4 September 2017, the leaders of the BRICS nations pledged to create a fair and modern global tax system that will address issues like tax evasion by shifting of profits to safe havens and to promote exchange of tax information that will seek to curb the practice.
The declaration was adopted at the ninth Summit of five emerging economies, held in Xiamen, which was attended by Brazilian President Michel Temer, Russian President Vladimir Putin, Chinese President Xi Jinping, South African President Jacob Zuma and Indian Prime Minister Narendra Modi.
The 25-page Xiamen Declaration said: "We reaffirm our commitment to achieving a fair and modern global tax system and promoting a more equitable, pro-growth and efficient international tax environment, including to deepening cooperation on addressing Base Erosion and Profit Shifting (BEPS), promoting exchange of tax information and improving capacity-building in developing countries.
"We will strengthen BRICS tax cooperation to increase BRICS contribution to setting international tax rules and provide, according to each country's priorities, effective and sustainable technical assistance to other developing countries."
The leaders also said that they were keenly aware of the negative impact of corruption on sustainable development and declared their support to efforts to enhance BRICS and anti-corruption cooperation.
"We acknowledge that corruption including illicit money and financial flows and ill-gotten wealth stashed in foreign jurisdictions is a global challenge which may impact negatively on economic growth and sustainable development. We will strive to coordinate our approach in this regard and encourage a stronger global commitment to prevent and combat corruption on the basis of the United Nations Convention against Corruption and other relevant international legal instruments," the declaration said.
The member nations vowed to strengthen BRICS tax cooperation to increase BRICS contribution to setting international tax rules and provide, according to each country's priorities, effective and sustainable technical assistance to other developing countries.
12 September 2017, Brunei Darussalam signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which serves as the main instrument for implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters developed by the OECD and G20 countries. The Convention will enable Brunei Darussalam to fulfil its commitment to begin the first of such exchanges by 2018.
The Convention provides for all forms of administrative assistance in tax matters: exchange of information on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection. It can also be used to implement the transparency measures of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project such as the automatic exchange of Country-by-Country reports under BEPS Action 13 and the sharing of rulings under BEPS Action 5.
Brunei Darussalam’s signature brings the number of jurisdictions participating in the Convention to 113. The full list can be found at: www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf
5 September 2017, Canadian Prime Minister Justin Trudeau defended his government’s budget proposals to ensure that high-income individuals cannot use strategies involving private corporations to gain unfair tax advantages. Finance Minister Bill Morneau announced the tax proposals in July, initiating a 75-day consultation process ending on 2 October.
The Canadian government is targeting three tax practices, which it says are being used to gain unfair tax advantages:
Addressing a national caucus meeting of Liberal MPs, Trudeau said: “I want to be clear: people who make $50,000 a year should not pay higher taxes than people who make $250,000 a year. We are always open to better ways to fix that problem, but we are going to fix that problem."
Currently 35 Canadian business organisations – including the Canadian Chamber of Commerce, the Canadian Taxpayers Federation, the Retail Council of Canada, the Canadian Medical Association, and the Canadian Association of Farm Advisors – have written to Morneau, opposing the proposals.
Confirming that 2 October would be the final day for submissions under the consultation, Morneau said: "As we move forward, we will certainly hear places where we need to make changes to the proposals in order to make sure we obtain our objective, which is to make sure our system is effective and that we deal with some tax advantages that aren't available to all Canadians."
The consultation documents can be viewed at http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp
26 September 2017, the Ministry of Commerce announced that it had abolished a regulation for the review and management of the representative office of foreign enterprises in China. The decision was made on 21 August and came into force from 14 September.
Under the Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation on the Approval and Control of Resident Representative Offices of Foreign Enterprises, enacted in 1995, a foreign enterprise had to present a written application to the approving department. If approved, the chief representative of the resident representative office was required to go to the approving department to collect the letter of approval and then present it to the registration department within 30 days, or the approval would be invalid.
The State Council released a circular (Guo Fa  No. 39) on 16 August, which set out measures to promote foreign direct investment (FDI) growth as part of China’s opening-up strategy. FDI fell by about 6% in the first seven months from a year earlier in US dollar terms, raising concerns about China’s appeal as an investment destination and the state of the economy.
The circular entails 22 measures that could be divided into five categories, including reducing market entry restrictions for foreign investment, making supportive fiscal and taxation policies, improving the investment environment for national development zones, attracting foreign talent, and optimising the business environment.
On 18 September, 12 national departments – including the State Intellectual Property Office (SIPO), the Ministry of Public Security (SPB), the Ministry of Commerce (MOFCOM), the General Administration of Customs (GAC), the State Administration of Industry and Commerce (SAIC), and the Supreme Court and the Supreme Procuratorate – launched a joint action plan to protect intellectual property (IP) held by foreign businesses.
According to the action plan, the authorities will conduct a special operation from September to December 2017 to target the theft of trade secrets, trademark infringement, patent violations, and online property rights violations.
The operation assigns each department a particular focus. For example, the SAIC is in charge of trademark infringement; the SIPO takes a leading role in patent protection; and the GAC focuses on IP violations in the trading process. Meanwhile, the Supreme Court and Procuratorate facilitate the trial and investigation of IP violation cases.
14 September 2017, the Eastern Caribbean Supreme Court (ECSC) announced the temporary relocation of the Commercial Division of the High Court to Saint Lucia due to the devastating impact of Hurricane Irma on the British Virgin Islands in respect of damage to the High Court buildings and the disruption of essential services.
The judges of the Commercial Division began hearing matters in Saint Lucia on 25 September 2017 at a building in Castries, which is being deemed a Court by order of the Chief Justice for the sitting of the Commercial Division of the Court of the Virgin Islands.
Legal practitioners are encouraged to have all documents in electronic form and documents should be filed with the Court electronically by email using the email address email@example.com. Full details on the procedures for filing by email including payment will be placed on the Court’s website (www.eccourts.org).
All criminal matters before the Criminal Division Judge emanating from the British Virgin Islands will be adjourned until further notice. All other civil matters before the Civil Division Judge are also adjourned unless practitioners, litigants and witnesses can travel to Saint Lucia and can be accommodated on a pre–arranged basis. Matters may also be heard via videoconference if communications are restored to a satisfactory level. These matters will be assessed for hearing on a case-by-case basis. The ECSC will be issuing further updates as they become available.
14 September 2017, the Court of Justice of the EU ruled that capital gains taxes imposed by the UK revenue authority on trustees that move from the UK to another EU member state infringe on the fundamental freedoms set out in EU laws, such as the free movement of capital.
