24 February 2020, the International Tax Authority (ITA) announced that it will soon be ready to accept multinational group country-by-country reporting filings for tax purposes. The filing can only be made via the BVI Financial Account Reporting System (BVIFARS) electronic portal, which was expected to be ready to accept filings in March 2020.
Under section 2 of the Mutual Legal Assistance Tax Matters (Amendment) Act (No. 8 of 2018) for Country-by-Country Reporting, under the Base Erosion and Profit Shifting (BEPS) Action 13, all constituent entities resident for tax purposes in the BVI – whether it is an Ultimate Parent Entity (UPE) or a Surrogate Parent Entity (SPE) or some other qualifying BVI entity that is the reporting entity of an MNE group – must submit filings with the ITA.
It should be noted that where more than one BVI constituent entity is a part of the same MNE Group, each BVI Constituent Entity has an obligation to register individually with the ITA. They must also identify the name of the reporting entity and the tax residence of the reporting entity for its MNE group.
Constituent entities that have already registered with the ITA are not required to register again when the system goes live. The registration confirmation and BVIFARs account number will be sent to the responsible person identified in the registration documents that were submitted to the ITA.
7 February 2020, the Mutual Funds (Amendment) Law 2020 and the Private Funds Law 2020 were gazetted and brought into force. The legislation is designed to align the Cayman Islands investment fund regulatory regime with international standards and respond to European Union requirements.
Under the Mutual Funds (Amendment) Law 2020, open-ended funds carrying on business in or from the Cayman Islands are now required to register with the Cayman Islands Monetary Authority (CIMA) and fall within its regulatory purview. Such funds were previously exempted from registration under Section 4(4) of the Mutual Funds Law (2020 Revision) provided that the shares or interests were held by not more than 15 investors, of which a majority were capable of appointing or removing the operator of the fund.
New s4(4) funds, launched after 7 February, will need to register with CIMA immediately upon launch. Existing s4(4) funds have a six-month grace period until 7 August 2020 to register with CIMA.
Each s4(4) fund that is a company will be required to have at least two natural persons as directors in order to satisfy the ‘four-eyes’ principle. Such directors will need to be registered with CIMA under the Directors Registration and Licensing Law. Each s4(4) fund will further be required to have its accounts audited annually by an auditor approved by CIMA.
The Private Funds Law establishes a framework to monitor closed-ended funds (‘private funds’), which were previously beyond the scope of the Mutual Funds Law. All vehicles falling within the scope of the private funds definition and section 3(1) of the Private Funds Law must register with CIMA and will be subject to regulatory obligations. Registration is due within 21 days of accepting capital commitments and before receipt of capital contributions.
Registered private funds must also comply with annual audit and return requirements and retain accessible records. Annual audits must be issued or undertaken by a CIMA-approved local auditor. Registered private funds must also comply with certain ongoing obligations in relation to valuation of fund assets, safekeeping of fund assets, cash monitoring and identification of securities.
Exemptions from registration exist for certain non-fund arrangements and the Law includes provisions that relieve the alternative investment vehicles of registered private funds from certain provisions.
5 February 2020, further key changes to the Cayman Islands anti-money laundering regulations, which address some recommendations made by the Caribbean Financial Action Task Force (CFATF) in last year's mutual evaluation report on the jurisdiction's AML regime, were gazetted.
The CFATF report, published in March 2019, prompted the Cayman Islands government to appoint a dedicated task force to create and execute a comprehensive action plan to correct the report’s highlighted 'strategic deficiencies'. As a result 11 Bills were presented to the Legislative Assembly in July 2019, which were brought into force in advance of the CFATF’s February 2020 deadline.
The new 2020 revision of the Anti-Money Laundering Regulations consolidate the amendments made during 2019 and was itself amended. The latest amendments to the Cayman Islands AML Regulations 2020 include:
-From 5 August 2020, Cayman Islands financial services providers (FSPs) must assess for themselves whether a given country has a low degree of risk of money laundering (ML) and terrorist financing (TF). When assessing country risk, an FSP should take account of factors set out in the AML Regulations and “credible sources” including reports published by the FATF, International Monetary Fund, World Bank, OECD and UN;
-From 5 August 2020, Cayman Island entities carrying on 'relevant financial business' may no longer rely on the 'equivalent jurisdiction list’ in deciding whether to apply simplified due diligence to an entity applying to do business with them. They will instead be required to conduct risk assessments on an applicant that will need to be recorded on the customer file;
-The Cayman Islands Monetary Authority (CIMA) has clarified that where there is a need to determine an applicant’s beneficial owners, the beneficial ownership threshold for corporate persons and partnerships under the AML Regulations remains unchanged at 10%;
-‘Know your customer’ (KYC) confirmations provided by an eligible introducer must now list the applicant for business being introduced, and (for non-natural persons) their beneficial owners. Financial service providers must monitor the relevant customers and beneficial owners and screen them against applicable sanctions lists; and
-The AML regulations now require financial service providers to have procedures to ensure compliance with relevant targeted financial sanctions obligations, and identifying assets subject to applicable targeted financial sanctions.
12 February 2020, the European Commission sent letters of formal notice to eight EU member states for their failure to transpose the fifth Anti-Money Laundering Directive.
The member states noticed are: Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia, and Spain. The Commission has not released any further information but it is likely that the issue is a failure to meet the implementation deadline or to implement the Directive fully.
