Wednesday, August 12, 2009

Britain and Liechtenstein: another curate's egg

A little out of date, as we're down to a skeleton staff of bloggers in the holiday season, we note that:

"Britain on Tuesday signed a tax cooperation agreement with Liechtenstein that would allow British holders of assets in secret accounts to declare their holdings voluntarily in exchange for a reduced penalty fee or face the closure of their accounts."

Now this is a curate's egg of a deal: parts of it are probably good (for one thing, it's an improvement on Liechtenstein's almost pure secrecy to date), but it is also riddled with shortcomings. Three of the obvious ones are: first, that Britain has had to actually negotiate with the providers of criminal services to curb these services, at least partially; second, that developing countries, which have seen plenty of their loot stashed in Liechtenstein, have once again been left out entirely from a bilateral deal; third, that a key component of the deal is that it conforms to a fair degree to the deeply inadequate OECD concept of information exchange "on request" which means you have to know what you are looking for before you request it.

The two countries have issued a joint declaration here, and a memorandum of understanding here, and the Tax Information Agreement (TIEA) is here (see our simple explanation of what TIEAs are here.) The British tax authorities said in a press release:

“Those who have been evading UK tax on assets held in Liechtenstein banks must now settle with us. There are no alternatives."

This sounds good, and the agreement certainly has good elements. Yet there are some other important drawbacks specific to the deal. For one thing, it essentially means that for five years Britain must rely on Lichtenstein to ensure that UK tax evaders using Lichtenstein regularise their affairs through this new 'Liechtenstein Disclosure Facility.'

Take a look at Article 6 of the new TIEA, for example, which contains a lot of ifs and buts about exchanging information. For example, requests made before the end of 2015 are restricted to tax matters where a formal criminal investigation has begun, or to persons who have applied under the Disclosure facility. So if a person does not apply under the Disclosure facility, the UK cannot make a request for information under the TIEA for 5 years, except for in formal criminal investigations.

That is a pretty serious shortcoming. Here is another one. TaxAnalysts (subscription-only) note that:

"in relation to the financial intermediaries, in view of the expected cooperative role that such financial intermediaries will undertake in ensuring that the taxpayer assistance and compliance programme as well as this disclosure facility are successful, HMRC anticipates that it is highly unlikely to be in the public interest of the UK to undertake a criminal investigation against such financial intermediaries."

In other words, the deal essentially offers a 'stay-out-of-jail card' to most UK tax evaders using Lichtenstein, and, importantly for the government and the Prince, Lichtenstein financial intermediaries.

And there seems to be a lot of bending over backwards to accomodate and placate the rampant criminality that has been going on. Tax evaders are to be allowed to come clean under the disclosure facility which basically caps their obligations at back taxes plus interest and a maximum penalty of 10%, which is extremely low. It also includes a special Bespoke Service, including an option for personalised treatment by a `discrete [sic] HMRC (UK Revenue and Customs) team to ensure consistency of treatment'.

There is also a question mark about trusts. One blogger says this about trusts in Liechtenstein:

"A Liechtenstein Trust is set up by a deed between the settlor and trustees. The trust deed does not have to name the beneficiaries. If the trust deed is deposited with the Liechtenstein Registrar of Trusts, it will not be publicly available, and later instruments, which might, for example, name beneficiaries, who might just happen to be Anglo Saxon, do not have to be disclosed. So if the trust is established with Liechtenstein trustees, there is no reason why the details of UK resident beneficiaries should show up in an audit. And, trust me, they won't."

Now Article 2 of the TIEA says that

"A Contracting Party is not obligated to provide information which is neither held by its authorities nor in the possession or control of persons who are within its territorial jurisdiction."

This question of trusts also seems to be a bit up in the air, for as the MoU says:

"Liechtenstein and HMRC will agree no later than 3 months of the signing of the MOU on written guidance and consistent approach to characterisation, recognition and treatment of a trust enterprise (trust reg.) (“Treuunternehmen”) and an establishment (“Anstalt”) in Liechtenstein."

Yet despite all its shortcomings, this agreement does represent an improvement on an appalling situation, and it does contain some innovative mechanisms which, it has been argued, represent an important and innovative step forward -- it being a document requiring active steps, in contrast to traditional TIEAs which are more passive documents. Also, as TaxAnalysts put it,

"Liechtenstein financial intermediaries will be required to verify that all clients subject to U.K. tax are complying with their U.K. tax obligations. If the financial intermediary can confirm that a U.K. investor is in compliance, it may continue to provide financial services to that client. If the intermediary cannot verify compliance, it must stop providing services to that client. . . . independent auditors will verify that undeclared accounts are closed. Liechtenstein must enact legislation within 12 months of the MOU's signing to give effect to the compliance verification and audit procedures."

That seems quite an improvement on many traditional exchange of information agreements.

There will be discussions with a view to a full Double Tax Treaty between the two countries, which no doubt Lichtenstein hopes will allow it to offer more mainstream offshore financial services. This would, we presume, include agreement on income on Lichtenstein trusts and Anstalts with UK-resident beneficiaries, although the wording in the MOU suggests that Britain will try to retain as much discretion as possible in how they tax such vehicles (for clear explanations on how trusts are used to evade tax, click here.)

And although we have often excoriated the OECD for its pitifully weak standards of information exchange and for allowing a large number of seriously abusive jurisdictions to sneak onto its so-called "white list", there is no doubt that to the extent there has been progress the OECD has certainly been an important part of the push.

Still, a lot of the devil will be in the detail, and we will watch to see what happens with the proposed Lichtenstein law on financial intermediaries, and how far their obligations will extend, for example, in relation to how assets are transferred to other jurisdictions -- which many tax evaders will no doubt wish to do during the five year grace period.


Blogger Demetrius said...

Today is the celebration of the life of Dr. Jeremy Taylor in the Anglican Communion, so "curates egg" is a good turn of phrase. He was also of an analytical turn of mind, and would have appreciated the thoroughness of the item. The UK media, inevitably, have bought the spin on this deal. I still say it will only catch the unwary and the strays.

3:29 am  

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