THE SCHMIDT OFFSHORE REPORT
(Vol 2, no 4)
Contents
NEWS
- EU Puts Squeeze on Money-transfer Companies
- Become a St Kitts Resident for US$350,000
- HMRC Still Considering Tax Amnesty
- New Manx Vehicle a Huge Success
- Bulgaria Slashes Corporate Rate
- Small Has Its Problems
- Invest in Australia Tax-free
- SWIFT Broke EU Privacy Laws
- The Dutch Antilles to be Broken Up
- Biggest Tax Dispute in History Settled
- Andorra Launches Corporation Tax
- Bahrain Launches New Trust Law
- EU Savings Directive Fails to Catch Irish Tax Dodgers
- Swiss Secrecy Laws Help Carousel Fraudsters
- Guide to Swiss Finance
- UAE to Offer Bearer Shares
- Australia Targets Pacific Tax Havens
- Things Looking Up in Belize
- Sark Says Goodbye to Feudalism
- Tax Revenues Rise in OECD
EDITORIAL
- The Austro-Hungarian War on Tax
- Thank Heavens for US Double Standards
- UK Resident? Don’t Forget...
- Spain – An Unexpected Tax Haven
- UK Residency Rules
NEWS
EU Puts Squeeze on Money-transfer Companies
The European Union has laid down new rules on: “The traceability of information regarding the payer that accompanies fund transfers and payments, for the purposes of prevention, investigation, and detection of money laundering and terrorist financing.” In other words, if you use Western Union or a similar company to transfer money, you will now be forced to provide verifiable proof of identity. This new regulation came into force on 1st January.
Become a St Kitts Resident for US$350,000
St Kitts and Nevis has revised its citizenship investment programme to reflect the focus on the promotion of investment rather than citizenship. Prime Minister Denzel Douglas announced a series of measures aimed at strengthening the already tight regulatory mechanisms currently in place in respect of its ‘citizenship by investment’ programme. The minimum investment in real estate that would make a person eligible to apply for citizenship has been increased to US$350,000 for the current minimum of US$250,000. The current option, whereby the purchase of Government bonds makes the person eligible to apply for citizenship, has been terminated.
HMRC Still Considering Tax Amnesty
HM Revenue & Customs (HMRC) is still considering a partial amnesty for UK tax evaders who have money hidden in undisclosed offshore accounts. According to a leaked report, penalties would be capped at one-tenth of their current maximum in an attempt to encourage individuals to disclose their offshore holdings. HMRC believes that UK residents are holding more than £180 billion in various offshore financial centres and it hopes to collect an extra £1.5 billion in unpaid tax by forcing UK banks to hand over records of their customers with offshore accounts. However, the amnesty is not as generous as it sounds. To begin with, the Government is expected to reserve the right to prosecute in the more serious cases, and there are unlikely to be any concessions on interest costs. Since HMRC has powers to recover unpaid tax going back 20 years, those taking advantage of the proposed amnesty could still find themselves footing a substantial bill. On the other hand, as HMRC will shortly have details of millions of UK residents with overseas accounts anyway, it is likely that a large percentage of tax evaders will choose to take advantage of the amnesty.
New Manx Vehicle a Huge Success
The Isle of Man Companies Act 2006, which came into force at the end of last year, introduced a new, simplified corporate vehicle into Manx law – which is known as the New Manx Vehicle (NMV). The NMV is modelled on the International Business Company (IBC) and has been designed to compete with offshore corporate vehicles sold in such places as the British Virgin Islands and Belize. Its launch was timed to coincide with the new zero-rate company-tax strategy introduced by the Isle of Man last year.
Bulgaria Slashes Corporate Rate
The Bulgarian Government has decided to reduce the corporate-tax rate on profits made by both Bulgarian and foreign companies operating from Bulgaria to 10%. This makes it one of the lowest rates of corporate income tax within the EU.
The Commonwealth Secretariat recently published a study entitled Developmental Implications of Anti-Money Laundering and Taxation Regulations, which considers how the costs of meeting “new multi-lateral regulatory standards have exceeded the short-to-medium term benefits for both the public and private sectors in smaller jurisdictions”. The study focused, in particular, on Barbados, Mauritius and Vanuatu. It discovered that the smaller offshore centres had lost considerable volumes of business despite the fact that they had improved their reputations by complying with standards drawn up by the Organisation for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF). However, a separate independent study found that now the heat is off many smaller jurisdictions are easing back on their regulatory obligations under FATF. “If you want an offshore vehicle that no one will pay any attention to it is better to go to somewhere small that has been cleared by the FATF – like Vanuatu – where they’ll appreciate your business or somewhere not considered offshore – like the USA,” commented one anonymous contributor.
