Stakes suddenly rising in U.S. tax shelter inquiry

By Jonathan D. Glater The New York Times

NEW YORK For accountants, lawyers and financial executives whose role in the sale of some questionable tax shelters in the United States has been under investigation, the stakes have suddenly risen sharply.

With a former bank executive's guilty plea on Thursday to conspiracy to commit tax shelter fraud, among other charges, U.S. prosecutors have put considerable pressure on potential defendants who worked at KPMG, the accounting firm that sold the shelters, and at the banks and law firms involved. Now prosecutors have a cooperating witness, creating an incentive for others who might have been involved to cut their own deals with the government.

"Getting one person to cooperate is clearly the first step," said Daniel Horwitz, a former local prosecutor who is now at Carter, Ledyard & Milburn in New York. "Typically, in a case where the government has a menu of people to choose from, they can play people against each other, so that the first people in the door are the ones that will get the benefit of a cooperation agreement. And for those who don't cooperate, as they say in the business, the train may have left the station."

Negotiations between prosecutors and KPMG appear to have set aside an indictment that could have been disastrous for that firm's business. Talks have focused instead on penalties and changes in practice.

A federal grand jury in New York has spent about 18 months investigating a number of tax shelters sold from 1996 to 2002. Investigators say the shelters cost the government as much as $1.4 billion in tax revenue. Nobody has been indicted despite the admission of guilt by Domenick DeGiorgio, who had been co-head of financial engineering for the New York operation of HVB Group, parent of HypoVereinsbank, based in Munich. He told the court he had essentially stolen money from his employer.

The prosecutors' filing in the case does not name KPMG, nor does it name any former partners at the firm or any lawyers or other executives at other financial institutions that had a role in creating the shelters, most of which the Internal Revenue Service has deemed invalid for purposes of tax deductions. To date, no court has ruled that the particular shelters described in the court filings were illegal.

The filing does repeatedly mention other people involved in marketing the shelters, including "tax shelter boutiques from California that devised or helped devise the tax shelter transactions and thereafter endeavored to market, or sell, the tax shelters to United States taxpayers; accounting firms; and other individuals who assisted in devising and marketing the transactions."

The document refers to "a partner at the accounting firm promoter" of a particular shelter transaction, as well as to "a New York, New York, attorney" who was also a promoter. It mentions a meeting DeGiorgio had "with a tax shelter promoter from San Francisco," as well as payments made by a California shelter promoter to cover some of DeGiorgio's personal expenses.

DeGiorgio, who is presumably cooperating with prosecutors, may well implicate those unnamed individuals, and that changes the way anyone who worked directly with him must think about a legal defense.

If DeGiorgio ever ends up testifying for the government, defense lawyers will almost certainly attack his motives and truthfulness. He has every reason to incriminate others, they will say, and in addition, he has pleaded guilty to crimes not directly related to the tax shelters that reflect poorly on his credibility, like tax evasion.

Accountants, financial executives and lawyers who worked on the tax shelters are likely to spend considerable time trying to anticipate what prosecutors could learn from DeGiorgio, how damaging his testimony could be and how best to minimize the risks they face.

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South Africa's leading source for independent investment information

HAVING an offshore trust is a far more complicated matter than in the past where everyone simply opened a blind offshore trust in a tax haven as a way of keeping illegal offshore money out of sight of the South African authorities.

Tony Barrett, regional manager at BJM Private Client Services who has lived and worked in the Channel Islands says that since the tightening on money laundering internationally no reputable trust company will accept blind trusts where the beneficiaries remain unidentified.

However there is still place for an offshore trust, depending on an investor’s specific requirement. “It is unfortunate that because the issue has become more complicated many financial advisors are steering away from offshore trusts yet they can offer huge benefits in certain circumstances” says Barrett.

For example an offshore inheritance paid into an offshore trust is the ideal way to preserve the inheritance, draw an income and avoid estate duty. “By foreign executors paying the money directly into an offshore trust, the funds do not accrue to you or your estate and any amount of the initial capital from the inheritance that you draw down from the trust is tax free” says Barrett.

Although you will pay tax in South Africa on any income or capital gains that is distributed to you as a beneficiary, if you are drawing down the initial capital to supplement your income locally, this will be seen as a capital distribution from the trust which is not taxable.

