To see or not to see

A vital but often overlooked aspect of offshore tax planning is that of transparency. So far as any tax-gathering authority is concerned, an offshore entity is either opaque or transparent. The amount of tax paid by the entity itself and its beneficial owners is more than likely to hinge on this issue. The concept is readily explained by example.

Mr Lawson, a UK resident, is a shareholder in a BVI company. The company pays such tax as is due in the British Virgin Islands. As a shareholder, Mr Lawson only has to pay tax in the UK when he receives a dividend or some other taxable benefit from the company. In other words, the company has a separate legal personality to its shareholder. Much as it would like to, HMRC is not able (usually!) to look through the company in order to tax its shareholders. The BVI company can, therefore, be considered opaque.

Now let us imagine Mr Lawson is also a partner in an advertising agency based in England.

The partnership is not viewed as a separate legal entity. Rather HMRC considers that each partner is individually engaged in trade. It is the partners who are taxed directly on any profits that the partnership makes. In this respect, the partnership can be considered transparent.

I must make it clear at this juncture that a limited company is not automatically opaque, any more than a partnership is automatically transparent. Since the invention of limited-liability companies (LLCs), the situation has become even muddier. However, some (but not much) clarity is offered by HMRC’s International Manual, which states that the following matters should be considered:

As HMRC itself says: “Some of those factors may point in one direction; others may point in another. An overall conclusion is reached from looking at all the factors together, though some have more significance than others.”

Why is any of this relevant? The moment Mr Lawson or any other UK taxpayer who has a beneficial interest in a company located overseas starts to receive dividend payments or some other distribution… HMRC is going to want its share! If HMRC believes the entity making the payments is transparent then UK tax on the underlying profits may be backdated to well before any benefit has been received. Moreover, if Mr Lawson happened to be resident but non-domiciled then taxation on a remittance basis may also be germane.

In Taxation magazine, dated the 14th October 2015, Shimon Shaw wrote a really excellent article on this subject, and if you were interested in learning more it would be a good starting point. You should also go online to the UK Government’s website (www.gov.uk) to download HMRC’s International Manual.

Anywhere and nowhere

The idea of being a perpetual traveller, or PT, was very popular until around 15 or 20 years ago and was often covered in the media. More recently, for reasons that are not entirely clear, it has become less fashionable and barely written about at all. However, it is not unusual for wealthy individuals to arrange their affairs so that they are not tax resident in any single jurisdiction. Every country, including the UK, has a set of rules that determine whether someone is resident for tax purposes or not. In many countries, such as the United States, it is possible to be tax resident without being legally resident. Anyway, if you do not meet the statutory resident test in any single jurisdiction, you will not be tax resident anywhere.

What does this mean in practice? Although it is perfectly feasible (and actually not that expensive) to move from country to country on a regular basis passport, immigration and anti-terrorism authorities are naturally suspicious of someone without a permanent residence. For this reason, it is often sensible to establish a legal tax residence somewhere, even if you spend next to no time in the location. Within Europe, Cyprus and Malta are good options. Outside Europe, Egypt, for example, is a good choice, as tax is entirely negotiable and you can rent an address for next to nothing. Moreover, Egypt has the added advantage of not being deemed a tax haven. It should also be noted that, if you are leaving the UK, HMRC is always much more comfortable with the idea of your establishing yourself somewhere else. It is always advisable, when you leave the UK, to take up permanent employment overseas.

Offshore squalls

The Government has launched a campaign advising those with offshore bank accounts that, from 2017, HMRC will automatically receive details including the name and address of the beneficial owner, balances etc. Since the Liechtenstein Disclosure Facility and Crown Dependency Disclosure Facility both close on the 31st of December 2015, if you want to make any sort of a declaration of wrongdoing to HMRC you will have to wait until a new facility is put in place next year. It is to be noted that HMRC’s powers for tackling evasion and deliberate errors have been greatly strengthened in recent years. Here is a summary of relevant HMRC existing and new powers:

New OECD rules

The OECD believes the new rules agreed by the world’s leading finance ministers for taxing the profits of multinationals will raise some $250 billion a year in additional revenues. Under the new regime, companies such as Amazon, Google and Starbucks will, apparently, find it harder to concentrate their profits in low-tax countries and tax havens. More than 60 governments have signed up to the plans to reduce corporate tax avoidance. The rules, which are referred to as ‘base erosion and profit shifting’, or BEPS, have been designed to close loopholes and restrict the use of tax havens. They are the result of an international project launched by G20 governments some two years ago supposedly in response to public anger over corporate tax avoidance.

As an aside, bank details belonging to hundreds of thousands of US expats are now beginning to be passed to the Internal Revenue Service (IRS). However, a survey by KPMG revealed that half of the banks it contacted worldwide are not yet in a position to meet the new ‘common reporting standard’ (CRS) results. The American Government, which is moving ahead of other countries in closing its net on offshore tax evaders, has already been forced to give some governments an extra year to comply with new rules requiring them to hand over the bank details of US citizens.

Interestingly, it is felt that an already overstretched IRS will have considerable trouble using the data it ends up receiving. Moreover, as mentioned in last month’s issue of TSTR, US expats who have failed to file US tax returns will be eligible for a partial amnesty, known as the Streamlined Program, which does not impose penalties on people who can say they have not wilfully failed to comply with their obligations to file returns.

Non-dom aide memoire

A quick reminder that HMRC is planning to dramatically overhaul the tax treatment of non-domiciled UK residents. These changes would appear to be planned for the 2017/18 tax year. At that juncture, UK-resident individuals who have lived in Britain for more than 15 of the past 20 years are likely to be treated as UK-domiciled for all tax purposes. In plain English, from the beginning of the 16th tax year of residency foreign income and gains will no longer be available for remittance basis treatment and inheritance tax will apply to all worldwide assets. The current arrangement whereby a non-UK-domiciled individual can pay an annual £90,000 fee once they have been resident for 17 of the previous 20 tax years (if they so choose) will no longer apply from April 2017. It is unclear whether the other two remittance basis charges (£30,000 and £60,000) will continue to be levied. If you are UK-resident but not UK-domiciled, you should seek professional advice at the earliest possible moment. In particular, if you have made use of offshore structures, such as offshore trusts, then you need to consider whether you may be exposed to a substantial tax liability should HMRC decide to treat such trusts as transparent in the future. We are only talking, at this stage, about proposals. The eventual rules may vary to a greater or lesser extent. Over the last two decades, the UK – and in particular London – has been considered a safe haven for many wealthy foreigners. For many, Britain will no longer be as attractive. Quite how this will play out is uncertain. However, internationally mobile non-doms are unlikely to be affected. Only those who have settled here permanently may experience an extra tax burden.