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Q3 2012 Feature: Offshore Trusts Under Threat?

The current controversy over the tax affairs of wealthy celebrities in the United Kingdom has cast an unwelcome spotlight onto offshore territories like Guernsey and Jersey, and has led some to suggest that the offshore trust, at least as far as these jurisdictions are concerned, has had its day, with David Cameron’s coalition government expected to fire a new volley of anti-avoidance legislation in their direction. Leading political and finance industry figures in the islands, however, beg to differ.

The often fiery debate over what distinguishes tax avoidance which is ‘acceptable’ from that which is ‘unacceptable’ or ‘aggressive’ – yet still within the letter of the law – has occupied the British media for the past several days after an investigation by The Times newspaper revealed how well-known entertainers had used schemes, often with an offshore component, to shelter their income from UK tax.

Much of this media coverage has focussed on one avoidance scheme in particular - the so-called ‘K2’ scheme. This structure establishes an employer-employee relationship between the individual and a Jersey-based company, and employment income is distributed to the individual in the form of a loan. The net result is that the user of this scheme is able to dramatically reduce liability to UK tax, and it was said that in the case of one individual, their effective tax rate had been slashed to as low as 1%. Another scheme called ‘Icebreaker 2’ (Icebreaker 1 had already been closed down by HM Revenue and Customs, HMRC) involved a complex circular transaction which exploited the UK film tax relief scheme.

At a time when the government is leaning on taxpayers to help close the GBP160bn budget deficit it inherited when elected in 2010, the news predictably provoked much public outrage, and using his politician’s nose to sniff out an opportunity for a populist sound-bite, Cameron went on the record to say that he thought the K2 scheme was “morally wrong”.  

But it is not just K2 and Icebreaker that has got the public and politicians spitting with indignation. Thanks to the complexity of the UK tax system, there are many ways in which those with means can manipulate what are usually loosely described as ‘loopholes’ to reduce exposure to tax, and the latest revelations about tax-dodging celebs has led to renewed calls for the government to accelerate the pace of tax reform, especially with regards simplification measures.

However, it is when tax avoidance involves an offshore dimension – regardless of whether it is legal or not - that hearts really start racing in Westminster (and in many other centres of government come to that). And offshore trusts, protected as they are by strong confidentiality rules, have become a particular target.

It is unclear what the government could do to force the issue. Although Guernsey and Jersey are Crown Dependencies, and therefore the UK holds much political influence over them, they are largely free to make their own laws as they see fit (as is the case with most offshore trust jurisdictions).

Both islands have signed up to several bilateral information exchange agreements whereby information about an individual can be passed to the tax authority of the requesting nation on request. However, not a single request has been received by Jersey for example from HMRC under the Tax Information Exchange Agreement which went into effect in November 2009.

Furthermore, efforts by the UK to crack down on aggressive tax avoidance using offshore trusts are nothing new, and several pieces of anti-avoidance legislation have been enacted down the years to prevent abuses of one type or another. Indeed, in the 2012 Budget, one of Chancellor George Osborne’s headline anti-avoidance measures was to impose a 15% rate of Stamp Duty Land Tax on purchases of property in the UK for GBP2m or more by non-natural persons, the intention being to reduce the number of property purchases involving complex ownership structures, including offshore trusts, to avoid UK tax.

Another measure announced at the 2012 Budget attempts to stop abuse of the ‘excluded property’ rules, under which a UK-domiciled individual can acquire an interest in settled property in an offshore trust, and reduce the value of the property for inheritance tax purposes through a series of transactions.

A general anti-abuse rule has also been proposed, in response to the Aaronson report into tax avoidance, and this is expected to be introduced next year. It is unclear how this would work in practice especially with regard to foreign trusts, and there will likely have to be a series of long-drawn-out court cases before the degree of sharpness of the GAAR’s teeth is established.

Whatever the future holds, successive tightenings in the past of UK anti-avoidance legislation in the area of offshore trusts has yet to put a huge dent into the fiduciary services industry in the Channel Islands. Although trust statistics are not readably available, it is estimated that the number of Jersey trusts is in the tens of thousands, and both government and industry in these jurisdictions do not seem unduly concerned at the latest wave of anti-offshore sentiment headed their way.

Responding to the Budget stamp duty announcement, Geoff Cook, CEO of Jersey Finance, the promotional body for the island’s finance industry, said: "The changes proposed are fiscal measures designed to increase revenues to the UK Treasury through the collection of stamp duty on UK residential property worth GBP2m or more. While this is important business for the Channel Islands' finance sector, it is very much a single service within a broad and deep portfolio of services that the islands offer."

And on the more general issue of tax avoidance, he commented: "While we cannot comment on specific schemes, which are a matter for HMRC to consider and review, Jersey’s position on tax evasion is very clear: tax evasion is illegal in Jersey and it is a criminal offence to facilitate or engage in tax evasion. Jersey is, and remains, one of the best regulated international finance centres in the world, a position that is regularly acknowledged by independent assessments from some of the world’s leading global bodies, including the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). In our view, conflation between illegal tax evasion and legal tax avoidance, or tax planning, is unhelpful in moving any wider debate forward."

Cook said that coverage of the matter in the UK, "raised some important points in this area", and noted in particular that it had described the complex system of British tax reliefs as "byzantine", and called for "lower" and "simpler" taxes.

