Warning: This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
The Australian Taxation Office provided this submission to the US Senate Committee on Homeland Security and Governmental Affairs for a hearing into tax haven banks and US tax compliance conducted by their Permanent Subcommittee on Investigations on 17 July 2008.
July 2008
The Australian Taxation Office (ATO) believes that persistent and sustained compliance action is required to contain abusive use of tax havens. We believe this is important not only to contain revenue leakage but also to sustain the community’s confidence in the fairness of the system and the effectiveness of tax administration.
While we are not aware of an effective way to measure the “compliance gap” in respect of the abusive use of tax havens, we note that the flow of funds through tax havens is increasing. For example, we are aware of OECD estimates that between $US 5-7 trillion are held in tax havens or banking secrecy jurisdictions.
In addition, the Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s Financial Intelligence Unit (FIU), has sophisticated capabilities to track international fund flows. In the fiscal year ending 30 June 2007, about $16 billion was sent directly to tax havens from Australia, and approximately $18 billion was sent directly from tax havens to Australia.
These figures show a material increase in fund flows over the 2006 fiscal year. Some of this increase is attributable to better capability i.e. our systems are providing better measurement of the flow of funds.
We also know from our risk assessment activities that a significant part of the flow of funds to and from tax havens is not abusive. These amounts may relate to tourism or travel, or legitimate business in goods or services. Another aspect of these funds relates to havens as “hubs” for certain financial transactions like insurance, private equity or hedge funding. These financial transactions may not give rise to tax risk other than in terms of tax competition.
Putting aside the use of havens for legitimate tax benefits and other purposes, we believe that Australia needs to be vigilant in relation to tax haven risk. This is because modern technologies make it easier to use tax havens, and the abusive use of tax havens adversely affects trust and confidence in our tax system. Our Compliance Program, that publishes our compliance strategies for business and the community, has made cross border dealings a top priority over the past 6 years and highlights our strong focus on dealing with abusive use of tax havens.
What has changed during this period is that international dealings with tax havens are beginning to spread beyond large corporates and high wealth individuals to all parts of the community. We are seeing examples of the “migration” of tax haven use to small businesses and individuals. We believe this is partly driven by globalisation, ease of travel, advances in communications (including the availability of International Business Companies over the internet), and relatively low establishment costs. However there are also risks associated with this activity.
The ATO has increased its efforts to educate the community on the dangers of abusive use of tax havens and strengthened its ability to deter, detect, disrupt tax haven schemes typically linked to tax avoidance or evasion, and in some cases concerned with serious criminality like money laundering. These risks are outlined in our Tax Haven Booklet.
An essential ingredient has been strengthening our ability to work with other Australian agencies and international cooperation with other revenue authorities, such as the Joint International Tax Shelter Information Centre (JITSIC)1. For example, one strategy in Australia Project Wickenby links various federal agencies (regulators, law enforcement, intelligence and prosecutors) in a taskforce under the leadership of the ATO.
We have made improvements in all stages of our compliance strategy associated with tax havens:
- Detecting the risk
- Educating and communicating
- Encouraging voluntary disclosure and correction
- Dealing firmly with the worst behaviours including promoters of abusive tax havens
- Recommending law reform, and
- Strengthening international cooperation.
Detecting the risk
A range of structures or typologies have been identified as abusive tax haven schemes. These range from the use of false invoices to inflate deductions to the establishment of legal entities to hold securities or other assets. The common element in all of these typologies is the secrecy or lack of transparency by which beneficial ownership can be hidden.
We make use of strategic intelligence analysis to understand the tax haven landscape, identify key leverage points and refine our strategies to combat the abusive use of tax havens.
These include:
- taxpayer profiles to draw trends across a broader population and understand behavioural drivers such as hiding assets from creditors (including family members after divorce), disguising “black funds” or concealing ownership to manipulate markets e.g. securities trading
- scheme typologies to expedite evidence gathering, achieve consistency in the application of the law and result in more targeted litigation and debt recovery
- mapping promoter and intermediary networks to understand the risks (taxpayer numbers, types of schemes, fund flows, whether historical or real time, commissions etc)
- engage with tax havens and have dialogue about concerns arising from aggregated case data and seek options for reform.