In Trustees of the P Panayi Accumulation & Maintenance Settlements v Commissioners for HMRC, C-646/15, a Cypriot national Panico Panayi had created four trusts in 1992 when he and his family resided in the UK. In 2004, Panayi and his wife returned to Cyprus, resigned as trustees and appointed three Cyprus-residents in their place, alongside one UK resident trust company.
In December 2005 the Panayi trustees sold the shares held in the Panayi trusts and reinvested the proceeds of that sale. In January 2006 those trustees filed tax returns, including self-assessments, for the tax year 2004/2005, in respect of each of the Panayi trusts. An accompanying letter provided the tax authority with details of the change of Panayi trustees and the subsequent disposal of shares by those trustees.
HMRC opened an inquiry because those returns did not include the relevant self-assessments to a liability under the Taxation of Chargeable Gains Act 1992 (TCGA). In September 2010 HMRC issued a decision to the trustees, re-assessing tax on the basis that there was a charge to tax under Section 80. It considered that a charge to tax was triggered by the appointment of new trustees, since the majority of the Panayi trustees were no longer resident in the UK on that date.
The Panayi trustees brought proceedings before the UK’s First-tier Tribunal (Tax Chamber), arguing that the charges were not compatible with the freedoms of movement and establishment under EU law.
The Tribunal considered that none of the freedoms were applicable to the case due to the legal status of a trust under the law of England & Wales, which does not have the same advantages as an individual or a company. However it decided to stay proceedings in 2015 and refer the case up to the ECJ for a preliminary ruling on the matter.
If any of the freedoms were held by the ECJ to apply, the HMRC accepted that the immediate payment of the exit tax would then need to be proved justified and proportionate, according to court documents.
The Court held that legislation in a Member State that provided for the taxation of unrealised gains in the value of assets held in trust on the occasion of a transfer of the place of management to another Member State was a suitable means of ensuring the preservation of the allocation of powers of taxation between the Member States, since the former Member State would lose its power to tax those capital gains after such a transfer.
However it said that legislation that provided that a trust could choose between immediate payment or deferred payment of the tax due on those capital gains (together with, if appropriate, interest in accordance with the applicable national legislation) when it transferred its place of management to another Member State would constitute a measure less harmful to freedom of establishment than the immediate payment of the tax due.
It was apparent from the documents submitted to the Court that the UK legislation at issue provided only for the immediate payment of the tax concerned. It followed that such legislation went beyond what was necessary to achieve the objective of preserving the allocation of powers of taxation between the Member States and therefore constituted an unjustified restriction on freedom of establishment.
As a result, the provisions of the Treaty on the Functioning of the European Union precludes legislation of a Member State that provides for the taxation of unrealised gains in value of assets held in trust when the majority of the trustees transfer their residence to another Member State, but fails to permit payment of the tax payable to be deferred.
The judgment can be viewed at http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d0f130d53351c3dca62f43d9b78fc62c80ab6e4b.e34KaxiLc3eQc40LaxqMbN4PaNaNe0?text=&docid=194425&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=806352
5 September 2017, the European Court of Justice published notice of an action brought by the European Commission against France for refusing to give full effect to the judgment of the Court in the Accor case, in particular on France’s application of the dividend tax credit to intercompany dividends.
In Ministre du Budget, des Comptes publics et de la Fonction publique v Accor SA (Case C-310/09), decided September 2011, the EU Court determined that French tax rules seeking to eliminate economic double taxation of dividends maintained discrimination in respect of dividends sourced in other EU Member States. The taxes that the Court had found to be contrary to EU law were to be reimbursed.
France, said the Commission, had failed to fulfil its obligations under the principles of equivalence and effectiveness and in accordance with Articles 49, 63 and the third paragraph of Article 267 of the Treaty on the Functioning of the European Union because the right to reimbursement of the advance payment illegally made was restricted by:
The Commission said France’s highest court, the Conseil d’État, had established these restrictions without asking the Court of Justice for the purposes of determining their compatibility with EU law.
21 September 2017, the European Commission launched a new EU agenda to ensure that the digital economy is taxed in a fair and growth-friendly way. It paves the way for a legislative proposal on EU rules for the taxation of profits in the digital economy, which could be set out as early as spring 2018.
According to the Communication adopted by the Commission, the current tax framework cannot capture activities that are increasingly based on intangible assets and data. As a result, the effective tax rate of digital companies in the EU is estimated to be half that of traditional companies – and often much less. At the same time, unilateral measures taken by Member States threaten to create new obstacles and loopholes in the Single Market.
The first focus will be on pushing for a fundamental reform of international tax rules, which would ensure a better link between how value is created and where it is taxed. Member States, it said, should converge on a strong and ambitious EU position in order to push for meaningful outcomes in the OECD report to the G20 on this issue next spring.
In the absence of adequate global progress, the EU should implement its own solutions to taxing the profits of digital economy companies. The Common Consolidated Corporate Tax Base (CCCTB) in particular offers a good basis to address the key challenges and provide a sustainable, robust and fair framework for taxing all large businesses in the future. This proposal is currently being discussed by Member States, it said, and digital taxation could easily be included in the scope of the final agreed rules. Short term 'quick fixes' such as a targeted turnover tax and an EU-wide advertising tax will also be assessed.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: "The goal of this Commission has always been to ensure that companies pay their fair share of tax where they generate profits. Digital firms make vast profits from their millions of users, even if they do not have a physical presence in the EU. We now want to create a level playing field so that all companies active in the EU can compete fairly, irrespective of whether they are operating via the cloud or from brick and mortar premises."
The Communication can be viewed at https://ec.europa.eu/taxation_customs/sites/taxation/files/1_en_act_part1_v10_en.pdf
30 August 2017, the French revenue is seeking €600 million in taxes from the local subsidiary of US multinational technology company Microsoft in respect of Internet advertising and keywords for Internet searches.
According to an unconfirmed report in L'Express newspaper, despite a considerable presence in France, Microsoft paid only €32.2 million in corporate tax last year because French customers are billed from Ireland. Microsoft's European headquarters is based in Dublin.
Microsoft told L'Express only that it "acts in accordance with the laws and regulations in all the countries in which it operates, working in close cooperation with local tax authorities to ensure complete compliance with local laws."
The French revenue previously demanded €1.1 billion in unpaid taxes from US tech giant Google but in July, a French court ruled in favour of Google on the grounds that Google France did not have a stable presence in the country and was only assisting Google’s European headquarters in Ireland. The French revenue is appealing.
23 March 2017, the Guernsey Royal Court set aside a transaction in which a UK business owner had, based on incorrect professional advice, transferred shares into a 'fundamentally flawed' tax-planning structure that would have had disastrous financial impact upon her.