Barrett says for this reason it becomes extremely important to have an expert trustee who keeps reliable records. The trustee must be able to prove to the receiver of revenue what portion of your distribution from the trust is made up of capital, interest or capital gains.

Barrett says trustees also need to be abreast of South African tax reporting requirements. “One of the problems is that most trust companies use December or June as their year end so they need to update the trust financials to meet the South African February tax year end which normally costs an additional fee”. In many cases a trust company will charge a set price for a set range of services and any additional services will be charged for over and above.

Barrett says when selecting a trust company you need to make sure you are getting value for money. “Be careful of simply going for the cheapest because it could end up costing you far more if the trustees are not keeping proper records in order to cut costs; this could land you up in an investigation by the Receiver. By the same token a trust company that is charging higher fees must prove what value added services they are offering”.

Barrett says when choosing a trust company you need to find out who is making the investment decisions. “A trustee is not necessarily an investment expert; you need to make sure your investment decisions are being made by the person with the right qualifications”.

Moneyweb: South Africa's leading source for independent investment information

Taxman stamps down on offshore accounts

The taxman is stepping up his clampdown on offshore bank accounts held by UK-based individuals.

HM Revenue & Customs has used its information powers to force banks to disclose details of offshore accounts operated by thousands of customers.

The clampdown focuses on individuals who have transferred funds offshore, bypassing their UK bank accounts.

These transfers are often made via sundry parties' accounts which means the existence of an offshore account can never be discovered via a customer's UK account.

Richard Foster, senior tax manager at KPMG in Cambridge said: "Anyone with offshore bank accounts should be reviewing them now to make sure they are compliant.

"This will provide reassurance to the compliant and an opportunity for voluntary disclosure to the non-compliant in order to minimise any tax penalties."

CEN Business : Your Money : Taxman stamps down on offshore accounts

New tax rules will drive us out of London, say big City firms

By Tim Webb and Jason Nisse

Big City firms - including Goldman Sachs and Morgan Stanley - are understood to be threatening the Treasury that they will scale back their London operations in a row about the tax paid by employees from abroad.

HM Revenue & Customs has moved to outlaw the use of dual contracts for those staff from overseas who also spend large parts of the year working outside the UK. This is part of a long-standing review of the rules covering so called "non-domiciled" residents, who live and work in Britain but pay a fraction of UK taxes.

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Irish Yacht as a tax strategy

Irish businessmen have used their investment in a luxury yacht to cut their tax bills. Former owner Onassis would be proud
Ireland is awash with new money and much of it is being spent acquiring and financing some of the old moneyed world’s celebrated meeting points and trophy assets. The Sandy Lane hotel in Barbados is among the most prized possessions of Dermot Desmond, John Magnier and JP McManus; Derek Quinlan’s assault on Europe’s property market has seen him claim numerous scalps, including the regal Claridge’s; while a less well-known group of Irish investors has played a pivotal role in the restoration of the luxurious Christina O, the 325ft motor yacht once owned by Aristotle Onassis, where the young John F Kennedy was introduced to Winston Churchill.

Temporary home for Thabo Mbeki, the South African prime minister, during last year’s Athens Olympics, the Christina O is also a favourite relaxation spot for Ireland’s growing ranks of millionaires.

Sean Dunne, the developer who recently purchased a site in Ballsbridge from Jurys Doyle for a record-breaking €54m an acre, and the social diarist Gayle Killilea staged their wedding reception on the ship. And the banker Michael Fingleton, whose Irish Nationwide helped finance the boat’s refurbishment, has stayed on the Christina O during the Monaco Grand Prix.

Based in the Mediterranean and registered in Panama, the Christina O was refurbished through a partnership registered on a south Pacific island and is majority-owned by a Greek shipping magnate. But as it cruises around the Med in the summer or through the Caribbean in the winter, the Christina O, on hire for between $1m (€800,000) and $1.5m a fortnight, has been sucking cash out of the Irish exchequer. For a government intent on eliminating tax shelters, the Christina O is a monumental embarrassment.

DOCUMENTS seen by The Sunday Times show that earlier this year, following a High Court case, the Revenue Commissioners were forced to hand Robert “Pino” Harris, a truck dealer and property investor, a cheque for €9.1m after attempts to disallow tax breaks on his investment in the luxury yacht were knocked back on appeal.

