Over the last decade, there has been a remarkable shift in attitudes about structures that private wealth practitioners have long regarded as normal and ordinary. Offshore companies, family trusts, and the use of offshore financial centres have increasingly come under intense scrutiny from the public, the media, and governments alike.
Typical tax planning and succession planning structures likewise have been thrust into the public eye (and in respect of the former, perhaps deservedly so). The perception is that such structures are used only by the wealthy and only for some nefarious purpose such as tax evasion or other criminal activity. Perhaps this change in attitudes can be traced back to the Singapore, Panama, and Paradise papers leaks which have brought the use of offshore trust and corporate structures into the limelight as journalists have reported on their uses without seeking to explain why such structures exist, inferring instead that something nefarious must be going on. And, no doubt, in some cases there was an element of wrongdoing but this was the case in only a very small number of the total structures identified.
The mainstream press have caught the public mood through a process of “naming and shaming” users of such arrangements and social media has inflamed this further with spurious assertions and overstated accusations. In any event, demands for the wealthy to pay their “fair share of tax” and to make more public disclosures about their assets are now prevalent. The debate is one sided, fuelled to a large extent (IMHO) by a lack of understanding about the legitimate use of trusts and offshore companies, and abetted by the failure of users and their advisers to stand up to this populist groundswell for fear of being accused of supporting criminals and tax evaders. The position today is that anyone using esoteric offshore structures will inevitably suffer suspicion, criticism, and maybe abuse. And of course, this has played well into the hands of governments who feel emboldened by these public sentiments to take increasing steps to seemingly clamp down on such arrangements but in reality seeking to impose more extensive information reporting requirements and more wide-ranging tax measures.
In light of this, it was refreshing to read a recent report prepared by the Society of Trust and Estate Practitioners (STEP), through its global Policy Committee, entitled “Social and Economic Benefits of Trusts” (2021)[i]. The report is an attempt to balance against the adverse sentiments towards trusts by explaining why trusts are frequently used and seeking to justify their utility. It is good to see a major professional body “go public” with such a defence although, in an era of 280 character media bites, one wonders whether the critics will be appeased.
There is no doubt that trusts are essential and, indeed, our society could not function without them. They have been used since the Crusades before an income tax system was ever contemplated and before tax evasion was possible. (Indeed, by allowing assets of the Crusaders to be beneficially owned by their wives, trusts probably represented the first legal mechanism on the long path to gender equality. Just saying.) In today’s world, we are faced with numerous needs of people for which a trust is a perfect solution. Parents need to make post-death provision for their disabled or infant children; employees need to save for their post-retirement through retirement schemes and to administer their assets as they age and become vulnerable through infirmity or dementia; and charities need a mechanism to hold and invest their assets before disbursing their funds on their noble deeds. Less commonly appreciated, business owners need to ensure their business’ continuity through a succession arrangement that is administered through a trust mechanism, and benefactors of impoverished children need a trust mechanism to look after the children’s education and living needs. Clearly, no-one can sensibly argue (although, admittedly, some have done so) that all trusts are bad and must be abolished. Yet, all trusts remain tainted.
This leads to only one conclusion – that anti-trust advocates do not appreciate the benefits of trusts and this in turn means that more needs to be done by our profession to contribute to public education in this regard. STEP has started this process and the rest of us need to continue it.
That said, there is also no doubt that the problem has arisen because, frankly, there are those who have used trusts and other palm-tree jurisdiction entities for nefarious purposes, be it to hide income from their tax authorities or illicit gains from their corrupt or criminal activities. It is this type of activity that should be the focus of the public’s criticism, rather than the use of trusts and companies more generally. After all, many criminals and tax evaders conduct their activities through domestic companies but we don’t hear demands for domestic companies to be abolished. It is the elements of a little understood structure (i.e. a trust) in an offshore jurisdiction (think of palm trees blowing in the breeze) that make people assume something nefarious is going on where these elements co-exist.