Together with partner agencies, we have sought to profile higher risk regions for Australian tax (and other regulatory) systems e.g. Vanuatu.
Educating and communicating
We have strengthened our communications with the community and the tax profession. The messages are simple: “don’t get mixed up in dodgy tax haven arrangements and, if you have, come clean!” We use every vehicle for relaying the message including taxpayer alerts to warn people what arrangements to avoid and booklets that gives tips on what to watch out for and what to do if you think you are at risk.
Encouraging voluntary disclosure and correction
We emphasise the benefits of coming clean, including peace of mind and low or no penalties for those who voluntarily tell us about their offshore arrangements. Our marketing efforts are supported by letters and calls to those we have detected as having tax haven transactions, prompting them if necessary to lodge a voluntary disclosure.
In some cases reduced risk of prosecution is also possible. Importantly this requires cooperation and full disclosure of the arrangements and the promoters involved.
Dealing firmly with the worst behaviours including promoters of abusive tax havens
Our top priority is to deal very firmly with the worst abuses and in particular promoters and their onshore associates who encourage use of abusive tax haven schemes. For this purpose, promoters are those who design, market or implement abusive haven schemes, and include some banks and financiers, accountants and lawyers, agents, trustees and brokers. Often based in tax havens or banking secrecy jurisdictions, promoters specialise in hiding assets or income so as to divide legal and beneficial ownership.
In these cases we will use the full weight of the law, including referral for prosecution and action to confiscate proceeds of crime to send a strong deterrent message. Our aim is to make Australia a “no go zone”. To support this it is essential we have integration and cooperation among partner agencies. In 2006 this was significantly strengthened with the funding of the multi-agency taskforce - Project Wickenby. The Australian Government supported the Wickenby taskforce by providing special funding and amending taxation laws to allow the sharing of tax information. Integration is also supported at the agency level by the secondment to, and rotation of, officers between agencies to share experiences, expertise and skilling.
The taskforce is focused on the most abusive cases and on those who promote these activities. Currently over 370 civil audits and 20 criminal investigations are underway. To date, Wickenby has raised $157 million in liabilities, collected over $70 million and restrained about $72 million from the proceeds of criminal activity. Criminal prosecution activity is underway. Several people have been charged with taxation offences, including one alleged promoter and one conviction resulting in a custodial sentence.
Recommending Law Reform
Changes have been made to our tax secrecy disclosure provisions to allow partner agencies involved in Project Wickenby to be able to “talk together” rather than deal with each other bilaterally. New anti-money laundering laws and our new promoter penalty regime also provide significant new tools to deter and deal with this behaviour.
Strengthening international cooperation
On an international level, the ATO participates in the processes of the OECD encouraging transparency and effective exchange of information. We are also strengthening our international framework via the negotiation of Tax Information Exchange Agreements.
More importantly, we are working with tax administrations through our double tax agreements with unprecedented levels of cooperation. This includes sharing data pursuant to tax treaties and the conduct of simultaneous examinations across jurisdictions and sharing intelligence and strategy so that common issues can be developed and actioned. These issues include tax haven regions, promoters and intermediaries, and some particular higher risk taxpayers.
An important development was the establishment of JITSIC in 2004 to supplement the ongoing work of tax administrations in identifying and curbing abusive tax avoidance transactions, arrangements and schemes. The ATO is working with our JITSIC partners in Washington DC and London to enhance bilateral and multilateral efforts to attack cross border schemes, including those promoted by firms and individuals who operate without regard to national borders.
