Owen, Christopher: Offshore Survey – April 2008 Supplement

4 November 2007, Bahraini Finance Minister Ahmad bin Muhammad al-Khalifa and Belgian Administrative Simplification Minister Vincent van Quickenborne signed a tax treaty in Manama. Sheikh Muhammad bin Isa Al-Kalifah, head of the Bahraini Economic Development Board, said the treaty was considered “vital for both parties, as there are currently more than 130 Belgian companies based in Bahrain”. He also said he hoped the treaty would pave the way for the early conclusion of the free-trade agreement between the European Union and the Gulf Cooperation Council.

Wikileaks, a website designed to enable whistleblowers to publish sensitive documents, published a number documents relating to the offshore activities of Swiss bank Julius Baer. Initially Julius Baer and its Cayman-based subsidiary obtained an injunction to close the site from the US District Court in California, which held that “immediate harm will result to (the bank) in the absence of injunctive relief.” The documents purported to show alleged money transfers into offshore accounts and had titles that include “tax avoidance”, “tax evasion” and “offshore tax scheme”. The source for the documents was Rudolf Elmer, former chief operating officer of Bank Julius Baer & Trust in the Cayman Islands. The records pertain to clients from 1997 to 2002. Mr Elmer claims they came lawfully into his possession. The bank alleges it was theft. Legal proceedings are ongoing in Switzerland. When the disputed information appeared on Wikileaks this year, the bank’s lawyers took legal action against the site’s operators and, on 15 February, obtained an injunction in the US District Court in California, which ordered that the web site was taken offline. But on 29 February, US District Judge Jeffrey White reversed his decision, dissolving the injunction and refusing to extend a restraining order that required Wikileaks and its server to remove the documents. He said restraining Wikileaks might be unconstitutional and his court might not have jurisdiction because there was no evidence the site’s creators were in the US. Julius Baer subsequently filed a note with the court saying it would voluntarily dismiss its own case. The bank further denied the authenticity of the material and rejects the ‘serious and defamatory’ allegations that it contains. Wikileaks was launched in early 2007 with the help of Chinese dissidents to help whistleblowers in authoritarian countries post sensitive documents on the Internet without being traced.

4 March 2008, German Finance Minister Peer Steinbrueck said the European Commission would look into expanding and developing the European Union Savings Directive and to report on this “very soon”. Speaking after the Ecofin meeting of EU finance ministers in Brussels, he said the Commission had been asked to report at the next Ecofin meeting in May on expansion of the 2005 Directive. The report had been due by October or November. The Germany government’s initiative was prompted by a massive investigation into tax evasion through Liechtenstein. It estimates that tax havens are costing EU public coffers at €30 billion a year. The draft proposal included:
an extension of the scope of the Directive to cover not just interest payments on cash savings but all forms of returns on financial assets, including dividend payments and capital gains.
making it applicable to legal entities, targeting German taxpayers who have parked their money in trusts in Liechtenstein and elsewhere in order to circumvent the rules.
creating a duty for countries with strict bank secrecy rules to transfer information about the identity of bank account holders.
Steinbrueck said he was “positively surprised” about the support for this move not only by several Scandinavian countries, France, Spain and Italy, but also by the UK and the Netherlands, which was “very important”. He reiterated that Germany would be willing to act on a national level if no international rules could be agreed. Austrian Finance Minister Wilhelm Molterer rejected criticism of Austria’s policy and said his country’s bank secrecy would remain in place. Under the existing Directive, Austria, Belgium and Luxembourg elected to opt out of automatic exchange of information about the savings income of foreign investors in favour of retaining secrecy and paying a fixed withholding tax to the taxpayers’ home country. Molterer said Austria would only be willing to agree to changes if “third party” European countries, which were not members of the EU – such as Switzerland, Liechtenstein, Andorra, San Marino and Monaco – also signed up. Meanwhile, senior EU tax officials, including European Tax Commissioner Laszlo Kovacs, launched a fresh approach to Asian financial centres in January, in a bid to have them included within the ambit of the Savings Tax Directive. Kovacs visited Hong Kong while other senior officials began talks with the Chinese territory of Macau and the city-state of Singapore. But no formal negotiations have been opened with any of the three. Currently, the Directive can largely be circumvented by moving assets out of personal bank accounts into corporate or trust structures, or to accounts based in territories out of the reach of the directive’s information sharing provisions.

