13 September 2018, Andorra Judge Canòlic Mingorance charged 28 people, including two Venezuelan former deputy ministers, with being part of a network of corrupt officials who received bribes from companies in return for lucrative contracts with Venezuela's state-run oil company, PDVSA.
Fourteen of the accused are Venezuelan, with nine others from Andorra and five from Spain. The list of those charged includes Diego Salazar, who is the cousin of former Venezuelan oil minister Rafael Ramírez, as well as two men – Nervis Villalobos and Javier Alvarado – who served as deputy energy ministers in the government of Hugo Chávez.
Judge Mingorance has been investigating the case since 2012. She alleges that the accused "joined forces to take control of PDVSA's public tendering as well as energy infrastructure projects run by PDVSA's subsidiaries, Corpoelec and Electricity of Caracas".
The network they allegedly formed part of is thought to have taken US$2.3 billion in bribes between 2007 and 2012. Prosecutors allege that they hid the money in the now defunct Banca Privada d'Andorra (BPA).
BPA was named by the US Treasury Department in March 2015 as a foreign financial institution of primary money laundering concern based on information indicating that, for several years, it knowingly facilitated transactions on behalf of third-party money launderers acting on behalf of transnational criminal organisations.
The activity involved the proceeds of organised criminals in Russia and China, foreign corruption, and other criminal activity. BPA accessed the US financial system through direct correspondent accounts held at four US banks, through which it has processed hundreds of millions of dollars.
The directors and three BPA managers were suspended by the Insititut Nacional Andorrà de Finances, the Andorran regulator, while chief executive officer Joan Pau Miquel Prats was arrested and imprisoned. Spanish and Andorran regulators assumed control of BPA and its subsidiary Banco de Madrid.
5 September 2018, the Court of Appeal overturned a High Court ruling that a business under investigation by the Serious Fraud Office should turn over materials prepared for an earlier internal investigation. It held that in-house advice prepared prior to court proceedings should be as protected by privilege as that given in the defence of proceedings.
In The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd  EWCA Civ 2006, London-based mining company ENRC had instructed lawyers and forensic accountants to conduct investigations between 2011 and 2013 after being alerted by a whistle-blower to possible fraud, bribery and corruption in its business in late 2010.
The firm entered a dialogue with the SFO in August 2011 with the SFO urging ENRC to consider its self-reporting guidelines. This culminated in the SFO commencing an ongoing criminal investigation against ENRC in late April 2013.
As part of its investigation, the SFO issued notices compelling the production of documents, including statements and evidence provided by the company’s employees and officers and the work of its forensic accountants, which ENRC resisted on the basis that these documents were protected by legal professional privilege.
The main documents at issue were interview notes taken by ENRC’s lawyers of evidence provided by employees, former employees and officers of the company or its subsidiaries, and materials generated by forensic accountants as part of a ‘books and records’ review undertaken between May 2011 and January 2013.
The SFO applied to the court for declarations that the documents it sought were not privileged and, in May 2017, the Judge at first instance, Andrews J, granted the declarations sought. She held that legal advice privilege did not apply to the interview notes because – following the Court of Appeal decision in Three Rivers District Council and others v The Governor and Company of the Bank of England (Three Rivers No 5) – they did not record communications between lawyers and ‘the client’.
Litigation privilege did not apply to the documents in issue either, because in her view litigation was not reasonably in prospect at the relevant time, the dominant purpose of the communications had not been to conduct or prepare for litigation but rather to avoid it, and because the intention had always been to show the materials to the SFO.
ENRC’s appeal was heard in July 2018 by Sir Brian Leveson, President of the Queen’s Bench Division, Sir Geoffrey Vos, Chancellor of the High Court and Lord Justice McCombe. In a single judgment they allowed the appeal against Andrews J’s declarations that the documents were not covered by litigation privilege but otherwise dismissed the appeal.
Litigation was, on a proper approach to the facts, in reasonable contemplation at the material time. The Judge’s approach to evaluating whether criminal proceedings were reasonably in contemplation was wrong. Further, the purpose of heading off, avoiding or settling litigation was a purpose that ought to be protected by litigation privilege. The Judge’s conclusion to the contrary was an error of law. The Judge was also wrong to conclude that ENRC had intended to share the material at issue with the SFO.
As to legal advice privilege, the Court of Appeal stated that Three Rivers No. 5 had decided that communications between an employee of a corporation and that corporation’s lawyers would not attract legal advice privilege unless the employee had been tasked with seeking and receiving such advice on behalf of the client.
On that analysis, the interview notes could not attract legal advice privilege. However, had it been open to it to do so, the Court of Appeal stated that it would have been in favour of departing from Three Rivers No. 5, as a matter of principle. The judges stated however that: “. 'It would be highly undesirable for us to enter into an unseemly disagreement which can be overturned only by the Supreme Court.”
The SFO is understood to be considering an appeal to the Supreme Court.
6 September 2018, a bilateral competent authority agreement (CAA) for conducting automatic exchange of financial account information in tax matters (AEOI) between the Mainland China and the Hong Kong Special Administrative Region was brought into force.
In September 2014, Hong Kong indicated its support for implementing AEOI on a reciprocal basis with appropriate partners, with a view to commencing the first exchanges from 2018. Under the OECD’s Common Reporting Standard (CRS), financial institutions in Hong Kong are required to identify financial accounts held by “tax residents of reportable jurisdictions” or held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions.
