Owen, Christopher: Global Survey – September 2019

16 August 2019, the 9th US Circuit Court of Appeals in Seattle upheld a 2017 ruling by the US Tax Court in favour of online retailer Amazon in a US$1.5 billion dispute over its tax treatment of transactions with a Luxembourg subsidiary.

In Amazon.com Inc et al v Commissioner of Internal Revenue No. 17-72922, the dispute involved a 2005 cost sharing agreement under which Amazon and its domestic subsidiaries transferred all intangible assets developed in the US that were required to operate Amazon’s European website business to an Amazon subsidiary in Luxembourg.

Amazon used the comparable uncontrolled transaction (CUT) method to value three groups of assets separately: website technology, marketing intangibles and European-customer information. As a result Amazon set the buy-in price for the transfer under the cost sharing agreement at $217 million.

On audit, the IRS determined that Amazon significantly undervalued the transfer. Using the discounted cash-flow method, the IRS concluded that a buy-in payment of $3.6 billion was required.

The IRS also significantly increased the amount of Amazon’s ongoing cost sharing payments. It determined deficiencies for 2005 and 2006 of $8.4 million and $225.7 million respectively. The IRS increased the amount of Amazon’s net operating loss carryover deduction used by just over $1 billion in 2005 and by $304.8 million in 2006.

In a March 2017 opinion, the Tax Court ruled mostly in favour of Amazon, concluding that the IRS method was inappropriate because it “necessarily sweeps into [the] calculation assets that were not transferred under the [cost sharing arrangement] and assets that were not compensable ‘intangibles’ to begin with.”

The Ninth Circuit affirmed the Tax Court’s decision. Circuit Judge Consuelo Callahan said the drafting history of applicable regulations and the Treasury Department’s thinking at the time “strongly favour” Amazon’s argument that ‘intangible’ assets were limited to “independently transferable” assets. She rejected the IRS proposal that they also encompass what she called “more nebulous” assets, including the value of Amazon’s goodwill, employees and “culture of innovation”.

In a footnote, Callahan said Congress changed the definition of intangible property in the 2017 tax overhaul, and that there was “no doubt” the IRS position would be correct if the new definition had governed the Amazon case.

14 August 2019, Australia's highest court denied a request by mining company Glencore to prevent the Australian Taxation Office (ATO) from using leaked documents describing the company's corporate restructuring.

In Glencore International AG v Commissioner of Taxation [2019] HCA 26, the ATO had obtained numerous documents containing Glencore’s legal advice as a result of the publication of confidential client documents in 2017 – known as the ‘Paradise Papers’ – following a data breach involving theft from Bermudan law firm Appleby.

Glencore requested the ATO to return the documents and to provide an undertaking that they would not be referred to or relied upon. The Commissioner declined and Glencore applied directly to the High Court seeking an injunction to return the documents and restrain use of them against Glencore in order to protect its fundamental common law right to legal professional privilege.

Not to grant the injunction, Glencore submitted, would deny legal professional privilege its status as a fundamental right and the fact that it has ordinarily been recognised as an immunity from compulsory production should not preclude the Court ordering an injunction to protect a right to privilege only lost as a result of wrongdoing by a third party.

The Court unanimously rejected Glencore’s case finding that it rested on an incorrect premise – that legal professional privilege is a legal right that is capable of being enforced. The Court instead held that it is simply an immunity from the exercise of powers that would otherwise compel the disclosure of privileged communications.

It was not, the Court determined, possible to discern from the case law that privilege, while being a fundamental common law right, was an actionable right. It was a right to resist compulsory production or disclosure of certain confidential information.

The rationale for legal professional privilege was that the rule promoted the public interest because it assisted and enhanced the administration of justice by facilitating the representation of clients by legal advisers. That public interest had been found to prevail over other matters of public interest, like the fair conduct of litigation with the benefit of all relevant documentation available. The Court found that the public interest behind privilege was, however, sufficiently secured through its operation as an immunity.

