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Déjà vu all over again: tax avoidance or criminal activity?

Déjà vu all over again: tax avoidance or criminal activity?

Are you avoiding tax within the bounds of the law or are you a criminal? This seems to have been the distinction missed by the Paradise Papers revelations and has wealth managers calling for clarity.

‘Wealth managers and investment managers do not understand what is meant by avoidance,’ suggested Daniel Freedman, CEO of London & Capital. ‘And the reason they don’t is because what was a legitimate tax planning scheme, such as a pension fund, film partnership, enterprise zone, business property relief, VCT, EIS, all those products that the government brought in have now been tainted – dubbed as tax avoidance and then a criminal offence.’

He added: ‘Why would the government on the one hand give an incentive for people to invest in small businesses and small companies, while on the other allow anyone who invests in it to be deemed as a tax avoider? I think the problem exists where there is no clarity between someone who is a tax avoider and someone who is a criminal.’

While Freedman admits that in the past there were significant issues around secrecy and avoidance, since the 1990s, the system has improved, he says.

‘In the 1990s, the idea of tax secrecy and avoidance existed big time all over the world. And the authorities were not really up to date. They didn’t have the resources and there was a big industry that was built up which basically was taking advantage of the system.’

However, the system has changed since then and ‘the wealth managers, the asset managers and the bankers are all under very strict compliance regimes where they are personally liable if they get involved in any evasion tactics’.

He pointed out that compliance departments will not accept business unless everything is fully documented.

In his view the problem arose because the authorities need to clarify what they mean by tax avoidance.

Freedman is not alone in arguing the need for more clarity.

‘The underlying problem here is that the tax system in the UK and in other developed countries has become extremely complex and that, combined with the internationalisation of wealth, means you will always have uneven tax regimes,’ said Neil Moles, managing director of Progeny Group.

‘The processes of tax planning and tax avoidance are completely legal, whilst tax evasion is illegal. A simplification of the tax code, both at home and coordinated on an international scale, would help the overall system.’

John Spiers, chief executive of EQ Investors, agreed, branding it a ‘horrendously complex’ system that ‘will always create opportunities for clever people to find loopholes’.

He has called for the tax statutes to be redrawn to simplify them and he also advocated naming and shaming those who deliberately break the rules as a deterrent.

However, Spiers was quick to point out that although in many cases laws were not being broken, the people named in Paradise Papers were not complying with its spirit.

Following the initial leak of the Panama Papers over a year ago and now the Paradise Papers, is anything actually changing?

After the Panama Papers there were a number of arrests, resignations of political figures across the world including Iceland’s prime minister, and numerous investigations were launched. Will the Paradise Papers lead to any changes including with policy, with one week until the UK Budget?

‘I fear for the worst in the Budget,’ stated Freedman.

‘I fear Philip Hammond is going to do very little. From what we hear, he wants to attack VCT and EIS. Possibly pensions. Neither make any sense, because you need to encourage people to save. If you’re trying to encourage small businesses to grow, why on earth attack EIS and VCT which are designed to support them? The chancellor will fuel the problem by making the grey areas even greyer.’ 


Argentina: A prosecutor issued arrest warrants for four officials at the University of Tucuman in connection to an alleged money laundering scheme connected to mining company La Alumbrera. The company was linked to offshore firms belonging to Glencore that were used to reduce taxes on mineral resources extracted from Argentina.

Chile: Authorities pledged to investigate Chilean companies that appear in the Paradise Papers and the Ministry of Transport and Telecoms said it had contacted tax officials to contribute to an audit of Alsacia-Express – an operator of public busses that conducted business in Bermuda.

Netherlands: The Dutch tax minister said the government will re-examine 4,000 advance tax rulings reached between the country and foreign companies.

Singapore: The Monetary Authority of Singapore said it will review the Paradise Papers and take action against any financial institution or individual who breaches regulations.

UK: Theresa May, at the CBI annual conference, said that there is already work being done to ensure greater transparency in the dependencies and British overseas territories. She stated: ‘HMRC is already able to see more information about the ownership of shell companies, for example, so they can ensure that people are paying their tax. We want people to pay the tax that’s due.’

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