ARE TAX INFORMATION EXCHANGE AGREEMENTS CAUSE FOR PANIC?
Panama is the latest in a raft of offshore havens to sign tax information exchange treaties. Should you be worried? Peter Macfarlane argues no.
Panama is the latest in a raft of offshore havens to sign tax information exchange treaties. Should you be worried? Peter Macfarlane argues no.
Tax information exchange agreements (TIEAs) are usually printed in black and white, and they nominally promote transparency. However, those are about the only aspects of these treaties that are black and white, or transparent
Take the recent news, for example, that Panama has agreed to sign a tax information exchange agreement with the USA. What are we to think of that? As usual, when such agreements are signed, I get a flood of e-mails from worried clients asking “what should I do?” or “what do you think of such and such?”
Take the recent news, for example, that Panama has agreed to sign a tax information exchange agreement with the USA. What are we to think of that? As usual, when such agreements are signed, I get a flood of e-mails from worried clients asking “what should I do?” or “what do you think of such and such?”
Panamanian President Ricardo Martinelli is a smart guy, and in my opinion he knows very well what he’s doing. Don’t worry. He is not going to destroy the financial services industry, on which much of the Central American country’s economy, is based. Clients who have followed my advice do not need to take any action at present. More on that in the article alongside this one… but first, let’s look at tax treaties in general, because this question pops up frequently in relation to other jurisdictions as well.
Those of us who grew up in major economies like the US or the UK tend to think that everything is black and white. However, most of the world doesn’t think quite like that – and neither do politicians anywhere. Politics is about horse trading. You give up something here, you gain something there. Perception by third parties (like voters) is more highly prized than substance. And tax agreements are a major political hot potato right now.
I had a client the other day who was adamant that he wanted a bank account in a country that had never been blacklisted and had never signed any TIEAs. But the first rule of defense is to analyze and understand what the enemy is really doing. The reality may be different from the platitudes and assumptions that typically appear in the mainstream media.
DTAs and TIEAs explained
What are tax treaties exactly? Exchange of tax information between the authorities of different jurisdictions states can be done bilaterally or multilaterally (like the European Union Savings Tax Directive, that is explained in my Practical Offshore Banking Guide available in the Q Wealth Members’ Area.)
When done bilaterally, two main types of agreements are used.
The first is Double Taxation Agreements (DTAs, also known as income tax treaties). These are your traditional double-tax treaties that are typically designed to avoid individuals or companies having to pay tax twice – in two different countries – on the same income. If a UK resident owns shares in a US company, the relevant DTA lays down the rules on how much tax the shareholder has to pay and where. They are not focused specifically on exchange of information.
The second type of treaty is the Tax Information Exchange Agreement (TIEA). TIEAs are intended for use with countries where a DTA is not considered appropriate, almost always because one of them is a low tax or bank secrecy jurisdiction that has no real interest in signing a traditional DTA. After all, what use is an agreement to reduce and divide taxes if there are no taxes in the first place.
While TIEAs are more specific in scope than DTAs, they are more detailed than DTAs on the subject of information exchange. They usually run to about 20-30 pages, outlining the rules and procedures for how such information exchange is to occur. Most TIEAs are based on an OECD Model Agreement which was published in 2002.
The recent frenzy to sign TIEAs was triggered by pressure from the OECD, spearheaded by Obama and by President Sarkozy of France. Countries that were blacklisted were required to sign TIEAs according to the OECD model, in order to be removed from the blacklist. They were told to sign at least a dozen such treaties within a year if they wanted to be ‘unblacklisted.’ Tax havens rushed to sign, and all but the most inefficient of them managed to get the requisite number of TIEAs under their belts very quickly.
They did this in the most pragmatic way possible. For example, the Isle of Man, Jersey, Guernsey have each concluded TIEAs with Greenland and the Faroe Islands (both Crown Dependencies of Denmark). These territories have a combined population of little over 100,000 people. While it is theoretically possible that Greenland and the Faroe Islands might need to investigate their residents’ use of tax avoidance structures in Guernsey, laments Markus Meinzer, of Tax Justice network, “it is far more likely that these treaties will hardly be used, and are merely concluded to bulk up the number of TIEAs signed.”
