Four years ago a sprightly 70- year-old Frenchman decided he was done paying tax on his ?8 million (Dh33.2m), sitting in a European account (not in France), and his four elegant flats. He set out to protect his wealth and contacted a tax expert, who happened to have set up shop in the UAE a few years before, to clear his own tax slate in his country of residence.
The tax expert suggested the individual gift a portion of his wealth to his only child and be done with attempting to avoid various things like inheritance tax. Plus his daughter had children of her own and could have done with financial help.
Her father didn't agree. He choose instead to become a resident - on paper - in the UAE, and setting up a series of legal structures involving offshore companies and the like. All this cost him a pretty penny and a lot of hassle, I'm sure.
And he was happy. Maybe he felt he was in control and that no one could tell him what he could and couldn't do with his money.
But of course none of us is in control. Of anything. Inevitably, disaster struck: a couple of years after the elaborate web of companies and ownerships being created, the gentleman inadvertently blew his own wealth cover by paying his wife's tax bill in France using a cheque from the account that held the ?8m. Whoops. French tax people came knocking.
The long and short of it is that this individual, now 74, has aged a couple of decades with worry, and is losing 80 per cent (yes, he is keeping 20 per cent only) of his wealth for various tax and legal reasons.
Perhaps he wishes he had just given his daughter the money.
Avoiding paying tax is draining, consuming and costly. Studies have shown that people are willing to spend more money, time and wait longer for returns on what is touted as "tax- free". This doesn't make sense, and I call it ITA: Irrational Tax Aversion, where we spend to "save".
Examples include standing in line for a chunk of time to save perhaps a couple of hundred dirhams vs buying the same thing (a jacket in this study) in a different shop but without a sale that does away with tax on that item. What is your time worth?
Another study shows that more people prefer to sink bonus money in an investment that they can't access for over 10 years, than a different one that pays out the same amount of money in total, but monthly, because the first one is labelled "tax free".
Talk about a false economy. Mr Former Wealthy Frenchman is such a poster boy for this - not only did he pay tens of thousand in fees every year, he also flew his tax adviser to Geneva to discuss the fine details over dinner.
OK, so he was unlucky and his plan could have worked - but there are changes on the ground that will do away with all this creative tax mitigation.
Cross-border tax information exchange is here. And it's on the rise. Next year is expected to be a watershed, with the advent of the Common Reporting Standard, or CRS.
CRS is based upon tax residence and unlike the US's Fatca, does not refer to citizenship. There are also other differences: Fatca, the US federal law that requires American citizens to file yearly reports on non-US accounts, forgives tax liability if the account holds less than $50,000. CRS dictates all individual accounts and new accounts opened by financial entities are considered reportable.With CRS, financial organisations and companies like the one the tax expert set up, have an obligation to report financial information (balances, interest, dividends and sales proceeds from financial assets) and who owns which company shares, on an annual basis to their local taxation authorities which will, in turn, pass that information on to the tax authorities where the account holder is resident.
This isn't some future possible scenario. It's already happening.
The first CRS reports are scheduled for September of 2017 and will cover the 2016 calendar year. More than 50 countries are in this first tranche of early adopters. Another 34 countries, including the UAE will start reporting in 2018.
This is why the tax adviser I talked to hopes his children don't follow in his footsteps - he sees it as a dwindling, or perhaps a more boring, opportunity - it's not going to be about structuring and being creative, it'll be about just paying up. Be prepared.
Nima Abu Wardeh is the founder of the personal finance website cashy.me. You can reach her at nima@cashy.me and find her on Twitter at @nimaabuwardeh
Run, but you cannot hide from the taxman
Cross-border tax information exchange is here. And it's on the rise, writes Nima Abu Wardeh.
Most popular today
