Owen, Christopher: Global Survey – September 2018

24 August 2018, the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 received Royal Assent. Schedules 1 and 2 of the Act introduce new Division 832 of the ITAA 1997 and the necessary amendments to give effect to Action 2 of the OECD’s Base Erosion and Profit Shifting (BEPS) on Neutralising the Effects of Hybrid Mismatch Arrangements.

The rules are intended to deter the use of certain hybrid arrangements that exploit differences in the tax treatment of an entity or financial instrument under the income tax laws of two or more countries, resulting in double non-taxation or long term tax deferral.

The rules also contain a targeted integrity provision that applies to certain deductible interest payments made to an interposed foreign entity where the rate of foreign income tax on the payment is 10% or less.

The rules have application to income years commencing on or after 1 January 2019 and to certain payments made after 1 January 2019. Limited transitional arrangements that impact frankable distributions also apply to additional Tier 1 regulatory capital issued by banks or insurance companies.

The structured imported mismatch rule will apply to income years commencing on or after 1 January 2019, but the direct and indirect imported mismatch rules will be delayed to income years commencing on or after 1 January 2020 to align with the EU introduction of the hybrid mismatch rules.

The Treasury Laws Amendment (OECD Multilateral Instrument) Act 2018, which gives the Multilateral Convention to Implement Tax Treaty Related Measures To Prevent BEPS the force of law in Australia, also received royal assent on 24 August. Australia signed the Multilateral Instrument (MLI) on 7 June 2017.

The MLI is a multilateral treaty that enables jurisdictions to modify their bilateral tax treaties swiftly to implement measures designed to better address multinational tax avoidance and to more effectively resolve tax disputes. The tax treaties that a jurisdiction wishes to be covered by the MLI are called 'Covered Tax Agreements' (CTAs).

The extent to which the MLI will modify Australia’s bilateral tax treaties will depend on the final adoption positions taken by each country.

17 July 2018, the Tax Court of Canada ruled that a Netherlands company whose sole director was resident in the Netherlands was nevertheless resident in Canada for income tax purposes because its two Canadian-resident shareholders exercised the company’s central management and control.

In Landbouwbedrijf Backx BV v. The Queen (2018 TCC 142), a Dutch couple – Michiel Backx and Backx – emigrated from the Netherlands to Canada in 1998 and acquired a dairy farm in Ontario.

The transaction was structured as a partnership under which the Backxes owned a 51% interest directly and the remaining 49% was held by the appellant Netherlands BV, of which the Marian’s sister, a resident of the Netherlands, was the sole director. From 1998 to the 2009 taxation year, the appellant filed tax returns as a non-resident and paid taxes on its share of the partnership income.

In 2009, the Backxes incorporated Backx Limited under the laws of Ontario and transferred their 51% interest in the farm partnership to the new company. They were the only directors and owned all the common shares. The same year, the appellant BV disposed of its interest in the farm partnership to Backx Ltd for proceeds of C$4,500,000, paid by the issuance of a promissory note and resulting in a capital gain of C$1,739,049 in Canada.

Under Part I of the Income Tax Act (Canada) (ITA), Canadian residents are liable to tax on their worldwide income. By contrast, non-residents are liable to tax on their “taxable income earned in Canada”, which includes a taxable capital gain from the disposition of a partnership interest, if at any time in the past five years more than 50% of the fair market value of the partnership interest was derived from real or immovable property situated in Canada, and provided that any income or gain from the disposition of the partnership interest is not exempt from Part I tax under an applicable tax treaty.

The appellant BV took the position in its 2009 tax return that it was not resident in Canada and the capital gain that it had realised on the disposition of its 49% interest in the partnership was exempt from Canadian tax by virtue of Article 13(4)(b) of the Canada-Netherlands Tax Treaty, as being a gain was from the disposition of an interest in a partnership the value of which was derived principally from property in which the business of the partnership was carried on.

At trial, the Crown took the position that the BV was resident in Canada and therefore liable to tax on its worldwide income, including the capital gain from the disposition of the 49% interest in the partnership. In the alternative, it argued that if the BV was found not to be resident in Canada, then the BV was liable for Canadian branch tax on the gain on the basis that such gain constituted earnings attributable to a permanent establishment in Canada.

On the primary issue of tax residency, Smith J found that BV was subject to CGT as a Canadian resident because its central management and control was in Canada, stating: “It was the Backxes who assumed effective and independent control of the Appellant. In most if not all instances, [the sister] was not even copied with the correspondence. This quite clearly suggests that she was a mere nominee who carried out clerical and administrative functions on behalf of the Backxes.

The Court also found that the tiebreaker rule in the Canada-Netherlands tax treaty had no direct bearing on the appeal. Even if the BV were found to be a resident of both Canada and the Netherlands under Article 4(3), the BV would not be entitled to the benefits of Article 13 until the competent authorities of the two countries had so decided.