Hong Kong has previously activated AEOI relationships with 49 other jurisdictions on the basis of similar bilateral CAAs or a multilateral competent authority agreement under the Convention on Mutual Administrative Assistance in Tax Matters. The Inland Revenue Department of Hong Kong will exchange the relevant information with their counterparts in the reportable jurisdictions concerned on an annual basis.
"With the conclusion of the arrangement, Hong Kong will conduct AEOI with the Mainland for the first time later this month along with that for 49 jurisdictions. Hong Kong will continue to deliver its obligations to implement AEOI in accordance with the CRS," a government spokesman said.
1 September 2018, the BVI Financial Services Commission brought the BVI Business Companies Act (Amendment of Schedule) (No. 3) Order 2018 into force, which reduced the maximum penalty for late filing of Registers of Directors (RODs) to $5,000.
RODs are not publicly accessible but can be made available under a court order or on the written request of a relevant authority acting in the exercise of its powers. BVI Business Companies that existed prior to 1 April 2016 were given until 31 March 2017 to file RODs at the Registry of Corporate Affairs. Companies that failed to comply were subject to escalating penalty fees, up to a maximum of $8,000.
The Order further authorised the issue of a refund in cases where a penalty above $5,000 was previously applied. The refund process has already begun and companies that paid penalties in excess of $5,000 will be issued refunds via credit to the account of the company’s registered agent.
The Order further provides for the Registrar to strike existing companies from the Register of Companies under Section 213 of the BVI Business Companies Act 2004 (BVIBCA) if they fail to file RODs on or before 31 December 2018.
The Registrar will enforce this provision and a notice will be issued to inform affected companies that they will be struck from the Register if they fail to comply. Companies that have not filed RODs by 31 December 2018 will be struck from the register on 2 January 2019.
The BVIBCA requires one or more persons to be appointed as the first director(s) of the company within six months of the date of incorporation of the company. Section 118B(2) requires the initial register of directors to be filed within 21 days of the appointment of the first directors under section 113. A penalty is imposed if the filing is done outside of the 21 days.
Section 213(1)(a)(ii) gives the Registrar authority to strike the name of the company from the Register if the company fails to file any annual return, notice or document required to be filed under the Act. In exercise of this power, companies incorporated between the period of 1 April 2016 and 31 March 2018 will also be struck from the Register if the RODs are not filed on or before 31 December 2018.
Going forward, companies incorporated after 31 March 2018 will be liable to being struck from the Register if RODs have not been filed within nine months of the incorporation of the company. The nine months includes the six-month appointment period, the 21-day filing requirement and an additional grace period.
From 1 January 2019, companies incorporated after 1 April 2016 that have been struck from the Register for non-payment of fees or for any other reason, and have not filed RODs, must file RODs and pay all outstanding fees and penalties together with an application for restoration in order to be restored to the Register.
From 1 October 2018, certificates of good standing will not be issued for companies that have not filed RODs. Under the BVI Business Companies (Amendment) Act 2018, which came into force on 1 October, a company that has not filed its RODs will not be eligible to receive a certificate of good standing.
BVI Business Companies that are not conducting any regulated financial services business are permitted to incorporate or register as Segregated Portfolio Companies (SPCs) under the BVI Business Companies (Amendment) Act 2018 and the Segregated Portfolio Companies (BVI Business Company) Regulations 2018, which came into force on 1 October 2018.
Transactions to register existing companies as SPCs are now active via the Virtual Integrated Registry and Regulatory General Information Network (VIRRGIN). VIRRGIN is the FSC's Internet-based information network that provides on-line electronic access to the services of the Registry of Corporate Affairs, including electronic filings of documents. Transactions to incorporate new companies as SPCs will come on stream via VIRRGIN in the near future.
20 September 2018, the European Court of Justice (ECJ) ruled that a German law introducing less favourable business tax treatment for dividends received from subsidiaries located in non-EU countries was in breach of EU laws requiring free movement of capital.
In EV v Finanzamt Lippstadt (Case C-685/16), a German subsidiary of the EV group received dividends from its wholly-owned subsidiary resident in Australia in 2008 and 2009. The dividends distributed by the Australian company had previously been received from a sub-subsidiary resident in the Philippines.
The German tax authorities considered that the dividends received by the German company did not fulfil all the conditions of the German participation exemption regime applicable to dividends received from subsidiaries resident in third countries and denied the exemption.
The German company appealed, arguing that the treatment of dividends distributed by a resident company and dividends distributed by a non-EU resident company was different and constituted a restriction on the free movement of capital.
Under the relevant German tax legislation, dividends from domestic shareholdings are exempt from German business tax, subject to a 15% minimum holding requirement, whereas foreign shareholdings must satisfy certain additional conditions, including an active business test at the level of the distributing subsidiary.
The German referring court requested the ECJ to consider whether the German rules applicable to dividends from non-EU subsidiaries were in violation of the free movement of capital.
The ECJ found that the German legislation did subject the tax deductibility of dividends paid by non-resident subsidiaries to stricter conditions than those applying to dividends paid by resident companies, and concluded that the latter constituted a restriction on the free movement of capital.