You’ll therefore find that the Principality of Andorra, which doesn’t even have an income or corporate tax, now has the right seek information from Liechtenstein banks on tax evasion by its citizens. But an Andorran banker told me just the other day that they have absolutely no intention of signing any such tax agreements with the USA.
No Automatic Information Exchange
Another important point to understand about TIEAs signed according to the OECD model is that they only require information exchange 'upon request'. This provision is designed to prevent `fishing expeditions’.
In other words, a bureaucrat cannot simply send an e-mail to his counterpart saying ‘tell me what you know about Mr X.’ In tax havens, there is no central register of bank accounts nor beneficial owners. So the receiving bureaucrat would not have access to that information even if he wanted to co-operate, which one would hope he wouldn’t anyway.
So, the tax authority carrying out the investigation would need at the very least to know the name of the bank or corporate services provider where the relationship is held. If the account is held by a legal entity, they would also need to know the name of that.
Mr Meinzer, who would apparently like to see governments have access full information on what their citizens are doing worldwide, in the belief that this would somehow eradicate poverty and social ills on a global scale (“Big Brother knows best?”) , continues that, “The legal technicalities provide ample opportunities to hinder and block requests for information. Well-resourced law and accountancy firms proliferate in secrecy jurisdictions, ready to take full advantage of every legal technicality. They can also use their good connections with the local officials, since there is little incentive for secrecy jurisdictions to stick properly to their obligations under TIEAs. The evidence so far is that TIEAs have produced little more than a trickle of information. For instance, the TIEA between the US and Jersey – two of the biggest players in the offshore system - was used only four times in 2008.”
Lee A. Sheppard, a tax expert writing in the specialist tax publication Tax Notes (23 March 2009) writes : “The standard OECD information exchange agreement is nearly worthless. Information exchange under the standard agreement is sporadic, difficult, and unwieldy for tax administrators even under the best of circumstances.”
So there is certainly no automatic exchange of information – and even if there is a ‘manual’ exchange, it may well be that the tax haven government has no information to hand over under the treaty. And it all comes down to you keeping your offshore relationships secret. Nobody should even know which country to start looking in, let alone which bank under which name. That way, your secret remains safe. But that does mean no telecommunications with your bank unless they are secured, and absolutely no transfers, cheques or credit cards for example that could possibly be linked to you.
Countries without TIEAs
So, let’s get back to things being black and white – or not, as the case may be. The client who wanted a bank in a country that had never been blacklisted and had never signed the TIEA was acting logically, right? Logically – yes. But he didn’t understand that things are simply not black and white.
First and foremost, governments don’t need a TIEA to get information. In fact, as I’ve just said, using a TIEA is an unwieldy, dysfunctional way of getting the information required, that is more about politicians and bureaucrats showing the world they’ve achieved something than about any serious exchange of information.
It’s usually a lot easier, cheaper and quicker for governments to get the information they want through less formal channels. In developed countries, this probably means faxing over a simple request on headed paper to the local office of a company that holds a lot of data, requesting that they hand over information held by their overseas associates. Experian, for example, have operations all over the world keeping track of people’s bank accounts and credit. Visa, Mastercard and American Express have access to rather a lot of juicy financial data too. As do Facebook, Linkedin, Paypal, eBay, Amazon, Microsoft, Google… Then, the US has access to the SWIFT system that keeps track of pretty much all international wire transfers. There are correspondent banks through which transactions for offshore banks pass. And the list goes on.
In less developed countries, it’s even easier. Threats work better, and there’s no risk of being sued for leaking information, even if it’s technically illegal. I’m sorry, but countries that depend on major partners for trade or aid flows or favours are not going to risk upsetting their benefactors by refusing to leak some information on little, insignificant you!
