Tuesday, November 13, 2012

Discretionary Trusts: Swiss courts tell U.S. IRS to go to hell

Since Switzerland first signed its poisonous "Rubik" tax deals with Germany, Britain and (more recently) Austria, we (and others) have pointed out its numerous loopholes and noted that - quite aside from the issue that these deals subvert democracy, provide permanent immunity to criminals, and have been expressly designed to kill transparency in Europe,  the deals will raise only a tiny fraction of what the politicians have been promising.

From our list of killer loopholes in the deals, our Exhibit A goes like this:
"Foundations, discretionary trusts and other ‘ownerless’ structures –standard tax evasion vehicles – are deliberately and explicitly outside Rubik’s scope. Such structures are slippery: while they will ultimately benefit someone (an Italian tycoon, say), that person is not legally identified as the beneficial owner or beneficiary: the assets are ‘ownerless’ and therefore outside the scope of a Rubik deal. (See Section 3.1 here; for an exploration of how trusts work, see our primer In Trusts We Trust.)"
We have publicly challenged tax advisers and tax authorities in the UK and Switzerland, not to mention the Swiss Bankers' Association, to show where our analysis is wrong. None has ever been able to, even on the occasions when they have provided responses to our challenges.

In case anyone still doubts our analysis, try this attempt by a private practitioner to cash in on this particular one of Rubik's many loopholes.
Rubik: what will occur to my assets? Have a look at the discretionary trust and foundation.
And then basically it goes on to pretty much reproduce the TJN analysis in full, noting that the Rubik UK deal explicitly carves out these structures from the scope of a Rubik deal 
"if it is not possible to ascertain the beneficial ownership of such assets, e.g. due to the discretionary nature of the arrangement."
This is a flagpost planted squarely in the agreement, holding a sign in big, bright letters saying "evade me here" and is one of a multitude of sources of shame for Britain's Revenue and Customs authority, HMRC.

Now in this vein, here is Matthew Shayle of the Society of Trust and Estate Practitioners, good friends of tax evasion vehicles, speaking with what must be a painfully forked tongue:
"There remain good reasons to keep faith in the discretion and security of Switzerland as a wealth-management jurisdiction, in particular where discretionary trusts are concerned.
. . .
Switzerland is no longer – if it ever was – a jurisdiction for estate plans built on secrecy rather than ordinary, tax-compliant succession planning."
So let us summarise what Mr. Shayle has to say: rest assured: Switzerland is still a classic secrecy and tax evasion jurisdiction - but Switzerland is no longer a classic secrecy and tax evasion jurisdiction. (We all know which part of this contradiction is true, and which is not: as, undoubtedly, does Mr. Shayle.)

So we know that the Swiss have been thumbing their noses at European taxpayers with their 'Rubik' deals - but we'd thought that the United States would be less of a soft touch, given its willingness to crack down on Swiss bankers being caught red handed helping U.S. taxpayers evade tax. However, we note from Shayle's article that even the United States may have been taken for a ride with respect to this one:
A further example came in the context of the UBS agreement, in which the Swiss Federal Administrative Court heard 380 appeals by US persons. Key to the determination of judgments was annex 10 of the UBS agreement, which set out the broad criteria for identifying persons relevant to an Internal Revenue Service information request, stating that ‘US persons (irrespective of their domicile) who beneficially owned “offshore company accounts”’ should be considered to be within scope. The annex did not contain a definition of ‘beneficially owned’
So basically there is a lack of clarity over the question of what it means to be a beneficial owner, and the discretionary trust is clearly a pertinent case here. The United States, with its grantor trust system, cuts through all this nonsense and just basically says that they are not going to tolerate the idea of 'ownerless' assets, and the assets aren't considered to have been given away until someone actually receives them. Otherwise the assets will sit in a secret, ownerless limbo, and we don't like that.

So did the Swiss courts decide to penetrate the veil of secrecy here, and take a similar view? Well, no. Uncle Sam won't be able to see into these structures:
"The result is that some clarity as to the position of discretionary trusts in the eyes of the Swiss Courts has been reached, confirming that the discretionary beneficiaries of a properly constituted discretionary trust should not be seen as the beneficial owners of the trust’s assets.
. . .
Consequently, the Swiss Courts have refused to permit the disclosure of information relating to discretionary beneficiaries to the IRS."
Essentially, the Swiss are telling the Americans to go to hell. They are saying that the legal beneficial owner of these structures is not the settlor (ie the person who puts the assets into the trust in the first place, and is typically the principal tax evader) but the trustee - the person who manages the assets of the trusts but who (apart from that management fee) doesn't actually have the power to enjoy the assets or their income. Geneva is stuffed full of trustees of foreign trusts - and of course the trustee doesn't get taxed. So nobody gets taxed!


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