Owen, Christopher: Global Survey - August 2016

8 July 2016, the Limited Liability Companies Law came into force in the Cayman Islands.  Approved by the Legislative Assembly on 6 May, Cayman Islands limited liability companies (LLCs) were made available for registration from 13 July.

Based on the Delaware LLC, the LLC Law provides for the formation and operation of an LLC in the Cayman Islands, as a body corporate with limited liability and separate legal personality from its members. It also provides for the conversion or merger of existing Cayman Islands exempted companies into LLCs and the continuation into the Cayman Islands as an LLC of entities established in another jurisdiction.

The LLC Law also incorporates LLCs into other Cayman Islands laws, such that LLCs can automatically be structured as mutual funds, general partners of exempted limited partnerships or as an investment manager or investment adviser.

The introduction of the LLC is a response to demand from the investment funds and financial services industry and will reinforce the position of the Cayman Islands as a leading jurisdiction for offshore investment funds and offshore corporate and SPV structures.

22 July 2016, the European Commission called on Austria to change its rules requiring non-resident taxpayers to appoint representatives to administer their tax affairs on their behalf. Persons resident in Austria do not have to comply with this legislation.

The Commission said it considers that these rules result in discriminatory treatment on the grounds of nationality and are contrary to the right to free movement of goods, capital, services and people as laid down in the Treaty on the Functioning of the European Union (TFEU) and the Agreement of the European Economic Area (EEA Agreement).

A letter of formal notice was sent to Austria on 31 March 2014. The request takes the form of a reasoned opinion. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the European Court of Justice.

22 July 2016, a judge of the Conseil d'État, France’s highest administrative court, ordered the provisional suspension of public accessibility to the National Register of Trusts after online access was first opened on 5 July.

The Register was established in 2013 by a law requiring trustees to make annual or event-triggered reports to the tax authorities if either the trustee, the settlor or one of the beneficiaries are French tax residents, or if any of the trust assets are located in France. Under a Decree of 10 May 2016, it was made open to inspection by any individual with a French tax number.

The Register contains the names, dates of birth and place of birth of settlors, trustees and beneficiaries. Details of beneficiaries who are minors are also given. Currently, 16,000 entities have been identified as trusts and are registered with the French tax administration

An 89-year-old American woman, resident in France, who is a beneficiary of one of the listed trusts, brought a legal challenge in the Conseil d'État. In ordering the provisional suspension of public accessibility pending a full hearing by the Conseil Constitutionnel, the judge considered that the personal nature of the information could lead to the disclosure of the applicant’s intentions in respect of her estate.

If the Conseil Constitutionnel rules that the Decree is constitutional, the Conseil d'État will decide whether or not it disproportionately infringes on the obligation to protect the applicant’s private life. If the French courts do not decide to restrict access to the National Register of Trusts to the tax office, the case may go forward to the European Court of Human Rights.

24 July 2016, a meeting of the G20 Finance Ministers and Central Bank Governors in Chengdu, China, endorsed the proposals made by the OECD on the objective criteria to identify non-cooperative jurisdictions with respect to tax transparency. It was their last meeting before the Hangzhou G20 Summit in September.

The final communiqué stated: “We ask the OECD to report back to us by June 2017 on the progress made by jurisdictions on tax transparency, and on how the Global Forum will manage the country review process in response to supplementary review requests of countries, with a view for the OECD to prepare a list by the July 2017 G20 Leaders' Summit of those jurisdictions that have not yet sufficiently progressed toward a satisfactory level of implementation of the agreed international standards on tax transparency.”

To be judged compliant with international tax transparency requirements, the OECD said jurisdictions are to be assessed against three objective criteria and would need to meet two of them. These are:

• The country is rated “largely compliant” or better by the OECD Global Forum against the Exchange of Information on Request (EOIR) standard;
• The country commits to adopting the OECD Common Reporting Standard (CRS) for Automatic Exchange of Information (AEOI); and
• The country has signed the Multilateral Convention on Mutual Administrative Assistance in tax matters (MCMAA).

