A new era for offshore banking

news: A new era for offshore banking

THE TIMES, they are a-changing and offshore banks and their clients are bearing the brunt of many of these changes.

One of the first things many Britons do on moving overseas is open an offshore bank account. These accounts have many practical uses and banks in the UK offshore islands offer excellent services geared to expatriates needs.

These reasons all remain justified. However, in the past many people chose to deposit their capital offshore as a means of tax avoidance – but according to the law in Portugal and UK you must pay tax on your worldwide income. You are as obliged to declare your offshore interest earnings as those from onshore banks.

In today’s world, tax evasion is no longer to be tolerated and various initiatives have been set up to end this practice.

The Savings Tax Directive

If you are resident in an EU Member State you are affected by this new directive which comes into force on July 1. Its aim is to ensure EU residents pay tax on their interest earnings, regardless of where their bank account is. Jersey, Guernsey and Isle of Man are also implementing the directive, although they were given a choice of applying its automatic exchange of information provisions or levying a withholding tax.

Most banks and affected financial institutions are passing this choice onto their clients. For example, the Anglo Irish Bank on the Isle of Man has listed these options for their clients:

a)Agree to the automatic exchange of information regarding the interest earned on your account. This information will be forwarded annually to the relevant tax authority where you are resident. Your interest will continue to be paid gross.

b)Pay a retention (withholding) tax, which will be a percentage of the interest earned on your accounts. No personal information will be submitted to any tax authority and your affairs will remain confidential. The rate of retention tax will be:

15 per cent from July 2005 to July 2008

20 per cent from July 2008 to July 2011

35 per cent from July 2011 onwards

If you already pay tax on this income in your home country you will want to request exchange of information so that you are not taxed twice. You will need to supply your local Tax Identification Number or similar documentation in order to be eligible for this option. If you are not tax resident anywhere, you will find that you are now taxed at the above rates and cannot opt for exchange of information. You may be better off investing the money within an insurance bond to legally avoid taxes in future.

Note also, that while banks and paying agents in the UK offshore islands may offer a choice to their customers, individual organisations may elect not to do so. In this case the retention tax option will be applied by default. If in doubt, clarify your position with your financial services provider.

In the face of the directive, offshore banks are becoming more innovative and offering new types of products. One of these is a non-interest bearing account where interest is only added when you draw money out. However, while you will not pay tax annually, you are simply deferring it to a later date. If you remain an EU resident, you will end up paying a higher tax rate when the retention tax rises to 35 per cent in 2011.You won’t want to pay 35 per cent tax when you could have paid 15 per cent.

The OECD and Non-EU Countries

It is possible to bank in places like Dubai and Hong Kong instead. However, if you move your money to one of these jurisdictions to escape the EU directive, you’ll probably find they adopt a similar system a few years down the line.

The Organisation for Economic Co-operation and Development (OECD) has made great strides in cracking down on tax evasion on an international level, and is currently paying close attention to the Middle East and Far East. It is putting pressure on jurisdictions the world over to conform, and using economic pressure can be very persuasive. OECD countries and the UK offshore islands will soon begin exchanging tax information on request. If you are suspected of tax evasion, money laundering or fraud the authorities can request information on your bank accounts, even if your bank normally protects your privacy.

Know Your Customer

Over recent years, Know Your Customer (KYC) regulations have become increasingly important in the fight against money laundering, tax evasion and terrorism. It ensures that banks and financial institutions get to know their customers in every sense. They need proof of identity and address and to build up a detailed profile of their customers and transactions.

This means you have to provide documentary evidence; explain the nature of your financial transactions and provide information to help the bank build up a picture of how you will run your account. The bank will monitor your account so it can spot anything out of the ordinary.

While you may feel this encroaches on your privacy, it is another sign of the times we live in today. On the positive side, it could also be to your benefit as it may help protect you against identity theft. If your bank knows how you usually run your account, they will notice any unusual transactions and alert you.

These new rules and regulations are also just the beginning – as countries the world over continue to crack down on tax evasion, money laundering and terrorism we can expect new and more draconian measures to come into place.

By Bill Blevins, Financial Correspondent,Blevins Franks

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