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 1.One off payment 2.Voluntary Reporting 3.Voluntary Disclosure/LDF 1.Final withholding tax 2.Voluntary reporting Complex Formula 19-34% of Capital at 31/12/10 Withholding Rates: Interest & other income48% CGT 27% Dividends40%

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

5. Essential Points 2 Past/future tax paid - Certified 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’ HMRC will not ‘Actively’ seek customer data stolen from Swiss banks 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. Exclusions ‘Excluded assets’ Contents of safe deposit boxes Real property Chattels Domiciliary trading companies Withdrawals to extent not re-deposited from outside UK between 1/11/11 AND 31/12/12 not cleared Bank charges & expenses not cleared Corporate tax NIC Tax on loans to directors

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

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

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

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 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 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

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 Saving - IHT on settlement + 10 year anniversary charge - Tax, interest and penalty for pre 1999 income But - IHT on closure 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

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 Avoids tax on the original £2m + rental income pre 1999 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

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 D - Responding to information requests A - Cross border Communication policy 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 C - Offshore structure audit Risk assessment on set up Ensure implemented & documentation captured day 1. Engage key personal on role/duties Ongoing management & compliance Review - changes B - Document retention policy Have a policy in place Understand accessibility of electronic systems (server location) Power and possession Destruction policy - electronic International Business

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