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Would the world be different without offshore structures?

Contributed by Laveco Ltd.
08 April, 2015

The short and sweet answer to this is no. And why not? Because the origin of all of the terrible sins mentioned in the same breath as offshore structures lies not in the system, but in human nature itself, which has remained unchanged for thousands of years. The desire for profit (which is totally natural) has been with us since time immemorial, with everyone wanting to win, and making use of whatever tools are necessary to do so. One such "tool" is offshore, even though this has now become something of a swear word.

The self-professed "experts" have been frightening clients and anyone interested with the apocalypse facing the offshore financial world in 2017. Everything we have known to date is going to collapse around us, everything is going to be transparent and they are going to know everything about everybody, because the banks are going to report to the tax authorities all over the world.

First of all, let's see just exactly who these experts are. In numerous cases the experts are only experts because they say that they are. There is no more precise definition, there is no state or private institution behind the individual, and they have appointed themselves to these positions of responsibility. They then give their opinions on a process which has not yet begun, of which there is no experience, and which cannot be compared to anything we have seen so far. The exchange of information taking shape at the moment is much more complicated than, for example, the FATCA.

Even this wouldn't bother me though, if these experts knew what they were talking about. Instead they tend to scare the life out of people, who were already paranoid, and after which it is very difficult to put them straight. In a one hour meeting they manage to create unfounded fears to such an extent that the client becomes totally confused. Naturally they do this with the intention that they will then serve up the solution on a plate. The trouble is that all too often the solution doesn't materialise, and all that is left is conceptions with no substance, empty speculation and little more than gossip.

Let's see where the process currently stands. The OECD Global Forum published a "statement of outcomes" of the meeting of ministers held on October 28-29 2014, in which it noted that 89 countries have issued statements of intent to sign up to the agreements on the automatic exchange of information. According to the plans, the first group of countries will start exchanging information from October 2017, with the second group joining from October 2018. There is also a handful of countries who have not yet decided when they would like to accede to the system. Those who report from 2017 will exchange information beginning from the year 2016, while those reporting from 2018 will begin with information relating to 2017.

Assuming, of course, that the legal and technical backgrounds are both in place. In July 2014 the OECD published on its website (www.oecd.gov) a model of the agreement which countries must sign to make information exchange possible. There are two main types of agreement. One is the bilateral agreement, where two countries agree on the exchange of information, while the other, the multilateral agreement, sees a number of countries joining the system as a group. Bilateral agreements can be reciprocal, whereby both countries give and receive information, or non-reciprocal, when only one of the parties gives information (the latter is recommended by the OECD in cases where, for example, one of the contracting countries has no personal income tax requirements).

The material published by the OECD in July sets down in detail exactly what has to be provided by the banks in the exchange of information, and this information is available to be studied by the bankers. Despite this, in my opinion the banks will need a considerable amount of time and expense to prepare the necessary software. At the current time, the banking systems are not prepared for the supply of information, and the question is whether they will be able to guarantee the technical background required by January 1st 2016. In order to be able to start collecting information in January 2016, the technical side must be operational.

This, however, will not be enough. The banks will find themselves faced with tasks which will cause them real headaches. One of the most difficult of these will be the precise definition of a "reportable person" in the case of foreign individuals and companies. And this has been delegated to the banks: they have to decide who qualifies as a reportable person for each and every client and account. In the case of individuals, it seems quite straightforward, but when it comes to companies, the complications really begin. I don't want to go into minute detail here, because even a summary would be very long and intricate. The banks' lawyers weren't exactly over the moon when they had to arrange everything to do with FATCA, and that only meant that they – or the banks – had to report on one country, the USA.

Now, according to the plans, this will be a worldwide process, with "everybody reporting to almost everybody." First of all, however, the countries have to sign the agreements mentioned earlier. Without this, it is not possible to establish either the legal banking background or the technological side. If the OECD only plans to publish its new Terms of Reference and Methodology in October, how will there be time for all this? But that is what appeared in their communication in October.

Two months is an extremely short period for the establishment of such a serious system carrying so much responsibility. In my opinion, if the whole thing kicks off at all, it will be with delays, last minute rush and a good dose of chaos. This can be foreseen even now. The banking system comes up against considerable obstacles when faced with the performance of much smaller tasks. Here though, the banks even have to decide on the starting point: who do they have to report? Who and to whom? For example, where would a Swiss bank send a report if the account was for a company from Cyprus whose director was a Serb resident in Dubai? There are numerous unanswered questions. Anyway, let's look at the worst scenario, which sees the system being started and reports being made. The tax authorities will be inundated with information on which beneficial owners have accounts where. Just to make things complicated, let's look at a company account in a Swiss bank. The Swiss reported to the national tax authority concerned. They are then faced with the most difficult task in their history to date. They have to compare the tax and asset returns of the individual concerned with the information received from abroad. Although in many cases now the onus is, paradoxically, on the taxpayer to provide proof, it would be very difficult to state that the interest accrued on a foreign company's bank account is automatically the private income of the individual and that he should pay tax on it. Firstly, we are talking about a company, which, for one reason or another, may have made a loss during the given year. Secondly, a company may have several owners, who distribute the company profits, or are entitled to a share of any non-distributed profit in accordance with the terms of the Memorandum and Articles of Association. So, the matter is not as black and white as the experts frightening clients to death would have us believe. And I haven't even touched upon the "creative accounting solutions" of the common law system.

I can also say with some certainty that the countries are going to argue over implementation as well. Let's be honest, every rule is only worth as much as can be achieved through it. If the USA only wants to receive information, but give nothing, then capital will flow their way. This, however, will not go down too well with their age old ally, the United Kingdom. And if the English can have something, then this will encourage the Germans, who won't want to miss out, and an Anglo-German standoff is on the cards. I could go on to list the conflicts of interest between the big players, as a result of which the whole thing is going to become much more relaxed.

There will, without a doubt, be something in the financial world, and we have to be prepared for it. Where possible, the necessary arrangements should be put in place during the 2015 tax year. Because if we take again the worst case scenario and the system does manage to start in 2016, then those structures which satisfy the requirements of the new system while still allowing us to enjoy the relative financial freedom which we have become accustomed to must be in place in 2015. On the basis of my 23 years in the business, I can state that there will always be solutions, good solutions, better solutions and even better solutions. The type of structure established is merely a question of time and money. First of all, however, it is a question of choice and being resolved. A service provider such as LAVECO Ltd. offers its clients excellent opportunities when it comes to solutions. This does require, however, the right level of client receptiveness. At the end of the day, after all, we can only implement solutions, it is the client who has to make the ultimate decision.

In summary, having been born into the Christian culture, I have to state that they drew up excellent moral rules for us 2000 years ago in the Ten Commandments. I wonder, though, whether 2000 years on there is less adultery or theft. How effective have those moral rules been? It certainly provides food for thought, though obviously everything is relative. Here in Hungary, for example, we are now better able to observe the "Remember the Sabbath day, to keep it holy" rule, since shops are now closed on Sundays, so we have more time to spend with the family. As to whether or not it will have an effect on the other rules, though, that will be analysed by someone else in another 2000 years. And don't be surprised if the analysis reads something like this: "while some, instead of going to church on Sunday morning preferred to sleep longer, others took advantage of this innocent snoozing to go and steal or even commit adultery."

Wishing you a pleasant read and reflection,

Warm regards

László Váradi

Managing Director



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