In particular, the ATO enjoys excellent working relations with the Internal Revenue Service (IRS). The interaction between our officers may include weekly teleconferences, opportunities to jointly workshop matters, sharing intelligence and training tools, enhanced evidence gathering to support civil or criminal investigations. The strength of these personal and professional relationships allows us to make joint representations to tax havens in order to explore reform options. For example, the ATO is working with other tax agencies including Her Majesty’s Revenue and Customs (HMRC) and IRS in respect of Liechtenstein in making joint representations for greater transparency.
We now address the 7 focus questions.
The OECD estimates globally, $US5-7 trillion is held off-shore2.
Abusive use of tax havens is a problem for many countries. Our analysis of Australia’s situation suggests that the risk of abusive transactions with tax havens may have increased, particularly among individuals and small businesses. However the size of the issue in Australia is small relative to some other countries.
While the flow of Australian dollars to and from tax havens is significant, it needs to be seen in the context that not all tax haven transactions are abusive under Australian tax law.
Intelligence also suggests that increases in flows to particular regions can be based on economic and commercial factors. An example of this is the concentration of hedge funds in the Cayman Islands.
Intelligence also indicates that fund flows to countries other than tax havens may also represent a tax risk where that country is being used as a conduit to channel funds to a tax haven.
Bank secrecy is often a feature of tax havens. However, some countries that are not low-tax jurisdictions have bank secrecy arrangements that may be exploited to conceal income and evade tax because they do not have effective tax information exchange with other countries.
While revenue is at risk because of abusive tax haven schemes, those who participate in these schemes also run risks. Some participants lack financial awareness and – through poor or unethical advice, lack of knowledge or wishful thinking – may believe that an abusive arrangement is legitimate. Some funds in tax havens have disappeared or been lost to the investor by the misdeeds of the promoter.
Offshore evasion is a concern internationally. However, we are not aware of an effective way to estimate precisely the amount of tax at risk. Factors that mitigate this risk in Australia include:
- geographical factors
- the existence of AUSTRAC
- our own vigilance in this area
- the lack of an inheritance tax or gift duty
- the relative size of the flow of funds from Australia to tax havens (compared to some other countries)
- the law-abiding ethics of most Australians
- the message we are sending from Project Wickenby and other activities.
Arrangements we are concerned about
Concealment is our main concern – in particular, those schemes and arrangements that use secrecy laws to conceal assets and income that are subject to tax in Australia.
In the simplest case of concealment, a taxpayer may seek to conceal assets and income by setting up a bank account in a tax haven. As the tax haven does not have an agreement to exchange information with Australia, or the country has a strict bank secrecy regime, we cannot obtain detailed information about the offshore bank account directly.
In more complex cases, taxpayers may use an ‘international promoter’ to set up and manage offshore trusts or companies that seek to conceal the taxpayer’s beneficial ownership of assets. The most common form of tax haven structure used to conceal ownership is the ‘international business company’.
In these cases, the international promoter may interpose trusts or companies as the shareholders, using their own companies as trustees or nominees. The directors of the offshore company may also be companies associated with the international promoter. Arrangements are put in place to ensure that the Australian taxpayer is still able to influence or control the offshore trust or company eg letter of wishes.
These complex arrangements aim to conceal the true ownership of assets and result in the failure to declare any offshore income or gains in relevant tax returns. Australians who use these arrangements leave other Australians to bear a greater tax burden. These arrangements erode community confidence in Australia’s tax system.
Intelligence indicates that a few Australians are using more complex offshore structures which involve the creation of layers of entities offshore and the opening of bank accounts under the names of these entities in jurisdictions not recognised as tax havens.
An example of the typologies is the intelligence obtained as a result of our compliance activities regarding Liechtenstein entities. A structure peculiar to Liechtenstein law, the “Foundation” has been identified as a vehicle that is used to conceal the ownership of assets and/ or income.
The ATO is currently reviewing the taxation affairs of Australian taxpayers who appear to have concealed income in offshore entities located in banking secrecy jurisdictions and tax havens.
International promoters provide specialised accounting, banking and professional trustee services. The services commonly include tax planning, administration of offshore assets and advising on the establishment of trust and corporate structures.