Finally, having found that the BV was resident in Canada for the purposes of the ITA, Smith J concluded that the Crown’s alternative argument relating to Canadian branch tax was not applicable.

The full decision can be viewed at https://www.canlii.org/en/ca/tcc/doc/2018/2018tcc142/2018tcc142.html

6 August 2018, the British Crown Dependencies – Guernsey, Jersey and the Isle of Man – have launched public consultations on the introduction of substance requirements for companies that are tax resident in those jurisdictions.

The proposed new requirements follow the screening of a large number of non-EU jurisdictions undertaken by the European Commission Code of Conduct Group in 2017 to assess standards of tax transparency, fair taxation and compliance with measures to prevent base erosion and profit shifting (BEPS).

The Crown Dependencies were re-affirmed as co-operative jurisdictions in December 2017, but the European Commission highlighted concerns about their ability to demonstrate that companies tax resident in their jurisdictions operated with sufficient substance to justify access to the islands' corporate tax regimes.

The Crown Dependencies made a commitment to the European Commission to address these concerns and the three jurisdictions have worked closely together to develop proposals that will meet this commitment by 31 December 2018.

The proposals will require companies that are tax resident in the Crown Dependencies, and engaged in key activities identified by the EU, to demonstrate that they meet minimum substance requirements as part of their annual tax return.

The key activities identified by the European Commission Code of Conduct Group are:

-Banking

-Insurance

-Fund management

-Financing and leasing

-Shipping

-Intellectual property

-Collective investment vehicles

-Holding companies that generate income from any of these key activities.

The substance requirements vary for each key activity to reflect the different needs of the companies involved. They are designed to be fair and proportionate while ensuring that there are sufficient activities undertaken in the Crown Dependencies to reflect the amount of profits accounted. The consultations closed on 31 August.

4 July 2018, an Ordinance to bring Curaçao’s preferential tax regimes into line with international standards on Base Erosion and Profit Shifting (BEPS) was published and brought into force. The changes will generally apply from 1 July 2018.

The OECD targeted 15 actions to address BEPS in a comprehensive manner, including Action 5: “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”, one of the four BEPS minimum standards. All members of the Inclusive Framework on BEPS, including Curaçao, must commit to implement the Action 5 minimum standard into their domestic tax legislation and to participate in peer reviews to ensure timely and accurate implementation.

The peer review of Curaçao identified three preferential tax regimes in to be harmful: tax-exempt companies, export facility companies and the regimes for economic zone (E-zone) companies. The OECD recommended adjustments to align these tax regimes with the internationally accepted standards to avoid BEPS. Other amendments relate to substance requirements, an ‘innovation box’ regime, offshore companies and the fiscal unity regime.

The Ordinance abolishes the profit tax regime for tax-exempt companies with retroactive effect from 1 July. Existing tax-exempt companies can continue to benefit until 1 January 2019, except in respect of benefits non-qualifying intangible assets, which will be taxed at the regular profit tax rate of 22% from 1 July 2018.

From 1 July 2018, it is possible to request the Tax Inspector to designate a company with a capital divided into shares and established in Curaçao as a Curaçao Investment Company (CIC). A CIC will qualify as a taxable subject and must file annual profit tax returns but qualifying income will be taxed at a newly introduced profit tax rate of 0%.

A new innovation box regime, which applies as from 1 July 2018, is introduced in line with the OECD’s ‘nexus approach’. Qualifying income from IP in Curaçao may be taxed at a 0% profit tax rate if it is derived from an intangible asset for which actual research and development (R&D) work is performed in Curaçao, or for which a Curaçao tax resident outsources the R&D activities to an unrelated foreign company for the account, risk and benefit of the Curaçao tax resident.

Trademarks, logos and similar assets are excluded as qualifying intangible fixed assets. Taxpayers may opt to have the income from qualifying intangible assets taxed at the 0% rate when filing their profit tax returns.

The export facility regime is abolished as of 1 July 2018. Existing export facility companies may continue operating under the present regime up to and including 31 December 2018, except with regard to benefits from non-qualifying intangible fixed assets, which in principle will be taxed at the regular profit tax rate of 22% from 1 July.

Curaçao has adopted the so-called ‘territorial approach’ in which a distinction is made between domestic and foreign sources of income. Resident taxpayers must declare their worldwide income for profit tax purposes, but only income derived from domestic sources is taxed, while foreign-source income is excluded from the taxable base in Curaçao. No application is needed to apply the exemption for foreign-source income.

Foreign-source income includes profits derived by a Curaçao tax resident entity through a permanent establishment or a permanent representative located abroad, from immovable property or rights to immovable property located abroad, and from the delivery of goods or provision of services to customers located abroad, even if domestic assets were used for these activities.

Some services are excluded from the exemption, notably insurance and reinsurance, legal, accountancy and tax activities, income derived from the exploitation of intellectual property (IP) and shipping activities.