18 February 2020, the Economic and Financial Affairs Council (ECOFIN) of EU finance ministers announced that it was moving the Cayman Islands, Palau and the Seychelles from its ‘grey list’ to its ‘black list’ of non-cooperative jurisdictions for tax purposes due to their failure to implement tax reforms to which they had committed by an agreed deadline. Panama was further added to the black list.
They join the eight jurisdictions – American Samoa, Fiji, Guam, Samoa, Oman, Trinidad & Tobago, Vanuatu and US Virgin Islands – that were previously blacklisted and which were found to still be non-compliant based on recommendations made by the EU Code of Conduct Group for Business Taxation.
The list of non-cooperative tax jurisdictions was first established in December 2017. Under the EU listing process, jurisdictions are assessed against three main criteria – tax transparency, fair taxation and real economic activity. Those that fall short on any of these criteria are asked for a commitment to address the deficiencies within a set deadline and are listed under Annex II of the conclusions – the ‘grey list’ – which covers jurisdictions with pending commitments. When a jurisdiction has met all its commitments, it is removed from Annex II.
Most commitments taken by third country jurisdictions were with a deadline of end 2019 and implementation was monitored by the EU Code of Conduct Group on business taxation. Following the latest review, deadline extensions were granted to 12 jurisdictions to enable them to pass the necessary reforms to deliver on their commitments. Most of the deadline extensions concern developing countries without a financial centre that have already made meaningful progress in the delivery of their commitments.
Under the transparency criteria, Turkey was granted until 31 December 2020 to make tangible progress in the effective implementation of the automatic exchange of information with all EU Member States. Anguilla, Botswana and Turkey, which had all committed to have a sufficient rating in relation to exchange of information on request by the end of 2018, are all awaiting a supplementary review by the OECD Global Forum.
The following developing countries, that do not have a financial centre and were found to have made meaningful progress in the delivery of their commitments, were granted until 31 August 2020 to sign the OECD Multilateral Convention on Mutual Administrative Assistance (MAC) and until 30 August 2021 to ratify the MAC – Bosnia & Herzegovina, Botswana, Eswatini, Jordan, Maldives, Mongolia, Namibia and Thailand.
Under the ‘fair taxation’ criteria, Saint Lucia had committed to amend or abolish its foreign source income exemption regime by the end of 2019. It was found to have adopted sufficient amendments in line with its commitments and had committed to address a remaining issue by 31 August 2020.
Australia and Morocco had committed to amend or abolish their harmful tax regimes by end 2019 but were prevented from doing so by a delayed process in the OECD Forum on Harmful Tax Practices. They have been granted until the end of 2020 to adapt their legislation.
Namibia has committed to amend or abolish its harmful tax regimes covering manufacturing activities and similar non-highly mobile activities by the end of 2019. It was found to have demonstrated tangible progress in initiating these reforms in 2019 and was granted until 31 August 2020 to adapt its legislation. Jordan has also committed to amend or abolish harmful tax regimes by the end of 2020.
A further 16 jurisdictions – Antigua & Barbuda, Armenia, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cabo Verde, Cook Islands, Curaçao, Marshall Islands, Montenegro, Nauru, Niue, St Kitts & Nevis and Vietnam – managed to implement all the necessary reforms to comply with EU tax good governance principles ahead of the agreed deadline and have therefore been removed from Annex II.
Croatian Deputy Prime Minister and Minister of finance Zdravko Marić said: “The work on the list of non-cooperative tax jurisdictions is based on a thorough process of assessment, monitoring and dialogue with about 70 third country jurisdictions. Since we started this exercise, 49 countries have implemented the necessary tax reforms to comply with the EU's criteria. This is an undeniable success. But it is also work in progress and a dynamic process where our methodology and criteria are constantly reviewed."
ECOFIN will continue to review and update the list in the coming years, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the list.
ECOFIN produced a guidance on further coordination of national defensive measures in the tax area towards non-cooperative jurisdictions in December 2019. It invited all member states to apply legislative defensive measure in taxation vis-à-vis the listed jurisdictions as of 1 January 2021, with the aim of encouraging those jurisdictions’ compliance with the Code of Conduct screening criteria on fair taxation and transparency.
21 February 2020, the Financial Action Task Force (FATF) reclassified Iran as a ‘high-risk jurisdiction’ and called for certain countermeasures to be imposed. It also announced that it had added seven jurisdictions – including Barbados and Mauritius – to its ‘grey list’ of countries that are subject to increased monitoring due to their deficiencies in combatting money laundering (ML) and terrorist financing (FT).
Iran adopted an action plan to address a number of significant deficiencies relating to ML/FT, with the FATF’s approval, in June 2016. However it failed to implement the plan, which expired in January 2018. Consequently, the FATF placed Iran on its “blacklist” and encouraged countries to deploy a variety of countermeasures, including:
-Limiting business relationships or financial transactions with Iran, and, if necessary, terminating all correspondent relationships with financial institutions in Iran.
-Requiring financial institutions to implement specific elements of enhanced due diligence.
-Introducing enhanced reporting mechanisms or systematic reporting of financial transactions.
The countermeasure relating to the possible termination of correspondent accounts with financial institutions in Iran mirrors the prohibition by the US Financial Crimes Enforcement Network (FinCEN) against the opening or maintaining of correspondent accounts in the US on behalf of Iranian financial institutions pursuant to Section 311 of US Patriot Act.
Other countermeasures suggested by the FATF include prohibiting financial institutions from using third parties in Iran for purposes of conducting customer due diligence, as well as increased or enhanced auditing requirements for any financial institutions that maintain branches or subsidiaries in Iran.