In many cases the international promoter provides its services to Australian residents and associated entities through intermediaries, commonly Australian attorneys and accountants.
Marketing material indicates that the essential service provided by the international promoter is tax and financial planning, which includes administering companies and trusts domiciled in tax haven or banking secrecy countries. Our intelligence shows that a component of the services provided by the international promoter is to establish entities or structures which are not able to be connected to the ultimate or beneficial owner. These arrangements rely on local bank secrecy and confidentiality laws in the jurisdictions where the entities are established.
The international promoter may act on verbal instructions from a client to settle a trust, which in turn owns shares in a company incorporated in a low tax jurisdiction, for example, the British Virgin Islands.
In-house entities associated with the international promoter are used as office bearers when incorporating entities for particular clients. The use of these entities makes it difficult to identify any natural person who controls, is associated with or receives a benefit from an entity established by the promoter.
The promoter may also arrange a bank account for the company it has incorporated for its client in, for example, London, Jersey or Switzerland and provide signatories for the account.
Other techniques used by the promoters include:
- the provision of foreign cell phones to prevent the tracing of calls in Australia
- meetings held in person, either in Australia or overseas
- the use of “e-faxes” which requires the client to have a subscription to access the e-faxes
- the use of London post office box addresses and London bank accounts for entities created, to give the appearance of UK domicile for those entities, when they are in reality domiciled in a low tax country
- the use of encryption on computer records
- the identification of clients by reference to initials or cryptic identifiers
- the use of couriers to deliver documents.
Banking secrecy poses a significant risk to the public revenue.
Essentially, the main impediment to the ATO posed by tax haven secrecy laws arises from the difficulty of obtaining basic information that may be indicative of fraud and evasion. This is a “Catch 22” situation – without knowing that a person has funds in a tax haven, it can be difficult to identify or prove fraud or evasion. Without having identified fraud or evasion, access to relevant information is precluded by the secrecy laws of the tax havens.
Tax havens which operate on the basis of privacy or secrecy laws provide the opportunity for trust and asset management institutions, such as LGT, to establish tailored, confidential structures for taxpayers looking to take advantage of these laws to conceal their income from their tax administrations.
Experience has shown that many taxpayers who use these tailored financial structures in tax havens are engaging in tax evasion. The hallmarks of these structures are:
- Deception about ultimate beneficial ownership
- Structures may be used to hide assets and/or income offshore and/or create deductions by deception
- Secrecy surrounding access to funds and repatriation
- funds accessed offshore or to fund lifestyle
- back to back loans for purchase of assets
- accounting records and bank accounts may be held offshore.
For example in the Liechtenstein context, the true beneficial owner of a foundation and its assets does not appear on the public records of the official public registry. The statutes and by-laws of an unregistered foundation are not available publicly.
The establishment of structures that use layering via multiple entities, such as nominee companies incorporated in various tax havens, makes it difficult for the ATO to gather offshore information which may reveal participation by Australian taxpayers in tax evasion. Secrecy laws in these tax havens mean that investigations into the interposed companies may not reveal the links to Australian taxpayers.
The lack of transparency inherent in these structures means that the ATO is largely reliant on the co-operation of the taxpayer (where the taxpayer is known) to proffer further information in the course of its investigations. The exercise of the ATO’s information gathering powers would otherwise prove ineffective given the jurisdictional limits of these powers.
The ATO is also aware that the level of secrecy afforded to a taxpayer may be linked to their political status. In the LGT context we are aware that different provisions may be put in place for politically exposed persons to maintain their confidentiality.
Whilst the legislative framework of banking and privacy laws governs the operation of financial institutions, trusts and nominee companies, it is useful to recognise the importance of separating the powers between the financial sector, the executive and the judiciary to ensure transparency and effective operation of the regulatory system. As a general comment, tax haven jurisdictions may have closely connected administrative arms with the Government in power, in contrast to the modern and transparent approach to separation of powers.