In Whittaker v Concept Fiduciaries Ltd (15/2017), Mrs Margaret Whittaker was the owner of the Slimming World business. In 2008, acting on professional advice, she transferred her shares in the companies, which were incorporated in England, into five Guernsey remuneration trusts. She understood that the effect would be to mitigate her exposure to income tax and capital gains tax during her lifetime, and that the incidence of inheritance tax on her probate estate would be reduced and that her children would be able to receive capital and income tax-free after her death.
After instructing new advisors in January 2016, Mrs Whittaker discovered that the earlier advice was incorrect. Not only would she and her family not benefit from the supposed UK tax advantages, it would in fact have disastrous tax and estate planning implications. On 23 November 2016, she applied to the Royal Court in Guernsey under the Trusts (Guernsey) Law 2007 to set aside the transfer by her of a total of 70,000 shares to Concept Fiduciaries Limited (CFL) on the grounds of mistake.
The case was complicated by the fact that the companies were incorporated in England, so the applicable law of mistake was that of England and Wales, notably the UK Supreme Court's judgment in Pitt v Holt (2013 UKSC 26), which has recently been followed in the Guernsey courts. HMRC was notified of the application and, by a letter dated 16 December 2016, stated that, if the transaction was set aside by the court on the grounds of mistake, then it agreed to be bound by that decision and treat the transfer as void.
The Royal Court found that the advice Mrs Whittaker received as to the tax consequences of transferring her shares into the remuneration trusts was seriously flawed and misleading and, as a result, she had made a distinct and “causative” mistake as to the whole foundation of the transaction.
“This was, on any footing, a grave mistake by Mrs Whittaker,” said Court said. “These shares represented Mrs Whittaker’s life’s work, and her primary source of wealth ... She did so in order to obtain ‘illusory’ or non-existent tax advantages and therefore no benefit at all. Further, having done so, it is unlikely that Mrs Whittaker’s children or grandchildren would have been able to benefit from the capital distributions from the remuneration trusts, and they would therefore have been unable to benefit from the wealth she had created.”
The Court concluded: “There is no principle of public policy in Guernsey which could have deprived Mrs Whittaker of the relief sought by her Application. In this context, I also note that HMRC were given the opportunity to make representations, but they declined to so. Further, there is no other equitable reason to refuse the remedy of setting aside the transfers of shares. In these circumstances, it was clear to me that it would have been unjust to leave the mistake uncorrected.”
The Royal Court further distinguished the Slimming World arrangement from “artificial tax avoidance transactions”, which it said might justify refusal to grant the relief. “Mrs Whittaker,” it said, “made genuine transfers of her shares in the companies to CFL as trustee of the remuneration trusts, and the evidence shows that CFL was a genuine trustee. Further, prior to the transfers … Mr and Mrs Whittaker (had been advised) that many successful business, like Slimming World, had entered into tax planning schemes that involved the establishment of remuneration trusts and sub-trusts, and that Slimming World was just the sort of business for which this planning would be appropriate.”
The judgement can be viewed at http://www.guernseylegalresources.gg/CHttpHandler.ashx?id=106673&p=0
25 September 2017, the IRS issued Notice 2017-46 to modify the requirements for financial institutions to collect taxpayer identification numbers (TINs) under the Foreign Account Tax Compliance Act (FATCA).
The notice provides that foreign financial institutions (FFIs) required to report TINs for US taxpayers’ accounts under a FATCA intergovernmental agreement will not be considered significantly non-compliant for years 2017-2019 if they are unable to report the TIN provided that they have searched the FFI’s electronically searchable data, reported the account holder’s date of birth and request the missing TIN annually from the account holder.
The notice delayed the start date for the requirement to provide foreign TINs from 1 January 2017 to 1 January 2018 and announced the intention to narrow the circumstances in which US financial institutions must provide foreign TINs and dates of birth for foreign account holders.
7 September 2017, Japan and Russia signed a revised tax treaty to replace the existing 1986 tax treaty and bring the agreement into line the current OECD Model Convention, as well as with the OECD’s Action Plan on Base Erosion and Profit Shifting (2015 BEPS Reports).
The revised treaty introduces a full exemption of withholding tax on interest and royalties, and reduces the rate of withholding tax on dividends from 15% to 10% except for dividends on shares that derive at least 50% of their value from immovable property. The rate is further reduced to 5% in cases where the payee holds at least 15% of the voting power of the payor for at least 365 days, and is reduced to zero in the case of dividends paid to pension funds.
The revised treaty also introduces a limitation on benefits and principal purpose tests for the entitlement of benefits, a tie-breaker rule for a treaty residency determination of non-individual dual resident persons and expands the scope of permanent establishment
The revised treaty and protocol will enter into force 30 days after the exchange of ratification instruments and will become effective as of 1 January of the year following entry into force. Unlike the 1986 treaty, it will apply only to Russia rather that the former USSR countries.
11 September 2017, the Jersey Royal Court ordered that a trust fund be reconstituted in the hands of new trustees after assets with an estimated value of some US$132 million were transferred into a second trust and ultimately transferred to the first defendant, who was both the settlor and one of the trustees of the trust.
In Crociani & O'rs v Crociani & O'rs 2017 JRC146, the first plaintiff Cristiana Crociani and her two children – the plaintiffs – sought to enforce their rights as beneficiaries of a Bahamian trust and to have the trust fund reconstituted in the hands of new trustees.
The Grand Trust was settled by Madame Edoarda Crociani in December 1987. An Italian national, she was at that time residing in New York and the trust agreement was drafted by her US legal advisers. It was governed by Bahamian Law and the first trustees were herself, her late husband’s executor Girolamo Cartia and Bankamerica Trust and Banking Corporation (Bahamas) Limited, a trust company carrying on business in the Bahamas.
According to the trust deed, it was Mme Crociani’s intention to create within it separate trusts for each of her children, Camilla (then aged 16) and Cristiana (then aged 14). The initial trust fund of the Grand Trust comprised the benefit of a promissory note, issued by Croci International BV, a company incorporated in the Netherlands, to Mme Crociani and assigned by her to the Grand Trust, in the sum of 75 billion lira, bearing interest at the rate of 8% per annum, and payable on 10 December 2017. Under the provisions of the Grand Trust deed, the trustees were not obliged to enforce their rights under the Promissory Note.
By 2010, Croci BV was owned by Croci International NV, a company incorporated in the Netherlands Antilles beneficially owned by Mme Crociani. Croci NV and Croci BV formed part of what was described as ‘a Dutch sandwich’, the purpose of which was to reduce withholding tax on dividends paid to Croci BV by its wholly-owned Italian subsidiary, Ciset SRL, which operated a successful engineering, technical and logistics services business in Italy. There were numerous other companies within the Croci Group, holding real estate and a yacht.