The Australian Senate has recently passed a Bill that exempts foreigners from paying capital gains tax on Australian assets, excluding items such as real estate and mining rights.
The European Union’s Article 29 Data Protection Working Party has ruled that SWIFT, the international-banking network, broke EU and Belgian law in secretly allowing the US Treasury Department access to its records after 9/11. SWIFT, which facilitates global financial transfers, is a cooperative owned by over 7,000 banks in more than 200 countries. Under EU law companies are forbidden from passing confidential personal data to another country unless that country offers sufficient protections. Interestingly, the EU does not consider that the US qualifies. The US Government requested SWIFT’s cooperation soon after the 9/11 terrorists attacks in order to attempt to track down terrorist funding.
The Dutch Antilles to be Broken Up
The Dutch Council of State has announced that the Netherlands Antilles will be dismantled as early as summer 2007. However, it did state that completing the process could take a number of years. Three of the smaller islands – Bonaire, Saba and St Eustatius have decided to continue as Dutch colonies. Curaçao and St Martin have decided to become completely independent jurisdictions. The Netherlands Antilles have, for many years, been utilised in international tax planning (owing to their favourable tax climate), and it is considered likely that the two new jurisdictions will seek to position themselves as offshore financial centres.
Biggest Tax Dispute in History Settled
Last year, the US Internal Revenue Service (IRS) reopened 16 years of accounts for the pharmaceutical company GlaxoSmithKline (GSK), claiming that the company owed US$11.5 billion. At the heart of the disagreement was an argument between the IRS and the UK Revenue over the price at which a subsidiary, Zantac, was transferred to the group’s US holding company. GSK has now agreed to pay US$3.1 billion in tax and interest to settle this transfer-pricing dispute.
Andorra Launches Corporation Tax
For the first time ever, the Government of Andorra has announced that it will be introducing corporate tax as part of plans to diversify the economy. The principality intends to charge corporate tax at a rate of 12%. In the past Andorran companies and individuals have not been subject to tax other than modest annual registration fees, municipal rates and property taxes.
Bahrain Launches New Trust Law
Bahrain has followed Dubai by introducing a new trust law to govern trustees and trust administration in the country. The new legislation allows trusts to be created for a maximum duration of 100 years and provides for high levels of confidentiality for the execution and administration of any trust fund. Trusts are a relatively new innovation in the Middle East, but the potential for growth is enormous as the region boosts the world’s largest concentration of high-net-worth individuals.
EU Savings Directive Fails to Catch Irish Tax Dodgers
When the European Union’s Savings Tax Directive came into force, the Irish Revenue Commissioners expected to receive millions of euros from other EU countries where Irish residents were holding their savings. Instead the Revenue Commissioners have announced that they have received just €400,000 in taxes from Irish investors with money held in selected offshore centres. This figure is much lower than expected, suggesting that substantial funds moved to locations not covered by the Directive. The Directive forced overseas banks and investment companies to report to the Revenue details of interest and other investment gains paid to Irish investors, or levy special withholding taxes up to 35%. Some countries covered by the EU Savings Directive decided to exchange information with the Irish Revenue Commissioners. Others chose to apply withholding tax instead. These included Austria, Belgium, Luxembourg, Jersey, Guernsey, the Isle of Man and the British Virgin Islands. It is to be noted that the Cayman Islands decided to exchange information with EU revenue authorities. It is widely believed that the EU will now attempt to redraft the Directive in order to ensure that it catches more offshore investors.
Swiss Secrecy Laws Help Carousel Fraudsters
Swiss law prohibits their own tax authorities from releasing information to other countries concerning tax evasion, which is not a crime in Switzerland. As a result the country has become home to criminal gangs involved in so-called carousel fraud. Basically, criminals import goods from one EU country to another free of duty, sell them to a partner company in the second country without handing over VAT to the authorities and then export them back out, claiming a tax refund. Switzerland secrecy laws on tax and geographical proximity to the EU make it a prime location for funnelling both mobile telephones and computer chips this way. A new Swiss–EU treaty designed to tackle such fraud by exchanging information is under negotiation, but Switzerland is reluctant to ratify it.