Given that most transactions or dealings by US companies with Iran are prohibited by existing US sanctions, the FATF’s countermeasures on Iran may have their greatest impact on European companies. Generally, under the EU blocking statute, European companies who refuse to engage in certain business with Iran due to compliance with US secondary sanctions may face criminal and civil penalties.
Although FATF’s standards carry no formal sanctions or penalties on either the jurisdiction deemed to be high-risk or the countries or jurisdictions that deal with them, EU-based companies may be able to cite to these countermeasures as grounds for declining Iran-related business given the weight and credibility placed on FATF’s recommendations, pronouncements, and determinations.
The FATF places jurisdictions with deficiencies in combatting money laundering, terrorist financing, and proliferation financing under increased monitoring. Countries on the grey list have committed to swiftly resolve their deficiencies within an agreed timeframe.
The FATF said it had identified Albania, Barbados, Jamaica, Mauritius, Myanmar, Nicaragua and Uganda as jurisdictions with strategic AML/CFT deficiencies. Each jurisdiction has developed an action plan with the FATF to address the most serious deficiencies. The FATF welcomed their high-level political commitment to their action plans.
They join the countries already on the grey list: the Bahamas, Botswana, Cambodia, Ghana, Iceland, Mongolia, Pakistan, Panama, Syria, Yemen and Zimbabwe. The FATF said that Trinidad & Tobago had been taken off the grey list because of the significant progress it has made in addressing the strategic AML/CFT deficiencies previously identified. Trinidad & Tobago will therefore no longer be subject to the FATF’s increased monitoring process
Although each country’s action plan is different, the grey list countries have generally committed to:
-Establish effective controls to detect and prevent criminal infiltration of the country’s economy;
-Ensure that beneficial ownership information is accurate and available on a timely basis and demonstrate the imposition of appropriate sanctions for non-compliance; and
-Establish a fully operational financial intelligence unit.
13 February 2020, the Financial Action Task Force (FATF) found that Switzerland had taken a number of actions to strengthen its framework for combatting money laundering and terrorist financing since its mutual evaluation in 2016, but that it would remain in an enhanced follow-up process.
In line with the FATF Procedures for mutual evaluations, Switzerland had reported back on the actions it has taken since 2016 and the FATF reported that it had now re-rated the country on the following Recommendations:
-Recommendation 16 (Wire transfers) – from ‘partially compliant’ to ‘largely compliant’
-Recommendation 19 (Higher-risk countries) – from ‘partially compliant’ to ‘compliant’
-Recommendation 33 (Statistics) – from ‘partially compliant’ to ‘compliant’.
The report also looked at whether Switzerland’s measures met the requirements of FATF Recommendations that have changed since the 2016 mutual evaluation. The FATF agreed to re-rate Recommendation 8 (Non-profit organisations) from ‘partially compliant’ to ‘largely compliant’ and to maintain the rating of ‘largely compliant’ in respect of: Recommendation 2 (National cooperation and coordination); Recommendation 5 (Terrorist financing offence); Recommendation 15 (New technologies) including virtual asset service providers (VASPs); Recommendation 18 (Internal controls and foreign branches and subsidiaries); and Recommendation 21 (Tipping-off and confidentiality).
The FATF also maintained the rating of ‘compliant’ for Recommendation 7 (Targeted financial sanctions related to proliferation).
Overall Switzerland was rated ‘compliant’ on eight Recommendations and ‘largely compliant’ on 27 Recommendations. It is remains ‘partially compliant’ on five Recommendations. As a result, Switzerland will continue to report back to FATF on its progress.
23 February 2020, G20 finance ministers and central bank governors welcomed, at a meeting in Saudi Arabia, the progress made towards reaching agreement on a coordinated update to the tax rules for multinational groups. They reiterated that counties needed to reach political agreement on key elements of a revised tax scheme by July 2020 in order to achieve consensus by the agreed deadline of 31 December.
In a communique released after the meeting, ministers endorsed the ‘unified approach’ as the basis for further negotiations on ‘pillar one’, which allocates additional taxing rights over multinational group profit to the countries where a multinational group’s customers or digital users reside. The unified approach was endorsed by the Inclusive Framework on Base Erosion and Profit Shifting (IF) on 30January.
The G20 finance ministers also said they welcomed the IF’s progress note on ‘pillar two’, which was also set out in the January statement. The goal of pillar two is for countries to agree to uniform rules for imposing a minimum tax on multinational groups.
“We encourage further progress on both pillars to overcome remaining differences and reaffirm our commitment to reach a consensus-based solution with a final report to be delivered by the end of 2020,” the ministers said in their communiqué. “We stress the importance of the G20/OECD Inclusive Framework on BEPS agreeing on the key policy features of a global and consensus-based solution by July 2020, which would form the basis of a political agreement.”
Efforts were stalled late last year by the US government’s proposal to add a 'safe harbour' regime. US Treasury Secretary Steven Mnuchin sought to reassure G20 delegates, saying: “It’s not an optional tax. You pay the safe harbour as opposed to paying something else. People may pay a little bit more in a safe harbour knowing they have tax certainty.”
The communiqué also welcomed the progress made on implementing the internationally agreed tax transparency standards, and in particular the updated G20/OECD list of jurisdictions that do not comply with such standards.
“We reiterate the importance of international cooperation to complete this work and ensure tax certainty. We welcome the progress made on implementing the internationally agreed tax transparency standards. We take note of the updated G20/OECD list of jurisdictions that do not comply with such standards. Defensive measures against listed jurisdictions will be considered.”