So while you and your traditional tax advisers are reading up on and worrying about TIEAs, the government will just get copies of all your G-mails from Google and work from there…
There’s another problem, too, with countries that haven’t signed TIEAs. They may just not be places you want to put your money. The Turkish Republic of Northern Cyprus is not blacklisted by the OECD and it has not signed any TIEAs. It is not even recognized as a country by the OECD – all the better you might say. Yet I was just yesterday helping out a client who has funds there. It seemed like a good idea at the time, because the bank asked few questions. Then the bank just decided to keep the money.
So What is the Solution?
We talk a lot in other Q wealth articles about privacy solutions. For example there are easily-implemented technical solutions to hide your trail on the internet. Cryptohippie is one of them. If you must use social networking sites, at least don’t put your real name on them. There’s no legitimate reason to send anything confidential via Gmail. Or is there?
First of all, we don’t support tax evasion. It is completely OK morally not to pay taxes, as far as this author is concerned. The more money we give to governments, the more damage they can do. But – and this is very important - you should not break the law because that would be a stupid thing to do.
Everyone is free to opt out of a tax system legally by changing their residency, or – in the exclusive case of Americans – changing their citizenship as well. At Q Wealth we give you plenty of practical tools to do this. There are plenty of exciting places in the world where you could live and do business completely tax free, completely legally, without upsetting anybody. If you want to live in a country like the USA or the UK, you should follow the applicable laws and pay your taxes.
Secondly, we do support privacy. We don’t buy the argument that banking secrecy is all about tax evasion. We think the less government interferes in the lives of ordinary citizens, the better off we will all be – from the richest in society right down to the poorest. We think that private business should stay private. We see people opening offshore accounts every day, and tax is a minor concern for most of them. What they are worried about is the government being out of control. They want to protect their hard earned assets, and they want to look for more opportunities. If you want to protect something, a good way to do so is to hide it so no-one knows where it is. That stands to reason. And for that reason we will fully support our clients in trying to hide their assets. Bank secrecy is an important part of this.
We believe that financial privacy is alive and well. Here’s how to get it:
* Internationalize your assets. Spread them across different jurisdictions.
* Always use a corporate structure. Never hold assets in your personal name. A corporate shield provides low-cost protection. Your name should appear in as few places as possible.
* Don’t tell anyone your hiding places. Never mind all the threats to your privacy today… if you have assets under a corporate name, established exclusively for this very purpose, in a private bank in a jurisdiction that respects privacy (not just legally but culturally) and you don’t tell anyone about it, you are still very secure.
You’ll find lots of information available throughout the Q Wealth Members Area to assist you in setting up watertight bank secrecy for yourself. If you prefer to have an expert guide you, come along to one of our events, or get in touch with Peter Macfarlane & Associates via http://www.petermacfarlane.info/2010/10/23/events/
Tags: offshore, macfarlane, peter, information, exchange, treaties, sign, havens, argues, worried, panicpanama, agreement, signsThose of us who grew up in major economies like the US or the UK tend to think that everything is black and white. However, most of the world doesn’t think quite like that – and neither do politicians anywhere. Politics is about horse trading. You give up something here, you gain something there. Perception by third parties (like voters) is more highly prized than substance. And tax agreements are a major political hot potato right now.
I had a client the other day who was adamant that he wanted a bank account in a country that had never been blacklisted and had never signed any TIEAs. But the first rule of defense is to analyze and understand what the enemy is really doing. The reality may be different from the platitudes and assumptions that typically appear in the mainstream media.
DTAs and TIEAs explained
What are tax treaties exactly? Exchange of tax information between the authorities of different jurisdictions states can be done bilaterally or multilaterally (like the European Union Savings Tax Directive, that is explained in my Practical Offshore Banking Guide available in the Q Wealth Members’ Area.)
When done bilaterally, two main types of agreements are used.
The first is Double Taxation Agreements (DTAs, also known as income tax treaties). These are your traditional double-tax treaties that are typically designed to avoid individuals or companies having to pay tax twice – in two different countries – on the same income. If a UK resident owns shares in a US company, the relevant DTA lays down the rules on how much tax the shareholder has to pay and where. They are not focused specifically on exchange of information.
