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February 24, 2011

The need for even tighter banking regulations are attracting attention in the wake of recent scandals arising from the release of sensitive documents through websites such as Wikileaks. Despite a gradual erosion of the secrecy behind the once complex institutions, a new challenge has emerged. The recent prosecution of former Swiss banker Rudolf Elmer, who pled guilty to charges of infringing on his country’s strict banking confidentiality code, resulted in the Court’s decision to issue a modest financial penalty and a suspended sentence. Not only is the outcome disappointing to prosecutors, it serves as an unlikely deterrent for other individuals who choose to participate in similar illegal activities.

In this issue of Tax Advisor Update, Andrew Watt discusses the current status of tax investigations in the light of offshore disclosure arrangements and new anti-bribery rules, which will be of great importance to companies.

The Liechtenstein Amnesty
All of this follows the whistle-blowing activities in a Liechtenstein bank which are believed to be at least partly responsible for the introduction of the Liechtenstein Disclosure Facility (“LDF”) – the groundbreaking disclosure arrangement between the Principality and HM Revenue and Customs (“HMRC”). This limits HMRC to collecting unpaid taxes for 10 years only (as opposed to the statutory 20 years). The arrangement, which is open in certain circumstances to those who have undisclosed funds in jurisdictions other than Liechtenstein, will last until 2015, by which time there should be no undisclosed funds held in Liechtenstein by UK residents.

The LDF is the first genuine amnesty ever offered by HMRC and anyone who thinks they might be eligible to participate should urgently consider acting now. There will, of course, be a temptation to wait to see if the UK / Swiss deal (see below) is even more favourable, but the danger in delaying is that HMRC may start an investigation which will make the target ineligible for the LDF and quite possibly for the impending Swiss arrangement.

UK Seeks Deal with Switzerland
The acquisition by the French tax authorities of information allegedly stolen from another Swiss bank was brought to HMRC’s attention and very quickly led to investigations that effectively prevented those targeted from making disclosures under the highly favourable terms of the LDF.

Pressure from the OECD, in conjunction with the unauthorised passing of data to revenue authorities, has led to Switzerland’s mutual cooperation with countries such as Germany and the UK. The proposed Swiss / UK deal was announced in October 2010 by the Department of Finance in Switzerland (but so far HMRC and the UK government have said little on the matter).

Unofficial estimates put the potential revenue at stake for the UK as high as £6 billion, but the only information available on the deal comes from the Swiss announcement regarding undisclosed assets held in Switzerland having to be "regularised" – presumably by paying a percentage of the funds to the UK. And income arising in the future from the remaining funds would be subject to a substantial withholding tax. However, those involved may be able to retain their anonymity as far as HMRC is concerned, leaving the unanswered question of how undisclosed funds in jurisdictions other than Switzerland could be "regularised". Any deal even remotely resembling that outlined in the Swiss announcement would undoubtedly give rise to a storm of protest from those who have already made complete disclosures under the LDF and previous UK offshore disclosure arrangements.

The IRS Announces a Second Disclosure Arrangement
The IRS has just announced a second offshore voluntary disclosure arrangement for US taxpayers. Briefly, the terms include payment of unpaid tax for the years 2003 to 2010, interest, fixed and tax-geared penalties, and up to 25 per cent of the highest aggregate balance in offshore bank accounts or value of foreign assets acquired with undeclared funds during the period covered by the disclosure. There is a guarantee of non-prosecution for those who come forward – and a matching threat of the possibility of such action for those who fail to disclose by the deadline of 31 August 2011.

The Bribery Act
Following substantial pressure from organisations representing UK multinational companies, the implementation of the Bribery Act 2010, due to take effect in April, has been postponed. The Act creates offences of paying and receiving bribes, including bribing foreign officials, and the failure of commercial organisations to prevent bribery. Certain corporate hospitality will be outlawed under the new rules, but the Government is now having second thoughts. After further consideration, the Ministry of Justice will produce new guidance notes, following which there is likely to be a further public consultation period.

Author:
Daniel Barton 
Senior Director
London
Telephone: (+44) 207.663.0414
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