THE SCHMIDT OFFSHORE REPORT
(Vol 2, no 1)
Contents
NEWS:
UK update by Christopher Curtis
OFPG are ordered to collect £1.5 billion
Transfer pricing
Stamp-duty changes
Accountants criticise Government
EU update by Jurg Langer
Jersey
New Tax treaties
The Isle of Man
The Netherlands
Luxembourg
Rest-of-the-world update by Mary Nolan
Australia
Nauru
Belize
OECD Global Forum on Taxation
SAARC sign treaty
Tax treaties
Dubai
My editorial for this issue of The Schmidt Offshore Report focuses on providing a number of tax tips for those interested in – or already using – offshore tax-planning techniques. However, before I do this, I really must express my disappointment that the OECD Global Forum on Taxation (see our ‘Rest-of the-world’ news section) did not achieve more. The purpose of the two-day meeting, which was held in Melbourne in November 2005, was to work towards a global level playing field regarding taxation. After the Forum, a statement was issued in which the OECD said that both OECD and non-OECD countries had implemented, or made considerable progress towards implementing, many of the standards which the Global Forum wished to see achieved. This included exchange of information, greater transparency, improved customer due diligence and the removal of banking confidentiality. The OECD are particularly keen to see an end to the use of bearer shares, and the statement boasted of the success achieved in this particular area. The Global Forum, while welcoming the progress made to date, said further effort would be needed if a global level playing field was to be achieved. Candidly, if a global level playing field is to be achieved, the OECD members must play fair! So far, all that has happened is that pressure has been put on the longer-established, smaller and weaker offshore jurisdictions while OECD member countries such as the UK and USA have continued to enjoy any number of tax advantages. The OECD still have a long shopping list of demands from non-OECD member countries. They are offering nothing from their own member states in return. Although many of the countries suffering at the hands of the OECD complain in private, they still seem too afraid to confront the bullying tactics of the OECD. The idea that the OECD are working towards a level playing field is a farce.
One of the things that the four correspondents who compile our ‘News’ section have to do every two months is check through the tax authorities’ press releases issued in the different countries they cover. The vast majority of these press releases relate to tax treaties. For the fun of it, my colleagues and I counted up all the different tax treaties we know of and decided that there were in excess of two thousand. The UK alone has negotiated more than one hundred treaties. Of course, the proliferation of tax treaties is a benefit to taxpayers because it makes tax arbitrage possible. This concept was neatly explained by Diane Ring of Harvard Law School, who recently said:
“Cross-border tax arbitrage refers to a situation in which a taxpayer or taxpayers rely on conflicts or differences between two countries’ tax rules to structure a transaction or entity with the goal of obtaining tax benefits (for example, reduced or no taxation) over all. Had the structure or transactions taken place entirely domestically, the net tax benefit (which was created by the conflict between the two countries) would not exist. Thus, taxpayers and the arbitrage transaction or structure exploit the intersection of the two countries’ tax systems to eliminate or reduce substantially their income tax. Particular areas of tax law can prove to be especially fertile breeding grounds for arbitrage, either because one country’s tax rule is rather unique or because it is difficult to apply, predictably.”
The wonderful thing about tax treaties is that they take a long time to negotiate (usually several years) and, having been negotiated, must be ratified by the relevant Governments. Once a tax treaty has been ratified, they often remain in force unchanged for long periods – even though there may have been changes to both countries’ domestic tax laws. The effect of this is that individuals, trusts and companies with a degree of flexibility can engage in what is frequently referred to as ‘treaty shopping’.
Many OECD countries claim that they do not enter into tax treaties with tax havens and other small developing countries – but this is not actually correct, for instance:
- Australia and Kiribati
- Austria and Belize
- Belgium and Hong Kong
- Canada and Barbados
- China and Barbados
- Denmark, Japan, Switzerland and many other OECD countries have tax treaties with Singapore
- France has tax treaties with every French-speaking country, no matter how small
- New Zealand and most other OECD countries have tax treaties with the United Arab Emirates
- Norway and Sweden and Barbados
- The UK and all its former colonies
- The US and all the former countries of the USSR.
The real point I’m trying to make is that if you are doing any business overseas – even if there is no tax treaty between the UK and the country you are doing business with – it may be possible to use a third location to reduce your ultimate tax bill. For instance, if you’re doing business in China, you might use their tax treaty with Barbados to effect a better deal for yourself.
