Gradually the era of bank secrecy and tax evasion is coming to an end.
Tax avoidance is doing everything possible within the law to reduce your tax bill legally. Without changing country of residence or giving up one’s citizenship, personal taxation may also legally be avoided by creating, separate legal entities to which one’s property is donated. These separate legal entities are often, companies, trust or foundations.
Assets are transferred to the new company or foundation so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner.
The company/foundation may also be able to avoid or lower corporate taxation, by using offshore financial centers, provided they are properly structured. Care must be exercised when selecting legal entities and offshore financial centers, also known as offshore structuring, because most countries have enacted anti-avoidance legislation designed to reduce or eliminate the effectiveness of offshore structures. Tax avoidance is sometimes also referred to as the art of lowering ones tax bill as much as possible, without breaking the law.
On the contrary, tax evasion is the general term for efforts by individuals, companies, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).
For those practicing the illegal act of tax evasion, confidentiality is of paramount importance!
Traditionally Offshore Financial Centers (OFCs) have been characterized by low or no taxes, less onerous compliance requirements, and secrecy.
However initiatives led by the Organization of Economic Cooperation and Development (OECD) against so-called “harmful” tax competition and by the Financial Action Task Force (FATF) against money laundering , have forced most OFCs to increase transparency and regulation, and to permit the exchange of information for both criminal and fiscal matters. This means that, under certain prescribed circumstances, the beneficial ownership of an offshore structure can and must be revealed on request by an inquiring tax authority.
The latest press release of the Global Forum on Transparency and Exchange of information which contains information about the various peer review reports, indicate that the majority of the countries reviewed, have changed or are in the process of changing their domestic legislation, following the recommendation received from the Global Forum. The Global Forum membership consists now of 101 countries band another 20 is expected to join by this year-end.
Also recent news reports indicate that USA and Switzerland (the bastion of bank secrecy) are in advanced talks on a general disclosure agreement, whereby Swiss Banks will pay fines and hand over historical client’s data to the USA Authorities in exchange for which the US Authorities would agree to drop legal charges.
None of this means that offshore structures are any less useful, but it is absolutely critical to arrange the ownership and management of an offshore structure correctly if they are to be effective.
By using a blend of offshore companies, life insurance contacts, offshore trusts and private foundations, one is able to create offshore structures that legitimately and legally defer and lower the tax bill in the tax payer’s home country.
As the American judge Learned Hand, once stated; “No one owes any public duty to pay more tax than what the law demands”.
