The tradition in Switzerland of encouraging taxpayers in other countries to break the laws of those countries by hiding their money in Switzerland cannot continue. Bank secrecy is in many ways legitimate and important e.g. in relation to the danger of kidnapping. The QI system of the US favours compliant banks, located in countries with exchange of information agreements with the US and with suitable Know Your Client rules. In consequence, Liechtenstein rushed to enter into an exchange of information agreement with the US and adopted broad know your client rules, so as to compete with Switzerland. Transparency for individual investment is only a first step. The credit card cases are examples of effective information-gathering: the right to information extends to non-US cardholders who use the card in the US. Amnesties and partial amnesties are part of the same movement. Bankers, promoters and lawyers who encourage taxpayers to evade are coming under the microscope. The IMF puts pressure on developing countries to enforce their tax laws. Tax officials train in the US. Tax authorities make an example of conspicuous evaders by destroying their lives. Families now need privacy as well as tax compliance. Industry is not interested in bank secrecy; it needs effective tax treaties. By threatening to withdraw from the Swiss tax treaty, the US is forcing the Swiss to exchange information. The US recently sent information to the Indonesian government about investments of its taxpayers in the US. The amount of undeclared money in Swiss banks is probably very large. The problem cannot be solved overnight. Banks need to understand, evaluate and price the risks they are taking. The younger generation see a secrecy-driven account as something not relevant to them. Such banks need to redirect their energies towards services they can provide in a legitimate context. They should not make the clients problem their problem. The client may shop the bank. A bank should at least not accept any more undeclared money or involve innocent clients in the affairs of evading ones e.g. the younger generation in the misdeeds of the older generation. The bank needs to identify the legitimate advantages they can offer e.g. tax-efficient portfolio planning, staff continuity. Legitimate planning opportunities though curtailed still exist.
Malta was an offshore centre from the enactment of the 1988 Trusts Act, based on the Jersey model, and having the usual offshore feature. The 1994 amendments were part of the phasing out of the offshore system. The Hague Convention was ratified. This opened the door to the use of trusts governed by foreign law e.g. in ship financing. The nominee company came to be seen as inappropriate especially in the light of the OECD initiative. Under the new regime, there are licensed professional trust companies and private trustees. Information may be exchanged. The MFSA has extensive regulatory powers. The tax code contains extensive anti-avoidance provisions, but these do not apply to non-residents. In principle, a stamp duty liability arises on the way into a trust, but not on the way out. Maltas tax treaties have inconsistent treatment of trusts. Proposals have been formulated to resolve potential conflict with the civil code: entails and fiduciary dispositions are permitted for trusts; legitim is protected if the settlor is domiciled in Malta; trusts are to be valid to the extent possible, and trustees are to have powers to make amendments to the trust instruments; trustees liability is to be limited to their trust fund. There are fast-track licences for trustees licensed in other jurisdictions. Trusts made by non-domiciled settlors may be governed by foreign law. Competition is not to be based on secrecy. Co-operation with other same-standard jurisdictions is foreseen; the larger EU countries will be expected to improve their regulation similarly.
The trustees duty of care, the wishes of the settlor and the requirements of the business can involve a number of difficult issues. Exclusion or exemption clauses may or may not be desirable. The trust instrument needs to embody appropriate powers. The law relating to trusts is everywhere derived in a general way from the English rules of equity. The trustee needs to take into account and with the requisite impartiality the intentions of the settlor as well as the expectations of the existing beneficiaries and the interest of future beneficiaries. The Bartlett and Lucking cases illustrate the breadth of the trustees duty of care. In the UK, the Trustee Act 2000 gives statutory expression to the trustees duty to review trust investments. Trustees commonly put a great deal of faith in the ability of the settlor/client to direct the business of companies in which they hold shares. This may be very sensible, but the trustees still have an essential supervisory role, monitoring the business, taking a view on major questions, whether they have a controlling shareholding or a significant minority interest in the company. The companys dividend policy has to be considered in the light of the interest of beneficiaries entitled to income. Should the trust fund be more widely diversified? Does a young beneficiary need the backing of trustees to do his own thing? Is the trust the appropriate vehicle to hold the interest in the company? What controls need to be put in place? Are there inappropriate restrictions on the rights conferred on shareholders by the constitution of the company? The family trust is fundamentally a relationship of trust: the better the relationship between the trustees and members of the family, the more effective it will be. Exclusion clauses have become standard. They can be wide, but cannot override the duty of care. Special power clauses may confer powers on others, but cannot override the trustees responsibilities and may restrict their awareness or their ability to take necessary actions.