Where they exist, these close connections between financial institutions, regulators, administrators and the judiciary may undermine any outwardly transparent statutory framework.
The ATO has encountered difficulties in applying Australian taxation laws to non-common law entities, such as Liechtenstein foundations. These hybrid entities possess characteristics of both a common law trust and a corporation and they may not fall squarely within the anti-deferral of tax provisions3.
Until legislative or judicial clarification is provided on this issue, the ATO will continue to characterise these hybrid entities on a case by case basis.
The ATO also faces impediments to gathering offshore information from banking institutions. For example, where a subsidiary or branch entity of an Australian bank is operating offshore, the question arises whether we are able to access offshore banking information in these circumstances. The question also arises where a foreign bank operates in Australia and has tax haven links.
Project Wickenby Taskforce
Project Wickenby is a multi-agency taskforce. It was formally funded in 2006 to investigate internationally promoted tax arrangements that allegedly involve tax avoidance or evasion and, in some cases, large-scale money laundering. The project has $305 million in funding over seven years. Its focus is to take decisive action against identified promoters and their Australian associates and clients.
The agencies involved in Project Wickenby, are the ATO, law enforcement agencies and the corporate regulator. The ATO is the lead agency. This is the first time these agencies, supported by our FIU, AUSTRAC, have brought their expertise and powers together to deal with tax avoidance and evasion.
Project Wickenby has led to a number of arrests and charges.
Legislative Reform
After the establishment of the Project Wickenby taskforce and the whole of government approach to tackling its challenges, it was considered that secrecy provisions contained in the tax legislation impeded the efficient and effective operations of the taskforce, necessitating some changes.
New provisions were enacted, sections 3G and 3H of the Taxation Administration Act, 1953, to allow greater interaction with all arms of the taskforce and to provide a mechanism to share tax information between taskforce members.
We will also use other approaches such as our new promoter penalty regime which provides substantial increased penalties – for a body corporate, up to $2.75 million or twice the profits from the scheme. This legislation is aimed at eliminating unscrupulous operators who promote unsustainable arrangements to the detriment of both taxpayers and ethical advisers.
In 2006 a new Anti-Money Laundering and Counter-Terrorist Financing Act 2006 was introduced which covers the finance sector, gambling sector, bullion dealers and some professions that provide financial services, such as lawyers and accountants. These groups will be required to monitor and report to our FIU on a wide range of services such as opening accounts, accepting deposits, issuing travellers cheques and some gambling activities.
Multi Jurisdiction Collaboration
The ATO in conjunction with its partner agencies including the IRS, HMRC, Canada Revenue Agency (CRA), and New Zealand Inland Revenue Department (NZIRD) are collaborating to develop strategies to combat the abusive use of tax havens. The ATO is also engaged with JITSIC to combat cross border tax non-compliance.
International Promoter Strategy (IPS)
The aim of this strategy is to engage tax havens about common issues with a view to reforms like enhanced transparency. Our approach is to identify off-shore promoters who are operating in Australia, and identify their on-shore associates (intermediaries) who are marketing and selling to Australian taxpayers.
By addressing high risk promoters, intermediaries and taxpayers we gather intelligence on the activity/ mischief and collate the information to produce a greater understanding of the tax haven and related tax risk. We share our intelligence with tax treaty nations as a step towards representations seeking reform. International cooperation is critical to the success of this strategy.
Mutual Assistance Requests
Mutual assistance protocols enhance our ability to tackle tax haven schemes involving criminality. However, material provided to police and prosecutors under mutual assistance is often restricted in that it cannot be shared with the ATO. This can impede our efforts towards collaboration.
Mutual assistance requests and assistance are predicated upon Australia reasonably making out a criminal matter. However, in havens and countries with banking secrecy laws, it may be very difficult to gather information in the first place. In other words, this “Catch 22” situation inhibits Australia’s ability to seek support under mutual assistance provisions.
