Tax Avoidance Explained
In the following article, corporate advisory firm The Sovereign Group (which also serves as parent company for RegisterAYacht.com) outlines the often unclear distinctions between tax evasion and tax avoidance which yacht owners can find confusing. We have selected the relevant excerpts and posted them as follows. Those interested may read the full article here.
Confidentiality, tax avoidance and evasion
Dennis Healy, when he was the UK Chancellor of the Exchequer, once said that “the difference between tax avoidance and tax evasion is the thickness of a prison wall.” What he meant was that there is a fine line between tax evasion, which is illegal, and tax avoidance which might be frowned upon but is legal. Put another way, if someone gets married and the unplanned consequence is that tax is saved that is lucky. If that person gets married and the main reason is to save tax, it is tax avoidance. If that person tells the tax authorities that they are married when they are not in order to save tax it is tax evasion.
Governments all around the world, including China, need to find more money and are under great pressure to collect more tax. Tax departments are becoming more sophisticated and better at catching tax cheats. Many are mounting concerted campaigns to convince the public that tax avoidance is illegal and immoral. It is not the former but is arguably the latter. The public relations war is being lost by wealthy tax payers. The vast majority of the population is paid a straight-forward wage and has little or no opportunity to reduce their taxes.. Even if there were tax saving possibilities it is likely that the fees they would pay to properly implement any kind of tax planning would be more than the tax saving. It is hardly surprising, then, that the majority do not like the idea that the wealthy minority employ professional advisors to reduce their taxes or simply hide their money, fail to declare taxable income and illegally evade tax.
As professional advisors, we clearly see nothing wrong in engaging in legitimate tax mitigation. That is not necessarily a view which the majority will agree with. Frequently we find it necessary to point out to those who judge tax saving to be immoral that it is also possible for us to advise them how to pay more tax if they feel that any sort of tax saving is wrong. Rarely is that offer taken up.
There is a worldwide effort being made to prevent tax evasion. Swiss banks are now being forced to offer up details of clients so that their home tax authorities can check that the capital in their accounts has had tax paid upon it and that the revenue generated on the capital sum is also being taxed correctly. In many cases it appears that this is not the case and that some naughty people have been using Swiss bank secrecy to assist their efforts to evade tax by failing to declare correctly on their tax forms. Who would have thought it!
Most countries, now including Hong Kong, Singapore, China have signed tax treaties which contain exchange of information clauses. All offshore financial centres such as BVI, Cayman etc, under pressure from the OECD, have been forced to sign Tax Information Exchange Agreements (TIEAs) which can be used by onshore countries to obtain information about the ownership of offshore companies, trust and bank accounts. Banking secrecy laws are being rolled back or removed altogether as evidenced by the details supplied recently by Lichtenstein and Switzerland to various tax authorities around the world. And finally if a tax authority cannot obtain the information legally then they are paying thieves who stole it to give it to them. My law studies suggested to me that it was illegal to pay for stolen information or property but apparently this law does not apply to governments. Recently a Swiss banker who was actually jailed for assisting US citizens to evade tax was awarded US$120 million for handing over details of the US tax evaders he assisted.
In short, banking secrecy and confidentiality has either completely disappeared or will completely disappear in the near future. Any tax plan which relies on the detail not being revealed is probably tax evasion and is probably going to be revealed and get the perpetrators, including their advisors, into a great deal of expense and trouble. So get it right and seek professional advice. Getting it right will almost certainly involve a degree of inconvenience and expense but should keep the tax payer out of trouble and out of jail. I suppose the other way of looking at it is that not seeking advice and just trying to hide taxable money involves two levels of saving: There is no need to pay professional fees and the end result is likely to be free board and lodge provided by your home penal authorities.
The Chinese tax authorities have quickly become much more knowledgeable and efficient at collecting tax. The tax code in China is quite basic but it is interpreted by different tax inspectors in different ways. Normally those tax inspectors consider offshore companies and trusts to be ineffective for saving tax. The tax system relies upon the tax payer properly declaring his taxable income and if there is doubt about whether income is taxable then it should be declared and the tax man can decide whether that income taxable or not. He rarely decides it is not. Chinese nationals appear to becoming increasingly sophisticated as well. They do have large amounts of money in Swiss banks and this has as much to do with security as with tax saving. They want to know that they have money outside the country in case something goes wrong inside the country. Spending some money and seeking professional advice as to how to give the best possible protection to that money and making legitimate tax savings is of increasing importance. Do not take short cuts and just try and hide money. It will not work. There are legitimate structures available which will protect assets held abroad and ensure that the money within them is not subject to tax. So why risk being a tax evader if you can achieve the same savings and protection with a legitimate, legal and compliant structure?
Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
