Article 53 of the Constitution requires everyone in Italy to be taxed according to his ability. Residence is the criterion for taxability. Residents are taxed on their world income. Non-residents are taxed on income arising in Italy. Residents are entitled to a credit for foreign tax; a recipient of dividends from foreign companies gets no credit for the underlying tax paid by the companies, but instead only 40% of the dividend is included in his income. An individual is resident in Italy if he is registered as residing for at least 184 days in a calendar year. A company is resident if it has its administration or main object in Italy for at least 184 days. Classes of income treated as having their source in Italy include income from land situated in Italy; investment income paid by the state, Italian institutions, residents and establishments; income from work done in Italy; income from "permanent organisations" within Italy; income from shares in Italian companies; income from partnerships operating within Italy; royalties from copyrights etc, exploited in Italy.

A law of December 1991 imposes heavier tax on dividends from tax haven companies. Expenses relating to transactions with such companies are not deductible. A Decree of 1992 specifies the territories and entities concerned. Exception is made for tax haven companies performing a real commercial activity and for companies belonging to the EC.

World financial markets experience dramatic moves with considerable consistency. Futures and options (derivatives) trading plays an essential role for the longer-term investor and commercial trader, both to protect against, as well as profit from, market volatility. Since tax consequences are likely, futures and options trading should be conducted with these in mind.

The expansion in the use of derivatives has not been matched in the development of tax laws affecting these financial instruments. Whilst haphazard, piecemeal legal developments have enabled tax advantages in some instances, often these have resulted in creating a deterrent to legitimate these have hedging activities - especially in the United States.

To appreciate futures and options trading in the context of tax planning international tax planners should have an understanding of the fundamentals of these financial products, but at the same time should not be intimidated by their apparent complexity. Exchange-traded financial futures, obligating the holder to deliver or take delivery of a financial commodity, and exchange-trade options, giving the holder the right to acquire or sell a commodity, are the most common risk management tools. Swaps, both interest rate and currency, have become popular in recent years and offer good tax deferral advantages.

The key to effective hedging is being matched economically as well as for tax. One of the most important tax issues is the categorisation of transactions between revenue and capital. The aim of trading is to insure that the ordinary expenses of futures and options trading can be offset against ordinary profits, and not be treated as capital expenses, and vice versa.

Most countries employ different transaction characterisation tests. Some distinguish between revenue and capital; most of the others that do not make the distinction treat derivative transactions as revenue items. Others distinguish between hedging and speculating, and between banks and non-financial traders. It is to be noted that a few countries, like Japan, tax non-residents on profits derived from local exchange transactions.

The United Kingdom has recently issued important Statements of Practice affecting futures and options trading and the use of local investment managers by non-residents. Whilst limiting the opportunities to exploit anomalies between trading and speculating, greater certainty is an advantage for planners. The Revenue concession regarding trading managers with specific reference to futures trading makes the UK a good base for the international trading activities of non-residents.

France and Germany have established major futures exchanges although comprehensive tax legislation is still lacking. This also applies to Italy, with one of the most recently established futures exchange. Each of these countries generally do not tax non-residents on local exchange transaction profits.

The United States is undergoing a period of great uncertainty regarding the taxation of traders who use derivatives for legitimate hedging activities. This is due to the IRS interpretation of Arkansas Best v Commissioners, a 1988 US Supreme Court case, which limits a trader's use of derivatives for hedging for income tax purposes to inventory items only, narrowly defined. Combined with the restrictions against the use of straddles for tax planning, US multinational investors are moving their financial risk management activities offshore. A proposed transaction tax may also prove a deterrent to derivative trading on US exchanges. Present-day tax planning using futures and options trading is directed towards the enhancement of trading profits by designing strategies with the impact of tax in mind. Successful hedging strategies using swaps also offer potential timing benefits.

The firm began in 1972. The speaker's brother, Keith, made an offshore trust ("K.I.") in 1973, which was invested in a new bank, Rossminster. The bank and the firm promoted tax schemes. The offices and homes of those involved were raided in 1979. It put them out of business. In 1983, the revenue announced no charges would be brought.

In 1984 assessments of over £18 million were made, and further ones later. From the Ramsay case, the new doctrine of "fiscal nullity" emerged. Would the House of Lords invent new doctrines to uphold these assessments?

The trustees of K.I. took bankruptcy advice. Could exploitation of speaker's earning power by trust investment amount to a transfer by speaker? Was K.I. simply a nominee for speaker? Counsel advised that the trust stoop up.

The speaker went bankrupt on the petition of a commercial creditor, but the Revenue claimed also and appointed the trustee in bankruptcy. The trustees of KI paid off the commercial creditor. Curiously, because the tax was not due and payable, the speaker's statement of affairs showed a credit!