Moreover, in assessing whether such a restriction could be justified by overriding reasons in the public interest, the ECJ concluded that the need to prevent abuse and tax evasion did not apply because the German legislation introduced an irrefutable presumption of abuse. It therefore concluded that the German legislation did create a restriction of the free movement of capital.
6 September 2018, the European Commission released the non-confidential version of its decision concluding that a Luxembourg tax ruling granted to subsidiaries of multinational French energy firm, Engie, was State aid. As a result of the decision, announced 20 June, Luxembourg must recover about €120 million in unpaid tax from the Engie group, plus interest.
Following an in-depth investigation launched in September 2016, the Commission concluded that two sets of tax rulings issued by Luxembourg had artificially lowered Engie's tax burden in Luxembourg for about a decade, without any valid justification.
In 2008 and 2010, respectively, Engie implemented two complex intra-group financing structures for two Engie group companies in Luxembourg – Engie LNG Supply and Engie Treasury Management. These involved a triangular transaction between Engie LNG Supply and Engie Treasury Management, respectively, and two other Engie group companies in Luxembourg.
The Commission concluded that Luxembourg's tax treatment of these financing structures did not reflect economic reality. Tax rulings issued by Luxembourg endorsed an inconsistent treatment of the same transaction both as debt and as equity.
On this basis, the Commission concluded that the tax rulings granted a selective economic advantage to Engie by allowing the group to pay less tax than other companies subject to the same national tax rules. In fact, the rulings enabled Engie to avoid paying any tax on 99% of the profits generated by Engie LNG Supply and Engie Treasury Management in Luxembourg.
The Luxembourg government has announced that it will appeal the Commission’s decision to the European Court of Justice.
19 September 2018, the European Commission found that the non-taxation of certain profits in Luxembourg from US food giant McDonald's did not lead to illegal state aid because it was in line with national tax laws and the Luxembourg-US double taxation treaty.
In December 2015, the Commission opened an in-depth investigation into two tax rulings issued by the Luxembourg authorities in respect of McDonald's Europe Franchising (MEF), a subsidiary of the US-based McDonald's Corporation, which was tax resident in Luxembourg and had two branches, one in the US and the other in Switzerland.
In 2009, MEF acquired a number of McDonald's franchise rights from McDonald's Corporation, which it subsequently allocated internally to its US branch. As a result, MEF received royalties from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia for the right to use the McDonald's brand. MEF also set up a Swiss branch responsible for the licensing of the franchise rights to franchisors, through which royalty payments flowed from Luxembourg to the US branch of the company.
In March 2009, the Luxembourg authorities granted MEF a first tax ruling confirming that the company did not need to pay corporate tax in Luxembourg since the profits would be subject to tax in the US. This was justified by reference to the Luxembourg-US tax treaty, which exempts income from corporate taxation in Luxembourg if it may be taxed in the US.
Under this first ruling, MEF was required to submit proof every year to the Luxembourg tax authorities that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and in Switzerland.
Following this first tax ruling, the Luxembourg authorities and McDonald's engaged in discussions concerning the taxable presence of MEF in the US. McDonald's claimed that although the US branch was not a ‘permanent establishment’ under US tax law, it was a ‘permanent establishment’ under Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.
The Luxembourg authorities ultimately agreed with this interpretation and, in September 2009, issued a second tax ruling under which MEF was no longer required to prove that its royalty income was subject to taxation in the US.
The Commission's in-depth investigation assessed whether the Luxembourg authorities had selectively derogated from the provisions of its national tax law and the Luxembourg-US tax treaty and given McDonald's an advantage not available to other companies subject to the same tax rules.
It concluded this was not the case. In particular, it could not be established that the interpretation given by the second tax ruling to the Luxembourg-US tax treaty was incorrect, even though it resulted in the double non-taxation of the royalties attributed to the US branch. It therefore found that the Luxembourg authorities did not misapply the treaty and that the tax advantage conferred to McDonald's Europe Franchising could not be considered State aid.
Commissioner Margrethe Vestager, in charge of competition policy, said: "The Commission investigated under EU State aid rules whether the double non-taxation of certain McDonald's profits was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald's.
“EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits. However, our in-depth investigation has shown that the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules.
“Of course, the fact remains that McDonald's did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view. That's why I very much welcome that the Luxembourg government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future."
In June, the Luxembourg government presented draft legislation to amend the tax code to bring the relevant provision into line with the OECD's Base Erosion and Profit Shifting project and to avoid similar cases of double non-taxation in the future.
Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. Luxembourg would also be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country. This is currently being discussed by the Luxembourg parliament.
12 September 2018, the European Parliament adopted its revised negotiating position on copyright rules, adding safeguards to protect small firms and freedom of expression. It was approved by 438 votes to 226, with 39 abstentions.
The proposed directive was originally rejected by MEPs in July following criticism of two key provisions, Articles 11 and 13, which were demonised as the “link tax” and “upload filter” by critics.
Amendments to the EU Commission’s original proposal aim to make certain that artists – notably musicians, performers and script authors, as well as news publishers and journalists – are paid for their work when it is used by sharing platforms such as YouTube or Facebook, and news aggregators such as Google News.
They also toughen the Commission’s proposed plans to make online platforms and aggregators liable for copyright infringements. This would also apply to snippets, where only a small part of a news publisher’s text is displayed. In practice, this liability requires such parties to pay rights holders for copyrighted material that they make available.
