During my almost three decades of providing professional advice to HNW individuals, I have observed a disturbing phenomenon. Some – thankfully not my clients – look for the benefits of a back-up plan for themselves and their families, but want to skirt the tax obligations which may go with it. A case in point is Residence by Investment and/or Citizenship by Investment programs that come with the obligation to pay tax on world-wide income. Despite having ample opportunity to do pre-immigration tax avoidance planning (which is legal), some individuals decided that their tax plan would simply be to “not disclose”. In other words, to engage in tax evasion (which is not legal). As I will discuss below, this evasion took a variety of forms including non-disclosure of overseas income and non-disclosure of overseas assets or bank accounts.
Non-Disclosure of Income
These evaders understood that almost all taxing jurisdictions relied on “self-reporting” of non-domestic international income. And they believed – or hoped – that since few tax authorities audited or challenged self-declarations, their false ones would get through. As a result, it became known that that this approach, though blatantly illegal, gave them a pretty good chance of reducing or completely avoiding paying the full tax bill for the status they had acquired. In short…it worked! Unfortunately for them, the situation has now changed dramatically and will no longer work!
Non-Disclosure of Accounts
This is where HNW individuals from the US and other high tax countries opened “secret” undisclosed Swiss bank accounts in order to evade tax. This approach worked for many decades…until it stopped working in 2006. Thats when the UBS Whistleblower Case blew up.
What was interesting to see and a good lesson for future reference – is that some of the smarter UBS offenders opted to “come in from the cold” by entering into Voluntary Disclosures and got substantially better deals than those who waited.
What was also interesting to observe was the offenders who were banking elsewhere who did not get or understand the underlying message from the UBS situation. I actually heard many people proudly proclaim, “Thank God I bank with HSBC in Switzerland!” As a result, when HSBC had its own scandal, those who then entered into voluntary disclosures did so on less favourable terms.
Despite this clear signal to voluntarily disclose, I still heard some people quietly say “Thank God I bank at a small cantonal bank like Bank Wegelin”. So of course, after Wegelin was shut down and no one was talking about secret Swiss bank accounts anymore, I heard the remaining hard-core evaders mutter “Thank God I don’t bank in Switzerland, but rather have an account in Singapore”. Then when Singapore banks got targeted, I heard the last few holdouts whisper, “Thank God I have a secret account in the Cook Islands or Vanuatu”. Then to no ones surprise but them, these islands got targeted!
What was interesting to observe and worth remembering was that with each progressive target, the terms to reach a Voluntary Disclosure Agreement got more and more onerous. Eventually most countries closed this compromise option completely and just threw the book at those who had not yet come in from the cold.
The reason I mapped out the sequence of events above is to illustrate the point that if you (or your clients) are planning to continue engaging in “secrecy planning” for tax evasion, you are being foolish. Oversight (systems and staff) is increasing and the incentives for whistle-blowing now exist everywhere. The reality is that the technique of using undisclosed foreign bank accounts is dying a hard and painful death with the last few remaining offenders being uncovered every day.
Pre-Immigration Tax Planning
Just as failing to disclose foreign bank accounts is a failed strategy, so is forgoing legal pre-immigration tax avoidance planning in favor of not disclosing non-domestic income and capital gains to the new country.
In a series of upcoming blogs I will describe in more detail how popular HNW immigration destinations such as Canada, Australia, the US and others have realized that there is rampant tax evasion in their immigrant communities – a situation that has generated negative press and anger within the local populations that can’t and won’t be ignored any longer.
In these blogs I will also outline various actions that each jurisdiction is actively and vigorously undertaking to uncover this tax evasion and collect the owed taxes, interest and penalties. Furthermore, I will identify other steps that are being taken against those who are engaging in this illegal behaviour such as criminal charges or revocation of immigration status.
Finally, I will offer my advice to those who are currently engaging in this behaviour as to how they can “come in from the cold” and to those who are just starting out in designing their back-up plans, how to do it right and avoid the expense and disruption of fixing a broken plan.