To disclose or not to disclose? That is the question facing Brazilians with offshore accounts who must come clean but who are concerned about privacy and their own safety, a lawyer says.

A newly-minted tax amnesty by Brazil designed to help repair the Latin American country’s embattled public finances creates a risk for persons who want to come clean but who face losing vital privacy, a UK lawyer argues.

The country is applying the amnesty to assets that were held abroad by Brazilian residents until 31 December, 2014, taking the dollar exchange rate of this date as a basis for calculation. A notice about this policy was issued in January. Taxpayers have 210 days to regularise their affairs once rules have been issued – the issuance date is expected to be 15 March (source: Baker & McKenzie). Assets will be taxed at 15 per cent and 15 per cent penalty on the asset’s value will be taken.

People with such undeclared assets may well conclude that paying up is the least of their worries because what concerns them most is putting their finances into the potential grasp of criminals who can exploit corrupt officials in Brazil, argues Mark Davies. His eponymous law firm specialises in advising UK-resident foreign domiciled individuals. He certainly doesn’t defend persons evading tax but says the issues of regularising accounts are not straightforward.

“A question a person must answer is do they [holders of undeclared accounts] settle their affairs, stay in Brazil and make themselves a target? Or settle their affairs, leave and move to a country with a benign tax regime, such as the UK,” he told this publication in a recent call. By “target”, Davies said that future governments, armed with new data on their country’s tax base, will impose new taxes (wealth taxes, etc.), while another risk is of tax data being passed over to criminals, a problem that a country such as Brazil faces.

Transparency International, an organisation tracking issues such as money laundering and corruption, says Brazil has a score of 38, where 100 is the highest possible ranking for probity and openness, and zero is seen as the lowest score. Davies asks whether such a nation can be fully trusted to guard the data that might emerge from an amnesty.

The size of undeclared money involved is potentially large, although exact data is difficult to obtain. “According to some estimates, anything up to $600 billions of assets could be held offshore by Brazil-based individuals although getting a clear idea of the actual value is impossible to determine,” Davies said. “Whatever the true figure, we are talking about very serious sums of cash,” he continued. 

Running from the country in the hope of avoiding the amnesty isn’t an option, however, Davies said. “A Brazil-based person who flees the country and just assumes he or she doesn’t need to regularise affairs will be in for a shock, as countries from all over the world co-operate on sharing tax information through regimes such as the Common Reporting Standard,” he said. (Brazil is due to adopt the CSR from 2018. For more detail on this, see here.)

“We have seen significant numbers of new Brazilian clients arriving in London in recent months, and several have contacted us this week to discuss the tax amnesty. Many of the assets in question are in the US and Switzerland and we will be working closely with their advisors in Brazil and in the US to coordinate large scale disclosures and their subsequent move to the UK,” Davies continued.

“With careful planning the UK can represent a tax haven to foreign domiciliaries, allowing them to be fully tax complaint and yet pay a low effective rate of tax. At a time when more and more countries are entering information-sharing deals in an effort to combat tax evasion, this is going to be a very attractive option for those Brazilians with undeclared assets abroad – estimated to amount to several hundreds of billions of dollars,” he said.

Brazil, along with many other countries that have set up account disclosure programmes, such as the UK, US and Italy, needs the money. In late December last year, figures showed that Brazil’s government accounts remained weak in November, with a budget deficit equal to 9.3 per cent of gross domestic product. Falling commodity prices have hit Brazil hard in recent months, because commodities, such as agricultural goods, are an important export market. The country has also suffered, along with its peers, from an expected raising of US interest rates.

A number of countries, such as the UK and Italy, have operated tax amnesties. The UK's disclosure facility arrangement with Liechtenstein, that concluded recently, is often cited as a relatively successful one; Italy has operated several amnesties in recent years, while the US in 2013 entered a programme with Swiss banks to enable the latter to come clean over undisclosed accounts in exchange for paying fines and signing non-prosecution agreements.

There have been concerns for some time that when some countries seek data about their citizens’ offshore accounts, they may be unreliable custodians of such information. Back in 2010, the Society of Trust and Estate Practitioners, or STEP, flagged this concern in a policy paper. STEP said it was concerned about a “major flaw” in the tax information exchange agreements as framed by the OECD.  “Without fresh safeguards, the result could be detailed data on individuals being provided to countries with poor records in areas such as respect for human rights or protecting personal data from abuse. This reflects a major flaw in the current OECD peer review process for TIEAs – the review process only examines a country’s ability to deliver tax information,” STEP said at the time.

Ironically, while Brazil has sought to clamp down on secret offshore accounts, two of its banking groups – Safra and BTG Pactual – have bought Switzerland-headquartered private banks in recent years. The country also last year liberalised its investment rules so that certain classes of persons can have more freedom to invest outside the country. The Brazilian Securities Commission, or Comissão de Valores Mobiliários, known as CVM for short, has brought in new rules that widen investor freedoms significantly. CVM’s Normative Ruling No. 554 sets out new terms for what are deemed to be “qualified investors” and creates the new classification of “professional investor”; the second rule, called 555, sets out new rules on how investment funds are managed, operated and reported.