The text includes provisions to ensure that copyright law is observed online without unfairly hampering the freedom of expression that has come to define the Internet. Sharing hyperlinks to articles, together with “individual words” to describe them, will be free of copyright constraints.
To encourage start-ups and innovation, the text now exempts small and micro platforms from the directive. In addition, the text also specifies that uploading to online encyclopaedias in a non-commercial way, such as Wikipedia, or open-source software platforms, such as GitHub, will automatically be excluded from the requirement to comply with copyright rules.
The text also strengthens the negotiating rights of authors and performers, by enabling them to “claim” additional remuneration from the party exploiting their rights when the remuneration originally agreed is “disproportionately” low compared to the benefits derived.
The text adds that these benefits should include “indirect revenues”. It would also empower authors and performers to revoke or terminate the exclusivity of an exploitation licence for their work if the party holding the exploitation rights is deemed not to be exercising this right.
The Copyright Directive is scheduled to receive final parliamentary approval in January. Rapporteur Axel Voss said, “I am very glad that despite the very strong lobbying campaign by the internet giants, there is now a majority in the full house backing the need to protect the principle of fair pay for European creatives.”
11 September 2018, a former executive of Loyal Bank pleaded guilty in the Eastern District of New York to conspiring to defraud the US by failing to comply with the Foreign Account Tax Compliance Act (FATCA). It was the first-ever conviction for failing to comply with FATCA.
FATCA, a federal law enacted in 2010, requires foreign financial institutions to identify their US customers and report information about financial accounts held by US taxpayers either directly or through a foreign entity.
Adrian Baron, former Chief Business Officer and Chief Executive Officer of Loyal Bank, an offshore bank with offices in Budapest, Hungary and Saint Vincent & the Grenadines, was extradited to the US from Hungary in July 2018. He now faces a maximum of five years in prison.
According to court documents, in June 2017, an undercover agent met Baron and explained that he was a US citizen involved in stock manipulation schemes and was interested in opening multiple corporate bank accounts at Loyal Bank. He did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts. Baron responded that Loyal Bank could open such accounts and provide debit cards linked to them.
In July 2017, the undercover agent again met with Baron and described how his stock manipulation scheme operated, including the need to circumvent the IRS’s reporting requirements under FATCA. During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” US involvement.
Subsequently, in July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did Baron or Loyal Bank request or collect FATCA Information from the undercover agent.
24 September 2018, the French government released its finance bill for 2019, which contains measures proposed as part of a global corporate tax reform. The package aims to ensure that French corporate tax rules are in line with OECD and EU initiatives, while maintaining the attractiveness of France as a place to invest.
The bill’s principal measures would bring the patent box regime in line with the OECD’s ‘modified nexus’ approach, implement the EU anti-tax avoidance directive (ATAD1) and make changes to the French tax consolidation regime to conform to recent decisions of the Court of Justice of the European Union (CJEU).
Parliamentary discussions on the proposals are scheduled to begin on 15 October and be finalised by the end of 2018 such that they generally would be effective from 1 January 2019.
27 September 2018, the OECD announced that Australia, France, Japan and the Slovak Republic had all deposited their instruments of ratification or acceptance for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). Israel and Lithuania had also deposited their instruments of ratification earlier.
The Multilateral Instrument enables a signatory to transpose a series of tax treaty measures from the OECD/G20 BEPS project into existing bilateral and multilateral tax agreements, and to set a new standard for mandatory binding arbitration in relation to resolving double tax disputes.
Aruba has also joined the Inclusive Framework on BEPS, bringing the total number of countries and jurisdictions participating on an equal footing in the Project to 118.
1 September 2018, the comprehensive double tax treaty signed by the government of Hong Kong and Saudi Arabia 0n 24 August 2017 was brought into force. The treaty will become effective on 1 January 2019 for Saudi Arabia and 1 April 2019 for Hong Kong.
Subject to specific anti-avoidance provisions, the applicable withholding rates for the passive income received from Saudi Arabia by a Hong Kong resident as the beneficial owner will be 5% for dividends and 0% for interest. For royalties a 5% rate applies in respect of industrial, commercial or scientific equipment. An 8% rate applies in all other cases.
Under Hong Kong’s domestic law, a Saudi Arabian resident is not subject to withholding tax on dividends or interest in Hong Kong, while royalties are subject to Hong Kong withholding tax at the rate of 4.95%.
Capital gains derived by a Hong Kong resident on the disposal of shares in a Saudi Arabian entity will generally be exempt from tax in Saudi Arabia, unless the shares represent company holding substantial immovable property in Saudi Arabia or the Hong Kong resident investor owns 10% or more of the shares. Hong Kong does not impose capital gains tax on share disposition by a Saudi Arabian resident under Hong Kong’s domestic law.
5 September 2018, Ireland’s Minister for Finance and Public Expenditure & Reform Paschal Donohoe published Ireland’s ‘Corporation Tax Roadmap’, which sets out the further actions that Ireland will take over the coming years in response to the changing international tax environment.
The Roadmap includes consideration of responses received to the Department’s consultation on the recommendations made in the Review of Ireland’s Corporation Tax Code, undertaken by Seamus Coffey, and the implementation of OECD's Base Erosion and Profit Shifting initiative and the EU’s Anti-Tax Avoidance Directive (ATAD).
