Tackling offshore tax evasion and the impact for Jersey

Transcription

1 Tackling offshore tax evasion and the impact for Jersey 30 September

2 Agenda Tackling offshore tax evasion Proposed changes to non-dom tax regime 1

3 Tackling offshore tax evasion

4 No safe havens Five key objectives : 1. There are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC 2. Would-be offshore evaders realise that the balance of risk is against them 3. Offshore evaders voluntarily pay the tax due and remain compliant 4. Those who do not come forward are detected and face vigorouslyenforced sanctions 5. There will be no place for facilitators or enablers of offshore evasion 3

5 Tackling offshore evasion In March 2015 HMRC issued a document setting out progress in Tackling Offshore Evasion & Avoidance On 16 July 2015 HMRC issued four separate consultation papers Tackling Offshore Evasion* (closing date for comments 8 October 2015): 1. Strengthening civil deterrents for offshore evaders 2. Civil sanctions for enablers of offshore evasion 3. A new corporate criminal offence of failure to prevent the facilitation of evasion 4. A new criminal offence for offshore evaders (the called strict liability offence not covered today) *Offshore tax evasion includes Moving UK gains, income or assets offshore to conceal them from HMRC Not declaring taxable income or gains that arise offshore, or taxable assets kept overseas Using complex offshore structures to hide the beneficial ownership of assets, income or gains 4

6 The mindset underpinning the proposals Focus is on 'enablers' 'If people help a burglar, they are accomplices too. Now it will be the same for those that help tax evaders Rt Hon Danny Alexander, Chief Secretary to the Treasury 5

7 Civil sanctions for enablers of offshore evaders An enabler is any person who, knowingly or unknowingly, provides services which assist a UK taxpayer to evade UK tax e.g. Acting as a middleman including arranging access and providing instructions Providing planning and bespoke advice Delivering the infrastructure including setting up companies, trusts and other vehicles that are used to hide BO; and opening bank accounts Maintenance of infrastructure such as providing professional trustee, company director services, nominee services, virtual offices Financial assistance: helping evader to move money and assets outside the UK Non-reporting: not fulfilling a persons reporting, regulatory or legal requirements Enablers exhibit 1 of 3 types of behaviour: unaware, careless or deliberate Current penalties adequately cover careless enablers, proposed change to deliberate enablers standard penalty of 100% of tax, to be split between all enablers Naming and shaming enablers Reduced penalties in certain circumstances but not lower than 30% 6

8 A new corporate criminal offence of failure to prevent the facilitation of evasion UK Government believe that corporations should take reasonable steps to prevent its agents (e.g. employees) from facilitating tax evasion (principally UK tax but also applies to UK persons assisting evasion of foreign tax) New offence to be introduced in advance of CRS to apply to corporations: that fail to take reasonable steps to prevent their employees criminally facilitating tax evasion and who circumvent the reporting obligations Broadly, the agent (employee) must intend to facilitate the evasion, believe that his acts are capable of assisting the evader and understand the essential matters of the offence Key ways an agent could facilitate are: 1. Acting as a broker / conduit (arranging access to others) 2. Providing planning & advice 3. Delivery & maintenance of infrastructure (e.g. professional trustee services) 4. Financial assistance (e.g. banking services) Reasonable steps include internal guidance, contractual terms for staff, training, monitoring etc 7

9 Examples Civil and criminal sanctions for enablers Example 1 Acting as a broker/conduit: Sarah In 2003, Sarah was introduced to Malus GmbH, a Swiss adviser, to create a tax efficient structure for potential future investment into UK property. Malus was an approved intermediary of a UK high street bank (after they carried out appropriate due diligence on Malus with a view to forming that relationship), and Sarah planned to put her post-tax employment earnings into this structure. Sarah had a relative, Maisie, who was neither resident nor domiciled in the UK. Malus advised Sarah that she should set up a Swiss trust using Maisie as the settlor. This happened, although Maisie was never asked to sign anything and was not even aware that a trust was being set up with her named as the settlor. Sarah was advised that she retained beneficial ownership of all the assets despite the trust arrangement. HMRC s view UK high street bank did not know that Malus would help Sarah evade tax and had referred Sarah to them in good faith so they were viewed to be unaware of the tax evasion for civil penalties; but they would need to prove to HMRC that they had taken reasonable steps to prevent any tax evasion. Malus staff s actions were clearly deliberate and they would be subject to the civil penalties; also Malus would be viewed to be guilty of the new criminal offence and would need to provide evidence of what reasonable steps it took to prevent these actions. Lunar bank s actions would be viewed to be careless as the issue should have considered under their AML procedures. The trust had bank accounts with Lunar Bank in Monaco. Sarah admitted her actions following initial contact with Malus were deliberate. 8

