Owen, Christopher: - Offshore Survey – April 2010

1 February 2010, the Insurance Act 2008, to replace the Insurance
Act 1994, and the Insurance Regulations 2009, which were gazetted on 22
December 2009 to replace the Insurance Regulations 1995, were brought into
force.The Act will have the effect of repealing and replacing the current
legislative structure and will implement a new regime for the licensing,
administration and supervision of insurance businesses in the BVI. Some of
the more significant changes brought about by the Act include the
introduction of multiple classes of insurance licences, new provisions for
the regulation and supervision of insurance managers, intermediaries and
loss adjusters, and reporting duties of insurance managers. The Act will
also ensure full compliance with the International Association of
Insurance Supervisors’ Core Principles. The BVI Financial Services
Commission (FSC) issued the Regulatory Code 2009 on the same date. The
Code contains detailed requirements that support the general framework
established by the primary financial services legislation and will affect
the operations of service providers licensed in the British Virgin Islands
as banks, trust companies, company managers, insurers and money service
businesses. A Financing and Money Servic es Act 2009 (FMSA) also came into
force on 31 March. The FMSA introduces a regime for the licensing,
regulation and supervision of financing and money services business
carried out from or within the BVI, together with criminal offences for
breach or non- compliance. The FMSA brings the BVI into full compliance
with Recommendation 23 of the Financial Action Task Force. The FSC
announced, on 5 January, the establishment of a focus group to review and
revise existing IP laws. This is to make “recommendations for legislative
revision that are in concert with recent developments in the field and
industry”. The eight-member focus group includes three Queen’s Counsel and
the FSC’s director of corporate affairs, who is also the registrar of
trademarks and patents. It is expected to complete its work by 31 December
2010.

16 March 2010, the European Council of Finance
Ministers (ECOFIN) adopted directives on mutual assistance for the
recovery of taxes. The main objective is to meet the needs of member
states in respect of the recovery of taxes by overhauling Directive
76/308, which has been the basis on which member states have engaged in
mutual assistance since 1976.”National provisions on tax recovery are
limited in scope to national territories, and fraudsters have taken
advantage of this to organise insolvencies in member states where they
have debts,” said a statement issued by ECOFIN. “Member states therefore
increasingly request the assistance of other member states to recover
taxes, but existing provisions have only allowed a small proportion of
debts to be recovered.” According to the statement, the draft directive is
designed to provide for an improved assistance system, with rules that are
easier to apply, including as regards information held by banks and other
financial institutions. It provides for more flexible conditions for
requesting assistance and requires information to be exchanged
spontaneously.With regard to other tax matters, the Council also agreed on
a general approach, pending the opinion of the European Parliament, on a
draft directive aimed at simplifying value-added tax (VAT) invoicing
requirements, in particular relating to electronic invoicing. At an
earlier ECOFIN meeting on 19 January, European finance ministers had
elected to back down from a multi-pronged bid to force Austria and
Luxembourg to open up banking secrecy laws. The decision followed a
warning by Luxembourg’s Finance Minister Luc Frieden that EU partners were
wasting their time trying to force him into an all-encompassing accord
because tax matters are reserved for member states. As a result, ECOFIN
did not to proceed with a related directive on administrative cooperation
in the field of direct taxes or on the major proposals that form the
anti-tax evasion and tax governance package supported by the Spanish EU
presidency. Outgoing EU taxation commissioner Laszlo Kovacs said there
were “five delicate taxation issues on the agenda” which were seen by most
backers as an integrated package. But, “there was an agreement that we can
split the package, in order to make faster progress,” he said.

