Owen, Christopher: Offshore Survey Supplement - January 2013

15 October 2012, the BVI Business Companies (Amendment) Act 2012 was brought into force together with the associated BVI Business Companies Regulations 2012. They represent the first significant update to the BVI’s corporate law regime since 2006.

Areas affected by the revised Act and Regulations include: listed companies; voluntary liquidations and voluntary liquidators; involuntary dissolution and striking off of a company; the mechanics of security registration; the passing of directors written resolutions; the re-use of company names and formalising the previous system for allowing BVI companies to be registered with foreign character names.

18 December 2012, the Cayman Islands parliament passed a vote of no confidence in Premier McKeeva Bush, who is facing corruption allegations. The motion, which in effect removed him as head of government in the British overseas territory, was passed by 11 votes to three, with members of Bush’s own United Democratic Party (UDP) voting against him.

Bush was arrested as part of a corruption investigation on 11 December. The charges against him included misuse of a government credit card and importing explosive materials without a permit. He was released the next day after questioning.

The Royal Cayman Islands Police Force said: “The Premier of the Cayman Islands, McKeeva Bush (57), has been arrested and is currently detained in police custody in connection with a number of ongoing police investigations.”

Bush, who has been in power since the UDP won general elections in 2009, claimed he was targeted by senior island officials as part of a “very vindictive political witch hunt”. The longest serving member of the Legislative Assembly having first been elected in 1984, Bush was finance minister as well as head of government.

The next step lies with the British-appointed governor, Duncan Taylor, who may decide to call early elections. The other option is to see whether the governing party can try to form a new government.

16 November 2012, the Ministry of Finance, State Administration of Taxation and China Securities Regulatory Commission issued Circular No. 85, which introduced a new dividend tax structure.

Intended to foster long-term stability in Chinese stock markets by reducing tax burdens on long-term investors and discouraging short-term speculation, the rate of withholding tax on dividends derived from companies listed on stock exchanges in China was replaced by a new differentiated regime based on holding period from 1 January 2013.

Previously the withholding tax rate levied under the individual income tax code on dividends and share bonuses received by Chinese investors from listed companies was 20%. However this was reduced to 10% in June 2005 to assist the strengthening of the China’s stock markets.

Under the new regime, investors who hold their shares for more than one year will be charged a tax rate of 5%; those holding shares for from one month to one year will be taxed at the present rate of 10%; and those holding shares for one month or less will pay the full tax rate of 20%.

6 December 2012, European Commissioner for Taxation Algirdas Šemeta announced an Action Plan designed to provide the European Union with a “strong and cohesive” stance against tax evasion. It sets out a comprehensive set of measures designed to help member states protect their tax bases and recapture the revenue legitimately due.

Šemeta said that an estimated €1 trillion was lost to tax evasion and avoidance every year in the EU and that unilateral solutions would not work alone because “within a globalised economy, national mismatches and loopholes become the playthings of those that seek to escape taxation.”

The Commission has accordingly adopted two Recommendations to encourage member states to take immediate and coordinated action on specific pressing problems. The first foresees a strong EU stance against tax havens, and envisages the Commission going beyond the current international measures. The Recommendation aims at helping member states identify tax havens and at placing them on national blacklists. It also sets out measures to persuade non-EU countries to apply EU governance standards.

The second Recommendation focuses on aggressive tax planning and lays out suggestions for addressing legal technicalities and loopholes. In particular, member states are urged to reinforce their double tax treaties and to adopt a common general anti-abuse rule (GAAR) that would enable revenue authorities to ignore any artificial arrangement carried out for tax avoidance purposes and instead tax on the basis of actual economic substance.

Also included in the Action Plan were proposals for a Taxpayers’ Code, an EU Tax Identification Number, a review of the anti-abuse provisions in key EU Directives, as well as common guidelines to trace money flows. The Commission will set up new monitoring tools and scoreboards to ensure that the Action Plan is progressed.

4 December 2012, the EU Economic and Financial Affairs Council (ECOFIN) formally ratified Guernsey’s zero-10 corporate tax regime as compliant with the principles of the EU Code of Conduct on Business Taxation.

In June the Guernsey parliament agreed to repeal the deemed distribution provisions ¬– which taxed Guernsey-resident individual shareholders of Guernsey companies personally on income arising at the level of the company by deeming distributions to have been made to the individual – from the tax regime as from 1 January 2013. This effectively removed the “harmful effects” identified by ECOFIN.

