Stonehage Fleming Law brings exceptional experience to wealthy international families, providing advice on long-term tax planning and structuring solutions, as well as ensuring day-to-day transactions are properly scrutinised for their tax and regulatory implications.
Because we have supported international families for over forty years, we understand the complicated legal issues our entrepreneurial family clients face every day: multi-dimensional estate planning, trusts, confusing cross-border tax regimes, and conflicting family opinion obstructing the need for decisive and rapid decision-making.
That is why our tax and legal advisers always offer advice that is, first and foremost, pragmatic and commercial, to deliver the essential outcomes you are striving for.
When necessary, we will source counsel from our international network of external advisers. However, we will never delegate responsibility for finding the right solutions.
We understand that the actions you take following our recommendations must operate effectively not only at inception but also for years down the line. We ensure our counsel is always simple to understand and communicate. We believe that wherever there is unnecessary complexity, risk may be around the corner.
Working with the same commitment, flexibility and accessibility that you would expect from your own in-house counsel. Stonehage Fleming’s lawyers are from a diverse range of jurisdictions and disciplines, with senior members of the team acting as strategic technical advisers to your family.
The legal and tax areas we cover are:
Peter Rosenberg, U.S. and International Estate and Trust Planning Attorney and Head of Family Office, US, Stonehage Fleming Law US, Philadelphia, Pennsylvania.
Sam Miller, Corporate Finance Attorney, Arent Fox, LLP, Los Angeles, California.
Traditionally, the United States has had one of the world’s highest corporate income tax rates.
A combined effective federal and state rate as high as 39% exceeded France, Germany and the UK, and gave many a foreign business pause in establishing a US presence, despite the obvious attractions of US markets and its centers of innovation.
However, the new Tax Cuts and Jobs Act (TCJA) slashed the federal corporate income tax rate to 21%, and has brought with it a new perspective on doing business in the US.
Here, we briefly look at how foreign businesses establish a US presence, and whether the TCJA has had any impact on this tax and liability driven analysis. But first an understanding of how foreigners are taxed in the
Most know that US persons are taxed on their world-wide income.
Conversely, foreigners pay US Tax on income that is either effectively connected to a US trade or business (“Effectively Connected Income” or “ECI”) or on US sourced income which is ‘fixed, determinable, annual or periodic’ and not effectively connected with a trade or business within the US (“FDAP” income).
There is no pinpoint definition of what constitutes a US ‘trade or business’, but clearly it must be of a regular or continuous character. This includes, generally, profits from selling in the US goods whether sourced or supplied inside or outside the US and personal services performed in the US.
So, while ECI generally covers income foreigners actively produce from US trade or business, FDAP is mostly on interest, dividends, royalties, rents and other fixed and determinable passive investment income received from a US source.
The way ECI and FDAP is taxed and collected differs too. ECI is taxed on net income, while FDAP is taxed on a gross basis. ECI is taxed at prevailing US marginal taxation rates, while FDAP is taxed at a flat 30% rate (potentially reduced or eliminated under an applicable income tax treaty). FDAP is collected at source; that is, the person paying the FDAP income to the foreigner is required to withhold, and pay the tax to the US Internal Revenue Service (“IRS”).
While US reach on foreigners seems wide, there are a number of exceptions for both ECI and FDAP which limit this. Payment to foreigners of interest on US bank deposits is generally exempt from tax, for example, and so too is interest paid on portfolio debt held for investment. FDAP gains derived from the sale of securities and other personal property (other than those primarily holding real property interests) are generally excluded.
Significantly, where there is an income tax treaty with the foreigner’s country of residence, ECI may be taxed only to the extent the foreigner’s connection with the US is sufficient to give rise to a “permanent establishment” in the US (a “PE”), usually triggered by having an office in the US.
CHOICE OF ENTITY
A foreign business usually establishes a PE through a subsidiary or branch.
By ‘subsidiary’, we mean a corporation or similar traditional structure, including limited liability partnerships, limited partnerships, and general partnerships. All are ‘formed’ at state level, and the choice of state may have little, if any, connection to the place where the foreign business operates. For example, Delaware is a familiar choice for its evolved corporate regime, with few foreign businesses incorporating there intending to operate there.