Here’s a quick reminder that the next time the EU Savings Directive can be reviewed is on 1st July 2008. In fact, this is just the starting date – the truth is negotiations with the member states and independent territories are likely to take several years. This means that, for the time being at least, it should be possible to make, say, medium-term tax-saving plans with a degree of certainty. Here are some of options:
- You could transfer your offshore savings into a ‘deferred interest’ account. Interest is left to roll up gross, and only paid and declared when the account is closed. This will be particularly useful for anyone planning to move overseas in the future. Clearly, it’s more in the way of a tax deferral than tax avoidance – but nevertheless it can be a valuable way to mitigate tax liability.
- If you transfer your money to Switzerland, you can take advantage of the fact that a large number of investments are excluded from the Swiss/EU withholding tax regime. These include dividends and capital gains, and also the proceeds of life assurance, certain payments originating from structured products and derivatives, payments from certain mutual funds, interest on grandfathered bonds, interest payments to companies (and to trusts, if the trustee is a company), foundations and individuals when they are resident but non-domiciled – and that includes individuals with expatriate status in Ireland. In other words, there are a great number of transactions that seem to fall outside the scope of the Directive.
- If you are Islamic, under shariah law you’re not allowed to take interest – so all the investment possibilities you have automatically are excluded from the new Savings Tax Directive.
There are a large number of ways in which individuals can create planning structures and investments which are not affected by the Directive. Of course, if EU citizens find and exploit loopholes, it’s likely that the member states will try and close them down – but they will not be able to do so until well after 2008 – and almost certainly not until after 2011.
Here’s another quick reminder that, if you’re looking to set up a tax-saving vehicle, one route to consider is setting up a UK-based charity. The charity may be a trust or a corporation, or an unincorporated association established for purposes which are exclusively charitable. Such charities are entirely tax-free and – compared to a trust – they give the person establishing them total control without the disadvantage of beneficial ownership. Of course, you cannot legally apply the assets for non-charitable purposes – but there’s a great number of things that you can do, for instance, patronage allowing you to give friends and relatives jobs and grants. Furthermore, provided you pay some relatively small amounts of money to genuine charitable causes, there are tremendous opportunities for using UK-based charities as part of an international tax plan.
Q – Our international import and export company is starting to do a considerable amount of business with China. There’s a great deal of flexibility regarding where we locate our operational base. Do you have any recommendations?
A – Barbados recently signed a double-taxation treaty with China that opens up many opportunities for companies in other locations to form partnerships with Barbadian international business companies and to thus improve their competitiveness as they seek to enter the Chinese markets. It is to be noted that China is the only Asian country that has a double-taxation treaty with Barbados.
Q – We wish to establish a public company so that we can raise money for an international trading venture. We had thought of taking over a shell company in Canada, the United States or the UK, but the costs appear to be prohibitive. Can you recommend an alternative?
A – You could do worse than consider having your company listed on the Cayman Islands Stock Exchange (CSX). The CSX was established in 1997 and has helped to expand the Cayman Islands as an offshore financial-services centre. The CSX offers a listing, well-policed regulatory system, and also uses the latest technology. If you list your company in the Cayman Islands, you will be able to enjoy:
- a tax-free jurisdiction
- a highly competitive pricing structure
- easy-to-follow and straightforward listing rules
- competitive listing fees.
Although the CSX was established in order to provide a fair, orderly and efficient market for the trading of securities, it has largely listed mutual funds. For more information, visit the CSX at www.csx.com.ky. If you’d like to look at some alternatives, Wikipedia carries a full list of stock exchanges at www.wikipedia.org.
Q – Having worked abroad for a number of years, I now plan to return to the UK. Can you offer me any advice regarding steps I should take before my return?
A – Presumably, while you’ve been working offshore, you would have been paying income tax at a much lower rate and, we presume, not paying any capital gains t (CGT) tax in the UK on any disposals made during your period of non-residence. Prior to returning home, it could well be advisable to dispose of and re-acquire any assets that are showing a capital gain immediately prior to returning to the UK. In this way, you can crystallise the gain and thus reduce any future liability to CGT. This is because gains will only count from the day you returned to the UK. Conversely, you should not dispose of any capital assets that are showing a loss, since such losses, if realised after you resume UK residence, may be useful to set against future taxable gains. Any interest-bearing bank accounts should be closed and re-opened immediately prior to returning to the UK in order to crystallise the crediting of interest to the account during the period of non-UK residence. If your contract of employment ends prior to 5th April, you should consider taking a holiday in a non-UK country in order to not return to the UK until after the start of the next UK tax year.
