The UK-Swiss Tax Agreement

1. The UK-Swiss Tax Agreement Leo Coyle Andrew McKenna Step Conference Bermuda 23 February 2012

2. Introduction • UK Swiss Agreement • Liechtenstein Disclosure Facility • Offshore Penalty Regime • International Compliance

3. UK - Swiss Agreement PAST FUTURE Swiss assets only • One off payment • Voluntary Reporting • Voluntary Disclosure/LDF • Final withholding tax • Voluntary reporting Complex Formula 19-34% of Capital at 31/12/10 Withholding Rates: Interest & other income 48% CGT 27% Dividends 40%

4. Participation remains anonymous Administered by Swiss paying agents (Banks) Essential Points Essential Points 1 Account must be open at: 31/12/10 AND 31/05/13 ‘Funds’ held directly or indirectly by UK individuals in Switzerland CGT IT VAT IHT UK Individual= Swiss Bank determine using normal due diligence rules Principal private address in UK British passport holder Taxes Only on ‘Swiss’ Assets: (Bankable Assets) cash, precious metals, accounts, stocks, shares, securities, options, debts, structured products

5. HMRC will not ‘Actively’ seek customer data stolen from Swiss banks Essential Points 2 • Anti-abuse clause: directed at banks • ‘Not knowingly manage or encourage use of artificial arrangements whose sole or main purpose is avoidance of tax under agreement’ Past/future tax paid - Certified • Enhanced exchange of information (500). • Plausible grounds • No fishing • Number of accounts • Previous 10 years • Voluntary Reporting • Client instructs • Identity • Bank provide all details • Statement of assets at each year end • RESULT: Normal application of tax, interest & penalties (20 yrs) • Money moved • <31/05/13: • HMRC notified where money sent • No names/number only (total)

6. One-off Past Tax Repayment • Complex formula • Swiss bank levy and pay up to Swiss FTA – in turn to HMRC • Covers 1/1/2003 – 31/12/12 • Rate 19-34% (average 26%) of assets at 31/12/10 • Accounts for - Capital, income & gains - Length account held - Rate of balance increase • Outcome = Cleared funds

7. Corporate tax • NIC • Tax on loans to directors • ‘Excluded assets’ • Contents of safe deposit boxes • Real property • Chattels Exclusions Bank charges & expenses not cleared Withdrawals to extent not re-deposited from outside UK between 1/11/11 AND 31/12/12 not cleared Domiciliary trading companies

8. Payment = Payment on account of 20yr tax, Interest & penalty calculation All open investigations Excludes Previous investigation Discretionary Trusts? Proceeds of crime other than evaded tax Those involved in a disclosure facility or campaign (HSBC A/C holders)

9. Assets held: • In own name • By domiciliary company if no commercial activity • Trusts where beneficiary known! • (?Discretionary position) Includes Non Domiciles (P.T.O) All tax interest and penalties due Death Illness Disabled Insurance wrappers Minimal risk protection Pay out or redemption not restricted to

10. Non Domiciles Swiss Bank identify and; Must ‘prove’ non domiciled (not be under enquiry) By:- certified by UK lawyer, accountant, tax professional -claim remittance basis10/11 or 11/12 • Options: • 1. Disclosure to UK • 2. Treat as if domiciled • 3. Self assess – identify UK income/gains + remittances (34%) • 4.Opt out. (Disclosure of certain details) Difficult and complex area – lot of guidance notes expected

11. Future Withholding Tax • Rates quite high - Interest/other income 48% - CGT 27% - Dividends 40% • Certified; levied by Swiss bank; anonymity retained • Income arising – Gains realised basis • Covers IT and CGT [table of concordance] • Non-domiciles: No opt out Annual certification required Charge on UK source & remittances • UK Domiciles can opt for voluntary disclosure – no WHT • Interacts with ESD – which takes priority

12. Example 1 Account opened 1993, cash amounts deposited over years and interest credited. £1m at 31/12/02 £2m at 31/12/10 £2.1m at 31/12/12 Expenses paid out to bank £95k One off payment 19% of £2.1m = £399,000 34% equation on £2.1m = £489,475 So: £489,475 payable (23% of 31/12/12 funds) Balance £2.1m cleared Only £95k fees not cleared

