Wednesday, November 18, 2009

Avoiding income tax in Spain - part 2

Regular readers will know that I have addressed this subject before in my imaginatively titled post "Avoiding Income Tax in Spain - part 1". There I mused about the motives of the tax avoider and why it's so prevalent in Spain. Here I will touch upon the temptations of all things offshore, well make a couple of points anyway.

Most of us ordinary folk wouldn't ordinarily think much about going "off-shore". Indeed it's a phrase with a slightly pejorative ring; something that drug-dealers and rakish bounders might consider or at least something that only the rich need concern themselves with. But if you sell up in one country (e.g. the UK) and move to another (e.g. Spain) the thought of going offshore suddenly seems worth a look. After all you are soon to be non-resident for taxes in your own country, you're not yet resident in your adopted country and you have liquidated your assets. Consequently a lot of ordinary folk have opened offshore bank accounts, including myself. My experience of offshore banking was pretty uneventful - deposited some money for a while, took it out a bit later to invest in Spain, closed the account. But lots of people go a lot further and there can be dangers. Two basic ones - they are very obvious - could be avoided by following the "just because it's offshore" rules:

1. Just because it's offshore doesn't mean it's a good investmemt - once seduced into the world of offshore finance some of us start hatching exotic plans for our money. A few clicks of the mouse and you can find a host of funds, trusts and bonds linked to all manner of asset classes like Hedge Funds and currencies. Nothing inherently wrong there as long as you weigh up the risks in the same way as you would ordinarily. There are tight rules in the UK about how different products can be sold to retail investors which won't necessarily apply offshore i.e. they will focus more on the benefits (expect to hear a lot about "tax efficiency" and "tax free") than the possible risks. Look at currency risk for example. Also what about the charges? The headline charges might be low but are there charges buried in the product. A good example would be a hedge fund - linked unit trust; the trust may charge a reasonable % fee but the underlying hedge funds which drive the funds can be subject to charges of 20% (of gains). Often offshore products are called "bonds", "wraps", "trusts", "portfolios" which may sound reassuringly familiar but, as they are really tax-efficient vehicles for holding funds and other investments which may have all kinds of risk (and charges) associated with them, you need to dig deeper and understand exactly what underlies them.

2. Just because it's offshore doesn't mean it is invisible. I don't think there are many people out there that aren't aware of the noose closing around people "hiding" money offshore. It isn't the placing of money offshore that is the problem of course, it's the non-declaration of the income. Wherever you are resident you should report your income and gains from offshore investments. With tighter and tighter information-sharing rules (where offshore operators have to disclose who's got what with them to any government that wants to know) you are always at risk of penalties and prosecution. That's why so many people have taken advantage of the UK's two offshore amnesties and come clean about offshore income and paid the tax. At the moment the UK has information sharing agreements with:

Of course for those with Spanish residency for tax, the Spanish tax authorities have their own agreements and there are EU wide directives.

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