Owen, Christopher: Offshore Survey – September 2005 Supplement

Macau reduces scope for offshore companies The Macau SAR government passed a new law on 13 June 2005 to restrict the scope of allowable business activities that may be conducted by a Macau offshore company (MOC) from 20 allowable activities to just eight. The eight allowable activities are: information equipment consultant; information and programming consultant; data processing; data bank services; administration and filing support services; R&D activities; technical research and analytical activities; and sailing vessels and aviation equipment administration services. The legislation excludes trading, commercial and service agents, management and business consultants, which have hitherto been the principal purposes for non-Macau residents to set up MOCs. Introduced in 1999, the MOC regime provides a number of incentives to qualifying companies, including an exemption from income tax, business tax and stamp duty. The new law does not affect existing MOCs or applications for establishing new MOCs that were lodged with the Macau Trade and Investment Institute on or before 13 June 2005.
Panama raises annual corporation tax Panama is to increase the annual franchise tax for corporations and private interest foundations from US$250 to US$300 as of 1 January 2006. Under Law No.6 of 2005, which was published in the Official Gazette No. 25,232 on 3 February 2005, every new company or private foundation will be required to pay a US$250 franchise tax when its articles of incorporation or foundation charter is filed at the Panamanian Public Registry. And from the second year of incorporation, companies and private foundations this will be increased to US$300 per year. For existing companies and private foundations, the tax will be increased from US$250 to US$300 per year. The timetable for payment has also changed to 15 June for entities incorporated in the first six months of any year, or 15 December for entities incorporated during the second six months. The penalty for nonpayment of the tax for two consecutive periods is to be increased from US$250 to US$300. Should the annual tax not be paid for ten consecutive periods, the corporation or private foundation will be withdrawn from the Public Registry.

China to unify corporate rates for foreign and domestic firms Foreign companies in China are to lose their preferential tax treatment from 2007. A proposed transition period would allow investors entering before the date of reform to continue to receive tax exemptions for five years, with companies entering after the reform paying the full, unified rate. Although foreign-invested firms and domestic Chinese companies are officially subject to the same headline corporate tax rate of 33% at present, foreign businesses actually pay an effective average rate of 11 to 12% through a system of tax breaks and holidays, according to government estimates. China’s present corporate tax laws were introduced on 1 July 1991 and were intended to encourage foreign direct investment. The government has been under pressure from domestic companies to provide a level playing field but has previously postponed reforms so as maintain inward investment. The current move comes in order to satisfy obligations of joining the WTO. Previous estimates put the anticipated unified tax rate for firms in China at 24% or 25%, but the latest proposed figure is 27%. When the reform is implemented, tax incentives will be retained for companies, both foreign and domestic, in hi-tech, energy-efficient and environmentally friendly industries, while low-end investors will be subject to full rates. Any decision on tax reform taken by the State Council will have to be ratified by the National People’s Congress, which meets in March next year.

Singapore signs tax treaties with Slovakia and Israel Singapore signed a new treaty with Slovakia for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes on 9 May 2005. Singapore also signed a renegotiated treaty with Israel on 19 May. When in force, the agreement will replace the current Israel-Singapore tax treaty, which was concluded in 1971. The new treaty reduces the maximum withholding tax rate on interest from 15% to 7%.

Brunei and Singapore sign tax treaty Singapore Foreign Affairs Minister George Yeo and Prince Mohamed Bolkiah, the Brunei Foreign Minister, signed an income tax treaty in Singapore on 19 August. The treaty is intended to increase bilateral trade and investment and increase the two-way flow of technology, talent, and expertise. Haji Mumin, Brunei?s director of special duties and revenue at the Ministry of Finance, also initialed a tax treaty with Pakistan on 20 August in Islamabad. It followed a second round of negotiations on the draft treaty; the first round was held in February.

UK and Switzerland to review tax treaty Talks were held in London on 21 June to review the 1978 tax treaty between the UK and Switzerland, as amended by the 1982 and 1994 Protocols.