The Court held that it is not sufficient to warrant a new remedy to say that the public interest that supports the privilege was furthered because communications between client and lawyer would be perceived to be even more secure.

ATO Second Commissioner Jeremy Hirschhorn said: “It would be a perverse outcome if the ATO and the Courts were not allowed to take into account information that the public at large can access, or had to forget information that is known. This ruling ensures that the ATO will continue to be able to use information in its possession, and can make decisions based on all of the available facts. An offshore law firm is not a cloak of invisibility to hide offshore arrangements.”

15 August 2019, Registrar General Sallyann Lockhart-Pratt exercised legal powers under the Register of Beneficial Ownership Act 2018 to strike off of thousands of companies from the Register of Companies after the 90-day notice period to pay fees and submit filings of more than 20 years' outstanding had expired.

The Act, which came into force on the 20 December 2018, provides for the establishment of a secure search system by the Attorney General of the Bahamas of databases managed by registered agents that hold beneficial ownership information of entities incorporated, registered, continued or otherwise established under the Companies Act or the International Business Companies Act.

It was enacted as part of the package of legislation required to satisfy the demands for transparency of the Financial Action Task Force (FATF) and Organisation for Economic Co-Operation and Development (OECD).

Deputy prime minister K P Turnquest said: "We have an obligation to know who the beneficial owners of all these companies are. A lot of them are companies that have been inactive and not met their commitments in terms of fees and filings. We can't find the people responsible, so are just striking them according to the law.

"They have to be registered. We need to know who's who and what they're trying to do; all of it. I believe there's about 80,000 companies on the registry and about 40,000 are regarded to be active."

The relevant Companies Act amendment empowering the Registrar General to "remove a company from the register which is, for more than 20 years, in default" came into force on 30 April. The companies were struck from the Register of Companies without prior notice or warning as of the date of gazetting.

29 August 2019, Canada and Switzerland deposited their instruments of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) with the OECD’s Secretary-General. It will apply from 1 December.

The MLI enables signatories to implement swiftly a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

6 August 2019, China’s State Council approved the establishment of a new area of the Shanghai Pilot Free Trade Zone (FTZ). The Lingang New Area is intended to be a “special economic functional zone with strong international market influence and competitiveness”.

Shanghai is setting up a special development fund to inject at least US$14.2 billion to construct the Lingang New Area, on the southeast edge of the city, over the next five years. Tax breaks, such as a preferential rate of 15% on corporate income tax (CIT) and import duty exemptions, will be offered to attract high-tech companies, talents and infrastructure.

Under the plan, Lingang New Area will almost double the size of the Shanghai FTZ. The new area will remove unnecessary trade regulation, licensing and procedural requirements. It will support domestic and foreign investors to set up joint innovation funds and cooperate on major scientific research projects.

26 August 2019, French President Emmanuel Macron confirmed that the US and France had reached a compromise agreement that requires France to reimburse the difference between tax paid by multinationals under the French digital services tax (DST) and what would be paid under a proposed international regime for taxing multinationals in the digital sector if it comes into force.

“The day international tax exists on digital services, France will do away with its national tax and everything that has already been paid under the French tax system will be reimbursed,” Macron said at a joint press conference with US President Donald Trump at the close of the G7 summit in Biarritz, France.

US officials had claimed that the DST, which imposes a 3% tax on the revenue earned by large tech companies with more than €25 million French revenue and €750 million worldwide, unfairly targeted US multinationals.

The French leader pushed hard in 2018 for a digital tax to cover EU member states but met resistance from some other countries. He therefore decided to go ahead with a national tax, which was signed into law in July and applies retroactively to 1 January 2019.

In July, the US launched an investigation under Section 301 of the Trade Act of 1974, which gives the President broad powers to investigate and respond to a foreign country’s unfair trade practices and take appropriate action, including retaliation, if required. President Trump even suggested that the US might impose a tariff on French wine.