22 March 2010, Hong Kong and The
Netherlands signed a new treaty to avoid double taxation and to prevent
tax evasion. It was signed by Hong Kong Secretary for Financial Services
and the Treasury K.C. Chan and Dutch Finance Minister Jan Kees de Jager
during the latter’s visit to China.The treaty calls for significantly
lower withholding tax rates on passive income, including dividends and
royalties. For dividends, a withholding tax rate of 0% – instead of the
15% rate currently applicable in the Netherlands in absence of a treaty –
will apply to dividends received by qualifying persons holding at least
10% of the share capital of the paying companies. The 0% rate will also
apply to dividends received by banks and insurance companies, pension
funds, headquarters companies, and certain other qualifying entities. A
withholding tax rate of 10% will apply to other dividends. Hong Kong does
not levy withholding tax on dividends.No source taxation will apply to
interest payments. Neither country levies withholding tax on interest
based on domestic legislation. For royalties, Hong Kong has agreed to
limit its withholding tax to 3%.The treaty does not include specific
beneficial ownership or limitation on benefits clauses, but the treaty and
protocol do contain provisions that would allow the competent tax
authorities to determine whether a claimant would qualify for the
favourable dividend treatment as a headquarters company or other company
that does not have as its main purpose or one of its main purposes
obtaining treaty benefits.Another noteworthy treaty clause is article 28,
which states that the treaty may be extended, either in its entirety or
with any necessary modifications, to either or both of the countries of
the Netherlands Antilles and Aruba – or the legal successor of either or
both of these countries – if the country concerned imposes taxes
substantially similar in character to those to which the agreement
applies.The treaty must be ratified both in the Netherlands and in Hong
Kong before it can enter into force. The provisions of the treaty will
have effect in Hong Kong, regarding Hong Kong tax, for any year of
assessment beginning on or after 1 April 2011; and in the Netherlands,
regarding Netherlands tax, for any tax years and periods beginning on or
after 1 January 2011.Hong Kong also signed a tax treaty and protocol with
Brunei on 20 March in Bandar Seri Begawan. The treaty was signed by Brunei
Minister of Finance II Abdul Rahman bin Ibrahim and Hong Kong Financial
Secretary John Tsang, and will enter into force 30 days after the parties
exchange instruments of ratification.The first treaty between the
countries, it provides that dividends will be taxable only in the country
of the beneficial owner’s residence. Interest will be subject to a maximum
tax rate of 5% if any bank or financial institution receives the interest,
and 10% in all other cases. Royalties will be taxable at a maximum
withholding tax rate of 5%, and technical assistance fees will be subject
to a maximum tax rate of 15%.Hong Kong concluded negotiations with
Liechtenstein on 12 March for a new tax treaty in accordance with the OECD
model. The agreement will be signed when approved by the respective
governments and will enter into force upon conclusion of ratification
procedures.The Hong Kong government also announced, on 12 March, that the
Inland Revenue (Amendment) Ordinance 2010 and Inland Revenue (Disclosure
of Information) Rules, which passed on 6 January 2010, had came into
force. Together they enable Hong Kong to enter into tax treaties in line
with the OECD exchange of information article.In addition to The
Netherlands, Brunei and Liechtenstein, Hong Kong has concluded new
agreements incorporating the OECD exchange of information article with
Austria, France, Hungary, Indonesia and Ireland. It is also negotiating
with existing treaty partners to upgrade exchange of information articles
to the new version.

11 March 2010, Europe’s biggest bank HSBC said
that a theft of data by a former employee affected up to 24,000 Swiss
client accounts. The bank had previously said “less than 10 clients” were
affected after a former employee stole client data from the bank which he
handed over to French tax authorities.”The theft, which was perpetrated by
a former IT employee about three years ago, involves approximately 15,000
existing clients who had accounts with the bank in Switzerland before
October 2006,” HSBC said in a statement. A further 9,000 accounts that had
been closed in the past were also affected. These accounts often were not
big enough to be eligible for private banking services, the bank said. It
has 100,000 clients in Switzerland.HSBC “unreservedly apologised” to
clients for the threat to their privacy, but said Swiss authorities would
not support the use of the stolen data to answer requests from foreign
authorities about tax issues. The stolen client information is limited to
accounts in Switzerland, excluding ex-HSBC Guyerzeller accounts.The Swiss
regulator, FINMA, was investigating how “a data theft to this extent could
have happened” and whether the organisational and technical measures
implemented by HSBC since the theft to prevent such incidents complied
with legal requirements.