The Federal Department of Finance (FDF) has produced a very useful new booklet entitled Swiss Financial Centre and Financial Market Policy. This new publication shows the relevance of Switzerland as a financial centre and its competitive position internationally. You can obtain it from any Swiss embassy or by looking at the website of the Federal Department of Finance: www.efd.admin.ch/finanzplatz.
The Ras al Khaimah Free Trade Zone is the first emirate in the United Arab Emirates (UAE) to offer a limited bearer shares facility. It will now be possible as a foreign investor to register an offshore company in the Free Zone and benefit from its tax-free status without the need to establish a physical presence in the emirate. The RAK Free Zone was established in 2000 with 15 registered companies, which has since grown to more than 2,100 companies.
Australia Targets Pacific Tax Havens
The Australian Taxation Office (ATO) is launching a campaign to crack down on corporate-tax avoidance using Pacific offshore financial centres. Tax information exchange agreements are in the process of being ratified with nine different countries in the region. The ATO Commissioner, Michael D’Ascenzo has been quoted as saying that the majority of tax avoidance by Australian companies occurs through transfer pricing.
The International Monetary Fund (IMF) recently sent a team to Belize in order to report on the country’s economy. The country has been suffering as a result of onerous levels of public borrowing and an unsustainable level of external current-account deficit. However, the IMF found that the Government had taken commendable steps in the last year and a half to begin correcting these imbalances, including substantial fiscal adjustment and monetary tightening. So, while important vulnerabilities still remain and need to be addressed quickly to avert the risk of an external payments crisis, the IMF believes that the economic future of the country now looks better.
Sark Says Goodbye to Feudalism
The minute Channel Island of Sark, the last feudal state in Europe, will shortly be holding elections for its parliament, the Chief Pleas. The 600 inhabitants have put an end to 500 years of tradition by removing all the powers previously held by the local landowners. The island was well known for something called the Sark Lark. This allowed every inhabitant on the island to be a front for anonymous trusts. However, Sark reformed its fiduciary laws about ten years ago and there is now no offshore activity on the island.
Tax revenues, measured as the ratio of tax to gross domestic product (GDP), are rising in many OECD countries despite deep cuts in tax rates, according to a new OECD report. This is as a result of:
- stronger economic growth
- higher corporate profits
- moves in some countries to offset the effects of cuts in tax rates by broadening the tax base
- improved tax compliance.
The tax burden in the UK rose 1.2 points to 37.2% in the last year alone.
EDITORIAL
The Austro-Hungarian War on Tax
Interestingly, both Austria and Hungary have recently taken steps designed to offer more favourable tax treatment to various niche taxpayer groups.
First and foremost, a tax treaty has been agreed between Austria and the United Arab Emirates (UAE). The main purpose of the agreement is to ensure that all dividends, interest and other passive income paid from Austria to an individual or company resident in the UAE are exempt from tax in both countries. The significance of this cannot be overstated. An individual or company resident outside the EU – but having investments or business interests within the EU – can now benefit from the lowest possible overall tax cost. This is because the beneficial owner – providing they are located in the UAE – will be able to (a) move profits made in any EU country to Austria with minimal tax liability and (b) then move those profits to the UAE, where they will suffer little or no tax. Interestingly, there are no statutory restrictions in Austria on ‘treaty shopping’ – however, the Austrian courts have denied treaty benefits in abusive cases. Therefore, considerable care needs to be taken before using this new Austrian tax treaty to ensure that it doesn’t fall foul of either EU or Austrian tax legislation. Incidentally, it is to be noted that Austria has no fewer than 60 income-tax treaties in force, meaning it may be possible to channel all sorts of profits and investments through Austria in order to reduce the ultimate tax bill. Note that tax treaties are in place not only with high-tax jurisdictions but also with such offshore financial centres as Cyprus, Luxembourg, Malta and Switzerland. It is also the only country to have a treaty with Lichtenstein. Other useful countries with which it has treaties include Kuwait (no tax), Malaysia (zero tax on foreign-source income), Singapore (ditto) and Belize (a country frequently attacked by the OECD for its allegedly harmful tax practices).
Austria may have a great deal to offer those interested in international tax planning, but one should not minimise the recent efforts made by Hungary to offer specialist support to a specific market sector: those involved in the royalty-planning industry. As you may be aware, Holland was traditionally the most favourable jurisdiction for those with an interest in reducing tax on the international flows of interest and royalties. However, as of 1st April 2001, the Dutch regime has no longer been available. Since then, tax practitioners have been looking for alternatives. Hungary has filled this gap in the following ways:
- Hungarian corporation tax is amongst the lowest in Europe at 16% of net profits.