If you send an anonymous query to our ‘panel of experts’ service, we will answer it in the next edition of the newsletter. Otherwise, all queries will be answered promptly by post or email.
UK UPDATE BY CHRISTOPHER CURTIS
At the beginning of this year HM Revenue and Customs (HMRC) appeared to stop using the term ‘offshore bank account’, replacing it with the more innocuous expression ‘non-UK bank accounts’. The distinction is an interesting one. The UK tax authorities have invested a great deal of time and effort convincing the general public that anything which is offshore must, perforce, be criminal or at least underhand. Why pull back now? The initiative almost certainly comes from the UK’s Offshore Fraud Project Group (OFPG). The OFPG are part of HMRC’s focus on the investigation of tax evasion using offshore bank accounts, offshore trusts and offshore companies. To achieve results, the OFPG need the co-operation of low-tax jurisdictions such as the Channel Islands, Isle of Man, British Virgin Islands and other international financial-service centres. These jurisdictions, not surprisingly, dislike the implication that they are in some way encouraging criminal activities. So my guess is that a whole new, more tactful, vocabulary is being employed by HMRC. The terminology may have changed, but the objectives have not. Since I last provided an offshore-tax update for the UK, the main story has, undoubtedly, been the way in which the OFPG have been hunting down British tax evaders – the main, but not the only news item. Other, lesser, stories relate to the transfer of assets abroad, new transfer pricing legislation, stamp-duty avoidance and further criticism of British money-laundering legislation.
OFPG are ordered to collect £1.5 billion
The OFPG was established by the Inland Revenue in 2003 with the purpose of hunting down UK residents involved in using offshore vehicles to evade British tax. When the initiative was unveiled by Gordon Brown, he gave the Inland Revenue an extra £66 million in part to fund the project. In exchange, he set stiff targets regarding the amount of additional tax, interest and penalties that he expected the OFPG to recover. Although the targets were made public – the Chancellor of the Exchequer was looking for an additional £1.5 billion for his investment – at the time no one took them very seriously. Now, however, it appears that Mr Brown was in deadly earnest. Insiders say that over the last few months the OFPG have been placed under severe pressure to deliver.
How are they doing? It seemed to take the group two years to organise themselves and focus their efforts. However, there are now over 50 senior officers working on the project, including inspectors, investigators, accountants and other experts. The group have concentrated on four distinct areas:
- They have demanded information from UK banks about UK residents involved in transferring money into offshore bank accounts.
- They have used exchange-of-information treaties in order to put pressure on offshore financial institutions to reveal information about UK residents that may be the beneficiaries of offshore trusts, or the beneficial owners of offshore companies, not previously known to the UK tax authorities.
- They have pursued banks and credit-card companies for information about credit cards issued by offshore banks in the UK to UK residents.
- They have demanded information from offshore financial institutions about life insurance policies sold as investments to UK residents.
In their first year of operation, the OFPG are reported to have gathered an additional £30 million of tax as a direct result of their investigations. The OFPG forecast that in their second full year of operation they will collect an additional £300 million of tax. There have been many changes in the leadership of the OFPG since it was set up, and, according to reliable sources, within the HMRC the position is considered something of a poisoned chalice. While those involved in the OFPG feel that they will be able to increase the additional tax gathered, no one seems to believe that it will be possible to reach Mr Brown’s target of £1.5 billion.
If you are a UK resident who previously relied on banking confidentiality and secrecy laws to keep your identity unknown to the UK tax authorities, you should make it a matter of some urgency to reconsider your affairs. Any UK tax resident with a credit card issued by a foreign bank, an account held anywhere overseas or involvement in either offshore companies or offshore trusts can no longer assume that the countries where they have made these arrangements will protect their anonymity. Note that The Schmidt Offshore Report does offer an entirely confidential and anonymous ‘ask the experts’ service.
The Financial Times recently surveyed the major UK accountancy practices in order to discover what they believed to be the most important issues facing multi-nationals. The list of concerns was headed up by transfer pricing. This is particularly relevant because just before Christmas the European Commission published their proposal to adopt a code of conduct that would standardise documentation that multi-nationals are obliged to provide to tax authorities on their pricing of ‘cross border intra group transactions’. This proposal came about because many multi-nationals have complained regarding the onerous and divergent documentation requirements and obligations imposed by different states. The key issue with transfer pricing is that where a taxpayer conducts business with a related party – whether in the UK or overseas – they must do so on an arm’s-length basis. In other words, the ‘transfer price’ charged must be the same, or within the range of a price that would have been charged, had the parties been unrelated. The object, obviously, is to stop UK companies and residents transferring assets and/or profits to lower tax jurisdictions. In order to prove that resident transactions have been done on a purely commercial basis, taxpayers are required to maintain supportive evidence. Such evidence may include:
- transactional record
- primary accounting records
- economic adjustment records
- economic studies
- functional assessments
- legal documents.