26 February 2020, Financial Secretary Paul Chan Mo-po announced in his budget speech that the government will earmark HK$18.3 billion (US$2.35 billion) to support businesses that have been hit by the economic downturn following months of social unrest and the US-China trade war, as well as further potential damage from the coronavirus outbreak.
He has been under intense pressure from lawmakers to dip into the government's large fiscal reserves of about HK$1.1 trillion to help the city ride out the economic slump. “Since January 2020, Hong Kong has come under the threat posed by the novel coronavirus outbreak, which further dealt a blow to the economy. We must take decisive measures to tackle the situation,” Chan said.
Presenting the budget proposals for the financial year that starts in April, Chan said Hong Kong permanent residents aged 18 and above will each to receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion (US$15 billion) relief deal rolled out by the government to ease the burden on individuals and companies, while saving jobs.
Chan outlined five new measures to support business enterprises:
-Concessionary low-interest loan scheme with 100% government guarantee up to a total of HK$20 billion. The maximum loan will be HK$2 million, with a repayment period up to three years and a moratorium on principal repayment for the first six months. The scheme will be open for application for six months.
-100% reduction in profits tax for the 2019-20 assessment year, subject to a ceiling of HK$20,000. This reduction will be reflected in the final tax payable for the year of assessment 2019/20.
-Waiving rates for non-domestic properties for 2020-21, subject to a ceiling of HK$5,000 per quarter in first two quarters and HK$1,500 per quarter for the remaining two quarters.
-Waiving business registration fees for 2020-21, a measure expected to benefit 1.5 million business operators.
-Waiving registration fees for company annual returns for two years, a measure expected to benefit 1.4 million companies.
The government also continues to implement relief measures announced last year – subsidising 75% of electricity charges for four extra months, subject to a monthly cap of HK$5,000, for non-residential accounts and waiving 75% of water and sewage charges of non-domestic households for four extra months, subject to a monthly cap of HK$20,000 and HK$12,500 respectively.
“I hope that [the measures] will not only help support our enterprises but also safeguard jobs for more than three million workers,” Chan said in his budget speech, urging all employers and employees to “stand together to ride out the difficult times”.
The government had earlier announced a HK$30 billion Anti-epidemic Fund to implement 24 measures to further enhance the administration’s capability in combating the COVID-19 epidemic and provide assistance to enterprises and members of the public.
Chan forecast a deficit for the next five years, with an estimated HK$139.1 billion for 2020-21, equivalent to be around 4.8% of GDP. In 2004, Hong Kong saw a HK$63.3 billion deficit in the wake of SARS and an economic downturn.
29 February 2020, the new income and capital tax treaty between Ireland and the Netherlands entered into force and will apply as from 1 January 2021. The new treaty, which was signed on 13 June 2019, will replace the existing 1969 tax treaty between the two countries.
The treaty covers income tax, universal social charge, corporation tax and capital gains tax in Ireland, and income tax, wages tax, corporation tax and dividend tax in the Netherlands. Ireland applies the credit method for the elimination of double taxation, while the Netherlands may apply the exemption or credit method depending on the type of income and the applicable provisions of its domestic law.
The treaty provides for a 0% withholding tax rate if the beneficial owner is a pension fund or a company that has directly held at least 10% of the paying company's capital throughout a 365-day period that includes the date of payment; otherwise, the rate will be 15%. Interest and royalties will be taxable only in the state of residence of the recipient.
An ‘entitlement to benefits’ article includes the provision that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
The 1969 tax treaty will cease to have effect from the dates on which the new treaty becomes effective. However, where any person entitled to benefits under the 1969 treaty would have been entitled to greater benefits than under the new treaty, the 1969 Convention can continue to have effect in its entirety for a period of 12 months from the date on which the provisions of the new treaty would otherwise have effect.
10 February 2020, the Labuan Business Activity Tax (Amendment) Act 2020, which introduces substance requirements and residence provisions for Labuan entities in line with international standards, was brought into force.
Labuan entities carrying on a Labuan trading business activity are generally taxed at 3% of chargeable profits under the Labuan Business Activity Tax Act 1990 (LBATA). Labuan trading business activities include banking, insurance, trading, management, licensing, and shipping operations.
The Amendment Act introduces a new provision that a Labuan entity carrying on a Labuan trading business activity is to be charged at the rate of 24% upon its chargeable profits if it fails to comply with substantial activity requirements for a year of assessment.
The Amendment Act also introduces new residence provisions for the purpose of double tax treaties, including:
-A Labuan entity carrying on a business or businesses for the basis period for a year of assessment is resident in Malaysia if, at any time during the basis period, the management and control of any of its businesses are exercised in Malaysia; and
-Any other Labuan entity is resident in Malaysia for the basis period for a year of assessment if, at any time during the basis period, the management and control of its affairs are exercised in Malaysia by its directors, partners, trustees, or other controlling authority.
The Director General of Inland Revenue is empowered to raise assessments or additional assessments of tax in cases where it appears that no assessment has been made, or an insufficient assessment has been made, on a person chargeable to tax for any year of assessment, subject to the following time limitations:
-Non-transfer pricing cases – within five years of the end of the year of assessment;
-Transfer pricing cases – within seven years of the end of the year of assessment;
-Fraud, willful default or negligence – no time limitation on the assessment.
