When evasion methods are legal but morals debatable

PUBLISHED : Sunday, 20 December, 2009, 12:00am
UPDATED : Sunday, 20 December, 2009, 12:00am

There have been media reports of late on how US prosecutors are trying to determine what role financial professionals in Hong Kong play in evasion of US taxes and how the US government has succeeded in penetrating Swiss banking secrecy.

And now we are told there will be new qualifying intermediary rules under which any financial institution that invests in the United States will be penalised unless it identifies any Americans on behalf of whom it is investing.

One Swiss bank recently avoided US prosecution by agreeing to disclose details of thousands of accounts held by Americans and to pay US$780 million in fines. This must be contrary to Swiss banking laws preventing details being revealed.

Clients might rightly feel aggrieved that they are being offered up by their banker to save the bank's skin. On the other hand, members of the wider community might have little sympathy for these account holders on the basis that they are probably filthy rich and should have been correctly declaring income earned on their accounts, so have got what they deserved.

One article states that so far prosecutors have won guilty pleas from six US bank clients who have described 'a web of bankers, lawyers and advisers who helped conceal income and assets'. Apparently these people helped them set up 'shell companies' to conceal accounts. Four of these people used Hong Kong corporations in their structures.

I am not clear on what exactly a shell company is. The term seems to be used in a derogatory way to describe a company that holds assets rather than engages in manufacturing or 'real business'. It seems to me nonsense to try to describe a company in this way. If it is incorporated, then it is proper and that is the end of it. Companies should not be defined by their activities, turnover or other criteria as being somehow false if they do not accord to the US tax authority's view of the level of activity required to make that company 'proper'.

The 'web of advisers' seem to be people who helped lead the poor US citizen down this illegal path. Ridiculous. There is nothing illegal or immoral about placing assets into a corporate structure. Of course US citizens have a duty to declare ownership of corporate structures and pay tax on income accruing to them. I am sure they were not advised otherwise. The offence took place when they filed their tax returns and 'forgot' to make the proper declarations. There was no offence in putting the assets into the structure, nor were their advisers doing anything illegal in helping them set up the structure. The US citizens could equally well have forgotten to declare the interest on accounts held in their own name.

Of course the morals of all this are very debatable. It must have been apparent to the advisers that there was little point in the structure being set up except to distance the US citizen from the account and to provide further confidentiality that might facilitate the lie on the tax form. Is it time advisers stopped assisting with such arrangements?

There are perfectly legitimate structures that allow tax to be deferred, avoided or mitigated. Yes, they are more complicated and yes, they are more expensive but they are legal and compliant, so they are a lot cheaper than something that does not work and is likely to lead to fines and even jail.

These articles also talk about 'sham bank accounts'. Again, I do not understand. Is it an account that does not exist? Or is it an account that does not contain anything? If it is a bank account with money in it, in what way is it sham?

The Organisation for Economic Co-operation and Development is accelerating moves to get all jurisdictions to sign tax information exchange agreements (TIEAs) so OECD members can get the information they need to tax their residents. To encourage jurisdictions to sign such agreements, the organisation has produced 'black', 'grey' and 'white' lists. To get on the white list, a jurisdiction has to sign 12 TIEAs. Singapore has just signed its 12th. Hong Kong has yet to comply but has changed the secrecy provisions within the Inland Revenue Ordinance in preparation of signing TIEAs.

The US leads the OECD. It is quite ironic that while it criticises banking secrecy and lack of transparency, it is the worst offender. The Tax Justice Network, a British think tank, recently completed a survey of tax secrecy and concluded that the US state of Delaware was the most secretive followed by Luxembourg, Switzerland, the Cayman Islands and the UK. Hong Kong appears at a modest No10.

From the website of Tax Justice Network, you can link to Transparency International, which rates places according to how corrupt they are. The least corrupt is New Zealand, Singapore is third, Hong Kong 12th and the US 19th. Pretty well all of Africa, Russia and the mainland are the worst culprits.

Hong Kong needs to decide whether it will remove financial privacy and open up its books to the rest of the world. If it does, Hong Kong residents need to understand that if they are liable to taxes abroad (as all who are resident or invest in another country will be), they need to get their planning right and cannot rely on what they invest remaining confidential. Any arrangement that relies on a tax authority not finding out what has really happened is likely to fail.

And now for something lighter. The Biscuit Injury Threat Evaluation (BITE) survey has concluded that the custard cream is the most dangerous biscuit. Apparently biscuit-related accidents are on the increase and doctors having to treat those who have hurt themselves in the eye with a biscuit, fallen off a chair by reaching for the biscuit tin, burned themselves while dunking the biscuit in tea, etc.

Have a great holiday.