The tax authorities are now trying to get the High Court to rule on the basis under which Harris and others claimed the controversial relief, and could yet seek repayment of the money. But as it stands, Harris and a number of other Irish taxpayers have managed to get millions of euros-worth of tax relief for fitting out what the American Academy of Hospitality Sciences calls the world’s “most prestigious luxury yacht”.

In May the Irish authorities moved to close off the loophole that allowed Harris and other wealthy individuals to substantially reduce their tax bills. But when the clampdown came it was accompanied by the familiar sound of doors being slammed long after the tax horse had bolted.

The precise details of ownership of the Christina O remain a mystery, but it is known that a number of individuals, including Harris, were instrumental in restoring the vessel to its former glory, at a cost of €50m. This investment was used to drastically cut their tax bills through an innovative use of the tax code.

Named Christina after his beloved only daughter, Aristotle Onassis purchased the vessel, a former Canadian naval frigate, in 1954 for $34,000 and promptly spent $4m refurbishing it. “You could smash up a $20,000 speedboat into pieces and not a word would be said, but spit on Christina’s deck and you were out of a job,” said a former Onassis employee.

Following the tycoon’s death in 1975, the ship was passed to his daughter and only heir. She donated the vessel to the Greek government as a presidential yacht, but it soon fell into disrepair. The ship appeared to have been salvaged when an American, Alexander Blastos, agreed to buy it for €2m in 1994. Blastos’ deposit cheque bounced, however, and it was 1998 before Greek shipping magnate John Paul Papanicolaou stepped in to buy the yacht.

Papanicolaou, who holidayed on the yacht as a child, renamed it Christina O, and set about finding the money to rebuild the yacht in a way that would have “awed Onassis himself”.

The search for funding led to Dublin’s Mount Street, and the offices of Ivor Fitzpatrick & Company, a leading solicitor’s firm that specialises in the area of tax planning.

Tax planning is often seen as a professional euphemism for tax avoidance, a legitimate means of reducing tax liabilities. The firm, and others like it throughout the world, earns a living by reducing the tax bills of wealthy clients. Often, in Ireland, this can involve marrying an investment proposal, such as the Christina O, with a weakness in the tax code.

According to Judge Income Tax, the leading legal publication in the area, section 1013 of the Consolidated Taxes Act 1997 is primarily “an anti-avoidance measure” designed to counteract schemes under which “partnership arrangements could be manipulated to create inflated tax losses . . . ”

The particular focus of the section is limited partnerships, an unusual corporate construct where the partners can limit their liability to a business failure. On three occasions in the past 20 years, the same section has been amended to tighten up the provisions and guard them against abuse. However, clever tax planners saw an opportunity.

“Anti-avoidance measures are the most fertile ground for tax planners because they are so general,” said one practitioner. “In truth, there has always been a cloud over the section.”

The gap in the legislation, in this case, was seized upon because the anti-avoidance measures did not stretch to cover offshore partnerships. Displaying a touch of nautical savvy, the limited partnership established to upgrade the Christina O was registered, appropriately enough, in the Cook Islands, an offshore Pacific tax haven.

Harris is one of a number of Irish residents who participated in the Christina Limited Partnership. To date, he is the only one to be identified.

Harris is the son of a Limerick scrap dealer. He earned his nickname because he loved pin-head oatmeal as a boy. Harris secured the Hino truck dealership in the 1980s and quickly established the Japanese marque as a market leader.

For many years, despite his rapidly accumulating wealth, he lived in two “knocked through” red-brick houses in the north Dublin suburb of Phibsboro with his mother. He now lives in Killiney, where his neighbours include the singer Enya, but he still displays a complete and utter distaste for ostentation.

