The Pretence of trust

The Pretence of trust – P5 of our series on Tax Havens

In Parts 1, 2 and 3 we looked at shell companies, and in part 4 we specifically dwelled into Personal Holding Companies (PHC). There is another skew peddled by the offshore tax evasion and money laundering services industry – it is called the Trust!

Raconteur: The Future CFO 2018

The role of the chief financial officer (CFO) is ever expanding. The modern CFO is called on to prioritise cybersecurity, act as strategist and salesperson for M&A, and work more closely with marketing chiefs. The Future CFO special report covers how the CFO must rebuild trust and why the role has such a high turnover rate. It explores the persistent dearth of women in finance, lessons to be learnt from high-growth businesses and how big data can make CFOs more effective. Also featured is the debate for and against quarterly reporting, and an infographic on the CFO’s key priorities for 2019

Raconteur: IoT for Business 2018

According to research firm Gartner, there will be 20 billion interconnected devices worldwide by 2020. Therefore, businesses cannot afford to ignore the power of the internet of things (IoT). The IoT for Business special report shows how to overcome barriers to IoT adoption. It looks at how combining IoT and 5G technology will transform logistics, five innovative startups doing exciting work on IoT security, and why C-suite executives should take notice of edge computing. Also featured is an infographic exploring the benefits of being an early IoT adopter

Offshore Pilot Quarterly (December 2018, Volume 21 Number 4)

Spirits Past and Present

An Empire of Dreams

The Whitehouse Butterfly

Poppies in Panama

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Science: Private research funders court controversy with billions in secretive investments

A Science investigation of public records and documents known as the Paradise Papers has found that leading research philanthropies—including the Wellcome Trust and the Robert Wood Johnson Foundation—have invested more than $5 billion in offshore tax and secrecy havens. Some investments, such as those in highly polluting fuels, undermine the groups' charitable goals. Routine use of secretive funds raises questions about accountability and social responsibility. Critics say that when foundations lend their sterling reputations to offshore strategies, they help legitimize lawful but extreme tax avoidance, and provide cover for money laundering. Such practices deprive governments of revenue, worsening economic inequality.

Raconteur: Cryptocurrencies & Blockchain 2018

2018 has seen the market value of cryptocurrencies drop by 75 per cent, but steps towards greater transparency and regulation are underway giving industry experts confidence in the potential of widespread crypto adoption. The Cryptocurrencies & Blockchain special report covers how blockchain and smart contracts can transform the supply chain, how traditional financial regulation can move cryptocurrencies forward, and how initial coin offerings are helping startups raise funds. Also featured is how cryptocurrencies and blockchain can affect real change, from combating electoral fraud to helping the homeless.

The Mauritius Africa FinTech Hub Due to Launch in December after Appointment of New CEO

After two years of intensive development, the Mauritius Africa FinTech Hub (MAFH) will be launching on the 5th of December.

Africa has immense potential for FinTech solutions, with 52% of all mobile transactions made to and from Africa, in spite of only 20% of the continent’s residents owning a bank account. Africa’s population is predicted to overtake China in 2025 with consumer spend reaching $1.3trn by 2030. In short, Africa is forecast to be one of the biggest growth stories over the next 20 years, yet less than 1% of FinTech investment has been made in Africa in recent years.

The Mauritius Africa FinTech Hub has a clear vision of changing the outlook for the whole continent by acting as a catalyst in the regulatory environment and the pan African FinTech ecosystem.

MAFH is supported by the Mauritian government, regulatory authorities and financial service providers, both big and small. After years of planning, they have appointed Michal Szymanski as CEO, a seasoned veteran in the business incubation space, whose team is now actively preparing a tech hub environment, ready to provide help to investors, corporations, academia and entrepreneurs to harness the growth potential of FinTech.

“Relative to the rest of the world, the FinTech industry in Africa has the greatest reach potential to positively influence the lives of its populations,” says Michal Szymanski, about the impact that he hopes the work of his organisation will have. “Our purpose is to serve the pan African FinTech ecosystem, in the regulatory environment and capacity building, while making Mauritius one of the world’s great FinTech hubs.This cannot be done alone or in isolation from cross border stakeholders, hence collaboration is key to unlocking Fintech innovations in Africa.”

Mike Reese, a board member of MAFH, says he has “worked closely with the financial services community over the last 15 years as part of my early efforts in designing and supporting the implementation of the IFC (International Finance Centre) status for Mauritius. I understand deeply the opportunity that it has to act as an innovator in the future of finance for the sub-continent. Being the link to capture capital and investment while attracting global innovation to ready it for the progress and benefit of Africa is a natural step for Mauritius. It has the capacity, enthusiasm and creativity to serve and benefit all stakeholders including corporates and regulators. I personally look forward to seeing this island nation grow from strength the strength as catalyst to capture the world’s attention when it comes to FinTech in Africa. “

Mauritius remains a favourite among treaty shoppers | International Tax Review

Treaty shopping is still a common practice among taxpayers when investing in Africa, and Mauritius remains one of the best jurisdictions for minimising tax liabilities.

Mauritius: Place of effective management (POEM)

The Institute of Export & International Trade - Doing Business In Mauritius

The main objective of this Doing Business in Mauritius Guide is to provide you with basic knowledge about Mauritius; an overview of its economy, business culture, potential opportunities and to identify the main issues associated with initial research, market entry, risk management and cultural and language issues.

The Economist: Treaty-shopping is about to get more expensive

Mauritius vows to make it harder for multinationals to use it as an investment conduit

Jersey Finance - The $30tn Great Wealth Transfer Can Be an ‘Evolution, Not Revolution’

A private wealth transfer worth $30 trillion between baby boomers and the current generation is imminent, but with ample professional advice there is no cause for undue stress, a Jersey-based report assures.