I am not exactly sure what we need to do to deal with this problem. On this point, we as a profession, and even the STEP paper, have not yet done enough to enlighten the discussion. I sense there is a fear in our profession about “going public” to defend what many people simply assume is intrinsically bad. We need to explain why we use offshore (and onshore) trusts and offshore companies. With the current retreat from globalisation, ‘offshore-ness’ is quickly becoming a dirty word.
We also need to educate the public that ‘offshore-ness’ does not entail illegality or tax evasion. The reality is that only a very small percentage of the companies identified in the Singapore, Panama, and Paradise leaks reeked of illegality but the whole offshore world has been tainted. All of this ignores all of the initiatives that have been undertaken over the last decade to ensure that offshore trusts and companies cannot be easily used for illegal activities. Tax-wise, opaqueness has been replaced with transparency as a result of the introduction of the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), public (in many cases) registers of beneficial ownership of trusts and companies, and exchanges of information with foreign tax authorities. To ensure that trusts and companies cannot be used for illegal purposes (at least, no more so than in domestic jurisdictions), anti-money laundering rules requiring due diligence and implementing know-your customer principles have been introduced and are monitored by the authorities as well as by international authorities (such as the Financial Action Task Force). Economic substance laws have also been introduced to counter the use of offshore entities for tax planning (and tax evasion) purposes. In addition, the OECD’s initiative to impose a global minimum tax rate (BEPS 2.0) makes tax planning involving offshore companies much less unlikely, with entities in low tax jurisdictions becoming subject to effective controlled company taxation in their parent company’s home jurisdiction.
All of these initiatives make it improbable that an offshore structure can be used for illegal or tax evasion purposes, or even tax planning purposes, any more than can a domestic structure.
And yet, the public does not know of all the initiatives, and negative perceptions persist. The changes over the last decade have been enormous, yet the public still believes that offshore structures remain unregulated in perceived cowboy jurisdictions. One therefore can’t help but wonder - why is there not more awareness of the numerous steps that have been taken at both local and global levels to regulate these jurisdictions and ensure that any perceived abuses are a thing of the past?
Perhaps one reason is that the press never reports about boring things like FATCA, CRS, anti-money laundering initiatives, the coming OECD minimum tax regime, nor about ultimate beneficial ownership registers. Why is this? Maybe it’s not as exciting to report on these dry topics compared to keeping passions inflamed with more exciting stories about tax evasion and other criminal activities. That said, it’s hard to believe that there is an active campaign by the press to keep the public ignorant about these developments, so one assumes either that journalists themselves need educating about these developments or else that journalists don’t think the public would be interested in hearing about these developments.
This is where we as a profession need to focus our activities. We, and our professional organisations, must take the lead in educating the public about these developments and to show that the knee-jerk reaction many people have about trusts and other offshore structures are not justified and that fears entrenched by past behaviours have been addressed and remedied. Governments in developed economies won’t do this because that is not their role and, in any event, they have an interest in continuing to fan the public’s passions with fears of criminality and tax evasion in order to justify the introduction of ever increasingly amounts of new information-gathering and tax-raising initiatives. It is therefore up to us and our professional associations to bring the message home.
Yes, there will always be those who will use offshore trusts and companies for illegal purposes, just as there are those who will use structures in their own countries for this purpose. In today’s environment, there is no reason to suppose that the offshore centres are any more tainted by illegality or tax evasion than more mainstream jurisdictions. In fact, they might be even less vulnerable to such misuse because of the extensive rules and regulations that they have adopted and applied that generally exceed those that apply in the other jurisdictions. Needless to say, the offshore jurisdictions are doing their best to make this message understood outside their borders but education at the user country level will go a long way to changing these adverse perceptions.
Senior Consultant in Tax, Baker & McKenzie in Hong Kong, formerly Senior Advisor at KPMG in Hong Kong. He has more than 25 years’ experience advising on corporate tax, wealth management, trust planning and estate succession matters. Olesnicky was until recently the Chair of STEP in Hong Kong. He chairs its China sub-committee and is the Hong Kong representative on STEP's Worldwide council. He is an honorary lecturer in the Law Faculty of Hong Kong University.