Many people were summoned to be examined over a 2-year period. For the speaker himself this was a stressful and educational experience: the cross-examination was harsh. Notices were served on people in the Channel Islands and on Keith in Belgium. The English Court of Appeal held that notice could not be served in Belgium.

At this stage there appeared a claimant ("Mr X"), as a result of which - on one view at least - the bankruptcy ceased to be a tax bankruptcy; this opened the door to examination in the Isle of Man and the Channel Islands. The Manx court upheld examinations in the Isle of Man even if the bankruptcy was a tax bankruptcy on the grounds that s122 Bankruptcy Act (Orders in Aid) overrode principles of private international law; the Guernsey court reached a different decision at first instance but on appeal came in substance to the same decision as the Manx appeal court. Mr X was paid off and the Jersey court held it a pure tax bankruptcy. A new claim was made by Mr Y.

After the Guernsey Court of Appeal decision most individuals in Guernsey, needing to come to U.K. complied. The Manx Appeal Court ratio decide should in principle have applied to subsequent proceeding, as well as to examinations in the Isle of Man. The Guernsey Appeal Court's decision has a less clear ratio but there had to be a considerable danger that it applied to enforcement as well.

Freezing orders were obtained by the trustee in Switzerland, the Isle of Man and Liechtenstein. These illustrate the dangers of making orders on ex parte applications by affidavit.

In March 1988, there was an inter partes hearing in Geneva. The speaker was named as defendant, but the trustee at first requested the speaker not to take any active part in it. This court maintained the freezing order; on appeal the Court of Appeal lifted the freezing order and the funds were moved before any appeal to the Supreme Court was entered, but the issue of tax bankruptcy was not mentioned.

In March 1989 the speaker reached a settlement with the Inland Revenue. Many hearings were avoided thereby.

Most investment into the United States by a foreign individual is via an offshore company with a US subsidiary. This is familiar but not altogether satisfactory: capital gains on sale are free of tax and offshore shares are not liable to estate tax but the subsidiary cannot be funded by related debt.

Unlike distributions by a corporation, distributions to partners are not in themselves taxable. In an offshore mutual fund taking the form of a limited partnership in Bermuda, Cayman, the Netherlands Antilles or St Kitts, the allocation of income may be arranged so that treaty protected income is allocated to investors in treaty countries (even though it may be in fact distributed differently); interest on a loan (not made by a partner with a 10% or more interest in the partnership) may be deductible (without any debt/equity ratio) but not have a US source.

US dividends may be allocated to US investors. Capital gain on sale may be free of tax by having the investor in the operation fund an investment fund.

A trust also offers a single layer of tax and the opportunity to allocate income. With a grantor trust, income is automatically attributed to grantor. Similar treatment is accorded to interest but here there is no 10% or other limitation on the beneficiary's interest in the trust.

The estate tax position is not entirely clear. It appears that where the offshore trust is itself the limited partner, US estate tax may not be chargeable on the deaths of a beneficiary, on the footing that the interest in the partnership does not have a US situs.

The client has in principle a right to expect his professional adviser to keep his affairs confidential. This right has been eroded, notably in the field of tax. The U.K. Revenue have wide powers under ICTA 1988 s745 and TMA 1970 s20. This latter section authorises notices (either naming or not naming the taxpayer) and entry pursuant to a warrant: they relate to "documents" and not to information as such. Privilege applies to a document brought into existence for the purposes of litigation.

Section 20 confers various powers on the Revenue. These do not extend to documents brought into existence for the purpose of audit or tax advice. Since 1990 these powers now do extend to documents relevant to tax liability of other EU states.

In Germany, the Commercial Code confers privilege on lawyers, auditors and others. In Belgium, professional privilege appears less extensive and in the United States the doctrine of professional privilege applies to some extent to lawyers but not to accountants.

In the 1980's corporations searched to improve their performance through value-driven management with a bias for action and hands-on-style. This was supplemented by enhanced productivity through people in an atmosphere which encouraged autonomy and entrepreneurship, simple organisational structure and lean staff teams. Groups began to adopt a policy of "sticking to the knitting" and as a result many multinationals commenced a period of restructuring. This was because many corporations did not offer adequate returns to their shareholders through dividends and share price appreciation. In other words outside market forces demanded management to increase shareholder value or risk a takeover.

Restructuring included divestment of under-performing subsidiaries, management buy-outs, spin-offs to shareholders, repurchase of shares, debt refinancing, and using cash from overfunded pension schemes. The next stage was to incorporate a shareholder-value concept into the corporate vision as the new standard for measuring corporate business performance. This approach estimates the economic value of an investment by discounting forecast cash flows by the cost of capital.

The key mechanisms involved in measuring shareholder value over a forecast duration period include the sales growth rate, operating profit margin, corporate income tax rate, working and fixed capital investment, and cost of capital. Focus is given to improving the present value of cash flows from operations in the forecast period in order to enhance the creation of shareholder value.