The Ordinance introduces new substance requirements and companies that fail to meet these requirements will be unable to apply a preferential tax regime. For Curaçao profit tax purposes, a real presence in the country will be deemed to exist if a corporate entity, considering the nature and size of its activities, employs a suitable number of full-time qualified staff and incurs a suitable amount of annually recurring domestic operational costs. It is possible to request a statement from the authorities confirming that an entity meets the substance requirements.

The E-zone is a specifically designated geographical area in Curaçao. Previously legal entities established in an E-zone were taxed at a reduced profit tax rate of 2%, and no sales tax or import duties were due on goods delivered/services provided to customers outside of Curaçao.

As from 1 July 2018, the Ordinance limits the E-zone regime to the delivery and sale of goods to foreign or domestic clients. The rendering of services will no longer be permitted from the E-zone nor be subject to the 2% profit tax rate. Existing E-zone entities may continue to benefit from the previous E-zone regime until 31 December 2018.

Existing companies that have ‘offshore company’ status based on the offshore profit tax regime, which will expire at the end of the last financial year commencing before 1 July 2019 and provides for a reduced profit tax rate of 2.4% to 3%, may apply for transparent company status at the beginning of a new financial year, provided all relevant requirements are met.

A transparent company will be treated similarly to a partnership for profit tax purposes. Its assets and income will be allocated pro rata to the shareholders, which may be subject to profit tax or personal income tax in Curaçao.

9 August 2018, the Second Protocol to amend the 2010 tax treaty between the Hong Kong and New Zealand by extending the exchange of information provisions and allowing for automatic exchange of information was brought into force with immediate effect following ratification by both parties. It was signed on 28 June 2017.

9 August 2018, the Mauritian parliament approved, without amendment, the Finance (Miscellaneous Provisions) Bill, which provides for proposed changes to the tax regime for corporations with global business licences to comply with the substance and transparency requirements of Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.

As from 1 January 2019, the deemed 80% foreign tax credit available to companies holding a Category 1 Global Business Licence will be abolished and the rate of tax for both domestic companies and Global Business Companies (GBCs) will be harmonised at 15%.

A new licence, termed a Global Business Licence (GBL), will be mandatory if a foreign-controlled company wishes to conduct its business principally outside Mauritius or with such category of persons as may be specified in the FSC Rules.

A GBL holder will be required to carry out its income generating activities in or from Mauritius though the direct and indirect employment of suitably qualified persons and should incur a minimum level of expenditure in accordance with its level of activities. It is mandatory for the holder of a GBL to be managed and controlled from Mauritius and administered by a management company.

A partial exemption, based on 80% of the relevant income and applicable to GBL and domestic companies, will be effective from 1 January 2019 and will apply to:

-Foreign-source dividends derived by a company;

-Interest derived from overseas by a company other than a bank;

-Profit attributable to a permanent establishment of a resident company in a foreign country;

-Foreign-source income derived by a collective investment scheme (CIS), closed-end fund, CIS manager, CIS administrator, investment adviser or asset manager, licensed or approved by the Financial Services Commission; and

-Income derived from overseas by companies engaged in ship and aircraft leasing.

Where a company has claimed the partial exemption, no credit for foreign taxes in the form of actual tax credit, underlying tax credit and tax sparing credit will be available. The definition of foreign-source income has been changed to “income which is not derived from Mauritius”.

Companies that were issued with a Category 2 Global Business Licence on or before 16 October 2017 will continue to be exempted from income tax until 30 June 2021.

23 August 2018, MONEYVAL, the permanent monitoring body of the Council of Europe, found that the overall appreciation of money laundering (ML) and financing of terrorism (FT) risk in Latvia’s financial sector was not commensurate with the factual exposure of financial institutions in general, and banks in particular, to the risk of being misused.

MONEYVAL acknowledged in its evaluation report that as a regional financial centre, with a majority of its commercial banks focusing on servicing foreign customers, mainly from the Commonwealth of Independent States (CIS) countries, one of Latvia’s key ML risks remained the vulnerability of CIS countries to economic crime, especially corruption. Latvia’s own level of corruption, vulnerability to international organised crime and significant shadow economy were also key factors of the overall ML risk.

The general understanding of risks among designated non-financial businesses and professions was limited to risks relevant for their particular businesses and professions, and did not amount to an appropriate perception and awareness of ML/FT risks.

Despite the steps taken to improve its AML/CFT legal framework, there was also uneven and overall inadequate appreciation of the potentially ML related cross-border with supervisors demonstrating widely varying views and knowledge. Until recently, the judicial system of Latvia did not appear to consider ML as a priority. ML was not investigated and prosecuted in line with its risk profile as a regional financial centre.

However MONEYVAL praised Latvia for proactively co-operating with foreign counterparts, effectively providing and seeking not only mutual legal assistance, but also exchanging financial intelligence, and engaging in joint investigations and cooperation meetings with positive results.

Latvia is to report back to MONEYVAL at the last Plenary meeting in 2019 about the implementation of its recommendations under enhanced follow-up procedures.