The recent report, Flourishing Futures: Making Succession a Success, by Jersey Finance demystifies the challenges around this much-talked phenomenon, with an insight into real succession-related problems HNWs face through a series of case studies provided by law firm Bedell Cristin. Presented as a 10-point guide for trustees, families and advisers, the report draws from Jersey’s experience as an international finance centre (IFC) holding over £400 billion worth of private wealth in trusts over a 50-year period.

‘[It’s an] evolution, not revolution,’ the report describes the succession planning attitude trustees need to adapt to ensure a smooth transition of wealth. From identifying the values of the wealth founding family to analysing the impact a nuptial agreement might have on the transfer, HNWs and their advisers worldwide need a comprehensive plan to accommodate the intergenerational transaction, it says. A case study within the report shows how Bedell Cristin had used these suggestions to help the new generation of a family whose founders survived a civil war in the 1900s, transfer the wealth into a Jersey foundation to provide aid for civil war refugees.

‘Jersey is widely regarded as one of the biggest trust centres in the world – there is a responsibility and obligation on us,’ Jersey Finance CEO Geoff Cook tells Spear’s about the rationale behind the study. 'We are stewarding so much value to create the platforms and the capabilities that allow HNWs to transfer or deploy their wealth in a way that they wish to’.

The recommendations in the guide reflect the many complexities HNW families from all corners of the globe, particularly those from the Middle East and Asia, where wealth accrual is so ‘phenomenal’ that for many this will be the first transfer after over 30 years. But only a quarter of these families have a strategy in place, Cook says.

‘I don’t think you can start too early,’ he says of having a transfer plan, which he says should be the result of an in-depth conversation between founders and the next generation of proprietors.  ‘We would advise, for the high-net-worth individual, that it’s an important thing, because generational planning can take quite a long time.’

One of the main challenges HNWs and advisers face in succession planning is the sheer difference in attitudes between the old and the young, with the latter not having quite the loyalty the former might have to their respective trusted advisers. ‘The younger generation are a little bit more transactional,’ Cook notes, ‘they are a little more independent-thinking and they want information available at their fingertips at any place, any time and through any kind of medium’.

This is because client knowledge is becoming increasingly crucial, he stresses, adding that there is a case now more than ever for an understanding of how the family structures, legal setting, wishes, future priorities and culture of each HNW client will influence their style of intergenerational transfer. ‘Service demands are changing – it’s very important that financial centres and the private wealth advisers in them aren’t complacent,’ Cook warns. ‘You can become out of date, or even irrelevant.’

The report also urges for greater innovation in the private wealth space, where Jersey has been offering services as an IFC with ‘a multichannel approach’ – using the expertise of more than 13,300 ‘highly-skilled’ and experienced professionals. This new outlook to client service is part of a greater ‘lateral’ discussion around wealth that is going on globally, Cook concludes. ‘”With great wealth comes great responsibility” is a much more prevalent attitude now.’

Private equity in India is coming of age | McKinsey

For private equity in India, more capital is becoming available, competition is increasing, and lessons from past excess and inexperience are guiding better performance. Now firms are reevaluating their strategies and internal capabilities.

EU: Code of Conduct Group (Business Taxation): Report to the Council (20 November 2018)

Identification of new preferential regimes under criterion 2.1

• Mauritius - MU010: Partial exemption system (under FHTP monitoring);
• Mauritius - MU011: banks holding a banking licence under the Banking Act 2004 (new regime replacing regime MU006) (under FHTP monitoring);
• Mauritius - MU012: manufacturing activities under the Freeport zone regime (under COCG monitoring);

The following assessments were furthermore agreed by the COCG in respect of the newly identified regimes that fall under its monitoring:

• Mauritius' MU012 regime is harmful;

The COCG agreed at its meeting of 15 November 2018 that the letters seeking commitment to amend/abolish the above harmful regimes by the end of 2019 will be sent to all concerned jurisdictions before the end of 2018.

Full Report

Mauritius: Offshore on the radar

The government wants to double the size of the financial sector within the next 12 years, but to do that it needs to find new growth strategies and respond to international pressure on jurisdictions that help companies avoid paying corporation tax

Personal Holding Companies (PHC)

Personal Holding Companies (PHC) – KP Balaraj episode – Part 4

In this ongoing series on Tax Havens, we describe the role PHCs play in Part 4. The previous parts can be accessed here.

First ‘Panama Papers’ Trailer Exposes Offshore Cash Scandal

Leaked by an anonymous source to journalists in 2015, The Panama Papers were an explosive collection of 11.5 million documents, exposing the use of secretive offshore companies to enable widespread tax evasion and money laundering. Largely viewed as the biggest global corruption scandal in history, the release of the Papers had wide-reaching implications, incriminating 12 current or former world leaders, 128 politicians or public officials, and various celebrities and public figures (among others). In his expansive documentary, director Alex Winter examines how this story reshaped our understanding of corruption amidst the highest forms of government, and the systemic problem of global inequality.

Variety

White-Collar Black-Money Secrets

White-Collar Black-Money Secrets – How the Tax Havens are used by The HNIs & Corporates  to hide Wealth & Income – Part 1

Be it an HNI or a Corporate - Tax Havens have enabled creative ways to hide illegal wealth & income and it is happening in plain sight!

Creating Shell Companies to hide Assets in Tax Havens – Part 2

Shell companies are opaque walls to hide ill-gotten money when corrupt politicians invest in them. Every time corrupt politician jets off to London, guess what he/ she is up to?

