Fiduciary Wealth Team

What effect has the new asset reporting requirement had on your business?
The first quarter of the year tends to be our busiest period. We find that clients are in a reflective mood...looking to review their finances and are generally much more receptive to ideas on how to restructure their assets to optimise tax efficiency and maximise returns. However this year has been quite exceptional in that we have been overwhelmed by the level of demand for advice on the new law.

Who is being targeted by the anti-fraud law?
That is a very good question. For the past three years we have been consistently warning your readership through our editorials that the expatriate community are a “soft political target.” We have also been saying that “tax avoidance” represents the past and that moving forward the focus will be on “tax mitigation.” Unfortunately our message has been largely ignored.
It is quite simple. The new law has been enacted to increase the taxable base and raise more in tax revenues. It makes no distinction between Spanish and foreign nationals. As far as the Spanish Government is concerned if you are “tax resident” in Spain you are obliged to fully declare your annual worldwide income for tax purposes and worldwide assets for wealth tax purposes. Surprisingly many British expats are still in denial and seem to think that the law is aimed solely at Spanish nationals. How wrong can they be!!!

What determines residency?
Spend more than 183 days in Spain in a calendar year and you are deemed to be resident whether you have formalised your tax residency or not. However if you spend equal amounts of time between the UK and Spain, it goes to a tie breaker, and the UK and Spanish tax authorities will then look at your centre of vital interests and economic activity to determine where you are actually tax resident.

How committed are the Spanish tax authorities to combating tax fraud?
Spain is in the midst of a major economic crisis. It is running budget deficits and desperately needs to balance its books. The fact that manpower resources have been diverted towards combating tax fraud pretty much tells the story. The tax authorities are now using a wide range of investigative methods including looking at patterns of electricity consumption to prevent tax evasion. The Spanish Government have made a statement of intent by declaring that any income arising from undeclared assets will be deemed to arise in the last tax year which effectively abolishes the statute of limitation. Spain means business!

How is the expatriate community reacting to the new disclosure requirements?
The vast majority of expats are incensed that the tax authorities, as they see it, are prying on their private affairs. However they enjoy the quality of life so much that they are reluctant to give up on residence. In our experience about half of all expats we have come into contact with are sensible enough to realise that the risks of non disclosure are simply too high. They are looking to make a full disclosure and restructure their financial assets through tax efficient vehicles to legitimately reduce their tax burden.
Not everyone feels the same way though, a good number have adopted a “wait and see” approach and intend to remain below the radar. They are playing a dangerous game and risk losing all their assets and leaving nothing to their children. We are heading towards a new global standard in international tax cooperation where automatic exchange of information becomes the norm. Whether the asset is held in an offshore bank account, company structure, discretionary trust, UK offshore bond or any other arrangement; the tax authorities will eventually get to know and apply punitive penalties which could theoretically, exceed the value of the assets. That’s the reality that many expats choose to ignore!

What has surprised you the most about people’s reaction to the new law?
We are surprised to see how people try to convince us that they have “returned to the UK” yet remain firmly based in Spain. It is a huge mistake and one which is bound to prove very costly. Helping expats get to grips with Form 720 has been a real eye opener.......many expats structure their savings, investments and retirement plans as if they were still UK resident, as a result of which their financial affairs are totally inefficient from a Spanish perspective. Many fail to understand that they could potentially structure their affairs more tax efficiently in Spain than they could otherwise do in the UK.
It is a real advantage which is either overlooked or simply not exploited due to the misconception that if your affairs are arranged tax efficiently in Spain then the assets must by definition also be held in Spain which is of course totally incorrect. The tax benefits of getting this right can make a huge difference not least from a UK inheritance and Spanish succession taxes point of view.

What are the consequences of failing to report?
It would be too costly to even consider. The taxpayer would be subject to tax at their highest marginal rate where the top rate exceeds 50%. The tax due would also be subject to late payment interest for the last four years as well as penalties as high as 150% of the total tax due on the asset. There would also be a fine of €5,000 for each piece of unreported data with a minimum of €10,000. Lastly if the tax defrauded exceeds €120,000 it would be considered a criminal offence. 

How do you see the future post 30th April 2013?
Well it will take some time for everything to unravel. Individuals are required to report on their financial position as at year end and once they have done so they will need to start planning on how to restructure their assets to optimise tax efficiency. This process may well last until the end of the year.
Looking ahead we expect the expat community to be much more discerning in their choice of financial advisory practice. The emphasis will be on “quality of advice” not just tax but also financial and investment advice. At the present time expats have a plethora of financial advisory firms to choose from although in reality there are very few firms who are able to offer professional advice.
It is not easy for expats to be able to distinguish between good and bad advice when unregulated practices abound. How can anyone tell the difference when pension busting, ridiculously high returns on structured notes, low risk double digit returns on gold and life settlements are actively marketed to unsophisticated investors through so called brokers and advisers? Where letters of advice are not always issued nor commissions disclosed and where MIFID applies in name only but not in practice. It is a market where the promise of high returns entices the greedy investor to make fatal mistakes.
We do believe that the new asset reporting law will force expats to overcome inertia and seek a second opinion and obtain better quality of advice. In time expats will realise that it actually pays to seek professional cross border financial and investment advice from a regulated firm like ours. Just as there is no such thing as a free lunch you should expect to pay for good quality financial planning advice.