#04: The pressure is On

The general opinion nowadays in de media is that tax evasion and tax friendly structures are one and the same as tax fraud. It is the common opinion that it is morally reprehensible. The recent publications about the Panama Papers are a confirmation for those who are of this opinion. However, the publications do not show whether the involved persons and entities actually hid their wealth or whether they were not transparent about it towards the tax authorities or even had to be. Nonetheless their names are mentioned in the newspapers and all over the internet. Without knowing the complete facts about the actual tax behavior of these persons this is naming and shaming in its purest form. For governments and tax authorities who are in ‘the fight against tax fraud’ the deterrent effect of naming and shaming seems to be a welcome tool to further break down – the usage of – the banking secrecy. In the past years the European banking secrecy has been attacked on various occasions. We will go in to the recent developments of the strive of the Dutch tax authorities against ‘hidden’ foreign bank accounts of Dutch tax payers in for instance Switzerland.

The fortress walls of the bank secrecy have been showing cracks since 2008 when the UBS bank and the United States closed a deal just after the economic crisis. The United States stated that the bank was an accomplice to tax fraud by wealthy American accountholders by providing them with Swiss bank accounts. The objective for the United States was to receive information about American accountholders in Switzerland. A lot of legal procedures followed. In the meantime Europe was not sitting still either. Europe proved to be successful in its attempt to achieve automatic exchange of relevant data between Switzerland and other European countries for determining tax assessments. This also was a key element in de policy of the European Committee regarding the repression of tax fraud.[1] Based on a European Directive[2] member states have to implement laws which make automatic exchange of data regarding tax matters possible. This was the signal for various banks to actively advise their clients who did not include their foreign bank accounts in their tax returns to ‘come forward’. It was the signal for the Dutch tax authorities to jump in and offered generous ‘discounts’ on administrative penalties when somebody voluntarily disclosed its income and filed a righteous tax return.

Based on the Dutch General Law on State Taxes the tax authorities can impose tax assessments regarding foreign assets for a period of (in total) twelve years.[3] If the tax return is filed with negligent or deliberately incorrect the tax authorities can also impose an administrative penalty. However, instead of imposing a penalty the tax authorities could decide to inform the public prosecutor about the inaccuracy of the tax return, in order for the prosecutor to (consider to) start a criminal investigation and prosecution. In the Netherlands this could result in a maximum of six years imprisonment.

The voluntary disclosure procedure – article 67n and 69 (3) of the General Law on State Taxes – prevents a criminal charge for tax fraud and or the administrative penalty will be reduced and obviously taxes need to be paid. The voluntary disclosure is bound by certain rules. The disclosure of relevant information has to be complete and without reservations. Voluntary disclosure however can only be successful if the tax payer comes forward before he knows or reasonably has to suspect that the tax inspector is aware of the fact that his tax return is incorrect. Not only tax assessments will finalize the voluntary disclosure procedure, also administrative penalties can be imposed.

In the Netherlands until 1 January 2010 a penalty could not be imposed after a successful voluntary disclosure procedure. As of 1 January 2010 this was changed. If the voluntary disclosure procedure has been initiated within two years after the incorrect tax return had been filed, no penalty would be imposed. If the procedure has been initiated after those two years the voluntary disclosure is considered a mitigating circumstance. For example, the Dutch law prescribes a penalty of 300% for those who did not include their foreign ‘income from savings and investments’ in their tax return. The Policy on Administrative Penalties of the Dutch tax authorities prescribed that until 1 July 2010 the penalty in voluntary disclosure procedures would be mitigated to 5% of the maximum fine of 300%, hence a penalty of 15% over the tax assessment. As of 1 July 2010 the policy prescribed that the penalty will be mitigated to 10% of the maximum of 300%. Hence, a net penalty of 30%. On 2 September 2013 the State Secretary of Finance took more serious measures and decided that all penalties regarding the voluntary disclosure procedure until 1 July 2014 would be mitigated to nil.[4] This means that no penalty will be imposed in voluntary disclosure procedures in which a final penalty has not been imposed on 2 September 2013. This ‘discount’ however was at that time already announces as a temporary lure for those who hid their foreign wealth from the tax authorities. As of 1 July 2014 the former policy of a 30% penalty would be applicable again and as of 1 July 2015 the State Secretary has doubled the penalty to 60%. It resulted in a storm of voluntary disclosure procedures.

For those who already came forward and were penalized this new policy seemed to be incompatible with the principle of equality. How can it be justified for the tax payer who came forward between 2010 and 2013 were to be penalized and others who came forward over tax assessments over the same years but before 2010 or after 2013 were not? Some were penalized and some were not even though the ground of the penalties are the same years. This feels unfair to the ones who were penalized and it is arguable that it is in breach with the law. The increase of penalty seems to be in breach with the principle of equality and the prohibition of arbitrariness. Jurisprudence however is not clear about this (yet).

Last year a ‘group request’ was made by the Dutch Tax authorities to the Swiss in order to receive information about Dutch accountholders in Switzerland. The accountholders were informed about this request. They had the opportunity to object against providing the information to the Dutch tax authorities. Practice showed that if the accountholder could show that he had been transparent about his back accounts to the Dutch authorities, the information would not be provided to the Dutch authorities. The ‘group request’ was the start of a fierce discussion about whether this request is a fishing expedition – the request did not contain any specific names of accountholders – and would be legitimate based on the treaty between the Netherlands and Switzerland. On 21 March 2016 the Swiss court judged that it was not a legitimate request. The request did not comply with the rules as set out in the treaty. The Swiss Supreme Court now has to take a decision on this. In the meantime this action by the Dutch tax authorities triggered accountholders who were not transparent yet to come forward and start a voluntarily disclosure procedure. In our opinion this general request of the Dutch tax authorities did not lead to a reason for the tax payer to reasonably suspect that the tax inspector will become aware of the foreign account. This is confirmed by the recent judgement of the Swiss court and leaves a strong argument to state that voluntary disclosure is (still) an option.

Recently the State Secretary of Finance took the (national) pressure on the non-transparent tax payers to the next level. He announced that as of 1 July 2016 – two months from now – the penalty will be doubled again. A penalty of 120% will be imposed for voluntary disclosure of ‘income from savings and investments’. Perhaps the ‘frightening’ of the Panama Papers triggered this action? Or was it the lack of success – for now – with the Swiss ‘group request’? It is clear that the pressure is on. The ‘ticket prize’ to use the voluntary disclosure option is increasing and the State Secretary announced that it might increase even further. Also again the arguments against increasing the penalties come up. Also the question is whether the increasing of the ‘ticket prize’ of the voluntary disclosure route will have the aimed effect. Will this ‘aggressive tax planning’ by the government result in a financial assessment of tax payers whether to use the voluntary disclosure option based on the probability of detection? Voluntary disclosure is getting more and more expensive, until it hardly makes any difference whether you come forward voluntarily or whether you are being detected and a penalty of a maximum of 300% – which can be reduced based on facts and circumstances of the specific case – will be imposed. Unless off course criminal prosecution will become the norm.

What is your experience in your country? What are the voluntary disclosure options and is the pressure to use the procedure increased as an answer to the current general opinion?

[1] Announcement COM(2012)722.

[2] EU directive 2011/16/EU.

[3] If an assessment has already been imposed, the authorities can impose an additional assessment if there are new facts that were not known to the authorities before or if the tax payer had the intent to act against the law.

[4] Decision of 2 September 2013, BLKB2013/509M.