Roundtripping ill-gotten wealth – Part 3

How ill-gotten wealth achieves a multiplier effect with Roundtripping

FSC Mauritius - Press Release : Appointment of Ms Francesca Omobola Harte as Director of Enforcement

The Financial Services Commission, Mauritius (FSC) is pleased to announce the appointment of Ms Francesca Omobola Harte as Director of Enforcement.

Press Release

Joint FSC and EDB Communiqué: Mauritius IFC remains a committed development partner for Africa

The IMF has published a working paper entitled “The Cost and Benefits of Tax Treaties with Investment Hubs – Findings from Sub-Saharan Africa” on the 24th of October 2018.

• The working paper, which does not reflect the views of the IMF, examines the cost and benefits of concluding Double Tax Treaties with investment hubs, with a focus on the tax treaty policies in Sub-Saharan Africa.
• In their findings, the authors suggest that African countries are likely to face a substantial reduction in tax revenue when signing tax agreements with investment hubs like Mauritius.

The Financial Services Commission and the Economic Development Board of Mauritius, deem that the findings of the paper are purportedly misleading and biased.

Communiqué

The Cost and Benefits of Tax Treaties with Investment Hubs: Findings from Sub-Saharan Africa

This paper investigates the costs and benefits of concluding double tax treaties with investment hubs. Based on a sample of 41 African economies from 1985–2015, the results suggest that signing treaties with investment hubs is not associated with additional investments; yet, these treaties tend to come with nonnegligible revenue losses. Building on a theoretical model, the paper investigates the role of treaty shopping in driving nominal investment flows and provides indirect evidence for its importance in the sample

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English High Court Ordered Inquiry Into Damages Caused by the Angolan Sovereign Wealth Fund Against Quantum Global and the Group’s Founder

Quantum Global Group (the “Group”) announced today that the English High Court ordered an inquiry to be commenced into the damage caused by the Fundo Soberano de Angola (“FSDEA”) following the wrongful imposition of a Worldwide Freezing Order (the “WFO”) obtained by the FSDEA against the Group.

The WFO, which was wrongfully imposed on the Group for four months from April to August 2018, caused significant losses to the Group and its affiliated companies. This has also greatly impacted the Group’s ability to fund its operations and pay its employees.

The start of the damages’ inquiry follows the judgment by the English High Court in August 2018 that the FSDEA had materially misled the Court in eight critical areas when it applied for and obtained the WFO in April. The FSDEA was ordered by the Court to pay the Group’s legal costs for the English Court proceedings.

Following the English Court’s August judgment, the Angolan authorities wrongfully imprisoned the Group’s Chairman and Founder, Mr Jean-Claude Bastos de Morais, on September 24 of this year pending an investigation into a real estate transaction that was previously reported and audited by respected international accounting firms. An assessment made by Mr Bastos’s legal counsel of the evidence and grounds of the preventive detention order shows that they are wrong and unfounded. The detention has been deemed completely unnecessary considering that Mr Bastos came to Angola on his own volition and had been fully cooperating with the authorities to clear his name since May when both of his passports were illegally seized in violation of Angolan Law. To date, no charges have been filed against Mr Bastos.

Mr. Bastos continues to be unnecessary held in a prison for violent offenders, which has been the subject of criticism in recent years by many international human rights organizations, including by Amnesty International, and so far, the appeals launched to release Mr Bastos based on Angolan laws and the Country’s constitution have fallen on deaf ears. The unlawful detention of Mr Bastos, a Swiss and Angolan dual national, raises serious questions with regards to the conduct of the authorities and the treatment of international investors and foreign nationals in Angola. Quantum Global calls on the Angolan Government and its Courts to uphold the rule of law and guarantee a fair hearing and due process.

Furthermore, Quantum Global continues to be dismayed by the actions and conduct of the Mauritian authorities in maintaining orders freezing Quantum Global bank accounts and suspending operating licenses. Despite repeated attempts in the last six months, the affidavit relied upon by the Financial Intelligence Unit (FIU) of Mauritius against Quantum Global is still being withheld from the Group. Reports in the Mauritian press indicate that there have been multiple approaches and visits by the Angolan authorities to Mauritius before the orders were granted and in the recent months thereafter, and serious questions have been raised with regards to the actions of the Mauritius authorities.

Offering an independent legal opinion on the matter in May, Lord Macdonald of River Glaven Kt QC, the former Director of Public Prosecutions of England and Wales, said that the continued deprivation of salaries from employees “is likely to be arbitrary and a significant breach of international human rights law. Moreover, we consider that the lack of disclosure and the associated lack of any meaningful opportunity to make representations against the deprivation of property renders the deprivation disproportionate.”

By intervening in a contractual dispute between Quantum Global and its client, the FSDEA, the Mauritius authorities’ actions represents a continued significant breach of due process. Similar to its call in Angola, the Group calls upon the Mauritius authorities to uphold their independence and guarantee a fair hearing and due process and not take actions that are detrimental to upholding the rights of investors.

Quantum Global has repeatedly stated its desire for a negotiated solution with the FSDEA that otherwise will have to be settled through a number of lengthy arbitration proceedings. The Group reiterated its call for the FSDEA to advance to a good faith solution, in accordance with international commercial law, to maintain the value of the portfolio and secure the jobs created in Angolan industries including ports, forestry, agriculture and real estate.

Bank ordered to disclose suspicious activity reports to customer

Lonsdale v National Westminster Bank [2018] EWHC 1843 (QB) (18 July 2018) 

A bank was ordered to disclose, to a customer, suspicious activity reports (SARs) that the bank had sent to the National Crime Agency (NCA) at the time of freezing the customer’s bank accounts. The bank’s arguments concerning confidentiality, tipping-off and prejudicing an investigation were unsuccessful. The court’s observations on the interplay between the SARs regime and the law on data protection, defamation and breach of contract will be of interest to all banks.