Much has been written about this topic in the areas of increasing market share and sales, improving profit margins and reducing the cost of fixed and working capital while maximising cash flows. On the other hand, little attention has historically been given to managing downwards the corporate tax burdens of a multi-national corporation (MNC) - a key driver in calculating shareholder value.

In the experience of the speaker, major tax-saving opportunities are often ignored by management, which fails to place emphasis on managing down international tax burdens with the same vigour as that applied to reducing other recurring costs. An escalating cash tax charge can have a very negative impact on shareholder value, particularly when such increases are multiplied by the P/E (price/earnings) multiple relevant to the MNC.

A practical approach to minimising such global tax burdens is to expect the tax department to contribute to bottom line profits by exploiting opportunities available within the corporate strategy; prepare a summary analysis of the MNC overall effective tax rate; compare effective tax rates to local standard corporate tax rates; compare home county effective tax rate to major foreign operations tax rates and decide where current tax rate is too high; make a "bench marking" industry comparison tax table identify areas of tax leakage such as unutilised tax losses and tax credits, CFC legislation, double taxation etc; review legal structure of the MNC and details of MNC financing; identify trends contributing to MNC tax charge; prepare initial diagnosis of reasons for high MNC effective tax rate; consider what should be target level of taxation burden on the MNC; value each percentage point of present taxation cost and impact having regard to P/E multiple; propose target for eduction of tax burden (number of percentage points and time period).

Key strategies may include generating profits in low tax jurisdictions or in tax loss companies; extract profits from high tax jurisdictions; place expenses and debt in high tax jurisdictions; defer tax payment dates; exploit fiscal and other incentives; maximise benefits of double taxation agreements; optimise use of foreign tax credits and underlying tax rates; maximise value of cash in local currencies and exploit effective hedging and repatriation strategies; avoid anti-avoidance legislation and CFC traps; insulate risks.

The rewards of such an international tax strategy can dramatically improve shareholder value. In one example a push-down of debt by a MNC from the US to Germany generated annual tax savings of some $17 million. The group's P/E ratio was 20 and thus shareholder value increased by some $340 million!

GATT is the basis of international business. Its standards have been adopted by the EC. More important than the rate of import duty is the valuation of the import: "dumping" is an import at a price substantially lower than the normal value. A manufacturer threatened with dumping should complain; an importer should be alert to dumping investigation and discuss his pricing with the EC investigators so as to head off any anti-dumping measures being applied to his imports.

Importing into the EC via eg Germany costs 15% VAT only. Where registration is required, it is important not to overlook it. Where a low valuation can be substantiated, there is an immediate VAT saving on import; an import via an offshore intermediary may retain the value of the price charged by the supplier. On an import by a branch, the value requires to be ascertained by the onward sale price - after deductions of the relevant costs. A production costs basis may be accepted more readily in the future.

There can be dispute about the classification into which a particular import falls. Some goods are prohibited or restricted; others can be hard to classify - a tracksuit, for example.

Origin is important - for anti-dumping and for preference. Goods have an origin in the country in which they acquire their form.

The UK and other countries have a duty deferment scheme. Duty-free warehousing is available; it may even be based on the importer's stock records; no duty is payable on goods re-exported.

In the UK, customs have extensive powers to raid, arrest, search and seize. Claims for underpaid duty and penalties can be negotiated and settled.

The prospect of massive tax increases in the United States and elsewhere also is generating interest in becoming a tax exile. Even today, US tax at 31% is as high as it was when the rate was 70% and more shelters and exceptions were available. The Clinton administration will require taxpayers earning over $250,000 to pay 20% or 30% more income tax; the government deficit will require the introduction of a VAT or other new taxes.

Residence, domicile, citizenship, marital status, source of income, location of assets, questions of timing and locations of beneficiaries - these are the main factors affecting taxability; the tax may be reduced by changing some or all of these. It should be noted that a wife has in many US States the domicile of her husband for estate tax purposes.

Suitable places for tax exile include Britain and Ireland (taking advantage of the "remittance basis" for the non-domicile) the Channel Islands and the Isle of Man. Foreigners living in Greece, Italy, Portugal, Spain and even France without conceding that they are resident have in the past paid no tax, but this may change. Switzerland is a possibility for retired individuals over 60; Campione in practice does not collect Italian tax (and such taxes would in any event be charged at a fictitiously low rate of exchange).

Gibraltar has an HNWI programme but limits residence to 7 months in the year. Malta and Cyprus have the remittance basis and special regimes for new residents: Cape Verde levies no tax on foreign income (and offers passports to investors); Israel levies no tax on foreign income (it offers new residents a 30-year exemption from exchange control and, if Jewish, a passport); the US will only tax an alien who acquires a green card or becomes resident under its rules.