The Roadmap outlines the significant further action that Ireland is taking as part of international tax reform efforts, including commitments that:
-Legislation will be introduced in Finance Bill 2018 to introduce Controlled Foreign Company rules with effect from 1 January 2019.
-Review of Ireland’s general Anti-Abuse Rule to ensure that it is consistent with the ATAD.
-The final legislative steps required to allow Ireland to complete the ratification of the BEPS Multilateral Instrument will be taken in Finance Bill 2018.
-Legislation to amend Ireland’s exit tax will be introduced no later than Finance Bill 2019.
-Legislation will be introduced in a subsequent Finance Bill to introduce an interest limitation ratio. The timing of this legislation is yet to be determined.
-Legislation will be introduced in Finance Bill 2019 to implement anti-hybrid rules and further legislation will be introduced in a subsequent Finance Bill to introduce reverse-hybrid rules.
-Legislation will be introduced in Finance Bill 2019 to updated Ireland’s transfer pricing rules.
-Legislation will be introduced in Finance Bill 2019 to ensure that Ireland fully implements the EU’s DAC6 Directive on the mandatory disclosure of tax planning arrangements.
-Regulations will be issued before July 2019 to implement the EU’s Dispute Resolution Mechanism Directive and provide Irish taxpayers with access to this new arbitration framework.
-The Taxation and Certain Other Matters (International Mutual Assistance) Bill will be published
-It is intended that a public consultation will be launched in early 2019, seeking input on the alternative options of moving to a territorial regime or conducting a substantial review and simplification of the rules for the computation of double tax relief.
Minister Donohoe said: “The Roadmap highlights the significant actions that Ireland has taken and the actions we will continue to take to ensure that our corporation tax regime is transparent, sustainable and legitimate.
“Tax rules need to continue evolve to match the modern world, and that evolution can best take place through international agreement at the OECD and the BEPS Inclusive Framework. Ireland will continue to foster economic activity in Ireland, the EU and beyond by adapting and evolving our corporate tax regime while maintaining our key 12.5% rate.”
18 September 2018, the Irish Department of Finance announced that US tech giant Apple had completed the transfer of €14.3 billion into an escrow fund established at the direction of the European Commission in a legal action over alleged state aid. It is likely to be several years before the matter is settled by the European courts.
Payments commenced in May and the Irish government had committed to recover the total payment from Apple – the principal amount of €13.1 billion plus interest of about €1.2 billion – by the end of the third quarter of this year.
Irish Finance Minister Paschal Donohoe said: “While the government fundamentally disagrees with the commission’s analysis in the Apple state-aid decision and is seeking an annulment of that decision in the European courts, as committed members of the EU we have always confirmed that we would recover the alleged state aid … (This) will be held in the escrow fund pending the outcome of the appeal process before the European courts.”
The Irish government missed an initial deadline to collect the money from Apple by January 2017. It blamed to delay on difficulties in setting up the most complex escrow account in the history of European state aid cases. As a result, the Commission announced its intention to launch infringement proceedings against Ireland.
Apple transferred bond investments, which require careful management while held in the account, rather than cash. Investment managers Goldman Sachs, Amundi and BlackRock were selected in March to manage the funds held in escrow. They will be overseen by BNY Mellon, which was selected to provide custodian and escrow services.
With payment now completed, Competition Commissioner Margrethe Vestager is to propose “to the college of commissioners the withdrawal of this court action”.
28 September 2018, the Internal Revenue Service closed the Offshore Voluntary Disclosure Programme (OVDP). It said the move reflected advances in third-party reporting under the Foreign Account Tax Compliance Act (FATCA) and increased awareness of US taxpayers of their offshore tax and reporting obligations.
More than 56,000 US taxpayers with undisclosed offshore accounts used the OVDP since its initial launch in 2009, paying a total of $11.1 billion in back taxes, interest and penalties. The number of taxpayer disclosures peaked in 2011, when about 18,000 people came forward, and then declined steadily, falling to only 600 disclosures in 2017.
A separate programme, the Streamlined Filing Compliance Procedures, for taxpayers who may have been unaware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The IRS said these procedures would continue to be available for the time being.
Separately, the IRS will continue to combat offshore tax avoidance and evasion using whistleblower leads, civil examination and criminal prosecution. Since 2009, 1,545 taxpayers have been indicted related to international activities through the work of IRS Criminal Investigation.
The IRS said it would maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose past actions and come into compliance with the tax system. Updated procedures will be announced soon. Taxpayers who have made non-wilful mistakes or omissions on their tax returns should also file amended returns or delinquent returns as soon as possible.
5 September 2018, the Isle of Man Department of Home Affairs issued a draft Anti-Money Laundering and Countering the Financing of Terrorism (Amendment) Code 2018 for the attention of all regulated persons, designated businesses and representative industry bodies.
The proposals set out in the draft amendment Code will give effect to recommendations made in the Mutual Evaluation Report issued by MONEYVAL after its Fifth Round Mutual Evaluation of the Isle of Man. MONEYVAL gave the Manx government until July 2019 to amend its money laundering legislation in line with its last mutual evaluation report in December 2016, which placed the island in the 'enhanced follow-up procedure'.