8 February 2010, Fiduco Treuhand AG, a former
subsidiary of Liechtenstein’s LGT Bank, announced that it will appeal a
February ruling by the Liechtenstein district court (Landgericht) awarding
a former client €7.3 million in damages.German national Elmer Schulte
filed a lawsuit accusing the bank of negligence for its failure to warn
him that data revealing his hidden assets had been compromised when former
LGT employee Heinrich Kieber stole data on account holders and sold it to
German, and other national, authorities. Schulte was convicted of tax
evasion in 2008 in a German court, reportedly receiving a €7.3 million
fine in lieu of prison time. According to press reports, Schulte is also
planning to appeal the Landgericht ruling, arguing that the award is too
low and that his three other claims alleging that he received bad advice
from the bank should not have been dismissed. Schulte alleges that LGT
Treuhand bank employees invested his assets in so-called black funds in
tax havens such as the Cayman Islands and Luxembourg without adequately
advising him. Both appeals will go to the Liechtenstein Supreme Court
(Oberster Gerichtshof).

17 March 2010, the Luxembourg Chamber of
Deputies adopted a first reading draft Law ratifying Luxembourg’s 20
pending tax treaties and tax treaty protocols that include the OECD
exchange of information article. Ratification will be completed after the
draft law is adopted by the Chamber of Deputies in a second reading and is
signed by Grand Duke Henri. The Law will ratify new tax treaties with:
Bahrain, signed 6 May 2000; Armenia, signed 23 June 2009; Qatar, signed 3
July 2009; Monaco, signed 27 July 2009; and Liechtenstein, signed 26
August 2009. The Law will also ratify protocols to existing tax treaties:
1996 Luxembourg-US tax treaty; 1968 Luxembourg-Netherlands tax treaty;
1958 France-Luxembourg tax treaty; 1980 Denmark-Luxembourg tax treaty;
1982 Finland-Luxembourg tax treaty; 1967 Luxembourg-UK tax treaty; 1962
Austria-Luxembourg tax treaty; 1983 Luxembourg-Norway tax treaty; 1970
Belgium-Luxembourg tax treaty; 1993 Luxembourg-Switzerland tax treaty;
1999 Iceland-Luxembourg tax treaty; 2003 Luxembourg-Turkey tax treaty;
2001 Luxembourg-Mexico tax treaty; 1986 Luxembourg-Spain tax treaty; and
1958 Germany-Luxembourg tax treaty.

19 January 2010, the Mauritius Financial Services
Commission said it had imposed a stringent set of conditions on
Mauritius-based companies investing in India in a bid to allay concerns
about “round-tripping” of funds. It also warned that licences of entities
investing in India would be revoked if they source funds from
India.Mauritius is the top source of foreign direct investment (FDI)
flowing into India. During the first seven months of the current financial
year, nearly $8 billion of the $18 billion FDI flowing into India came
from Mauritius. The India-Mauritius tax treaty provides capital gains
exemption to all Mauritius-based investors investing in India. The Indian
government has been pushing for a renegotiation of the treaty for many
years, but Mauritius has consistently refused to do so. An annual audit of
Mauritius-based entities investing in India has now been made mandatory,
said Milan Meetrabhan, chief executive of the Financial Services
Commission of Mauritius. The Indian side has been apprised of the steps
taken to check round-tripping and Mauritius hopes that this will take care
of the concerns about tax evasion.A Mauritian team headed by Dr Rama
Sithanen, vice prime minister and minister of finance, met Indian finance
minister Pranab Mukherjee. “There are concerns and we are addressing them.
Mauritius is not a tax haven,” Sithanen said. “There are a number of other
countries with more attractive tax treaties with India, but so much
investment is not flowing through them. Mauritius is preferred because we
have a transparent regulatory system and a sound financial sector.”
Sithanen added that India and Mauritius had already formed a joint working
group to look into the ways of improving the information flow between
them. Mauritius remained open to any suggestions to improve the financial
reporting between two nations.

