The new boundaries

  • Author : John Riches
  • Date : November 2012
ABOUT THE AUTHOR: John Riches TEP is a Partner at Withers LLP and co-Chair of the STEP Public Policy Committee

Three dominant themes have emerged in the past year as being of critical importance for advisors to wealthy families. These are the morality of tax planning, the changing relationship between taxpayers and revenue authorities, and expectations for transparency in disclosure of asset-holding structures. It is no surprise that these themes are intimately linked.

Morality of tax planning

On the subject of the morality of tax planning, governments in Organisation for Economic Cooperation and Development (OECD) jurisdictions are clearly making a concerted effort to create an ethical climate in which not only is tax evasion reviled as criminal activity (as it rightly should be) but also ‘aggressive’ tax planning is regarded with disdain and is stigmatised. Politicians and policymakers alike are responding to a perceived swing in public opinion that is not unlike that which occurred in the early 1930s. The arguments in favour of encouraging taxpayers to see it as their moral duty (as well as their legal obligation) to pay taxes and to refrain from indulging in aggressive avoidance are based on the proposition that the wealthiest members of society should make a proportionate contribution to public services and support those less fortunate than themselves. As a basic proposition this is clearly correct. The debate becomes more problematic when complex arguments are reduced to simplistic soundbites, especially in the context of what is regarded as ‘aggressive’ tax planning. It is notable that in the UK, in the aftermath of the Spring Budget of 2012, when the government proposed capping the amount of relief available to taxpayers to a maximum of 25 per cent of that individual’s annual income, that serious commentators were suggesting that individuals who made significant contributions to charity and claimed tax relief were in some way engaging in aggressive tax avoidance. This is just a small example of the way the debate over tax policy becomes swirled in confusion: there is a tendency to characterise certain aspects of tax systems that are deliberate reliefs or exemptions as ‘loopholes’.

There is also irony in the fact that this proposal was withdrawn in response to a campaign from the voluntary sector – an argument that could have been advanced in defence of the proposal was that allowing unlimited tax deductions for charitable donations might be seen as a form of hypothecation in which individuals with sufficient funds could substitute donations to their favoured charities for contributions to the basic services that other taxpayers effectively support. This reasonable defence to the proposal was lost in the furore and never effectively advanced.

One especially concerning aspect of the debate about the morality of tax planning is the absence of any parallel emphasis on the duty of tax authorities to produce clear and fair rules of taxation that could be easily understood and applied. If one sees the relationship between taxpayer and tax authority as akin to a social contract then there has been too little emphasis on the duties of tax authorities to refrain from ill-thought-out changes to tax statutes or from producing sweeping anti-avoidance rules that create huge uncertainty for both individuals and businesses.

Regardless of this, it seems that in the years ahead, those of us acting as advisors to wealthy families will need to ensure that in delivering advice on what is an appropriate tax strategy, we bear in mind the possibility that, in future, the actions of our clients (and indeed our own advice) are likely to be judged not just for their technical accuracy, as legally appropriate, but also for moral content. It will be important for us to highlight for clients whether the tax planning strategy being considered may risk being seen as ‘unduly aggressive’ even if it is legally correct.

Relationship between taxpayers and revenue authorities

One positive development in the relationships between revenue authorities and wealthy taxpayers is the introduction of high-net-worth (HNW) units in many OECD countries. These units look to provide greater coordination in overseeing the usually more complex tax affairs of wealthy individuals and the ability for a taxpayer’s professional advisor, in some cases, to foster an enhanced relationship of openness with the HNW unit, given that in many jurisdictions the principle of self-assessment places an onus on taxpayers to highlight areas of uncertainty so that the revenue authority can consider them. In future, those taxpayers could find that their long-term interests are better served by erring on the side of transparency in their dealings with revenue authorities. In many jurisdictions, the ability to seek advance rulings is one route to achieving greater certainty; in others, ensuring one’s tax advisor has well-placed contacts with revenue authorities is an alternative. The climate of mutual suspicion that has historically been characteristic of dealings between taxpayers and tax authorities will not evaporate overnight. The evidence emerging in other sectors (notably that of large corporate taxpayers) is, however, that in many cases a more transparent approach will serve the client’s interests and may also reduce compliance costs. This is not to suggest that the role of the tax advisor should not be to defend and advance the client’s interests on specific tax issues, but that to point out that they should also consider how to achieve an optimal outcome bearing in mind the client’s long-term interest in remaining in good standing with the tax authorities.