Branches, though, are ‘unincorporated’, but still may require registration in the state where they operate. As we shall see, liability and tax concerns serve to prefer subsidiaries over branches.
US ‘subsidiaries’ also include ‘limited liability companies’, affectionately called ‘LLCs’. Popular in the US, they allow for the novelty of one-stop ‘pass-through’ taxation and limited liability. In contrast, elsewhere, limited liability and ‘pass-through’ taxation are mutually exclusive. Your entity choice determines which you’ll have: a corporation for limited liability or a partnership or sole proprietorship for pass-through taxation.
A further US novelty is that you can also sometimes elect how you would like your entity to be taxed.
By default, an LLC with one owner is taxed as a disregarded entity, and with more than one, a partnership so that the taxable income is passed through to the owners, with the result that, in most cases, there is only one level of taxation. Even though income is taxed once in the hands of its owners, the LLC still, in concept, affords limited liability, protecting its owners from personal liability for the debts of the LLC.
An LLC may also be taxed as a corporation. If so elected, for tax purposes, it operates as traditional corporation, with two levels of taxation: once at the corporate level, and again at the owner level.
But that’s not all. Even traditional corporations can be taxed as pass-through entities. This is what we call ‘Subchapter S corporations’ or, affectionately, ‘S-Corps’.
While all this sounds wonderful, the bad news for foreigners is that pass-through tax liability coupled with limited liability generally isn’t a good idea as it gives rise to US federal withholding tax obligations, and potential loss of double taxation treaty benefits. Moreover, foreigners cannot be shareholders in S Corps.
Using branches or partnerships are also generally not good ideas. Here, with no limited liability, the foreign parent would be exposed to the liabilities of the US business, and potentially accrue US tax and filing obligations.
So, foreign businesses almost always establish a US presence through a traditional US corporation (called ‘C corporations’ or ‘C Corps’) or LLC’s taxed as a corporation for US income tax purposes. Here, the subsidiary would act as a ‘blocker’ shielding the foreign parent from ECI and from liability for the subsidiary’s operations. since it would be a PE, the subsidiary would have ECI and would pay US corporate income tax, plus a 30% withholding tax on dividends actually paid to the foreign parent, usually reduced by treaty.
In contrast, a branch would still be a PE, subject to the prevailing US corporate tax rate, and a 30% ‘branch profits’ remittance tax, also usually reduced by treaty, but payable whether or not actually remitted to the non-US corporate parent. In addition to making more tax and liability sense, C Corps should be familiar in foreigners’ hands, with constitutional and corporate governance structures similar to their cousins in other common law countries. An LLC taxed as a corporation may be preferred because it is administratively easier to operate than a C corp.
For liability and tax reasons, worrying about the type of entity ‘maybe for nought if inadvertently the subsidiary acts as the non-US parent’s agent. Getting the parent-subsidiary relationship correct is therefore crucial.
This relationship can be modeled differently, and includes using: (i) an independent distributor model; (ii) commission model; or (iii) consignment model.
In the first, parent and subsidiary act as independent principals. The subsidiary sells as principal product purchased from the non-US parent, bearing payment and other risks.
The commission model sees the US subsidiary act as sales representative or commission agent for the parent. Here, it is the non-US parent who sells to the customer, and bears credit and other risks.
The consignment model is similar to the first except that title in the goods only passes to the subsidiary when it makes a sale to its US customer.
In any of these, if the subsidiary acts as an ‘agent’ or extension of the parent, ECI and liability for the US operations could be attributed to the parent. The commission model is most prone to this, where a key consideration would be ensuring that the parent approves sales in writing outside the US.
The relationship should ensure that pricing or commission structures are at arm’s length, and fair market value. Conceivably, a parent could charge its subsidiary a premium for its product, resulting in little taxable profit in the subsidiary. IRS ‘transfer pricing rules’ (beyond our scope here) work to keep taxable profits with the subsidiary. Keeping contemporaneous documentation supporting pricing used and obtaining competent accounting, tax and legal advice can help navigate these complex rules, and is essential, generally, in structuring this relationship.
