What the Financial Times of London calls "a cascade of concessions on tax secrecy by some of the world’s leading private wealth centers" is being hailed by some as "a breakthrough in a decade-long international assault on tax evasion."
To some degree that may be true, since the pursuit of specific tax evaders by foreign countries will be made easier by greater co-operation from Switzerland, Austria, Luxembourg, Hong Kong, Singapore, Liechtenstein, Andorra and others.
In recent days each of these leading offshore jurisdictions has bowed to pressure, announcing that they will adopt international standards on tax information exchange, although they insist they will continue to protect investors’ privacy under their own laws.
Tax Evasion Added Change
The major change is the addition of "tax evasion" as a valid basis for foreign tax agency inquiries concerning their citizens with accounts in an offshore center. The new standard is that set by the Organization for Economic Cooperation and Development (OECD), based on Article 26 of the "OECD Model Tax Convention"
Under this OECD procedure, foreign tax authorities wishing to take advantage of tax information exchange agreements need to supply hard evidence of their suspicions (names, facts, alleged tax crimes) to the requested government. If they have no "smoking gun" they wont be able to get information.
Privacy Limits Remain
Fears that foreign tax authorities, such as the U.S. IRS, would be able to make "blanket requests" for information were not realized. There will be no so-called "fishing expeditions" allowed and no automatic disclosure of information, which is what tax haven critics have demanded. Bank-client confidentiality remains in place for all foreign clients not under suspicion.
Bankers and lawyers in the offshore financial centers affected by last week’s announcements are emphasizing the limits to the new concessions. Jean Schaffner, a Luxembourg partner of Allen & Overy, said that country's proposals are a "good compromise between the need to co-operate with foreign tax administrations and the desire to preserve privacy".
Where They Stand Now
Here's a run down of where various established tax and asset protection havens now stand on privacy and tax information exchange procedures:
1) Cayman Islands*: Under pressure form London several years ago, all United Kingdom overseas territories and Crown Dependencies (Isle of Man, Channel Islands) made foreign tax evasion a local crime and each now exchanges tax information.
Caymans have a Tax Information Exchange Agreement (TIEA) with the U.S. and many other countries. It just announced new TIEAs with seven Scandinavian countries. (U.K. territories in list marked with *)
2) Bermuda*: Same status as Cayman Islands. Has had U.S. TIEA for several years, cooperates with Washington and London.
3) Isle of Man*: Same status as Cayman Islands and Bermuda. Signed TIEA with Germany March 2. Already has U.S. TIEA.
4) Switzerland, Austria, Luxembourg:Announced last week they will apply OECD tax information exchange rules for the first time, easing past strict privacy laws in specific cases.
5) Belgium: Announced it now will exchange EU savings tax info with other EU states. Signed TIEA with U.S. in 2007.
6) Andorra: Says it will ease strict financial secrecy laws by this fall; will then exchange tax info under OECD rules.
7) Leichtenstein: Will apply OECD tax info exchange rules and begin signing TIEAs with other nations.
8) Guernsey*: Same status as other U.K. offshore centers (Caymans, Bermuda). Already has TIEA with the U.S. Signed TIEA with U.K. last week.
9) Jersey*: Same status as other U.K. centers. Has TIEA with U.S., signed TIEA with U.K. in January.
10) Monaco: Press reports the principality is about to fall in line with Switzerland, Leichtenstein. Prince Albert wants to get off OECD blacklist.
11) Singapore: Has secrecy law modeled after Switzerland; says it will adopt OECD info exchange rules by mid-2009.
12) Hong Kong: Plans to formalize OECD info exchange rules in law this year.
No Appeasing Crazies
In my view, it is doubtful whether what indeed are major changes in bank secrecy and financial privacy laws will appease the most radical anti-tax haven crazies, such as Senator Carl Levin, Oxfam, and the so-called Tax Justice League. But these real concessions may go a long way to support more moderate reformers who realize that tax havens serve good purposes in the global financial system and as a source of needed tax competition.
Good Reasons for Tax havens
I agree with Lex, in the Financial Times who writes:"To be clear: tax evasion is as reprehensible as it is illegal. But that is only one reason why a someone might want to secret their money offshore. Indeed, there is a moral argument that people should be able to do so. Swiss bank secrecy laws, after all, were introduced in 1934 in part to protect German trade unionists and Jews from the Nazis, who punished offshore account holders with prison or worse.
"The wealthy are also as entitled as any to protect themselves and future generations from the runaway inflation, exchange controls and worthless currencies that can accompany oppressive, or simply incompetent, regimes. Ask any number of South Americans.
"As governments hound offshore banking centers...they should take care not to take an indiscriminate approach that extinguishes them altogether. Offshore banks may face a pogrom. But the havens' very presence, and the possibility that money can flow to them, is a stick across the backs of repressive governments everywhere."
Keep Up With Offshore Developments
We will have more news and analysis as developments unfold.
There are still many advantages to offshore banking and investing and the Sovereign Society is a recognized voice in the complex offshore world.
Join the Sovereign Society and keep informed.
Comments