In December 2011, ECOFIN similarly approved the zero-10 tax regimes of Jersey and the Isle of Man, ending a process that began in 2009 when it first announced a review of the zero-10 regimes of the three islands. According to recent press reports, ECOFIN has raised concerns about Gibraltar’s tax regime in response to an objection filed with the Commission’s Competition Directorate in June by Spain.

29 December 2012, the Constitutional Court ruled that President Francois Hollande’s proposed 75% tax rate was unconstitutional because it failed to guarantee taxpayer equality.

Hollande’s proposal would have added extra levies of 18% on individuals’ incomes of more than €1 million, while regular income taxes and a 4% exceptional contribution for high earners would have been based on household income. As a result, two households with the same total revenue could end up paying different rates.

The tax, which Hollande said would be in place for two years, is part of the 2013 budget and would have gone into effect starting on 1 January. Prime Minister Jean-Marc Ayrault said the government “took note” of the decision and would present a new proposal in line with the principles laid down by the Constitutional Court. It would apply to earnings for 2013 and 2014.

In August, the Court approved a series of measures targeting wealthy individuals, banks and oil companies, including a proposal to impose an exceptional contribution on wealth (ISF) in 2012, arguing that the levy was only applicable for 2012 and was intended to compensate for the reduced ISF rates introduced by the previous government.

The ISF was proposed by the government as an interim measure, prior to its planned structural reform of the solidarity tax on wealth in 2013. It overturned a 2011 reform implemented by former president Nicolas Sarkozy’s government.

Adopted within the framework of the country’s 2011 supplementary finance bill, the 2011 reform simplified the ISF tax, providing for just two tax brackets: a 0.25% tax rate imposed on individuals with net taxable wealth in excess of €1.3m (US$1.6m) and a 0.5% tax rate levied on individuals with net taxable assets above €3m. Previously, the entry threshold at which wealth tax was applied was €800,000, with the rates varying between 0.55% and 1.8%.

The court said that if the government had planned to both increase the tax rates and impose an exceptional contribution this year, then the contribution would have been deemed “confiscatory” and therefore unconstitutional. It warned the government that any plans to reinstate the previous tax scale next year must include provision for a cap.

As a result of the exceptional contribution and lack of any mechanism to cap tax payments, a number of taxpayers subject to ISF were expected to pay record sums. ISF revenues were expected to rise to around €5.7bn, compared with €4.5bn in previous years.

23 November 2012, Germany’s upper house of parliament rejected a deal with Switzerland to tax assets deposited by German citizens in Swiss bank accounts. The Bundesrat, where Chancellor Angela Merkel’s centre-right government no longer has a majority, rejected the proposed treaty on the grounds that it treated tax evaders too leniently.

The treaty, which would have retroactively taxed the unclaimed money held by German citizens in Swiss bank accounts, was expected to bring in about €10 billion ($12.9 billion) in tax revenues. Under the agreement, money deposited in Switzerland over the last 10 years would be taxed at a rate of between 21 and 41%, and the account holders would remain anonymous. As from 2013, they would also then be taxed at normal German rates.

The Bundesrat is now negotiating changes to the treaty with the Bundestag, Germany’s lower house of parliament, which had already approved the treaty. Any changes would have to be approved by Switzerland as well. Swiss President Eveline Widmer-Schlumpf said Switzerland is not prepared to give any more concessions to Germany, and that the failure of the agreement would be “good news for German tax evaders”.

1 November 2012, Guernsey’s parliament approved the drafting of legislation to enable an aircraft registry to be set up and operated in the island without recourse to Jersey.

In September 2011, deputies approved plans to create a joint Channel Islands registry but Commerce and Employment Minister Kevin Stewart told members it had not been possible to reach agreement with Jersey. “I’m not going to sit around waiting for everyone else to join in, I want to move forward,” he said.

Guernsey is working with a Dutch aviation service provider to establish the regulatory framework for the new register, which is set to go live in 2013. SGI Aviation will run the register on the government’s behalf.

27 October 2012, the Hong Kong government imposed a 15% emergency tax on foreign buyers of residential property in a bid to dampen the island’s property market, which saw property values jump by some 30% in a year. It follows rival centre Singapore, which imposed a 15% stamp duty on non-resident and corporate buyers in December 2011.