The use of this formula has been met with criticism, notably for potentially allowing the US to avoid blacklisting despite its failure to adopt the CRS. The US is instead using its own reporting system, developed under the Foreign Account Tax Compliance Act.

The Tax Justice Network stated: “The USA should not be among the jurisdictions named as being committed to implementing the CRS because the USA refuses to implement the CRS. Yet the USA is named in a footnote in the relevant OECD document. This risks erroneously treating the USA in any eventual blacklist as being in compliance with [criterion 2 above].’

The OECD reported that all countries and jurisdictions which had been asked to commit to AEOI have done so, with Bahrain, Lebanon, Nauru, Panama, and Vanuatu being the latest to make that commitment. In addition, Lebanon as well as Egypt and Paraguay have decided to join the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), bringing its membership to 135.

The Dominican Republic, Jamaica, Nauru and Uruguay signed the multilateral convention in June, bringing to 98 the number of participating countries and jurisdictions, while Panama has now also requested to sign.

The OECD reported that over 50 countries have taken concrete steps to implement country-by-country reporting. There are now 85 members in the Base Erosion and Profit Shifting (BEPS) project, with a further 19 countries and jurisdictions that attended the inaugural meeting in Kyoto likely to join the inclusive framework by year end, the OECD said.

In addition 96 countries are currently negotiating on the multilateral instrument (MLI) covering implementation of its BEPS actions, which include a number of tax treaty-related actions.

The OECD report states: “Major progress has been made and we expect the text of the MLI to be initialled, at the latest, in November. This would allow the opening of the instrument for signature before year end, as per your mandate.”

The MLI will allow countries to meet the BEPS minimum standard aiming to put an end to treaty shopping (Action 6). It will also provide the possibility for countries to address the issue of hybrid mismatches, the updated definition of the permanent establishment concept, other forms of treaty abuses with specific treaty rules, as well as improving dispute resolution processes.

More than 2,000 bilateral tax treaties could be amended if these countries sign the convention when the instrument is finalised. A signing ceremony for countries, including all G20 members, will be organised in the first half of 2017.

26 July 2016, Switzerland was rated as “overall largely compliant” by the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes, following the completion of the Phase 2 peer review, which focuses on the implementation and effectiveness of its legislative framework for exchange of information (EOI).

The Forum said its review showed that Switzerland’s exchange of information practice is generally in line with the international standard for transparency and exchange of information for tax purposes. The evaluation found that: “Switzerland’s approach to exchange of information for tax purposes has changed significantly over the past three years.” It welcomed Switzerland's attempt to ease administrative assistance in tax matters and extend its network of double-taxation agreements.

However it made recommendation in respect of identifying the owners of bearer shares which some types of Swiss companies can issue, the use of stolen bank data by other countries to request information on suspected tax evasion, and in regard to foreign entities carrying on business or with a permanent establishment in Switzerland.

The report recommended that Switzerland ensures that appropriate reporting mechanisms are in place to effectively ensure the identification of the owners of bearer shares in all cases. Switzerland was ranked “partially compliant” for its refusal to accept tax data requests from countries based on stolen bank data. The report recommended that appropriate Swiss legislation and practices should be modified. The Swiss government has signalled its intent to cooperate on some investigations involving stolen data, but this has yet to be passed by parliament.

The Swiss Finance Ministry said the rating reflects progress made during the assessment period from 1 July 2012 to 30 June 2015 with the implementation of the international standard for the exchange of information on request. The ranking, it said, puts Switzerland on the same level as countries including Singapore, Liechtenstein and Hong Kong.

"What we achieved for Switzerland is absolutely central," said Finance Minister Ueli Maurer, saying international recognition was crucial to ensure financial stability and to conduct business as usual. With bank account secrecy for tax avoidance now largely abolished, Switzerland in future will have to rely on its reputation for political and economic stability to win business, he added.

A new round of peer reviews on how countries exchange information begins this year. Switzerland's review will start in 2018.

The Global forum also published Phase 2 peer review reports for six other jurisdictions, five of which – Albania, Cameroon, Gabon, Pakistan and Senegal – received an overall rating of “Largely Compliant.”  The United Arab Emirates was rated as “Partially Compliant.”