The Financial Action Task Force (FATF) against money laundering is to hold a meeting of all FATF ministers in April 2008 in Washington DC to adopt a revised mandate for the organisation and set out its future strategic priorities. At its plenary meeting in Paris, from 27 to 29 February 2008, the FATF agreed to issue a statement highlighting deficiencies in the anti-money laundering and counter terrorist financing systems in Uzbekistan, Iran, Pakistan, São Tomé & Príncipe and Turkmenistan. It calls on its members and all jurisdictions to advise their financial institutions to take the risk arising from the deficiencies in these regimes into account for enhanced due diligence. It also drew attention to the AML/CFT risks in the northern part of Cyprus. The FATF welcomed the Caribbean Financial Action Task Force (CFATF) as the fifth associate member of the FATF. Associate membership gives the FATF-style regional bodies a greater decision-making role within the FATF. The FATF finalised a comprehensive report on terrorist financing, which explores the range of methods used by terrorists to move funds within and between organisations. The three main avenues for such movements, it found, were through the financial sector, by physical transportation and through the commercial trade system. Charities and alternative remittance systems have also been used to disguise movement of terrorist funds. The study identified four strategies which could help in further strengthening counter-terrorist financing efforts:
Action to address jurisdictional issues, including safe havens and failed states;
Outreach to the private sector to ensure access to the information necessary to detect terrorist financing;
Building a better understanding of terrorist financing across the public and private sectors;
Using financial investigation, enhanced by financial intelligence.
The FATF also adopted new guidance to support the full and effective implementation of the FATF Standards in low capacity countries. This focuses on key implementation priorities such as co-operation, engagement, prioritisation and planning. Building on ideas raised in the private sector consultative forum, established in October 2007, the FATF is to initiate a joint project with the private sector on the role of intermediaries and other third parties in performing customer due diligence. The FATF is an inter-governmental body to develop and promote policies, both at national and international levels, to combat money laundering and terrorist financing. The FATF Secretariat is housed at the OECD in Paris. The FATF currently includes 32 member states, as well as the European Commission and the Gulf Co-operation Council. India and the Republic of Korea are observer countries.

17 March 2008, the Trusts (Guernsey) Law 2007, which was passed by the States of Guernsey last July and received Royal Assent on 12 February, has been brought into force. The most significant changes include:
The introduction of (non-charitable) Purpose Trusts
Removal of limits on the length of a trust’s duration – allowing perpetual trusts
Clarification of the position of retiring trustees, making the transfer process more streamlined
Clarification of the circumstances under which information has to be given to beneficiaries
Abolition of the liability of directors of corporate trustees based in Guernsey or acting as trustees of Guernsey law trusts, particularly as a way to encourage greater use of Private Trust Companies (PTCs)
Revision of arrangements regarding limitation periods and Alternative Dispute Resolution.
The new law has its roots in a series of proposals made in the ‘Evans Report’, a review of the Guernsey’s trust legislation by a working party under the chairmanship of advocate Rupert Evans. Guernsey has more than 140 licensed fiduciaries, which hold between £200 and £300 billion worth of assets in trust. “The amendments to Guernsey’s trust legislation include several significant changes like the introduction of Purpose Trusts that will particularly enhance the Island’s fiduciary environment,” said Peter Niven, chief executive of GuernseyFinance – the promotional agency for the finance industry. “Work continues to introduce legislation that will allow the establishment of Foundations. The addition of this innovative tool will ensure that the island’s practitioners are able to offer their internationally mobile clients the widest spectrum of products and services,” he added.

30 January 2008, Hong Kong and the Chinese mainland signed a second protocol to the recent tax treaty, which further clarifies which Hong Kong firms should pay Enterprise Income Tax on the Chinese mainland. Hong Kong Secretary for Financial Services and Treasury Professor K C Chan signed the agreement with the Chinese deputy Taxation Commissioner Wang Li in Beijing. The tax treaty itself was formally signed on 21 August 2006 and came into effect on 8 December that year, but both sides have differed on the interpretation of certain sections. After negotiation they agreed on the amendments and initialled the second protocol last September. At the same time, the new Enterprise Income Tax Law of the Mainland came into effect on 1 January 2008. Corresponding adjustment of the relevant articles of the treaty had to be made in respect of tax types involved and the definition of a “resident”. In determining whether a Hong Kong enterprise providing services, including consulting services, in the Mainland is liable to the Enterprise Income Tax, both sides have now agreed to substitute “183 days” for “six months” as the basis of calculation. The meaning of “month” had been subject to different interpretations. Hong Kong enterprises will therefore be considered as having a permanent establishment on the Mainland and be chargeable to tax if they provide services for an aggregate of 183 days in any 12-month period on the Mainland. Apart from some specified transactions in the treaty and the second protocol, the gains derived by a Hong Kong resident from the alienation of immovable assets should be taxable in Hong Kong only. Investors can now estimate their tax liabilities with increased certainty. Hong Kong has entered into tax treaties with the Mainland, Belgium, Thailand and Luxembourg. This is the first occasion on which amendments are made to the articles of a treaty by signing a protocol, which is considered to be an important move in the proper implementation of a treaty.