The Hong Kong tax applies to both non-resident and corporate purchasers. Stamp duty has also been increased for speculators who sell on properties soon shortly after purchase. For sales within six months of purchase, the rate has gone up from 15 to 20%, while a 15% duty will apply to sales within 12 months and 10% for sales within three years.

Hong Kong’s Financial Secretary John Tsang said the measure was aimed at quick-turnaround property investors, and that permanent residents who were genuine end-users would be unaffected unless they bought through corporate vehicles. He said almost 20% of new properties were sold to non-resident buyers in 2011.

26 October 2012, the OECD the Global Forum on Transparency and Exchange of Information for Tax Purposes held its fifth meeting in Cape Town, South Africa, attended by delegates from 81 jurisdictions and 11 international organisations.

The Global Forum adopted a further seven Phase 1 reports ¬– for Dominica, Marshall Islands, Niue, Russia, Samoa, Sint Maarten and Slovenia ¬– and two Combined Phase 1 and Phase 2 reports ¬– for Argentina and South Africa. The Forum concluded that Dominica, the Marshall Islands and Niue should not move to a Phase 2 Review until they had acted on the recommendations made in the reports to rectify significant deficiencies in their legal and regulatory frameworks.

The Global Forum said that, with 88 now completed, it was reaching the end of the Phase 1 reviews. The stand-alone Phase 2 reviews, which examine whether countries are enforcing their tax-related legislation, were launched in the second quarter of 2012. These reviews will provide in-depth investigations into the procedures and resources available for the exchange of information The first stand-alone Phase 2 reviews will be published in 2013 and more than 50 Phase 2 reviews will be completed by the end of the year.

In addition, the Forum adopted three Supplementary reports on Liechtenstein, Monaco and Uruguay to assess their progress following their Phase 1 reviews. As a result of these reports, the Forum determined that Liechtenstein and Uruguay could now move to a Phase 2 review. Monaco’s Phase 2 Peer Review is currently underway.

At the Global Forum meeting, the Czech Republic, Malta and New Zealand signed the Convention on Mutual Administrative Assistance in Tax Matters, which regulates information exchange between states on the exchange of information. Lithuania, Nigeria, Gabon, Kazakhstan and Latvia also signed letters of intent to sign the Convention. More than 50 countries have either signed or stated their intention to sign the Convention since its 2009 amendment responding to a call from the G20.

9 October 2012, the Monetary Authority of Singapore (MAS) issued a consultation paper on the designation of tax crimes as money laundering (ML) predicate offences in Singapore from 1 July 2013 as part of its ongoing efforts to “protect the integrity and reputation of Singapore as a trusted international financial centre”.

The Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act is to be updated such that financial institutions must apply the full suite of the Anti-Money Laundering/Countering the Financing of Terrorism measures to prevent the laundering of proceeds from serious tax crimes. This involves rigorous customer due diligence and transactions monitoring, as well as proper reporting of suspicious transactions.

The new rules, said MAS, are part of “efforts to protect the integrity and reputation of Singapore as a trusted international financial center.” With onshore governments worldwide seeking to improve tax collection and Swiss banking secrecy under attack, Singapore has faced accusations that some of the funds flowing in may be undeclared. The Financial Times Deutschland reported in August that bankers had helped transfer some German client’s money from Switzerland to Singapore to try and protect their identities.

On 14 October, the governments of Germany and Singapore agreed to incorporate the OECD international standard for exchange of information, which provides for exchange of information for the administration and enforcement of the domestic tax laws of the requesting country, into their existing double tax treaty.

As a result it will be possible to exchange information for all types of tax rather than just income and capital taxes. Exchange of information will no longer depend on the taxpayer being resident in one of the contracting states and the requested state is obligated to obtain information even in a case where it does not itself require the requested information for tax purposes. Banking secrecy will not constitute an obstacle to exchanging information. Over the past three years, Singapore has revised half of its 70 tax treaties to facilitate tax information exchange information.

1 August 2012, a new tax treaty between Switzerland and Singapore entered into force. It replaces the former treaty dating from 1975 and contains an administrative assistance clause in accordance with the internationally agreed OECD standard for the exchange of information for tax purposes upon request. The provisions of the new treaty applied from 1 January 2013.

Aside from the exchange of information, Switzerland and Singapore agreed a withholding tax of 5% on dividend payments from holdings of at least 10% in the capital of the company making the payment. Interest payments will be subject to a withholding tax of a maximum of 5%. Interest payments to the national banks of both countries in the agreement, as well as interest payments between banks in Switzerland and Singapore will in future be exempt from withholding tax.