A Phase 1 report on Ukraine assessed the legal and regulatory framework for transparency and exchange of information, which was found sufficient to move Ukraine to the new round of reviews, which will assess its legal framework and practices for exchange of information against the revised Terms of Reference during the second half of 2018.

Liberia’s Supplementary Report assessed improvements made to the legal framework and exchange of tax information mechanisms since the adoption of a Phase 1 Report in 2012. In light of actions undertaken to address the recommendations made in 2012, Liberia is in a position to move to the next round of peer reviews, which is scheduled to commence in the second half of 2018.

The Phase 2 supplementary report for Saint Lucia assessed changes to its exchange of information practices since the adoption of its previous review in 2014. The overall rating for Saint Lucia has been upgraded from “Partially Compliant” to “Largely Compliant.”

The Global Forum has now completed 235 peer reviews and assigned compliance ratings to 101 jurisdictions that have undergone Phase 2 Reviews. To date, 22 jurisdictions are rated “Compliant”, 67 are rated “Largely Compliant” and 12 are rated “Partially Compliant”. There are still seven jurisdictions that remain blocked from moving to a Phase 2 review, due to insufficiencies in the legal and regulatory framework. The supplementary reviews of five of these jurisdictions are currently under way.

Egypt has just joined the Global Forum, bringing membership to 135 jurisdictions.

27 July 2016, the Federal Court of Canada approved federal requests for seven years' worth of transaction information from the Royal Bank of Canada and Citibank in respect of accounts in the name of Cayman National Bank.

The Royal Bank and Citibank – neither of which opposed the federal demands – have 120 days to hand over records from 1 January 2009 to 31 December 2015, including account statements, deposit slips, cheques, bank drafts and wire transfer orders.

The Canada Revenue Agency (CRA) plans to analyse the data to see if Canadian residents are using the Canadian dollar accounts, opened by Cayman National Bank, to transfer funds to Canada and avoid reporting taxable income from their foreign holdings.

In an affidavit filed with the Federal Court, CRA auditor David Letkeman said the agency was alerted by a Canadian woman who declared unreported assets under a special voluntary disclosure programme.

Documents showed she transferred money from the Cayman Islands, through Cayman National Bank’s account at a Canadian branch of Citibank, to a Canadian bank account in her name. She was ordered to pay a total of more than $1.2 million plus interest for unreported capital gains.

27 July 2016, the IRS delivered a notice of deficiency to Facebook for $3 billion to $5 billion, plus interest and penalties, based on its audit of its transfer pricing related to the transfer of its global operations to Ireland in 2010, according to a regulatory filing by the social media giant. Facebook said it plans to challenge the notice in federal tax court.

The IRS asked a federal magistrate judge in California to force the company to turn over detailed internal corporate records related to the value of the assets moved to Ireland. This included all operations outside the US and Canada.

According to court filings, the IRS claims Facebook’s tax adviser Ernst & Young undervalued the company’s property when it was transferred to Facebook Ireland Holdings Ltd by evaluating pieces of the online platform separately.

The IRS began investigating the transaction in 2013 by obtaining documents related to the transfer of licences and assets that were used to determine the value of the royalty Facebook Ireland paid the primary entity in 2010. Those statements included agreements for the division of users and marketing, the online platform and cost sharing.

The IRS claimed that EY’s method for determining the value of those assets individually worked in direct conflict with otherwise intertwined business entities. In April 2015, tax officials issued a preliminary presentation to Facebook, which was rejected.

In its complaint, the IRS said it met with resistance as Facebook first produced only limited documentation in January 2016 before declining to provide further details by April. In June, the IRS filed the first of seven requests for records through court summons in hopes of receiving details. Facebook then failed to appear twice in June at the IRS’s offices in California.

With the statute of limitations for the IRS to continue requesting documents set to lapse on 31 July, it instead served Facebook with the tax demand. Facebook said in its filing that the liability “could have a material adverse impact” on its finances, results or cash flows. The case is US v Facebook Inc., 16-cv-03777, US District Court, Northern District of California.