Provisions have been added to clarify that the profit of a Labuan entity carrying on a Labuan ‘non-trading’ business activity that is not chargeable to tax does not include income derived from intellectual property rights. Any income derived from IP rights is subject to tax under the Income Tax Act 1967.
Clarification is provided that the profits of a Labuan entity carrying on a Labuan ‘non-trading’ business activity, which are not chargeable to tax under the LBATA, do not include income derived from royalties or other income derived from an intellectual property right. Such income is subject to tax under the ITA. This provision is deemed to have come into operation on 1 January 2019.
13 February 2020, Mali became the 161st country to join the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes having committed to combatting tax evasion through implementing the internationally agreed standards of transparency and exchange of information for tax purposes-both exchange of information on request and automatic exchange of information.
Members of the Global Forum include all G20 countries, all OECD members, all international financial centres and a very large number of developing countries. Mali will also participate in the Africa Initiative, a programme of work launched in 2014 by the Global Forum with its African members and partner organisations to support domestic revenue mobilisation and the fight against illicit financial flows in Africa through enhanced tax transparency and exchange of information.
12 February 2020, the Council of Europe’s anti-money laundering body MONEYVAL called on the Cypriot authorities to pursue money laundering from criminal proceeds generated outside of Cyprus more aggressively, and take a more proactive approach to the freezing and confiscation of foreign proceeds.
The report made a comprehensive assessment of the effectiveness of Cyprus's anti-money laundering and countering the financing of terrorism (AML/CFT) system and its level of compliance with the Recommendations of the Financial Action Task Force (FATF).
MONEYVAL concluded that while Cyprus understood the AML/CFT risks that it faced to a large extent, its understanding of terrorist financing risk was less comprehensive. It also noted that major improvements were necessary for the effectiveness of the Cypriot AML/CFT regime:
-The competent authorities were not yet sufficiently pursuing money laundering from criminal proceeds generated outside of Cyprus, which posed the highest threat to the Cypriot financial system.
-The competent authorities had not been very proactive at freezing and confiscating foreign criminal proceeds at their own initiative, although they had been instrumental in assisting other countries.
-Cyprus had not yet conducted a formal assessment of risks posed by legal persons, despite having a developed company formation and administration sector. This had reduced the authorities’ ability to implement more targeted mitigating measures to ensure the transparency of legal persons.
-There were weaknesses in the implementation of preventive measures by the trust and corporate services sector as a whole. This had major implications for the availability of beneficial ownership information of legal persons and arrangements registered in Cyprus and the reporting of suspicious transactions. Significant strides had been made by Cyprus to implement a comprehensive supervisory framework for trust and corporate services providers, but further progress was required, with certain areas requiring major improvement.
-The risk in the real estate sector had increased exponentially since it had become the preferred choice of investment to acquire citizenship under the Cyprus Investment Programme. This risk had not been properly mitigated and the report recommended that supervision should be significantly enhanced and measures taken to increase the level of compliance with preventive measures by real estate agents.
-Risks related to the Cyprus Investment Programme had not been assessed comprehensively – the report recommended that Cyprus should conduct a comprehensive AML/CFT risk assessment of the programme.
-Trust and corporate service providers did not demonstrate a uniform level of understanding of the risks of evasion of targeted financial sanctions for terrorist financing and the proliferation of weapons of mass destruction. Given their role as gatekeepers, this shortcoming constituted a significant vulnerability.
However, several measures had been deployed to mitigate some of the main risks effectively. There was a good level of domestic co-operation and co-ordination between the competent authorities, both on policy issues and at an operational level. The banking sector had become more effective in mitigating risks. This was largely due to the increasingly sound supervisory practices of the Central Bank of Cyprus.
The report also noted positively that the authorities investigated the financial aspects where there was a terrorism investigation/prosecution, that they had carried out a number of terrorist financing investigations in the review period and that they had taken steps to increase awareness of terrorist financing risks.
The Financial Intelligence Unit (FIU) had the ability to support the operational needs of competent authorities through its analysis and dissemination functions. Cyprus had developed mechanisms that were capable of delivering constructive and timely assistance to other countries both on a formal and informal basis.
The evaluation of Cyprus’ anti-money laundering and combating financing of terrorism system was based on the 2012 FATF Recommendations and was prepared using the 2013 Methodology. Based on the results of its evaluation, MONEYVAL decided to apply its enhanced follow-up procedure and invited Cyprus to report back at its first plenary in 2021.
12 February 2020, the Council of Europe’s anti-money laundering body MONEYVAL called on the authorities of the British Overseas Territory of Gibraltar to use the tools and mechanisms they have in place to combat money laundering (ML) and financing of terrorism (FT) more effectively.
The report made a comprehensive assessment of the effectiveness of Gibraltar's anti-ML and countering FT system and its level of compliance with the Recommendations of the Financial Action Task Force (FATF). Based on the results of its evaluation, MONEYVAL decided to apply its enhanced follow-up procedure and invited Gibraltar to report back at its first plenary in 2021.
The report found the authorities in Gibraltar had a varied understanding of ML/FT risks. The key supervisors had a robust understanding of risks at sectoral level, but the jurisdiction’s overall understanding was affected by several shortcomings related to the National Risk Assessment and in particular by insufficient analysis of the cross-border threat that Gibraltar faces as an international financial centre.
The Financial Intelligence Unit (FIU) had increased its capacity in recent years and extended cooperation with the law enforcement and supervisory authorities. However, its analytical products were used only to a limited extent and therefore had not had a significant impact on developing investigations into ML and predicate offences.