FSC Press Release – Participation of Mauritius delegation at the OECD Forum on Harmful Tax Practices

The Mauritius regimes on the agenda were actively discussed and debated at the Forum. Further to the deliberations, the delegation is confident the Forum has been provided with all justifications and information that will help the OECD's BEPS Inclusive Framework to reach a favorable conclusion about the said Mauritius regimes. The OECD's BEPS Inclusive Framework monitors the different works undertaken to implement the BEPS minimum standards.

From the crypto-goldrush to new compliance concerns: offshore firms weather the storm

Ongoing regulatory scrutiny across the offshore world continues to hang heavy - but law firms are tapping into new opportunities

African Governments Are Paying for the World Bank’s Mauritius Miracle

Ghost offices on the small island provide legal but questionable means of siphoning tax dollars away from poor countries and into the pockets of the global elite.

OECD: Residence/Citizenship by investment update

Further to the press coverage following yesterday's publication of the guidance for financial institutions on residence by investment (RBI) and citizenship by investment (CBI) schemes, the OECD would like to reiterate that the sole objective of the high-risk RBI/CBI schemes included in this guidance is to provide Financial Institutions with the right tools to identify accountholders that may misuse RBI/CBI schemes to circumvent the Common Reporting Standard (CRS) and carry out enhanced CRS due diligence procedures, where appropriate. This guidance was issued as part of the OECD's ongoing efforts to address any risks to the integrity of the CRS, including those arising from the possible misuse of RBI/CBI schemes.  

Since the release of the guidance, Monaco has provided additional information with respect to its residence and migration requirements confirming that information on relevant applicants is exchanged with all existing jurisdictions of residence. On this basis, the residence and immigration requirements do not give rise to particular risks to the integrity of the CRS and the guidance will be updated accordingly.

OECD clamps down on CRS avoidance through residence and citizenship by investment schemes

Residence and citizenship by investment (CBI/RBI) schemes, often referred to as golden passports or visas, can create the potential for misuse as tools to hide assets held abroad from reporting under the OECD/G20 Common Reporting Standard (CRS).

In particular, Identity Cards, residence permits and other documentation obtained through CBI/RBI schemes can potentially be abused to misrepresent an individual’s jurisdiction(s) of tax residence and to endanger the proper operation of the CRS due diligence procedures.

Therefore, and as part of its work to preserve the integrity of the CRS, today, the OECD has published the results of its analysis of over 100 CBI/RBI schemes offered by CRS-committed jurisdictions, identifying those schemes that potentially pose a high-risk to the integrity of CRS.

Potentially high-risk CBI/RBI schemes are those that give access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme. Such schemes are currently operated by Antigua and Barbuda, The Bahamas, Bahrain, Barbados, Colombia, Cyprus, Dominica, Grenada, Malaysia, Malta, Mauritius, Monaco, Montserrat, Panama, Qatar, Saint Kitts and Nevis, Saint Lucia, Seychelles, Turks and Caicos Islands, United Arab Emirates and Vanuatu.

Together with the results of the analysis, the OECD is also publishing practical guidance (see Frequently Asked Questions section) that will enable financial institutions to identify and prevent cases of CRS avoidance through the use of such schemes. In particular, where there are doubts regarding the tax residence(s) of a CBI/RBI user, the OECD has recommended further questions that a financial institution may raise with the account holder.

Moreover, a number of jurisdictions have committed to spontaneously exchanging information regarding users of CBI/RBI schemes with all original jurisdiction(s) of tax residence, which reduces the attractiveness of CBI/RBI schemes as a vehicle for CRS avoidance.

Going forward, the OECD will work with CRS-committed jurisdictions, as well as financial institutions, to ensure that the guidance and other OECD measures remain effective in ensuring that foreign income is reported to the actual jurisdiction of residence.

FSC Mauritius issues Circular Letter on Substance Requirements for GBCs

Following consultation with stakeholders, including industry associations, the Financial Services Commission (“FSC”) is hereby issuing this Circular Letter to provide clarifications on the new enhanced substance requirements.

Dentons launches new interactive tool on Transparency Register laws in major EU markets

Dentons, the world’s largest law firm, has launched a new interactive tool, which allows users to look up and compare Transparency Register laws in the 13 EU countries where the firm currently has offices.

“Under the EU’s Fourth Anti-Money Laundering Directive, EU member states are obliged to introduce a central register which holds information on the ultimate beneficial owners of legal entities incorporated within their territory,” explained Daren Allen, a partner in Dentons’ Litigation and Dispute Resolution team in London. “This tool helps companies understand the requirements of the Transparency Register in each EU country so they can take appropriate action.”

The tool is free and is available online at www.transparencyregisterlaws.com. It provides an overview of the status of the Transparency Register’s implementation in each EU country, and clearly defines the requirements for the register and the registration process. It also provides a link to the register in each country as well as information regarding access and sanctions. Users can compare and contrast up to three countries at a time.

Rainer Markfort, Corporate Partner in Berlin and head of Dentons Europe Compliance Group, commented, “The impetus for creating this tool came from our clients, who struggled with different requirements across EU jurisdictions and were frustrated that the information was not available in one place. So we consolidated our knowledge and brought relevant information onto one innovative platform for the benefit of our clients.”

This tool is useful for all companies and private equity houses operating or actively investing in the EU. It is a particularly valuable resource for conducting business partner due diligence and complying with legal anti-money laundering requirements.

