The taxman cometh

news: The taxman cometh

Tax has formed part of our society for the last two millennia – Rome had a sophisticated tax system in place by the 4th century AD. The first recorded income tax was in 1404AD England (it was so hated that Parliament later had all records of it burned).

Tax is no more popular today and schemes have always existed to help people lower their tax bills (often illegally). Today, however, tax collectors are in an excellent position to successfully counter tax evasion.

The 1950s and 1960s saw the emergence of offshore financial centres (OFCs) like Jersey, Monaco, Switzerland and Bermuda. Their business grew with the lifting of exchange control regulations, which meant money could move freely round the world.Governments soon realised they were losing tax revenue and changed their laws to make foreign sourced income taxable. However, the lack of exchange of information treaties meant the taxman had no way of uncovering offshore money.

Tax authorities around the world have since made it their mission to recoup these lost billions and shut down systems enabling people to evade taxes.

Increasingly sophisticated technology and improved cooperation has resulted in nations the world over working together to this end. The OECD started talking about “harmful tax competition” and pressurising OFCs to hand over information on bank accounts. The G7 group and the Financial Action Task Force forced banks to get more information on client identity and transactions.

Following September 2001, banking transparency became a bigger issue. The US government wanted full access to banking information and entity ownership. Countries the world over became increasingly willing to share information.

Phrases like “know your customer” and “source of funds” have become commonplace and mean that banks must get increased information on your identity. You may now need to provide details on where your money has come from and what you need it for.

The fight against tax evasion continues to strengthen. Here in Europe the Savings Tax Directive commences this July. Tax authorities will now have increased access to personal information on bank accounts and interest bearing investments. Places like the Channel Islands, Switzerland, Monaco and other key non-EU financial centres are also complying.

What is unique about these new regulations is that information (on your identity, bank accounts, interest earnings, etc.) will be exchanged automatically, and not only when tax evasion is suspected. The authorities in the country where you have your savings will give the French taxman information about your finances.

In the early years of implementation certain jurisdictions have been granted a “transitional” exception and may levy a withholding tax rather than exchange information. This will only be for another six years, and in any case, these centres will exchange information in cases of fraud or similar misbehaviour.

Across the world, the OECD and G20 group of nations are setting up systems for tax authorities to exchange information on request and for easier access to banking information and asset ownership. Similar systems are being established in Asia and the Middle East.

There is no doubt that tax collectors have more power and access to information than ever before, and this global collaboration is already yielding results.

The taxman cometh, have no doubt about that. Tax evasion by non-declaration is now a high-risk strategy and legitimate tax planning requires great care. This does not mean, however, that it cannot still be achieved, but it must involve legal structures.The use of certain investment vehicles like insurance bonds and trusts allow for significant and legitimate reduction in income, capital gains and inheritance taxes.

The first step is to seek advice from an international wealth management and tax expert. Today’s rules are so complex it’s easy to fall foul of the law – in such complicated matters professional advice is not a choice, it is essential.

Blevins Franks will be discussing these issues at our forthcoming seminars. See advertisement for further details.