Countries which repeatedly use tax amnesties but which do not give wide publicity to these efforts stand far less chance of regaining revenues than states which use them rarely, according to the results of a survey by Datamonitor.
It said banks in Jersey, Guernsey and the Isle of Man were at most risk if amnesties are successful in future. It also warned that Switzerland was at risk due to its reliance on Germans’ offshore cash.
In recent years, governments such as those of the UK and Italy have used amnesty arrangements to hunt after money believed to be secreted abroad in places such as Switzerland and Liechtenstein.
At one extreme, governments - such as Germany's - have bought client account information that has been stolen from private banks, as in the case of Liechtenstein's LGT. Germany has also bought such data stolen from Credit Suisse.
Datamontor, a financial research firm, says its survey of amnesties has identified five factors that drive whether these moves succeed: structural changes in the home market; attractiveness of the terms of the amnesty; frequency of announced amnesties in the country; enforcement powers/threat of non-compliance and finally, the level of publicity for the enforcement measures.
“Generally, if investors do not believe that an amnesty is a one-time opportunity, they will be less likely to be tempted by it. Italy announced three amnesties in eight years, which should have meant a low response to the current one; however, the terms were so attractive that they proved irresistible,” said Michele Gorman, financial services analyst at Datamonitor.
Some amnesties have been relatively unsuccessful: In March, it was reported that the UK tax authority, HM Revenue and Customs, overestimated how much money would be raised from an amnesty. It expected at the time to raise up to £500 million over four years from tax paid on previously undeclared offshore assets as a result of the latest amnesty for which it accepted online disclosures until 12 March. An initial disclosure deadline was in January and at that time, reports said that only a small number of 20,000 people with undeclared offshore accounts had come forward. The UK government used a similar process around three years ago.
However, the Liechtenstein Disclosure Facility between the UK and the tiny Alpine principality has been relatively successful due to the fact, advisors say, that back-taxes are calculated in a relatively forgiving manner, encouraging people to come clean about their finances.
Another recent example of a successful amnesty process has been the case of Italy, which carried out a widely publicised raid on Swiss banks thought to be harbouring tax dodgers, Datamonitor said.
Explaining the more successful amnesties, Datamonitor’s Gorman listed some of the benefits of Italy’s approach: “The terms included: a very low 5 per cent tax on the assets declared, with anonymity; the ability to keep the money abroad if in the European Economic Space; and fiscal and criminal immunity.”
“Also encouraging the success of this amnesty was the threat of enforcement: tax police carried out raids on more than 75 Swiss banks in Italy and used cameras at the Swiss border to try to catch Italians bringing money into the country. These tactics, and the significant publicity they garnered, helped spur Italians to declare their offshore funds,” she said.
The UK amnesty was less effective, for related reasons, she said.
“Meanwhile, the UK's initiative, which required full disclosure of all undeclared assets, payment of outstanding taxes, interest and penalties, plus a further 10 per cent penalty, was a much less attractive deal. In addition, there was little publicity about the consequences of non-compliance. In fact, it is believed that more than 200 banks did not even warn their clients that their details could be handed to HMRC. The success of the Italian amnesty and the relative failure of the UK's serves to prove that in tax amnesties, both the carrot and the stick are necessary,” she said.
Should future amnesties be successful banks in Jersey, Guernsey and the Isle of Man are most at risk of losing business, Datamonitor said.
“As a legacy of the strength of the UK banking sector, nearly 70 per cent of the Channel Islands/Isle of Man offshore client base is domiciled in Western Europe, with over half from the UK alone. Whilst this has been a strength in the past, an increasing focus from governments to get this money back onshore means these banks are at risk of losing a significant amount of business to a successful UK tax amnesty.”
Comparatively, the Asian offshore centres are more balanced, drawing funds predominantly from across Western Europe, Asia and the rest of the world. Switzerland is also well placed, with the most diverse sources for its offshore clients; however, there is a strong reliance on Germany which could be problematic if the country launches a successful amnesty, Datamonitor said.
To view a recent article about the Liechtenstein Disclosure Facility, click here.
To view article on the Italian tax amnesty, click here.