Tax evasion strategies put to the test
Practical assistance in the evasion of income, especially from capital assets, has) apparently been part of the more or less tolerated business model of certain private banks, insurance companies, state banks or subsidiaries for decades. Abroad, such “institutions” are also called savings banks, institutions, trusts, cantonal banks, trustees or foundations. So far, there is evidence of a US crackdown on selected financial centres. The layman wonders how this works practically.
Section 154 of the German Fiscal Code (AO) stipulates that bank accounts may not be set up in false or fictitious names. If the account holder is a natural person, the investment income is automatically collected and reported centrally since the abolition of banking secrecy in Germany in 2004. Those who see banking secrecy as a civil right can look for a bank abroad that deducts the usual 35 percent EU withholding tax. Provided that there is no church tax liability in Germany, tax evasion is thus ruled out. The domestic final withholding tax plus solidarity surcharge is almost ten percentage points lower. The demand by certain finance ministers that there should be an automatic exchange of information with foreign countries is proving to be a sham, because for decades the usual solutions for medium-sized assets and above have often resulted in a different person appearing as the account holder. This tradition is older than the Federal Republic of Germany.
If you have about 100k or more in assets, you can invest your money under a different name, even if it is just through a Belize insurance company. This would even be legally possible, if it were not for the unfortunate fact that the providers had negligently avoided having the construction professionally checked. The consequence of this thriftiness often leads directly to the completely unnecessary accusation of tax evasion against customers. This is because the state has also placed an obligation on intermediaries to report brokered life insurance policies abroad. The provider, but also the banks as intermediaries, will talk themselves out of it with the fact that the tax questions were to be clarified “after the small print” alone by the customer.
Trustee, Foundation, Trust & Co.
As soon as the assets under management at a domestic bank have reached seven figures, helpful bankers offer to make the customer’s assets disappear in a hurry. A company, for example, in the Seychelles can be had for a few hundred dollars – in Singapore the amount is already in four figures. The annual costs for the “administration”, which mostly consists in the fact that the asset owner receives a general power of attorney, are then in a similar amount, and one simply does not provide any other services – apart from the kick-back settlement towards the domestic bank. It is part of the “system” that the general power of attorney is limited in time, and when it comes to the extension, the banker has the last word – not the customer, who often becomes aware of his total loss or blackmail risk too late. The charm of this off-the-shelf solution lies precisely in the fact that you don’t need a suitcase of money to get it across a green border, but you pay x times the usual bank fees for it.
Black money in domestic banks?
Certainly there are good reasons to deposit one’s assets in foreign banks, perhaps even outside the eurozone or outside the EU, as fearful observers of the “expropriation of account holders” in Cyprus have observed. For the mass of wealthy account holders this way is too laborious – they speculate on the fact that tax auditors with too much curiosity in bank audits in doubt simply times prematurely a service disability is certified. At the same time, without any international agreements, it would already be possible for every apprentice at banks and insurance companies in Germany to detect and question such suspicious cases. The client advisors as key witnesses together with the associated exchange of information with the clients would also be on the spot – in Germany. If this were true, we would have a financial mafia in the state – and hardly any reason to brand any prominent individual cases as antisocial in the media.
Second passport as cheap solutions
Thousands of domestic and foreign fiduciaries and advisors worldwide are well connected with private banks and similar financial institutions. On their menu you can sometimes find the option for a foreign second passport, or more precisely a second citizenship. This makes it easy to open accounts at home and abroad. Those who have their (supposedly only) residence in a more distant foreign country don’t even need a second passport. The bank(st)er will recommend this as a trick, so that he simply notes “foreigner” in the account documents, and the financial house is already allowed to refrain from deducting capital gains tax or final withholding tax. In many cases, the rule applies that the further away a camouflage residence is located abroad, the cheaper it is to have it – and on top of that, the tax advantages that are only apparently legally available increase with it.
After certain major banks were targeted by the tax investigation, numerous client advisors changed their employers – and in many cases the clients followed suit. It was only a matter of time before the US tax authorities discovered this. The public has known how important data security is ever since customer data was bought up by the state. It may be more lucrative to secure a reward of over EUR 10 million as a whistleblower, and at the same time retire as a banker.
At the latest as soon as unpaid taxes in the amount of more than 50 TEUR have been accumulated over the last 10 years, tax evasion becomes a predicate offence for money laundering. The usual models (waiver of income by the client via accounts, reallocation to investments with deduction of the final withholding tax, acquisition of gold or real estate, contribution to life insurance shell companies) speculate on the fact that each year a part of the tax evasion becomes time-barred. However, this does absolutely nothing to change the fact that these assets are and will remain tainted by money laundering – also with regard to all “surrogates”. In the case of money laundering, however, the statute of limitations does not begin to run until the assets have been completely consumed – not, however, in the case of the acquisition of valuables or luxury goods. Unfortunately, such assets can then be confiscated for money laundering even if tax evasion is already time-barred. The only way back is to self-disclose.
The secondary account
Resourceful bank(st)ers abroad advise tax evaders among their clients to open a bank account with a custody account – with very small assets. If the business relationship is exposed, for example through “offshore leaks”, one can show this and escape greater punishment, while “behind” there is another account with a deposit – where the actual buried treasures are located.
In Germany, there is a tried and tested business model of certain “consultants” who report that the tax authorities have so little time for audits or are understaffed that they are happy about any “creative accounting” as a self-disclosure, and in such cases rarely really check carefully. Thus, it should still be possible in practice to submit masses of incomplete voluntary declarations, which are not recognized as such, although they are completely ineffective according to case law, and therefore cannot lead to immunity from prosecution.
It is part of the dogma of a united Europe that each national parliament claims the royal right of taxation for itself. For example, corporations can – completely legally – transfer their profits via the Netherlands to tax havens such as the Cayman Islands almost tax-free. Medium-sized companies and employees can hardly legally reduce their tax burden in this way.
Unconstitutionality of the taxation of income?
If this is true, it would be appropriate for the decision-makers to address this anti-social problem instead of pillorying any “peanuts cases” involving celebrities.
This de facto unequal treatment would be understood as an invitation to have the entire system of income taxation put to the test (once again) by the Federal Constitutional Court “on account of a structural enforcement deficit or unconstitutional taxation error”. Freely after the motto: Why should actually the tax honest be the stupid one?
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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