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Tax Avoidance – An Offshore Trustee’s View

Michael Giraud

Investec Trust (Jersey)

22 October 2012

Michael Giraud, head of new business development at Investec Trust (Jersey), discusses international developments affecting the offshore trust sector.

Going by recent headlines in the international press, and the strong anti-tax avoidance rhetoric emanating from governments, offshore service providers are rightly feeling pilloried from all sides.

The fallout from the financial crisis continues to have repercussions around the globe at every level, from the man on the street with less disposable income in his pocket all the way up to the governments that are struggling to balance their budgets. They are pursuing all forms of revenue generation to help them service their existing debt mountains, repay their creditors and support flagging economies.

This search for revenue quite properly includes aggressively pursuing individuals who wrongfully chose to evade taxes in their home jurisdictions and the individuals and institutions which facilitated the evasion. Practitioners in jurisdictions which advocated tax-compliant structures welcome the new level playing field and agree that encouraging and facilitating tax evasion does not have a place within the modern wealth management industry. What many question is why the war on tax evasion has taken so long to happen and how it has moved to such an extreme so quickly, where even legal tax-compliant planning is being attacked in the press and by governments. It is certainly a case of the goal posts being shifted when legal planning is derided and considered as being “morally wrong”. One anticipates that this change in attitude is on account of the perilous financial position that many economies now find themselves in.

A number of jurisdictions have already implemented general anti-avoidance legislation to ensure that a structure is not using aggressive, convoluted and artificial means to avoid paying taxes. Even the UK, a jurisdiction which has historically been accepting of an individual’s right to arrange their affairs in a tax-efficient manner, is seeking to implement a General Anti-Abuse Rule (GAAR). The GAAR will target abusive tax avoidance arrangements seeking to aggressively reduce potential tax liabilities and will be in addition to the Disclosure of Tax Avoidance Schemes (DOTAS) regime which is already effective in the UK. The DOTAS allows HMRC to review and, if necessary, amend legislation to counter any planning which is deemed too aggressive. Many tax advisors are already debating which planning will fall foul of the new legislation.

An individual’s right to arrange their affairs in a tax-efficient manner is evident throughout society. This is apparent from the UK resident setting up a tax-free ISA, or gifting assets away prior to death, through to the UK resident non-domiciled individual who settles a trust before becoming deemed domiciled in the UK for inheritance tax purposes. The aim of each person will be to reduce their tax liabilities through what is accepted as non-aggressive estate planning. Despite the unaggressive and perfectly legal nature of the planning, it is the individual settling the trust who would be derided by the press, the government and the general public. Any criticism will ultimately be directed towards the greater value saving being made by the individual settling the trust, which is of course conversely a greater loss to the public purse.

Taking market sentiment into account

So what is next for the offshore trust industry? It is absolutely necessary for service providers to take account of the changing market sentiment when offering their services. The existence of the GAAR, DOTAS and similar legislation around the world highlights the need for professional trustees to acknowledge that simply having tax advice on file is no longer sufficient (especially if the advice could be considered aggressive). It is equally important for tax advice to be updated as a structure evolves and for all those party to the structure to adhere to the governing documentation and respect their defined place in the decision-making process and in relation to the structure’s governance and administration (this is by no means a new position and there is a vast amount of case law to suggest that this should already be best practice to avoid prejudicing the integrity of the structure).

It will become increasingly important for trustees to understand what is acceptable planning and to review their existing structures to ensure that they do not fall foul of what is considered aggressive planning (although exactly what is considered aggressive is understandably open to debate). Trustees in regulated jurisdictions will start to feel increased pressure from their financial services regulators as they attempt to protect and police the industry, seeking to ensure that planning is compliant and unaggressive. The need for global compliance has again been highlighted in the press where a single non-compliant office can have reputational and financial implications for other group members. This is even more likely to happen with the emerging trend of disgruntled or opportunistic employees stealing data to sell on to governments eager to identify and bring to book domestic tax evaders with undeclared assets or structures abroad.

Looking to new markets

Due to market saturation and the increasingly punitive legislation in traditional markets, trustees are shifting their focus towards the developing markets as a means to organically grow their business. With the shift towards greater international tax cooperation, it is important that individuals and institutions do not replicate the mistakes of the past in the new markets. It is only a matter of time before these jurisdictions either implement similar anti-avoidance legislation or an insurmountable amount of pressure is placed on the financial services providers operating in those jurisdictions and on the local governments to disclose non-compliant structures and individuals.

The future of the offshore trust industry is ineluctably predicated on compliance and transparency. This is evidenced by the number of jurisdictions working hard to repair their damaged reputations and attempting to reposition themselves as being compliant, cooperative and transparent (when only a few years ago their business model would have been one of resolute secrecy). There will of course be a process of catching up, as these jurisdictions are now lagging behind those that have long advocated the importance of transparency and compliance; however their efforts should be commended and are certainly long overdue.

In recent years one of the influencing factors for establishing a trust has been tax mitigation or tax deferral. This has, to an extent, resulted in people taking for granted all the other benefits a trust structure can provide. As tax mitigation opportunities recede, perhaps it is a time for families and their advisors to refocus on why a trust should be established in the first instance and properly consider all the benefits a trust has to offer. These may include controlled succession planning, management of complex estates and asset classes, consolidation of assets, protection from geopolitical or economic risk, protection from future creditors, the removal of the assets from the probate process, the protection of wealth from spendthrifts and family disputes, etc.

Despite the changing nature of tax legislation and public perception, it would be foolish not to arrange one’s affairs in a tax-efficient manner. There will continue to be a place for tax-efficient estate planning and offshore trust structures will continue to form an integral part of the estate plans. What is however less certain is the type of planning that will be considered acceptable in the future and to what degree will legal and compliant planning be considered morally wrong?