Singapore’s new treaty with Canada also entered into force on 31 August 2012, while a protocol to the existing tax treaty with Bahrain came into force on 29 September.

1 October 2012, the Swiss government launched a process to reform the criminal law on tax issues in order grant cantonal authorities access to bank client data in order to investigate on suspected tax evasion. The move could lead to a further weakening of traditional banking secrecy rules.

Switzerland relaxed external banking secrecy in line with the OECD standard agreement on tax information exchange in 2009 but, unless tax fraud can be proved, Swiss banks are not obliged to hand over details of client assets in domestic investigations. Tax evasion ¬– when citizens fail to declare their income or wealth – is considered merely a civil offence and is punished by a fine.

The Swiss federal and cantonal tax authorities have subsequently been seeking the same level of access to Swiss residents’ bank data so as to create a level playing field between foreign and domestic tax authorities trying to investigate tax evasion.

The finance ministry has been mandated to present a detailed draft by next spring, which will be published for consultation. The Swiss parliament would then discuss the proposals, which are likely to prove highly controversial.

19 December 2012, Switzerland’s Federal Council adopted a strategic overview of financial market policy, which is geared towards boosting competitiveness and combating financial crime and the investment of untaxed assets in Switzerland more intensively.

In order to exploit growth potential in the areas of asset management, pension funds and the capital market, the Council is to undertake an in-depth analysis of the business environment for the financial centre. Regulatory and tax adjustments should improve conditions for existing business areas and enable the private sector to develop new business areas.

The Council is also stepping up its efforts to combat abuses in the area of money laundering and taxation by swiftly implementing the revised Recommendations of the Financial Action Task Force (FATF). Serious tax offences will also be punishable under the heading of money laundering and, in the event that they suspect serious tax offences, financial intermediaries must report these cases to the Money Laundering Reporting Office Switzerland.

When accepting new assets, financial intermediaries should take into account not only the risks of money laundering and terrorist financing, but also tax considerations. On 14 December 2012, the Council instructed the Federal Department of Finance to present a corresponding consultation draft designed to prevent the acceptance of untaxed assets at the start of 2013. The consultation procedure on the improvement of due diligence requirements in the area of taxation will commence at the same time as that on the implementation of the revised FATF Recommendations.

Switzerland will further continue to combat abuses in the area of taxation by implementing withholding tax agreements, administrative and mutual assistance in accordance with the international standard. The withholding tax agreements with the UK and Austria entered into force on 1 January 2013 and should be followed by agreements with other countries both within and outside Europe.

The actual implementation of the tax agreements is governed by the Federal Act on International Withholding Tax (IWTA), which contains provisions on organisation, procedure, judicial channels, criminal law provisions and domestic procedural rules for the upfront payment to the UK by Swiss paying agents. It went into force on 20 December along with two additional ordinances required for implementation.

30 October 2012, the Swiss Federal Supreme Court confirmed a landmark ruling that could establish a precedent for all banks in Switzerland having to repay to clients’ “retrocession fees” relating to discretionary mandates, bringing the banks’ standards in line with the rules for Swiss independent financial advisers.

Traditionally the existence and amounts of retrocessions received have not been disclosed to clients but in a 2006 court ruling involving an independent asset manager, the Swiss Supreme Court found that, as a principle, retrocessions were the property of the client.

In the new test case, a client sought reimbursement from Swiss bank UBS of commissions paid to it by the management companies of investment products. The banking agreement provided for the client’s waiver to receive payment of retrocessions but did not specify the amount or extent of payments to be waived. The bank refused to disclose the amount of retrocessions paid to it.

The Zurich High Court decided in January 2012 that banks should reimburse retrocession fees to clients with whom they have an asset management agreement, unless those fees had been received for genuine distribution services. It found that the connection between the payment of retrocessions and the asset management agreement was established because the scale of payments to the bank varied depending on the volume of products placed in the managed portfolios.

The Supreme Court agreed, determining that the duty of restitution is fundamental under the mandate that prevents the agent from acting with a conflict of interest. Indirect benefits received from third parties are covered by the duty of restitution, irrespective of whether such benefits are qualified as retrocessions or not.