13 July 2016, New Zealand said it would introduce a compulsory register of foreign trusts searchable by law enforcement agencies. The registry was recommended by an independent review led by accountant John Shewan, which was set up after the “Panama Papers” data leaks revealed the widespread use of New Zealand foreign trusts.

Shewan's report found that New Zealand has registered 12,000-plus foreign trusts with unidentified beneficiaries and privately-held accounts. Ownership information could be requested by New Zealand's regulators under powers set out in the 2006 foreign trust rules, but it was not immediately available because trustees were not required to file records.

Shewan recommended improvements to registration and disclosure of information, anti-money laundering rules and increased information sharing between government agencies.

New Zealand Finance Minister, Bill English, accepted his recommendations and committed to introduce a bill to Parliament in August, requiring the Inland Revenue Department (IR) to establish a register to "ensure that our foreign trust disclosure rules are strengthened and New Zealand's reputation is protected."

As of the April 2017 tax year, foreign trusts will be required to register on establishment and will have to submit annual updating reports. There will also be a transitional rule requiring existing foreign trusts to register and to supply the information required by 30 June 2017. Each trust will pay a registration fee of NZD500 and an annual fee of the same amount.

The information required will comprise the name, email address, foreign residential address, country of tax residence and tax identification numbers of the settlors and protector; non-resident trustees; any other natural person who has effective control of the trust, including through a chain of control or ownership; and beneficiaries of fixed trusts, including the underlying beneficiary where a named beneficiary is a nominee.

For discretionary trusts, any class of beneficiary not listed on the trust deed must be listed and each class of beneficiary must be described in sufficient detail to enable identity to be established at the time of a distribution or when vested rights are exercised. The trust deed will have to be filed with the registration form.

Trustees will have to report any changes to the information provided at registration on an annual basis, as well as the trust's annual financial statements and the amount of any distributions paid or credited, along with full details of the recipients. This information will be kept by the Inland Revenue Department and will be searchable by the police and the Department of Internal Affairs, though not by members of the public.

Foreign trusts that have not fulfilled these obligations will not be granted an exemption from New Zealand tax on foreign-source income.

26 July 2016, the Limited Liability Company Act 2016 passed in the Senate and is set to come into force in the near future. The Act introduces into Bermuda the first new corporate structure in 100 years.

The Bermuda LLC will be a hybrid entity that includes features of both limited companies and partnerships. Similar to both companies and partnerships, LLCs have a legal existence separate and distinct from its members. As with shareholders in a limited company, LLC members are generally not personally liable for financial obligations of the LLC. As with partnerships, LLCs are governed by contractual agreement amongst the members.

Any LLC member may participate in the day-to-day management and operations of the LLC without losing the liability protection offered by this structure; and there are limited statutory formalities that apply to the management and operation of an LLC. This results in lower overall costs for forming and operating an LLC as compared to a limited company.

Economic Development Minister Dr Grant Gibbons said in the House of Assembly: “LLCs are well known amongst US law firms as a vehicle of choice for private equity funds and asset holding structures. In Delaware alone, there are nearly 800,000 active LLCs, with just over 180,000 being formed since the start of 2015.

“LLCs are also utilised in some offshore jurisdictions such as the Isle of Man, Anguilla and the Marshall Islands. LLCs have also recently been introduced in the Cayman Islands. The popularity of LLCs is based on market demand by persons and entities seeking the same flexibility and protection offered by this corporate structure that Bermuda businesses will soon be able to enjoy.”

12 July 2016, the European Union and Monaco signed a new tax transparency agreement, under which they will automatically exchange information on the financial accounts of each other's residents from 2018.

Under the new agreement, Member States will receive the names, addresses, tax identification numbers and dates of birth of their residents with accounts in the Principality, as well as other financial and account balance information. It is in line with the new OECD/G20 global standard for the automatic exchange of information.

EU Tax Commissioner Pierre Moscovici said: "Today's agreement reinforces Monaco's commitment to international tax transparency standards. The EU and Monaco have today sent a joint clear signal: we are allies when it comes to tax transparency and allies in the fight against international tax avoidance and tax evasion."