Macron said the objective of France’s DST was not to tax multinationals of a particular country. Rather, he said, that the aim was to reach international agreement at the OECD level.

Countries are aiming to reach agreement on a revised international tax system by the end of 2020. G7 leaders said in a declaration after their meeting: “The G7 commits to reaching in 2020 an agreement to simplify regulatory barriers and modernise international taxation within the framework of the OECD.”

Pascal Saint-Amans, who is leading the negotiations as the OECD’s head of tax policy, said: “The multilateral process is underway. We're going to make a proposal that will be made public before the next meeting of G20 finance ministers and central bankers, set for 17 October in Washington. We needed a political push and I think this will relaunch the discussions.”

26 July 2019, the Gibraltar Government issued a regulation to transpose the EU's new tax dispute resolution mechanisms, set out in EU Council Directive 2017/1852, into Gibraltar's domestic tax law.

The new rules are designed to ensure swifter and more effective resolution of tax disputes between EU member states and provide greater certainty to businesses and individuals in respect of double taxation issues.

Gibraltar's Tax Dispute Resolution Regulations 2019 apply to complaints submitted from 1 July 2019, relating to questions of dispute in matters of income or capital earned in a tax year commencing on or after 1 January 2018, in line with the EU Directive.

26 August 2019, Guinea, Namibia and Honduras joined the Global Forum on Transparency and Exchange of Information for Tax Purposes by committing to implement both the international standard of exchange of information on request and the standard on automatic exchange of financial account information.

The Global Forum Secretariat will assist the three countries to implement the standard of exchange of information on request and ensure they can participate in automatic exchange of information as soon as practicable. They bring the number of members to 157.

26 July 2019, the High Court in England refused to amend its own court order, granted following a minority shareholder action, for the respondents’ purchase of their shares in a company registered in the sole names of the applicants.

In Estera Trust (Jersey) and another v J Singh and others [2019] EWHC 2039 (Ch), after a further order setting the purchase price for the shares had been made (trial 2), the applicants realised that the planned purchase by the company of the trust’s shares would be treated as an income distribution by a UK resident company under The Income Tax (Trading & Other Income) Act 2005, ss 368 and 383, taxable at the dividend trust rate of 38.1%.

Had Jasminder Singh acquired the shares directly, the proceeds would have been treated as a capital receipt, giving rise to a trust gain taxable at only 20%. Singh was not however in a financial position to buy all the trust’s shares and the company was entitled to do so. The petitioners had no say in the matter.

The petitioners had been advised that any immediate tax liability could be avoided if the trust incorporated a Jersey company and transferred the shares to it, such that the shares would be sold by the new Jersey company rather than by the trust itself.

Singh and the company had declined to engage voluntarily in such a structure because they considered there was a real risk that HMRC would view the structure as aggressive tax avoidance and they did not want to wait to acquire the shares until the proposed date in 2020. The petitioners therefore sought an order to that effect.

The court confirmed it had jurisdiction to grant such an order but refused to do so. Fancourt J said: “The Court should not without very good reason order reluctant parties to enter into a scheme that could be held to be improper (in the sense that I have identified). Such an order could assist the parties to persuade HMRC not to challenge a scheme that it would otherwise have challenged. For this and other reasons that I will develop, I am not willing to make such an order in this case.”

The petitioners claimed they only became aware of the potential for an income tax liability after the hand down of the judgment at trial 2 and upon taking interim tax advice. On this basis, they sought to argue that this was equivalent with the mistake in Pitt v Holt.

The court said such relief could only remove the effect of the mistake; it could not put the person seeking relief into a better position than he would have been in had he not been mistaken. There was no compelling reason why the Court should force reluctant parties to enter into a transaction solely for the purpose of saving tax for another party, even if there is no possible harm to them.

“There is no public policy interest in favour of making such an order,” said Fancourt J. “This is a case of an offshore trust, which will incur a tax liability on the receipt of an enormous sum of money, which it can very likely mitigate so that only the same tax has to be paid as would be paid by a private person resident in the UK. The public interest seems to me to be served by the payment of that tax, not by the avoidance of the substantial majority of the tax payable.”