FSC Mauritius - Transforming the Mauritius IFC: Cross-border investments

A case for Reform in the Global Business Sector 

Category 2 Global Business Licence 

GBL2 issued by the FSC after 16 October 2017 are deemed to lapse on 31 December 2018. Grandfathering provisions will apply for GBL2 issued prior to 16 October 2017, which may continue to operate under the ‘former regime’ up to 30 June 2021. In line with this development, holders of GBL2s licensed after 16 October 2017, have three options:

• to either wind up; or
• to apply for a change in regime by opting to continue as a Global Business Corporation or an Authorisation Company before 31 December 2018; or
• to redomicile in another jurisdiction and to inform the FSC of same before 31 December 2018.

The FSC has issued application forms for Authorised Companies as per a Communiqué dated 01 October 2018.

Authorised Company 

The eligibility criteria to operate as an Authorised Company is provided in Section 71A of the Financial Services Act (FSA) as amended by the Finance Act 2018. The fee structure for Authorised Companies, applying after 31 December 2018 shall be as follows: Processing fee of USD 150 and Annual Fee of USD 350. In this respect, the Financial Services (Licensing and Fees) Rules was amended. The Rules provide for the licensing criteria to be considered by the FSC.

As a general rule, Authorised Companies will not be allowed to:

• conduct financial services;
• to carry out other activities that the FSC may deem detrimental to Mauritius. 

Global Business Corporations 

The Finance Act 2018 further amended the FSA to review the current Category 1 Global Business Licence (GBL1), now deemed to be Global Business Corporations (GBC). The GBCs will be required to fulfil additional substance requirements embedded in the FSA. Substance will be assessed based on the nature and level of activities, whether the employment is reasonable and the expenditure is adequate.

The FSC has started communicating with its licensees and will continue through Rules, Circular Letter, and Explanatory Notes - to facilitate the transitional period and to mitigate disruptions in the business process. The reform in the Global Business marks a new era of development for the Mauritius IFC.

UK House of Commons Briefing - Tax avoidance: recent developments

In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes, both in the accountancy industry and its customers: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments. Following these initiatives the Government has continued to introduce provisions to tackle both tax avoidance and tax evasion, including measures in both the Spring & Autumn Budgets last year. This note provides an introduction to the issue of tax avoidance, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach.

In recent years tax avoidance has been the subject of considerable public concern, although there is no statutory definition of what tax avoidance consists of. Tax avoidance is to be distinguished from tax evasion, where someone acts against the law. By contrast tax avoidance is compliant with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek to comply with the letter of the law, but to subvert its purpose. As Treasury Minister David Gauke has observed, there is a distinction between tax planning and tax avoidance, “although there will be occasions when the line is a little blurred.”[1]

In recent years HM Revenue & Customs has produced estimates of the tax gap, the difference between tax that is collected and that which is ‘theoretically due’:[2]

The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law) ... An equivalent way of defining the tax gap is the tax that is lost through non-payment, use of avoidance schemes, interpretation of tax effect of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attack.

In June 2018 HMRC published revised estimates, which put the total tax gap at £33 billion for 2016/17, representing 5.7% of total tax liabilities.[3]  There has been a long-term reduction in the tax gap, which was estimated to be 7.3% in 2005/06. HMRC’s analysis provides a breakdown of the gap by reference to the different types of taxpayer behaviour that lead to a shortfall in receipts, though as HMRC note, the “estimates give a broad indication of behaviours and are calculated using assumptions and judgment.” This work suggests that in 2016/17 the annual cost of tax avoidance was £1.7 billion, while the cost of tax evasion was £5.3 billion.[4]

Historically UK tax law has been specifically targeted rather than purposive; in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light.  Often the response to this legislation has been the creation of new schemes to circumvent the law, which in turn has seen further legislation – an ‘arms race’ between the revenue authorities and Parliamentary counsel on one side, and on the other, taxpayers aided and abetted by the legal profession.  In recent years concerns as to the scale of mass marketed tax avoidance schemes have led to three major initiatives to undermine this market, and encourage a sea change in attitudes: the Disclosure of Tax Avoidance Schemes regime (DOTAS); the General Anti-Abuse Rule (GAAR); and the system of follower notices & accelerated payments.

Over the past twenty years many commentators have suggested having legislation to counter tax avoidance in general: by providing certainty for both sides as to the tax consequences of any transaction, a ‘general anti-avoidance rule’ might dissuade the most egregious efforts to avoid tax, encourage taxpayers and legal counsel to redirect their energies to more productive activities and allow the authorities to simplify the law without fear of it being systematically undermined. In the late 1990s the Labour Government consulted on an anti-avoidance rule before deciding against it. Concerns over the scale of tax avoidance rekindled interest in the idea, though in its 2004 Budget the Labour Government announced a new ‘disclosure regime’ as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments.[5]  Under ‘DOTAS’ accountants, financial advisers and other 'promoters' selling tax avoidance schemes are required to notify the tax authorities of any new scheme they are to offer to taxpayers. Each scheme is given a reference number which, in turn, taxpayers have to use in their tax return, if they have used it. HMRC have used this information to track the take-up of avoidance schemes, challenge individual schemes in the courts if HMRC have assessed that they do not work in the way the promoter claims, or to address unintended loopholes in the law that some schemes seek to exploit.

