There are occasions when clients and their representatives tell us that a structure is not tax driven and sometimes we are told that there are ‘no tax issues’.
Whilst it may be true that the rationale and manner in which clients organise their affairs using offshore structures may not be tax driven, it is also true that whatever you do there is likely to be a tax consequence, be it a liability or just a reporting obligation. It would be unusual if there were no tax implications at all and you would definitely want the assurance of knowing that to be true.
Many clients operate cross-border which means that, at the very least; there will be two different jurisdictions’ tax legislations to consider. Additionally, the client’s own domicile and residence positions will have an impact on how a jurisdiction’s tax rules apply to their circumstances. Each jurisdiction has its own unique nuances; for example domicile is a concept in UK tax law but may not be recognised in other jurisdictions to which the client is connected. Further compounding the complexities are the number of family members and jurisdictions involved in structures and transactions; you can readily appreciate how quickly the layers of complexity mount up.
In a recent poll of event attendees, when asked what they found most challenging about tax compliance, 90% reported that legislative changes in tax law and understanding historic and potentially contentious issues were the most challenging. If those complexities and interactions between different jurisdictions’ legislations are not understood by clients and their service providers alike, it is very easy to fall foul of legal obligations which could result in unexpected financial costs, tax investigations and reputational damage for all involved parties.
With reliable, clear and regular tax advice, clients and service providers can implement and manage structures in a manner which meets the clients’ objectives, takes into account changing circumstances and ensures time and cost efficiencies whilst still remaining compliant with reporting obligations.
In addition to attending to the tax filing obligations of clients and their structures, we are now operating in a world of AEOI – Automatic Exchange of Information – where service providers are obliged to provide information to tax authorities which is then exchanged with the tax authorities of the jurisdiction(s) in which clients are tax resident. Different countries have different rules that determine whether a person or entity is resident for tax purposes, so it is important to have certainty.
I haven’t had tax advice before, why do I need it now?
The world in which we now operate is significantly changed from that of ten, twenty or thirty years ago. Just take the UK as an example, every year the Chancellor of the Exchequer tinkers with the legislation in an attempt to close loopholes and increase tax revenue.
These politically and economically motivated changes may mean that an existing structure established under a regime with fairly benign tax consequences, at a time when offshore jurisdictions and clients with offshore arrangements were not in the political or moral spotlight of today, may find that the regime under which the structure was established is no longer and the structure must now be considered in light of the current rules.
Why should I pay for tax advice?
Clients establish trusts to protect assets and direct them into the right hands in the present and in the future; protection should be considered from a legal and tax perspective to ensure optimal succession planning. Where there is a properly engaged professional tax adviser, it allows clients and service providers (directors and trustees) to place some reliance upon the advice of those professionals in the face of any tax enquiries from tax authorities.
If I’ve got entities in multiple jurisdictions, is one set of advice sufficient?
It depends on the adviser, their scope of expertise in relation to the transaction in hand and the parties and jurisdictions involved. In some instances a firm will have offices in the other relevant jurisdictions or may be part of a network of firms across the world, so may be able to call on colleagues in those offices.
It would be necessary to consider all jurisdictional touchpoints and ensure that advisers are working together with an understanding of the wider structure/transaction so they can advise on cross-border matters such as potential double taxation (which, with planning, can be avoided), non-taxation or artificially low taxation which the Organisation for Economic Co-operation and Development (OECD) aims to stamp out.
What are the benefits of tax advice?
Clear and comprehensive advice provides clients and service providers with an understanding of the environment in which they are operating, their reporting obligations, and likely liabilities and how those might be mitigated.
Such advice also informs how a structure or transactions can be implemented to ensure they are managed effectively. For example, within real estate there is a difference in treatment for UK tax purposes for residential and commercial property; if you are investing in residential UK real estate, even through an offshore company, it will now be subject to IHT, however if you’re investing in commercial UK real estate it is not subject to IHT if you're investing through an offshore structure. Knowing where you fit into the tax puzzle, can make a difference to the protection of your current and future assets.
Can tax advice save me money?
Absolutely! On the face of it, tax advice might appear expensive but if the tax savings exceed the cost of the advice and any other associated fees then the overall position will be a saving.
How regularly should I refresh my tax advice?
There is no set formula but trigger events such as changes to or introductions of tax legislation, a change in client circumstances (especially if you are UK non-domiciled and about to commence your 15th year of UK residency, thereby becoming deemed domiciled for UK tax purposes), entering into a new transaction or a new activity should prompt a refresh of your tax advice.
If no such trigger events arise, then ideally every 2-3 years.
What if I don’t have tax advice?
You and your service providers run the risk of failing to understand their obligations, file returns and pay taxes when they are due which would lead to late filing penalties, interest and possibly tax investigations.
With no understanding of the relevant tax rules the actions of clients and service providers might inadvertently and/or unknowingly bring a client or structure into scope of tax.
Even where tax mitigation is not the objective, understanding the tax obligations enables trustees and other service providers to ensure optimal protection of the trust’s assets and that those obligations are not overlooked.
However simple you may perceive your tax status to be, tax advice is essential! If you don’t have an adviser already or are unhappy with your current adviser we can introduce you, through our extensive network of global contacts, to firms with relevant expertise.
Note: VG does not provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.