Halcyon days of hiding money offshore are over

PUBLISHED : Sunday, 23 August, 2009, 12:00am
UPDATED : Sunday, 23 August, 2009, 12:00am

Hong Kong has a very lenient system of taxation. The rates are low and tax is charged only on income that has a Hong Kong source. Capital gains are not taxed and there is no inheritance tax or estate duty. Few developed economies offer such leniency.

There are places that charge no tax whatsoever. Residents of the Bahamas, Turks & Caicos Islands, Monaco and other small island-states pay nothing, but living there is challenging and facilities are limited. In other places, such as Gibraltar, it's possible to reside if you pay a maximum tax of GBP22,000 (HK$281,700) per year, irrespective of your worldwide income. But again, living conditions are not to everybody's taste.

If you leave Hong Kong, you are likely to face a different tax system with much higher rates. The most popular destinations are the US, Canada, Australia and Britain. They charge residents tax on their worldwide income at rates of 30 per cent upwards and make it difficult to shield income and capital gains from tax.

We recently conducted an exercise to see how much of a typical high-rate taxpayer's income in Britain was returned to the government. There are breaks for those who are not domiciled in Britain but very few for those who are both resident and domiciled.

The higher rate is 50 per cent, national insurance normally adds another 10 per cent on salary income. Then there are duties on alcohol, tobacco, fuel and other items. Add in road tax, congestion charges, rates on your house and VAT at 14 per cent on everything you spend, and it can be seen that 75 to 80 per cent of the income goes back to the government!

It is possible to spend a reasonable amount of time in each of these countries without becoming tax resident, but it's easy to overstay your welcome and get caught.

Other countries consider you tax resident if that country is your primary residence or centre of main economic and family activity. So unless it's possible to point to somewhere else where you actually live, you can be considered tax resident without spending the minimum required number of days there.

Many people use offshore structures to shield their income and capital gains from tax, but anti-avoidance rules now look through most of these structures and treat the underlying income rolled up within a trust or company offshore as belonging to the taxpayer and tax him on it even if he doesn't receive it.

Previously, many had set up non-compliant structures and assumed the confidentiality afforded offshore would protect them. But now there is an accelerating process in place whereby an onshore country is able to obtain information about who is behind a particular structure.

Recent examples of this can be seen in Britain, where the country's banks have been forced to reveal details of all residents who hold accounts with them in their offshore branches. HMRC estimates there are 500,000 such accounts, and they are now offering a second chance to those who have had such accounts and not declared the income. If they come clean, they pay reduced penalties and start afresh. Many are expected to take up that opportunity because if they don't, they could face penalties of up to 100 per cent and criminal prosecution.

The United States is likewise forcing Swiss banks to reveal details of US account-holders. Liechtenstein has recently been forced to sign tax co-operation agreements which will force it to reveal details of foreign account-holders upon request.

Offshore Financial Centres (OFCs) are being forced to sign Tax Information Exchange Agreements which give the right to onshore countries to obtain information about ownership of hitherto confidential structures set up in their jurisdiction and pass it to the local onshore revenue authority.

The European Union has forced member states and territories under their control to automatically pass details of any bank account held by a resident of another EU state back to the country of his residence. Although not an EU member, Switzerland is being forced to sign up to this initiative.

For residents of Hong Kong who move away and settle in another country, this can all come as a nasty shock. Many simply do not realise the additional tax cost of moving to another country. Many also do not realise that the days of hiding money in secret accounts or structures are now well and truly gone.

Careful planning is everything. There are structures you can set up that will be effective in mitigating or avoiding tax and not rely on confidentiality, but they are unlikely to be simple or cheap.