Expressing his hope that the GAAR consultation would be a positive development, in drawing a line in the sand on what constitutes acceptable tax planning, Cook stated: "It is this sort of informed debate and intelligent legislative development that can provide greater clarity and certainty for all parties and which we welcome as a positive way to develop the business of international finance.”

On behalf of Guernsey's Policy Council, the island's Chief Minister, Peter Harwood, said that Guernsey regularly discusses taxation issues with counterparts in the UK, the European Union, the United States, and supranational bodies such as the OECD, and would continue to do so.

He underscored that: "Guernsey has the highest possible category (category A) of tax information exchange with HMRC; has implemented automatic tax information exchange with the UK and all other EU Member States that meets the standard of the EU Savings Directive; and late last year the G20's Financial Stability Board confirmed that Guernsey was a jurisdiction that was 'already demonstrating sufficiently strong adherence to regulatory and supervisory standards on cooperation and information exchange.'"

The bad news for the Channel Islands, and offshore trust jurisdictions generally, is that the danger is not coming just from the UK. Indeed, some countries, notably the United States, have gone much further than the UK in cracking down on the perceived problem of offshore-based tax avoidance, which, according to the accepted estimate, costs the US Treasury USD100bn a year.

US tax laws already make it extremely difficult for US citizens, either located abroad, with overseas assets, or with foreign-source income, to escape the domestic tax net. And the Foreign Account Tax Compliance Act, the provisions of which begin to kick in next year, will make it a whole lot harder for Americans with foreign investments to escape the attentions of the Internal Revenue Service – to the point where many foreign banks and wealth managers no longer want anything to do with US clients.

Then there is Francois Hollande’s new Socialist government France, which is preparing to declare war on wealthy tax avoiders in a bid to restore tax ‘justice’.

But perhaps Cook and Harwood are right not to be too concerned by all this. In the future, Guernsey and Jersey, as well as the Isle of Man, will be less reliant on the UK wealth management market, with considerable new business expected to flow in from the growing population of newly-affluent in the Middle and Far East looking for wealth and succession management, and asset protection services.

Considerable resources have been set aside for marketing purposes in these regions, and both Channel Islands have established firm links with the Gulf states, Hong Kong and China, having opened representative offices there.

It is a strategy which appears to paying dividends, as demonstrated by the June visit of a delegation of nearly 30 officials and practitioners from the Chinese trust sector to Guernsey, where the possibility of undertaking increased business in the island was explored.

Peter Niven, Chief Executive of Guernsey Finance, said: “Guernsey Finance established a representative office in Shanghai at the end of 2007 and since then, we have made huge strides in raising awareness of the Guernsey brand. Part of this process has been building relationships with the relevant professional associations, including the China Trustee Association (CTA). The delegation was here for less than 24 hours but I really do think that we were able to showcase the best of the island in its various different guises. We have made a very positive impression which will enable us to further strengthen our ties with the CTA and its membership in the future. Indeed, extending our reach, particularly through professional associations, is an extremely important strand of our work to help develop new business flows from China.”

Less than one week later, the Isle of Man played host to a delegation of leading business people from the London operations of some of China's leading companies from various sectors, including banking, shipping, telecoms, petrochemicals and food.

"This was the first visit of its kind to the Isle of Man and it is highly encouraging that the Chinese delegation had expressed a desire to visit here over other jurisdictions,” commented Michael Charlton, Director of International Business Development in the Manx government. “We have been very proactive over the last year in building relationships with key Chinese Government Ministries, trade bodies and business leaders with three visits from Isle of Man delegations having visited China already and another planned for the Autumn."

Zhou Xiaoming, Minister Counsellor, Economic & Commercial Office, Embassy of the People's Republic of China in London was “impressed” by the diversity of the Island's economy, the range of opportunities available to Chinese business. “We see this visit as the beginning of a lasting relationship and very much look forward to working together with the Isle of Man Government and the Island's businesses we have met to mutual advantage."

Ultimately, these jurisdictions have taken all that the OECD, the FATF and the EU could throw at them over the past decade or more during the campaigns for transparency and fiscal fairness, and they have come through the ordeal leaner and fitter. It may well become more difficult for people in places like the US, the UK and elsewhere in Europe to utilise offshore trusts, but the potentially huge volume of custom headed from the newly-wealthy in the emerging economies suggests they have a secure future, and places like the Channel Islands and the Isle of Man in particular have adapted well to the changing financial environment in recent years.



Tags: China (CH) | Hong Kong (HK) | Francois Hollande | France (FR) | United States of Amercia (USA) | Organisation for Economic Co-operation and Development (OECD) | UK Treasury | Jersey Finance | General Anti-Avoidance Rule (GAAR) | George Osborne | Tax Information Exchange Agreement (TIEZ) | HM Revenue & Customs (HMRC) | Tax Avoidance | United Kingdom | Guernsey | Jersey | offshore trusts | Tax Relief | Stamp Duty | Land Tax | China Trustee Association (CTA) | Financial Action Task Force (FATF) | European Union (EU)

The Report

Offshore Trusts Guide: Introduction

Offshore Trusts Guide: Jurisdictions

Bahamas Barbados Bermuda British Virgin Islands Cayman Islands Cook Islands Cyprus Gibraltar Guernsey Isle of Man Jersey Liechtenstein Madeira Malta Mauritius Monaco Nevis New Zealand Panama Seychelles Turks & Caicos Vanuatu