Switzerland revokes ’50/50,’ ’80/20′ Tax Practices for OECD compliance Switzerland’s long-standing “50/50″ and “80/20″ tax practices, designed to determine the tax bases of certain corporate taxpayers in cases where it may be difficult to substantiate expenses, was revoked by the Federal Tax Administration as of 1 July. The move came in response to criticism by the OECD that the tax practices did not adhere to the arm’s-length standard for transfer pricing. Under grandfathering provisions, taxpayers that had obtained 50/50 and 80/20 rulings before 30 June will continue to operate under those tax rules until the end of 2008. Under Swiss tax law, the burden is on the taxpayer to demonstrate that expenses are tax-deductible, and the tax base is determined according to the commercial balance sheet. The 50/50 practice, which generally applied to reinvoicing companies, estimated deductible expenses to be 50% of gross profit, with the remaining 50% of profit subject to taxation. Under the 80/20 practice, intellectual property (IP) branches were permitted to deduct a lump sum of up to 80% of gross foreign-source income, with the remaining 20% subject to taxation. Under both practices, the taxpayer was not required to substantiate the expenses, although it could choose to demonstrate that its expenses were higher than 50% or 80%, respectively. While Switzerland does not have specific transfer pricing legislation, the country does follow the OECD guidelines, particularly the application of the arm’s-length standard. After examining some of Switzerland’s tax practices, the OECD concluded in 2004 that the “cost plus 5%” practice, and more recently, that the 50/50 and 80/20 practices, are not in line with the arm’s-length principle. The common factor in those tax practices was that they were linked to a fixed cost-plus markup or a fixed percentage of deduction, and that is the aspect that the OECD deemed to be incompatible with the arm’s-length standard. Under the new tax practice, all expenses must be commercially justified and documented in detail, and must meet the arm’s-length standard. The tax administration will continue to grant advance rulings in specific cases to provide certainty whether particular expenses are appropriate, but will not accept unsubstantiated lump-sum deductions. In future, third party benchmarking will play a more critical role in justifying tax-deductible expenses.

Gibraltar opens consultation on new gambling legislation The Government has issued a detailed consultation paper, including draft legislation, for a Bill for a Gambling Ordinance, which is intended to update the current gaming laws. Views and comments were invited by 31 July 2005. It is the Government?s intention to take a Gambling Bill to the House of Assembly early in the autumn. The proposed Gambling Ordinance is intended to create a statutory licensing and regulatory framework to protect Gibraltar?s jurisdictional reputation in the light of the recent growth in new gaming activities and enhance the operating environment for Gibraltar-based gaming companies.

UK Revenue in crackdown on offshore credit cards UK Revenue & Customs (HMRC) has issued “production orders” requiring credit card companies to hand over records in order to trace UK-domiciled individuals suspected of evading taxes by keeping money in offshore centres. It is reported to have secured 30,000 names. HMRC said it was increasingly focused on tackling tax evasion by people using offshore debit and credit cards and was using a wide range of information sources to solve the problem. The latest move is the responsibility of its Offshore Fraud Project Group, set up in 2003. HMRC has drawn on the experience of the Internal Revenue Service in the US, which in 1998 and 1999 made credit card companies divulge information on accounts billed to addresses in three Caribbean centres. The investigation led the IRS to estimate that up to two million US citizens had offshore debt or credit card accounts.

Singapore guidance on new Advance Ruling System A guide to the advance ruling system, due to be introduced in Singapore as of 1 January 2006 subject to approval, was issued by the Inland Revenue Authority of Singapore (IRAS) on 8 June. Previously the IRAS has provided advance rulings to taxpayers for proposed business arrangements upon written request, but these have not been legally binding. Changes to Singapore’s Income Tax Act have been drafted as part of the 2005 Income Tax (Amendment) Bill, in a new section 108 together with a new, seventh, schedule. The circular further clarifies what will be considered an advance ruling and sets out the administrative procedure for an advance ruling request. A ruling request under the proposed section 108 should involve an interpretation of Singapore tax law and how the law applies to a specific taxpayer and a proposed arrangement that is seriously contemplated by the taxpayer. The advance ruling system will only be applicable to income tax matters The facts for a proposed arrangement should be established and should not be dependent on assumptions about a future event. Failure to set forth relevant facts constitutes grounds for the comptroller to deny the ruling request and, if any assumption later proves to be incorrect, the ruling would become void. An advance ruling issued by the comptroller will be binding on the particular arrangement concerned for the specified period, unless the arrangement is materially different from the arrangement identified in the ruling or the comptroller stipulates a condition that is not satisfied. The comptroller may withdraw an advance ruling at any time by notifying the applicant in writing and furnishing the reasons for withdrawal. The withdrawal will take effect from the date specified in the notice but the ruling would continue to apply to any existing arrangement for the remainder of the period specified. When a provision of the ITA is amended such that it changes the way the provision would apply to the ruling, the advance ruling will cease to apply from the date the relevant provision is repealed or amended. An advance ruling is final and will not be subject to the appeal process provided in the ITA. If a taxpayer disagrees with a ruling there is no requirement to follow it but, when completing an income tax return, the taxpayer should indicate the existence of the ruling and whether it was relied on. The taxpayer should also provide any material changes to the arrangement identified in the ruling. The IRAS will charge taxpayers for the provision of an advance ruling. In addition to a non-refundable SD $525 application fee, a fee will be charged for every hour beyond the first two hours the IRAS spends considering the application. The taxpayer will also be required to reimburse the IRAS for costs and disbursements, including fees paid to an external adviser. The IRAS commits to providing a ruling within eight weeks but, if the request is complex, the IRAS will inform the applicant that it may take longer.