The main proposed amendments to the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 are:
-The introduction of requirements to conduct sanctions screening;
-The introduction of the need to consider whether the relevant person has met the customer in the course of business when conducting client risk assessments;
-The introduction of Paragraph 10A which places requirements on a relevant person to undertake certain considerations in cases of introduced business;
-Expansion of the requirements of Paragraph 21 to bring it in to line with FATF requirements; and,
-Amendment of Paragraph 23 to ensure that it only deals with instances where a relevant person places reliance on an eligible introducer.
The amendments were considered to be strategically important to the Island’s proposition as a responsible international finance centre, such that a short consultation period was required to enable the proposals to be brought into effect as soon as practicable. The consultation closed on 11 September.
Further amendments are likely to follow, including one to address deficiencies related to internal controls and foreign branches and subsidiaries of online gambling operators; and record-keeping obligations on trustees.
11 September 2018, the States of Jersey approved a draft Limited Liability Companies (Jersey) Law to provide for the establishment of limited liability companies (LLCs) in Jersey. It followed the new Limited Liability Partnerships (Jersey) Law 2017, which was brought into force on 1 August.
LLCs combine the flexibility and privacy of a partnership with the protective limited liability of a company and have become popular vehicles globally for a wide variety of uses, from SMEs and holding companies to fund structuring.
LLCs currently account for over two-thirds of all new transparent business structures formed in the US each year and it is anticipated that the introduction of a Jersey LLC will give US advisers, investors, businesses and fund managers a familiar option for cross-border structuring.
Geoff Cook, CEO of Jersey Finance, said: “Jersey is keen to support the growth the US is currently experiencing and has recognized the demand amongst US institutions and fund managers for a vehicle that can meet their cross-border requirements.
‘We are confident that the Jersey LLC can provide an attractive proposition for US-based hedge fund managers, particularly in operating master-feeder structures. We anticipate strong growth in this area, whilst we also believe the LLC can be a really positive addition to our suite of vehicles more widely to enable better international structuring.”
18 September 2018, the Dutch Ministry of Finance published the Dutch government’s tax plans for 2019 and beyond. The package includes legislative proposals implementing the EU Anti-Tax Avoidance Directive (ATAD 1), a phased reduction of the corporate income tax (CIT) rate and the abolition of the current dividend withholding tax.
From 1 January 2019, a new interest deduction limitation will be introduced by way of the ATAD1 earnings stripping rules. This will limit the deductibility of interest where the net interest expenses of the taxpayer exceed the highest of: 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA) for Dutch tax purposes; and €1 million. Non-deductible interest can be carried forward indefinitely, subject to anti-abuse rules.
The 30% EBITDA rule would be applied at the level of a fiscal unity. The legislative proposal does not include a group exception. There also would not be any grandfathering rules to shelter existing loans, and no specific exceptions would apply for financial undertakings. A specific minimum capital rule would be introduced in 2020 for banks and insurance companies.
The interest deduction limitations for participation and acquisition debt will also be abolished from 1 January 2019.
ATAD1 also requires EU member states to introduce controlled foreign company (CFC) rules to prevent profit shifting to subsidiaries established in low-taxed countries. It provides two options for determining the CFC’s income:
-Option A, which attributes certain predefined categories of non-distributed (passive) income (e.g. dividends, interest, royalties, capital gains, etc.) to a taxpayer; or
-Option B, which attributes non-distributed income from non-genuine arrangements of a more-than-50% controlled, low-taxed, direct or indirect corporation (or permanent establishment) to the Dutch taxpayer/parent company.
The Netherlands’ transfer pricing rules already constitute sufficient implementation of ‘option B’. The Netherlands would apply ‘option A’ only to a CFC located in a jurisdiction on the EU list of non-cooperative jurisdictions or a ‘low-tax jurisdiction’ that does not levy CIT or has a statutory rate below 7%.
The ATAD2 hybrid mismatch rules will be introduced effective from 1 January 2020. Draft legislation implementing these rules is due to be published for consultation soon.
The Dutch corporate income tax rate currently is 20% on the first €200,000 of taxable profits, and 25% on taxable profits above this amount. Under the legislative proposal, the 25% corporate income tax rate would be reduced to 24.3% rate for years starting on or after 1 January 2019 (with a step-up rate of 19%), a 23.9% rate as from 1 January 2020 (with a step-up rate of 17.5%) and 22.25% from 1 January 2021 (with a step-up rate of 16%).
The tax loss carry forward period would be reduced from nine years to six years. As a transitional rule, losses incurred in financial years starting before 1 January 2019 would be able to be carried forward under the current rules.
The current dividend withholding tax will be abolished from 1 January 2020 with immediate effect. No grandfathering or transitional rules are provided. It will be replaced by a new withholding tax on dividends that would apply if a Dutch resident company pays a dividend to a group company resident in a jurisdiction that has a CIT rate below 7% or is listed on the EU list of non-cooperative countries. The rate of the new withholding tax will be equal to the Dutch CIT rate.
The withholding tax also applies: if the recipient interposes an intermediary holding company in a jurisdiction with that has a CIT rate below 7%, unless the intermediary holding company acts as a management link and satisfies the existing Dutch substance requirements; in case of direct or indirect disposals of shares in a Dutch resident company in abusive situations where the recipient aims to convert dividend income into capital gains income.
From 1 January 2021, the scope of the new conditional withholding tax will be extended to payments of interest and royalties. The legislative proposal for this extension is due to be published next year.