15 August 2018, the New Zealand parliament passed the Overseas Investment Amendment (OIA) Bill, which will prohibit many non-resident foreigners from buying existing homes in New Zealand. The Bill, which was an election campaign pledge of the Labour-led government, had its first reading in December 2017.

Under the OIA Bill, an overseas person – a person who is not a New Zealand citizen or ordinarily resident in New Zealand – will require Overseas Investment Office (OIO) approval to purchase “residential land”. “Residential land” means land that has a property category of residential or lifestyle in the relevant local authority's District Valuation Roll.

A special definition of "ordinarily resident in New Zealand" applies to the residential land rules. Residence class visa holders who have been living in New Zealand for at least 12 months before the purchase and been present in New Zealand for at least 183 days of that time, and who are tax resident in New Zealand will not require OIO consent.

The existing ‘benefit to New Zealand’ test has been retained. This applies to sensitive land, including residential land, and involves an assessment of whether the investment would benefit New Zealand against 21 factors set out in the Overseas Investment Act and Regulations. If the land is residential, a "residential land outcome" will be imposed such that an on-sale requirement will be imposed if the land is used for a residential dwelling.

Other overseas investors buying residential land will still need to apply for consent, but may be able to avoid the ‘benefit to New Zealand test’ if they can access one of three new consent pathways:

-Commitment to reside in New Zealand;

-Develop “increased housing" subject to an on-sale requirement once the development is completed;

-Non-residential (or incidental residential) use of residential land.

To comply with New Zealand’s international obligations under existing free trade agreements, certain exemptions will be made by regulation for Australians and Singaporeans to acquire residential land.

The law follows a 60% surge in house prices during the past decade that has driven local home ownership levels down to their lowest in almost 70 years. Immigration, a shortage of affordable homes and high rents are also contributing to a housing crisis, which has placed the issue at the top of the political agenda.

It was originally Prime Minister Jacinda Ardern’s intention to have the Bill passed in early 2018 before the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into effect. However the timeframe for the CPTPP was extended, allowing a longer process for the OIA Bill.

The OIA Act will come into force two months after Royal assent or on an earlier date to be determined by Order in Council.

30 August 2018, the OECD published the fourth round of stage one peer review reports to assess the efforts of eight countries to implement the Action 14 minimum standard under the Action Plan on Base Erosion and Profit Shifting (BEPS). This is intended to ensure that treaty-related disputes can be resolved in a timely, effective and efficient manner.

The reports – covering Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugal – contain over 130 targeted recommendations that will be followed up in stage two of the peer review process. A document addressing the implementation of best practices is also available for each jurisdiction that opted to have such best practices assessed.

In total, 29 peer reviews have been finalised, with a further eight pending approval. The sixth batch of Action 14 peer reviews were launched this month with eight more countries beginning their peer review process.

3 August 2018, Russian President Vladimir Putin signed a package of seven federal laws to establish two ‘offshore’ zones in Russia, which will enable Russian-controlled overseas companies to re-register as international companies under Russian jurisdiction.

The move is designed to minimise the consequences of international sanctions and facilitate the repatriation of assets to Russia.

The legislation establishes two ‘special administrative regions’ (SARs) within Russia – on Russky Island in the Sea of Japan and on Oktyabrsky, an island on a river in the Russian exclave of Kaliningrad.

Foreign companies re-domiciling in the SARs can obtain the status of an international company and benefit from special tax regulations, including zero taxes on profits received by way of dividends.

Russia’s Code of Merchant Shipping has also been amended to allow vessels owned by foreign citizens and legal entities to be registered on the Russian Register of Vessels and to sail under the Russian flag.

The package of federal laws was adopted by the State Duma (lower house) on 26 July and approved by the Federation Council (upper house) on 28 July 28.

29 August 2018, the Monetary Authority of Singapore (MAS) and the Dubai Financial Services Authority (DFSA) signed a FinTech Agreement that allows referrals of FinTech companies to each other, as well as to facilitate the sharing of information on financial sector innovation in their respective markets.

Both authorities have also agreed to work on joint innovation projects on the application of key technologies such as digital and mobile payments, blockchain and distributed ledgers, big data, and Application Programming Interfaces (APIs).

Chief FinTech Officer at MAS Sopnendu Mohanty said: “The rising FinTech boom in the Middle East creates new opportunities for the region and beyond. Through this FinTech cooperation with DFSA, we look forward to closer interactions between our markets, and for FinTech firms in Singapore to capture these new opportunities and grow the FinTech landscape.”

Both MAS and DFSA are founder members of the new Global Financial Innovation Network (GFIN), along with the UK's Financial Conduct Authority (FCA) and regulators from Australia, the US, Canada, Hong Kong, Bahrain, Abu Dhabi and Guernsey.

MAS and DFSA previously signed a Memorandum of Understanding (MOU) in 2008 to foster supervisory cooperation in banking, insurance and capital markets. It also facilitates the exchange of information for supervisory purposes between the two authorities.