In its first Budget in June 2010 the Coalition Government announced it would consult on a general anti-avoidance rule, and commissioned a study group, led by Graham Aaronson QC, to consider the case. In his report, published in 2011, Mr Aaronson recommended a narrowly focused rule targeted at ‘abusive arrangements’ only, and following a consultation exercise, in December 2012 the Government announced the introduction of a General Anti-Abuse Rule (GAAR) in 2013.[6]

In 2014 the Coalition Government announced the introduction of a system of follower notices & accelerated payments.[7]  Broadly speaking, in cases where someone is in dispute over their assessment, HMRC may issue a ‘follower notice’ if this arises from the use of an avoidance scheme that is either the same or has similar arrangements to one that HMRC has successfully challenged in court. Taxpayers must settle their affairs, or pay a penalty. HMRC may also issue a notice for an accelerated payment, where the taxpayer is required to pay the disputed sum ‘up front’, before their assessment had been definitively decided – either by the taxpayer agreeing HMRC’s assessment, or the courts making a final judgement in their case. Taxpayers do not have the right to appeal HMRC’s decision to the Tribunal. 

Controversially, the Government announced these arrangements would apply to outstanding disputes for past tax years, and that HMRC would also issue demands for accelerated payments in relation to avoidance schemes notified under ‘DOTAS’. Despite concerns as the ‘retrospective’ nature of the new regime, the new rules were agreed, with only minor amendments, in July 2014. In July 2017 HMRC reported that it had issued over 75,000 notices worth in excess of £7 billion and collected nearly £4 billion.[8]

The Government has continued to introduce provisions to tackle tax avoidance and tax evasion, including measures in both the Spring Budget and Autumn Budget last year.[9]  This paper provides an introduction to the issue of tax avoidance and evasion and the measurement of the tax gap, looking in detail at the development of follower notices and accelerated payments, before discussing the current Government’s approach. Two other Library papers look at the Labour Government’s consideration of a general anti‑avoidance rule and the establishment of the disclosure regime, and at the Coalition Government’s decision to introduce a GAAR.[10]

Notes : 

[1]    HC Deb 12 July 2010 c706

[2]    Measuring Tax Gaps 2013, October 2013 p6. HMRC’s work on the tax gap is collated on Gov.uk

[3]    HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June 2018; see also, HMRC, Calculating the 2016-17 Tax Gap: Issue Briefing, 14 June 2018

[4]    Measuring Tax Gaps 2018, June 2018 p5

[5]    Budget 2004, HC 301, March 2004, p202. Guidance on DOTAS is on Gov.uk    

[6]    Autumn Statement, Cm 8480 December 2012 para 1.178. Guidance on the GAAR is on Gov.uk

[7]    Budget 2014, HC 1104, March 2014 para 1.198-201

[8]    HMRC Annual Report 2016/17, HC 18, July 2017 p24. Guidance on follower notices & accelerated payments is on Gov.uk.

[9]    Spring Budget 2017, HC 1025, March 2017 para 3.42-49; Autumn Budget 2017, HC 57, November 2017 para 3.65-77. See also, PQ117106, 7 December 2017 & PQ135367, 18 April 2018.

[10]   Tax avoidance: a General Anti-Avoidance Rule - background history (1990-2010), CBP2956, 13 April 2016; and, Tax avoidance: a General Anti-Abuse Rule, CBP6265, 7 September 2018.

Commons Briefing papers CBP-7948

Author: Antony Seely

Topic: Taxation

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Tax avoidance: recent developments (   PDF, 2.09 MB)

The Japanese Passport Is Now the Strongest in the World, with Singapore and South Korea Not Far Behind

Japan has overtaken Singapore to claim the top spot on the 2018 Henley Passport Index, having gained visa-free access to Myanmar earlier this month. Japan now enjoys visa-free/visa-on-arrival access to 190 destinations, compared to Singapore’s total of 189. Japan and Singapore have been neck and neck on the index since they both climbed to 1st place in February — following a visa-exemption from Uzbekistan — and pushed Germany down to 2nd place for the first time since 2014.

This quarter, Germany has fallen further to 3rd place, which it now shares with South Korea and France. France moved up from 4th to 3rd place last Friday when it gained visa-free access to Uzbekistan, while South Korea moved from 4th to 3rd place on 1 October when it gained visa-free access to Myanmar. Germany, France, and South Korea all have a visa-free/visa-on-arrival score of 188. Iraq and Afghanistan continue to hold the bottom (106th) spot of the Henley Passport Index, with only 30 destinations accessible to their citizens.

The US and the UK, both with 186 destinations, have also slid down one spot — from 4th to 5th place — with neither having gained access to any new jurisdictions since the start of 2018. With stagnant outbound visa activity compared to Asian high-performers such as Japan, Singapore, and South Korea, it seems increasingly unlikely that the US and the UK will regain the number 1 spot they jointly held in 2015.

Russia received a boost in September when Taiwan announced a visa-waiver for Russian nationals (valid until July 2019), but the country has nonetheless fallen from 46th to 47th place compared to Q3, because of movements higher up in the ranking. The same is true of China: Chinese nationals obtained access to two new jurisdictions (St. Lucia and Myanmar), but the Chinese passport fell two places this quarter, to 71st overall. This is still an impressive 14-place improvement over the position that China held at the start of 2017.

What has been most remarkable in recent years is the UAE’s stunning ascent on the Henley Passport Index, from 62nd place in 2006 to 21st place worldwide currently. The UAE now holds the number 1 passport in the Middle East region.

Dr. Christian H. Kälin, Group Chairman of Henley & Partners, commented on these developments: “The Henley Passport Index, which is based on exclusive data from the International Air Transport Association (IATA), is an important tool for measuring not only the relative strength of the world’s passports but also the extraordinary results that states can achieve when they work hand in hand with their global peers to build a more interconnected and collaborative world. China and the UAE exemplify this kind of progress, with both states among the highest overall climbers compared to 2017, purely as a result of the strong relationships they have built with partner countries around the world.”

