Taking shelter

THE mention of tax havens conjures up pictures of mixing with royalty in Monaco, living under blue skies on creamy beaches in the Caribbean or interminable ski holidays on the romantic slopes of Switzerland.

But the list of safe countries for the very rich has grown considerably since Liechtenstein started the business of providing a safe haven for the wealth many years ago.

Offering tax shelters and engaging in robust tax competition has developed into a huge global business that encompasses a whole range of options and elements, including International Financial Services Centres like that in Dublin.

Being a tax haven has proved a very profitable option for dozens of places in the world, and in some cases, for individual families. The Grimaldi family in Monaco and the Liechtenstein royals are billionaires as a result of offering these services.

Being competitive in the area of tax has proved very beneficial to Ireland for instance, and its 12.5% corporation tax has resulted in many big companies (and several lesser ones) setting up office here.

Even countries without that playground-of-the-rich mystique, like Belgium and Austria, have become favourites for wealthy investors, with their offerings of tax avoidance for certain types of companies.

Entrepreneurs, their accountants and lawyers have devised creative strategies to reduce or eliminate tax liabilities too. Consider Richard Branson, who lives on his own Caribbean island and his web of companies that buy and sell from one another in a highly tax-efficient way.

Ireland, too, has its growing number of tax emigrants and the State has a list of rules to regulate them. The Department of Finance estimates there are more than 3,000 tax exiles, including at least 10 of the country’s richest.

Billionaire Dermot Desmond officially lives in Gibraltar where he must spend 30 days a year, own or lease accommodation for seven months a year and pay about €26,500 a year on his income. Fellow billionaire Denis O’Brien lives in Malta, which means he must visit the island once a year and is not charged tax on assets or income not brought into the jurisdiction.

Three others — Hugh Mackeown of Musgrave Group and the horseracing millionaires John Magnier and JP McManus — “live” in Switzerland, where they can decide the amount of money they pay tax on. Cardboard packaging king Michael Smurfit and dancing tycoon Michael Flatley are residents of Monaco, where there is no personal income tax.

They are entitled to visit Ireland as often as they like, provided they spend no more than 183 days in any one year — which amounts to every weekend plus 10 weeks’ holidays — and no more than 280 over any two years.

Ireland has double taxation agreements with a very large number of countries, which means that their respective citizens will be taxed in just one jurisdiction.

Choosing the most suitable tax haven is not a simple matter as very few if any countries offer the most complete package. Such things as political and banking stability for instance is a must, as anybody lured by the incentives offered by Beirut and Tangier in years gone by discovered.

Banking secrecy is another given, with old hands in the business, like Switzerland, making indiscretion a crime and which Liechtenstein is discovering to its cost.

Technology and the telecoms revolution have allowed tax havens to develop on small islands and otherwise underdeveloped locations. While nice weather, good hotels and an excellent standard of living add to the attractiveness, a small landing strip for private planes and helicopters is just as important as it allows tax-exiles to frequent for purposes of residency and escape for the rest of the time.

Tax shelters are not just for the individually wealthy as Ireland well knows, having made itself extremely attractive to foreign companies. They benefit not just from one of the lowest corporation tax rates in the world, but also from arrangements that allow subsidiaries to offset their borrowings against their tax liabilities — much to the fury of the German Finance Minister Peer Steinbruck, for one.

Germany is leading the current drive against tax havens. As well as having reduced its corporation tax in recent years, it is not an enthusiastic player in the game of tax competition and has become annoyed with what it sees as the leakage of potential revenue to countries like Ireland. Subsequently, it is demanding reforms.

But for every country that does so, there are others that are less interested in pursuing the option as they have come to other arrangements. For instance, while Britain has a reasonably regular set of tax arrangements, their dependencies and other islands overseas offer anything a tax-shy millionaire could want. Ireland is not to the forefront of demanding reforms, nor is Luxembourg.

As a result it took the EU 14 years to agree to the most basic deal on how to claw back some of what countries saw as their money from savings stashed away in tax-efficient bank accounts in other European countries.

All 27 EU and 15 non-EU countries signed up to the savings tax directive which came into force in 2005.