The TCJA has, if anything, served to reinforce existing analysis for establishing in the US, and, certainly, with its headlining reduction in the federal corporate income tax rate has made the case for using ‘blocker’ entities, even with their two tier taxation, more compelling.
The TCJA further significantly reduces the attraction to foreigners of tax-transparent entities by reversing a recent Tax Court decision to provide that gains from a foreigner’s sale of a US partnership interest, to the extent that it is attributable to the partnership’s ECI, will be subject to US income tax.
The TCJA also moved away from a hallmark of US global taxation, by taxing foreign subsidiaries of US corporations at foreign, rather than US corporate rates, and exempting from tax dividends attributable to foreign earnings paid to US corporations by their 10% or more foreign subsidiaries. These, and other cash repatriating provisions significantly improve corporate bottom-line, and substantially soften the impact of the two-tier taxation system implicit in using non tax- transparent vehicles.
Nevertheless, its provisions are not all corporate friendly, and require careful advice in choice of entity and relationship structure. For example, the TCJA eliminated carrybacks for the deduction of net operating losses (NOLs), limiting the use of NOLs, and introduced certain limitations on deductions for ‘excess’ net business interest expense.
Furthermore, in exchange for the tax exemption on dividends from foreign subsidiaries, the TCJA requires any US shareholder owning 10% or more of a foreign corporation to include in its income for the 2017 taxable year its proportionate share of the foreign corporation’s undistributed profits, to be taxed at rates ranging from 8% to 15.5% for corporate shareholders and 9.05% to 17.54% for individual shareholders. This has double-edged implication, not only for increasing the tax obligations of US portfolio companies in which foreigners may be invested, but also may result in considerable phantom income to foreigners who are invested in tax transparent structures.
While the TCJA has, for foreign businesses, certainly been favorable from a federal corporate income tax perspective, taxation is never simple and there are further factors which affect this analysis.
One in particular is the Federal estate tax consequences of privately owned foreign businesses.
US citizens and residents are subject to US Federal estate taxation on their worldwide estates at death. Any assets they transfer at death are subject to this tax, but they are entitled to an exclusion amount of $11,180,000. This is an inflation adjusted amount off $10,000,000 which has been doubled from $5,000,000 by the TCJA and is scheduled to revert back to the inflation adjusted equivalent of $5,000,000 in 2025. Married couples with proper planning in place can transfer up to double that amount in value to their heirs without estate tax. Otherwise, a person’s estate in excess of that amount is taxed at a rate of 40%.
Notably, the TCJA left a non-citizen/non-resident with the same reality he faced under prior law. A non-citizen/non-resident is subject to US Federal estate tax only on US situs assets owned at death. For estate tax purposes, US situs assets include a broad range of real, tangible and intangible property located in the US or where the issuer of securities or other property is located in the US or is a US person. However, whereas US citizens and residents are endowed with a generous exclusion amount, a non- citizen/non-resident is limited to an exclusion amount of only $60,000. Their US estates will reach the 40% rate at a value of $1,000,000.
In addition, many of the avenues available to US citizen/residents to reduce the size of their estates during their lifetime are not available to non-citizen/non-residents. For example, because debt is often used to fund business ventures, foreign private investors often think that debt will serve as a Dollar for Dollar deduction against their US estates and thus reduce their potential Federal estate tax liability. However, the deductibility of a non- citizen/non-resident’s debt is limited by a fraction the nominator of which is the value of his US estate and the denominator of which the value of his worldwide estate.
Many foreign private investors make use of trusts, foundations and other types of vehicles to own their business enterprises. US tax law subjects these structures to the same type of scrutiny that are imposed on similar structures used by US citizen/residents for estate planning purposes. In general, if a donor has not fully parted with dominion and control of his assets and/or the power to determine who can enjoy the use of his assets, or if a beneficiary or related party holds certain powers over such structures, US tax law will look through the structure to the natural person and subject the US situs assets to US Federal estate tax upon the death of such person. Frequently, the tax laws of a foreign jurisdiction are more permissive when it comes to the retention of such powers by donors, beneficiaries and related parties. For these reasons, it is very important for a foreign business owner to consider the estate tax consequences of entering the US market. Fortunately, many of the structures which facilitate good income tax planning for foreign businesses serve as good estate tax planning structures as well.