The report recognised improvements in the legal framework, which now provided a solid basis for the authorities to detect, investigate and prosecute money laundering and financing of terrorism. Improvements were also noted in relation to inter-agency cooperation, but Gibraltar had not demonstrated effective investigation and prosecution of ML offences.
Whilst there had been several convictions for self-laundering involving domestic predicate offences, there had been no successful third-party and stand-alone ML prosecutions or convictions. This did not appear to be in line with the jurisdiction’s risk profile. Fundamental improvements were also needed with regard to the confiscation of proceeds of crime from ML and associated predicate offences.
Law enforcement authorities had demonstrated a good understanding of potential FT that may occur in an international financial centre such as Gibraltar. However, the relative lack of suspicious transactions reports related to FT – considered against the backdrop of transactions that the financial institutions carried out with conflict zones and high-risk jurisdictions – raised concerns as to whether the absence of any prosecutions for FT was in line with the jurisdiction’s risk profile.
Through legislation enacted prior to the MONEYVAL on-site visit, Gibraltar had ensured implementation of the United Nations’ targeted financial sanctions regimes on FT and the financing of proliferation of weapons of mass destruction. Overall, the awareness of ‘reporting entities’ of the obligations in respect of targeted financial sanctions for FT appeared to be higher than those concerning the financing of proliferation.
The report also reflected that obligations were being implemented to some extent by reporting entities such as financial institutions and designated non-financial businesses and professions (DNFBPs). Their understanding of the ML risk was satisfactory overall but differed across and within the sectors. Unlike the ML risk, the FT risk was not properly understood. The quality of reporting of suspicious transactions remained a concern.
MONEYVAL noted that the supervisory authorities applied licensing and screening measures to prevent criminals and their associates from abusing financial institutions and DNFBPs. Although the competent authorities applied a risk-based approach in carrying out supervision, further improvements were needed. Sanctions for non-compliance with anti-ML and counter-FT requirements were not considered proportionate and dissuasive.
Gibraltar had taken a number of measures to prevent the misuse of legal persons and arrangements for ML/FT purposes, including the establishment of a Register of Ultimate Beneficial Owners. The competent authorities were able to obtain beneficial ownership information – both directly from reporting entities and through the Register – but the risk of misuse for ML/FT purposes by these entities was only understood to a limited extent.
Finally, the report noted that Gibraltar legislation provided a comprehensive framework for international co-operation, which enabled the authorities to provide assistance, with generally positive feedback from international partners.
13 February 2020, the OECD published a new economic analysis showing that a proposed solution to the tax challenges arising from the digitalisation of the economy under negotiation at the OECD would have a significant positive impact on global tax revenues.
The analysis puts the combined effect of the ‘two pillar’ solution under discussion at up to 4% of global corporate income tax (CIT) revenues, or USD100 billion annually. These revenue gains are broadly similar across high, middle and low-income economies, as a share of corporate tax revenues.
The Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS), which brings together 137 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules, decided in January to move ahead with a ‘two pillar’ negotiation to address the tax challenges of digitalisation.
Participants agreed to pursue the negotiation of new rules on where tax should be paid (‘nexus’) and on what portion of profits they should be taxed (‘profit allocation’), on the basis of a ‘unified approach’ under Pillar One.
The aim is to ensure that multinational enterprises (MNEs) conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions. They also decided to continue discussions on Pillar Two, which aims to address remaining BEPS issues and ensure that international businesses pay a minimum level of tax.
The analysis covered data from more than 200 jurisdictions, including all IF members and more than 27,000 multi-national enterprise (MNE) groups. It found that:
-Pillar One reform could bring small tax revenue gain for most jurisdictions. Low and middle-income economies are expected to gain relatively more revenue than advanced economies, with investment hubs experiencing some loss in tax revenues. More than half of the profit re-allocated would come from 100 large MNE groups.
-Pillar Two could raise significant additional tax revenues. By reducing the tax rate differentials between jurisdictions, the reform is expected to lead to a significant reduction in profit shifting by MNEs, particularly for developing economies.
The overall direct effect on investment costs is expected to be small in most countries, because the reforms target firms with high levels of profitability and low effective tax rates. The reforms would further reduce the influence of corporate taxes on investment location decisions. In addition, failure to reach a consensus-based solution would likely lead to further unilateral measures and greater uncertainty.
11 February 2020, the OECD released a new Transfer Pricing Guidance that, for the first time, includes guidance on the transfer pricing aspects of financial transactions. It is designed to contribute to consistency in the interpretation of the arm’s length principle and help avoid transfer pricing disputes and double taxation.
OECD and G20 member countries, working together on an equal footing, adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS) in 2013. As part of the final BEPS package of measures, the OECD/G20 published reports on ‘Limiting Base Erosion Involving Interest Deductions And Other Financial Payments’ (Action 4) and ‘Aligning Transfer Pricing Outcomes with Value Creation’ (Actions 8-10) in October 2015.
Both these reports mandated follow-up work on the transfer pricing aspects of financial transactions, which has now been included in the new guidance along with a number of case studies to illustrate the principles discussed in the report. The report is divided as follows:
-Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions;
-Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of a multi national enterprise (MNE) within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation;
-Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions;
-Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions;
-Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.
Sections A to E of the new report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106.
In order to ensure the effective and consistent implementation of the BEPS measures, the Inclusive Framework on BEPS was established in 2016 and now has 137 members. It brings together all interested countries and jurisdictions on an equal footing.