AUSTRAC
An important source of information is AUSTRAC, which identifies Australian taxpayers who may be engaged in tax evasion using tax havens. AUSTRAC routinely monitors domestic transactions over $10,000 as well as international fund transfers.
AUSTRAC records the details of the ordering customer, beneficiary customer, the account to which the funds are to be credited, the amount transferred and the sending and receiving institutions. We use the information in these reports to identify participants and promoters of abusive tax schemes and tax evasion, as well as taxpayers who are hiding outside the tax system. In addition, we use AUSTRAC information to:
- monitor money movements into and out of Australia
- profile individuals and other taxpayers
- identify high-risk or suspicious transactions
- identify and quantify compliance risks and develop compliance strategies, and
- select cases for further investigation.
We also have access to information from financial institutions, as well as transaction data for credit and debit cards that have been issued offshore and used in Australia.
Information gathering powers of the ATO
The ATO has compulsory information gathering powers under the Income Tax Assessment Act, 1936 (ITAA).
Under section 263 of the ITAA the ATO can seek access without notice to places, buildings, and documents. The decision to use this power is made by a senior ATO officer.
Under section 264 of the ITAA the ATO can issue a formal notice requiring production of documents or information including the attendance at a formal interview. In these formal interviews the privilege against self incrimination is not available. However, attorney/ client privilege still applies in respect of the powers. In some cases, ambit claims of attorney/ client privilege have been used to hinder investigations.
There are penalties for non-compliance with these provisions.
Under section 264A of the ITAA the ATO can issue an “offshore information request”. There is an evidentiary sanction for non-compliance with this provision.
Encouraging Voluntary Compliance
Our Compliance Program that publishes our compliance strategies right across the community has dealing with abusive use of tax havens as one of its top priorities. Through Project Wickenby and a broader offshore compliance initiative, we are increasing our audit coverage including our coverage of high wealth individuals. We are also sending several thousand letters asking taxpayers to review their international issues.
The other element of our compliance strategy relates to enhanced communications with the community and the tax professions. Our tax haven concerns have been relayed via publications, in speeches to business and professional forums, and via the media. The messages have been simple – don’t get mixed up in this and if you do come clean!
The benefits of coming clean have been articulated as reduced penalties and interest, less audit stress and inconvenience and in some cases reduced risk of prosecution. The Australian prosecutor, the Commonwealth Director of Public Prosecutions, has stated publicly that he will, subject to certain conditions, look favourably on voluntary haven disclosures, thus reducing the prosecution risk.
Penalty concessions have been provided under our Offshore Voluntary Disclosure Initiative (OVDI). Under this initiative, taxpayers who volunteer their offshore arrangements may receive low or no penalties. To date 733 people have made disclosures involving over $31 million in income.
Intelligence and feedback from the tax profession has been favourable about our efforts to encourage voluntary disclosures. Some firms are establishing particular expertise in unwinding haven structures and settling up with the ATO.
Analysis of data trends and community perception testing confirm that our tax haven strategies are having a positive impact on compliance. Data analysis suggests that those people subject to review under Project Wickenby have ongoing improved compliance up to 57% higher than the “control” population. Community perception surveys also suggest broad support for ATO strategies in dealing with haven participants firmly and fairly.
Education and Communication
Taxpayer Alerts
The ATO issues “taxpayer alerts” to help people avoid becoming entangled in the abusive use of tax havens. The ATO issues alerts on our website about emerging schemes we are concerned about and risky arrangements.
The ATO issued a specific taxpayer alert (TA 2008/2) on 13 March 2008 to address the risks identified in relation to the abusive use of Liechtenstein foundations and/or bank accounts. We also issued a taxpayer alert (TA 2008/08) on 7 May 2008 warning against using tax evasion arrangements in Vanuatu.
Publications
To assist taxpayers in their understanding of tax havens and their Australian tax obligations, in October 2007 the ATO published a revised version of its original 2004 publication Tax havens and tax administrations. This publication illustrates the ATO’s approach to dealing with tax avoidance and evasion where tax havens are used, including the information sources that are available, such as AUSTRAC.