The substantial reduction in the federal corporate income tax rate heralded by the TCJA effectively removes what the World Economic Forum calls the primary ‘problematic factor’ for doing business in the US and entrenches the US as a viable destination for foreign investment.
The TCJA reinforces the tried and tested structure for establishing a presence in the US. While using ‘blocker’ entities has long been the preferred route, the TCJA’s assault on the tax rate makes this structure considerably more attractive.
Care though needs to be exercised, and competent US legal and taxation advice is essential in this analysis. This is particularly true in privately owned foreign businesses and in assessing state and local taxes.
All this considered, the TCJA is bound to increase foreign business interest in the US. The world is much smaller than it ever was, and a sea change in the corporate tax structure of the second largest world economy, may be an opportunity too good to miss.
1 Signed into law on December 22, 2017
2 Although the individual states within the US follow US federal taxation concepts and generally seek to have their taxation rules conform to US federal rules, a state’s rules may differ from federal taxation, and other states’ laws. Furthermore, since the individual states are not parties to income tax treaties between the US and foreign countries, certain taxes, reduced or eliminated for federal tax purposes, may still be payable on a state level. This could be particularly true of ECI free of federal income tax under a treaty for a foreigner who does not have a PE, but still taxed at state or local level. In addition, a foreigner conducting business directly in the US may be subject to county, city and other local taxes, including taxes on gross receipts and real estate and business personal property taxes. For these and other reasons it needs no mention that entering the US requires competent and comprehensive federal, state and local tax and legal advice.
3 However, the TCJA allows now for indefinite carry forwards of NOL’s.
An unfortunate impact of the media assault on the ‘offshore sector’, prompted this time by the so called ‘Paradise Papers’, is that it tarnishes the reputation of Trusts more generally, whether onshore or offshore. The demand for a clampdown reflects the widespread view that trusts are primarily vehicles for tax avoidance and money laundering, with little understanding of the many other important functions which they serve.
Indeed it is ironic that some commentators are predicting the gradual demise of the onshore English Trust, despite the fact that the alleged abuse has mainly taken place in offshore jurisdictions. For onshore English Trusts, the ‘clampdown’ has long since taken place and they offer limited potential for tax avoidance, other than for legitimate purposes specifically intended in the relevant legislation.
But the English Trust is one of the most successful and enduring concepts in common law, showing itself to be an inherently flexible and durable instrument. It will recover from the publicity, as it always has in the past, as families and their advisors focus on the multiple benefits of trusts, which go far beyond tax and which have served society so well for centuries.
The trust industry is itself to blame for allowing abuse and too often in the past trusts (especially offshore trusts) were sold as products, ‘marketed’ primarily for their tax efficiency, rather than the other advantages they offer. But when you look beyond the tax issues, most of the benefits of English trusts remain intact especially for those concerned with long-term wealth and succession planning.
Trusts first emerged in English law in the 1200’s usually as a solution to a particular problem. During the Crusades, for example, they enabled assets to be managed in the absence of their owners, for long periods with poor lines of communication.
More recently, prior to the Married Woman’s Property Act in 1882, a father would commonly declare a settlement for his daughters to safeguard their interests, as a woman could not legally hold property in her own right.
Today the trust is frequently used as a vehicle for holding a family business, reducing the prospect of family disputes and avoiding the disruption which may occur on the death of a major shareholder.
Many families establish trusts for specific purposes, such as education, dealing with hardship, or encouraging entrepreneurial activity. Some have valuable art collections or other assets which, for a variety of reasons, are best managed through a trust structure.
Trusts are frequently used to protect the vulnerable, both from themselves and from those who may wish to exploit them - for example children or those who may struggle to own assets directly perhaps because of a disability or limited capacity to make decisions.
