A taxing issue

Attention has fallen on offshore tax havens in recent months, with calls for greater transparency in order to restore public trust

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The Panama Papers, as the 11.5 million documents leaked from the world’s fourth largest offshore law firm Mossack Fonseca have been dubbed, have resulted in the resignation of the Icelandic prime minister and Spain’s minister of industry; sparked criticism of politicians from countries as varied as Malta and Pakistan; and, of course, enveloped then UK Prime Minister David Cameron in a media frenzy over the revelation that his father ran a fund registered in the Bahamas.

But the long-term impact of the leak could go far beyond a few political upheavals. It may end up changing the complexion of offshore investment forever. For what was truly startling about the Panama Papers was not just that a few politicians were using tax havens to conceal wealth; it was how widely and deeply these tax havens have permeated all corners of the world and are used by people from all walks of life. 
Changing attitudesGeorge Bull, Senior Tax Partner at RSM, thinks that leaks like this have caused a shift in attitude. He said: “For my entire career, there has been a perception that, somehow, offshore does equate with something to hide but, for a long time, the public view was that it was a victimless crime. [The driver of the current concern] is the growth of what is seen as excessive inequality of wealth, and the fact that most of the northern hemisphere countries of the G20 suffered from the financial crisis. While governments have assured the public we are all in it together, the evidence of overseas tax avoidance says to large swathes of the electorate that we are not in it together.”

Fiona Fernie, Head of Tax Investigations at Pinsent Masons, added: “A number of people with a high profile in public life are more worried about having even legitimate vehicles which could be subject to attack. [They] are beginning to think that, even if their offshore operations are entirely legitimate, for their own reputations they cannot afford to have them.”
“For a long time, the public view was that it was a victimless crime” In fact, the professionals all agree that there are legitimate reasons for offshore investing – and that many of us may be doing it without realising it; whether through having a foreign bank account or a product like an exchange-traded fund or an Undertakings for Collective Investment in Transferable Securities (UCITs) vehicle, many of which are based in Dublin or Luxembourg. According to the Association of Investment Companies, 117 investment companies, around a third of the total, are domiciled overseas. 
Closing inHowever, the further tax havens stray into exotic territories, the more questions are raised about their legitimacy. Ian Shipway CFP™ Chartered FCSI, Managing Director of HC Wealth Management, said: “Tax havens more off the beaten track, like the British Virgin Islands, the Cayman Islands or Panama become less and less visible. There can be totally legitimate reasons for investing through the Cayman Islands, not involving any tax avoidance – for example, investment vehicles can be based there because of the freedom it gives the investment manager to invest in a range of vehicles that may be restricted by regulators in the UK. That is not avoiding and it is certainly not evading tax.”

Bull accepts that, for many, the main reason for choosing these offshore havens will be tax – but he believes that the tax authorities are catching up. “Over the last few years, HM Revenue & Customs (HMRC) has changed the tax code to a remarkable degree and has brought in substantial amounts of extra tax as a result.”
Need for reformThe growing furore over the extent of tax haven investment means there is growing pressure for reforms to make it more difficult to conceal assets and income overseas. The key concern for most is transparency. How much should investors be made to reveal? Shipway said: “On the one hand, I am tempted to say that, from the privacy point of view, individuals should be free to deal with offshore centres as they wish. There is a requirement on UK individuals to declare all their worldwide income, although a smattering of individuals are unaware of that requirement.”

He points out that, for many foreign residents, the UK is considered a tax haven. “For example, you do not pay capital gains tax if you are not a UK resident, although that is starting to change with property. If you are, for example, a non-resident investor in the UK, the UK taxman will not come after your income or assets.”

Bull thinks that the public disquiet could, in itself, help to clamp down on offshore activity. “There is also pressure on firms [to look more closely at what their clients are doing]. Reputable firms already have sophisticated ‘know your client’ and anti-money laundering procedures in place because that is the law and that is what you do. 

Shipway thinks one solution to increasing transparency may be a centralised authority, with wide powers of investigation. He said: “The debate has started and it might get to the stage where some authority somewhere would be allowed to get information and inspect affairs.”

The original version of this article was published in the July 2016 print edition of The Review. To opt in to receive future printed editions, log in to MyCISI, select 'Communications' under 'My Account', and tick 'Yes' to receive The Review hard copy.
 
Published: 29 Jul 2016
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