The Grand Trust also acquired artwork held through a company Twenty-three Investments Limited and over time built up a substantial portfolio of cash and investments from payments of interest made by Croci BV under the Promissory Note.
In January 1992, Bankamerica retired as a trustee and Chase Bank & Trust Company CI Limited was appointed as a co-trustee along with Mme Crociani and Mr Cartia. The proper law was changed from that of the Bahamas to that of Jersey.
In December 1997, Mr Cartia resigned as a trustee and in March 1998, a François Canonica and Dante Canonica, who had been nominated under clause Fourth of the Grand Trust deed to succeed him, disclaimed their rights to be appointed.
In May 1998, by letter addressed to Mme Crociani, Chase Bank retired as a trustee leaving her as the sole trustee. In April 1999, the second defendant, Paul Foortse, and Banque Paribas International Trustee (Guernsey) Limited were appointed as co-trustees along with Mme Crociani and the proper law was changed from that of Jersey to that of Guernsey.
In October 2007, Banque Paribas (then known as BNP Paribas International Trustee (Guernsey) Limited) retired as a trustee and the third defendant, BNP Paribas Jersey Trust Corporation Limited, was appointed as a co-trustee along with Mme Crociani and Mr Foortse and the proper law changed back to that of Jersey.
In 2004 and 2008, with funds distributed to her from the Grand Trust, Cristiana purchased two apartments in Miami, held through a BVI company known as Crica Investments Ltd. She lived in the first apartment for three months of the year, and the second apartment was purchased as an investment. In March 2010, Cristiana transferred the shares in Crica to the Fortunate Trust, which had been created by Madame Crociani in September 1989, to hold valuable works of art acquired predominantly in the 1970s separately from the art acquired by the Grand Trust). Cristiana sought to set aside that transfer on the grounds of mistake.
Between 2007 and 2011, substantial distributions were made out of the Grand Trust to Camilla and Cristiana, much of which was transferred on by them to Mme Crociani with whom they were living in an apartment in Monaco. The plaintiffs alleged that these distributions to Cristiana, to the extent that they were transferred on to Mme Crociani, were a fraud on the power.
By an appointment in 2010, the whole of the trust fund of the Grand Trust, bar the Promissory Note, was appointed by Mme Crociani, Mr Foortse and BNP Jersey, as the trustees of the Grand Trust, to Mme Crociani and BNP Jersey as trustees of the Fortunate Trust. That appointment was made under clause Eleventh of the Grand Trust deed, which gave the trustees an overriding power to appoint the trust fund to other trusts “in favour or for the benefit of all or any one or more exclusively of the others or other of the beneficiaries (other than the Settlor) ….”. The plaintiffs challenged the 2010 appointment as being an excessive execution, a fraud on the power and a mistake.
The terms of the Fortunate Trust were amended so that upon the 2010 appointment, Mme Crociani was the sole beneficiary of income and capital during her lifetime, with a power to revoke the trust and withdraw all of the capital from it. Camilla and Cristiana and their respective children were reversionary discretionary beneficiaries.
By April 2011, the relationship between Cristiana on the one hand and Mme Crociani and Camilla on the other hand had broken down and lawyers were consulted. In June 2011, Mme Crociani revoked the Fortunate Trust and withdrew all of its assets, comprising inter alia, the assets appointed to it under the 2010 appointment. Mme Crociani dispersed the assets to various parts of the world and she refused to comply with an order of the Royal Court made at the instance of BNP Jersey, to disclose where and how they were held.
In February 2012, Mme Crociani, Mr Foortse and BNP Jersey purported to retire as trustees of the Grand Trust and to appoint the fourth defendant, Appleby Trust (Mauritius) Ltd in their place, changing the proper law to that of Mauritius and assigning the Promissory Note. The plaintiffs challenged that appointment as being a fraud on the power.
In July 2012, the plaintiffs sent a letter before action to BNP Jersey and to Mme Crociani, Mr Foortse and Appleby Mauritius. In August 2012, and prior to responding substantively to that letter, Mme Crociani, Mr Foortse, BNP Jersey and Appleby Mauritius, as former and present trustees of the Grand Trust, entered into a deed of appointment known as the ‘Agate appointment’ by which they purported to appoint to Appleby Mauritius and Mr Foortse, as trustees of the Agate Trust (dated 2 August 2012) the right of the Grand Trust trustees to recover the assets appointed by the 2010 appointment, should that appointment be found to be invalid.
Under the terms of the Agate Trust deed, the trust fund vested in the sixth defendant, Camillo Crociani Foundation IBC (Bahamas) Limited, formerly Camillo Crociani Foundation Limited, should Mme Crociani survive by seven days, which she did. The Foundation, which changed its objects in 1991, was a discretionary income beneficiary under the Grand Trust, and was beneficially owned by Mme Crociani. The plaintiffs challenged the Agate appointment as being an excessive execution and fraud on the power.
In January 2016, without notice to the Court or to the parties, other than Mme Crociani and potentially Camilla, Appleby Mauritius purported to resign as trustee of the Grand Trust and to appoint the eighth defendant, GFin Corporate Services Limited, another company carrying on a financial services business in Mauritius, in its place and assigned to it the Promissory Note. Under the terms of the instrument of retirement and appointment, Appleby Mauritius and GFin purported to amend the terms of the Grand Trust by conferring on the Mauritius courts jurisdiction over all disputes relating to the Grand Trust. The plaintiffs challenged the appointment of GFin and the amendments as being a fraud on the power.
A matter of days before retiring as trustee, Appleby Mauritius and Croci BV purported to amend the terms of the Promissory Note by extending the repayment date to 12 December 2022, at an increased interest rate of 11% per annum. The plaintiffs challenged that amendment as being a breach of trust.
The Order of Justice was issued initially against Mme Crociani, Mr Foortse, BNP Jersey and Appleby Mauritius on 18 January 2013. Jurisdiction was accepted by these defendants, but following a change in legal representation, they then challenged Jersey as the appropriate forum, unsuccessfully, in the Royal Court (Crociani-v-Crociani  (2) JLR 369), the Court of Appeal (Crociani-v-Crociani  JCA 089) and the Privy Council (Crociani-v-Crociani  UKPC 40), the final judgment of the Privy Council being handed down on 26 November 2014.
Subsequently, Camilla, the Foundation and the seventh defendant, BNP Paribas Jersey Nominee Company Limited were added as defendants. A composite answer resisting the claims of the plaintiffs was filed on behalf of Mme Crociani, Mr Foortse, BNP Jersey and Appleby Mauritius.