Taxation Information Exchange Agreement (TIEA)
In March 2002, the OECD’s global forum on taxation developed a model agreement for information exchange on tax matters. Australia has begun a program to negotiate TIEAs with a number of countries using the model agreement. We concluded agreements with Bermuda in November 2005, Antigua and Barbuda in January 2007, and the Netherlands Antilles in March 2007. We are negotiating agreements with another seven countries. In addition, the Isle of Man has agreed to sign an agreement with Australia. Whilst we are pleased that TIEA negotiations progress, their broader use and effectiveness is yet to be determined.
Tax Office Strategy
The ATO is investigating the use of Liechtenstein entities and bank accounts in collaboration with other revenue agencies. In Australia, we are conducting 20 tax audits which are likely to raise tax liabilities in excess of $100 million. Anecdotal information suggests that relatively few Australians are involved in Liechtenstein arrangements relative to citizens from other countries.
Liechtenstein
The ATO is currently reviewing the taxation affairs of Australian taxpayers who appear to have concealed income in offshore entities located in banking secrecy jurisdictions and tax havens. We have a particular focus on taxpayers who have used the services of the LGT Group and its trustee entity, LGT Treuhand Aktiengesellschaft in Vaduz, Liechtenstein (LGT).
- LGT Treuhand A.G. operates a fiduciary or trustee service and establishes and administers legal entities such as anstalts, stiftungs (foundations) and trusts for its clients.
- LGT Bank in Liechtenstein A.G. is the banking division of the LGT Group. It has responsibility for banking services related to the investment functions of the LGT Group.
The services provided by LGT include administration and investment of offshore assets which appear to be beneficially owned by the client. LGT acts on instructions from a client to establish or create a Liechtenstein entity and subsidiary entities in other tax haven jurisdictions. In the Australian examples, the parent entity is usually a foundation or trust. In some instances, LGT appears to have been retained as an agent of the client, and has established and administered a Liechtenstein entity acting in that capacity.
The beneficial owners of the Liechtenstein entity are commonly a natural person and their family members, however their identity and control appear to be concealed on public and bank records by the interposition of a foundation board comprising LGT officials, who exercise control of that entity on behalf of the beneficial owners. Documents relating to a private family foundation are not recorded on the Liechtenstein public registry. The foundation is a separate legal entity and the board members have discretion to nominate beneficiaries, so that secrecy is maintained.
The ATO understands that in practice the foundation board members act on the wishes or instructions of the settlor or beneficial owners of the entity. In other cases the client has used a foreign attorney to give instructions to the foundation board members or has replaced the by-laws or regulations of the foundation to appoint new beneficiaries.
LGT allegedly designs client structures so that the client or beneficial owner is unable to be connected to the Liechtenstein entity, whether that entity is a foundation, trust or anstalt. The services provided by LGT rely on the banking and secrecy laws operating in Liechtenstein to prevent disclosure of the client’s identity or information.
LGT will also arrange to open and operate a bank account for the foundation or trust it has established for its client. The bank accounts are typically held in the name of the entity, to avoid any connection with the instructing client, and to meet the bank’s anti-money laundering obligations.
Assets administered by LGT may be invested in a diverse range of managed funds and currencies. Further, safety deposit facilities can be arranged for clients to secure other valuable items such as art and jewellery which may also form part of the investment portfolio.
Funds owned by entities that are established by LGT for its clients are commonly invested with its own bank or funds management entities:
- LGT Bank in Liechtenstein;
- LGT Capital Invest Limited Grand Cayman; and
- LGT Portfolio Management (Cayman) Limited.
At the client’s direction, funds may be invested with a third party bank, usually operated in a banking secrecy jurisdiction.
The ATO understands that for a trust or foundation to be established by LGT, substantial funds must be settled in the trust or foundation for it to be economically viable for LGT. LGT clients are wealthy investors who typically invest a small portion of their total wealth in a LGT structure and who do not need access to these funds to support their domestic lifestyle.
