A change in mindset

The global economic crisis and recent tax evasion scandals have spurred calls for fairness and transparency in the tax system. It is said that if tax on assets hidden by tax dodgers were collected in their owners’ jurisdictions billions of dollars could become available for financing needs. Removing practices that facilitate tax evasion are part of a broader drive to clean up one of the most controversial sides of a globalised economy. At the Berlin Conference against international tax fraud and evasion on 23 June, ministers and officials of 19 countries emphasised that transparency and exchange of information in tax matters are the basis for fair competition in a global economy. These efforts seem to have been successful: under pressure from the Organisation for Economic Co-operation and Development (OECD), governments from the Isle of Man to the Cayman Islands and Singapore have pledged to co-operate with foreign tax authorities. Switzerland, for example, has signed 11 agreements for the exchange of information in tax matters, inter alia with the United States. Switzerland, Austria, Luxembourg, Liechtenstein and Andorra have responded to the international effort by relaxing their strict bank secrecy laws. A milestone in the fight of the German government against tax evasion was the acquisition of a CD from an employee of Liechtenstein’s leading bank LGT showing accounts and names of German taxpayers hiding their assets from the German tax authorities. By the end of September this year, the acquisition costs of this CD (€5m) have already shown a good return – nearly €180m in tax payments and fines have already been collected by the German tax authorities. Many tax havens are meanwhile closed for taxpayers since the German government could sign agreements with Bermuda, Jersey, Guernsey, Isle of Man and Liechtenstein for the exchange of tax information. Other countries such as Andorra, Hong Kong, Luxembourg, Macao, Monaco, Austria, Switzerland and Singapore have demonstrated their willingness to co-operate in tax matters. The German government itself enacted a special law against tax evasion at the end of July, and an interpretative guideline on 24 September extends the obligation to retain records and the duty to cooperate with the tax authorities where a taxpayer keeps his financial assets abroad. A list of “non-co-operative” states – in contrast to the original intention – was not published with the guidelines: the so-called “blacklist” of the OECD with states not accepting OECD standards no longer shows any entries since countries like Costa Rica, Malaysia and Uruguay have accepted the OECD rules on exchange of tax information. The alternatives for German private wealth It has been reported that German tax consultants see an increasing number of their clients moving back to tax honesty. This obviously is an outcome of the OECD’s fight against tax evasion in general and the attitude of the German Government in particular when attacking states like Switzerland. These common efforts seem to have led to a change in the mentality of at least some tax dodgers. For those having invested and hidden their money in tax havens the time might have come for them to shift their assets back to Germany. If taking this option, professional advice from tax consultants should be sought to avoid unnecessary fines. Once repatriated to Germany there is still the chance to invest the funds in sensible structures. Since the implementation of the German flat tax regime the possibility to earn tax-free capital yields might be over. However, there are structures enabling the taxpayer to achieve a tax deferral up to the time when the money is actually needed – and this on a legally accepted basis. Those still having the character of gamblers and not having realised the trend towards tax-compliance might invest in doubtful life insurance schemes or foundations in Panama or Dubai – the fees for such investments which quite often end up eating up the tax savings from the last 10 or 20 years. Harsh sentences which courts have imposed on prominent tax dodgers recently are likely to deter many others. In the recent past, the G20 states have made big progress regarding transparency and exchange of information in tax matters. This has led to a climate where private wealth is seeking its way back to the home countries. Tax avoidance schemes no longer seem to be trendy, rather the time has come for sensible tax planning and optimisation.