At present, HMRC do not provide taxpayers with guidance. However, prompted by the European Commission it is to be hoped that they will now do so. It is, after all, unlikely that any code of conduct will be implemented in the immediate future.
The timing of the European Commission proposal was interesting, because within days the Government announced changes to the legislation on the transfer of assets abroad. These changes are, essentially, retroactive. The purpose of the new legislation is to make it considerably harder for individuals, companies and trusts to transfer assets abroad without suffering the same rate of taxation as if those assets had remained within the UK. Previously, the application of this legislation depended on the taxpayer’s purposes, which he knew, but now they depend on the perception of his purpose by HMRC. While the new legislation is aimed at people with tax avoidance on their mind, the reality is it will affect many innocent parties. Furthermore, there is no advance clearance procedure. Readers who have transferred assets in the past – or who intend to do so in the future – are advised to seek professional guidance.
HMRC are intending to close a loophole whereby property dealers are able to escape the 4% land tax levy by placing buildings into new offshore property unit trusts. As it currently stands, if a building is transferred into a new offshore unit trust, stamp duty is not applicable. Those readers involved in such arrangements are recommended to seek professional advice at the earliest possible moment.
Accountants criticise Government
The Institute of Chartered Accountants recently conducted a survey of their members on the subject of anti-money-laundering regulations. Nine out of ten members believed the regulations were too severe compared to the risks, and an even higher percentage believed that the rules were ineffective in deterring money-laundering or detecting crime. Those accountants surveyed reported that the cost of policing the regulations varied anything from £100 to £40,000 a year, with an average of £7,800. Fifty-seven per cent of respondents said that the anti-money-laundering regulations are “poor or very poor at detecting money-laundering”. To date, the Economic Crime Unit have only identified £2.5 million that may – or may not – have been laundered, as a result of this particular piece of legislation.
As I explained in the last issue of The Schmidt Offshore Report, the Internal Revenue Service (IRS) have decided to concentrate on “abusive transactions involving offshore jurisdictions”. Congress recently increased the IRS budget to $10.7 billion, and this included a substantial increase in funding for “enforcement”. Mark Everson, the IRS Commissioner, said that “combating abusive shelters would be the centre-piece of IRS enforcement efforts”. The main problem is that although US citizens must declare their world-wide income, many tax professionals are still promoting aggressive plans designed to use low-and zero-tax jurisdictions to reduce US taxation for both individuals and corporations. Some of the tactics being used are multi-layered structures involving convoluted combinations of trusts, partnerships, insurance policies, annuities or retirement plans and – of course – offshore companies.
Meanwhile, as part of the IRS project to track down US residents using foreign credit-card accounts to avoid paying US income tax, the tax authorities have gone to court in order to win the right to access customers’ records held by PayPal – the online payments arm of eBay. The IRS want PayPal to disclose the credit-car numbers and bank accounts of people who may be using PayPal to avoid paying US taxes.
EU UPDATE BY JURG LANGER
As Nathaniel Litmann is dealing with the subject of the EU Savings Directive in his editorial, I won’t cover the same ground here in my bi-monthly EU tax update. Indeed, while this is still an important story, there are many other tax stories to report.
Jersey has approved new legislation involving amendments to the Companies (Jersey) Law that will allow protected cell companies (PCCs) to be established in the jurisdiction. Essentially, a PCC allows a company to be incorporated with a number of cells, each of which has its assets ring-fenced from other cells, the whole sharing a common constitution. One of the advantages of the Jersey legislation is that a company can elect, at the time a sale is established, for that cell to be incorporated with a separate legal identity. Additionally, in the event of the insolvency of a cell, the only assets that will be available to creditors will be the assets of the particular cell with which the creditors contracted.
The introduction of this legislation is almost certainly a response to the fact that Jersey’s financial-services sector has been badly hit by a combination of problems, including uncompetitive rates of tax, information sharing with the UK and other onshore jurisdictions, and the EU Savings Directive. Furthermore, Jersey’s income-tax rate (20%) and the cost of becoming resident in the State, has put off many high-net-worth individuals.
