The UK-Swiss Tax Agreement

Leo CoyleAndrew McKenna

Step Conference Bermuda23 February 2012

Introduction

• UK Swiss Agreement

• Liechtenstein Disclosure Facility

• Offshore Penalty Regime

• International Compliance

UK - Swiss Agreement

PAST FUTURE

Swiss assets only1. One off payment

2. Voluntary Reporting

3. Voluntary Disclosure/LDF

1. Final withholding tax

2. Voluntary reporting

Complex Formula

19-34% of

Capital at 31/12/10

Withholding Rates:Interest & other income 48%CGT 27%Dividends 40%

Essential PointsEssential Points 1

‘Funds’ held directly or indirectly by UK

individuals in Switzerland

Account must be open at: 31/12/10 AND

31/05/13

Participation remains anonymous Administered by Swiss

paying agents (Banks)

CGTIT

VATIHT

UK Individual= Swiss Bank determine

using normal due diligence rules

Principal private address in UK

British passport holderOnly on ‘Swiss’ Assets: (Bankable Assets) cash,

precious metals, accounts, stocks, shares, securities,

options, debts, structured products

Taxes

Essential Points 2

Past/future tax paid- Certified

• Anti-abuse clause: directed at banks

• ‘Not knowingly manage or encourage use of artificial

arrangements whose sole or main purpose is avoidance of

tax under agreement’

HMRC will not ‘Actively’ seek customer data stolen from

Swiss banks

• Enhanced exchange of information (500).

• Plausible grounds• No fishing

• Number of accounts• Previous 10 years

• Voluntary Reporting• Client instructs

• Identity• Bank provide all details

• Statement of assets at each year end

•RESULT: Normal application of tax, interest & penalties (20 yrs)

Money moved<31/05/13:

• HMRC notified where money sent

• No names/number only (total)

One-off Past Tax Repayment

• Complex formula

• Swiss bank levy and pay up to Swiss FTA – in turn to HMRC

• Covers 1/1/2003 – 31/12/12

• Rate 19-34% (average 26%) of assets at 31/12/10

• Accounts for - Capital, income & gains- Length account held- Rate of balance increase

• Outcome = Cleared funds

Exclusions

‘Excluded assets’•Contents of safe

deposit boxes•Real property

•Chattels

Domiciliary trading companies

Withdrawals to extent not re-deposited from outside UK between

1/11/11 AND 31/12/12 not cleared

Bank charges & expenses not cleared

•Corporate tax•NIC

•Tax on loans to directors

Excludes

Those involved in a disclosure facility

or campaign (HSBC A/C

holders)

Proceeds of crime other than evaded

tax

Previous investigation

Discretionary Trusts?

All open investigations

Payment = Payment on

account of 20yr tax, Interest &

penalty calculation

Insurance wrappersMinimal risk protection

Pay out or redemption not restricted to

All tax interest and penalties due

Non Domiciles (P.T.O)Includes

Assets held:• In own name

• By domiciliary company if no commercial activity

• Trusts where beneficiary known!• (?Discretionary position)

DeathIllness

Disabled

Non Domiciles

Swiss Bank identify and;

Must ‘prove’ non domiciled(not be under enquiry)

By:- certified by UK lawyer, accountant, tax professional

-claim remittance basis10/11 or 11/12

Options:

1. Disclosure to UK

2. Treat as if domiciled

3. Self assess – identify UK income/gains + remittances (34%)

4.Opt out. (Disclosure of certain details)

Difficult and complex area – lot of guidance notes expected

Future Withholding Tax

• Rates quite high - Interest/other income 48%- CGT 27%- Dividends 40%

• Certified; levied by Swiss bank; anonymity retained• Income arising – Gains realised basis• Covers IT and CGT [table of concordance]• Non-domiciles: No opt out

Annual certification requiredCharge on UK source & remittances

• UK Domiciles can opt for voluntary disclosure – no WHT• Interacts with ESD – which takes priority

Example 1Account opened 1993, cash amounts deposited over years and interest credited.

£1m at 31/12/02£2m at 31/12/10£2.1m at 31/12/12Expenses paid out to bank £95k

One off payment19% of £2.1m = £399,00034% equation on £2.1m = £489,475So: £489,475 payable (23% of 31/12/12 funds)

Balance £2.1m clearedOnly £95k fees not cleared

Example 2Account opened in 2007. Deposits 2008-2011, large withdrawal 2012.