17 March 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act of 2010, which raises $8.7 billion through new withholding rules and other enforcement measures from the Foreign Account Tax Compliance Act (FATCA) in order to fund $13 billion in tax incentives for companies hiring new workers.The law will essentially present foreign financial firms with the choice of entering into agreements with the IRS to provide information about their US accountholders or becoming subject to 30-percent withholding tax. The reach of the legislation goes beyond traditional financial institutions and covers virtually every type of foreign financial institution (FFI), including hedge funds, private equity funds and typical offshore securitisation vehicles that hold US assets and issue their own equity and debt securities, such as collateralised debt obligation issuers. The provisions in the “FACTA” element of the Act will:
Impose a 30% tax withholding on payments either
to foreign banks and trusts that fail to identify US accounts and their
owners and assets to the IRS, or to foreign corporations that do not
supply the name, address, and tax identification number of any US
individual with at least 10% ownership in the firm (effective for
payments made after 31 December 2012, with some exceptions for
grandfathered agreements);
Extend bearer-bond tax penalties to any such
bonds marketed to offshore investors, and prevent the US government from
issuing bearer b onds (effective two years after the date of enactment);
Impose penalties as high as $50,000 on US
taxpayers who own at least $50,000 in offshore accounts or assets but
fail to report the accounts on their annual income tax return (effective
for tax years beginning after the date of enactment);
Levy a 40% penalty on the amount of any
understatement attributed to undisclosed foreign assets (effective for
tax years after the date of enactment);
Extend to six years the statute of limitations
for “substantial” omissions – exceeding $5,000 and 25% of reported
income – derived from offshore assets (effective for returns filed after
the date of enactment or for any return filed on or before that date if
the section 6501 assessment period for that return has not expired as of
the date of enactment);
Require shareholders in passive foreign
investment companies to file annual returns (effective on enactment);
Oblige financial firms to file withholding tax
returns electronically, even if they file fewer than 250 returns
annually (effective for returns due after the date of enactment);
Codify Treasury regulations that treat foreign
trusts as having US beneficiaries if any current, future or contingent
beneficiary is a US person;
Allow the Treasury Department to presume that a
foreign trust has US beneficiaries if a US person directly or indirectly
transfers property to the trust (effective for transfers of property
after the date of enactment);
Establish a $10,000 minimum failure-to-file
penalty for some foreign trust-related information returns (effective
for notices and returns due after 31 December 2009); and
Subject dividend equivalent payments included in notional principal contracts and paid to overseas corporations to the same 30% withholding tax levied on dividends paid to foreign investors (effective for payments made on or after 180 days after enactment).
FATCA as included in the HIRE Act omits the language
that would have required tax or investment advisors to disclose the
identities of any clients that they assist in buying offshore assets, as
well as the assets purchased.

24 February 2010, the Federal Council
laid out measures for implementing its strategy, agreed last December, of
preserving the integrity of its financial centre by preventing the flow of
undeclared funds from foreign countries into Swiss banks.To achieve
clarity and legal security, it wished to push ahead with the
regularisation of undeclared assets whilst at the same time ensuring that
privacy is safeguarded. “The Federal Council is against attracting
undeclared funds from overseas. In order to prevent new, undeclared funds
from coming to Switzerland, the Federal Department of Finance (FDF) will
draw up various solutions,” it said. It has also instructed the FDF to
continue to implement the new administrative assistance policy. Since 13
March 2009, Switzerland has been offering international administrative
assistance in accordance with the OECD standard, and no longer makes a
distinction in relation to foreign countries between tax fraud and tax
evasion in the case of corresponding applications. In the meantime, the
Federal Council said Switzerland has negotiated tax treaties with 18
countries on the basis of the OECD standard. The onus was now on
parliament to ratify them. The Council of States would address the first
five treaties in the spring session. The statement noted that: “The
Federal Council continues to reject the automatic exchange of information
in terms of laying bare every detail of citizens’ lives.”