Bermuda expresses concern over EU tax directive

Bermuda Finance Minister Paula Cox took concerns about the impact of a European Union tax directive on investment funds located in Bermuda directly to tax officials in Berne, Switzerland last week.
Finance officials said the tax directive, which came into effect on July 1, has negatively affected some funds domiciled in Bermuda even though the Island and other financial services domiciles, including Singapore and Hong Kong, are not directly affected by the new ruling.
The directive provides a mechanism for EU countries, as well as third-party countries aligned with the directive, to share information on the savings income of EU citizens with their home governments.
In some limited cases, a system of tax retention through a withholding tax has been instituted.
Finance officials said a Bermuda domiciled fund could be adversely affected if, for example, its paying agent was located in Switzerland, which means it would be caught within the scope of the directive.
Ms Cox, who was joined by Finance Ministry and industry officials on her trip, addressed these points with senior officials at the Swiss Federal Tax Administration in Berne, Switzerland.
"The delegation of senior Swiss tax officials with whom we met were very well briefed and understood Bermuda's concerns about the impact on our funds sector," she said, in a statement yesterday.
"Our delegation submitted a written brief together with a copy of Bermuda's Collective Investment Scheme Regulations," she said, and that Swiss authorities are due to respond to the submission as soon as the "complex" issues were reviewed.
Ms Cox was joined by Financial Secretary Donald Scott, Economic Policy Adviser Dr. Andrew Brimmer and Legislative Consultant Shauna MacKenzie, Conyers Dill & Pearman partner John Collis, CITCO Fund Services' Ian Pilgrim, as well as an official of the British Embassy in Berne, Martin Webber. "Our delegation represented Bermuda's interests exceedingly well and was a sterling example of public-private partnership in defence of Bermuda's national economic interest," she said. Ms Cox said informal discussions around the tax directive meeting widened to Swiss interest in Bermuda's public and private sector.
The Swiss officials expressed an interest in "relationship building" with both the public and private sectors, she said, and a future visit to the Island was discussed. Ms Cox also travelled to Switzerland on Government business last September to explore joining the World Trade Organisation.

China to allow money brokers in forex, bond markets

BEIJING (AFX) - The China Banking Regulatory Commission said that it is allowing currency brokerages to set up operations to trade on behalf of clients in the foreign exchange, bond and money markets both on and offshore.

The move is the latest in a series of steps to develop China's onshore foreign exchange market following last month's revaluation of the yuan and the scrapping of the peg to the US dollar.

'The introduction of a brokerage system and establishment of currency brokerages will help to enhance market liquidity and transparency, improve the operation and efficiency of capital allocation in the financial market and promote the healthy development of the financial markets,' the CBRC said in a statement on its website.

The banking watchdog said that foreign brokerages need more than 20 years of experience with annual net profits of no less than 5 mln usd. They also are required to have a representative office in China for more than two years.

Domestic firms wanting to establish operations must be non-bank financial institutions and have been operating in the foreign exchange and money markets for more than five years.

Both foreign and domestic firms wanting to establish broking operations need to have been profitable for the last three consecutive years, it said.

The CBRC added that, among domestic candidates, only investment trust firms would meet those requirements.

China to allow money brokers in forex, bond markets - Forbes.com

Money laundering legislation in Bermuda

Government's National Anti-Money Laundering Committee has launched its official website designed to provide the public with information on Bermuda's initiatives to combat money laundering and the financing of terrorism.
The site www.namlc.bm contains information on Bermuda's current anti-money laundering policies and practises, access to the relevant anti-money laundering legislation, links to other relevant sites as well as background and contact information.
The website also includes the most recent mutual evaluation report on Bermuda which offers an assessment of Bermuda's anti-money laundering and anti-terrorism financing initiatives.
"The Government recognises the benefits to be gained by promoting greater public awareness and understanding of the ill effects of money laundering and financing of terrorism and will continue to do so," Minister of Finance Paula Cox told Parliament as she announced the launch of the new site.

Royal Gazette

New Zealand Money laundering regulations needed

The financial sector needs new regulations to safeguard against money laundering and terrorist financing, Justice Minister Phil Goff said yesterday.

"A discussion paper is in the process of being circulated to the financial sector outlining the new proposals," Mr Goff said.

"The sector will not necessarily welcome greater regulation as it imposes administrative costs, but I expect it to recognise that New Zealand must take action to comply with international standards."

Mr Goff said the financial sector was extensively deregulated in the 1980s and 1990s, and an international evaluation had confirmed that some re-regulation was needed.

Mr Goff said in February that re-regulation was likely to be needed.