They are also used to give family members a degree of anonymity, in the extreme protecting them from extortion and kidnap, or less dramatically, from people seeking a friendship or relationship for the wrong (financial) reasons. Whilst the extent of privacy afforded by trusts is undeniably reduced as a result of recent measures designed to encourage tax transparency (such as the UK Trust Register), they still provide a significant degree of protection.
Finally, wealthy families tend to create philanthropic trusts as vehicles for charitable giving, often involving a variety of family members across generations, working together to use their wealth for the benefit of society. In short trusts can be used to ensure some continuity of purpose for wealth across generations, the trustees being responsible for balancing the differing views of beneficiaries with the intentions of the settlor, as expressed in the trust deed and letter of wishes.
The phrase “rags to rags in three generations” is often repeated because it is so true. Using a trust, or indeed multiple trusts, can help protect the family’s wealth for generations to come.
It does so by creating a set of criteria to ensure the wealth is responsibly managed and distributed to beneficiaries on a basis which is sustainable and appropriate. Many wealth creators are also concerned by the potential negative impact of wealth on the lives of those who inherit, particularly those who inherit at a young age. The flexibility inherent in a trust addresses this concern.
Crucial to this is having strong stewardship in the form of trustees who are able to guide the family wealth in the best interests of the beneficiaries. A trustee is a neutral party, who can negotiate and adjudicate between competing and differing family interests.
It is, however, important to understand the precise wording of the trust deed and most settlors also leave a letter of wishes explaining how they anticipate their trustees will exercise discretion.
Circumstances change and later generations may not necessarily hold the same views or interests as those of the founder. It is in such circumstances that a trustee with suitable experience and judgement will be able to review and reinterpret the original wishes of the settlor in a changing environment.
Using a trust can help preserve, manage and develop specific assets, such as a family business, an art collection or a heritage estate. No-one would wish such assets to decline through lack of direction, mismanagement or family disputes, as happens only too often.
By placing assets into trust, settlors are able to set out a broad strategy and a framework for major decisions.
On the other hand, no settlor would wish an asset to outlive its usefulness or suffer a severe deterioration or erosion of value. Within the terms of the trust, it is often the job of the trustee to make the judgement to dispose of such an asset if and when circumstances dictate.
Changing attitudes towards wealth, both in the external world and within families themselves were highlighted in a Stonehage Fleming research paper, entitled ‘Four Pillars of Capital for the Twenty First Century’. This saw a recognition of the changing context in which many families saw their legacy, in terms of four overlapping forms of capital: financial, intellectual, cultural and social.
In essence, the prevailing view was that wealth has to have a purpose and a context if it is to survive through several generations. Trusts help a family preserve the central purpose of their wealth within a changing environment.
Many people want to leave a charitable legacy, either during their lifetime, or on death.
One of the most effective and popular methods for giving back to the community is to endow a charitable trust, which can help to leave a lasting charitable legacy long after death.
Philanthropic trusts can also provide a helpful gateway to introduce the next generation to the greater role of wealth. It can create a sense of common interest and a common cause – which may help to bind the family together.
Trusts existed in England long before our statutory tax system, so the system always made special provision for trust taxation. The general principle was that trusts should be tax neutral and not provide an unfair advantage. Indeed because they were used by the wealthy, some governments have imposed strict regimes most notably in the changes made to Inheritance tax in 2006. However, flexibly drawn trusts, predominately those contained in wills, can still provide significant estate planning opportunities.
In broad terms, trustees will pay income and capital gains tax at rates roughly comparable to an individual’s higher marginal rate. Nonetheless it should be noted that there are some classes of trust which are treated as tax “favoured” trusts by virtue of their class of beneficiaries (minor children or disabled persons, for example).
As a general rule, inheritance tax is due at 20% when assets are transferred into trust (on the value above GBP325,000) and there is a “periodic charge” of 6%, every 10 years, with a similar charge on distributions. By comparison, inheritance tax is charged at 40% on a person’s death.