The amount of fees to be reimbursed to claimants is still being determined by the Zurich High Court. It is likely to vary considerably from bank to bank depending on the proportion of funds and other investment products affected, as well as the duration and starting date of the limitation period before the restitution of retrocessions becomes time barred.

11 September 2012, Bradley Birkenfeld, a former UBS banker who assisted the US government in its international crackdown on tax evasion was awarded $104 million – believed to be the largest-ever whistleblower payout to an individual.

Birkenfeld began cooperating with US authorities in 2007, while still at UBS, and provided prosecutors with detailed evidence of the bank’s efforts to promote tax evasion that lifted the veil of Swiss bank secrecy.

In 2009 UBS agreed to turn over the names of more than 4,000 account holders who were US taxpayers and pay $780 million to resolve a criminal case involving secret offshore accounts. Subsequently more than 33,000 US taxpayers have confessed to holding undeclared overseas accounts and paid more than $5 billion in taxes and penalties.

Birkenfeld was also was implicated and pleaded guilty in 2008 to one count of conspiracy to defraud the US. He was given a 40-month sentence. At his sentencing, Justice Department official Kevin Downing said, “Without Mr. Birkenfeld walking into the door of the Justice Department in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered by the US government.”

Birkenfeld’s lawyer said the $104 million award was 26% of the $400 million in tax paid by UBS to the IRS as a result of the 2009 settlement. The large-awards programme pays between 15% and 30% of proceeds collected. He said his client has other related whistleblower claims outstanding. IRS whistleblower awards are fully taxable.

24 October 2012, the Supreme Court handed down judgments in two unrelated cases – Rubin v Eurofinance SA and New Cap Re v A E Grant – in which insolvency practitioners were seeking to enforce foreign, non-European Union court judgments arising from insolvency proceedings in their jurisdictions through the English courts against English defendants. The decision will have significant consequences for cross-border insolvencies.

The majority held that Cambridge Gas, the previously leading case, which promoted the idea of universality of recognition in insolvency proceedings, was wrongly decided. Instead, the Supreme Court held that insolvency judgments are subject to the standard common law principles relating to recognition and enforcement.

Specifically, the Supreme Court held that a foreign judgment cannot be enforced under the Cross-Border Insolvency Regulations 2006 or under §426 of the Insolvency Act, as it was considered that in both cases the legislation was not designed to provide for the enforcement of judgments.

Parties wishing to enforce insolvency judgments in England through the English courts will have to rely on the traditional common law body of cases, and where appropriate the EC Regulation on Insolvency Proceedings, which is not affected by this judgment and which makes foreign judgments falling within the ambit of the EC Regulations enforceable automatically in the UK.

3 January 2013, Switzerland’s oldest private bank, Wegelin, pleaded guilty in a Manhattan federal court to helping wealthy US taxpayers hide at least $1.2 billion in offshore accounts. The bank was indicted last February on charges of conspiracy and fraud but had repeatedly failed to appear in the US court, arguing that the summons had not been delivered correctly.

Otto Bruderer, an official at the St Gallen-based bank, entered a plea on the company’s behalf to a single count of conspiracy. “From 2002 to 2010, Wegelin conspired with certain US taxpayers to evade US taxes,” Bruderer told the court.

Under a proposed plea agreement, the bank will pay $20 million in restitution to the US authorities, forfeit $15.8 million, representing fees on undeclared accounts, and pay a fine of $29.4 million. The deal requires the approval of the US district judge and sentencing was set for 4 March 2013. In a separate civil law suit last year, another district judge entered a default judgment against the bank, ordering it to forfeit about $16.2 million held in its US accounts.

Wegelin, which was founded in 1741, split and sold its non-US operations to retail bank Raiffeisen in 2011 in a bid to protect its assets from the charges. Wegelin said it had set aside money to pay the fine, restitution and forfeiture. “Once the matter is finally concluded, Wegelin will cease to operate as a bank,” a statement said.

US prosecutors said that between 2002 to 2011, more than 100 US taxpayers conspired with Wegelin and at least three named bankers. The defendants were accused of soliciting US clients fleeing Switzerland’s largest bank UBS, which avoided prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over data on about 250 accounts. It later disclosed information on about 4,450 accounts.

Wegelin was the first Swiss bank charged in a US crackdown on offshore firms suspected of helping Americans evade taxes. At least 13 banks in Switzerland are being targeted by US tax investigators in a row over American client’s undeclared assets.