Anonymous offshore bank accounts are nearly as old as banking itself. While pressure in Europe may be mounting to crack down on tax evaders, there are still plenty of options -- from Asia to some familiar European havens.
BERLIN - The big wave started in 1993, set in motion by Germany's Federal Constitutional Court. Less than two years earlier, Karlsruhe's judges had ordered the German state to stop tolerating investors who were not declaring capital income in order to avoid paying tax on it. So the then coalition government introduced a 30-35% tax on interest payments, which sent undeclared German money rolling in the direction of Switzerland, Austria, Liechtenstein, Luxembourg and Monaco.
In and of itself, the phenomenon was not new. "There were always families who kept money in foreign accounts," says Peter Lüdemann, a lawyer and tax adviser.
Since the early days of industrialization, it has been customary for portions of large fortunes to be deposited abroad. A partner in the consulting firm Ecovis, Lüdemann explains that traditionally the reasons for sending money abroad were "fear of currency reforms, political change, unforeseeable changes in the law, or general caution."
Swiss Federal Councilor Willy Ritschard, a Social Democrat, once quipped that banking secrets were as "untouchable as a nun." During the 1990s, banks began openly advertising the practice to new customers with slogans like "Luxembourg, your money's second home." The sums transferred were huge.
In Swiss accounts alone, there is an estimated 131 billion euros in undeclared German money. BBW Marketing Dr. Vossen und Partner, a management consulting firm, estimated the amount in 2008 was closer to 175 billion, with 80 billion euros in Luxembourg and 70 billion euros in Austria.
As finances began to tighten in Western industrialized countries and concerns increased about funding of terrorism, tax havens increasingly came under pressure, with banking secrecy jeopardized after finance ministers launched a worldwide hunt for tax evaders.
In light of the threat by the Organization for Economic Co-operation and Development (OECD) to blacklist countries that do not cooperate in the fight against tax evasion, Liechtenstein, Andorra, Switzerland, Austria, Luxemburg, Belgium and Monaco declared in 2009 that they were ready to loosen their strict banking secrecy laws.
But this has inevitably set off the next wave: money deposited in more distant and obscure locations -- in the Cayman or Cook Islands, Hong Kong or Singapore. "The press of a button – and the money in Switzerland is in Singapore or Hong Kong," says one top German government official.
In the first eight months of 2010 alone, 62 billion Swiss francs are thought to have made their way from Switzerland to Asia. In Singapore, there are dozens of business and investment banks competing to lure investors. Swiss banks like Crédit Suisse and UBS have branches there, and there are hundreds of smaller financial service providers. Singapore's unbeatable selling point: 0% tax on capital gains. There is a double taxation agreement with Germany, but it only pertains to declared capital.
Dividend payments from Hong Kong firms and capital gains are tax free. The Cayman Islands are great favorites of the pros: company creation is relatively easy and a large part of the hedge fund industry is located there. Banking secrecy laws are so strict that any one breaking them can count on 15 years in jail.
So far, Western fiscal authorities haven't had much of a handle on tax evaders with funds in tax oases further afield. There are no agreements, so banks don't have to give investigators any information. Accounts and deposits stay secret, and investors anonymous.
Still, in light of a growing crackdown in Europe on tax evaders, the risk of getting caught seems to increasingly outweigh the benefits. "From a tax standpoint, smuggling capital abroad is actually idiotic," says Lüdemann. "For a tax advantage of maybe 1,000 euros per year, they block 100,000 euros of capital that they can't use to buy a car, a home or other purchases."
As of May 2011, German tax evaders have to come completely clean about funds held illegally in tax oases if they want to avoid prosecution under a law aimed at fighting money laundering and tax evasion. "What the law does is to encourage a return to tax honesty and parallel to that make the punishment for tax evasion more severe," explains Oliver Biernat, an auditor and tax advisor at Benefitax in Frankfurt am Main.
"One big advantage to turning yourself in, is that for the money that's now legal you can use all the legal tax saving options," says Anton Rudolf Götzenberger, a tax advisor in Halfing, Bavaria, specialized in the legalization of undeclared money. "I recently had a case of a client who turned himself in and then got a reimbursement from fiscal authorities." On average, Götzenberger estimates, a tax evader gets to keep 70% to 80% of their funds.
The rush of lonstanding German tax evaders now turning themselves in has less to do with a wish to behave correctly than with fear that if they don't investigators will dig up their details and they may face the embarrassment of a very public arrest, which is what happened to former Deutsche Post boss Klaus Zumwinkel.
In 2010, 26,392 people turned themselves in across Germany, which meant some 2 billion euros in state coffers.
Although a new tax agreement with Switzerland increases the pressure on would-be evaders, tax oases will certainly not run dry. On the contrary. Lüdemann expects that "the agreement should actually help the Liechtenstein foundations." They offer investors not only the possibility of hiding money from tax authorities, but also from creditors, heirs, and ex-husbands or wives. These institutions, says Lüdemann, are open to "anybody, really, who wants to hide money, for whatever reason."
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