Balances – 31/12/07 £200k 31/12/10 £1m 31/12/12 £500k

19% of £1m = £190,00034% by equation on £1m = £267,353£1m balance of funds at 31/12/10 cleared£267,353 payable (53% of remaining funds, 26% of cleared funds)

Example 3Deposits exceed withdrawals:-

Balance 31/12/02 £1mDeposits £6mIncome/gains £2mDrawn £3mBalance 31/12/10 £6mIncome/gains £1mDeposits £5mBalance 31/12/12 £12m

One-off charge = £3.18m(26.5% of 31/12/12 balance)

Cleared funds:-31/12/10 balance

£6m- Plus income > 31/12/10

£1m- Plus deposits > 31/12/10

franking withdrawals < 31/12/10 (£3m) £3m

£10m

So: £2m funds not cleared under Swiss Agreement

Example 4Account opened 1991Deposited £500k over years

(undeclared)£500k cash undeclared – spent£1m investment income£750k used to acquire Spanish

villa£50k Spanish villa rental

(undeclared)05/04/1999 balance £1,000,00031/12/02 - £1.5m31/12/10 - £1.5m31/12/12 - £1.7m

Swiss Calculation:-19% of £1.7m = £323,00034% via equation = £239,733So £323k payable£1.7m cleared fundsBUTNot cleared - £500k undeclared cash

spent - £750k spent on Spanish

Villa - £50k Spanish rentalWhich if picked up on enquiry =

£850k+But prosecution riskLDF liability - £1.17m (est.)

Essential PointsAreas of Importance

No exemption from criminal prosecution (example 4)

Swiss agreement only deals with Swiss assets

(LDF worldwide)

Compare to LDF

Moving funds – risk in future

(Criminal, 50% + penalties)

Discretionary trusts exempt (?)

Non domiciles care needed –

consider position, reviewEnsure bank

agree = discretionary

Forms A/T

Beneficiaries known

Swiss bank action/decision

What is the Liechtenstein Disclosure Facility (LDF)

• An opportunity to disclose to HMRC untaxed income/gains and have a clean slate for the future.

• Commenced 01/09/2009• Available until 12 March 2015 but now extended

to 5 April 2016• Beneficial terms for a 10 year period eg

06/04/99 – 05/04/09• Subject to variation

Eligibility

• Must have a UK Tax Problem

• Must have an Offshore Asset as at 01/09/09

• Must have Relevant Property in Liechtenstein

• Must obtain a Certificate of Relevance from Liechtenstein intermediary

Benefits• Years prior to 06/04/99 falls outside taxation (normal enquiry would go back

to 20 years)

• Penalty = 10% of the tax for the beneficial period, 20% for subsequent years

• Anonymity retained prior to registration to understand certain treatment for UK tax purposes

• Immunity from prosecution – unless there is a wider criminality

• No naming and shaming

• Provides closure

• Going forward – access funds freely

• Domicile agreed – difficult to establish outside of LDF

Exclusions• Ongoing Code of Practice 9 (COP9) = serious fraud

enquiry

• Notified you are under criminal investigation by HMRC and you have been arrested or cautioned

• Beneficial aspects lost if:-1. Offshore bank account opened through a UK branch or

agency – LDF but 20 years2. Offshore asset not held at 01/09/093. Past letter from HMRC about ODF or NDO – 20%

penalty

Additional points

• Use actual rates of tax or elect for the special composite rate of tax

• Composite Rate of Tax (CRO). Single rate of 40% for beneficial period only – covers all taxes.

• But - no reliefs, deductions or allowances in calculation or to carry forward. (Except EU savings tax)

• No IHT where CRO used – substantial savings.

• Any Director’s overdrawn loan account issues will need to be correctly recorded after the beneficial period.

The Process• Identify UK tax problem

• Confirm offshore asset held as at 01/09/09

• Obtain Liechtenstein relevant property if not already held

• Obtain certificate of relevance

• Register for LDF

• Prepare a disclosure report- narrative & calculations for a full disclosure of all worldwide tax irregularities

• Actual basis – disclosure within 10 months of registrationCRO basis – disclosure within 7 months of registration

• Reports are accompanied by:-1. Letter of offer2. Certificate of full disclosure3. Statement of assets and liabilities

Example 1

Account opened in Switzerland in 1994 - deposited £1m from previous IOM accountInvestment income £50k per annumOwns Spanish villa acquired 1995 £1m (taken from Swiss account)Received £10k per annum rental income - All undeclaredObtains relevant property in Liechtenstein and receives COR in the tax year 2011/12

• Clears all worldwide issues

• Avoids tax interest & penalty on original £1m and income pre 6 April 1999.