2 August 2018, the Federal Court in Lausanne, Switzerland's highest appeals court, upheld the right of the Federal Tax Administration (FTA) to co-operate with the Indian tax authorities in a tax evasion investigation, even though the request was based on data stolen by whistle-blower Hervé Falciani.

The Court rejected an appeal brought by two Indian citizens and two companies against the decision of the Federal Administrative Court in St Gallen last July to authorise the FTA to transfer information concerning their banking activities between April 2011 and March 2014, when they held HSBC trust accounts in the BVI.

The appellants claimed that the data upon which the Indian authorities had based their request for assistance had been stolen by Falciani and therefore did not amount to valid grounds for co-operation.

Falciani, a French citizen who worked for HSBC's Swiss private bank, passed account data on thousands of clients to the French authorities in 2008. Last year, the Swiss Supreme Court rejected a French request for help in investigating a married couple for tax offences, ruling that stolen data was inadmissible.

The Federal Court, however, ruled that India should get access to the client data it sought. Unlike the French case, it noted, India made no explicit statements about whether it got the data legally, and had received it from another country rather than from Falciani directly.

The information sharing agreement between Switzerland and India did not oblige the country making a request to reveal how it acquired the information underlying the request. Requests for legal assistance might be granted provided that the requesting countries had not purchased stolen data for use in such requests.

22 August 2018, the Swiss Federal Council adopted the dispatch on the multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS). The dispatch was submitted to parliament.

Switzerland signed the BEPS convention on 7 June 2017, which was approved by a majority in the subsequent consultation. It will initially adjust the Swiss double taxation agreements (DTAs) with Argentina, Austria, Chile, the Czech Republic, Iceland, Italy, Lithuania, Luxembourg, Mexico, Portugal, South Africa, and Turkey to the tax treaty related minimum standards defined within the framework of the BEPS project.

The tax treaty-related BEPS minimum standards can also be incorporated via bilateral treaty amendments. To date, Switzerland has revised its treaties with Brazil, Latvia, Kosovo, Pakistan, Saudi Arabia, the UK and Zambia. Further treaty revisions are ongoing.

The Federal Council further adopted the dispatch concerning a protocol of amendment to the 1977 treaty with the UK on 22 August. The Protocol incorporates the minimum agreement standards defined within the framework of the BEPS project. In particular, it includes a general agreement abuse clause.

31 August 2018, the Swiss Federal Criminal Court published a ruling, originally delivered in May, which concluded there was insufficient evidence to convict a Swiss asset manager of treason for turning over client data to US prosecutors.

In May 2014, Zurich-based Swisspartners entered into a non-prosecution agreement (NPA) with the US Attorney’s Office for the Southern District of New York and agreed to pay US$4.4 million in penalties.

The NPA was entered into based on, among other things, “the firm’s remedial measures, voluntary self-reporting and extraordinary co-operation, including its voluntary production of approximately 110 client files for non-compliant US-taxpayer clients”.

The Swiss attorney general’s office (OAG) accused Swisspartners chairman Martin Egli of “forbidden actions in the service of a foreign country” and sought fines of US$275,000.

In a 17-page ruling, a Swiss judge concluded there was insufficient evidence for a conviction. “It can be presumed in favour of the accused that he believed in the legality of his approach and didn’t consider the possibility that he acted unlawfully for a foreign state,” the ruling said.

Egli, who remains chairman of Swisspartners, was awarded CHF 33,300 in the case, mostly in respect of legal costs.

24 July 2018, the Swiss Federal Tax Administration (FTA) published a circular letter summarising the legal framework and the practice of the Administration and of the cantonal tax authorities in respect of lump-sum taxation.

The Circular sets out a minimum taxable income of CHF 400,000 and confirms a transitional period of five years for taxpayers who applied for the lump-sum taxation after 1 January 2016. The new rules adopted in September 2012 will apply to all deals from 1 January 2021.

The Swiss lump-sum tax regime can only be applied to non-Swiss citizens who take up residency in Switzerland for the first time, or after an absence of 10 years, and do not undertake any commercial activity in Switzerland.

According to the Circular, performing a commercial activity in Switzerland is defined as carrying out any type of employment – main or auxiliary, employed or self-employed – in Switzerland that generates income in Switzerland or abroad. In the case of married couples, both partners must fulfil the requirements to benefit from the lump-sum taxation.

Relevant living expenses include the costs of food, clothing, housing and vehicle maintenance, as well as expenses for education and travel. Since 1 January 2016, the annual living expenses must correspond to at least seven times the annual rental value of the taxpayer’s home or the annual rent paid. The Circular explicitly provides that, if the taxpayer has more than one real estate property in Switzerland, the highest annual rental value or rent paid has to be taken into consideration.