The full judgment can be accessed at https://www.bailii.org/ew/cases/EWHC/Ch/2019/2039.html

5 August 2019, the US Department of Justice announced that Swiss private bank LLB Verwaltung (Switzerland) had agreed to pay a penalty of USD10.6 million under a non-prosecution agreement in respect of assisting US taxpayers to commit tax evasion. It also agreed to co-operate in any related criminal or civil proceedings.

It said that LLB-Switzerland – formerly known as Liechtensteinische Landesbank (Schweiz) – and some of its employees, including members of the bank's management, had conspired with a Swiss asset manager and US clients to conceal those clients' assets and income from the IRS using various arrangements, including using Swiss bank secrecy protections and nominee companies set up in low tax jurisdictions.

In 2003, LLB-Switzerland delegated the authority to prepare account opening and ‘know your customer’ documents to a Swiss asset manager. The bank and its management knew that the Swiss asset manager was marketing structures to clients as a means of tax evasion because the bank kept a copy of the manager’s sales letter in the bank’s files.

At its peak, LLB-Switzerland had over 100 US clients holding nearly US$200 million in assets. The majority of the accounts were in the names of nominee entities. LLB-Switzerland’s management knew that many of the US clients coming to LLB‑Switzerland were bringing undeclared funds with them.

The DoJ said that LLB-Switzerland's remediation efforts since 2012 had been “comprehensive”. It had halted and terminated all US cross-border business with US clients and its relationship with the Swiss asset manager had been ended. It also dismissed those managers and employees implicated in the DoJ’s investigation. In 2013, LLB-Vaduz had closed LLB-Switzerland and returned its banking licence to the Swiss Financial Market Supervisory Authority.

29 August 2019, the Luxembourg Business Registers announced that the initial declaration submission deadline for registration with a new register of beneficial owners had been postponed from 31 August 2019 until 30 November 2019.

Luxembourg enacted the Law to create the Registre des bénéficiaires effectifs (RBE) on 13 January 2019, which came into force on 1 March. It applies to all Luxembourg legal entities registered with the Luxembourg Trade & Companies Register, including common funds (FCPs), trusts and Luxembourg branches of foreign companies.

The 1 September deadline applied to all entities incorporated before 1 March 2019. Companies incorporated after 1 March 2019 are required to file their ultimate beneficial owner declaration within 30 days of registration. Entities that fail to complete a declaration or knowingly provide incorrect or partial information, could incur a fine ranging from €1,250 to €1.25 million. The same applies to entities that do not report a change in beneficial ownership within 30 days.

Luxembourg had already exceeded the deadline specified under the EU Fourth Anti-Money Laundering Directive (4AMLD), which required all EU Member States to implement central registers of beneficial ownership by June 2017.

The new deferment means that the registration deadline now falls within three months of the implementation of the Fifth EU Anti-Money Laundering Directive (5AMLD), which Member States must transpose by January 2020. This directive requires that beneficial ownership registries will be open to public inspection.

13 August 2019, the Patent Box Regime (Deduction) Rules 2019 were published in the government gazette as LN 208 of 2019. They apply to qualifying income derived from qualifying intellectual property on or after 1 January 2019.

The rules set out the conditions which must subsist for the application of the deduction permitted by article 14(1)(p) of the Income Tax Act, and the manner in which the percentage of qualifying income derived from qualifying IP is to be computed, by reference to the Qualifying IP Expenditure and the Total IP Expenditure and the income/gains derived from qualifying IP, clarifying the scope of each of these terms.

The rules have been drafted to be compliant with the OECD Modified Nexus Approach for IP Regimes, and are understood to be compliant with the relevant parameters as defined by the EU Code of Conduct Group.