Transparency agenda

Moving to my third and final theme, the publication by the OECD, in February 2012, of its updated guidance on the Financial Action Task Force (FATF) 40 Recommendations and the expanded interpretive notes accompanying it is the latest manifestation at the supranational level of policymakers seeking to force through a transparency agenda for international holding structures in their fight against tax evasion. Below I set out some comments from interpretive guidance on Recommendation 24, commenting on bearer share arrangements:

‘14. Countries should take measures to prevent the misuse of bearer shares and bearer share warrants, for example by applying one or more of the following mechanisms:

(a) prohibiting them;

(b) converting them into registered shares or share warrants (for example through dematerialisation);

(c) immobilising them by requiring them to be held with a regulated financial institution or professional intermediary; or

(d) requiring shareholders with a controlling interest to notify the company, and the company to record their identity.

‘15. Countries should take measures to prevent the misuse of nominee shares and nominee directors, for example by applying one or more of the following mechanisms:

(a) requiring nominee shareholders and directors to disclose the identity of their nominator to the company and to any relevant registry, and for this information to be included in the relevant register; or

(b) requiring nominee shareholders and directors to be licensed, for their nominee status to be recorded in company registries, and for them to maintain information identifying their nominator, and make this information available to the competent authorities upon request.’

This shows that the underlying philosophy of the FATF guidance is that any arrangement that is based on anonymity will be regarded by authorities as suspicious, and a prima facie indication of an attempt to conceal the reality of beneficial ownership. In most cases, families wish to maintain privacy in their financial affairs not to evade taxes, but to protect their assets from predators such as kidnappers or individuals who may be motivated to exploit them in inappropriate ways. The fact that the FATF’s mandate was renewed in April 2012 for a further eight years, until at least 2020, is evidence of the desire of OECD countries to maintain a sharp focus on transparency in tandem with the actions of the parallel initiatives being undertaken by the Global Tax Forum.

“As advisors we need to carefully consider the way we legitimately protect our law-abiding clients”

It is clear that the boundary line as to what can legitimately be regarded as private and not requiring explanation or justification in the structuring of an individual’s financial affairs has been radically redrawn in recent years. Any individual wishing to engage the services of a financial institution or professional advisor will be effectively obliged to provide full beneficial ownership information as an essential pre-condition. As advisors we will therefore need to carefully consider how we can legitimately protect our law-abiding, taxpaying clients from unwarranted and unwelcome scrutiny from those who are motivated by greed or improper motives. We also need to ensure that we maintain an effective dialogue with policymakers that highlights the legitimate strategies that wealthy families pursue and the many non-tax reasons that underpin those strategies – in particular, where complex cross-border challenges of holding assets are addressed by using trusts or foundations that have a strong rationale in ensuring business continuity or legitimate asset protection.

Proper judgment

To conclude, I believe that the years ahead may well behove us, as advisors, to exercise proper judgment to assist our clients in making appropriate choices about the moral probity, as well as legality, of their tax-planning arrangements. Equally, it will be necessary to consider how to properly protect the privacy of our clients without giving the impression that their desire for privacy is a cloak for improper motives that will invite unwelcome suspicion or hostility from tax or regulatory authorities, or indeed third-party service providers whom they wish to engage in a business relationship. Failure to abide by the new prevailing norms of transparency could well be costly. The effectiveness of our own advice in the future is likely to be judged with the benefit of 20/20 hindsight.

Reproduced with permission from Law Business Research Ltd. First published in The Private Wealth & Private Client Law Review (published in November 2012, editor John Riches). For further information please see members can receive a 30 per cent discount on this title. Go to for more information (you must log in to receive the discount).


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