- Of the pre-tax amount of the royalties received, 50% may be deducted from the tax base, thus reducing the effective corporate-tax rate on such royalties to 8%.
- There are no withholding taxes on royalties being paid.
- Royalties (as well as dividend and interest) income is exempt from all local business taxes.
- Royalties paid out by Hungarian licensees or sub-licensors are tax-deductible.
- Hungary has a comprehensive network of double-taxation treaties with over 65 countries.
Effectively, by channelling royalties through Hungary, it may be possible to reduce the tax burden to 8%. For those involved in any sort of licensing endeavour from patents through to film rights, this could be an invaluable EU-located tax loophole.
Thank Heavens for US Double Standards
The fact that the US enthusiastically supports (and might even be said to be driving) the OECD campaign to ensure a level playing field with regard to taxation is somewhat ironic given that America itself is actually operating the biggest of the international tax havens.
Since 1998, the OECD has been demanding formal commitment from so-called tax havens to actively participate with its programme for global transparency, including the collection and exchange, on request, of financial data. You may remember that OECD demands were backed up by threats to shut uncooperative international financial centres out of the world’s banking and securities market. However, when the OECD launched its programme against the tax havens – none of which were OECD members – it did nothing to ensure that its own member countries followed the same rules. Under pressure, the smaller offshore centres agreed to support the OECD project for tax-information exchange on the condition of there being a level playing field – in other words, an assurance that OECD countries and others left out of the project would adopt similar standards.
What happened next was that the EU, which was also looking for information exchange with tax havens, allowed a number of select countries to avoid this in exchange for imposing a withholding tax on deposits held by EU residents. This struck the smaller offshore centres as deeply unfair and they complained. The more so as key OECD states were making no move to change their own harmful tax practices. To add insult to injury, Seiichi Kondo, Deputy Secretary General of the OECD, published a widely circulated press article in May 2002 entitled Little Cheats will have to Repent. Mr Kondo highlighted the lack of transparency for ownership of companies established in “uncooperative tax havens” claiming that it threatened the “integrity of the international financial system”.
In particular, the US, while propelling the OECD campaign forward, has done absolutely nothing to stamp out its own practices on corporate ownership data. Some eight years after the launch of the OECD initiative, anonymously owned companies are still on offer in several US states and single-member LLCs (limited-liability companies) are widely used instead of the anonymous companies previously promoted by such jurisdictions as the British Virgin Islands, the Isle of Man, Belize and other offshore financial centres. As the marketing material of a Delaware-based company formation agent points out:
“Single-member Delaware LLCs can also provide tax avoidance benefits to international investors who are neither citizens nor residents of the US because they combine anonymity with the tax free status of non-US source income. Since the single member Delaware LLC is classified by the IRS as a disregarded entity, it is not required to file a US federal tax return. At the individual tax level, non-resident aliens of the US do not pay federal income tax on non-US source income.”
As the US treasury itself remarked:
“A Delaware registered company may be owned by a national of any jurisdiction, regardless of his or her place of residence. The company can be operated and managed worldwide, and is not required to report any assets. Delaware is not, however, the most permissive jurisdiction in the United States with regard to company formation. Both Nevada and Wyoming permit companies to have bearer shares and nominee shareholders, which Delaware does not.”
The fact is, if you are looking for a totally confidential, anonymous, secure, flexible and inexpensive offshore corporate structure – and you are not an American citizen – you could do no better than to go to Delaware, Nevada or Wyoming to establish your business. Long may it last.
According to Government statistics, over a quarter of a million households in the UK own a second home overseas. Once, such ownership might have been considered confidential. No longer. Thanks to the exchange of information between different countries not only within the EU but also elsewhere, if ownership is anyway traceable back to the beneficial owners it is certain that the UK Revenue will – sooner or later – learn about it. Therefore, if you have purchased an overseas property, you should be ready to:
- produce bank records going back several years to satisfy the Tax Inspector that no rents have been received from letting the property
- be able to show your Tax Inspector copies of all mortgage documents to check the level of income declared to get any loan, as well as the completion documents and all other legal paperwork
- produce convincing evidence of where the money came from to purchase the property in the first place.
Two further points.