13. Example 2 Account opened in 2007. Deposits 2008-2011, large withdrawal 2012. Balances – 31/12/07 £200k 31/12/10 £1m 31/12/12 £500k 19% of £1m = £190,000 34% by equation on £1m = £267,353 £1m balance of funds at 31/12/10 cleared £267,353 payable (53% of remaining funds, 26% of cleared funds)

14. Example 3 Deposits exceed withdrawals:- Balance 31/12/02 £1m Deposits £6m Income/gains £2m Drawn £3m Balance 31/12/10 £6m Income/gains £1m Deposits £5m Balance 31/12/12 £12m • One-off charge = £3.18m • (26.5% of 31/12/12 balance) • Cleared funds:- • 31/12/10 balance £6m • Plus income > 31/12/10 £1m • Plus deposits > 31/12/10 • franking withdrawals • < 31/12/10 (£3m) £3m • £10m • So: £2m funds not cleared under Swiss Agreement

15. Example 4 Account opened 1991 Deposited £500k over years (undeclared) £500k cash undeclared – spent £1m investment income £750k used to acquire Spanish villa £50k Spanish villa rental (undeclared) 05/04/1999 balance £1,000,000 31/12/02 - £1.5m 31/12/10 - £1.5m 31/12/12 - £1.7m Swiss Calculation:- 19% of £1.7m = £323,000 34% via equation = £239,733 So £323k payable £1.7m cleared funds BUT Not cleared - £500k undeclared cash spent - £750k spent on Spanish Villa - £50k Spanish rental Which if picked up on enquiry = £850k+ But prosecution risk LDF liability - £1.17m (est.)

16. Compare to LDF Moving funds – risk in future (Criminal, 50% + penalties) Essential Points Areas of Importance Swiss agreement only deals with Swiss assets (LDF worldwide) No exemption from criminal prosecution (example 4) Non domiciles care needed – consider position, review Discretionary trusts exempt (?) Ensure bank agree = discretionary Beneficiaries known Swiss bank action/decision Forms A/T

17. What is the Liechtenstein Disclosure Facility (LDF) • An opportunity to disclose to HMRC untaxed income/gains and have a clean slate for the future. • Commenced 01/09/2009 • Available until 12 March 2015 but now extended to 5 April 2016 • Beneficial terms for a 10 year period eg 06/04/99 – 05/04/09 • Subject to variation

18. Eligibility • Must have a UK Tax Problem • Must have an Offshore Asset as at 01/09/09 • Must have Relevant Property in Liechtenstein • Must obtain a Certificate of Relevance from Liechtenstein intermediary

19. Benefits • Years prior to 06/04/99 falls outside taxation (normal enquiry would go back to 20 years) • Penalty = 10% of the tax for the beneficial period, 20% for subsequent years • Anonymity retained prior to registration to understand certain treatment for UK tax purposes • Immunity from prosecution – unless there is a wider criminality • No naming and shaming • Provides closure • Going forward – access funds freely • Domicile agreed – difficult to establish outside of LDF

20. Exclusions • Ongoing Code of Practice 9 (COP9) = serious fraud enquiry • Notified you are under criminal investigation by HMRC and you have been arrested or cautioned • Beneficial aspects lost if:- 1. Offshore bank account opened through a UK branch or agency – LDF but 20 years 2. Offshore asset not held at 01/09/09 3. Past letter from HMRC about ODF or NDO – 20% penalty

21. Additional points • Use actual rates of tax or elect for the special composite rate of tax • Composite Rate of Tax (CRO). Single rate of 40% for beneficial period only – covers all taxes. • But - no reliefs, deductions or allowances in calculation or to carry forward. (Except EU savings tax) • No IHT where CRO used – substantial savings. • Any Director’s overdrawn loan account issues will need to be correctly recorded after the beneficial period.

22. The Process • Identify UK tax problem • Confirm offshore asset held as at 01/09/09 • Obtain Liechtenstein relevant property if not already held • Obtain certificate of relevance • Register for LDF • Prepare a disclosure report- narrative & calculations for a full disclosure of all worldwide tax irregularities • Actual basis – disclosure within 10 months of registration CRO basis – disclosure within 7 months of registration • Reports are accompanied by:- 1. Letter of offer 2. Certificate of full disclosure 3. Statement of assets and liabilities