31 March 2010, the Swiss Federal
Council and US government approved an amending protocol to revise the UBS
Request Agreement. This was to remedy the shortcomings pointed out in the
Federal Administrative Court’s judgment of 27 January and ensure that
Switzerland was able to fulfill its obligations under international law
that it entered into with the original agreement.The amending protocol
raises the treaty request agreement of 19 August 2009 to the same level as
the bilateral tax treaty such that the UBS Agreement now takes precedence
over the older and more general treaty, and permits Switzerland to provide
treaty assistance in cases not only of tax fraud, but also of continued
and serious tax evasion. By signing the UBS Agreement last August,
Switzerland undertook to process the US request for treaty assistance – by
issuing around 4,450 final decisions – within a year. But the Federal
Administrative Court ruled that the agreement’s more liberal
interpretation of “tax fraud and the like” was insufficient to change the
meaning of the current Swiss-US tax treaty. As a result, it prohibited the
government from disclosing information not covered by the current treaty’s
allowance for disclosure of cases involving tax fraud as defined by Swiss
law. The ruling affected approximately 4,200 of the expected disclosures.
The Swiss government announced on 24 February that it would therefore seek
parliamentary approval of the August agreement, which would give the
agreement the same effect as a treaty and overcome the court’s objections.
The new amending protocol states clearly that the UBS Agreement is not
simply a competent authority interpretation, but constitutes an
international agreement. Furthermore, a conflict of laws regulation
determines that the UBS Agreement takes precedence over the bilateral
double taxation convention and the attendant protocol in the event of any
clash. Finally, the amending protocol lays down regulations for the
provisional application of the revised Agreement. In cases of particular
urgency and in order to safeguard important Swiss interests, under the
terms of governmental and administrative organization law, the Federal
Council may apply a treaty provisionally from the date on which it is
signed. The Federal Council said it felt that there were compelling
reasons to exercise this authority because the present case fulfills both
the particular urgency and important interests conditions. Legal hearings,
the examination of the corresponding statements and the sheer dimensions
of the process meant that it would be impossible to complete all cases in
parallel before the one-year deadline if application were delayed until
after the June session of parliament. This would a risk a legal and
sovereignty conflict with the US. The Federal Council said the provisional
application of the revised treaty request agreement did not take the Swiss
parliament’s decision for granted. Rather, it guaranteed that the
agreement that is submitted to parliament could actually be implemented
after its approval. The Federal Council would issue its dispatch on the
acceptance of the revised treaty request agreement to parliament in April
and had instructed the Swiss Federal Tax Administration not to hand over
any client data to the US until the UBS Agreement has been passed by
parliament.

26 February 2010, Switzerland and the Netherlands
signed a new income tax treaty that includes Article 26 of the OECD Model
Tax Convention on Exchange of Information and the definitions of residency
and permanent establishment. The new agreement will replace the existing
treaty of 1951.The percentage holding for withholding tax exemption for
dividends has been reduced from 25% at present to 10%. This threshold
corresponds to the minimum holding requirement based on the EU parent
subsidiary directive. Dividend payments to pension funds will also be
exempt from tax in the source state in future. Interest payments and
royalties are zero-rated. The old treaty limited withholding tax on
interest to 5%.The provision in the protocol of the old treaty for an
upfront allocation of 10% to 20% of profits to the place of effective
management of a company, if it had a permanent establishment in the other
contracting state, has not been adopted in the new treaty. The new treaty
also contains an arbitration clause if the competent authorities are
unable to reach an agreement within three years following the commencement
of a mutual agreement procedure.