The number of new local companies registered in Hong Long in 2007 hit a record high of 100,761, up 23% on 2006, according to the Hong Kong Companies Registry. The statistics showed that 748 new overseas companies established a place of business in Hong Kong Special Administrative Region and registered under the Companies Ordinance last year, up 23% on 2006. The total number of live companies registered at the end of last year was 655,038, up 63,094 from the end of 2006. The total number of overseas companies stood at 8,081, 372 more than in 2006.

The Indian government is proposing to strip the Cyprus-India tax treaty of its capital gains tax exemption benefits. It is negotiating for an amendment under which Cyprus-resident individuals and companies would have to pay CGT at the rate of 10%. It is also proposed that a limitation on benefits clause should be inserted to ensure that ineligible entities cannot gain a benefit under the tax treaty. Cyprus does not impose CGT on its residents and, with India exempting the capital gains under the treaty, investors can currently avail themselves of benefits similar to the India-Mauritius tax treaty. Dividend income is also exempt from withholding tax. The proposed amendments would be on a par with those recently made to the India-United Arab Emirates tax treaty, by which capital gains have been made taxable in the state where the gains are earned. India is also seeking to renegotiate its tax treaty with Mauritius and, with the UAE and Cyprus treaties losing their tax concessions, the pressure on Mauritius would increase.

The phased registration of businesses for the introduction of Jersey’s Goods and Services Tax (GST) on 1 May 2008 began on 14 January for businesses with a 12-month taxable turnover of more than £10 million. Phase two began on 18 February, for businesses with a 12-month taxable turnover of between £1 million and £10 million; and phase three on 18 March, for businesses with a 12-month taxable turnover of between £300,000 and £1 million, and for those requesting voluntary registration.

January 2008, EU Taxation Commissioner László Kovács confirmed that he will issue proposals on a common method for calculating corporate tax in September. He expressed confidence that the initiative would receive strong backing from the French government, which takes the helm of the EU presidency in the second half of the year. “I have some high expectations of the French presidency both on direct and indirect taxation,” he said. France, Germany, Spain, Italy, Austria and the Benelux countries were, he said, “fully and actively” supportive. Other member states, including Ireland, the UK and Slovakia, have expressed scepticism about the proposed common consolidated corporate tax base (CCCTB). The commissioner reiterated assurances that the tax base will not, as such countries fear, lead to the introduction of harmonised tax rates. Should member states fail to agree unanimously on the matter, Kovács again indicated his readiness to use enhanced co-operation to introduce proposals. Under the Treaty of Amsterdam, agreed in 1997, member states may use enhanced co-operation to proceed in adopting laws in areas like taxation that would normally require unanimity. Business, he said, was strongly behind the proposals. MEPs criticised the European Commission last year for relegating CCCTB in its programme for 2008 from the status of a strategic priority to work-in-progress, apparently in a bid to avoid any disruption to the ratification of the Treaty of Lisbon. French Socialist MEP Pervenche Berès, who chairs the European Parliament’s committee on economic and monetary affairs, is trying to rally cross-party support for the proposals to ensure that the Commission does not retreat. Berès said that the issue should be approached from a political, rather than a national, perspective.

30 January 2008, Labuan has rebranded the International Offshore Financial Centre as the Labuan International Business and Financial Centre as part of a strategy to attract more foreign direct investments. Currently, there are more than 6,000 international companies registered in Labuan, including 900 that are Malaysian-owned and more than 300 financial institutions. Labuan is host to 56 banks, 131 insurance and insurance-related companies, 99 leasing and 21 trust companies. The Labuan Offshore Financial Services Authority anticipates a 10% increase in the number of offshore companies registered this year, boosted by its re-branding strategy, said its director-general Datuk Azizan Abdul Rahman. Going forward, Azizan said a number of programmes would be initiated, including measures aimed at securing the “gold standard for holding company jurisdiction”, the expansion of captive insurance and private equity, as well as the promotion of shariah-compliant trusts and foundations to complement the Islamic financial products and services available in Kuala Lumpur. “One of the main things we are doing now is aggressively reviewing the legal framework to enhance Labuan’s competitiveness as an international offshore financial hub,” he said. LOFSA has appointed legal consultants to conduct benchmarking studies against other offshore centres. Azizan also said the option for Labuan offshore companies to elect to be under the Malaysian Income Tax Act 1967 or the Labuan Offshore Business Activity Tax Act 1990 would enable businesses to structure their transactions more efficiently.