The Monaco agreement marks the latest in a series the EU has signed with Switzerland, Liechtenstein, San Marino and Andorra to update its existing Savings taxation agreements with European third countries in line with Directive 2014/107/EU, which implements the OECD Common Reporting Standard for the automatic exchange of financial account information. A common feature of the five revised agreements is reciprocity, which was not foreseen in the original Savings taxation agreements.

29 July 2016, the US Treasury announced that it would begin updating its list of intergovernmental agreements (IGAs) to facilitate implementation of the Foreign Account Tax Compliance Act (FATCA) from 1 January 2017 in order that those jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect.

The US has signed IGAs with 83 jurisdictions; of those IGAs, 61 are in force. It has also reached agreements in substance with a further 30 jurisdictions. The US has been treating such countries as if they have an IGA in effect with the US. As a result, foreign financial institutions (FFIs) located in those jurisdictions are considered to comply with FATCA and to be exempt from withholding without the need to enter into an FFI agreement with the US.

Each jurisdiction with an IGA that is not yet in force and that wishes to continue to be treated as having an IGA in effect must provide to Treasury, by 31 December 2016, a detailed explanation of why the jurisdiction has not yet brought the IGA into force and a step-by-step plan that the jurisdiction intends to follow in order to sign the IGA (if it has not yet been signed) and bring the IGA into force, including expected dates for achieving each step.

FFIs in jurisdictions with a signed or “agreed in substance” Model 1 IGA that had not entered into force as of 30 September 2015, will continue to be treated as compliant provided that any information that would have been reportable under the IGA on 30 September 2015 is exchanged by 30 September 2016, together with any information that is reportable under the IGA on 30 September 2016.

In evaluating whether a jurisdiction will continue to be treated as if it has an IGA in effect, Treasury will consider whether: the jurisdiction has submitted the explanation and plan with timetable; and that the explanation and plan, as well as the jurisdiction’s previous conduct in respect of IGA discussions, show that the jurisdiction continues to demonstrate firm resolve to bring its IGA into force.

Failure to adhere to the submitted timeline could result in a determination that the jurisdiction is no longer demonstrating firm resolve to bring its IGA into force and therefore will no longer be treated as if it has an IGA in effect. In order to provide notice to FFIs, a jurisdiction will not cease to be treated as having an IGA in effect until at least 60 days after the jurisdiction’s status on the IGA List is updated.

Unless they qualify for an exemption under the FATCA regulations, such FFIs will have to enter into FFI Agreements in order to comply with their FATCA obligations, including reporting information to the IRS and withholding pursuant to the terms of the FFI Agreement.

With respect to the timing of the exchange of prior year information upon entry into force of a Model 1 IGA, the Treasury said it does not intend to find FFIs to be in significant non-compliance with the IGA as long as any information for prior years is exchanged before the next 30 September after the obligation under the IGA to exchange information has taken effect.

The jurisdictions with which the US has signed IGAs that are not yet in force are: Algeria, Angola, Belgium, Cambodia, Chile, Costa Rica, Croatia, Georgia, Israel, Montserrat, Panama, Philippines, Portugal, San Marino, South Korea, St. Lucia, Thailand, Turkey, United Arab Emirates and Uzbekistan.

​​​​​The jurisdictions with which the US has reached agreements in substance are: Anguilla, Antigua and Barbuda, Armenia, Bahrain, Cabo Verde, China, Dominica, Dominican Republic, Greece, Greenland, Grenada, Guyana, Haiti, Indonesia, Iraq, Kazakhstan, Macao, Malaysia, Montenegro, Nicaragua, Paraguay, Peru, Saudi Arabia, Serbia, Seychelles, Taiwan, Trinidad and Tobago, Tunisia, Turkmenistan and Ukraine.

5 July 2016, the Swiss Federal Tax Administration (FTA) ordered Switzerland’s largest bank UBS to transfer information based on a French request for international administrative assistance in tax matters.

