Monday, September 5, 2011

Taxes: UK - Swiss tax agreement, what it means for UK Citizen and Europe (includes advice for UK non-doms)

Continuing news coming from the Euro zone keep us alert that the shocks that we have forecasted coming over the next few months are going to be on time.

As countries, especially European one are coming to terms with their mounting debts, the same are focusing more and more resources into uncovering and taxing financial resources that their citizen have traditionally kept in “safe” places such as Switzerland, Lichtenstein and Luxemburg.

It is therefore not surprising the latest news with regards to the UK/Swiss tax deal that was initialed on August 24, 2011. Please note that this deal follows a similar deal again between Switzerland and Germany initialed on August 10.

The concept is simple: both deals impose a withholding tax; the UK deal includes a withholding tax just below its top marginal tax rates of income, dividends and capital gains. The German deal includes a withholding tax rate of 26.375%, corresponding to its flat tax rate for income and capital. Both of these agreements include a one-off taxation between 19% and 35% depending on the value of the account at a specific point in time.
In essence: the Swiss authorities have agreed to tax the “illicit” funds held by UK and German citizen and share the proceeds while not divulgating the identity of account holders. In other words Swiss authorities will collect the taxes and remit them to the UK and German authorities. Please note that under the UK agreement there is a “one off” fee for UK citizen that want to retain their privacy.

Further note that according to these agreements the UK revenue service can request the details of up to 500 accounts per year versus the German agreement allows for up to 999 account requests per year.

For whoever is not familiar with this matter please note that the European’s Union Savings Directive (EUSD) in place since 2005 already includes provisions for a withholding tax. The latest unilateral moves by the UK and the German government with Switzerland are obviously moving away from the perspective of a concerted European Union effort, putting into question whether a EUSD is going to see revisions added very soon or whether given the current economic climate each country is going to move forward by itself in regulating its tax relationships with Switzerland. A recent comment by senior of officials of the HM Revenue & Customs (HMRC) to Accountancy Age

With regards to the UK: this latest agreement takes precedence over the EUSD. What does it mean for the investors? Well, savings will be taxed at 48%, but the agreement covers more than liquid assets and it includes: shares, commodities, interest, dividends or capital gains (27%) that are generated in Switzerland.

The commitment on sharing records by the number per year is also an important signal to keep in mind. Further, I am unclear on how the accounting system is going to be managed between the Swiss authorities that collect the information but don’t share them and the HMRC or German authorities that receive them.

The US approach
The US government has stepped up the pressure "on" the Swiss authorities but followed a separate path which is consistent with its quest for full disclosure.
The US made it clear that it has no interest in a deal including a withholding tax with Switzerland, it wants full disclosure of US citizen’s accounts instead.
The US Foreign Account Tax Compliance Act (FATCA) requires all banks to disclose information about accounts held by US citizen of businesses. Such Compliance Act is going to be unilaterally imposed on July 1, 2013. Foreign banks that don’t comply with the Act will face sanctions, including large financial liabilities that will affect their operations in the US (see USD denominated transactions). This follows the famous UBS inquiry by US government authorities, the investigation has been ongoing since 2007 and that forced UBS to disclose more than 4,500 customer names and received a settlement of $780M USD.

The US government puts pressure on foreign banks and its citizen alike. Recently a Federal appeal last week ruled out that the Fifth Amendment doesn’t apply to non-disclosure of offshore accounts. Please note that the Fifth Amendment gives US citizen the right to remain silent on issues that incriminate themselves.

Although there are serious doubts over the legality of FATCA, given its extraterritorial nature, it is clear that the USA have the necessary “might” to force the situation since banks, Swiss or not, have the necessity to operate in the US. Small boutique banks will have more latitude in their operation if they succeed in carving out niche markets for themselves.

Options for the UK non residents/domiciled or better called “Non Doms”
Many of the non-doms in the UK are American and their status is perhaps the most intriguing. Unlike UK domiciled individuals, non-doms are not necessarily taxed on their whole worldwide income. Therefore, if they wish to maintain the secrecy of the account, the one-off charge might not be appropriate, as it would be taxing income that is not subject to UK tax.

Because of this, the agreement makes specific provisions for them. They have the option to fully disclose or retain their privacy and pay the one-off fee, the same as all taxpayers. However, non-doms have two more options. First, they can self-assess their UK taxable funds in the account as of 31 December 2010 on which they will be charged 34%. The benefit of this is that they will not have 19% to 34% of their whole funds taken out. Second, they can also opt out of this part of the agreement. This is, of course, not without controversy. The Telegraph quotes one expert who says: "It's no secret that Switzerland houses non-doms' cash and this immunity looks very unfair for everyone else."

HMRC has been keen to stress that non-doms who opt out of the agreement or self-assess and are later found to have had undeclared UK taxable funds will be treated with severe penalties, including criminal prosecution.

There is no opting out on the withholding tax. Non-doms on the remittance basis will face a withholding tax on their UK-sourced income and remitted income. Of course, they would have to remove their privacy so that the taxman knows they are on the remittance basis. However, unlike UK-domiciled individuals, when non-doms remove their privacy, they will only be charged the withholding tax rates and not the UK top rate of tax – for example, 48% on income as opposed to 50%.

Having said all this, non-doms are in a better position than UK-domiciled individuals as they have more choice available. But, contrary to some reports, this does not represent a complete immunity. Perhaps to hammer this point home, we can expect to see HMRC focusing on non-doms who have self-assessed or opted out. More than anything, a prosecution along these lines would be a public relations coup and would dampen down the understandable criticisms of non-doms getting an easy ride.

Advice to applicable UK taxpayers
Although there is choice available to non-doms, the overwhelming advice from tax professionals to all taxpayers is to fully disclose through Liechtenstein. The Liechtenstein Disclosure Facility (LDF) allows taxpayers to become fully compliant with a fixed penalty of 10% plus interest on all past liabilities since 1999 and, importantly, immunity from prosecution.

Switzerland banking secret and its role as a tax heaven is obviously becoming part of the past, as so it is for Liechtenstein.  The recent UK and German agreements seem to me more a transitory step towards the type of full transparency that European countries and the USA require given the necessity to recovery as much funds as possible to manage the growing debt related concerns.

As always in life, I am sure that other jurisdictions will take leading roles in filling the void. It is also clear though that the same pressure coming down to Switzerland will be asserted against other obvious traditional tax heavens like BVI (British Virgin Islands, Cayman Islands, etc.), although the effectiveness of such pressure is yet to be measured.

Current trends highlight the strategic role of jurisdictions such as the United Arab Emirates that rather than a tax heaven is a country with a solid economy and thriving trade but still retain a tax-free regime. I expect to see more and more investors and retiree to opt for residency in the Emirates to take advantage of the friendly lifestyle, tax-free regime and the advantageous bilateral trade agreements. Further note that the UAE is neither a signatory to the relevant directory, nor agreeing to cooperate with the Organization of Economic Cooperation and Development (OECD).

Don't hesitate to contact me directly if you are interested in any further information about this topic or you would like to discuss any related problem or strategy.