Report Examines Amnesty Threat To Offshore

by Amanda Banks, Tax-News.com, London

19 May 2010

A new report has highlighted the complexities that governments face in encouraging taxpayers to repatriate their funds back onshore through the use of amnesties, and indeed the potential impact that well-implemented amnesties might have on the offshore banking industry.

In the face of a recent increased focus of governments trying to repatriate wealth, the report by Datamonitor identified five factors that will determine an amnesty’s success: structural changes in the home market; attractiveness of the terms of the amnesty; frequency of announced amnesties in the country; enforcement powers/threat of non-compliance; and finally, how well publicized the enforcement measures are.

Michele Gorman, financial services analyst at Datamonitor, explained:

“Generally, if investors do not believe that an amnesty is a one-time opportunity, they will be less likely to be tempted by it. Italy announced three amnesties in eight years, which should have meant a low response to the current one; however, the terms were so attractive that they proved irresistible.”

“The terms included: a very low 5% tax on the assets declared, with anonymity; the ability to keep the money abroad if in the European economic space; and fiscal and criminal immunity. Also encouraging the success of this amnesty was the threat of enforcement: tax police carried out raids on more than 75 Swiss banks in Italy and used cameras at the Swiss border to try to catch Italians bringing money into the country. These tactics, and the significant publicity they garnered, helped spur Italians to declare their offshore funds.”

“Meanwhile, the UK’s initiative, which required full disclosure of all undeclared assets, payment of outstanding taxes, interest and penalties, plus a further 10% penalty, was a much less attractive deal. In addition, there was little publicity about the consequences of non-compliance. In fact, it is believed that more than 200 banks did not even warn their clients that their details could be handed to HMRC (the UK revenue body). The success of the Italian amnesty and the relative failure of the UK’s serves to prove that in tax amnesties, both the carrot and the stick are necessary.”

According to the report however, many believe that the fact that offshore clients are being opportunistic in taking advantage of amnesties to regularize undeclared funds, coupled with their reasons for being offshore in the first place, means that much of the newly declared money will simply flow back offshore.

The report predicts that, should future amnesties by the UK, and other European nations, be successful, banks in Jersey, Guernsey and the Isle of Man are most at risk of losing business.

Gorman added: “As a legacy of the strength of the UK banking sector, nearly 70% of the Channel Islands/Isle of Man offshore client base is domiciled in Western Europe with over half from the UK alone. Whilst this has been a strength in the past, an increasing focus from governments to get this money back onshore means these banks are at risk of losing a significant amount of business to a successful UK tax amnesty.”

Comparatively the Asian offshore centres are more balanced, the report finds, as they draw funds predominantly from across Western Europe, Asia and the rest of the world. Switzerland is also well placed, it found, with the most diverse sources for its offshore clients; however there is a strong reliance on Germany, which could be problematic should the country launch a successful amnesty, the report concludes.

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