Yesterday he said there was no specific evidence that New Zealand was being used by international crime or terrorist groups to launder money or finance terrorism, but it could not be complacent.

He said the proposed regulations would include:
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# a comprehensive monitoring framework to ensure all financial institutions meet standards for countering money laundering and terrorist financing;

# people providing money transfer or currency change services would be subject to a registration regime;

# statutory requirements for financial institutions to comply with customer due diligence, and the implementation of internal anti-money laundering systems and procedures;

# financial institutions will be required to obtain, verify and retain information concerning the identity of the originator of wire transfers; and

# consideration of the practicability of directors and senior managers in the insurance and securities sectors being evaluated to ensure they meet "fit and proper persons" criteria.

The United States Embassy welcomed Mr Goff's announcement.

"New Zealand demonstrates a clear understanding of the importance of international co-operation in the areas of money laundering and terrorist financing, and recognises that it is in our shared interests to work together to combat such criminal activities, Charge d'Affaire's David Burnett said.

"New Zealand's continued technical and training assistance in the Pacific region is also deeply valued by the United States and other members of the international community."

New Zealand's source for business, stock market & currency news on Stuff.co.nz: Money laundering regulations needed - Goff

Aruba: A Drug Trafficker's Paradise

Located only 20 miles off the coast of Venezuela, the island paradise of Aruba serves as a transshipment point for illicit drugs—primarily cocaine from South America. Smugglers generally move large loads of cocaine into Aruba on fishing vessels, private yachts, and go-fast boats. They also move drugs out of Aruba inside maritime containerized cargo and airfreight. Drug trafficking organizations continue to exploit Aruba’s air and sea links to the continental United States, South America, Europe, Puerto Rico, and other Caribbean nations. Most of the cocaine transiting Aruba is destined for European markets—primarily the Netherlands.

Aruba has large free-zone facilities (areas that allow goods to be held and then re-shipped elsewhere without paying an import or duty tax), which provide opportunities for bulk shipments of cocaine to transit the area without the scrutiny of local officials. Cocaine shipments in containerized cargo increasingly are transiting the area, specifically through the free zone. The free-zone facilities on Aruba are conducive to transshipments, not only of drugs, but also chemicals used in illicit manufacture of drugs. Some firms in the free zone are suspected of involvement in money laundering.

Couriers on commercial flights and cruise ships smuggle small (usually from 1- to 10-kilogram) amounts of cocaine and, to a lesser extent, heroin, into and out of Aruba, either concealed in their luggage or taped to their bodies. Commercial air couriers, sometimes swallow up to 1 kilogram of cocaine or heroin per trip. Drug couriers easily blend into the hundreds of thousands of tourists who visit Aruba each year.

The proximity of Aruba to South America, a high standard of living in Aruba, and an underdeveloped law enforcement infrastructure make the country an attractive meeting place for South American, European, and U.S. drug traffickers. Colombian traffickers play a major role in the shipments of cocaine and heroin that transit the island, having forged trafficking relationships with local Arubans. In the past, some airline employees and cruise-ship personnel have smuggled drugs through Aruba.

Aruba plays a significant role as an offshore center for drug-related money laundering. Money laundering organizations are well established on Aruba and enjoy protection from considerable bank secrecy laws and a stable currency. The organizations use Aruba’s offshore banking and incorporation systems, free-zone areas, and resort/casino complexes to transfer and to launder drug proceeds. Although money laundering was made illegal in 1999, the legislation requires a provable underlying crime with a penalty of at least 4 years. The Government of Aruba also has an asset-seizure law that allows for seizure at the time of arrest to prevent criminals from moving assets prior to conviction.

The Government of Aruba has recently issued several decrees on money laundering that include increased oversight of casinos and insurance companies. The Government of Aruba also is in the process of instituting reporting requirements for cross-border currency movements in excess of 20,000 Aruban florins (approximately US$11,200). Aruba has a Financial Intelligence Unit (FIU), known as the Meldpunt Ongebruikelijke Transacties (MOT), and is a member of the Egmont Group, an international group of FIUs.

Aruba is not a source country for any of the chemicals used in illicit drug production and has no specific legislation controlling essential chemicals. Difficulties abound when attempting to gauge the levels of chemical transshipment through Aruba, as most chemicals legally pass through Aruba’s Free Trade Zone—an area in which local law enforcement has limited oversight due to local regulations and manpower shortages. The reporting of chemicals transiting the island is strictly voluntary.

