My colleagues at MouxtiBay will probably have a little smile on their faces when I begin my Christmas toast this year. It must seem a little clichéd when the analysis of the year begins like this:
“Offshore companies are coming to the end of what has been a difficult year, and I don’t expect the next one to be any easier.”
Clichéd or not, I have had no choice but to draw the same conclusion for a number of years now: our industry has hit a period of turbulence, and it is unlikely that we will find more favorable air for a while yet, so we can expect the “plane” to be buffeted about for some time to come.
In 2014 the action against the tax havens and the fight against companies offering tax-free/low tax opportunities continued. The main flag bearer of the fight is the OECD. The organization, headquartered in Paris, has been seriously influencing the financial system with its recommendations for more than 15 years now.
OECD role in international taxation.
On many occasions, the financial system is forced to slavishly impose – and enforce – these suggestions. The OECD sees the fact that money diverted to tax havens is not taxed, and thus the budgets of the developed nations are left short-changed, and that the money “parked” there is not used more efficiently in the world economy’s bloodstream, as one of the greatest obstacles to the development of the world economy.
They took the fight, and are still taking it, to just about every player in the system simultaneously in 2014. In 2014 they continued to bombard the jurisdictions which offer the incorporation of offshore companies with requirements on transparency.
Transparency and exchange of information for tax purposes.
They demanded greater transparency in company structures, the identification of owners, and the written documentation of any changes in the individuals concerned. They all but eliminated the issue of bearer shares in almost every jurisdiction.
In this way, for example, anyone who failed to change their bearer shares in companies registered in Seychelles by June 16th, 2014 now finds themselves with shares that are null and void (although this does not mean that the company can no longer operate, but rather that the ownership structure has not been clarified).
With the exception of the Marshall Islands, there are possibly no other jurisdictions that now offer the option of bearer shares. But before you rush to register a company there, bear in mind that you will not be able to open a bank account.
Banks respond negatively to customers wishing to open accounts if the company, even if only in principle, has the possibility to issue this type of shares.
Transparency was also the password when it came to insisting that offshore companies declare the address where they keep the documentation related to their operation.
It is now all but impossible for a company to exist without keeping at least minimal accounts regarding its business transactions. And if the authorities ask to see them, then it is necessary to present these records to them.
The characteristically uniform regulations show that apart from minor differences in detail and timing, the requirements are almost identical for the world’s most popular offshore jurisdiction, the British Virgin Islands, and for jurisdictions such as Belize or Seychelles. It is also important, at this point, to emphasize two very significant factors:
Requirements of international accounting standards.
In preparing the accounting records application of International and Financial Accounting Standards is not a requirement.
It is not necessary to lodge or file financial statements with any authority in the country of registration. The main requirement is simply that the records should “enable the financial position of the International Business Company to be determined with reasonable accuracy at any time.”
A further element of the OECD fight is the identification of the beneficial owners behind a company. 2014 saw no significant changes in this respect, it was just more of the same.
Certain western banks began to specifically identify the individuals who were the Ultimate Beneficial Owners behind company bank accounts some 15 years ago.
Today, there is probably not a bank in the developed world that does not require the unequivocal identification of these individuals at the time of opening accounts. If we examine this point in detail, then it can be stated without fear of contradiction that today the banks of the major financial centers are in possession of the details of the beneficiaries behind company accounts held there, and this fact is food for thought, indeed.
Why I wonder did they gather all this data so conscientiously? And how, in this situation, can we speak about anonymity?
Power of the Banks in the world of Offshore Companies.
At the same time, the banks represent an important stage in the fight. The power of the banks over us mere mortals is extraordinary. This is even more acute in the world of offshore companies.
Today there are only a dozen or so banks in a couple of countries where it is relatively easy to open an account for a newly incorporated offshore company.
The OECD continuously heightens the hysteria in banking circles with its impossible recommendations. The compliance departments are forever introducing new internal regulations under the guise of the prevention of terrorism.
Their efficiency is extremely questionable, tending instead to have a disturbing effect. The banks have increased the tension to the point of absurdity, with a significant part of the rules impossible to understand or comply with.
The OECD is trying to impose on the banks the role of policeman, or rather prosecutor and judge rolled into one. On what grounds, for example, does the bank decide whether I, as the ultimate beneficial owner, can be involved in a certain company, just because it doesn’t seem natural to them?
Believe it or not, that is where we stand today. If I have spent my whole life working in consultancy, then the bank can not see the logic behind my intention to start dealing in real estate. If they are unable to find a logical link between the beneficial owner and the company, then they will reject the application for an account.
Swiss banks and money laundering.
The Swiss banks, who for centuries helped their customers to expatriate the gains from tax evasion/avoidance, are now trying to portray themselves as being “whiter than white.”
From this year, they only really seem interested in opening accounts for individuals, and they insist that customers declare that they have satisfied all their taxation requirements at home in regard to funds being deposited. Some capital is fleeing from Switzerland, or rather the banks themselves are “kicking out” a significant number of western customers. Exactly what the gentlemen in the compliance departments are afraid of is unclear to me.
So what does the future hold?
Apparently, the automatic exchange of information between the bank and the customer’s tax authority. At least that is the OECD’s plan, and according to the figures at the end of September 2014, 65 countries have now given the go-ahead to its introduction.