Swiss law provides that every taxpayer that is subject to the lump-sum tax regime must establish a ‘control calculation’ on an annual basis. The amount of tax payable under the lump sum taxation has to exceed the income tax that would be due under the ordinary system on the gross income from Swiss sources, including financial assets.

The Circular specifies that Swiss-sourced financial assets mean that the issuer of the security must be a Swiss resident; the physical location of the security is not relevant. The control calculation also comprises foreign-sourced portfolio income for which the taxpayer wants to claim for partial or total exemption of foreign withholding taxes under a double tax treaty.

Specific regulations are applicable with respect to the double tax treaties with Austria, Belgium, Canada, France, Germany, Italy, Norway and the US.

31 July 2018, the High Court discharged a US$3 billion worldwide freezing order (WFO) granted in favour of Angola’s sovereign wealth fund (FSDEA) against its Swiss asset manager Quantum Global due to "serious and substantial" breaches of its duty to provide full and frank disclosure of all material facts in the case.

In FSDEA and Ors v Dos Santos and Ors [2018] EWHC 2199, FSDEA and seven of its subsidiaries were granted a WFO against 20 individuals and companies, including its former chairman, in April 2018.

The dispute, which followed a change of government in Angola, related to a claim by FSDEA of a dishonest conspiracy between the former chairman, José Filomeno dos Santos, and his friend and business partner, Jean-Claude Bastos de Morais, who is the 95% beneficial owner of the Quantum group of companies, which included the rest of the defendants.

The defendants sought to have the WFO set aside on jurisdictional grounds. It was further argued that FSDEA had not established a good arguable case in respect of some of the causes of action or established a sufficient risk of dissipation, as well as the breach of the duty of full and frank disclosure.

In his judgment Mr Justice Popplewell re-stated the principles surrounding the duty of full and frank disclosure, as summarised by Lord Justice Gibson in the 1998 decision of Brink's Mat Ltd v Elcombe. He noted that the duty was the "necessary corollary of the court being prepared to depart from the principle that it will hear both sides before reaching a decision", which underpins the right to a fair trial set out at article 6 of the European Convention on Human Rights.

He identified eight counts of "non-disclosure and an unfair presentation" that undermined FSDEA's case for the WFO. There was also no solid evidence that there was sufficient risk of dissipation of assets to justify a freezing order.

Popplewell J said: "Occasional errors in preparing the material in a case of this size and complexity can perhaps be understood. But the unfair presentation in this case in the respects I have identified goes far beyond the odd accidental slip, and goes to the central elements of the case alleging dishonesty in support of a US$3 billion freezing order and proprietary order.

"Given the size of the freezing order sought, and the allegations of dishonesty being made, it was incumbent on the claimants and their legal advisers to make the fullest inquiry into the central elements of their case if they were to proceed without notice.

"I should make clear, however, that I would reach the same conclusion even if satisfied of a risk of dissipation," the judge said. "The breaches of duty are sufficiently serious and culpable to warrant discharging the WFO and not granting fresh relief, irrespective of the other grounds of challenge," he said.

1 August 2018, UK law firm Mishcon de Reya announced it had filed a legal complaint under the General Data Protection Regulation with the Information Commissioner’s Office (ICO) against the OECD Common Reporting Standard and the Beneficial Ownership registers which, it said, “call into question the wider repercussions for fundamental rights and the relationship between individuals and the state”.

The complaint was filed on behalf of an unnamed EU citizen who has Italian domicile and did not wish to be identified. She was reported to have been resident in the UK and to have had a UK bank account containing £4,000. The complaint claims that sharing her information with overseas tax authorities would subject her to a risk of her data being hacked, and would infringe European data protection and human rights laws.

Mishcon said the Common Reporting Standard (CRS) and Beneficial Ownership (BO) registers had been introduced to fight tax evasion and money laundering but the rights to privacy and data protection were fundamental rights. They were the cornerstone of the General Data Protection Regulation (GDPR) – which came into force in May 2018 – and emanated directly from European Convention on Human Rights and the EU's Charter of Fundamental Rights. Accordingly, any interference with these rights must have a clear legal basis, pursue a legitimate public interest and be proportionate.

“Our contention,” said the law firm, “is that the publication of sensitive data concerning the internal governance and ownership of private companies by the BOs is not necessary to achieve the stated objectives. Similarly, we believe that the exchange of information under the CRS is excessive, as information is exchanged indiscriminately and affects all account holders regardless of the size of the account.

“The information exchanged under the CRS includes sensitive personal data (such as the name, date/place of birth and tax identification number of the account holder) as well as financial data about the financial account itself such as the account number and balance.  This exposes compliant account holders to risk of hacking and data loss: it could lead to identity theft on a grand scale.

“Multiple letters have been written to Her Majesty's Revenue and Customs (HMRC) and Companies House to ask for confirmation that they will not exchange or publish information under the CRS or the UK version of the BOs. HMRC has already formally refused to provide such confirmation. Accordingly, a formal complaint has now been issued to the UK's Information Commissioner under the GDPR copying in the EU's data protection authorities.”