16 February 2010, the UK Court of Appeal rejected
an appeal by British businessman Robert Gaines-Cooper that he did not owe
taxes because he was a non-resident, leaving him a £30 million tax bill
for the years 1993 to 2004. It held that a taxpayer must show a “distinct
break” from social and family ties to the UK and that spending less than
91 days outside the country is not sufficient to establish non-residency
status.The case involved judicial review of the earlier decision that the
position of HM Revenue & Customs (HMRC) was contrary to the guidance
given in leaflet IR20. Gaines-Cooper had argued he did not owe taxes in
the UK because he has been a resident of the Seychelles since 1976. He
justified his position with a rule that defines a non-resident as one who
spends less than 91 days per year in the UK. The Court of Appeal confirmed
the importance of Revenue practices and that HMRC were indeed bound by the
terms of IR20. But it also accepted that there was an implied condition in
IR20 that, in order for the individual in question to be treated as
non-resident, they have to have made a distinct break with the UK by
severing all social and family ties with the UK. And, as Gaines-Cooper was
deemed not to have done so, he was to be treated as resident in the UK
even after his ostensible departure in 1976. Lord Justice Alan Moses,
writing for fellow judges Dyson and Ward LJJ, said that the correct
interpretation of tax residency status turned on whether England had
remained the taxpayer’s “centre of gravity of his life and interests,”
according to the report. The 91-day rule could not establish non-resident
status, rather it was “important only to establish whether non-resident
status, once acquired, has been lost”. The court found that Gaines-Cooper,
who was born in Reading in Berkshire, never meaningfully cut ties with the
UK. He maintained a mansion at Henley-on-Thames, which the court called
his “chief residence” and was home to his second wife and son, as well his
collections of art and guns. Also, his son attended an English school, his
will was drawn up under English law and he regularly attended Ascot
racecourse. Because of these connections, the court found that
Gaines-Cooper had failed to show the required distinct break and that his
complaints of unfair treatment by HMRC were based on an “impossible
construction” of the law. The fact that Gaines-Cooper had not been in the
country for more than 91 days in any one year since 1976 made no
difference to his status, the court said. The court said HMRC’s
interpretation of tax residency was correct, adding that there were “ample
grounds on which to conclude that he had been resident and ordinarily
resident in the UK throughout [the period]”. HMRC is “fully entitled to
look for a clear break – or a clean break – with this country before
affording non-resident status,” the court concluded. Gaines-Cooper plans
to appeal the case to the Supreme Court. His counsel said that HMRC was
“playing games” with his client and mischievously reinterpreting its own
guidance, turning it “from a sensible, practical, guide into something
meaningless and, which is worse, a devious trap”.

27 January 2010, the UK High Court
upheld the right of HM Revenue & Customs to seek £100 million in
income taxes from 2,500 users of an offshore tax avoidance scheme. It also
ruled that the backdating of demands was “in the relevant circumstances
proportionate” and did not breach human rights.In R (on the application of
Huitson) v HMRC, Robert Huitson was a UK-resident, self-employed IT
contractor who, before 2008, belonged to a scheme whereby his services to
UK clients were supplied through an Isle of Man intermediary. Double
taxation relief under the UK-Isle of Man tax treaty ensured that no UK
income tax liability arose. The judge said that the overall effect had
been to reduce Huitson’s tax rate to just 3.5%.The UK Finance Act 2008
subsequently prevented this type of scheme from working, with
retrospective effect. Huitson issued an application for judicial review,
arguing that HMRC’s retrospective imposition of the law breached the 1998
Human Rights Act. He emphasised that HMRC had failed to take any action
against the sch eme before the law was changed, despite being well aware
of it.Mr Justice Parker rejected this, upholding the 2008 Finance Act,
which let the Revenue close the loophole retrospectively. He noted that
the Revenue had warned the users of the tax avoidance scheme that it might
be challenged, and said the government was entitled to change tax law
retrospectively to quash artificial arrangements. “The tax avoidance
scheme, if it worked, would, therefore, appear to realise every taxpayer’s
dream of lawfully avoiding, or at least greatly reducing, income tax in
any jurisdiction,” he said. “It is also immediately plain that the tax
avoidance scheme, if it worked, would be singularly attractive to any
person in the position of the claimant, that is, any resident of the UK
who, as a self-employed person, carried on a trade or profession here.”
Although the judge refused Huitson permission to appeal, his lawyers
indicated that they would ask the Court of Appeal to hear the case because
of its important general implications.