10 Examples Civil and criminal sanctions for enablers Example 2 providing planning and advice: John John ran a UK business. In the mid-1970s, he opened a Channel Islands bank account in which he could hide untaxed business income from HMRC. John took his untaxed funds on a regular basis to a business contact, Michael, who often travelled to the Channel Islands. Michael would take the money in a suitcase to the Channel Islands and deposit it in John s bank account. In 2004, following unsolicited advice from the Channel Island bank, John transferred the bank accounts to a nominee Foundation in Panama to avoid reporting under the EU Savings Directive and retain secrecy over his funds. The Foundation was operated by Channel Island professionals. 9

11 Examples Civil and criminal sanctions for enablers Example 2 providing planning and advice: John John ran a UK business. In the mid-1970s, he opened a Channel Islands bank account in which he could hide untaxed business income from HMRC. John took his untaxed funds on a regular basis to a business contact, Michael, who often travelled to the Channel Islands. Michael would take the money in a suitcase to the Channel Islands and deposit it in John s bank account. In 2004, following unsolicited advice from the Channel Island bank, John transferred the bank accounts to a nominee Foundation in Panama to avoid reporting under the EU Savings Directive and retain secrecy over his funds. The Foundation was operated by Channel Island professionals. HMRC s views Michael was knowingly helping John to evade tax and so his actions would be viewed as deliberate for the civil penalties. The staff actions at CI bank would also be viewed as deliberate and the bank would be facing criminal actions unless they can prove that they took reasonable steps to prevent its staff facilitating John s tax evasion. The trustees actions would also be viewed as deliberate and the trust company would be viewed to be guilty of the new criminal offence and would need to provide evidence of what reasonable steps it took to prevent these actions. 10

12 Examples Civil and criminal sanctions for enablers Example 3 Delivery of infrastructure: Manjit Manjit was the owner and Director of a UK-based interior design business. He generated false invoices and drew cheques with fictitious payee details logged in the company records in order to divert proceeds offshore and reduce taxable profits in the UK. These cheques were, in fact, made payable to an extensive network of offshore discretionary trusts and corporate vehicles in Gibraltar, Belize, Seychelles, and the British Virgin Islands ( BVI ). These were managed by a professional trust company. In particular, the trustees invested the funds in a portfolio of bank accounts and investment properties held in the name of off the shelf corporate vehicles in the Seychelles and BVI. The properties, acquired with the proceeds of tax evasion, were then rented out commercially with UK taxes paid on the rental income under the non-resident landlord scheme ( NRLS ) to give the appearance of a genuine offshore ownership arrangement. The NRLS arrangement had been accepted by HMRC, being the only information that was available at the time. [Following an HMRC investigation, Manjit accepted that these transactions were fraudulent. 11

13 Examples Civil and criminal sanctions for enablers Example 3 Delivery of infrastructure: Manjit Manjit was the owner and Director of a UK-based interior design business. He generated false invoices and drew cheques with fictitious payee details logged in the company records in order to divert proceeds offshore and reduce taxable profits in the UK. These cheques were, in fact, made payable to an extensive network of offshore discretionary trusts and corporate vehicles in Gibraltar, Belize, Seychelles, and the British Virgin Islands ( BVI ). These were managed by a professional trust company. In particular, the trustees invested the funds in a portfolio of bank accounts and investment properties held in the name of off the shelf corporate vehicles in the Seychelles and BVI. The properties, acquired with the proceeds of tax evasion, were then rented out commercially with UK taxes paid on the rental income under the non-resident landlord scheme ( NRLS ) to give the appearance of a genuine offshore ownership arrangement. The NRLS arrangement had been accepted by HMRC, being the only information that was available at the time. HMRC s view The trustees claimed that they believed everything they were doing was above board, and that the affairs of their clients were none of their business. However, HMRC s view was that the trustees turned a blind eye to the true beneficial ownership and so the staff s actions were deliberate for the civil penalties. If the trustee had known of the tax evasion (but decided to ignore it) then they would have been guilty of the new criminal offence and would need to provide evidence of what reasonable steps it took to prevent these actions. [Following an HMRC investigation, Manjit accepted that these transactions were fraudulent. 12