Liechtenstein, whose banks are currently embroiled in the massive German tax evasion investigation, said on 21 February that is to accelerate proposed reforms to its laws regulating foundations. Under the proposals, individuals who set up a foundation will not be named in the foundation register, but there will be some circumstances in which their identities may be disclosed. The purpose of a foundation will also have to be specified when the foundation is set up and can only be changed thereafter for specific reasons. The proposed changes, drafted in 2004, are intended to “modernise” a law first established in 1926, said Liechtenstein Justice Minister Klaus Tschuetscher at a press conference in the capital of Vaduz. Despite the timing, he stressed that the changes were not related to the German investigation.

27 February 2008, Prince Albert II of Monaco pledged to cooperate with Germany in countering tax evasion, according to a report by Agence France-Presse that quoted a German government spokesman. At a meeting in Berlin with German Chancellor Angela Merkel, Prince Albert “gave his agreement to cooperation between the German and Monaco authorities as well as improved data exchange in the fight against tax fraud, money laundering and corruption,” the government spokesman said. “Our understanding is that such an agreement would include tax evasion.” Prince Albert told Germany’s Frankfurt Allgemeine Zeitung newspaper that Monaco has improved its banking transparency and aims to reach the highest international banking standards. “Our steps forward have been considerable, but it’s not enough to be blameless,” he was quoted as saying in an interview. “I want Monaco’s financial centre to diversify.” He said he also wants the principality to focus less on managing assets and to offer financial products, possibly through trading in environmental funds and emissions. “Our financial centre must reach the highest standards. The principality has strived for many years for our banking centre to conform to international regulations,” Prince Albert said. He said Monaco is currently applying EU guidelines on interest, taxing interest at source at the rate of 15%, with an increase to 20% planned for 2009. His comments were echoed by Monaco Finance Minister Gilles Tonelli who said Monaco was prepared to work with the OECD. According to a report on france24.com, he told a news conference that “Monaco does not intend to distance itself from a general movement of information exchange as long as it is really applied by everyone.” Monaco is one of only three jurisdictions worldwide, together with Liechtenstein and Andorra, which still appears on the OECD’s list of uncooperative tax havens first published in 2002.

1 March 2008, the Netherlands-Jersey Tax Information Exchange Agreement and the Netherlands-Jersey Agreement on Adjustment of Profits and Participation Exemption were brought into force, according to a Dutch Ministry of Finance. Both treaties were signed last June. The TlEA will have effect for criminal tax matters on that date and for all other tax matters on that date, but only in respect of taxable periods beginning on or after that date or, where there is no taxable period, all charges to tax arising on or after that date. The agreement on the access to mutual agreements procedures will apply to proceedings initiated after 1 March 2008.

The Portuguese government is to amend the individual tax code (IRS) so as to extend the tax exemption enjoyed by capital gains made on the disposal of property intended for permanent habitation by a taxpayer and their family. Currently the exemption applies only if the capital gains are reinvested in Portuguese territory in respect of property for permanent habitation and within 24 months of the gain arising. The amendment will extend the exemption to capital gains reinvested in any other EU Member State under the same conditions. It applies not just in respect of property for permanent habitation, but also for land for construction of a property for permanent habitation or in the construction, enlargement or improvement of an existing property for permanent habitation by the taxpayer and their family. The current exemption was found by the European Court of Justice, in a judgment handed down on 26 October 2006, to be incompatible with the principle of free movement of capital under the EC Treaty. It is anticipated that the proposed amendment will become effective as from the current tax year. In October last year, the ECJ further determined that Portugal’s differing capital gains tax treatment of residents and non-residents who transfer Portuguese immovable property was also in breach of the EC Treaty. Under Portugal’s CGT regime, Portuguese residents benefited from a special 50% reduction of the tax base but were taxed on a progressive basis up to a rate of 42%, while non-residents were taxed on the entire capital gains but at a special flat rate of 25%. A non-resident taxpayer, a German citizen, argued that the different tax treatment was disadvantageous to her and, in particular, that it breached her rights under EU law. The ECJ agreed, noting that the less favourable tax rules for non-residents on the same immovable property, made the transfer of capital “less attractive for non-residents by deterring them from making investments in immovable property in Portugal and . . . from carrying out transactions related to those investments such as selling immovable property.” It therefore concluded that the differing treatment constituted a restriction on the free movement of capital, which the Portuguese government failed to justify. As a result, Portugal will have either to reduce the taxation of EU citizens or revoke the benefit for tax residents and refund the tax unduly levied in the last four years to those taxpayers that file a valid claim.