28 February 2020, Portugal deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) with the OECD’s Secretary-General. For Portugal, the MLI will enter into force on 1 June.
The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. 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.
Uruguay deposited its instrument of ratification for the Multilateral BEPS Convention on 6 February and it will enter into force on 1 June. Japan expanded the application of the Multilateral BEPS Convention to its existing treaties on 14 February.
4 February 2020, the governments of Singapore and Indonesia finally signed a new treaty for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance after five years of negotiations.
The new treaty will replace the existing treaty, which has been in effect since 1992, and will provide for a 10% withholding tax rate on dividends paid to a company that owns directly at least 25% of the capital of the payer company; otherwise, the rate will be 15%. A 10% rate will apply to interest.
In respect of royalties, a 10% rate will apply to royalties paid for the use of, or the right to use, any copyright of literary, artistic, or scientific work; and any patent, trademark, design or model, plan, secret formula, or process; an 8% rate will apply to royalties paid for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.
The treaty further provides for tax exemption in the source state for certain capital gains and incorporates internationally-agreed standards to counter treaty abuse.
18 February 2020, Deputy Prime Minister and Finance Minister Heng Swee Keat announced a stabilisation and support package as part of the Budget 2020 to help weather near-term economic uncertainties economy created by the COVID-19 outbreak. The Budget also contained a number of extensions and revisions to existing schemes and incentives to encourage growth and development.
No changes were announced for the Corporate Income Tax (CIT). However, to help companies cope with the cash flow, a rebate of 25% on the taxes payable, capped at S$15,000 was announced for the Year of Assessment (YA) 2020. The carry back of losses and allowances has been extended from one year to three, though it remains capped at S$100,000.
It was announced in 2018 that rate of the goods and services tax (GST) would be raised from 7% to 9% at some point between 2021 and 2025. As part of the 2020 Budget, it was decided that the GST increase in would not be activated in 2021. The increase is still due to take place by 2025, but sufficient notice will be provided by the government.
The Double Tax Deduction for Internationalisation (DTDi) scheme, which allows a 200% tax deduction on qualifying market expansion and investment development expenses, has been extended from 31 March 2020 to 31 December 2025. It will include an expanded range of allowable expenses, including third-party consultancy costs and overseas business missions.
The Mergers & Acquisition (M&A) Scheme, which was to expire on 31 March 2020, is to be extended to cover qualifying acquisitions made on or before 31 December 2025. However, the stamp duty relief (currently capped at S$80,000) will be removed for deals done on or after 1 April 2020. Requirements regarding the need for the holding company of the acquiring group to be incorporated and tax resident in Singapore will be strictly enforced.
The exemption under section 13Z of the Income Tax Act (ITA) for gains arising upon a disposal of ordinary shares in an investee company will be extended beyond its current sunset of 31 May 2022 to 31 December 2027. For disposals on or after 1 June 2022, the scheme has been restricted to exclude the sale of unlisted property companies whether trading, holding or developing immovable properties in Singapore or overseas.
The Finance and Treasury Centre (FTC) incentive will be extended to 31 December 2026. The 8% tax rate will continue to apply to income from qualifying sources and activities, but qualifying sources of funds will be extended to include convertible debt, and qualifying activities to include investment into certain private equity or venture capital funds.
The tax exemption under section 13H of the ITA, which confers tax exemptions on certain profits of a venture capital company, has been extended to 31 December 2025. With effect from 1 April 2020, the incentive has been expanded by extending qualifying investments to those available under the funds incentives of Sections 13CA, 13R and 13X. It has also been expanded to include foreign incorporated companies and the new Variable Capital Company (VCC) entity.
The term of the approval under the incentive is also increased from the current 10-year period to the life of the fund up to 15 years. An approved venture capital fund will be entitled to recover GST on its inputs at a fixed recovery rate.
14 February 2020, the Accounting and Corporate Regulatory Authority (ACRA) of Singapore announced that proposals for the introduction of a central register of controllers, together with an amendment to legislation to require disclosure of the particulars of ‘nominee shareholders’, before the end of May 2020.
The announcement was made informally at a conference and the official notifications and draft amendments have not yet been made available. Neither register is likely to be accessible to the public.
Reporting entities, including companies, foreign companies and limited liability partnerships (LLPs) registered in Singapore, will be required to maintain and update their registers of controllers, currently kept at their registered offices or by their registered filing agent on their behalf, and provide this information to ACRA.
Singapore companies and LLPs have been required to maintain registers of controlling parties since 2017. Under s.386AN of Singapore's Companies Act, ACRA has powers to maintain a central register of controllers of companies and foreign companies when it has published a notification in the government's official gazette.
ACRA said the registers were necessary because of the increasing complexity of money laundering schemes involving corporate entities; the need to keep pace with international efforts to enhance transparency of ownership and control of corporate entities; and to ensure that beneficial ownership information is readily accessible for law enforcement agencies.
ACRA said it will begin notifying reporting entities and their registered filing agents that they must submit the required information by mid-April 2020. It expects that an s.386AN(1) notification will be gazetted to bring the new regulation into effect in May, after which it will take enforcement action against entities that do not comply. The system should be operating by mid-May 2020.
ACRA will also adopt a new definition of 'nominee shareholder' – a member of a company who legally holds shares in the company on behalf of another person. The particulars of the real shareholder will have to be disclosed to ACRA.