The UAE and Russia consolidate their international position

Strengthening its position as the passport-power champion of the Middle East, the UAE signed a visa-waiver with Russia in July, which is due to come into effect in the coming months.

Commenting on the UAE’s latest visa-waiver agreement, Ryan Cummings, Director of Signal Risk, said that it is aimed at “strengthening bilateral relations between the UAE and another global superpower”, following the visa-waiver signed with China earlier this year. Specifically, this latest agreement with Russia will help the UAE “lower its dependence on its hydrocarbon sector and continue its robust economic growth trajectory” by stimulating tourism and trade.

Tim Geschwindt, Analyst at S-RM Intelligence and Risk Consulting, says the agreement also speaks to Russia’s shifting position within the international community: “The country is continuing to seek improved bilateral relations, as well as trade, investments, and tourism ties, with new partners. Russia’s recent decision to grant visa-free travel access to not only Emiratis but also citizens of several other nations speaks to this effort. Russia’s agreement with the UAE in particular is part of a foreign policy push to attract foreign investment into the country, especially from Emirati businesses and businesspeople.”

Kosovo–EU visa-liberalization on the cards

Looking ahead, the most dramatic climb on the Henley Passport Index might come from Kosovo, which officially met all the criteria for visa-liberalization with the EU in July and is now in discussions with the European Council.

Prof. Florian Trauner, Research Professor at the Institute for European Studies at the Free University of Brussels, commented on this development: “The approval of the European Parliament is a recognition of the hard work done by the Kosovar authorities to fulfill the conditions set by the EU. The discussion within the Council will remain difficult, however. Several member states are reluctant to grant visa-liberalization. Relaxing visa rules may be criticized as being lenient on migration control — a criticism few want to risk in a time when right-wing populist parties are on the rise.”

Citizenship-by-investment countries make strong gains

Countries with citizenship-by-investment (CBI) programs in place all fall within the top 50 of the Henley Passport Index and are continually rising up the ranking. Newcomer Moldova, for example, which launched its CBI program in the second half of this year, has climbed 20 places since 2008. Every CBI program country has improved its visa-free/visa-on-arrival score since the start of the year.

“CBI programs offer access to some of the world’s strongest and most promising passports,” says Dr. Kälin, “and the merit of these passports is a reflection of the underlying stability and attractiveness of the countries themselves. The travel freedom that comes with a second passport is significant for individuals, while the economic and societal value that CBI programs generate for host countries can be transformative.”

Mauritius: The Financial Intelligence and Anti-Money Laundering (Amendment) Regulations 2018

Mauritius: The Financial Intelligence and Anti-Money Laundering Regulations 2018

SPERI: The UK’s Finance Curse? Costs and Processes

A new SPERI report assesses the cost of ‘too much finance’ for the UK from the 1990s to the current period.

The UK’s Finance Curse? Costs and Processes suggests that the total cost of lost growth potential for the UK caused by ‘too much finance’ between 1995 and 2015 is in the region of £4,500 billion. This total figure amounts to roughly 2.5 years of the average GDP across the period.

The report provides the first ever numerical estimate for the scale of damage caused by the UK’s finance sector growing beyond a useful size. Of the £4,500 billion loss in economic output, £2,700 billion is accounted for by the misallocation of resources where resources, skills and investments are diverted away from more productive non-financial activities into finance. The other £1,8 billion arises from the 2008 banking crisis.

The report is by Professor Andrew Baker, Professorial Fellow in Political Economy in SPERI and the Department of Politics at the University of Sheffield; Professor Gerald Epstein, Professor of Economics and Co-Director of the Political Economy Research Institute at the University of Massachusetts Amherst, and Dr Juan Montecino, postdoctoral researcher at the University of Columbia.

Professor Andrew Baker said: “The ‘too much finance’ problem has been identified in previous studies. For the UK, the numbers are powerful and hint at a deep underlying problem of misallocation, and ‘crowding out.’  UK economic strategy in a post-Brexit world, needs to make addressing this the central challenge, recognising that where finance is concerned, more can sometimes be less, and less could be more.”

The data in the report suggests that the UK economy, may have performed much better in overall growth terms if: (a) its financial sector was smaller; (b) if finance was more focused on supporting other areas of the economy, rather than trying to act as a source of wealth generation (extraction) in its own right.

This evidence also provides support for the idea that the UK suffers from a form of ‘finance curse’: a development trajectory of financial over dependence involving a crowding out of other sectors and a skewing of social relations, geography and politics.

The authors call for a focused and systematic interdisciplinary research agenda using the finance curse framing to further dig behind the numbers presented in the report. They argue that the report’s findings and ideas should mark the start of a process of more carefully debating and considering the potential social and economic costs of excessive finance in the UK and should be of both interest to researchers and of concern to policy makers.

Mauritius - Finance ​​InFocus: Newsletter October 2018 Issue 2​

FireEye - APT38: Details on New North Korean Regime-Backed Threat Group

Today, we are releasing details on the threat group that we believe is responsible for conducting financial crime on behalf of the North Korean regime, stealing millions of dollars from banks worldwide. The group is particularly aggressive; they regularly use destructive malware to render victim networks inoperable following theft. More importantly, diplomatic efforts, including the recent Department of Justice (DOJ) complaint that outlined attribution to North Korea, have thus far failed to put an end to their activity. We are calling this group APT38.

We are releasing a special report, APT38: Un-usual Suspects, to expose the methods used by this active and serious threat, and to complement earlier efforts by others to expose these operations, using FireEye’s unique insight into the attacker lifecycle.