The Aruba Organized Crime Unit, a small investigative team of the Aruba Police, or Politie, has responsibility for investigating large-scale drug trafficking crimes. The Coast Guard of the Netherlands Antilles and Aruba (CGNAA) is responsible for maritime drug interdictions around Aruba and the Netherlands Antilles. The Governments of the Netherlands Antilles and Aruba have agreed to work more closely with the other coast guards operating in the region in order to present a united front against drug trafficking. The CGNAA has its own Criminal Intelligence Division (CID) which is separate from the Politie. However, due to Dutch law, unless the CGNAA can demonstrate that a given vessel is either coming from or going to territorial waters of the Netherlands Antilles or Aruba, any drug law enforcement, other than an administrative boarding, is considered illegal. Dutch investigators also support law enforcement investigations in the Netherlands Antilles.

Cocaine, heroin, and marijuana are readily available in Aruba. Wholesale amounts of cocaine sell for from US$3,800 to US$4,500 per kilogram among drug traffickers; heroin sells for about US$23,000 per kilogram; and marijuana sells for about US$2,000 per kilogram. These low prices suggest a heavy flow of drugs into Aruba. According to Aruban statistics, an estimated 14 percent of Arubans regularly use illicit drugs.

Aruba serves as one of two forward operating locations (FOLs) in the Caribbean for U.S. counterdrug aircraft. The FOL, located at Queen Beatrix Airport near Oranjestad, provides a landing and servicing area for counterdrug detection and monitoring missions in the region. The United States and Aruba do not have a formal maritime law enforcement agreement.

Sources: Central Intelligence Agency, Drug Enforcement Administration, National Security Institute

Aruba: A Drug Trafficker's Paradise - Jim Kouri CPP

Offshore income in focus as tax haven drive hots up

By Jennifer Hill

UK AUTHORITIES have stepped up their campaign targeting tax avoidance via offshore arrangements, as firms that have used aggressive tax-avoidance schemes to pay benefits and shares to employees are also now facing a crackdown.

Experts have claimed a "heavy handed" approach adopted by Her Majesty's Customs and Revenue (HMCR) on offshore accounts could alarm many people.

And a recent House of Lords ruling has been branded the "latest blow" in a long line of government attacks on employee benefit trusts (EBTs) used for tax avoidance.

HMCR's offshore fraud projects team has written to a string of people with offshore accounts, giving them 30 days to reply with an explanation of why there is no tax liability arising from those accounts.

Andrew Watt, director of tax investigations at independent tax consultancy Chiltern, warned: "These letters are being issued in cases where HMRC feel that tax fraud has taken place but there's sufficient doubt to stop short of pursuing the taxpayer under the Hansard process, which deals with suspected serious tax fraud.

"This is a very heavy-handed approach that is likely to frighten those people that receive them. Many people are unaware of whether their overseas income is taxable in the UK and may not have thought to take professional advice.

"Receiving a letter from HMCR referring to tax evasion and possible prosecution will be extremely alarming."

Those who receive the letters should check their tax affairs are in order, Watt advised.

"It's important to bear in mind that, according to HMRC, these letters do not constitute their opening an inquiry," he added.

"However, it's unclear what action HMCR would take if a recipient of such a letter was unable to reply within the prescribed 30 days.

"In the first instance, check you have no undisclosed non-UK bank income and, if this is the case and your tax returns are correct, reply to that effect within the deadline."

Those with undisclosed non-UK bank income should seek professional advice.

Offshore bank account holders have lately been hit by a controversial cross-border tax on interest income from savings. The EU Savings Directive, introduced from the start of last month, means those who hold a bank deposit account in the likes of Jersey, Guernsey or the Isle of Man - which previously saw them avoid the taxman's clutches until deposits were bought back to the UK - could be hit with a hefty tax bill.

At the same time, the Inland Revenue has set up a special team tasked to ensure that outstanding tax from EBTs is hotly pursued.

It follows a Lords ruling on the McDonald v Dextra case, which centred on a group of companies in the mobile telecoms industry. They set up a trust in a tax haven, which then created further sub trusts. Funds were lent to various employees, but mainly directors.