Parliamentary discussions on the proposal began immediately and it is likely that the draft legislation will be finalised by the end of 2018 so it can become effective on 1 January 2019.
5 September 2018, the Federal Council adopted the dispatch on the double taxation agreement (DTA) in the area of taxes on income with Brazil. This is the first DTA between Switzerland and Brazil. The agreement was signed in Brasilia on 3 May 2018 and will enter into force after it will be approved by parliament in both countries.
The agreement contains favourable regulations on the international taxation of company profits and other income. It also implements several provisions from the OECD and G20 project to combat base erosion and profit shifting (BEPS). Furthermore, the DTA contains an administrative assistance clause in accordance with the current international standard for the exchange of information upon request.
5 September 2018, the Swiss Federal Council instructed the Federal Department of Finance (FDF) to draw up a proposal, by mid-2019, for a legislative revision to facilitate the market launch of innovative products and improve the appeal of Switzerland as an investment fund location.
The proposed provisions would introduce a new category of funds – Limited Qualified Investment Funds (L-QIF) – that would not be subject to approval by the Swiss Financial Market Supervisory Authority (FINMA) under the Collective Investment Schemes Act.
This new category of funds would be reserved for qualified investors such as pension funds and insurers and could be placed on the market much more quickly and cost-effectively. The proposal will be subject to a consultation procedure.
28 September 2018, the Swiss Parliament approved the final draft of the Federal Act on Tax Reform and AHV Financing (TRAF) – formerly referred to as Tax Proposal 17 – after the two parliamentary chambers, National Council and Council of States, reached a final agreement.
The tax reform’s objective is to secure the long-term tax attractiveness of Switzerland as a business location and to restore international acceptance of the Swiss tax system and at the same time securing an appropriate level of tax revenue. The tax reform foresees the replacement of certain preferential tax regimes with a new set of internationally accepted measures. The legislative changes will also see a broad reduction of the cantonal corporate tax rates.
Some of the cantonal measures are optional so that the cantons can tailor their legislation to their specific circumstances and needs. Some measures are subject to a restriction limiting the overall tax relief to a maximum of 70%.
The last proposed tax reform with the same aim – Corporate Tax Reform III – was rejected by the Swiss voters at the beginning of 2017. Since the need for tax reform was undisputed, the Federal Council immediately drew up a new proposal. Based on the experience of the rejection of the Corporate Tax Reform III, the tax losses of TRAF will be compensated by additional AHV financing as a form of socio-political compensation.
At the cantonal level, tax privileges for holding companies, domicile companies and mixed companies are to be terminated. At the federal level, the profit allocation rules of principal companies and Swiss finance branches are to be repealed.
Patent box with a maximum relief of 90%, mandatory at cantonal level
A core element is the introduction of a patent box regime in accordance with the OECD2 standard. In the box, net profits from domestic and foreign patents and similar rights are to be taxed separately with a maximum reduction of 90% (rate at cantonal discretion). Before the patent box can be applied for the first time, the corresponding tax deducted research and development (R&D) expenditures must be recaptured and taxed.
R&D super deduction of maximum 50%, optional at cantonal level
The introduction of this super deduction for domestic R&D is Switzerland’s commitment to be recognized as an attractive location for R&D. For administrative reasons, the maximum deduction of 50% (rate at cantonal discretion) is limited to personnel expenses for R&D plus a flat-rate surcharge of 35% for other costs and 80% of expenses for domestic R&D carried out by third parties or group companies.
Notional interest deduction (NID), optional at cantonal level
So-called high-tax cantons have the possibility of introducing a NID on excess capital. According to the currently published intentions of the cantonal governments regarding tax rate developments, only the canton of Zurich would meet the requirements.
Disclosure of hidden reserves
Hidden reserves including any self-created goodwill at the moment of the transition from privileged to ordinary taxation or migration to Switzerland are confirmed by the tax authorities.
In the case of a migration to Switzerland, the so called step-up system is applied. The tax-free disclosed hidden reserves are to be depreciated annually at the rate applied for tax purposes to the respective assets.
In the case of a transition, the so called two-rate system is applied. Profits relating to the realization of hidden reserves that were generated under a (now abolished) privileged tax regime are subject to a separate tax rate. The cantons are free to determine the amount of this special tax rate. The two-rate system ensures a competitive income tax burden during a five-year transition period.
It should be noted that taxpayers may revoke voluntarily their tax privileged status before the reform enters into force (so called early transition). Depending on the transitional regulations offered by the cantons this may be a beneficial option.
Overall tax relief of 70%, mandatory at cantonal level
The patent box, R&D super deduction, NID as well as possible depreciations from the early transition from privileged to ordinary taxation are subject to the overall tax relief of 70%.
Adjustments in taxation of dividend income from qualifying participations
Dividend income of individuals from qualifying participations is currently partially exempt from taxation in order to mitigate double taxation at the shareholder level. At the federal level, the taxation rate increases from 50% (business investments) and 60% (private investments) respectively to a standard rate of 70%. At the cantonal level, there is a harmonization of the relief method and an introduction of a minimum taxation rate of 50% (rate at discretion of cantons).
Capital tax relief, optional at cantonal level
Privileged taxed companies usually benefit from a low capital tax rate. In order to compensate for the loss of this tax advantage, the cantons are given the possibility to reduce the taxable capital on patents and similar rights, qualifying participations and intra-group loans in order to also remain competitive from this angle.