• Swiss treaty would be cheaper but £1m withdrawn for villa not cleared nor is rental income.

• Not available till 2013 so if picked up for enquiry exposed to possible further £1m tax, interest + penalty.

• Swiss treaty does not clear matters outside Switzerland

Calculation

10 years x £50k = £500k x 40% = £200k

10 years x £10k = £100k x 40% = £ 40k

Tax = £240k

Interest say 30% = £ 80k

Penalty 10% = £ 24k

2 years x £50k = £100k x 40% = £ 40k

2 years x £10k = £20k x 40% = £ 8k

Interest say 5% x £48k = £ 2.4k

Penalty 20% = £ 9.6k

Settlement = £404k

Example 2

Client has £1m in IOM bank account at 1990, settles it all into an offshore trust in 1995. Trust income and gains of £10k per annum. Settlor withdraws £20k & £50k at his desire.

Balance in trust 2012 = £1.2m

Relevant property in Liechtenstein & COR obtained

Due to IHT on establishment of trust and 10 year anniversary, elects for CRO (40%)

Considered to be settlor interested discretionary trust

Saving - IHT on settlement + 10 year anniversary charge

- Tax, interest and penalty for pre 1999 income

But - IHT on closure

Calculation

10 years at £10k = £100k x 40% = £40k

Interest say 30% = £12k

Penalty @ 10% = £ 4k

2 years at £10k = £20k x 40% = £ 8k

Interest say 5% = £0.4k

Penalty @ 20% = £1.6k

£66k

Example 3

• Client is UK resident but non domiciled• Pays tax on the remittance basis• He has two accounts A&B• Account A is fully disclosed and no further tax is due• Account B earns £100k per annum and £50k per annum

has been remitted to the UK• Should he elect for CRO or pay on Actual Rate Basis• If he elects for CRO he will be taxed on £100k per

annum as CRO is not calculated by reference to the amount remitted. It is charged on the income per annum that is earned by account

• Actual rate taxes only the remittance

Example 4

•Client extracts cash from his business and lodged it in an account offshore.•Balance as at January 1998 = £2m. When his business ceased and account closed•£1m gifted between 4 children. Other £1m spent on new build house which cost total £1.5m (£500k from compliant bona fide source) client has adequate compliant pensions & UK funds to live on.•He owns 1/3 share in a property in Dublin which he inherited with his brother and sister when their father died in 1990 (IHT compliant) – rental income of £6k per annum not declared by him. Still owned.•Overseas asset at 01/09/09 = 1/3 share in Dublin property•Obtain relevant property + COR

Avoids tax on the original £2m + rental income pre 1999

Calculation

10 years x £6k x 1/3 = £20k x 40= £8k

Interest say 30% = £2.4k

Penalty @ 10% = £0.8k

2 years x £6k x 1/3 = £4k x 40% = £1.6k

Interest say 5% = £0.08k

Penalty @ 20% = £0.32k

Settlement = £13.2k

Offshore penalty regime

From 06/04/2011

For – failure to notify - inaccuracy on a return - late return

Income and capital gains tax

Penalty linked to tax transparency in which income/gain arises

Levels of Penalty

Category 1 – Penalty same as in UK (up to 100% tax)

Category 2 – Penalty up to 150% of tax

Category 3 – Penalty up to 200% of tax

Bermuda and Switzerland in Category 2

International Compliance – Areas to consider

D - Responding to information requests

A - Cross border Communication policy

• Understand request and legality

•Consequences of no response

•Accessibility and power/possession (evolving case law)

•Link to A and B and C

•Understand accessibility by regulatory bodies

• Electronic communication policy

• Capturing/sharing communications

C - Offshore structure audit

•Risk assessment on set up

•Ensure implemented & documentation captured day 1.•Engage key personal on role/duties•Ongoing management & compliance

•Review - changes

B - Document retention policy

• Have a policy in place

• Understand accessibility of electronic systems (server location)

• Power and possession

• Destruction policy - electronic

International Business

Contact Us

Leo CoylePartner+44 (0)161 837 1879+44 (0)7919 342 622leo.coyle@smith.williamson.co.uk

Andrew McKennaPartner+44 (0)161 837 1886+44 (0)7841 494 471andrew.mckenna@smith.williamson.co.uk