We believe APT38’s financial motivation, unique toolset, and tactics, techniques and procedures (TTPs) observed during their carefully executed operations are distinct enough to be tracked separately from other North Korean cyber activity. There are many overlapping characteristics with other operations, known as “Lazarus” and the actor we call TEMP.Hermit; however, we believe separating this group will provide defenders with a more focused understanding of the adversary and allow them to prioritize resources and enable defense. The following are some of the ways APT38 is different from other North Korean actors, and some of the ways they are similar:

• We find there are clear distinctions between APT38 activity and the activity of other North Korean actors, including the actor we call TEMP.Hermit. Our investigation indicates they are disparate operations against different targets and reliance on distinct TTPs; however, the malware tools being used either overlap or exhibit shared characteristics, indicating a shared developer or access to the same code repositories. As evident in the DOJ complaint, there are other shared resources, such as personnel who may be assisting multiple efforts.
• A 2016 Novetta report detailed the work of security vendors attempting to unveil tools and infrastructure related to the 2014 destructive attack against Sony Pictures Entertainment. This report detailed malware and TTPs related to a set of developers and operators they dubbed “Lazarus,” a name that has become synonymous with aggressive North Korean cyber operations.
• Since then, public reporting attributed additional activity to the “Lazarus” group with varying levels of confidence primarily based on malware similarities being leveraged in identified operations. Over time, these malware similarities diverged, as did targeting, intended outcomes and TTPs, almost certainly indicating that this activity is made up of multiple operational groups primarily linked together with shared malware development resources and North Korean state sponsorship.

Since at least 2014, APT38 has conducted operations in more than 16 organizations in at least 11 countries, sometimes simultaneously, indicating that the group is a large, prolific operation with extensive resources. The following are some details about APT38 targeting:

• The total number of organizations targeted by APT38 may be even higher when considering the probable low incident reporting rate from affected organizations.
• APT38 is characterized by long planning, extended periods of access to compromised victim environments preceding any attempts to steal money, fluency across mixed operating system environments, the use of custom developed tools, and a constant effort to thwart investigations capped with a willingness to completely destroy compromised machines afterwards.
• The group is careful, calculated, and has demonstrated a desire to maintain access to a victim environment for as long as necessary to understand the network layout, required permissions, and system technologies to achieve its goals.
• On average, we have observed APT38 remain within a victim network for approximately 155 days, with the longest time within a compromised environment believed to be almost two years.
• In just the publicly reported heists alone, APT38 has attempted to steal over $1.1 billion dollars from financial institutions.

Investigating intrusions of many victimized organizations has provided us with a unique perspective into APT38’s entire attack lifecycle. Figure 1 contains a breakdown of observed malware families used by APT38 during the different stages of their operations. At a high-level, their targeting of financial organizations and subsequent heists have followed the same general pattern:

1. Information Gathering: Conducted research into an organization’s personnel and targeted third party vendors with likely access to SWIFT transaction systems to understand the mechanics of SWIFT transactions on victim networks (Please note: The systems in question are those used by the victim to conduct SWIFT transactions. At no point did we observe these actors breach the integrity of the SWIFT system itself.).
2. Initial Compromise: Relied on watering holes and exploited an insecure out-of-date version of Apache Struts2 to execute code on a system.
3. Internal Reconnaissance: Deployed malware to gather credentials, mapped the victim’s network topology, and used tools already present in the victim environment to scan systems.
4. Pivot to Victim Servers Used for SWIFT Transactions: Installed reconnaissance malware and internal network monitoring tools on systems used for SWIFT to further understand how they are configured and being used. Deployed both active and passive backdoors on these systems to access segmented internal systems at a victim organization and avoid detection.
5. Transfer funds: Deployed and executed malware to insert fraudulent SWIFT transactions and alter transaction history. Transferred funds via multiple transactions to accounts set up in other banks, usually located in separate countries to enable money laundering.
6. Destroy Evidence: Securely deleted logs, as well as deployed and executed disk-wiping malware, to cover tracks and disrupt forensic analysis.

APT38 is unique in that it is not afraid to aggressively destroy evidence or victim networks as part of its operations. This attitude toward destruction is probably a result of the group trying to not only cover its tracks, but also to provide cover for money laundering operations.

In addition to cyber operations, public reporting has detailed recruitment and cooperation of individuals in-country to support with the tail end of APT38’s thefts, including persons responsible for laundering funds and interacting with recipient banks of stolen funds. This adds to the complexity and necessary coordination amongst multiple components supporting APT38 operations.

Despite recent efforts to curtail their activity, APT38 remains active and dangerous to financial institutions worldwide. By conservative estimates, this actor has stolen over a hundred million dollars, which would be a major return on the likely investment necessary to orchestrate these operations. Furthermore, given the sheer scale of the thefts they attempt, and their penchant for destroying targeted networks, APT38 should be considered a serious risk to the sector.

Raconteur: Future of Payments 2018

Innovation in the payments sector is set to make cash and card look as old fashioned as bartering with livestock, and financial companies are scrambling to keep up. The Future of Payments report, published in The Times, details the sluggish progress of open banking, while China sprints ahead with highly developed mobile payment systems. From blockchain to biometrics, it explores the technological advances changing the face of how we pay, alongside comment on lingering gender inequality in the financial sector and an infographic on the battle for digital wallets.

FSC Mauritius issues Circular Letter with respect to Payment Intermediary Services Licence - New Minimum Capital Requirements

Mauritius: Financial Services (Authorised Company) Rules 2018

FSC Rules made by the Financial Services Commission under Section 71A and 93 of the Financial Services Act 2007.