According to a statement posted on its website, UBS said: “The request concerns a number of UBS account numbers pertaining to current and former French domiciled clients and is based on data from 2006 and 2008. Since then, the client base underlying the data has changed significantly and a large number of the accounts affected by the French request are closed.”

UBS was placed under formal investigation in France for illegal solicitation in June 2013, for aggravated tax fraud and money laundering in July 2014 and for abetting money laundering in March 2015. It faces a €4.88 billion fine if found guilty in the last case.

The latest request was made under the double tax treaty between Switzerland and France. The French tax authority based its request on data received from the German authorities, UBS said.  That data was “apparently shared with other European countries”. UBS said it expressed concern to the FTA that “the legal grounds for this request are ambiguous at best”. As from 2017, all Swiss banks will have to provide data to French and other tax authorities on an annual basis.

6 July 2016, Barcelona and Argentina footballer Lionel Messi and his father Jorge were both handed 21-month prison sentences by a Spanish court after each was convicted on three charges of tax fraud. Neither is likely to be imprisoned because under Spanish law, sentences of less than two years for first-time offenders are suspended.

Messi was also fined €2.09 million and his father €1.5 million. Both are appealing. They made a voluntary €5 million “corrective payment”, equal to the unpaid tax plus interest, in August 2013. Messi is reported to have earned on the region of €67 million last year – €47 million from playing and €20 million from sponsors.

During a four-day trial the court was told how Messi and his father hid earnings from image rights using companies based in Britain and Switzerland. Judge Mercedes Armas Galve, who presided over the trial, said in a statement: “[Messi’s] avoidable ignorance, which was derived from indifference, is not an error and it does not remove responsibility. The information that the accused avoided having was, in reality, within his reach via trustworthy and accessible sources.”

15 July 2016, the Panamanian government formally notified the OECD of its decision to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which was amended in 2010 to align it to the international standard for exchange of information on request.

The revised Convention has been signed by 98 countries and territories. It also serves as a possible international legal framework to implement the standard for automatic exchange of information in tax matters, including the Model Competent Authority Agreement (MCAA) and the Common Reporting Standard (CRS), which contains the reporting and due diligence requirements for the automatic exchange of information for financial accounts.

“We very much welcome Panama's request to join the Convention. Signing and ratifying the Convention will be a very significant step forward in implementing its commitment to tax transparency and effective exchange of information,” said Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration.

Panama must now sign the Convention and have it approved by the Cabinet Council and ratified by the National Assembly of Panama. No timeframe for this has yet been issued.

15 July 2016, Guernsey has joined the list of jurisdictions that have declared their support for the G5 initiative to establish automatic exchange of information on beneficial ownership. It was the last Crown Dependency to do so, having delayed its formal decision until the outcome of a general election that took place in April. It has also signed an Exchange of Notes with the UK in respect of the mutual sharing of beneficial ownership information.

Guernsey launched a consultation on implementation of the central register of beneficial ownership in April. It proposed that the register would be rapidly accessible by Guernsey authorities through “legal gateways” and that the Guernsey authorities would be able to disclose the information to authorities outside the island for the purposes of investigation, prevention, prosecution of offences, collection of taxes and “the carrying out of any functions of any intelligence service”. The register would not be publicly accessible. The consultation closed on 10 July.

The government said the G5-led initiative, which will see the development and implementation of a new international standard for the automatic exchange of beneficial ownership information, should provide a global level playing field that has significant potential to help law enforcement authorities tackle the misuse of corporate and other structures, including misuse through financial crime, tax evasion and money laundering.

The Exchange of Notes establishes the commitment of Guernsey and the UK to provide law enforcement authorities, including tax authorities, of each jurisdiction with beneficial ownership information for legal entities. Guernsey has been regulating corporate service providers since 2000.

Vice President of the Policy and Resources Committee, Deputy Lyndon Trott said: “With our establishment of a beneficial ownership register, we will be building on the system we already have in place, which includes a legal obligation for corporate service providers to retain beneficial ownership information. This, coupled with our system of regulation, will ensure that we have a register that is accurate and verifiable.”