Is Andorra’s status as a tax haven in jeopardy?
The geographically tiny country of Andorra for decades was known as a tax haven for the wealthy and anyone looking for a lower tax bill. A non-EU member, Andorra has long held a fierce independent spirit that allowed it to turn away from widely accepted international tax policies. Historically, the Andorran tax system was based on indirect taxation (i.e. tax on vehicle ownership, court fees and taxes, licensing taxes, etc…) In 2006, a direct taxation scheme came to be through taxation on capital gains related to real estate transfers. Direct taxation continued to advance ultimately including personal and corporate income tax effective 1 January 2015. Although Andorra has an income tax, it is still extremely low comparatively speaking. It is capped at 10%.
Being a tax haven generally requires two criteria: low or no taxes and bank secrecy laws. Andorra’s bank secrecy regulations were scaled back tremendously recently with the signing of an agreement with the EU that requires the EU and Andorra to automatically exchange information on the bank accounts of each other’s residents. This agreement was signed on 12 February 2016 and takes affect for reporting in 2018 for information gathered in 2017. This now puts Andorra on par with all EU nations for strict anti-fraud and tax evasion reporting. Although this agreement does not affect US taxpayers, it might be just a matter of time before Andorra signs on to FATCA (Foreign Account Tax Compliance Act). In a nutshell, similar to the EU agreement, FATCA is the US law designed to combat tax evasion and fraud that requires foreign financial institutions to disclose certain information about its US taxpayers to the US government or face a 30% withholding penalty for any payments remitted from a US financial institution to the foreign financial institution.
In March 2015, FinCEN, the US Treasury’s Financial Crimes Enforcement Network tasked for combating money laundering, went after Andorran bank Banca Privada d’Andorra (“BPA”) claiming BPA was a primary money laundering concern. This investigation by FinCEN resulted in the arrest by Andorran authorities of BPA’s CEO and subsequent government takeover of BPA. Based upon the Andorran government’s actions regarding the investigation, earlier this month FinCEN determined BPA was no longer a money laundering concern and agreed to take no further actions against BPA. BPA is the only Andorran bank thus far targeted by the US with money laundering allegations. However, Andorra’s bank laws were altered, repealed, and recreated during this process. Andorra’s low tax rates are and will remain appealing but the recent changes regarding bank secrecy and allegations of money laundering may have created a slippery slope detracting from Andorra’s status as a tax haven. Time will tell.