OECD targets

It’s a long-standing principle in high net worth tax-planning: You can’t tax what you can’t find. Stashing money away in jurisdictions that offer bank secrecy is an established tradition amongst the world’s wealthiest, but advisors may want to think twice about this strategy.

The Organization for Economic Co-operation and Development is meeting this week in Berlin, and pulling back the curtain on bank secrecy.

“The last time we met, only eight months ago, it was to discuss how to respond to the lack of progress in implementing the OECD Standards of Transparency and Exchange of Information,” OECD secretary-general Angel Gurría said in a speech today. “Over these eight months, we have made more progress than in the last 10 years.”

The first domino to fall was the Liechtenstein case in 2002, in which an IT staffer at LGT Treuhand provided account information to German tax authorities regarding accounts held by German nationals.

While this earned the whistleblower an INTERPOL arrest warrant for theft in Liechtenstein, the German government welcomed the disclosure and has prosecuted some of the account holders for tax evasion.

Since then, the OECD has been pressing for an end to bank secrecy on the grounds it not only deprives government coffers of tax revenues, but also provides a financial safe haven for criminal and terrorist organizations.

Austria, Luxembourg and Switzerland have recently signed tax treaties with OECD members, bringing these jurisdictions in line with the OECD Model Tax Convention, which governs the exchange of information. As of now, 84 countries have endorsed the OECD standards and agreed to implement them.

“Taxpayers are realizing there are no longer any safe havens to hide assets and income from tax authorities,” Gurría said. “Those who in the past failed to report income and assets to their country of residence now recognize the risk of detection has increased, which has spurred greater willingness to become fully compliant.”

He urged governments to show leniency toward those who take advantage of voluntary disclosure regimes, but to deal “firmly” with those caught prior to disclosure.

In a report released in May entitled Building Transparent Tax Compliance by Banks, the OECD recommended governments not only target HNW individuals who evade taxes, but also the promoters of questionable “aggressive tax planning.”

“Offshore secrecy is declining in importance and will soon become a thing of the past,” said Michael Cadesky, managing partner, Cadesky and Associates LLP, speaking at the eleventh National Conference of the Society of Trust and Estate Practitioners (STEP) Canada, in Toronto last week. “People who set up plans on the basis that these plans won’t be discovered are, I think, deluding themselves.”

The fall of the shroud of bank secrecy will lead to increased voluntary disclosure by ultra high net worth clients. This has already begun in Canada and Cadesky says his practice has seen several UHNW clients sorting out their back-taxes.

“Canada, in my view, must fix its tax system if it is serious in engaging HNW individuals in some discussion of the system. The system must be seen as fair and workable,” he said, citing double taxation and “ridiculous complexity” as the key issues the wealthy face.

While the Swiss government was slow to sign onto the OECD protocols, at least one Swiss bank decided it was in its best global interests to play ball with U.S. tax authorities.

As a result of UBS cooperating with the U.S. government, the IRS has received “a flood” of voluntary disclosure filings, Cadesky said. The IRS has offered an amnesty, of sorts, for those who report their accounts before September 2009. Under the amnesty, penalties are reduced and account holders may avoid jail time, providing the money being reported is not the proceeds of crime.

“But there’s no way everybody is going to get all of this done, even if you don’t take summer vacation,” said Cadesky.

Further complicating matters is the credit market meltdown and the subsequent stock market decline in 2008.

“There are some people whose Swiss fortunes have been wiped out as a result of the market meltdown, and they don’t have any money anymore,” he explains. “But they have this huge back-tax penalty, so you can see people not being able to pay the tax, and going bankrupt as a result of this.”

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Suggested readings

Read: OECD Model Tax Convention Read: Building Transparent Tax Compliance by Banks Read: Engaging With High Net Worth Individuals on Tax Compliance

(06/23/09)