26 February 2020, South African Finance Minister Tito Mboweni announced, as part of the Budget speech, that the “administratively burdensome” process of emigration through the South African Reserve Bank (SARB) was to be phased out from March 2021, while the tax exemption on foreign remuneration for a South African resident would increase from R1 million to R1.25 million on 1 March this year.
Mboweni said that South Africans who have been living abroad for many years have increasingly opted to emigrate or break their ties with the SA in an effort to avoid the so-called ‘expat tax’, which was brought into effect on 1 March.
Under the ‘expat tax’, South Africans working overseas but remaining tax resident in South Africa were only to be exempt from paying tax on the first R1 million they earn abroad. The rest of their foreign earnings – including all fringe benefits, like housing, education and flight allowances – will be taxed at the standard SA tax rates for the year. As a result of the Budget change, the R1 million exemption has now been extended to R1.25 million.
According to the speech: “Following reforms to the income tax treatment of South African tax residents who receive remuneration outside the country, government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment. The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service (SARS).
“Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.”
The emigration process will now shift to the SARS and there will be a validation confirmation process to see when the Section 10 foreign income exemption is applicable. Tax residency for individuals will continue to be determined by the ordinarily resident and physically presence tests as set out in the Income Tax Act (1962).
South Africa participates in the automatic sharing of information between tax authorities on individual’s financial accounts and investments under the OECD common reporting standard (CRS). Mboweni said these cooperative practices will remain in place to ensure that South African Tax residents who have offshore income and investments paid the appropriate level of tax.
Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – have been removed.
The rules for emigrants withdrawing funds from retirement funds – pension preservation funds, provident preservation funds and retirement annuity funds – will also be amended because these required proof of the SARB emigration that is to be phased out. It is proposed that the trigger for individuals to withdraw these funds be reviewed. Any resulting amendments will come into effect on 1 March 2021.
5 February 2020, the Court of Appeal dismissed an appeal by the wife of a jailed Azerbaijani banker seeking to discharge two unexplained wealth orders (UWOs), which were the first ever issued.
In Hajiyeva v NCA, 2020 EWCA Civ 108), Zamira Hajiyeva was an Azerbaijani national married to Jahangir Hajiyev, former chairman of the International Bank of Azerbaijan who is serving 15 years in jail for defrauding it of at least USD39 million. She came to the UK in 2015, prior to her husband's arrest, and has applied for indefinite leave to remain.
In February 2018, the UK National Crime Agency (NCA) obtained two UWOs against Mrs Hajiyeva in an ex-parte hearing, together with an interim freezing order in respect of a property in central London acquired for £11.5 million in 2009 and a golf club near Ascot that was bought for £10.5m in 2013.
The UWO, a new type of power that was introduced by the Criminal Finances Act 2017, required the respondent to provide a statement setting out her interest in the property; to explain how she obtained the property and the money to buy it; and to give any other information specified by the authorities about the property.
Mrs Hajiyeva stated she was the beneficial owner of Vicksburg Global, a BVI company that acquired the central London property. The BVI Financial Investigation Agency subsequently informed the UK authorities that Mr Hajiyev was actually the beneficial owner of the company.
Mrs Hajiyeva said the orders were based on an unfair trial of her husband, who was imprisoned in Azerbaijan for fraud and embezzlement, and had appealed against a court order to comply.
The High Court refused Mrs Hajiyeva leave to appeal further. This was later overruled on the basis that, as first case involving a UWO, it would be beneficial to have guidance from the Court of Appeal on the scope of statutory powers underlying UWOs.
Mrs Hajiyeva's appeal was based on four principal grounds:
-The lower courts had wrongly interpreted the statutory test for a 'politically exposed person', one of the conditions of applying for a UWO;
-Her husband's bank was not a state-owned enterprise, despite its shares being owned in part by the Azerbaijani government.
-The 'income requirement' of s.362B(3) Proceeds of Crime Act 2002, that there were reasonable grounds for suspecting that the Hajiyevs' legitimate income was too low for them to be able to buy the property, was not met;
-UWOs break the rule against self-incrimination and/or spousal privilege, although statements made by a UWO respondent cannot be used in evidence against that person in criminal proceedings.
The Court of Appeal dismissed all the grounds. Lord Chief Justice Burnett and two other senior judges said Mrs Hajiyeva had been lawfully targeted by the UWO and also refused to allow Mrs Hajiyeva to take the case to the Supreme Court.
"The relevant requirement for making a UWO [is that] the court must be satisfied that there are reasonable grounds for suspecting that the known sources of the lawfully obtained income available [to the targeted individual] would have been insufficient to enable him or her to obtain the property," said the judges.
"In the present case Mr Hajiyev's conviction for fraud and embezzlement was only one of the strands. There was evidence of Mr Hajiyev's status as a state employee and the unlikelihood that his legitimate income... would have been sufficient to generate funds used to purchase the property."
Mrs Hajiyeva must now provide the NCA with a full account of the sources of her wealth. If she is unable provide satisfactory evidence that the investigators, they can then return to court to ask another judge to make a separate order to seize the property.
NCA Head of Asset Denial Andy Lewis said: “Unexplained Wealth Orders, and other asset denial tools such as Account Freezing Orders, are hugely powerful tools that are enabling us to investigate illicit finance and discourage it happening in the first place. We will continue to seek opportunities to use these orders to tackle illicit finance and fight serious and organised crime. We are ultimately looking for Mrs Hajiyeva to comply with the original order of February 2018 to explain the source of the funds used to purchase her property, pending any further right of appeal that may be granted.”