Marilyn Stowe Blog

Tax havens and the G-20 Summit – by guest blogger Frank Arndt

If you have hidden your treasure in a “haven”: beware!

Tomorrow, the leaders of the world’s 20 largest economies meet in London to discuss the state of the global economy.

High on their agenda will be the issue of offshore tax havens. On the face of it, this is an issue for accountants, not family lawyers. Offshore accounts are favoured by the wealthy as a way of avoiding higher tax levels and, in some cases, masking outright tax evasion.

My previous post on divorce and tax havens described several governments’ purchase of data stolen from LGT Group, a bank owned by the Royal Family of Liechtenstein.

It is difficult to give any reliable figure on how much money is held in tax havens such as this one, but estimates of the value of assets held offshore range from US$1.7 trillion to US$11.5 trillion. A recent report by the United States Senate estimated that American tax authorities could be losing some US$100 billion in annual tax revenues due to offshore tax abuses.

However, there is also an important aspect of family law that should be considered. The secrecy afforded to offshore accounts means that if a marriage does end, it can extremely difficult to quantify the assets to be divided.

The collapse of financial institutions which hid their financial liabilities behind a myriad web of offshore bank accounts, trusts and companies, has propelled these issues up the political agenda.

The G-20 Agenda

Against this background Jose Angel Gurria, the current Secretary General of the Organisation for Economic Cooperation and Development (OECD), announced in February that improved tax cooperation is key to restoring financial confidence.

The secrecy previously afforded to those who used tax havens was protected by the national laws of the haven country: for example, a policy of preventing foreign angencies from accessing bank account information. Those countries are now being pressured to fall into line with the larger economies and adopt the OECD’s standards for information sharing.

If you are a spouse who has hidden money in one of these jurisdictions, beware!

Last November at their summit in Washington, G-20 leaders signalled their determination to combat cross-border tax evasion. Since then, more than 20 bilateral tax information exchange agreements have been signed between different partners.

Here is a brief summary of the tax havens that have been identified, and the progress that has been made:

Austria, Luxembourg and Switzerland have announced that they will adapt their tax laws to reflect the internationally agreed standard of exchange of information developed by the OECD.

Singapore and Hong Kong intend to remove domestic hurdles to the exchange of information. On 25 February, China announced that it would work with Hong Kong to negotiate agreements implementing the OECD standard for effective exchange of information.

Andorra and Liechtenstein have stated that they will move in the same direction. Andorra has announced its willingness to enter into tax information exchange agreements. It intends to eliminate strict bank secrecy for tax purposes by November 2009.

Liechtenstein, which has already signed a tax information exchange agreement with the United States, has announced its acceptance of the OECD standards and its willingness to negotiate agreements that provide for effective exchange of information in all tax matters.

Jersey and the United Kingdom signed an agreement on 10 March 2009, which covers the exchange of information for tax purposes. It is the 11^th such agreement entered into by Jersey.

Belgium, which already signalled a move towards the international standard last year, with its bilateral tax treaty with America, said it would be adopting the same approach in tax treaties with other countries.

The Cayman Islands has announced that it will sign tax information exchange agreements with seven Nordic economies on 1 April 2009.

As for Russia and Eastern Europe: in 2008 the OECD launched a Eurasia Competitiveness Programme. This covers two regions: Central Asia (Afghanistan, Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan and Uzbekistan) and the South Caucasus and Ukraine (Armenia, Azerbaijan, Georgia and Ukraine, with Moldova as an observer).This programme aims to progress national investment agendas and to encourage specific reforms and delivery of reforms.  The wider agenda is to move the countries towards joining the OECD Declaration on International Investment, and converging to OECD and EC standards.

Since Russia’s official request for OECD membership in 1996, co-operation between the OECD and the Russian Federation has increased. The Russian Federation participates in 18 OECD Committees and various Working Groups. Russian Ministers regularly participate in Ministerial Council Meetings. The Russian Federation also participates in meetings of the OECD Global Forums and regional activities with non-members in Europe. Currently, Russia is the only non-member for which the OECD Council has created a Liaison Committee. This Committee monitors and reviews the implementation of the annual work programmes. It also serves as the platform for discussion of progress in economic reform process in the Russian Federation, the OECD-Russia co-operation and other issues of mutual interest. The Committee meets every 18 months.

The next stage:

It is yet to be seen how successful the OECD’s work will be in opening up these traditionally secretive jurisdictions, or how performance will be measured.

Clearly some countries will have to modify their legislation and renegotiate their existing tax agreements, all of which will take some time.

Thirty-five jurisdictions have made commitments to transparency and effective exchange of information and are considered co-operative jurisdictions by the OECD’s Committee on Fiscal Affairs.

The following jurisdictions, which have not yet made commitments to transparency and effective exchange of information, have been identified by the OECD’s Committee on Fiscal Affairs before the G20 summit as uncooperative tax havens.

• Andorra
• The Principality of Liechtenstein
• The Principality of Monaco

This week’s meeting could be a watershed moment in the reform of secretive offshore financial institutions. What remains to be seen is if spouses will be afforded the same level of detail as the tax authorities are demanding.

In the meantime it is up to the less wealthy spouse to work with professionals who can do the digging for them. Stowe Family Law’s International Family Law Department works closely with our two forensic accountants, who work to ensure that our clients are not caught out by offshore scheming.

Frank Arndt heads the International Law Department at Stowe Family Law. He is a qualified lawyer in two European countries, a qualified judge in Germany and a registered European lawyer with the Law Society in England. An expert in cross-border family law, he regularly advises on cases involving families and assets scattered across continents.

Treasure Island image credit: Aaron Escobar.