25 July 2019, Mauritius published the Finance (Miscellaneous Provisions) Act 2019, which provides for implementation of measures announced as part of the 2019-2020 Budget, in the Official Gazette. It contains a multitude of changes, including new substance rules, a new controlled foreign company (CFC) rule and several tax holiday and partial exemption changes.

To address the deficiencies identified by the EU in the partial exemption regimes, the Income Tax Regulations 1996 is amended to define the detailed substance requirements that must be met in order for a taxpayer to enjoy the partial exemption benefit, and to lay down the conditions that must be satisfied where a company outsources its core income generating activities. Consequential amendments will be made to Section 71 of the Financial Services Act.

The Income Tax Act is amended to set out rules on controlled foreign companies (CFC). In addition, the Companies Act, Limited Liability Partnerships Act and Limited Partnerships Act are amended to provide for the definition of beneficial owner with a view to fulfilling the requirements of the OECD.

The Income Tax Act is amended to provide that, as of 1 July 2019, a company will not be considered as tax resident in Mauritius if it is centrally managed and controlled outside Mauritius.

A new REIT regime will apply from the year of assessment commencing on 1 July 2020. Subject to certain conditions, this exempts authorised REITs from income tax and corporate social responsibility contributions, with the beneficiaries/participants of a REIT subject to tax on REIT distributions.

New tax incentives include the following:

-Innovation Box Regime – A newly set-up company involved in innovation-driven activities to benefit from an eight-year tax holiday on income derived from intellectual property assets developed in Mauritius. Existing companies will also qualify for income derived from intellectual property assets developed in Mauritius after 10 June 2019. In order to qualify, companies will have to satisfy pre-defined substantial activities requirement in compliance with the Base Erosion and Profit Shifting (BEPS) Action 5 report.

-E-commerce Platform – A five-year tax holiday will be introduced for a company setting up an e-commerce platform, provided the company is incorporated in Mauritius before 30 June 2025. The Economic Development Board Act will be amended to allow for the issuance of E-commerce Scheme Certificate.

-Peer-to-Peer Lending – A 5-year tax holiday will be granted to a Peer-to-Peer lending operator provided the company starts its operation prior to 31 December 2020.

9 August 2019, Namibia and Albania joined the OECD/G20 BEPS Inclusive Framework, bringing the total number of countries and jurisdictions participating on an equal footing in the project to 134. Members are working to implement 15 Actions designed to equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.

8 August 2019, New Zealand and Switzerland signed a protocol to update the existing 1980 double tax agreement. The protocol will enter into force once both countries have completed their domestic ratification procedures.

New Zealand Revenue Minister Stuart Nash said: “The new agreement includes provisions to reduce multinational tax avoidance by incorporating base erosion and profit shifting (BEPS) measures.”

He said work was also progressing on a protocol to the existing Tax Information Exchange Agreement with Guernsey and this should be concluded in the near future.

8 August 2019, the number of non-domiciled taxpayers in the UK fell by 13.5% from 90,500 to 78,300 in the 2017-2018 tax year, according to figures from HMRC, resulting in a loss of tax revenue approaching £2 billion.

The fall in numbers followed the introduction of changes to the taxation of resident non-domiciled individuals in April 2017, which provided that long-staying non-doms would be deemed domiciled and taxed on their worldwide income and assets, as are ordinary residents. Further reforms were introduced the following tax year.

HMRC said the decrease in the number of non-domiciles between 2016-17 and 2017-18 was due to two reasons: individuals switching to domiciled status and continuing to pay tax in the UK; and individuals leaving the UK tax system. The effects were roughly equal.

It estimated that non-domiciled taxpayers paid £7.54 billion in UK Income Tax, Capital Gains Tax and National Insurance contributions in 2017-18. This was a decrease from the previous year’s estimate of £9.49 billion.

However, while the statistics showed a drop in the number of non-domicile taxpayers and the amount of tax and NI contributions, HMRC said this had not resulted in a net fall in revenue. This was due to many taxpayers who were previously non-domiciled had become domiciled – and therefore were no longer counted – while those non-domiciled taxpayers who left the UK tax system in 2016-17 had contributed comparatively little tax.

