The deal struck between the UK and Liechtenstein governments to provide depositors with a way to come clean on tax disclosure is a constructive sign of how financial services can be part of the solution to enforcing the law, not the problem, argues Baker & McKenzie

The proactive approach of Liechtenstein to encourage UK-connected clients who may not fully comply with UK tax obligations to disclose assets under favourable arrangements negotiated by the tiny Alpine state sets a strong example, according to law firm Baker & Mackenzie.

The approach taken by Liechtenstein also shows how the financial services industry and financial centres can avoid being barriers to hunting tax evaders, the firm says.

Importantly, being part of the solution, it says can provide a "win, win, win" result, with all benefitting, including affected families, the financial services industry and the government whose taxes are involved, in this case the UK, the firm told WealthBriefing in a recent interview.

Drawn up this year, the Liechtenstein Disclosure Facility was introduced by HM Revenue & Customs, the UK tax authority, for UK taxpayers with existing and newly acquired Liechtenstein assets or interests. Such taxpayers can generally disclose any unpaid UK taxes and pay them with interest and a 10 per cent penalty sum.

Importantly, the maximum look-back period is ten years (as opposed to the 20 years otherwise applicable) and other benefits are also available, such as the possible use of a "composite" rate. The composite rate option can provide substantial savings in a variety of circumstances including where multiple taxes would otherwise apply, such as both the inheritance and income tax. The composite rate permits a single rate of tax to apply, much simplifying the calculation and often significantly reducing the cost of voluntary disclosure.

The approach taken by Liechtenstein, which does not compromise important elements of client privacy and which has not involved a bruising legal conflict, is commendable as it shows how Liechtenstein has adopted a positive approach in co-operating with another state, Philip Marcovici, a partner at the law firm, said last week. Baker & McKenzie was one of the firms advising Liechtenstein on the LDF.

“The reaction of the UK government [to Liechtenstein’s approach] has helped put Liechtenstein in the driving seat; this benefits clients, the UK and Liechtenstein. The governments have agreed to a gentle but clear transition toward the future,” said Mr Marcovici.

“I explained to the OECD, early on in our thinking, that the model that Liechtenstein implemented with the UK would only make sense where the 'other' country, in this case the UK, had a tax system which respected client confidentiality,” Mr Marcovici said. Such agreements will not work if account holders’ details are published in the media, as has happened in Italy and other countries recently, he said.

Mr Marcovici pointed out that there are good reasons for defending client privacy, but this should not mean clients can hide from the tax authorities.

“There is a real risk that the defensive approach that some countries are adopting will end up with them confusing the issue of privacy with that of hiding money from the tax perspective,” he said.

The agreement comes at a time when offshore financial jurisdictions around the world are under pressure to help countries hunt for tax evaders. In April, the Group of 20 major industrialised nations agreed on possible sanctions for regimes deemed not to be co-operating in rooting out tax cheats. (Details on what possible sanctions might be applied are as yet unclear). However, some commentators, such as the US-based Cato Institute, have warned that a broad-based crackdown on tax havens is a form of economic protectionism by high-taxing, high-spending governments.

Mr Marcovici said other governments, in contrast to the approach taken by Liechtenstein and the UK, have only given bank account holders the option of getting an amnesty if they repatriate money to their home country. By contrast, he said, Liechtenstein’s disclosure facility does not require the repatriation of funds and, indeed, contains a number of elements designed to enhance the attractiveness of the Liechtenstein financial centre for UK-connected clients.

He said in the case of neighbouring Switzerland, the country’s government and banking system had at least for the moment, adopted a more “defensive” posture rather than trying to take the initiative.

"On the other hand, the LDF is generally available until 31 March 2015 in order to provide for a transition period during which Liechtenstein intermediaries and their existing and new UK-connected clients can gather the necessary information and prepare a proper disclosure and payment of tax," Lyubomir Georgiev, a colleague at Baker & McKenzie, said in the same interview.

"Finally, as part of their tax arrangements and further co-operation, the UK and Liechtenstein are expected to start soon first talks on a comprehensive income and capital gains tax treaty. Such a treaty may increase the attractiveness of UK-connected taxpayers even further as a long term solution," he said.

Besides the Liechtenstein Disclosure Facility, the UK government also has launched its New Disclosure Opportunity, which is a voluntary disclosure programme introduced by HMRC for UK taxpayers with offshore accounts or assets.

Unlike the LDF, the New Disclosure Opportunity is much shorter. Intention to notify that a disclosure will take place ends on 4 January next year and the actual disclosure ends by 12 March. On the other hand, the LDF is available until 31 March 2015.

Mr Marcovici is a member of WealthBriefing’s editorial board.