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No mention of any government plans to make public, national registers of the beneficial owners of ‘trusts’ was made by UK Prime Minister Cameron during his address to the Open Government Partnership Summit last week.
Instead he declared his intent to make national registers of the ‘real’ or beneficial owners of companies publicly accessible, and urged his colleagues in the G20 to do the same.
For more on Cameron’s policy shift read Part I of this post here
Does this mean that trusts have escaped the transparency dragnet set in train by the G20’s recent pronouncements on the link between tax evasion, corruption, poverty and the legalized opacity of trusts.
What’s a Trust?
A common law concept well known and widely used throughout the Commonwealth, a trust was created to provide an ‘equitable’ remedy where no legal remedy was available.
Originally used to secure the financial security of mistresses and their illegitimate offspring – who fell outside the legal definition of marriage – typically a trust is created where a ‘settlor’ donates his assets to a trustee who manages the assets in the name of one or more beneficiaries, who are to receive the assets at some time in the future, usually on the death of the settlor.
Modern use of trusts has so evolved that even companies use trusts for a number of commercial reasons. A trust however, is not a legal construct like a company. It is an obligation undertaken by one party, at the request or another, and for the benefit of a third party.
This triggers a split in the ownership of the assets with the trustee as the legal owner, while the beneficiaries or the settlor, or both, can at different times exercise beneficial ownership, or control who else gets the trust assets.
In a recent story about a Zurich-based tax consultant who, unburdened his conscience to European Commission officials on the ways to hide ‘dirty money’, the Economist agreed that most trusts are used for legitimate purposes, such as managing charitable donations, family estate planning and ring-fencing employee pension plans from the other assets of a business.
It quoted George Hodgson of the Society of Trust and Estate Practitioners, who said that “If you want to evade taxes a corporate structure is usually more useful than a trust,” Hodgson also explained that “trustees must know the full details of the beneficial owners and typically must pass that information on to competent authorities when requested.” He surmised too, that “it is in the trustee’s interest to ensure tax is paid because he is personally liable if it isn’t.”
The Dis-trust of Discretionary Trusts
Still, some have found ways to use trusts for unlawful purposes. This coupled with the fact that confidentiality lies at the core of the trust relationship which is protected by law; and the ‘duality’ of trust asset ownership has caused this legally binding obligation to become shrouded in suspicion.
This is especially evident in the reaction of Francophone tax authourities to the use of trusts by their residents.
Singled out for particular dis-trust are discretionary trusts.
Under such an obligation, the settlor and trustees are known. However, the beneficial ownership is held by a person, or group of persons unknown at the time of the transfer of ownership, for example,where the benefit of trust assets is held for an unborn child.
A Turning of the Tide?
Just because Cameron didn’t reference trusts in his speech to the Open Government Partnership Summit doesn’t mean that trusts have escaped the movement towards greater transparency.
Here’s some evidence:
- France has changed its law to treat all potential trust beneficiaries—even those who may never receive a penny—as owners for tax purposes.
- The regulations issued to flesh out America’s Foreign Account Tax Compliance Act (FATCA), which will take effect next year, appear to impose the same draconian reporting obligations on trusts as on banks.
- The directive on savings-tax payments in the European Union, which is home to the majority of users of trusts. The new EU regime would reject the idea of ownerless assets, at least for trusts managed in the EU and dependent territories, which is currently the vast majority. It would say, in effect, that until the beneficiary has received money, the original owner hasn’t given it away and is thus liable for tax. It also puts the onus on the trustee to act as “paying agent”, responsible for passing on tax payments.
Whether these trust rules will go ‘viral’ is unclear and may explain why no G20 leader has made any declaration about public registers of the beneficial owners of trusts.
This doesn’t mean that they won’t in time, especially in circumstances where the OECD Action Plan on Base Erosion and Profits Shifting , recently adopted by the G20, puts the trust relationship directly in their line of sight.
So far, the imperatives of confidentiality and transparency are not incompatible. How long this remains the case depends on how fierce the global fight for tax capture becomes.