An ICO spokesperson said: “We have received a complaint relating to HMRC and the Common Reporting Standard and will be looking into the details.”

28 August 2018, the US District Court for the Southern District of Florida approved a deferred prosecution agreement (DPA) entered into by the US Department of Justice with Basler Kantonalbank (BKB). As part of the agreement, BKB will pay US $60.4 million in penalties.

In the DPA and related court documents, BKB admitted that between 2002 and 2012 it conspired with its employees, external asset managers, and clients to defraud the US with respect to taxes, commit tax evasion and file false federal tax returns.

At its peak in 2010, BKB held approximately 1,144 accounts for US customers, with an aggregate value of US$813.2 million. The majority was held in undeclared accounts that were part of the conspiracy.

BKB and the external asset managers working with the bank promoted BKB as a safe haven because it lacked a US presence and supposedly would not be subject to a US criminal investigation. Between July 2008 and March 2009, BKB opened 398 new accounts for US customers, with a resulting inflow of approximately US $441.6 million in new assets.

Throughout the conspiracy, BKB took a number of steps and provided a number of services to its undeclared clients. These included promoting Swiss bank secrecy as a means of concealing assets and income from US taxation, providing hold-mail services and ‘assumed name’ and ‘numbered accounts’, and allowing accounts to be established through nominee entities set up in jurisdictions that included the British Virgin Islands, Liechtenstein and Panama.

According to the terms of the DPA, BKB will cooperate fully with US authorities and disclose certain material information it may later uncover regarding US-related accounts. It will further disclose certain information consistent with the US Swiss Bank Programme with respect to accounts closed between 1 January 2009 and 31 December 2017.

Under the DPA, prosecution against the bank for conspiracy will be deferred for an initial period of three years to allow BKB to demonstrate good conduct. The US$60.4 million penalty against BKB has three parts – US$17.2 million in restitution to the IRS of the unpaid taxes resulting from BKB’s participation in the conspiracy, US$29.7 million to the US in respect of gross fees earned on its undeclared accounts between 2002 and 2012, and a fine of US$13.5 million.

The Department of Justice said the penalty amount reflected BKB’s thorough internal investigation and cooperation with the US, as well as the bank’s extensive efforts at remediation, and its waiver of any claim of foreign sovereign immunity.

Among other remedial efforts, BKB implemented measures to require all US-related accounts be tax compliant, closed a branch office responsible for much of the tax fraud and fired the employees involved in the offence, and conducted extensive outreach to former clients to encourage them to participate in IRS-sponsored voluntary disclosure programmes.

1 August 2018, the Internal Revenue Service and Department of the Treasury issued proposed regulations on section 965 of the Internal Revenue Code, a transition rule added in the Tax Cuts and Jobs Act that requires a taxable repatriation of US companies’ existing foreign subsidiary earnings at reduced tax rates.

The proposed regulations affect US shareholders, as defined under section 951(b) of the Code, with direct or indirect ownership in certain specified foreign corporations, as defined under section 965(e) of the Code.

Section 965, enacted in December 2017, levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by US shareholders by deeming those earnings to be repatriated. For domestic corporations, foreign earnings held in the form of cash and cash equivalents are generally intended to be taxed at a 15.5% rate for 2017 calendar years, and the remaining earnings are intended to be taxed at an 8% rate for 2017 calendar years.

The lower effective tax rates applicable to section 965 income inclusions are achieved by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit also applies with respect to the inclusion under section 965(g) of the Code.

Taxpayers can generally elect to pay the transition tax in instalments over an eight-year period under section 965(h) of the Code. The proposed regulations contain detailed information on the calculation and reporting of a US shareholder’s section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under section 965.

The regulations aim to produce more equitable results by preventing double counting in the computation of the aggregate foreign cash position and deferred earnings arising from amounts paid or incurred between related parties between measurement dates, the government said.

The proposed regulations also seek to reduce uncertainty and ambiguity by providing that all members of a consolidated group that are US shareholders of a specified foreign corporation are treated as a single US shareholder.

Comments and requests for a public hearing on the proposed regulation must be submitted within 60 days of publication in the Federal Register.

31 July 2018, the US Department of Justice (DoJ) signed an addendum to its non-prosecution agreement (NPA) with Zurich-based Bank Lombard Odier & Co. in respect of US-related accounts that were undisclosed at the time of the original signing on 31 December 2015.

Under the Swiss Bank Programme, the DoJ executed NPAs with 80 banks between March 2015 and January 2016. All these banks represented that they had disclosed all of their US-related accounts that were open at each bank between 1 August 2008 and 31 December 2014. They would also, during the term of the NPA, continue to disclose all material information relating to their US-related accounts.

In the addendum, Lombard Odier acknowledged that there were certain additional US-related accounts that it knew about, or should have known about, but that were not disclosed at the time of signing the NPA. The DoJ said the bank had provided early self-disclosure of the unreported accounts and had cooperated fully.