By its answer the Foundation aligned itself with Mme Crociani in resisting the plaintiffs’ claims but did not otherwise participate in proceedings. By her answer, Camilla also aligned herself with Madame Crociani in resisting the plaintiffs’ claims. In May 2015, BNP Jersey and BNP Nominees chose to be separately represented and they subsequently filed separate answers.
In July 2015, the plaintiffs amended their Order of Justice to include a claim for breach of trust against Mme Crociani, Mr Foortse and BNP Jersey as the former trustees of the Grand Trust and Appleby Mauritius as the current trustee, for failing to collect the interest on the Promissory Note from 2003.
In August 2015, Mme Crociani amended her answer to include a counter-claim against the plaintiffs for the Grand Trust to be set aside on the grounds of mistake, should the Court hold that she was not entitled to benefit from the Grand Trust either directly or indirectly through the Foundation.
In October 2015, BNP Jersey and BNP Nominees filed an amended answer, which included a third party claim by BNP Jersey against Mme Crociani under the indemnities given to it by her in relation to the 2010 appointment and the revocation of the Fortunate Trust. Mme Crociani and Mr Foortse later filed a counter-claim against BNP Jersey, seeking a contribution, indemnity or damages from BNP Jersey should they be found liable under the plaintiffs’ claims, and this on the ground of alleged breaches of duties said to be owed to them by BNP Jersey as the professional trustee.
In February 2016, shortly after its purported appointment as trustee of the Grand Trust, GFin instituted rival proceedings in Mauritius relating to the matters in dispute in these proceedings, and in March 2016, it applied for an anti-suit injunction against the plaintiffs. GFin was joined as a party to the Jersey proceedings but refused to submit to the jurisdiction of the Royal Court.
The Royal Court granted the plaintiffs an injunction against Appleby Mauritius and GFin, restraining them from dealing with the Promissory Note, such that it be held to the order of the Court. In July 2016, the Supreme Court of Mauritius dismissed GFin’s application for an anti-suit injunction. GFin’s appeal against that judgment has been abandoned.
In August 2016, BNP Jersey obtained a freezing injunction and disclosure order against Mme Crociani, pursuant to its third party claim against her. Leave to appeal that judgment was granted in December, but an application for the stay of the disclosure order was refused. Mme Crociani refused to comply with the disclosure order. That appeal came before the Court of Appeal in January 2017, when it ordered that her entitlement to pursue her appeal was conditional upon her lodging with the Judicial Greffe by 3 February, a sealed confidential envelope containing an affidavit giving proper disclosure of her worldwide assets. She failed to comply with that condition and her appeal was dismissed on 21 February. She remained in breach of the disclosure order.
In November 2016, Mme Crociani ceased funding the defence of Appleby Mauritius. On 10 January 2017, the Court granted Appleby Mauritius an injunction against GFin restraining it from dealing with the Promissory Note. In March 2017, Appleby Mauritius applied to the courts of Mauritius for the injunction to be rendered executory. GFin resisted that application, which has yet to be determined.
She also ceased funding Mr Foortse’s defence such that he had no option other than to represent himself at the hearing. By e-mail to the Court in December 2016, Camilla gave notice that she would not be represented at the hearing and would not be giving evidence.
In January 2017, the Court received a letter from Mme Crociani saying that she would not physically take part in the hearing, due to her age and state of health, which discouraged her from making the trip and staying over in Jersey. No evidence was provided to substantiate her inability to attend on health grounds and the plaintiffs produced an extract from Facebook showing her at a New Year’s Eve celebration on 1 January apparently in rude health. As a consequence of her not appearing, Mme Crociani’s counter-claims against the plaintiffs in mistake and BNP Jersey for breach of duty were dismissed.
The plaintiffs’ primary case was that the Grand Trust had not been created for the purpose or intention of providing any benefit to Mme Crociani. Under its terms, Mme Crociani was not able to benefit otherwise than as a default beneficiary, if all of her live descendants were extinguished.
The defendants’ case was that Mme Crociani had always been intended to benefit from the Grand Trust and the Foundation was named as a beneficiary as the legal vehicle through which she would benefit. Their case was that Mme Crociani generated a fortune of her own after her husband Camillo Crociani died insolvent. For US tax reasons she was advised to create a discretionary trust for the benefit of herself and her daughters and for Dutch tax reasons, the Foundation was made a beneficiary of the Grand Trust as a vehicle for her to benefit from it.
The key underlying issue, therefore, was whether Mme Crociani was, and was intended to be, an indirect beneficiary of the Grand Trust through ownership of the Foundation, or whether the Foundation was included as a beneficiary purely to permit charitable donations.
The claims of the plaintiffs raised the following issues for the Court to determine:
To the extent that the plaintiffs succeeded in these claims, further issues the fell to be determined by the Court:
In its judgment, the Court ordered that the 2010 appointment, the 2012 appointment of Appleby Mauritius, the Agate appointment, the 2016 appointment of GFin and the transfer of the Crica shares all be set aside as void and of no legal effect. It ordered that Mme Crociani, BNP Jersey and Mr Foortse be removed as trustees of the Grand Trust and that a new trustee be appointed in their place. It also gave directions to the new trustee to revoke the delegation of investment powers to Mme Crociani. It also confirmed the status of Cristiana’s children as beneficiaries of the Grand Trust.
It further ordered BNP Jersey and Mme Crociani jointly and severally to pay to the new trustee of the Grand Trust within 28 days of its appointment the sum of US$100,347,046, being the amount transferred out of the portfolio of the Grand Trust to the Fortunate Trust on 16 May 2011, together with compensation to put the Grand Trust back to what it would have been as at the date of judgment had that amount not been transferred, and interest on the same from the date of judgment to the date of payment at a rate to be determined by the Court.
It further ordered BNP Jersey and Mme Crociani jointly and severally to pay to the new trustee of the Grand Trust, within 28 days of its appointment, the balances due in respect of the interest-free loans made by the Grand Trust, to the extent that they were recoverable on the 9 February, 2010, plus interest from a date and at a rate to be determined by the Court until payment.
It further ordered an inquiry into the value of the Crica shares, and ordered that Mme Crociani and BNP Jersey should jointly and severally pay compensation to Cristiana on terms to be determined.
It further ordered an inquiry into the value of the eight pieces of art work formerly held in the Grand Trust through Twenty-Three Investments Ltd and ordered that Mme Crociani and BNP Jersey should jointly and severally pay compensation to the new trustee of the Grand Trust on terms to be determined after further input from counsel.
It exonerated Mr Foortse under Article 45(1) of the Trusts Law from his personal liability for the breach of trust arising out of the 2010 appointment and the transfer of the Crica shares.