23. Example 1 Account opened in Switzerland in 1994 - deposited £1m from previous IOM account Investment income £50k per annum Owns Spanish villa acquired 1995 £1m (taken from Swiss account) Received £10k per annum rental income - All undeclared Obtains relevant property in Liechtenstein and receives COR in the tax year 2011/12 Calculation 10 years x £50k = £500k x 40% = £200k 10 years x £10k = £100k x 40% = £ 40k Tax = £240k Interest say 30% = £ 80k Penalty 10% = £ 24k 2 years x £50k = £100k x 40% = £ 40k 2 years x £10k = £20k x 40% = £ 8k Interest say 5% x £48k = £ 2.4k Penalty 20% = £ 9.6k Settlement = £404k • Clears all worldwide issues • Avoids tax interest & penalty on original £1m and income pre 6 April 1999. • Swiss treaty would be cheaper but £1m withdrawn for villa not cleared nor is rental income. • Not available till 2013 so if picked up for enquiry exposed to possible further £1m tax, interest + penalty. • Swiss treaty does not clear matters outside Switzerland

24. Example 2 Client has £1m in IOM bank account at 1990, settles it all into an offshore trust in 1995. Trust income and gains of £10k per annum. Settlor withdraws £20k & £50k at his desire. Balance in trust 2012 = £1.2m Relevant property in Liechtenstein & COR obtained Due to IHT on establishment of trust and 10 year anniversary, elects for CRO (40%) Considered to be settlor interested discretionary trust Calculation 10 years at £10k = £100k x 40% = £40k Interest say 30% = £12k Penalty @ 10% = £ 4k 2 years at £10k = £20k x 40%= £ 8k Interest say 5% = £0.4k Penalty @ 20% = £1.6k £66k Saving - IHT on settlement + 10 year anniversary charge - Tax, interest and penalty for pre 1999 income But - IHT on closure

25. Example 3 • Client is UK resident but non domiciled • Pays tax on the remittance basis • He has two accounts A&B • Account A is fully disclosed and no further tax is due • Account B earns £100k per annum and £50k per annum has been remitted to the UK • Should he elect for CRO or pay on Actual Rate Basis • If he elects for CRO he will be taxed on £100k per annum as CRO is not calculated by reference to the amount remitted. It is charged on the income per annum that is earned by account • Actual rate taxes only the remittance

26. Example 4 • Client extracts cash from his business and lodged it in an account offshore. • Balance as at January 1998 = £2m. When his business ceased and account closed • £1m gifted between 4 children. Other £1m spent on new build house which cost total £1.5m (£500k from compliant bona fide source) client has adequate compliant pensions & UK funds to live on. • He owns 1/3 share in a property in Dublin which he inherited with his brother and sister when their father died in 1990 (IHT compliant) – rental income of £6k per annum not declared by him. Still owned. • Overseas asset at 01/09/09 = 1/3 share in Dublin property • Obtain relevant property + COR Calculation 10 years x £6k x 1/3 = £20k x 40 = £8k Interest say 30% = £2.4k Penalty @ 10% = £0.8k 2 years x £6k x 1/3 = £4k x 40% = £1.6k Interest say 5% = £0.08k Penalty @ 20% = £0.32k Settlement = £13.2k Avoids tax on the original £2m + rental income pre 1999

27. Offshore penalty regime From 06/04/2011 For – failure to notify - inaccuracy on a return - late return Income and capital gains tax Penalty linked to tax transparency in which income/gain arises Levels of Penalty Category 1 – Penalty same as in UK (up to 100% tax) Category 2 – Penalty up to 150% of tax Category 3 – Penalty up to 200% of tax Bermuda and Switzerland in Category 2

28. International Compliance – Areas to consider A - Cross border Communication policy D - Responding to information requests • Understand request and legality • Consequences of no response • Accessibility and power/possession (evolving case law) • Link to A and B and C • Understand accessibility by regulatory bodies • Electronic communication policy • Capturing/sharing communications International Business C - Offshore structure audit B -Document retention policy • Risk assessment on set up • Ensure implemented & documentation captured day 1. • Engage key personal on role/duties • Ongoing management & compliance • Review - changes • Have a policy in place • Understand accessibility of electronic systems (server location) • Power and possession • Destruction policy - electronic

29. Contact Us Leo Coyle Partner +44 (0)161 837 1879 +44 (0)7919 342 622 leo.coyle@smith.williamson.co.uk Andrew McKenna Partner +44 (0)161 837 1886 +44 (0)7841 494 471 andrew.mckenna@smith.williamson.co.uk