The Revenue has been keen to sweep away EBTs, used to gain tax relief from both ends - companies paying in and employees receiving benefits out.

"For many of Scotland's businesses, this may well be the final nail in the coffin for aggressive tax planning," said Ricky Murray, head of tax in Scotland at Baker Tilly. "And with estimated deductions totalling many hundreds of millions of pounds, expect no mercy."

He said a more cautious approach to tax planning was required, including tax-approved schemes to deliver shares and pension benefits.

The contributions affected are those made before 27 November, 2002. Special legislation was introduced with effect from that date to block artificial schemes.

Businesses at risk of losing out as a result of the Lords ruling might still be able to obtain tax deductions by paying funds to employees in a taxable form, said Murray.
Scotsman.com Business - Top Stories - Offshore income in focus as tax haven drive hots up

Accountants do U-turn as Brown targets loopholes

By Robert Outram

WHEN even accountants complain that the tax system has become too complicated, you know that it's serious. Under the UK's self-assessment system, companies and individuals are expected to work out their own tax liability, but the volume and impenetrability of the legislation makes this no easy task.

One reason for the complexity of Britain's tax laws is what tax professionals like to call the "sticking-plaster" approach. Much legislation contains loopholes and, when they are exploited - quite legally - by taxpayers and their advisers, the law has to change again to close the loophole. So the law grows, layer upon layer.

One solution is to replace reams of legislation with a simple rule: if a transaction has been structured in a certain way simply to save tax, it should still attract the same tax liability it would have done if it had been structured along purely commercial lines.

In other words, rather than keep coming up with legislation drafted to anticipate every piece of tax avoidance, why not simply rule out artificial tax avoidance altogether?

Such an approach is known as a "GAAR" - general anti-avoidance rule - and it has already been introduced in tax regimes overseas, Canada being one example.

When the UK Government proposed introducing a GAAR back in 1998, however, the idea went down like a lead balloon with companies and their advisers. A GAAR would create "uncertainty", the professionals said; it was too draconian and moved too far away from the idea that the letter of the law, not the will of politicians, should determine what a taxpayer owes. The idea was quietly dropped.

Seven years on, the Institute of Chartered Accountants of Scotland (ICAS) has ditched its opposition and is now calling on the Government to consult on how a GAAR might be introduced.

A formal paper presented to Chancellor Gordon Brown last month included a general avoidance rule as one of three elements in a root and branch reform of the UK tax system. The other two are repeals of much of the existing anti-avoidance legislation and the ability to have transactions cleared in advance by the tax authorities, so there is certainty as to whether a particular scheme or arrangement will be accepted.

So what has changed? The biggest difference is that, rather than try to push through a GAAR against widespread opposition, the Government opted to tackle tax avoidance though a disclosure rule that makes it mandatory to report any proposed tax-saving scheme to tax authorities ahead of implementing them.

This, combined with a determination to introduce retrospective legislation if need be to close loopholes, has radically shifted the balance of power towards the Exchequer.

A GAAR might now be the lesser of two evils, according to ICAS. With the right safeguards, it could help to simplify the tax system, and reduce uncertainty and unnecessary costs. The paper outlining the proposal makes it clear that streamlining of current legislation and introducing a system of "pre-transaction rulings", must also be part of the reforms.

The latter measure would mean that companies would know at an early stage what is acceptable and what is not, rather than finding the law, as they understand it, overturned by backdated legislation.

Not all accountants believe that a GAAR is the answer, and many of the original objections are still argued strongly in some quarters. The Government itself may be put off by the potential cost of having to provide pre-transaction rulings - although the cost to the Exchequer of having a dysfunctional tax system may be greater.

In 1999, the UK topped the table for US companies' pre-tax overseas profits; in 2002 it had slipped to fourth place behind Ireland, Bermuda and the Netherlands. The relative corporation tax rates have not changed significantly; one reason for the change may be that the UK's tax system is seen as less business-friendly and less certain than it was.

It would be ironic if a measure widely condemned as draconian seven years ago proved to be the solution.

• Robert Outram is editor of CA Magazine. The views expressed are his own

Scotsman.com Business - Banking & Insurance - Accountants do U-turn as Brown targets loopholes