It ordered Mme Crociani to indemnify BNP Jersey under the two contractual indemnities and under the inherent jurisdiction of the Court.
It gave judgement against Appleby Mauritius on liability arising out of the breaches of trust that it found against it, with compensation for any loss to the trust fund of the Grand Trust arising from such breaches to be assessed.
The full judgment of the Royal Court can be viewed at https://www.jerseylaw.je/judgments/unreported/Pages/JRC146.aspx
26 September 2017, French President Emmanuel Macron said the European Union should move to a common corporate tax band and any member state that resists should be penalised by being blocked from the European cohesion fund.
Speaking at the Sorbonne in Paris, Macron outlined sweeping EU reforms he would like to introduce. He called for a joint military "rapid response force", a common defence budget, a single asylum system and an EU border force. He also said the single-currency eurozone should have its own budget and finance minister.
Macron called for a common corporate tax band to be introduced by 2020. He also favoured a digital tax that would impose a levy on technology companies such as Google based on the sales generated in each member state.
9 September 2017, The Netherlands government issued a decree and policy statement concerning the treatment of hybrid financial instruments for corporate income tax and dividend withholding tax purposes.
The aim of the decree, prepared by the Dutch State Secretary of Finance, is to provide more guidance on the qualification of certain hybrid financial instruments as debt or equity for Dutch tax purposes. It has retroactive effect as from 29 August 2017.
According to the statement, perpetual default-based liability loans should generally be regarded as equity for Dutch tax purposes. It confirms that the participation exemption will apply to perpetual default-based liability loans even though such loans are not profit participating loans, provided the requirements for application of the participation exemption are met. However, for the participation exemption to apply, a qualifying participation based on the shareholding in the debtor already must exist at the level of the lender or an affiliated entity of the lender.
In addition, before granting the loan, the lender must submit a written application for approval of the participation exemption, which also includes a declaration that the lender actually will apply the participation exemption irrespective of whether it is beneficial. Interest paid on a perpetual default-based liability loan is not subject to Dutch dividend withholding tax.
Default-based liability loans with a fixed term exceeding 50 years will be considered to be profit participating loans – equity for tax purposes – provided that the requirement to pay interest is profit-related.
14 September 2017, the OECD confirmed that all 49 jurisdictions that had committed to start exchanges under the Common Reporting Standard (CRS) in September 2017 had now activated their exchange relationships under the CRS Multilateral Competent Authority Agreement (CRS MCAA) and their network of bilateral exchange relationships. This was sufficient to cover over 99% of the total number of potential exchange relationships.
The successful implementation of the CRS requires both domestic legislation to ensure that financial institutions correctly identify and report accounts held by non-residents, and an international legal framework for the automatic exchange of CRS information.
The CRS MCAA defines the scope, timing, format and conditions for the exchange of CRS information and is based on the multilateral Convention on Mutual Administrative Assistance in Tax Matters, the prime instrument for cooperation in tax matters. At present, 95 jurisdictions have signed the CRS MCAA.
While the CRS MCAA is a multilateral agreement, exchange relationships for CRS information are bilateral in nature and are activated when both jurisdictions have the domestic framework for CRS exchange in place and have listed each other as intended exchange partners.
At present, 102 jurisdictions had publicly committed to implement the CRS, with 49 taking up exchanges in September 2017 and a further 53 taking up exchanges in September 2018. The OECD announced that a further series of bilateral exchange relationships was established under the CRS MCAA, such that there were now over 2000 bilateral relationships for the automatic exchange of CRS information in place across the globe.
In addition, 20 of the 53 jurisdictions committed to first exchanges in 2018 had already put the international legal requirements in place to commence exchanges under the CRS MCAA next year. A further activation round for jurisdictions committed to a 2018 timeline is scheduled to take place in November 2017 which will allow the remaining jurisdictions to nominate the partners with which they will undertake automatic exchanges of CRS information.
The full list of automatic exchange relationships that are currently in place under the CRS MCAA is available at http://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/exchange-relationships/
26 September 2017, the OECD released the first six peer review reports to evaluate how countries are implementing new minimum standards agreed in the OECD/G20 BEPS Project. In addition to implementing BEPS Action 14 on more effective dispute resolution mechanisms, countries committed to have their compliance with this standard reviewed and monitored by their peers.
The first six peer review reports relate to implementation by Belgium, Canada, the Netherlands, Switzerland, the United Kingdom and the United States. A document addressing the implementation of best practices is also available on each jurisdiction.
The six reports related to implementation by Belgium, Canada, the Netherlands, Switzerland, the UK and the US, and include over 110 recommendations relating to the minimum standard. In Stage 2 of the peer review process, each jurisdiction’s efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored.
The six assessed jurisdictions performed well in various mutual agreement procedure (MAP) areas. All provided for roll-back of bilateral advance pricing agreements (APAs) with a view to preventing disputes from arising; MAP was available and access to MAP was granted in the situations required by the minimum standard; the competent authority function was adequately resourced, and was taking a pragmatic and principled approach for the resolution of MAP cases; and MAP agreements reached so far have been implemented on time.
The main areas where improvements were required concerned:
The OECD said the first peer review reports represented an important step forward to turn the political commitments made by members of the Inclusive Framework into measureable, tangible progress. The six jurisdictions concerned are already working to address deficiencies identified in their respective reports.
The OECD will continue to publish Stage 1 peer review reports in accordance with the Action 14 peer review assessment schedule. The Inclusive Framework intends to launch assessments of 60 countries through 2019. The next tranche of Stage 1 reviews will assess Austria, France, Germany, Italy, Liechtenstein, Luxembourg and Sweden.
A document addressing the implementation of best practices is available on each jurisdiction via the OECD website at http://www.oecd.org/tax/beps/oecd-releases-first-peer-reviews-on-implementation-of-beps-minimum-standards-on-improving-tax-dispute-resolution-mechanisms.htm
6 September 2017, the OECD's Inclusive Framework on BEPS released two sets of guidance to give greater certainty to tax administrations and MNE groups on the implementation and operation of Country-by-Country (CbC) Reporting (BEPS Action 13).
Existing guidance on the implementation of CbC Reporting has been updated and now addresses the following issues: the definition of revenues; the treatment of MNE groups with a short accounting period; and the treatment of the amount of income tax accrued and income tax paid.
Guidance was also released on the appropriate use of the information contained in CbC Reports. This includes guidance on the meaning of ‘appropriate use’, the consequences of non-compliance with the appropriate use condition and approaches that may be used by tax administrations to ensure the appropriate use of CbC information.