Switzerland and Austria have published a draft treaty protocol relating to CGT, Luxembourg has signed a tax treaty with the United Arab Emirates, the Netherlands have signed a tax treaty with South Africa, the Isle of Man has signed a Tax Information Exchange Agreement with the Netherlands and Jersey and Malta have also signed an information-sharing pact.
Abbey International (formerly the Abbey National Building Society) have decided to close their Isle of Man operation, with the result that 140 people will lose their jobs. Abbey plan to move their entire European offshore operation to the Channel Islands. The Isle of Man Government have finally unveiled plans to cut income tax and attract high-net-worth individuals. We will cover these in detail in the next issue.
The Dutch Government plan to reduce corporate income tax down to 26.9% in an effort to establish an attractive tax regime for both Dutch and international companies.
Luxembourg is to introduce new rules for high-net-worth individuals in an attempt to attract wealthy investors to the Grand Duchy. Wealth tax is to be abolished, and there is to be a flat rate tax of just 10% on bank interest for residents. That is also to be cut for multi-national telephony companies to just 3%. Formerly it was 15%.
REST-OF-THE-WORLD UPDATE BY MARY NOLAN
The Paris-based Financial Action Task Force (FATF) have accused the Australian Government of failing to act effectively to stem money-laundering in the country which, the agency believe, involves up to US$3 billion a year. The FATF criticised Australia for only managing five convictions for money-laundering since 2003. Meanwhile, Australia’s Taxation Office have identified an additional 187 people suspected of hiding income in so-called offshore tax havens. This brings the total number of potential offshore tax avoidance and fraud cases identified by the ATO to 687. The ATO have been identifying the cases using credit-card companies and banks to identify Australian residents likely to be using offshore structures. Finally, Australia has agreed its first tax information-exchange pact with Bermuda. Australia has been putting huge pressure on offshore financial service centres such as Bermuda, the British Virgin Islands and the Cayman Islands to provide information on Australians with accounts in those jurisdictions.
The FATF have removed Nauru, the tiny Pacific island state, from their money-laundering blacklist. This was after the Nauruan Government closed all the offshore banks, de-registered any other offshore companies that had failed to comply with new requirements and implemented an offshore business registry that met IMF and FATF standards and requirements.
Belize is to introduce new money-laundering prevention and anti-terrorism legislation designed to:
- increase the scope of the money-laundering offence
- introduce the financing of terrorism as an offence
- allow the forfeiture of the proceeds of all serious crimes – including the proceeds from money-laundering.
However, the Belizean economy is currently facing a severe balance of payments crisis, and the economy is in recession. As a result, no funds are available to enforce the proposed legislation. The Belizean attitude to money-laundering and exchange of information with other tax authorities has always been, to quote one local accountant, “relaxed”.
Over 130 representatives of 55 governments, the Commonwealth Secretariat, and the European Commission met in November last year in Melbourne, Australia, to review progress towards a “level playing field based on high standards of transparency and effective exchange of information for tax purposes”. Prior to the meeting, many of the longer-established offshore financial centres had threatened rebellion. Many were unhappy at having been forced to introduce highly restrictive new legislation, reducing their competitiveness in the offshore financial-services arena while other OECD countries (such as the UK) were continuing to enjoy substantial advantages. As it transpired, the rebellion failed to materialise.
The South Asian Association for Regional Co-operation (SAARC) signed a limited-scope multi-lateral tax treaty in Dhaka on 13th November 2005. The treaty covers co-operation regarding direct taxation, exchange of information, mutual assistance in tax collection, service of tax-related documents, training of tax officials and co-ordination in devising tax policy in member countries. The countries involved are Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka.
Hong Kong has signed a tax treaty with Thailand, Hong Kong and China have also opened tax treaty talks, the Seychelles and Vietnam will sign a tax treaty in spring of this year and South Africa is to sign a tax treaty with the Netherlands.
Dubai has introduced legislation that will allow the creation of trusts in the Dubai International Financial Centre.
It is our intention to be as accurate in fact, detail, analysis and comment as possible. However, publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The Schmidt Offshore Report is sold on this understanding. The Schmidt Offshore Report is commissioned and published by Wentworth Publishing Ltd, 17 Fleet Street, London EC4Y 1AA. Email: wentworth@online.rednet.co.uk Tel: 020 7353 6606. © Wentworth Publishing Ltd 2006. All rights strictly reserved. This publication may not be lent, hired, reproduced (in any way whatsoever) or re-sold. This information is authorised for personal consumption only.
 |
|