Australian Tax Office acts on offshore schemes Tax Commissioner Michael Carmody announced on 10 June that the Australian Crime Commission (ACC), assisted by the Australian Federal Police and tax officers, had executed warrants at 48 sites around Australia, acting on information suggesting that individuals have entered into offshore schemes directed at creating fictitious deductions or concealing income from tax. In addition the Tax Office had exercised its powers of access to conduct unannounced visits at 37 sites. These were cases where there was information and material to justify audits of possible breaches of the tax law, that is, undisclosed income or improperly claimed deductions. Tax Commissioner Michael Carmody said the schemes under investigation had relied on the use of offshore structures put in place by scheme promoters. In some cases deductions were claimed for payments for fictitious expenses and services, in other cases assessable income derived offshore was not brought to account in Australia but secretly returned to disguised as loan, inheritances, gifts or through credit and debit cards.

Antigua reintroduces income tax The Antigua government passed the Personal Income Tax Act 2005 in March to reintroduce an individual income tax for the first time in almost 30 years. Prime Minister Baldwin Spencer’s year-old United Progressive Party government said it was forced to reimpose the tax to address the deficit left by the previous Labour Party (AP) government. The law took effect on 1 April. Four AP members left the Senate chamber before the vote on 29 March to protest the measure, which they said would further weaken the country’s tourism-based economy and unnecessarily burden workers. The legislation will levy the tax at rates ranging from 10 to 25% on those whose annual income exceeds US$3,000.

Bahrain and Pakistan sign tax treaty Bahrain’s finance minister, Shaikh Ahmed bin Mohammed Al Khalifa, and the Pakistani prime minister’s adviser on finance, Syed Salman Shah, signed an income tax treaty in Islamabad on 27 June.

Canada sets up new centres to target tax evasion Minister of National Revenue John McCallum announced on 10 August that Canada has established 11 centres of expertise to combat tax evasion from offshore accounts. It has also recruited 100 new auditors to join the 270-person team responsible for overseeing international transactions. McCallum said that although over 90% of Canadians pad their taxes in full, evading taxes by investing in offshore accounts had been on the rise in Canada over the past decade. The centres, operated by existing Canada Revenue Agency staff, are located at Tax Services Offices in the cities of London, Laval, Halifax, Saint John, Montreal, Toronto, Ottawa, Winnipeg, Calgary, Vancouver, and Burnaby.

China and Hong Kong to update tax treaty Hong Kong and Chinese officials announced in July that they are to start negotiating to expand and update the 1998 Income Tax Memorandum and Arrangement in order to prevent Hong Kong and P.R.C. companies’ from being subject to double taxation. The 1998 agreement covers Hong Kong companies that have factories in the P.R.C., but does not cover service companies, or withholding taxes on dividends, interest and royalties, nor does it provide for the exchange of tax information.

China halves tax on dividends The Finance Ministry of the People’s Republic of China announced on 13 June 2005 that it was temporarily reducing the tax on dividends and the issue of bonus shares with immediate effect. Investors previously paid a 20% tax rate on all dividends and bonuses. Under the new measure, only 50% of dividends and bonuses will be subject to that tax, the ministry announced through a joint statement with the State Tax Administration. The move is a part of the government’s plan to boost the stock market that has fallen to an eight-year low. The tax reduction is only temporary and the Finance Ministry has not provided details on its duration.

Israel and Singapore sign new tax treaty Israeli Finance Minister Benjamin Netanyahu and Singapore Senior Minister Goh Chok Tong signed an income tax treaty in Tel Aviv on 19 May. The agreement, when in force, will replace the current Israel-Singapore tax treaty, which dates from 1971. The new treaty reduces the maximum withholding tax rate on interest from 15% to 7%.

India and Singapore sign tax treaty protocol The governments of India and Singapore signed a protocol on 29 June 2005, to amend the India-Singapore income tax treaty of 1994. The amendments came into force as of 1 August. The taxation of capital gains under the protocol is similar to the taxation of capital gains under the India-Mauritius income tax treaty. Capital gains on the sale of shares in India that are realised by a Singapore tax resident would be exempt from tax in India under the protocol. But, unlike the Mauritius tax treaty, the protocol tax exemption is subject to a limitation of benefits provision. The exemption will not apply in cases where transactions are arranged with the primary purpose of taking advantage of the tax exemption or the entity is a shell company with no real and continuous business activities. The protocol will continue to apply provided that the capital gains exemption in the India-Mauritius tax treaty remains in force.