The OECD further released, on 20 September, updated and new IT-tools and guidance to support the technical implementation of the exchange of tax information under the Common Reporting Standard (CRS), on CbC Reporting and in relation to exchanges on tax rulings (ETR).
In relation to CbC Reporting under BEPS Action 13, the updated CbC XML Schema and User Guide now allows MNE groups to indicate cases of stateless entities and stateless income, as well as to specify the commercial name of the MNE group. Furthermore, both with respect to the CbC and ETR XML Schemas and User Guides, certain clarifications have been made, in particular with respect to the correction mechanisms.
A dedicated XML Schema and User Guide have been developed to provide structured feedback on received CbC and ETR information. The CbC and ETR Status Message XML Schemas will allow tax administrations to provide structured feedback to the sender on frequent errors encountered, with a view to improving overall data quality and receiving corrected information, where necessary. In the same context, the User Guide for providing CRS-related Status Messages has also been slightly updated to clarify the technical aspects of the structured feedback process.
27 September 2017, the Superintendency of Banks of Panama announced sanctions against three banks – Multibank, Banvivienda and Banco Nacional de Panamá – for non-compliance with anti-money laundering and banking regime rules.
Multibank was fined US$300,000 for violating anti-money laundering and combatting the financing of terrorism (AML/CFT) rules, and US$100,000 for violations of the banking system. Banvivienda was fined US$90,000 for AML/CFT violations and US$40,000 for banking violations. Banco Nacional de Panamá, Panama’s state-owned national bank, was also fined US$106,750 for AML/CFT violations and US$21,875 for banking violating.
It is the second round of fines imposed for AML/CFT this year. In January, fines were issued against nine Panamanian banks – Caja de Ahorros (a stated-owned bank), St. George Bank, Banco Azteca (Panama), Austrobank Overseas (Panama), Banesco, Unibank, Banco Universal, Global Bank and Banco Ficohsa.
On 9 September, Panama’s Superintendency of Insurance and Reinsurance suspended the licenses of 745 Panama insurance brokers for failing to comply with AML/CFT regulations. Under Law 23 of 2015, insurers and insurance brokers are obliged to report transactions in cash and suspicious transactions. They were also required to register with the Financial Analysis Unit’s (UAF) online portal by 31 July.
Superintendent José Joaquín Riesen said that circulars warning of the obligation to register on the UAF had been issued. Since the law came into force two years ago, some 950 licences have been suspended. The suspension is for a period of three months, extendable by a further three months. If at that time they have not complied, the licences are cancelled.
6 September 2017, the Swiss Federal Council published a new detailed draft for a corporate tax reform, known as ‘Tax Proposal 17’, which is intended to secure Switzerland's overall attractiveness as a business location while remaining in compliance with international rules. A previous proposal, Corporate Tax Reform III (CTR III), was rejected in a nationwide referendum in February.
The new proposal includes many of the elements of the CTR III, but also respective counter-financing and other measures in order to achieve a politically feasible solution. The proposed measures include:
As a counter-financing measure, the so-called partial taxation of dividends from qualified shareholdings (applicable in case of a minimum stake of 10%), the Federal Council proposes to increase the taxation of qualifying dividends at a Federal level from currently 60% (in case private assets) to 70% on both. Cantons will need to tax at least 70% of such dividends as well.
In order to compensate the cantons for the losses in tax revenues expected to arise from the proposed changes in legislation, the Federal Council proposes to increase the cantonal share of Federal income tax revenues from 17% to 20.5%.
The consultation procedure is open until December 6 2017. The Federal Council is due to submit the Tax Proposal 17 to parliament in the first half of 2018. Entry into force will not be before the year 2020 and may be subject to an additional popular referendum.
29 September 2017, the Swiss Federal Council adopted an Ordinance to implement the Federal Act on the International Automatic Exchange of Country-by-Country (CbC) Reports of Multinationals. It will apply the global minimum standards provided by the G20/OECD project on base erosion and profit shifting (BEPS) and establish a uniform framework for the exchange of CbC reports.
Under the Ordinance, multinationals operating in Switzerland will be obliged to submit annual CbC reports to the Federal Tax Administration (FTA) from the 2018 tax year. Switzerland will begin exchanging reports with partner states from 2020.
The Ordinance specifies that CbC reporting is mandatory for multinationals if the ultimate parent entity of a group resident in Switzerland has annual consolidated group revenue equal to or higher than CHF900 million in the preceding fiscal year. It also sets out the required content of CbC reports.
The Ordinance further permits multinationals to voluntarily submit CbC reports for tax periods before 2018, which the FTA can exchange with partners states on the basis of the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports.
The Ordinance will come into force on 1 December if the referendum deadline expires on 5 October without a referendum being called.
On 27 September, the Swiss House of Representatives voted by 129 votes to 53 to establish specific criteria that will have to be met by recipient countries before Switzerland will share bank account information for tax purposes under the OECD Common Reporting Standard (CRS) in order to prevent data transfer to ‘abusive’ countries.
Switzerland is committed to implement automatic exchange of financial account information in time to commence exchanges in 2018 having ratified the multilateral Convention on Mutual Administrative Assistance in Tax Matters in September 2016. It has also signed the CRS Multilateral Competent Authority Agreement.
Switzerland already has 38 Competent Authority Agreements (CAAs) in place with advanced economies, with data exchange taking place from 1 January 2018. But the latest tranche of 41 proposed CCAs, which need to be ratified by parliament, contains states with less straightforward democratic credentials such as China, Russia, Indonesia and Saudi Arabia.
The suggested criteria for exchange include having a legal base for the treaty, as well as securing equivalent exchange treaties from other important financial centres. The countries must also respect confidentiality and data security and the Swiss cabinet must ensure that no violations have been reported.
A further demand was to guarantee that any information exchange would not result in serious human rights violations of those concerned. Finally, parliament sought clarification as to whether a specific case or a general laxity in meeting the terms of a CAA would result in its being annulled.
28 September 2017, the Trump Administration, the House Committee on Ways and Means and the Senate Committee on Finance published a nine-page “unified framework for fixing our broken tax code”, which has been modified in the light of its inability to pass legislation reducing federal government spending.
According to the White House, the new framework proposes to:
The Committee for a Responsible Federal Budget estimated that framework would equate to a US$2.2 trillion tax cut, with US$5.8 trillion lost to lower rates and other changes, and another US$3.6 trillion recouped by eliminating deductions.
The next step for congressional Republicans is to pass a budget resolution that would allow a tax bill to pass the Senate with a 51-vote majority. Once the budget resolution passes both chambers, the tax-writing committees — Senate Finance and House Ways and Means — would begin drafting and amending tax legislation. Lawmakers will have to identify offsets of about US$3 trillion over 10 years to align the plan with the budget resolution.