LGT plays an active role in servicing and administering the client’s Liechtenstein entity. For example the board members of a foundation will be LGT employees. They are responsible for administration of the entity and are the approved signatories.
The use of LGT employees as board members or trustees and in-house or ‘omnibus’ entities as nominee directors of interposed entities is considered to be another means by which the beneficial owner is distanced from being connected to their Liechtenstein entity. This may facilitate the avoidance or evasion of tax on any offshore income derived by the Liechtenstein entity by an Australian taxpayer, who is the beneficial owner.
LGT also arranges for shell entities incorporated in other tax haven jurisdictions (such as BVI or Panama) to be set up as interposed entities of the Liechtenstein entity for its clients. The ATO considers that these special purpose vehicles are used to layer the transactions and the flow of funds, and may be designed to prevent regulators and tax administrators from determining the underlying ownership and control of the entity established by LGT and its assets and income.
LGT allegedly recommends to clients that fund transfers be conducted through interposed entities in countries outside the client’s domestic jurisdiction. The Australian experience is that clients have adopted this recommendation and that few international fund transfers are remitted directly between Australian residents and Liechtenstein or Switzerland as detected by our FIU.
Communication between the ultimate beneficial owner of the foundation and LGT appears to be limited to either face to face or telephone contact. LGT instructs the ultimate beneficial owner of the foundation to avoid written correspondence with it and clients are provided with codes and passwords to maintain confidentiality and secrecy.
Intelligence held by the ATO indicates that at July 2006 there were 14 banks operating in Liechtenstein with funds under control of approximately 255 billion Swiss francs. Also operating in Liechtenstein was numerous Treuhand (Trust Service Companies). Further intelligence indicates that as at November 2006 approximately 127,000 entities were registered with the public company registry (the population of Liechtenstein is approximately 35,000).
The ATO has employed several compliance strategies – audits, issuing information production notices (both domestically and off-shore), conducting formal and informal interviews, accessing premises (with or without notice) to copy documents, and exchanging information with our Tax Treaty partners.
More importantly, the sharing of intelligence between international tax agencies has provided a unique understanding of Liechtenstein financial services and entities and will provide an opportunity to engage with Liechtenstein to achieve greater transparency and exchange of information.
The ATO welcomes news that new laws in Liechtenstein will enhance regulation and transparency in relation to some legal entities. However, we are concerned to see the detailed law and its proposed implementation in 2009 to determine whether there are practical changes to trustee/ banking practices.
Lessons learned
- Project management strategies are essential to successful audit outcomes.
- Sharing of information with other revenue agencies expedites the progress of cases.
- Our compliance activities have resulted in disclosures or settlements.
- Information sharing amongst revenue authorities – multi jurisdictional as opposed to bilateral (treaty based)
- Where appropriate undertake simultaneous audits
- Regular and timely exchange of information under the treaty
- Compliance with OECD guidelines on exchange of information and transparency
- Defensive legislative measures to protect revenue bases from the abusive use of tax haven arrangements
- Looking at broader options for sustainable economic and social development for those tax havens which are developing economies
- Develop close working relationships and regular communications, including participating in successful workshops with other revenue agencies
- Policy makers and country leaders that drive cultural and behavioural changes resulting in the belief that tax haven abuse is inconsistent with being a good citizen.
Footnotes
1 JITSIC member countries include Australia, Canada, Japan, United Kingdom and the United States of America.
2 Testimony of Mr Jeffrey Owens, Director of the Centre for tax Policy and Administration at the OECD before the USA’s Senate Finance Committee on Off-shore tax Evasion.
3 For example, Australia’s Controlled Foreign Companies provisions apply where a tax haven company is controlled from Australia and the company is primarily in receipt of passive income. Different provisions apply to trusts
Last Modified: Tuesday, 22 July 2008
Subscribe