In theory, the exchange of information will begin in 2017. Of course, there are still many question marks. The exact detailed regulations are unknown, and the organization will publish the final rules and standards sometime in 2015.
The big question for me surrounds the observance of the principles of reciprocation. As one of the most important conceptions is exactly that: everyone is expected not only to receive information but also to give it.
The world’s largest financial power, the United States, having achieved what it wants through its own system, the FATCA, doesn’t exactly bend over backward when it comes to providing information to others.
Receiving information from others, on the other hand, is a different matter: they want to receive information on their own citizens and companies from all quarters.
What, this isn’t fair? Indeed it isn’t!
And sooner or later somebody is going to raise that point, leading to the breakdown of the system. At this point, a rather interesting question occurred to me: if this general, reciprocal exchange of information is going to take place, and the tax authorities are going to know everything about every client when the information is presented, then what are the heads of the compliance departments so afraid of?
From here on, the system is an open book; the guilty will come unstuck in their own countries and will be made to pay for their crimes of the past, because the system will be “watertight.” Everything will be transparent, there will be no more cheating, and no more sneaking money abroad; in short, it will be like in the fairytales. And in the fairytales, there are no compliance departments, either.
Of course, this is going way too far. We will certainly not get to this point, as it is simply not possible to turn the world economy and modern financial system (based as it is on virtual money) on their heads from one minute to the next. That requires decades. Today’s system wasn’t developed overnight but is rather the result of a 30-40 year process.
Anyone who has reached this point in the article will now surely be thinking that there is nothing positive to look forward to, so what is the point of continuing? However, this is where you have to start reading between the lines.
Please allow me to mention just a few matters – this should by no means be considered a complete list – which might provide those interested in and open to the topic with some food for thought:
USA and Automatic Exchange of Information.
The automatic exchange of information has not yet begun, and already conflicts of interest are starting to appear. The world’s largest financial power, the USA, only wants to receive information, but not give it out.
I wonder whether others will follow suit. The United Kingdom, for example. During the Ukrainian crisis they were far from happy when it appeared that, fearing that their assets would be frozen, the Russian oligarchs might take their money out of London’s banks. Even though we have no idea exactly how much is there since the English remain very tight-lipped about it. But if at some stage they have to make a declaration, then what will be the outcome?
What is going to happen to those banks which reaped abundant profits from the offshore funds deposited there over recent decades or even centuries? Will the Swiss be able to survive on the back of a few Milka cows and the production of watches, or will they still need the financial sector?
Then again, if the capital flees, then there will be no assets to protect for the princely fee of 2% per annum. I wonder whether all the banks are going to provide information honestly, or whether it will be the banks themselves who try to come up with some sort of “in-house” solution for their customers.
Bearer shares are not permitted and beneficial ownership must be declared. However, they want to tie company assets to the beneficial owners and force them to pay taxes in their own countries on the income accrued by offshore companies.
It’s a nice idea, but it’s going to be difficult to enforce and check, even in the strictest of systems. It is not possible to make a company act correctly in its own interests and pay out all of its profit in dividends.
The owners of the company may decide to re-invest profits into the company over a number of years. I have been involved myself in the formation of a company where the owners decided that we wouldn’t take out a dividend for the first five years of the company’s operation because we wanted to use the profits for expansion. Is somebody going to tell me that this is unnatural, or even illegal?
Offshore Companies should keep accounting records.
From now on offshore companies also have to keep accounting records. We have come to the end of a romantic era where everything went on freely. However, keeping accounts for a company from Seychelles is still not the same as for an English company. In England, the financial report must be prepared in line with international standards. The balance sheet must be filed with the taxman, and tax must be paid on profits.
In Seychelles, on the other hand, the standards have no meaning, as the rate of tax is 0%. Who is going to decide whether this or that expense arose as part of the company’s activity or not?
It doesn’t matter anyway, as there is no tax, so anything can be deducted as an expense and the tax base can be as big as you want because the tax will still be a fixed amount of 100 USD per year.
However, it is only worth making money if we can spend it as well, otherwise, the amount will merely serve to bolster the bank or the collection of safes.
The bureaucrats of the OECD are living in cloud cuckoo land. If they think that anybody is just happily and voluntarily going to pay tax, then they are making one of the biggest mistakes of their lives.
The paying of tax is compulsory, it is not a voluntarily undertaken obligation. It is an obligation imposed on us by the state in which we live and whose tax laws we are compelled to abide by. However, as is the case with everything which is forced upon us, we try to protect ourselves.
This is instinctive. If someone wants to punch me, and I see the fist coming towards me, I at least raise my own arms to try and protect myself. Can this instinctive reaction be stamped out? Isn’t it just as instinctive to try and protect our assets?
When someone has acquired assets or income, then any amount taken away is considered as a loss, even if it is the laws that are legally taking it away. Will this ever change?
It’s extremely unlikely if you ask me. One way or another, we will always try and defend against the loss of assets or income, and as long as the sun keeps rising each morning, there will always be vehicles and methods for this purpose.
Offshore was one of those methods and has been serving the needs of entrepreneurs in its modern form for 50 years.
There will definitely be another 50 years too, but it will be a little different. It will be constantly changing. But anyone who is able to adapt to the changes in the system will be able to make a lot more than those who don’t take advantage of the opportunities available. At least that’s how I’ve seen things.