of Trust Companies (JATCo),

Poor Ms Coward has complained that:

the industry is suffering ‘disproportionate’ compliance costs but gaining little advantage

and that

the Island’s regulator the Jersey Financial Services Commission, has failed to stand up for the industry in the light of demands from the International Monetary Fund, in that trust and company services providers are not recognised as’financial institutions’ for compliance purposes in the same way as are banking and investment services.

She apparently added that:

the industry was mindful of the need for regulation to contain risk and protect the Island’s reputation. But regulation was a ‘dangerous burden,’ she said, eroding margins, distracting management and discouraging innovation.

I have a message for Ms Coward. Those of us beyond St Helier harbour wall think that we need protection from you because we think you provide abusive services. Sham trusts, nominee services for companies and a culture of secrecy are just the top of abuses that we count as crimes against other country’s tax systems and the world’s financial architecture whose credibility is undermined as a result. The least the IMF can do and will do is hold you to account. We’re asking it to do rather more. So if you think it’s tough now, I’d get out of the kitchen because the temperature will be rising.

Richard Murphy Ethics, Jersey, Trusts

This week Jersey has tried to be all thing to all people. First it tells the US Senate how compliant its finance industry. Then it bangs it’s drum about winning the ‘Offshore Finance Centre of the Year Award’. Look at this stuff from the associated press release:

In winning the prestigious award, Jersey beat off competition from other international finance centres including Dublin, Gibraltar, Guernsey, the Isle of Man and Luxembourg, who were all short listed.

The judges commented that they were impressed by the innovation Jersey has shown during the past year, identifying opportunities and introducing initiatives to keep up with the fast pace of change occurring in offshore centres. These initiatives included the introduction of Incorporated Cell Company Structures, a review of the Island’s trust law and the introduction of the Listed Fund Guide.

Let’s be clear what the finance industry thinks of incorporated cell company structures:

Protected Cell companies have — in concert with other entities — been used to construct what has been called “an impenetrable wall” against creditors and prying eyes. Whilst these claims can only be tested by time, this novel use of a PCC for asset protection and financial privacy is an interesting approach and a valuable piece of intellectual property.

And,as the correspondence between Jersey’s own ministers and civil servants leaked to the Observer showed, Jersey’s new trust laws are so open to tax abuse they’re even worried they might be used against Jersey itself. To put it another way. They’re designed to allow sham trusts.

This is precisely why Jersey is on the list of abusive, secretive and threatening tax havens before the US Senate. Along with the other contestants.

PS But note where the award ceremony was held:

The Victoria Park Plaza Hotel, London.

Right there in the biggest finance centre of all.

Richard Murphy Corruption, Guernsey, Ireland, Isle of Man, Jersey, Trusts