14 Examples Civil and criminal sanctions for enablers Example 4 Maintenance of infrastructure: Paula Paula was domiciled in Australia, but had been resident in the UK since the 1970s. In 2012, Paula wanted to regularise her affairs and disclosed to HMRC that she had been hiding substantial UK taxable income for a prolonged period. She had been using companies in Bermuda and the Bahamas to hide both business and private assets and to facilitate the movement of funds through a variety of jurisdictions. HMRC s views The lawyer actively assisted Paula to evade tax and so his actions were deliberate. Any company or partnership for which the lawyer worked would be guilty of the new criminal offence and would need to provide evidence of what reasonable steps it took to prevent these actions. The network of companies had been set up by Paula s lawyer, a partner in a Guernsey-based legal partnership, in total secrecy, meaning that Paula had never contributed to UK taxes during more than 30 years of UK residence. 13

15 Examples Civil and criminal sanctions for enablers Example 5 Financial Assistance: Christoph Christoph was a wealthy non-domiciled individual who was a long-term UK resident. His job entitled him to significant bonus payments, related to duties performed wholly in the UK, on which he did not want to suffer UK tax. His self-employed UK accountant put him in touch with an adviser in Israel. The Israeli adviser set up a number of bank accounts in Singapore in the names of BVIregistered companies, under the control of a discretionary trust. Christoph arranged for his bonus payments to be lodged in the accounts operated in Singapore. As well as evading income tax on his employment income over a number of years, Christoph's settlements also attracted significant Inheritance Tax liabilities. HMRC s views The accountant actively assisted Christoph to evade tax and so his actions were deliberate. Any company or partnership for which the lawyer worked would be guilty of the new criminal offence and would need to provide evidence of what reasonable steps it took to prevent these actions. The Israeli adviser understood Christoph s aims and knew that secrecy was key to achieving those aims and so his actions were deliberate. Any company or partnership for which the adviser worked would be guilty of the new criminal offence unless it took reasonable steps it took to prevent these actions. The bank did not know that the structure was being used to evade UK tax and so their actions were viewed to be unaware. 14

16 Key practical issues It will become increasingly important for Jersey financial institutions to distinguish between tax evasion and aggressive tax avoidance due to the increased severity of penalties attached to tax evasion The onus will now be on the corporation accused of facilitating tax evasion to prove that it did not know, and took reasonable steps to ensure that their agents were not knowingly facilitating tax evasion schemes HMRC has not set out what are reasonable steps, but it is expected that financial institutions should: Articulate their tax risk appetite Address their training and communication Continually review and assess processes and risks What other processes can provide existing safeguards Business partnerships, referrals and joint ventures formal and informal Assess due diligence for: Client onboarding and how this links with FATCA and CRS processes Dealing with clients after onboarding Provision of services to clients on ongoing basis 15

17 Proposed changes to non-dom tax regime Jason Laity

18 Those were the days UK resident but non domiciled individuals (RND) Non-dom status could continue even when individual had spent lengthy periods of time in UK, deemed domicile rules (17/20) only applied to IHT Possible for UK dom to leave UK and return a non UK dom Non-dom status passed down to UK born children UK RND taxed on foreign source income & gains on remittance basis UK income & (personal) gains taxed on arising basis Offshore accounts capital & income kept separately Many ways to turn foreign income into remittable capital (some even worked!) No CGT charge for settlor on gains No CGT charge for beneficiary on distributions UK situs assets within scope of IHT but UK situs assets (including residential property) held by offshore company outside scope No charge for RND status 17

19 Things got slightly worse in UK resident but non domiciled individuals (RND) Non-dom status could continue even when individual had spent lengthy periods of time in UK, deemed domicile rules (17/20) only applied to IHT Possible for UK dom to leave UK and return a non UK dom Non-dom status passed down to UK born children UK RND taxed on foreign source income & gains on remittance basis UK income & (personal) gains taxed on arising basis Offshore accounts capital & income kept separately Many ways to turn foreign income into remittable capital (some even worked!) Extensive tracing rules introduced No CGT charge for settlor on gains No CGT charge for beneficiary on distributions CGT extended to beneficiaries No charge for RND status Remittance basis charge of 30K PA introduced after 7/9 years, and increasing UK situs assets within scope of IHT but UK situs assets (including residential property) held by offshore company outside scope of IHT ATED introduced 2013 for high value residential properties in companies, NR CGT introduced