The DoJ imposed a total of more than US$1.36 billion in penalties under the Swiss Bank Programme, including more than US$99 million from Lombard Odier. Pursuant to the addendum, Lombard Odier will pay an additional US$5.3 million and provide supplemental information in respect of an additional 88 US-related accounts.

“The DoJ and IRS have capitalised on information obtained under the Swiss Bank Programme to analyse the flow of money of US tax evaders from closed Swiss bank accounts to banks in other countries,” said Richard Zuckerman, Principal Deputy Assistant Attorney General of the DoJ’s Tax Division.

“I urge any banks that aided and abetted in these schemes, or that have received money from closed Swiss bank accounts owned or controlled by persons or entities that are US related, to contact the Tax Division and disclose complete and accurate information about these activities before they are contacted by the Division or the IRS.”

20 August 2018, a US taxpayer pleaded guilty in US District Court for the Central District of California to wilfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR), which would have disclosed his foreign bank accounts.

According to court documents, Los Angeles-based Ben Zion Birman held offshore accounts in Israel at Bank Leumi Le-Israel from 2006 to 2011. He wilfully failed to file an FBAR for calendar year 2010, despite having over US$1 million in Bank Leumi accounts, and instructed Bank Leumi to hold bank mail from delivery to the US.

Birman obtained access to his offshore funds through the use of ‘back-to-back’ loans, which were designed to enable borrowers to tap their concealed accounts. These lending arrangements permitted Birman to have funds issued by Leumi’s US branch that were secretly secured by funds in his undeclared accounts in Israel.

In December 2014, Bank Leumi entered into a deferred prosecution agreement after it admitted to conspiring, from at least 2000 until early 2011, to aid and assist US taxpayers to prepare and present false tax returns by hiding income and assets in offshore bank accounts in Israel and other locations around the world. Bank Leumi paid the US a total of US $270 million and continues to cooperate with respect to civil and criminal tax investigations.

Birman faces a maximum sentence of five years in prison, as well as a period of supervised release, restitution and monetary penalties. Sentencing is scheduled for 10 December.

13 August 2018, US Attorney for the Southern District of New York Geoffrey Berman announced the filing of criminal charges against Swiss bank Zürcher Kantonalbank (ZKB) for conspiring to help US taxpayer-clients evade their US tax obligations, file false federal tax returns, and otherwise hide hundreds of millions of dollars in offshore bank accounts.

At the same time he announced a deferred prosecution agreement under which the Swiss bank admitted to its unlawful conduct and agreed to pay a total of US$98.5 million in financial penalties. The amount of ZKB’s ‘co-operation credit’ was reduced to reflect the bank’s actions in dissuading two indicted ZKB bankers, Stephan Fellmann and Christof Reist, from cooperating with US authorities for years after their indictment.

ZKB further agreed to provide ongoing assistance to the Department of Justice, including providing detailed information about accounts in which US taxpayers have a direct or indirect interest, including detailed information as to other banks that transferred funds into those accounts or that accepted funds when the ZKB accounts were closed.

ZKB also agreed to cooperate with prosecutors in making treaty requests to Switzerland or other countries for account information. Under the terms of the agreement, the US government will defer prosecution for three years and then seek to dismiss the charges.

According to the Statement of Facts, between 2002 and 2009, ZKB assisted US taxpayers to evade their US tax obligations by opening and maintaining undeclared accounts for US taxpayers at ZKB, and by allowing third-party asset managers to open undeclared accounts for US taxpayers at ZKB. ZKB held approximately 2,000 undeclared accounts on behalf of US taxpayer-clients, who collectively evaded over US $39 million in US taxes between 2002 and 2013.

At the high-water mark in 2008, ZKB had approximately US$794 million in assets under management relating to undeclared accounts held by US taxpayer-clients. Between 2002 and 2013, ZKB earned approximately US$21 million in profits on approximately US$24 million gross revenues from its undeclared US taxpayer accounts, including accounts held through structures.

In December 2012, three ZKB bankers – Fellmann, Reist and Otto Hüppi – were charged in the Southern District of New York with conspiracy to defraud the US and the IRS for their role in ZKB’s offence. Fellmann and Reist both pleaded guilty to one count of conspiracy to wilfully fail to file returns, supply information, or pay tax and face a maximum sentence of one year in prison. They are due to be sentenced on 30 November. Hüppi remains a fugitive.

Berman said:  “ZKB and two of its bankers have admitted to conspiring to assist US taxpayers in evading their tax obligations. The bank enabled taxpayers to hide accounts from the IRS and actively sought to win the business of Americans looking to evade taxes. After doing so, ZKB dissuaded the two bankers from cooperating with US authorities, which has today resulted in a reduction in the bank’s cooperation credit. The substantial financial penalties imposed on the bank, and the two bankers’ pleas, should make clear that helping US taxpayers to be tax evaders will not be tolerated.”