First of all, HMRC closed down the tiny Offshore Fraud Project Group (OFPG) – the Revenue’s elite investigation unit – and replaced it with a chain of eight new specialist offices in various locations around the UK. Although they are not yet up to full speed (and there is anecdotal evidence that they are having training and personnel issues), there are now more people engaged in hunting down offshore tax evaders than ever before.
Secondly, if you hold an account with the offshore branch or subsidiary of a UK-based bank, you should assume that the taxman will shortly be receiving full details, including the date the account was opened, the initial deposit and its sources and statements for six specified months. If you have any worries in this regard, I would strongly advise you to take professional advice sooner rather than later.
Spain – An Unexpected Tax Haven
Mainland Spain is not known for its low levels of personal or corporate taxation. However, there exists within the Spanish territory an unusual tax haven. It is called the Zona Especial Canaria (ZEC) or – in English – the Canary Islands ZEC. The Canary Islands, to many people’s surprise, is actually one of the best low-tax jurisdictions in the world. This is because:
- the islands are part of Spain and therefore of the EU, as such they benefit from a wide range of double-tax treaties and complete freedom of movement of capital and labour
- companies established within the ZEC pay a maximum of 4% corporation tax
- such companies can engage in almost any activity, with a few exceptions (such as banking)
- if established in certain areas within the island, the company can also avoid sales tax.
The paid-up capital for a ZEC company need only be about €15,000. However, the new company must make an investment in the territory of the Canary Islands with at least €100,000 in fixed assets within two years of being founded and – in most cases – must create between three and five jobs within six months of being formed. I should mention that in addition to being able to offer mild year-round temperatures, sandy beaches, delicious food and a friendly, educated, population, the Canary Islands is now well served in terms of transport and other communications.
If you are looking for a very low tax base from which to launch a new business whether you are in manufacturing, import/export or one of the service sectors, you should definitely put the Canary Islands on your list of possible options. If you would like to know more, I would suggest that you contact the Spanish embassy. Incidentally, it is perfectly acceptable for a ZEC company to pass all dividends to another low-tax jurisdiction without being taxed.
As you may be aware, following a ruling last November by the Special Commissioners, who adjudicate on high-level tax disputes, a British-born businessman based in the Seychelles lost a key legal battle over his domicile and residence. The court ruled that Robert Gaines-Cooper owed thousands of pounds in back taxes as his ties with the UK were too strong to claim his domicile elsewhere. Under the ruling, the Special Commissioners argued Gaines-Cooper has closer ties to the UK partly because his wife resided here and partly because of the time he spent each year in the country.
The case is a complicated one because Mr Gaines-Cooper was clearly domiciled and resident outside the UK for many years during the period in question.
What the case highlights is that it is much easier to change your residency than it is your domicile. Residency is really about where you are actually living; so it is just a matter of spending time in a particular country for you to your residency status elsewhere. If you wish to lose your UK residency, what you need to do is:
- live outside the UK for three years
- don’t return for more than 90 days on average per year over any four-year period
- never spend more than 183 days in the UK during any one tax year.
You might also be well advised to dispose of all your UK property because – although it is not supposed to make any difference – the reality is that it may now be taken into consideration when deciding your residency status. It must also be remembered that, although the day of arrival and/or leaving the UK is not supposed to be counted as part of the 90 days, there is reason to believe that what is basically a HMRC concession may be withdrawn or altered – possibly retrospectively – at any moment. One leading commentator made the following points:
“It is not right to say that IR20 (the Inland Revenue leaflet which covers residency) expressly confirms that arrival and departure days are always ignored or that the Commissioners have effectively abolished this test. What IR20 says is that such days are normally ignored in the context of the 90-day test. It has always been known that an alternative test could be applied in cases of perceived abuse. Gaines-Cooper does not abolish the IR20 practice and HMRC should not be expected to revisit IR20 as a result of the decision. The 90-day test is only relevant to someone who has gone abroad for a settled purpose and established non-residence in the first place. It seems that the Commissioners were not satisfied that Mr Gaines-Cooper had done that, and the nights test they applied was just one factor in reaching that conclusion. Case law does suggest that Commissioners are entitled to consider a variety of facts. HMRC could have been expected to stand by IR20 assuming no abuse there would have been no reason for the Commissioners to have done otherwise if it had simply been necessary to show that a non-resident taxpayer was here for some temporary purpose. What the case demonstrates is a tendency for HMRC to come at residence from the stand point that unless there is a clearly established purpose for absence, United Kingdom residence is not easily shed by someone whose home remains here. This attitude has been around for a while.”
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.
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