20 But will get a lot worse in 2017 Labour defends plan to scrap non-dom tax status Labour has defended its plans to end the non-domicile rule that allows some wealthy UK residents to limit the tax paid on earnings outside the country. Ed Miliband said the non-dom rules were "indefensible" and axing them would raise "hundreds of millions" in tax. But shadow chancellor Ed Balls was forced to deny contradicting himself after saying in January that scrapping the rule "would cost Britain money". 19

21 Some things remain. UK resident but non domiciled individuals (RND) Non-dom status could continue even when individual had spent lengthy periods of time in UK, deemed domicile rules (17/20) only applied to IHT Possible for UK dom to leave UK and return a non UK dom Non-dom status passed down to UK born children UK RND taxed on foreign source income & gains on remittance basis UK income & (personal) gains taxed on arising basis Offshore accounts capital & income kept separately Many ways to turn foreign income into remittable capital (some even worked!) Extensive tracing rules introduced No CGT charge for settlor on gains No CGT charge for beneficiary on distributions CGT extended to beneficiaries No charge for RND status Remittance basis charge of 30K PA introduced after 7/9 years, and increasing UK situs assets within scope of IHT but UK situs assets (including residential property) held by offshore company outside scope of IHT ATED introduced 2013 for high value residential properties in companies, NR CGT introduced

22 But some things don t UK resident but non domiciled individuals (RND) Non-dom status could continue even when individual had spent lengthy periods of time in UK, deemed domicile rules (17/20) only applied to IHT Possible for UK dom to leave UK and return a non UK dom Non-dom status passed down to UK born children UK RND taxed on foreign source income & gains on remittance basis UK income & (personal) gains taxed on arising basis Offshore accounts capital & income kept separately Many ways to turn foreign income into remittable capital (some even worked!) Extensive tracing rules introduced No CGT charge for settlor on gains No CGT charge for beneficiary on distributions CGT extended to beneficiaries No charge for RND status Remittance basis charge of 30K PA introduced after 7/9 years, and increasing UK situs assets within scope of IHT but UK situs assets (including residential property ) held by offshore company outside scope of IHT ATED introduced 2013 for high value residential properties in companies, NR CGT introduced

23 15 year rule Deemed domicile status for all tax purposes UK resident for more than 15 of the past 20 tax years but foreign domiciled under general law Split years count Years under 18 count New rules effective from 6 April 2017 irrespective of when non-dom arrived in the UK Departing deemed-dom needs to be non-uk resident for more than 5 full tax years (currently 3) before becoming non-dom (will be relevant for IHT) UK dom (i.e. not a deemed-dom) becoming non-dom will also be subject to 5 year rule Not intended to align with SRT 22

24 15 year rule continued Special rules for deemed-dom settlors of offshore trusts TCGA 1992, s86 will not apply IHT advantages continue (subject to new rules on UK residential property) As now, UK income in trust/company taxed on settlor on arising basis But taxed on taxable value of any benefit received from trust/company worldwide, without reference to underlying income or gains Considering extending that rule to UK res non dom non deemed dom but on remittance basis Consultation on now, draft legislation at Autumn Statement

25 Returning UK doms Applies to individuals who have UK domicile of origin; acquire a foreign domicile of choice; and return to the UK Such individuals will automatically be taxed as UK doms once they become UK resident Trusts set up by such individuals while non-dom will lose all tax benefits (including IHT) when UK resident What happens on death of settlor? New rules effective from 6 April 2017 irrespective of when non-dom arrived in the UK 24

26 UK residential property indirectly held by non-doms Excluded property rules will be amended so that non-doms and trusts established by non-doms will be subject to IHT in relation to UK residential property even if held indirectly through offshore company etc. Applies to all non-doms, whether or not they are UK resident IHT therefore imposed on value of UK residential property on death of non-dom gift of property owning company to trust 10 year anniversary of trust distribution of property owning company out of trust death of donor of property owning company within 7 years of making gift Same exemptions and reliefs apply to non-dom as if property was held directly Enforcement issues will be addressed to ensure liability & reporting are adequate Government to consult on ways to address the cost of de-enveloping Consultation awaited with changes effective on or after 6 April

27 Questions

28 Contacts John Riva Head of Tax Tel: +44 (0) Fax: +44 (0) Jason Laity Managing Director Tel: +44 (0) Fax: +44 (0)

29 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Channel Islands Limited, a Jersey Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).