In addition, there are particular tax advantages when transferring certain assets to trust, examples being as follows:
Subject to certain conditions, the inheritance tax charge on the transfer of a family business into trust can be 100% mitigated by Business or Agricultural Property Relief. There should also be no immediate capital gains tax consequences, so long as it is possible to ‘hold over’ the capital gain. This allows such an asset to pass to future generations without having to pay 40% inheritance tax.
A gift to a charitable trust will be free from inheritance tax and can also be made without any capital gains tax being due.
Given all that is said above, the choice of trustees is critical. Historically, the trustees would be family members, friends, or longstanding family advisers who would be appointed to act as trustee on the basis that they would have a deep understanding of the family and their needs. In recent decades however, the complexity, responsibility and risks of trusteeship have increased significantly and there is a stronger case for the professional trustee, who can offer relevant experience, more resources and greater continuity. In practice, many families tend to combine the two.
As the nature of the assets commonly held in trusts have evolved, so too have the traditional fee structures. Broadly, the charges depend on three main factors:
A trust made in a UK context will be subject to a complex tax regime, the details of which need to be fully understood, but may well still provide long term advantages for wealthy families. In such circumstances, it may also be that tax mitigation is not the main motivation for using a trust. The English trust is inherently respected and will not generally give rise to the negative association of some offshore jurisdictions. The settlor, beneficiaries and indeed trustees will be able to take comfort in knowing that the trust will be administered in a jurisdiction with centuries of well tested and established trust law, and it would be rare for a question to arise which had not been seen before.
The trust is an alternative to the more usual approach of leaving assets directly to beneficiaries. The trust should be considered where the settlor:
The role of the trustee is crucial, and may have a massive impact on the welfare, happiness and unity of the family. It is not just a question of finding a suitably experienced trustee when the trust is established, but providing for the appointment of successor trustees in the future.
It is a system that has worked extremely well, in the past for UK families, particularly those who own land or business assets. Despite the loss of tax benefits and the bad publicity of recent years, the English Trust will continue to play a pivotal role in the management of wealth and succession.
Personal data is a complex issue, made more so by a number of tensions pulling in apparently different directions. On the one hand, legislation like the European Convention on Human Rights (ECHR) and the General Data Protection Regulation (GDPR) are designed to protect an individual’s personal information and their right to privacy. On the other, there is increasing pressure on people to disclose detailed personal information about themselves and their families, all in the name of commercial convenience or tax transparency.
We now live in a world where public figures - not just US presidential candidates – apparently owe it to the public at large to disclose details of their personal affairs. There is a growing sense that having substantial wealth and influence means that how you arrange your personal financial affairs is everyone’s business.
This trend is further fuelled by the pull from society’s external expectations, including the media, questioning the value of what wealthy families do with their money. Since 1989 the Sunday Times Rich List has featured the 1000 wealthiest UK people or families ranked by wealth. In 2005 the paper started publishing an annual Giving List of the most generous philanthropists in the UK by proportion to their wealth. This year the newspaper published its inaugural Tax List, which takes account of UK tax paid.
For this and other reasons, wealthy families are increasingly recognising the need for a strategy to manage their public identity. Our research shows there is a growing belief among wealthy families that wealth can only be created and preserved through the generations if used to make a positive contribution to the community, as well as providing for a family‘s financial needs. This in itself adds to the tensions between privacy and transparency as people increasingly feel the need to justify the use to which they put their money and influence. A small number of families have begun to develop tangible processes for setting objectives and monitoring performance in this area. 10% have put in place a formal process, while 13% have implemented an informal one (source: Stonehage Fleming, Four Pillars of Capital: The Next Chapter 2018).
The reasons we have arrived in this new era of card sharing, plot an interesting journey. In the 1960s, when I became a solicitor, client confidentiality was paramount. But for years there has been a steady movement towards increasing disclosure, not only for lawyers but also across the financial services world. Anti-money laundering (AML) legislation, starting with pressure from the US in relation to drug monies held in offshore jurisdictions, was the first to require solicitors to report on clients - and to do so without telling them. That was a shockwave.