Adjustments of the capital contribution principle
Swiss-listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Not affected by this scheme are intra-group dividends and capital contribution reserves from assets transferred from abroad after 24 February 2008 and in the case of a liquidation. The above rules shall also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.
Extension of the flat-rate tax credits on foreign companies permanent establishments
To prevent an international double taxation, Swiss permanent establishments of foreign companies should be able to claim withholding taxes on income from third countries with a flat-rate tax credit.
Social compensation via the AHV (Old-Age and Survivors Insurance)
It is assumed that the loss of tax receipts due to the tax reform will amount to CHF2b (in a static view). This shortfall will be compensated through the AHV:
0.3% increase in salary contributions (employers and employees one half each)
Allocation of the federal share of the demographic percentage of value added tax to the AHV
Increase in the federal contribution to the AHV from the current 19.55% to 20.2%
Reduction of cantonal profit tax rates
The reduction of cantonal profit tax rates is not directly covered by TRAF but necessary to remain attractive from a tax perspective for former tax privileged companies and thus a key part of the proposed tax reform. The increase of the canton’s share of the federal direct tax from 17% to 21.2% enables the cantons to reduce their tax rates. Based on official announcements made by the cantonal governments, it is expected that the majority of the Swiss cantons will provide attractive tax rates on pre-tax income between 12% and 18% (including federal tax).
If no referendum is held, the first measures of the tax reform could enter into force in 2019 and the main part of the measures from 2020. If 50,000 voters sign a petition requesting a public referendum within 100 days of the final bill’s publication in the Official Gazette, the proposed TRAF measures will be subject to a popular vote. Certain parties have already announced their intention to hold a public referendum. TRAF would thus most likely be put to the people’s vote on 19 May 2019. The entry into force of TRAF would be delayed accordingly, but would still occur swiftly.
The European Union (EU) has given Switzerland until the end of 2018 to abolish the internationally no longer accepted tax privileges. The EU finance ministers will meet in March 2019 for a general update on the tax policy.
The proposed tax reform achieves its main goal of retaining Switzerland’s international attractiveness while having an internationally accepted tax system. Even though a referendum is rather likely, the tight time frame requires swift planning from the taxpayers regarding the transition to the new regulations. The Swiss Federal Council said the potential referendum on the Federal Act on Tax Reform and AHV Financing (TRAF) – formerly Tax Proposal 17 – would be held on 19 May 2019. The law is to enter into force on 1 January 2020.
By holding a potential referendum on 19 May 2019, the legal deadlines and processes for referendums can be respected. Before reaching this decision, the Federal Council also closely examined the possibility of bringing forward the referendum date to 10 February 2019. However, the current legal requirements and political considerations do not allow this. Proper organisation and implementation of the referendum would not be guaranteed.
Based on the above-mentioned considerations, the Federal Council decided on the voting date of 19 May 2019. The preparatory work for the implementation of this reform in the cantons can begin right after the final vote in Parliament.
29 September 2018, UK Prime Minister Theresa May announced proposals for a stamp duty land tax (SDLT) surcharge of 1 to 3% on foreign buyers of UK properties. A consultation is being prepared on the proposal. It is not known when the new levy might be introduced.
May told the Conservative Party conference that it “cannot be right” that non-residents and foreign companies could buy properties as easily as British residents. The money raised by the new tax would be used to address homelessness.
Research cited by the party suggested that 13% of new London homes were bought by non-UK residents between 2014 and 2016, and that an increase of one percentage point in the volume of homes being sold to overseas companies put up house prices by 2.1%.
In August, New Zealand's parliament approved legislation to ban many foreigners from buying existing homes in the country, a move aimed at making properties more affordable. Several Australian states have also introduced extra levies on foreign property buyers in recent years.
13 September 2018, the US Treasury Department and IRS issued a first set of guidance on computing global intangible low-taxed income (GILTI). US shareholders are required to include GILTI generated by controlled foreign corporations (CFCs) in their gross income under the 2017 Tax Cuts & Jobs Act.
Under the new law, a US taxpayer owning at least 10% of the value or voting rights in one or more CFCs is required to include its GILTI as currently taxable income, regardless of whether any amount is distributed to shareholders. This includes US individuals, domestic corporations, partnerships, trusts and estates.
The proposed regulations set out provisions including:
-How to calculate the fundamental elements underlying the GILTI inclusion – tested income and qualified business asset investment
-Anti-abuse rules for certain basis ‘step-up’ transactions for purposes of the GILTI regime
-How consolidated groups compute their GILTI inclusions
-A hybrid ‘aggregate/entity’ approach to US partnerships and their partners
“These proposed regulations will implement key provisions of the Tax Cuts & Jobs Act, and mark an important step towards modernising the US tax system as we shift from a worldwide system toward a territorial system,” said Treasury Secretary Steven Mnuchin. “We are providing clarity to taxpayers and closing loopholes that previously allowed for inappropriate international tax planning and shifting profits overseas.”
The new law applies to the first tax year of a CFC beginning after 31 December 2017, and the US shareholder’s year with or within which that year ends, and all subsequent tax years.
There will be three sets of regulations providing guidance on GILTI. Future guidance on the foreign tax credit will be issued in 60 days and guidance on the Section 250 deduction and the foreign-derived intangible income regime will be released later this year.