Colombian pop star Shakira’s tax fraud case has reached a conclusion after she agreed to settle on the opening day of her trial.
The singer faced six counts of tax fraud for failing to pay €14.5 million in income tax between 2012 and 2014, charges she continues to deny, and faced up to eight years in prison and a €23.7 million fine if she had been found guilty.
Instead, Shakira reached a deal with Spanish prosecutors in which she was given a three-year suspended sentence and agreed to pay €7.3 million fine. The deal, which was announced on Monday, brought to an end a long-running dispute between the singer and the authorities.
The case has highlighted tax liability pitfalls of jet-set UHNWs, those who may consider themselves ‘fiscal nomads’, living and/or working abroad, according to experts
Shakira’s tax fraud case is a ‘cautionary tale’
‘There are some dangerous assumptions that people may know the rules very well in one country, and they think, often incorrectly, that those rules apply in other countries,’ she said.
‘It’s very easy as a socially mobile individual to fall into a trap where you don’t quite realise how much of a connection you do have to a particular jurisdiction,’ he says.
How did Shakira’s tax fraud case unfold?
At the centre of Shakira’s tax row was her residency status between 2012 and 2014. Under Spanish law, anyone who spends more than 183 days in Spain during a calendar year is considered a resident for tax purposes.
Prosecutors alleged that she was living in Spain but listing her official residence in the Bahamas in order to benefit from more favourable tax arrangements.
Shakira cast herself as a nomad, and said she was only visiting Spain to spend time with her then boyfriend, ex-Barcelona player Gerard Piqué.
Her defence team said she had not spent more than 60 days a year in Spain, arguing she was away from Barcelona for long stretches on tours. She was also partly based in the US, where she was a judge on NBC talent show The Voice.
Register notes that while ‘nomad’ has become a popular way for UHNWs to describe their country-hopping lifestyles, it does not hold sway with HMRC.
‘Certainly for UK purposes, you could be resident in multiple countries at the same time,’ she says. And then you may have to look at double taxation agreements (determining which country has the primary taxing), and things like that. It can very quickly get quite complicated.’
Cross-jurisdiction advice is key
Avoiding Shakira’s fate is about having ‘switched on advisers who will ask the right questions,’ Crippin says. ‘If they (the advisers) don’t ask more searching questions, and they just take the information that they’re given at face value. They may be going off in a particular tangent that may not be wholly appropriate or accurate.’
Clients need good advisers who will obtain information from them but also look critically at the paperwork, he says.
Wealthy ‘nomads’ should take expert advice in each jurisdiction, not just their main base, as tax liability differs hugely between borders, tax advisers tell Spear’s.
‘They may travel in and out of other countries and not get advice. And clearly, that can be a mistake if you don’t understand what the rules are,’ Register says.
Crippin adds: ‘You definitely need to get appropriate advice in the relevant jurisdiction.’
UHNW individuals should ensure tax advisers in different jurisdictions are taking a joined-up approach to managing their affairs to avoid tax issues.
Tax advice requires a joined-up approach
Crippin recommends having someone who ‘will draw the bits and pieces of advice’ together and coordinate the estate.
‘You need someone to ensure the right advice is being obtained,’ he says. ‘And then when it’s obtained, they get to grips with it, fully understand it, possibly discussing it further with the relevant advisers and break it down in a way that’s understandable to the client. He or she can then decide what the best thing to do is.
‘Advisers in different countries won’t necessarily speak to each other. So you need somebody who’s going to facilitate that cross-border discussion. Get involved with advisers who are willing to try to get the best outcome – not just from a tax point of view – but from a reputation point of view, too. Make sure that there aren’t any inadvetant slip-ups which could be reputationally damaging.’
Keep a travel diary for HMRC
Register advises UHNWs to keep ‘very detailed diaries’ of their movements across jurisdictions and how much time they spend in each country as evidence in case HMRC comes knocking.
HMRC is increasingly using Border Agency data to gather information on residency, Register says.
‘It can be quite common for tax authorities to ask for things like passport stamps, or flight tickets to prove when you were in and out of a jurisdiction’ she says.
The tax you pay is not just about how long you spend in a country and non-residents may be subject to local tax rules.
Non-resident sportspeople and entertainers can be taxed for earnings they’ve made in the UK. Tennis players, for example, are taxed on their Wimbledon prize money. Entertainers like Shakira are also subject to local tax rules when they are touring.
It’s not just the number of days that counts
Countries use different criteria to determine whether a person should be taxed as a resident. Spain, for example, has the ‘183-day rule’ at the centre of the Shakira tax fraud case, while US citizens and resident aliens are subject to US income tax rules on their income, no matter where they live.
How much tax you will have to pay in the UK, even if you spend much of your time overseas, is determined by the statutory residence test, which takes into consideration more than just how many days you spend in the country.
Register says how much you pay will depend on several factors including your ties to the UK, if you have immediate family in the UK, if you own UK property, and if you’re employed in the UK.
‘You have to look at all those factors to determine how many days you can spend before you become a resident,’ she says.
Crippin adds: ‘If you have ties to the UK or wherever it is, those ties do speak for themselves.’
‘In the UK we now have a statutory residence test which is supposed to make it easier to determine whether or not you are a UK resident,’ Brodrick says.
‘However, the rules are complicated and many people still have to judge whether they are resident based on a combination of the number of days they spend in the UK and the number of ties they have, which makes it difficult for those with a peripatetic lifestyle to know with any degree of certainty whether or not they are resident.’
Shakira’s tax fraud case has a starry precedent
Shakira’s personal income and wealth tax was under the spotlight in this case, but business tax liability adds another layer of complexity.
‘It can depend on whether you’re employed, or if you run a company – the rules then become quite complicated,’ Register says.
In her statement, Shakira said she had sought ‘the advice of the world’s preeminent tax authorities PricewaterhouseCoopers International Limited and Ernst & Young Global Limited’, her advisers throughout the process.
Shakira, who is worth £240 million, has repeatedly denied any wrongdoing and said she settled ‘with the best interest of my kids at heart’.
Shakira’s tax fraud case is far from the first time the Spanish authorities have targeted a high-profile individual. Argentinian footballer Lionel Messi and Portugal’s Cristiano Ronaldo have been the subject of high-profile tax fraud cases in Spain and fined millions of euros.