The second type of treaty is the Tax Information Exchange Agreement (TIEA). TIEAs are intended for use with countries where a DTA is not considered appropriate, almost always because one of them is a low tax or bank secrecy jurisdiction that has no real interest in signing a traditional DTA. After all, what use is an agreement to reduce and divide taxes if there are no taxes in the first place.
While TIEAs are more specific in scope than DTAs, they are more detailed than DTAs on the subject of information exchange. They usually run to about 20-30 pages, outlining the rules and procedures for how such information exchange is to occur. Most TIEAs are based on an OECD Model Agreement which was published in 2002.
The recent frenzy to sign TIEAs was triggered by pressure from the OECD, spearheaded by Obama and by President Sarkozy of France. Countries that were blacklisted were required to sign TIEAs according to the OECD model, in order to be removed from the blacklist. They were told to sign at least a dozen such treaties within a year if they wanted to be ‘unblacklisted.’ Tax havens rushed to sign, and all but the most inefficient of them managed to get the requisite number of TIEAs under their belts very quickly.
They did this in the most pragmatic way possible. For example, the Isle of Man, Jersey, Guernsey have each concluded TIEAs with Greenland and the Faroe Islands (both Crown Dependencies of Denmark). These territories have a combined population of little over 100,000 people. While it is theoretically possible that Greenland and the Faroe Islands might need to investigate their residents’ use of tax avoidance structures in Guernsey, laments Markus Meinzer, of Tax Justice network, “it is far more likely that these treaties will hardly be used, and are merely concluded to bulk up the number of TIEAs signed.”
You’ll therefore find that the Principality of Andorra, which doesn’t even have an income or corporate tax, now has the right seek information from Liechtenstein banks on tax evasion by its citizens. But an Andorran banker told me just the other day that they have absolutely no intention of signing any such tax agreements with the USA.
No Automatic Information Exchange
Another important point to understand about TIEAs signed according to the OECD model is that they only require information exchange 'upon request'. This provision is designed to prevent `fishing expeditions’.
In other words, a bureaucrat cannot simply send an e-mail to his counterpart saying ‘tell me what you know about Mr X.’ In tax havens, there is no central register of bank accounts nor beneficial owners. So the receiving bureaucrat would not have access to that information even if he wanted to co-operate, which one would hope he wouldn’t anyway.
So, the tax authority carrying out the investigation would need at the very least to know the name of the bank or corporate services provider where the relationship is held. If the account is held by a legal entity, they would also need to know the name of that.
Mr Meinzer, who would apparently like to see governments have access full information on what their citizens are doing worldwide, in the belief that this would somehow eradicate poverty and social ills on a global scale (“Big Brother knows best?”) , continues that, “The legal technicalities provide ample opportunities to hinder and block requests for information. Well-resourced law and accountancy firms proliferate in secrecy jurisdictions, ready to take full advantage of every legal technicality. They can also use their good connections with the local officials, since there is little incentive for secrecy jurisdictions to stick properly to their obligations under TIEAs. The evidence so far is that TIEAs have produced little more than a trickle of information. For instance, the TIEA between the US and Jersey – two of the biggest players in the offshore system - was used only four times in 2008.”
Lee A. Sheppard, a tax expert writing in the specialist tax publication Tax Notes (23 March 2009) writes : “The standard OECD information exchange agreement is nearly worthless. Information exchange under the standard agreement is sporadic, difficult, and unwieldy for tax administrators even under the best of circumstances.”
So there is certainly no automatic exchange of information – and even if there is a ‘manual’ exchange, it may well be that the tax haven government has no information to hand over under the treaty. And it all comes down to you keeping your offshore relationships secret. Nobody should even know which country to start looking in, let alone which bank under which name. That way, your secret remains safe. But that does mean no telecommunications with your bank unless they are secured, and absolutely no transfers, cheques or credit cards for example that could possibly be linked to you.
Countries without TIEAs
So, let’s get back to things being black and white – or not, as the case may be. The client who wanted a bank in a country that had never been blacklisted and had never signed the TIEA was acting logically, right? Logically – yes. But he didn’t understand that things are simply not black and white.