Since then we have seen a relentless increase in compulsory reporting and data sharing. The threat of terrorism from the IRA in the UK, atrocities like 9/11 in New York and the 7/7 London bombings all played their part. Data leakage episodes such as Ed Snowden’s revelations and the Panama and Paradise Papers fuelled media thirst for increasing openness in relation to government activity and the cross-border financial affairs of wealthy individuals.
Suddenly governments, all with budget deficits, woke up to the possibility that modern computer power could seriously reduce tax evasion and increase tax take. The US led the charge against Swiss Banking Secrecy and in a few short years, stamped out practices that had become endemic since the Second World War. It had never quite made sense to me that one member of the Organisation for Economic Co-operation and Development (OECD) could make money out of encouraging citizens of other OECD countries to cheat on their taxes.
This was followed in 2010 by the introduction of Foreign Account Tax Compliance Act (FATCA), through which the US was able to rely on the universal pull of dollar markets to impose reporting requirements on the US taxpayer clients of financial institutions worldwide.
The rest of the world played catch up when in 2013 the G20 committed to automatic exchange of information (AEoI) as the new global standard. By May 2014 over 60 jurisdictions had committed to implement the Common Reporting Standard (CRS). This requires jurisdictions to obtain information from their financial institutions in relation to client accounts and automatically exchange it with other jurisdictions on an annual basis. The idea is that this will stamp out tax evasion around the world, but obviously some jurisdictions have more to gain from this than others.
CRS has resulted in huge amounts of bureaucracy, but the outcome now is that massive amounts of detailed personal information are being exchanged between the revenue authorities of different jurisdictions. Whether it has achieved its objective, or done so at a sensible economic and proportionate cost, is another question.
First, some governments have just not applied the resources required to process the information they have received. Apparently, several EU governments have openly admitted they do not yet have the computer software or staff in place to analyse the information in the first place. The OECD now claims one of the main advantages of the system may be to encourage taxpayers to comply, out of concern that the external reporting system will catch them out if they do not.
Second, whilst compliant individuals and institutions have incurred significant economic cost in implementing CRS, there are those, like Islamic State, who obviously have continued contraband trading of oil and weapons at a very significant level, apparently completely unaffected by the whole AML and CRS regime.
Third, there can be little doubt that some of the information exchanged will find its way into the wrong hands. Governments do not have a good record for data security and many of the countries that have signed up to CRS also feature high up the list of corrupt jurisdictions. Having talked to both clients and lawyers from jurisdictions where the risk of kidnapping is a real and active problem, I can understand their concerns.
Finally, there is an open question as to whether certain aspects of the current AML and CRS regimes are in direct conflict with the fundamental principles of ECHR and GDPR. This point was raised at the time the CRS legislation was being speedily implemented, but as far as I am aware, governments have simply turned a blind eye to this uncomfortable question.
Back in Europe the debate continues on the need for expanded public registers of beneficial ownership. As prime minister, David Cameron took the initiative in relation to public beneficial ownership registers for companies. He then backed off in relation to similar registers for trusts, although the OECD argued strongly for them.
Personally, I can see a distinction between transparency in relation to limited liability entities and trusts. I believe members of the public engaging with the former should be able to find out all they need to know about them. But if you press for full transparency into every trust why stop there? Why not just demand it in relation to all assets that may be owned by individuals? This would surely make a mockery of any right to privacy at all.
On the mainland of Europe, there was an interesting case in France in 2016 where the Cour Constitutionnel judged that trust registers were contrary to the 1789 Declaration of the Rights of Man and of the Citizen and as such, are in direct conflict with the French constitution. The UK government, meanwhile, plans to launch a public beneficial ownership register in relation to UK property owned by overseas companies and legal entities and proposes to impose public registers of beneficial ownership on Jersey, Guernsey, the Isle of Man and British Overseas Territories such as the Cayman Islands and Bermuda.
It is not hard to discern the direction of travel. Despite wide-ranging and powerful legislation to protect personal data in a digital age, the right of the wealthy to protect their private information is under increasing threat from the impulse to make it transparent - or eventually public. All the more reason for families to take hold of the narrative themselves and demonstrate their understanding of the social contract.
John Rhodes is a Director of Stonehage Fleming Law Ltd.
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