Tax evasion is reportable. Avoidance and mitigation are not. Understanding the difference is important. Governments all over Europe need more income. Evasion is more prevalent in Continental Europe than in the UK, but everywhere the figures are frightening: an estimated 2% of global GDP is laundered. In June 2003 came the EU Savings Tax Directive a shoddy compromise; initially it applies to individuals but will doubtless extend to companies in due course. Switzerland, the Far East and the US are homes to black money. The US cannot afford to do without other peoples illegal money. There have been new initiatives against tax evasion in the UK, Ireland, US, Australia and Germany. The anti-money laundering legislation was not directed at tax evasion, but now in certain countries it clearly applies to evasion both of domestic and foreign taxes. The UK Revenue summary of 2003 underlines the point, but some other countries take a different view. Professional privilege does not apply to legal advice where the legal counsellor is taking part in money laundering activities. The UK Proceeds of Crime Act 2002 introduced new knowledge-based provisions. The adviser in the UK is required to look at foreign behaviour through UK eyes: crime includes anything done abroad which would be a crime if done in the UK. Does this extend to dealing in handguns in the US? S.330 deals with the failure to disclose. S.340 extends a subjective test to criminal property. The decision in Ghosh is relevant. Sections 327, 328 and 329 have only objective tests. They will lead to over-reporting. Legal privilege is limited to professional legal advisers. But the S.330 exemption is limited: whose intention is relevant? It includes that of the client, but the lawyer who knows nothing of the clients criminal intent may nevertheless be excused.
Options are widespread. They support many business objectives. Options attracting favourable tax treatment are generally described as “approved”. In the UK, the unapproved option carries a 48.5% tax. The usual tax implications in Europe involve no tax on grant or vesting but tax on capital gain on exercise. But there are exceptions – imposing tax on grant, in Belgium, Ireland, Netherlands and Switzerland; on vesting, in Netherlands and Norway. Denmark, Finland, France, Germany, Greece, Ireland, Norway, Portugal, Spain and Switzerland charge tax on exercise. Italy and Sweden impose (in some cases) no tax at all. A tax charge on sale arises in several countries. There is a double tax risk, arising from timing mismatch, or from different residence rules. Art. 15 of the OECD Model Treaty goes some way to resolving anomalies, but does not cure timing or tax mismatches. The Article is interpreted differently in different countries. The OECD Committee has released proposals for changes, providing relief for timing mismatches and providing for uniform distinction between income and capital gains. These considerations can be a minefield; the local rules and the relevant treaties need careful study in each case.
Good regulation needs to work hand in hand with good business. There is presently a danger in over-regulation: there is no such thing as a risk-free world. Regulation must be clear, cost-effective and necessary. Regulation aims to protect consumers. Caveat emptor now has limited application to purchases of goods and services. Such protection is particularly important where the product is not purchased frequently, where faults cannot be easily rectified and where the product is complex. The consumer sees regulation as cost-free, bit of course it is not. Investors compensation schemes may actually encourage consumers to take greater risk. Regulation also aims to maintain confidence in the market. It can remove the dishonest and incompetent. Without regulation, consumers may withdraw from the market altogether, a jurisdiction may be blacklisted, and specific products may be banned. Regulation can improve standards. Minimum standards prevent drift to the bottom. They need to be based on good practice. The regulator can function as an external consultant. Regulators reduce criminal use of the financial system. The regulator is not a policeman, traffic warden or (ideally) an ombudsman. But he does function as a gatekeeper and monitor. Regulation has direct costs. It also has indirect costs the incremental costs of compliance and distortion costs – said to have a one-to-four relationship. Many costs of complying with the law are wrongly attributed to regulatory compliance. The badly-run business finds compliance expensive, and may go out of business. Restrictions should be proportionate to the benefits. Regulators need to achieve an appropriate balance between restriction and freedom; if it can do that it is of great benefit to the financial industry and to society as a whole.
A non-resident should be able to structure his investment so that no income tax, capital gains tax or inheritance tax liabilities will arise. A zero-tax trust (e.g. in the Channel Islands) may invest through a zero-tax company (e.g. in the BVI), lending to the company. A deduction will be allowed for interest to the extent that it does not exceed the arms length amount; the Inland Revenue will generally (in the speakers experience) accept a loan of 85% of the cost, charged on the property. Lifts and other machinery will carry capital allowance. S.776 prevents a transaction where the taxpayer has bought property wholly or mainly with a view to turning it over at a profit from masquerading as a capital gain. The Revenue accept that the interest has a foreign source and is therefore not taxable. The Government has initiated discussions on possible changes to this treatment, making the interest taxable (at 20%). Any such change may appear in the Budget next week and take effect in July 2004. Bank lending may not be affected. An alternative structure involves using discounted securities, the company taking an annual deduction of part of the discount if the parties are not connected, or on redemption (subject to arms-length pricing) if they are connected. A larger deduction may be obtained if the trust puts additional investments into the company against an issue of shares. This increases the amount which can be borrowed on arms length terms: these investments would give the lender additional security and the transaction satisfy the transfer-pricing requirements. If the rent increases over the years, the company can sell to a subsidiary and start again. There is relief from stamp duty land tax on inter-group transfers. On the general point of SDLT mitigation, there is an advantage in transferring shares rather than land. Also at present, the vendor can put UK land into a non-UK limited partnership and sell his interest in the partnership to a BVI company, the partnership then being wound up. The BVI company can then sell the land to a BVI subsidiary. A quick land deal can be done through Mauritius. A Guernsey company is more attractive for residential development. The accommodation charge affects the non-domiciled but resident individual who lives in property owned by a foreign company: he can be treated as a director of the company, and a notional remuneration attributed to him equal to the benefit of his occupation of the property. This structure is to be avoided. The charge can be avoided if the individual reimburses the company for its expenditure.