Tuesday, July 22, 2008

Lock and Load.. It's Tax War

The latest in the tax Mafia saga hit the broadsheets today with news that hundreds of Britons with investments in offshore tax havens face electrocution...sorry.. 'prosecution' after an investigation by HM Revenue & Customs.

The tax office is believed to be particularly interested' in about 300 Britons with investments totaling more than £1bn offshore, most notably the tax haven Liechtenstein.

How did they come by this information? The tax authorities secured the information from a disc they bought. This disc reportedly contains information on 100 of the some of the wealthiest families in Britain who have accounts in Lichtenstein.

This is after 44,000 Brits gave up their banking information on the Revenue's last attack. It was worth it for them however, they claimed to have raised £400mn in back taxes, penalties and interest.

Those who didn’t 'fess up' are being investigated with the likelihood that criminal proceedings will be taken against the worst offenders.

As I have said before, I am not against the IRS, the Revenue or any other tax authorities seeking to maximise their tax revenue. I am very much against the methods that are being employed and the rhetoric that is going along with it.

Here is the story so far:

In February 2008, a global tax scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT Bank in Liechtenstein.

On February 14, 2008, German tax authorities, having obtained the names of 600-700 German taxpayers with Liechtenstein accounts, executed multiple search warrants and arrested a prominent businessman for allegedly using Liechtenstein bank accounts to evade €1 million ($1.45 million) in tax. About a week later, the U.S. Internal Revenue Service (IRS) announced it had “initiat[ed] enforcement action involving more than 100 U.S. taxpayers to ensure proper income reporting and tax payment in connection accounts in Liechtenstein.”

The United Kingdom, Italy, France, Spain, and Australia made similar announcements on the same day. Altogether since February, nearly a dozen countries have announced plans to investigate taxpayers with Liechtenstein accounts.

In May 2008, a second international tax scandal broke when the United States arrested a private banker formerly employed by UBS AG, one of the largest banks in the world, on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.

The United States had earlier detained, as a material witness in that prosecution, a senior UBS private banking official from Switzerland traveling on business in Florida, allegedly seizing his computer and other evidence. In June 2008, the former UBS private banker, Bradley Birkenfeld, pleaded guilty to conspiracy to defraud the IRS. His alleged co-conspirator, Mario Staggl, part owner of a trust company, remains at large in Liechtenstein. The current UBS senior private banking official, Martin Liechti, remains under travel restrictions.

The above is taken from the Senate Hearing Committee chaired by US Sen, Carl Levin who has said;

"Tax havens are engaged in economic warfare against the United States and honest, hardworking American taxpayers."

He chairs the same Senate sub committee that was headed by Senator Joseph R McCarthy. Yes the very same McCarthy who gave rise to the term "McCarthyism" when directed at "the practice of making unfair allegations or using unfair investigative techniques, in many instances unsupported by proof"..

I don't know your view but bribing a disgruntled employee and giving him a new identity for giving up the information seems...well, a little 'off'.

You have to read the Senate Hearing Report in order to get a full grasp of the information that this guy gave up. It was not just bank account details with money in, it was huge amounts of information on corporate structures.

For example (and I have changed the names..if you want to read the doc...it will be on the net somewhere).

MR X Accounts: Hiding Assets from Courts and a Spouse.

Mr. X, a U.K. citizen, has claimed residency in Bermuda, but lived in California for a decade, from 1991 to 2002. In 2003, after his wife of nearly 40 years filed for divorce, he effectively disappeared from view, ignored court orders to transfer California real estate and £3 million in alimony to his ex-wife, and hid assets from the court in offshore jurisdictions around the world, including possibly at LGT.

LGT documents show that, in the early 1990s, LGT helped Mr. X open an account in Liechtenstein and deposit millions of Swiss francs, apparently transferred from another Liechtenstein bank that had been disclosed to his wife’s legal counsel.

In 1998, having obtained information indicating that Mr. X was hiding assets from his wife and tax authorities, LGT nevertheless helped him form a Liechtenstein foundation and transfer into its account his existing LGT funds, then valued at nearly 10 million Swiss francs or $6.6 million.
Also in 1998, Mr. X purchased a $700,000 condominium in California, hiding his ownership by making the purchase in the name of a Guernsey corporation owned by a Guernsey trust. Despite evidence that he lived in the condominium for years, Mr. X denied being a U.S. resident; an internal LGT memorandum noted approvingly: “The financial beneficiary has his PLACE OF RESIDENCE IN BERMUDA and not in the U.S. Hence, he pays no taxes in the U.S.!!!!!!”

At the end of 2001, $6 million in assets remained at LGT. In 2003, a U.K. court ordered Mr. X to pay £3 million in alimony and transfer the California realty to his ex-wife. He failed to acknowledge or comply with the court order. When Ms. X filed papers to enforce the U.K. court order in a California court; Mr. X unsuccessfully contested the case. In the end, the U.S. court awarded Ms X the real estate, but she was unable to obtain the alimony. The existence of the Liechtenstein foundation and funds were not disclosed to the courts or his ex-wife.

That is not just bank information, that is laying bear the complete structure of Mr. X's protection of his money. I am not making a comment that he was right or that it was legal, I merely use the above to show the kind of information that was received from the LTG banker.

For anyone with complicated tax structures out there, this must be a frightening revelation.

The issue for me, in all of this, is not that the IRS or any other authority are not entitled to unravel such structures if they are illegal, it is the way that they have come across this information.

The UK reportedly paid £100,000 to see the information on the disc handed over by the banker and have started investigations off the back of it.

Lichtenstein, like Switzerland and other countries have laws that fuel an industry based on efficient tax planning. They have chosen not to make tax evasion illegal and that is the law of the country, why is that not being respected by the international community?

Tax competition is there for all to see. If I can structure my tax affairs with trusts and companies legally formulated through tax havens, what is the problem? If you want to keep more money on your shores, don't tax people as much. If you can't afford to run your country with lower taxes then make cut backs. $255mn per day (not to mention 3000 brave souls) is the cost of the Iraq war for example...

Isn't this the root of our current problems in the market? Countries, companies and individuals borrowing more than they can afford to pay back. Taxes go up (or in this case the tax authorities declare 'war'), companies put up prices and consumers default on their mortgages.

To extend the notion that the root of all evil is people that want to avoid (not evade) paying taxes that fuel an over-indulgent country collapsing under the weight of its own fiscal mismanagement, is, frankly, absurd.

When those countries then unleash bribery and other illegal activities to by-pass sovereign nations laws we are heading down a road that will only end in tears. The problem is, however, that the cartel of tax authorities are obviously hell bent on breaking those countries that are better a tax management than they are.

It's war alright, but it is not on those countries bleating about tax evasion, it is on the inalienable right of an individual to protect his wealth from the tax authorities.

This quote from Frederic Bastiat sums up the current tax war perfectly:

"The war against illegal plunder has been fought since the beginning of the world. But how is legal plunder to be identified? Quite simply, see if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Then abolish this law without delay ... If such a law is not abolished immediately it will spread, multiply and develop into a system."

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