First and foremost, governments don’t need a TIEA to get information. In fact, as I’ve just said, using a TIEA is an unwieldy, dysfunctional way of getting the information required, that is more about politicians and bureaucrats showing the world they’ve achieved something than about any serious exchange of information.
It’s usually a lot easier, cheaper and quicker for governments to get the information they want through less formal channels. In developed countries, this probably means faxing over a simple request on headed paper to the local office of a company that holds a lot of data, requesting that they hand over information held by their overseas associates. Experian, for example, have operations all over the world keeping track of people’s bank accounts and credit. Visa, Mastercard and American Express have access to rather a lot of juicy financial data too. As do Facebook, Linkedin, Paypal, eBay, Amazon, Microsoft, Google… Then, the US has access to the SWIFT system that keeps track of pretty much all international wire transfers. There are correspondent banks through which transactions for offshore banks pass. And the list goes on.
In less developed countries, it’s even easier. Threats work better, and there’s no risk of being sued for leaking information, even if it’s technically illegal. I’m sorry, but countries that depend on major partners for trade or aid flows or favours are not going to risk upsetting their benefactors by refusing to leak some information on little, insignificant you!
So while you and your traditional tax advisers are reading up on and worrying about TIEAs, the government will just get copies of all your G-mails from Google and work from there…
There’s another problem, too, with countries that haven’t signed TIEAs. They may just not be places you want to put your money. The Turkish Republic of Northern Cyprus is not blacklisted by the OECD and it has not signed any TIEAs. It is not even recognized as a country by the OECD – all the better you might say. Yet I was just yesterday helping out a client who has funds there. It seemed like a good idea at the time, because the bank asked few questions. Then the bank just decided to keep the money.
So What is the Solution?
We talk a lot in other Q wealth articles about privacy solutions. For example there are easily-implemented technical solutions to hide your trail on the internet. Cryptohippie is one of them. If you must use social networking sites, at least don’t put your real name on them. There’s no legitimate reason to send anything confidential via Gmail. Or is there?
First of all, we don’t support tax evasion. It is completely OK morally not to pay taxes, as far as this author is concerned. The more money we give to governments, the more damage they can do. But – and this is very important - you should not break the law because that would be a stupid thing to do.
Everyone is free to opt out of a tax system legally by changing their residency, or – in the exclusive case of Americans – changing their citizenship as well. At Q Wealth we give you plenty of practical tools to do this. There are plenty of exciting places in the world where you could live and do business completely tax free, completely legally, without upsetting anybody. If you want to live in a country like the USA or the UK, you should follow the applicable laws and pay your taxes.
Secondly, we do support privacy. We don’t buy the argument that banking secrecy is all about tax evasion. We think the less government interferes in the lives of ordinary citizens, the better off we will all be – from the richest in society right down to the poorest. We think that private business should stay private. We see people opening offshore accounts every day, and tax is a minor concern for most of them. What they are worried about is the government being out of control. They want to protect their hard earned assets, and they want to look for more opportunities. If you want to protect something, a good way to do so is to hide it so no-one knows where it is. That stands to reason. And for that reason we will fully support our clients in trying to hide their assets. Bank secrecy is an important part of this.
We believe that financial privacy is alive and well. Here’s how to get it:
* Internationalize your assets. Spread them across different jurisdictions.
* Always use a corporate structure. Never hold assets in your personal name. A corporate shield provides low-cost protection. Your name should appear in as few places as possible.
* Don’t tell anyone your hiding places. Never mind all the threats to your privacy today… if you have assets under a corporate name, established exclusively for this very purpose, in a private bank in a jurisdiction that respects privacy (not just legally but culturally) and you don’t tell anyone about it, you are still very secure.
You’ll find lots of information available throughout the Q Wealth Members Area to assist you in setting up watertight bank secrecy for yourself. If you prefer to have an expert guide you, come along to one of our events, or get in touch with Peter Macfarlane & Associates via http://www.petermacfarlane.info/2010/10/23/events/
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