Caribbean Court of Justice hears its first case The Caribbean Court of Justice began hearing its first case, an appeal against a libel verdict by Barbadian courts, on 11 August. Based in Port-of-Spain, Trinidad, the court replaces the UK-based Privy Council, which has served as the final court of appeal court for former British Colonies since 1833. Although the court was inaugurated in April, only Barbados, where there was political consensus, and Guyana, where there was no third-tier court, have so far formally adopted the CCJ in its criminal and civil jurisdictions. Other members of the 16-nation Caribbean Community are dealing with legal obstacles or resistance from critics who fear the court could be vulnerable to political pressure.

US indicts tax professionals over tax shelters The US government has indicted nine tax professionals for conspiring with accountant KPMG to commit tax shelter fraud. At the same time, the government announced a deferred prosecution agreement with KPMG, under which the firm will pay US$456 million and admit to criminal wrongdoing. It is alleged that from 1996 through 2003, KPMG, the nine indicted defendants and others conspired to defraud the IRS by designing, marketing, and implementing four illegal tax shelters, known as FLIP, OPIS, BLIPS, and SOS. The individuals include seven former KPMG tax partners and a former tax partner of the law firm Sidley Austin Brown & Wood. The indictment alleges that as part of the conspiracy to defraud the government, KPMG, the nine defendants, and their unnamed coconspirators prepared false and fraudulent documents, including engagement letters, transactional documents, representation letters, and opinion letters, to deceive the IRS if it should learn of the transactions. The firm, the indicted defendants, and their coconspirators are also charged with preparing false and fraudulent representations that investors were required to make to obtain opinion letters from KPMG and law firms. The indictment charges that the nine individuals concealed the shelters from the IRS by not registering them, by preparing returns that fraudulently concealed the losses, by attempting to conceal from the IRS the tax shelter losses and transactions “with sham attorney-client privilege claims,” and by obstructing IRS and Senate investigations into their shelter activities. The deferred prosecution agreement provides that prosecution of the criminal charge against KPMG will be deferred until 31 December 2006, if some conditions, including payment of the US$456 million in fines, restitution, and penalties, are met. The US$456 million payment includes: US$100 million in civil fines for failure to register the tax shelters with the IRS; US$128 million in criminal fines representing disgorgement of fees earned by KPMG on the four shelters; and US$228 million in criminal restitution representing lost taxes to the IRS as a result of KPMG’s intransigence in turning over documents and information to the IRS, which caused the statute of limitations to run, according to the agreement. The agreement requires permanent restrictions on KPMG’s tax practice and calls for permanent adherence to higher tax practice standards regarding the issuance of some tax opinions and the preparation of tax returns. It also prohibits KPMG’s involvement with any prepackaged tax products and restricts KPMG’s acceptance of fees not based on hourly rates. The agreement further requires KPMG to implement and maintain an effective compliance and ethics program; to install an independent, government-appointed monitor who will oversee KPMG’s compliance with the deferred prosecution agreement for three years; and its full and truthful cooperation in the pending criminal investigation, including the voluntary provision of information and documents. Richard Breeden, former chair of the Securities and Exchange Commission, has been appointed to serve as the independent monitor. After his duties end, the IRS will monitor KPMG’s tax practice and adherence to elevated standards for two years.

Israel changes the taxation of trusts The Israeli Parliament approved a major amendment to the Israeli Income Tax Ordinance on 25 July. The legislation, which will take effect on 1 January 2006, includes new rules governing the taxation of trusts. The new trust tax regime will mean that trusts established by Israeli residents for the benefit of other Israelis will be liable to Israeli tax ? even on assets and income located outside Israel. But the new law also provides that where a non-resident creates a trust for the benefit of a resident of Israel, trust income from non-Israeli sources will in general not be liable to Israeli tax. Similarly, where a resident of Israel establishes a trust for a non-resident beneficiary, trust income from non-Israeli sources will generally not be liable to Israeli tax. Where a non-resident settles a trust for the benefit of an Israeli resident and subsequently becomes resident in Israel, then the exemption from Israeli tax on foreign-sourced income no longer applies. If an Israeli resident establishes a trust for the benefit of a non-resident using appreciated property, that property will be deemed to be sold when the trust is created and the grantor may be liable to Israeli capital gains tax. Anyone who establishes a trust, acts as a trustee, or receives a distribution from a trust as a beneficiary must submit an annual tax return.