13 February 2015

No safe havens

Maurice Martin
Of counsel | UK

Drones! These are the latest method used by the tax authority of Argentina to identify mansions on “empty” plots and swimming pools not declared on tax returns.

Meanwhile, HM Revenue & Customs (HMRC) in the UK is also pursuing a strategy to combat evasion which is equally transparent and powerful. The objective is to ensure that there is no jurisdiction (or “safe haven”) where a UK taxpayer would wish to risk investing assets where HMRC will not discover them.

Automatic exchange of tax information developed by the Organisation for Economic Co-operation & Development (OECD) is a key part of their strategy and is rapidly becoming the new global standard. Countries around the world are steadily signing up, while other developments such as Foreign Account Tax Compliance Act (FATCA), the UK-Swiss Agreement and enhanced IT capability via the new deep mining “Connect” System all serve to break down deep traditional barriers of secrecy.

Liechtenstein is among numerous countries which have adopted the new global standard. Switzerland used to be another virtually impenetrable jurisdiction for the ‘UK Taxman', yet since 2011 it has yielded up details of secret accounts held by more than 25,000 people. HMRC has only to ask the Swiss for the bank details of up to 1000 names each year without the need to show more than plausible grounds. Negotiations with other tax jurisdictions are continuing and more are expected to sign up for automatic exchange in the near future.

Perhaps most important of all, public attitude has turned dramatically against avoidance as well as evasion. Only a few years ago, there was doubt as to whether bank information stolen from HSBC Geneva could have been used in proceedings. HMRC now openly proclaim that whistleblowers will be financially rewarded – a concept with which our US readers will be familiar – and legislation will soon be presented to Parliament to make it a strict liability criminal offence for a UK taxpayer to fail to declare taxable offshore income.

Anyone who has experienced a tax investigation will know the emotional cost it brings. Well, so does HMRC who are now using behavioural insight as part of its deterrent policy, designed to increase the emotional cost and use it as a deterrent.

At the same time as breaking down international secrecy, publishing the names of deliberate avoiders as well as convicted persons, and the other methods outlined above, the UK has also experienced the most generous voluntary disclosure programme ever known (see article in this newsletter by James Edwards on the Liechtenstein Disclosure Facility). Nowhere is its “carrot and stick” policy more clearly visible than by comparing the opportunity voluntarily to come forward, enjoy complete immunity, and gain beneficial financial terms, on one hand, with HMRC'S target of increasing the number of prosecutions five-fold from 2010-11 to 2014-15. It is expected that there will be over 1000 charging decisions taken in this current tax year.

The world is getting smaller. If global exchange of information, new criminal offences and naming and shaming don't work then HMRC can always resort to drones.

Maurice Martin Of counsel | London

Category: Article