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Global warning

From the lead-up to and aftermath of the recent G20 meetings, it is clear the developed world is seeking to ensure as many International Financial Centres as possible sign up to a broad range of commitments, largely embodied in the OECD standards on transparency and the exchange and provision of tax information.

As a result, the OECD global forum has made public much-referred to “lists” that categorise jurisdictions by reference to the extent to which they have implemented the internationally agreed standards on the exchange of information.

The initial lists were:

  • White – jurisdictions that have substantially implemented the internationally agreed standards.

  • Grey – jurisdictions that have committed to the standards but have not yet substantially implemented them.

  • Black – jurisdictions that have not committed to implement the standards.

    The pressure of being on the black list meant the four countries originally on there rapidly and publicly committed to implement the OECD standards so as to move on to the less publicly damaging “grey list”.

    It was rumoured that those countries on the black list would be subjected to financial sanctions imposed by G20 “white list” countries. The grey list now comprises some 42 countries and they will continue to be pressured to implement the disclosure/exchange standards in order to move on to the white list as IFCs that fully co-operate in international tax investigations.

    In the US the clearly named “stop tax haven abuse” bill has been introduced, giving the Internal Revenue Service significantly increased powers to attack offshore non-compliance. An alternative bill with the same overall objectives has also apparently been introduced.

    Liechtenstein has introduced a tax information exchange agreement with the US and has committed to OECD standards on transparency and information exchange.

    How does this concerted global effort affect the UK stance on offshore centres and products? Given the strong publicity to the need to stem “offshore abuse” and increase transparency from – and information exchange between – as many countries as possible, including IFCs, should we expect to see increased activity to reduce the tax attraction of “acceptable” offshore products, such as offshore funds and offshore insurance products?

    Well, you never know. The Government’s need to reduce public sector debt will be around for some time. If we look for legislative activity in connection with core offshore products we can, for example, see that this year’s Budget has introduced changes to the taxation of offshore distributing funds, bringing them closer in line with UK funds.

    Hardly evidence of a hard line being taken. Currently, there is no firm indication that the legitimate tax deferment offered by offshore roll-up funds and offshore bonds is currently on the Government radar of attack.

    However, it is worth keeping in mind that while offshore bonds currently enable individual investors access to cash investments while avoiding the disclosure or withholding provisions of the EU savings directive, moves are afoot to stop this.

    There is also the relatively simple avoidance of the need to pay the remittance basis charge to the extent that a non-domiciliary’s investments are held inside an offshore bond. It is when a product has the capacity for simple avoidance of an important strategic provision (such as the disclosure/withholding tax provisions of the EU Savings Directive or any of the new global disclosure/tax information exchange provisions that are being implemented) that concerns over the potential for legislation would be justified.

    As things stand, though, keeping in mind the likely implementation of provisions to bring offshore bonds with interest-bearing investments into line with the EU Savings Directive, offshore bonds continue to offer the same tax-deferment qualities they always have.

    Of course, whether they are the most tax-efficient product wrapper in any particular case will depend on many factors including, to name a few:

  • the constituents of the underlying portfolio (particularly the extent to which the portfolio produces capital gains or income);

  • the investor’s tax rate and exemptions (both now and in the future); and

  • the investment term.

    The recently proposed 50 per cent additional tax rate and the removal of higher-rate tax relief on pension contributions for high-earners may cause even more attention to be focused on the choice of investment wrapper – and the bigger the amount to be invested, the more important it will be to seek advice.

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