The “unified framework “ can be viewed at
30 September 2017, the UK Criminal Finances Act 2017, which introduces two new corporate criminal offences, was brought into force. These new offences can make a company criminally liable if it fails to prevent the facilitation of UK or non-UK tax evasion by an employee, agent or anyone else acting for or on behalf of the company.
The new legislation does not change what constitutes tax evasion or the facilitation of tax evasion, but it is designed to make it more straightforward to prosecute a company that fails to prevent an ‘associated person’ from facilitating tax evasion.
A company commits an offence if it fails to prevent an ‘associated person’ from committing a UK or non-UK tax evasion facilitation offence. ‘Facilitating’ involves criminally assisting others, such as clients or agents, to evade taxes. The definition of an ‘associated person’ includes employees, but also third parties acting on behalf of the company
The Act makes it much simpler to attach criminal liability to a company by focusing on the controls that the company has in place to prevent associated persons from facilitating tax evasion. There must be both criminal tax evasion by a third party and criminal facilitation by the ‘associated person’, but it is not necessary for the tax evasion and facilitation offences to have been prosecuted in order for the company to be liable for ‘failure to prevent’.
The UK tax offence will apply to both UK and non-UK companies. The non-UK tax offence will catch UK firms, and also non-UK firms if either the non-UK firm carries on business in the UK, or some or all of the facilitation happens in the UK. As a result, firms with UK branches will be caught by these new rules to the same extent as UK firms, even if there is no other nexus with the UK.
8 September 2017, the UK government published the Finance (No. 2) Bill, which contains a number of measures that were originally to be included in the Finance Act 2017 after the Spring Budget, but were dropped to allow it to be passed quickly before the general election.
The Bill provides for the introduction of the deemed domicile rule for all tax purposes for those who have lived in the UK for 15 of the previous 20 tax years and specific measures for those born in the UK with a UK domicile of origin to treat them as UK domiciled.
It also provides for the ability of deemed domiciled individuals to rebase foreign-sited assets for capital gains tax purposes and for all non-doms that have previously claimed the remittance basis of assessment to cleanse mixed funds.
It also contains certain protections for offshore trusts as well as tainting provisions and the introduction of ‘look through’ rules for Inheritance Tax purposes where UK residential property is held within a corporate, partnership or trust structure.
Other key measures in the Finance Bill include provisions on the corporate interest restriction (CIR) rules, corporate loss reform, hybrid and other mismatches and the Substantial Shareholding Exemption for institutional investors:
Most of the provisions of Finance (No 2) Bill 2017 will come into effect from April 2017 to reflect the government's original intention. It is expected that the review of the bill in committee will start in mid-October. This leaves a very tight schedule if the government is to secure Royal Assent before the Autumn Budget is announced on 22 November.
The progress of the Bill can be followed at https://services.parliament.uk/bills/2017-19/finance.html
13 September 2017, Swiss Life, Switzerland’s biggest life insurer, announced that it had been contacted by the US Department of Justice (DOJ) in respect of its cross-border business with US clients.
It is reported that the DoJ inquiry concerns insurance wrapper products, which Swiss Life started selling in 2006. It stopped selling them in the US in 2012. The insurer said its portfolio with US clients of Swiss Life Liechtenstein and Swiss Life Singapore was currently around CHF250 million, down from CHF1 billion at its peak.
“All insurance contracts have been categorised and been reported pursuant to the FATCA legislation,” Swiss Life said. “Swiss Life will use the opportunity for dialogue and explain its past cross-border business in cooperation with the US.”
20 September 2017, the US District Court for the Eastern District of Pennsylvania found that the government failed to prove that a pharmaceutical executive had wilfully failed to list the larger of his two accounts at Swiss bank UBS on a 2007 FBAR, and that therefore, the increased penalty under 31 U.S.C. section 5321(b)(2) would not apply.
In Bedrosian v United States, No. 2:15-cv-05853 (E.D. Pa. 2017), Arthur Bedrosian had opened a Swiss bank account with a $100 deposit during overseas business travel in 1973. By 2005, he had opened a second Swiss account and both accounts had balances exceeding the $10,000 Report of Foreign Bank and Financial Accounts (FBAR) filing threshold. For many years, he did not inform his accountant.
In 2007, having hired a new accountant, Bedrosian reported on his 2007 federal income tax return for the first time that he had assets in a Swiss account and filed an FBAR for only one of the Swiss accounts, which contained assets of US$240,000. The undisclosed account contained assets of US$2.3 million. He also failed to report income earned on either account on his 2007 return.
In November 2008, Bedrosian asked the Swiss bank to close one of the accounts and transfer its assets to a different Swiss bank. In December 2008, he asked the first Swiss bank to close the remaining account and transfer all of its assets to a US bank account.
In August 2010, Bedrosian sought to address the failure to disclose by filing an amended return for 2007 and an amended FBAR that included both accounts. The amended return reported approximately $220,000 in income from the Swiss accounts. By the time Bedrosian made these corrections, the IRS had already received information about these accounts from the Swiss bank, but had not yet opened an audit for the 2007 and 2008 tax years.
In September 2010, Bedrosian said he attempted to enter the IRS Offshore Voluntary Disclosure Program (OVDP), but he claimed he was advised by an IRS agent not to do so. The IRS contended that this claim was incorrect, and that his OVDP application was instead rejected.
In July 2013, the IRS imposed a penalty for wilful failure to file an FBAR against Bedrosian for US$975,789.17, the highest amount permitted under the regulations. Bedrosian challenged the order, alleging illegal extraction. The government filed a counterclaim for full payment of the penalty with accrued interest, a late payment penalty and other statutory additions.
The court found that while Bedrosian had erred in failing to report the second account, he had approached his personal lawyer and retained an accounting firm to file amended returns and rectify the issue prior to learning that the government was investigating him and prior to learning that UBS was turning his information over to the IRS.
“Although we apply the lower, civil standard of wilfulness here, we nevertheless do not see Bedrosian’s as the sort of conduct intended by Congress or the IRS to constitute a wilful violation,” said Judge Baylson. “This is especially so in light of the dearth of precedent finding a wilful violation on comparable facts. Because we find that the government failed to meet its burden as to the wilfulness requirement, we decline to engage in an analysis concerning the calculation of the penalty amount.”
Having concluded that the government had not established that Bedrosian was “wilful”, the court then determined that any money penalty exacted from Bedrosian had been illegally exacted. Consequently, the amount that Bedrosian paid in partial satisfaction of his allegedly wilful violation – US$9,757.89 – should be repaid.