Cross-Border Column

Fiscal Paradise Lost

  • Date : May 2009
Richard Frimston TEP is a Partner at Russell Cooke LLP and Chairman of the STEP Cross Border Estates Group

‘Man’s disobedience, and the loss thereupon of Paradise: the prime cause of his fall, Satan in the Serpent; who revolting from God, and drawing to his side many Legions of Angels, was by the command of God driven out of Heaven with all his Crew into the great Deep.’John Milton, Paradise Lost

The Public Policy Committee has been grappling for some time with the difficulties of how STEP should respond as an organisation to the growing demands from the OECD, the EU and the USA for exchange of tax information between states and the inequalities of bargaining positions.

For a long time, I was of the opinion that such matters did not directly affect my cross-border estate practice; my client base tends towards the residents of high-tax jurisdictions who are at risk of double or triple tax on their assets in such jurisdictions, rather than the über wealthy residents of low-tax jurisdictions with trust or foundation structures in international financial centres who are aiming for low or no taxation. The traditional distinction between off- and onshore put me firmly in the Thames estuary. We cross-border practitioners were largely unaffected; that was for the internationalists.

Recent developments have, however, reminded me that the world is becoming a very small place and that offshore jurisdictions may not be quite where you expect. The current OECD list of ‘uncooperative tax havens’ (in French paradis fiscaux) consists of Andorra, Liechtenstein and Monaco.

Robin Paul recently reminded me again that the old Government of India v Taylor [1955] AC 491 rule of non-enforceability for inheritance tax is wearing thin. The European Community Council Mutual Assistance Recovery Directive 2001/44 does not apply to inheritance tax. However, the Council of Europe – OECD ETS No 127 Convention on Mutual Administrative Assistance in Tax Matters of 25 January 1988 does. More than 20 years old, this convention took some time to get going. It did not come into force until 1995, but was not ratified by the United Kingdom until 1 May 2008. The convention has now been ratified by Council of Europe members Azerbaijan, Belgium, Denmark, Finland, France, Iceland, Italy, Netherlands, Norway, Poland, Sweden and OECD member USA (Canada, Germany and Ukraine have signed but not yet ratified). From a UK perspective, inheritance and gift tax can now be enforceable between Convention states. The practical effects of this Convention are yet to become apparent. If the relevant limitation period is that of the other state, how are personal representatives to be protected? Must we apply to court for an order for distribution in such cases?

Recent developments have reminded me that the world is becoming a very small place and that offshore jurisdictions may not be quite where you expect

The UK and France have gone even further in their new double tax treaty SI 2009 No. 226 on income and capital gains ratified by the UK on 11 February 2009, but not yet by France. Article 27 on information exchange applies to information in relation to any tax, not only income and capital gains. If information is requested by a Contracting State, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes.

Such obligations are wide-ranging. Even though other tax information exchange agreements may be restricted and with specific confidentiality limits, it would be a brave soul who would be prepared to predict that such wide powers and obligations will not be ranged against smaller island paradises in due course.

For cross-border estates, tax in the other jurisdiction will become an increasing problem. The distinctions between international wealth and cross-border affluence will be forgotten in the governmental stampede to increase tax collection.


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