These included Switzerland, Monaco, Andorra, San Marino, Liechtenstein and some former Dutch and British colonies. All agreed to tax savings accounts and share it with the country of the account holder. This is being done on a sliding scale that will reach 35% in 2011, but the non-EU countries together with Luxembourg, Austria and Belgium do not name names, but remit the tax anonymously.

All other EU countries agree to exchange banking information on their citizens with one another.

This was a compromise and as such not exactly what many countries wanted. For instance money from other types of investments, trusts and foundations are not covered.

The European Commission had begun a review of the directive this year, but the sale of the client list from a former Liechtenstein employee to the German tax authorities suddenly put it under the spotlight.

The Germans have been particularly sensitive about their companies and citizens using more gentle tax regimes in other countries for even legitimate tax avoidance. This fuelled the attack by their Finance Minister last year on Ireland’s corporation tax system — not just the 12.5% rate but also the regulations that allow sophisticated tax avoidance by German companies.

Now the Tax Commissioner, Laszlo Kovacs, who was prepared to move forward gently knowing the difficulties that countries like Austria and Luxembourg would create over a revision of the directive will have a report in May, a formal review of how the current directive is working in June and new proposals before the end of the year.

But nobody expects that even the best possible directive can close the loopholes and ensure that everyone pays tax as they should.

Accountants and bankers have lots of experience in finding ways around state laws to help their clients avoid sharing their wealth.

And one man’s tax haven may be another’s hell. Consider that 19 of Ireland’s wealthiest people are domiciled abroad, while several of the world’s wealthy base themselves happily in Ireland, where they only pay tax on money brought into the country.

For some nationalities there is no escaping tax though. The US authorities will tax their citizens irrespective of where they live or where their income comes from. The only way out is to surrender your citizenship and stay out of the country.

But despite all the words and work, there is no sign of a real change in the reality voiced by the Queen of Mean, Leona Helmsley, widow of an extremely wealthy New York property tycoon, when she said, “Only little people pay taxes”, adding that she did not.

The top four tax havens

SWITZERLAND

Manages about €1 trillion for foreign clients and holds about a third of the assets held in offshore accounts by the world’s wealthy.

Fiscal deal if you are worth at least €1m that includes residence permit and negotiation how much you will pay tax on — normally five times your apartment rental, but you must not work there.

Crime for Swiss bankers to violate clients’ privacy. Most refuse to reveal anything to foreign tax authorities unless by Swiss court order. Swiss franc very healthy.

Very strict laws on anti-money-laundering mean they investigate potential clients fully; remit tax on interest to tax authorities of EU account holders without the name. High minimum deposit averaging €200,000 required to open account.

PANAMA

World-class tax haven with financial privacy, solid asset protection and freedom from outside political pressures. The major multinational banks located there hold €24bn in assets.

Has resisted pressure to tax foreign investors, including the EU tax on savings and has no double tax treaties.

Only tax your locally derived income and exempts any income earned from foreign sources. Zero tax for offshore international business companies. Specialises in tax-free family foundations and is a leading retirement haven with first-class healthcare and low overheads including live-in maids for €100 a month.

LIECHTENSTEIN

The world’s oldest and most exclusive tax haven, 25km long and 5.6km wide, population 34,000 is nestled in the mountains between Switzerland and Austria.

Its monarch, Hans-Adam II, won the right to veto laws in 2003 and owns the LLB bank whose records were stolen.

Residents and non-residents enjoy the same low taxes. The income tax rate is about 18%, but no income tax is due on investment income from dividends, interest or rental income, provided a small wealth tax is paid.

It provides special investment foundations whose income can be tax free — these are the arrangements that have angered the German authorities so much.

Up to now it had one of the best reputations for banking privacy.

Not an EU member, it has signed up to the EU savings tax directive that means it remits tax (20%, rising to 35% in 2011) to the bank holders’ home country without revealing their name.

HONG KONG

Gateway to China and, despite the Chinese communist clamp-down on democracy, money talks so the island continues to be the region’s financial powerhouse. No tax paid on income made outside Hong Kong so setting up an offshore company there can mean no income and corporate tax being paid. Estate and inheritance taxes have been abolished.

It’s not on the OECD’s “watch-list” of dodgy tax havens so is easier to remain under the radar of an investor’s home country. Sophisticated banking and financial management with secrecy guaranteed.

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