12 February 2008, the Qatar-Turkey income tax treaty entered into force. Its provisions will apply beginning 1 January 2009. The agreement, which was signed in Ankara in December 2001, is the first tax treaty concluded between the two countries.

A Russian tax amnesty launched in March 2007 has raised RUB3.66 billion ($150 million) in tax with over 83% of the total being declared in the final month, said the Russian Federal Treasury. In the first ever amnesty, which ran until December 2007, individuals and self-employed entrepreneurs paid 13% tax on RUB28.19 billion in previously untaxed income earned prior to 1 January 2006. Those who took advantage of the amnesty will now be exempt from any legal action by tax and law enforcement agencies, said local agency reports. The government brought in the amnesty to try to halt capital flight and encourage inflow into Russia. It has been estimated that more than $160 billion left Russia following the collapse of the Soviet Union. Under the amnesty, no restrictions were set on the minimum or maximum amount that could be declared and the simplified procedure allowed individuals to make a “declaration payment” on income earned since 2001 and then pay 13% of the declared sum without penalty. The amnesty did not extend to those already convicted of tax evasion and tax-related crimes.

10 January 2008, the Gibraltar government welcomed an agreement on the longstanding issue of Spain’s objection to the application of international treaties, conventions and agreements to Gibraltar. The EU’s adherence to many important international conventions has been obstructed by Spain’s objection to Gibraltar’s participation. Spain’s position has been that all countries should deal with Gibraltar through the UK. The matter has been resolved by an agreement that extends the 2000 Competent Authority between Gibraltar and Spain to all international agreements. Gibraltar and Spain will channel their formal, written communications through UK diplomatic channels, called ‘the Post Box’. Those between Gibraltar and every other country will remain direct. The agreement will not alter the fact that the policy, executive and administrative acts and decisions will continue to be taken exclusively in Gibraltar by the Gibraltar Competent Authority, the government added. “We are delighted with these agreements which work very well for all sides,” stated Gibraltar’s Chief Minister Peter Caruana. “These agreements remove a whole area of traditional problems and difficulties between Spain, Gibraltar and the UK in the diplomatic arena, and will allow international business to be conducted more fluidly.”

1 February 2008, the newly established Financial Centre Dialogue Steering Committee, set up to coordinate moves to strengthen and develop the international competitiveness of the Swiss financial sector, held its first meeting. Working groups were set up to examine existing and new proposals for measures to improve the conditions of the financial centre, and implement them where appropriate. A working group will also examine the fiscal and regulatory framework regarding hedge funds and private equity. Last September the Swiss Bankers Association, the Swiss Insurance Association, the Swiss Funds Association and Swiss Financial Market Services published the “Swiss Financial Centre Master Plan” to strengthen and develop the international competitiveness of the Swiss financial sector. The Financial Centre Dialogue Steering Committee is chaired by the director of the Federal Finance Administration, Peter Siegenthaler. The Swiss authorities are represented by the Swiss National Bank, the Swiss Federal Banking Commission, the Federal Office of Private Insurance and the Federal Tax Administration. The Financial Centre Dialogue Steering Committee will meet three or four times a year to implement mandates from the Strategy Committee and prepare the groundwork for the latter to be able to take decisions. Federal Councillor Hans-Rudolf Merz chairs the strategy committee.

The US Treasury Department announced that protocols amending existing tax treaties with Germany, Denmark and Finland, together with a new tax treaty and protocol with Belgium, were ratified and entered into force on 28 December 2007. All generally apply to tax years beginning on or after 1 January 2008, although certain provisions of the protocols with both Germany and Finland are effective as of 1 January 2007. Provisions of the protocols include elimination of source-country withholding taxes on certain dividends, royalty and interest payments, and modernisation of the treaty’s limitation of benefits provision. The new treaty and protocol with Belgium also includes provision for improved exchange of information between the US and Belgium. The US Senate approved the protocols with Denmark and with Finland on 16 November 2007, and the protocol with Germany and new treaty and protocol with Belgium on 14 December 2007.