As Benjamin Franklin once said, ‘in this world, nothing can be said to be certain, except death and taxes’. It is true that there is no escape from some taxes, but it is possible to avoid others and man has been attempting to do so since time immemorial. Over recent years, however, it has got considerably harder and the first decade of the twenty first century could well be remembered for the death of banking secrecy.
On an international level, the Organisation for Economic Cooperation has been fighting ‘harmful tax practices’ and pushing for ‘exchange of information’, to help each country collect as much tax revenue as possible. It has been successful in getting countries to sign treaties whereby they will exchange information in cases of tax fraud – if someone is under investigation for tax fraud personal banking information may therefore be released to his tax authority.
Then of course, within Europe, we now have the Savings Tax Directive. Some jurisdictions have been able to retain banking secrecy and instead apply a withholding tax but the ‘ultimate aim’ is to have all EU countries and participating jurisdictions (including Switzerland) automatically exchange information, hopefully from 2011.
The UK’s tax revenue, HM Revenue & Customs (HMRC) was evidently not satisfied with these arrangements and, by taking leading high street banks to court, managed to override the Directive’s withholding tax provision. These banks were forced to disclose information on their offshore clients. This was a highly significant victory – it proves that tax authorities are winning the battle against tax evasion and are now able to push banking secrecy rules aside and obtain confidential information and trace tax evasion.
The Revenue is now investigating at least 100,000 taxpayers and a further 60,000 have come forward voluntarily to get their affairs in order. It also plans to expand its investigations to all the banks in the UK.
The UK is not the only country taking ever successful steps to prevent tax evasion and recoup lost tax revenue. Here in Spain, the authorities also take the matter very seriously and are currently on a mission to tackle property fraud. In July Luis Pedroche, director of the Spanish agency for tax collection, announced that a full third of the agency’s resources will be dedicated to preventing and controlling real estate fraud, one of the biggest sources of tax evasion in Spain.
Sur in English has also reported that a new computer programme, which will link the computers used by property registry offices and public notaries throughout Spain with the national tax agency, so it automatically knows when a house is sold. The programme will compare the sale price to the average property prices in its area and flag up if the declared value is suspiciously lower than it should be.
The tax office is also increasing the number of inspectors working on this area of tax evasion. It will be encouraged by its success so far – 90% more investigations were carried out in 2006 than in 2005.
So what will happen next? Considering the success the UK Revenue has had, the writing is well and truly on the wall for banking secrecy – it is only a matter of time before its demise, though quite how much time remains to be seen. Many consider the EU too optimistic when aiming to eradicate it within Europe by 2011, but at some point it will happen. In any case, from 2011 the withholding tax will rise to 35% in 2011 and many would be able to pay a lower tax rate in their country of residence.
The current withholding tax option is rather misleading. It appears to give people a choice as to whether to declare these savings or not. Legally, though, there is actually no choice, worldwide income should be declared even if you are paying the withholding tax.
Once a tax authority finds out about a previously undeclared bank account – whether through changes in the Savings Tax Directive rules or other methods – it will want to establish how much income was undeclared over the years, how much tax was unpaid, where the money came from and whether it was correctly taxed at the time (eg, capital gains tax, inheritance tax etc).
There is still no need to pay more tax than necessary but you must use legitimate methods to do so. For example you can move your savings and investments into tax efficient structures (ones that fall outside the Savings Tax Directive) and reduce or eliminate tax on your income and capital today as well as on any assets you leave your heirs in the future.
Article by Blevins Franks
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