Summary
As the IRS examines the 4,450 UBS AG Swiss bank accounts it would do to remember that companies offshore as well as individuals.
If you do not understand the structure of the company, or the role/purpose of its offshore holdings then treat it with extreme caution.
The international regulatory environment (wrt offshore companies and tax treaties) will tighten over the next few years, thus making it increasingly difficult for companies to use these dubious structures.
Analysis
Bloomberg reports the following today:
"The U.S. Internal Revenue Service is shifting audits of wealthy Americans suspected of offshore tax evasion to an elite division that usually examines businesses as it prepares to receive data on 4,450 UBS AG Swiss bank accounts.
The tax agency posted internal job listings yesterday seeking auditors to work for a newly created office within its Large and Mid-Size Business division that will be tasked with monitoring what it called the “global high-wealth industry.”
The move centralizes responsibility for auditing wealthy individuals suspected of offshore tax evasion in a unit with the most experience navigating international tax treaties and untangling complex cross-border business structures."
As I noted in my article The Reality of UBS and Liechtenstein Tax Settlements , Her Majesty's Customs and Revenue (HMRC) are "upping the ante" against offshoring as evidenced by their recent announcement of two new disclosure facilities for offshore tax evaders.
- The Liechtenstein Disclosure Facility (LDF (OBB:LDFI))
- The New (LON:NEW) Disclosure Opportunity (NDO).
The LDF offers a 10% cap on the penalties, compared with the 20% cap on NDO.
However, aside from targeting individual offshore tax evaders, the Internal Revenue Service and HMRC would do well to remember that companies offshore as well as individuals.
During various stages in my career as an accountant, head of audit and head of fraud investigation I have come across numerous examples of offshore structures based in a variety of exotic locations (outwith the organisations' actual operational locations) eg; the Caymans, Bermuda, Luxembourg and Jersey. Indeed one organisation had over 100 offshore companies.
Cynically viewed, there are five reasons why an organisation would wish to use an offshore company (outwith it actual operational area):
1. The “less than demanding” accounting rules, and reporting requirements, of the offshore base enable the company to “hide” transactions and relationships that it does not wish the outside world to see.
2. The tax regime of the offshore base enables the organisation to avoid tax that it would have to pay if it resided elsewhere. Note, tax avoidance is perfectly legal.
3. The tax regime, and the “less than demanding” accounting rules, of the offshore base enables the organisation to evade tax that it would have to pay if it resided elsewhere. Note, tax evasion is illegal.
4. Loading the organisation chart with numerous offshore companies, which have complex cross holdings in each other, leads to an unnecessarily complex and difficult to understand organisation. This enables the organisation to hide fraudulent transactions.
5. Offshore organisations, if the share holdings are engineered in a particular way, can be excluded from the organisation structure disclosed in the public accounts.
I have the following advice for investors, regulators, employees, auditors and tax investigators:
- Carefully study the structure of the companies that you are dealing with, ask if there are offshore companies.
- Where there are offshore companies, make sure you understand their role and their place in the organisation as a whole.
- If you do not understand the structure of the company, or the role/purpose of its offshore holdings then treat it with extreme caution.
Cynically viewed, there are five reasons why an organisation would wish to use an offshore company (outwith it actual operational area):
1. The “less than demanding” accounting rules, and reporting requirements, of the offshore base enable the company to “hide” transactions and relationships that it does not wish the outside world to see.
2. The tax regime of the offshore base enables the organisation to avoid tax that it would have to pay if it resided elsewhere. Note, tax avoidance is perfectly legal.
3. The tax regime, and the “less than demanding” accounting rules, of the offshore base enables the organisation to evade tax that it would have to pay if it resided elsewhere. Note, tax evasion is illegal.
4. Loading the organisation chart with numerous offshore companies, which have complex cross holdings in each other, leads to an unnecessarily complex and difficult to understand organisation. This enables the organisation to hide fraudulent transactions.
5. Offshore organisations, if the share holdings are engineered in a particular way, can be excluded from the organisation structure disclosed in the public accounts.
I have the following advice for investors, regulators, employees, auditors and tax investigators:
- Carefully study the structure of the companies that you are dealing with, ask if there are offshore companies.
- Where there are offshore companies, make sure you understand their role and their place in the organisation as a whole.
- If you do not understand the structure of the company, or the role/purpose of its offshore holdings then treat it with extreme caution.
The international regulatory environment (wrt offshore companies and tax treaties) will tighten over the next few years, thus making it increasingly difficult for companies to use these dubious structures.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