It said the vast majority of non-domiciled taxpayers were UK resident. For the tax year 2016-17, the number of UK-resident non-domiciled taxpayers fell from 85,000 to 75,900, compared with a fall from 90,500 to 78,300 for all non-domiciled taxpayers.

The UK-resident non-domiciled group was taxed on two bases: a remittance basis when foreign income was remitted to the UK, or an arising basis. The fall in non-domiciled UK resident taxpayers in 2016-17 was mainly due to a fall in those claiming the arising basis.

London had the largest non-domiciled population in 2016-17, with 58% of non-domiciled taxpayers who paid 76% of tax and NI contributions. London also had the largest population of UK resident non-domiciled taxpayers, and the largest population of non-domiciled taxpayers on the remittance basis.

In 2016-17 the cumulative value of investments in UK businesses on which Business Investment Relief has been claimed was nearly £3.47 billion. In 2016-17 alone, £979 million was invested in the UK from 500 non-domiciled taxpayers, the highest annual amount since the Business Investment Relief scheme was introduced.

13 August 2019, the OECD published the first round of stage 2 peer review monitoring reports for Belgium, Canada, the Netherlands, Switzerland, the UK and the US evaluating their progress in respect of BEPS Action 14 on improving tax dispute resolution mechanisms.

The reviews focus on the Mutual Agreement Procedure (MAP), which is used to settle disputes between countries and taxpayers concerning cross-border tax arrangements for trade and investment where double taxation of the same income occurs.

The OECD said the reports, which monitor the follow-up of any recommendations resulting from stage 1 peer review reports, demonstrated positive change across all six jurisdictions, including that:

-Some jurisdictions had updated or clarified issues in their MAP guidance;

-All jurisdictions that had not already done so had introduced documented internal guidance to provide for a notification or bilateral consultation process with the other competent authority concerned in cases where an objection was considered as being not justified;

-In some jurisdictions, more resources had been provided to the competent authority function and organisational changes had been implemented with a view to handling MAP cases in a more timely, effective, and efficient manner;

-Each of the six jurisdictions had decreased (or maintained) the amount of time needed to close MAP cases and five of the six jurisdictions had met the 24-month average timeframe to close MAP cases.

-The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) had been utilised by almost all jurisdictions to bring some tax treaties in line with the standard, and bilateral negotiations had been concluded (or were ongoing) for most jurisdictions.

The OECD said further progress on making dispute resolutions more timely, effective and efficient would become known when other stage 2 monitoring reports were published. In the meantime, it would continue to publish stage 1 peer review reports in accordance with the Action 14 peer review assessment schedule. The publication of the sixth batch of Action 14 peer reviews was forthcoming.

14 August 2019, the Swiss Federal Council confirmed that, following positive reviews from the economic affairs and taxation committees of both parliamentary chambers, Switzerland would begin exchanging financial account information with 33 more partner countries in September.

The Federal Council approved a report on the review mechanism for standard-compliant implementation of the AEOI on 29 May. This was issued to the relevant parliamentary committees for consultation to receive recommendations of the partner states before the first exchange of data.

Although a number of questions had been raised during the consultation, both committees agreed to recommend the Federal Council to make data available to the following partner states – Andorra, Argentina, Barbados, Belize, Brazil, Chile, China, Colombia, Cook Island, Costa Rica, Curaçao, Faroe Islands, Greenland, Hong Kong, India, Indonesia, Liechtenstein, Malaysia, Mauritius, Mexico, Monaco, Montserrat, New Zealand, Russia, St Kitts & Nevis, Sint Maarten, St Vincent & the Grenadines, St Lucia, Saudi Arabia, Seychelles, Singapore, South Africa and Uruguay.

Switzerland automatically exchanged financial account information with 36 states and territories for the first time at the end of September 2018. The Federal Council will continue to evaluate the situation in the individual partner states as required by the review mechanism.