Owen, Christopher: Global Survey – June 2020

  • Australian revenue to target mischaracterised FDI arrangements
    • 25 May 2020, the Commissioner of Taxation issued a Taxpayer Alert in relation to mischaracterised arrangements and schemes connected with foreign direct investment into Australian businesses. It is concerned that arrangements are being deliberately structured to avoid Australian tax payable on the return to the foreign investor, or to obtain a tax deduction for the Australian entity.

      Relevant arrangements, said the Commissioner, typically display one or more of the following features:

      -The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms;

      -The foreign investor either already participates in the management, control or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment;

      -The investment has features not consistent with vanilla debt or equity investments;

      -The investment may provide the foreign investor with direct exposure to the economic return from a particular business or its underlying assets, whether ongoing profit or a gain on disposal.

      Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny. The Commissioner said it would review the tax characterisation adopted by the taxpayer and test its appropriateness having regard to the factual circumstances, relevant tax laws and applicable tax treaties.

      “We will consider applying the general anti-avoidance rules in circumstances where arrangements are contrived (including, in the case of significant global entities, by diverting profits) to reduce the amount of taxable income, or the amount of withholding tax payable by a taxpayer,” it said. “The general anti-avoidance rules may apply where a tax benefit or a diverted profits tax benefit is obtained in connection with these arrangements.

      “We will consider applying the transfer pricing provisions in the taxation law where parties are not dealing wholly independently in relation to the terms or conditions of the arrangements, including as it affects amounts deducted by the Australian entity in connection with the arrangements.”


  • Belgium excludes companies linked to tax havens from receiving public aid
    • 6 May 2020, the Finance Committee of the Belgian Chamber of Representatives approved a bill to block Covid-19 pandemic relief measures to companies with a presence in tax havens. Belgium was the fourth EU country to do so after France, Poland and Denmark had adopted similar measures.

      The amendment, proposed by Belgian Finance Minister Alexander De Croo, stipulated that any company with links to a tax haven via a shareholder or subsidiary would not be eligible for government aid. An exception will be made for companies with a genuine presence in "fiscally attractive countries" as long as they can demonstrate good faith.

      The EU list of non-cooperative jurisdictions for tax purposes, compiled by the Code of Conduct Group on business taxation, currently comprises 12 jurisdictions: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad & Tobago, the US Virgin Islands and Vanuatu.

      None of the countries on the list are members of the EU, since the bloc claims all member states are fully compliant and held to a higher level of scrutiny than other countries across the globe.

      A spokesperson from the European Commission said was up to member states if they wished to grant state aid and to design measures in line with EU rules, “such as to prevent fraud and tax evasion or aggressive avoidance.”

      At the same time, the spokesperson said member states “must comply” with fundamental freedoms guaranteed by the EU Treaty, including on the free movement of capital and the free movement of persons. “This means they cannot exclude companies from aid schemes on the basis of headquarters or tax residency in a different EU country,” she said.

  • BVI Court of Appeal overturns Black Swan
    • 29 May 2020, the Eastern Caribbean Court of Appeal ruled that the BVI Court cannot grant a free standing freezing injunction against a BVI company where that company is not a party to substantive proceedings either in the BVI or elsewhere. The effect is to determine that the case of Black Swan Investments ISA v Harvest View Limited (BVIHCV 2009/399) was wrongly decided.

      In Broad Idea International Limited v Convoy Collateral Limited (BVICMAP 2019/0026), the appellant was a company, Broad Idea, incorporated in the BVI. Its shareholders were Dr Cho Kwai Chee and Francis Choi Chee Ming who held 50.1% and 49.9% of its shares respectively. Broad Idea’s sole known asset of value was its 18.85% shareholding in Town Health International Medical Group Ltd.

      The respondent company, Convoy Collateral, was incorporated in Hong Kong, where it commenced proceedings against Dr Cho in February 2018 claiming damages and other relief for breach of fiduciary and other duties. It applied to the Commercial Court in the BVI to freeze Dr Cho and Broad Idea’s assets and to restrain Broad Idea from registering certain dealings with its shares.

      Convoy succeeded in obtaining the injunction at first instance. It sought to continue this injunction, but Dr Cho applied to set it aside. Subsequently, Convoy made an additional application seeking a freezing injunction against Broad Idea in support of the proceedings against Dr Cho in Hong Kong. Dr Cho’s application to set aside the first instance judgment in relation to Broad Idea was granted and the BVI freezing order was discharged.

      The subsequent application brought by Convoy against Broad Idea was granted by Adderley J. In his judgment, he reasoned that, pursuant to the decision in Black Swan, he had jurisdiction and continued the freezing order against Broad Idea. It is this order that Broad Idea appealed.

      The key issues for determination by the Court of Appeal were as follows:

      -Jurisdiction – whether the judge had the power under section 24 of the West Indies Associated States Supreme Court (Virgin Islands) Act (Cap 80) to grant a freezing order in circumstances where Convoy had not raised any substantive cause of action and had not pursued any substantive proceedings against Broad Idea in the BVI or Hong Kong or anywhere else in the world, and whether in any event any such power extended to granting a freezing order in support of foreign proceedings to which Broad Idea was not a party;

      -Discretion – If the judge had jurisdiction, whether he properly exercised his discretion to grant the freezing order on the basis of his findings of a risk of dissipation and that the Chabra jurisdiction applied.

      In considering the effect of section 24 of the Supreme Court Act Chief Justice Pereira held that: “the authorities all support the proposition that, for the court’s jurisdiction under section 24 of the Supreme Court Act to be properly invoked, there must be an enforceable cause of action against a defendant which the court has jurisdiction to enforce by final judgment, and that cause of action must be raised in substantive proceedings or an undertaking must be given to commence such proceedings.’’

      It was therefore a critical failure that Convoy had no cause of action against Broad Idea nor did it plan to bring proceedings at a later date. The absence of an enforceable cause of action giving rise to actual or potential substantive proceedings “falls short of the requirements… for the grant of interlocutory injunctions such as freezing orders’’.

      In considering Convoy’s reliance on the decision in Black Swan, Pereira CJ commented: “Further, pre-1982 English authorities such as the Siskina suggest that interlocutory injunctions should not be granted otherwise than as ancillary to substantive proceedings in the BVI. There is therefore no common law basis for the grant of such injunctions apart from Black Swan. In my view, the jurisdiction to grant such interlocutory injunctions must be one which arises as a result of an enactment.”

      Pereira CJ referred to the UK’s Civil Jurisdiction and Judgments Act 1982, which empowers courts to grant injunctions in support of specified foreign proceedings. The position in the UK was therefore “vastly different” because comparable legislation has not been enacted in the BVI, such that “In the absence of any statutory authorisation, it was not open to the learned judge in Black Swan to have concluded that he could have expanded the jurisdiction of the court, even though he was very well intentioned. In my view, the courts in the BVI, in the absence of legislative authority, have no jurisdiction to grant a free standing interlocutory in aid of foreign proceedings.”

      Pereira CJ further reasoned that the decision in Yukos was not binding on the Court in so far as it assumed the existence of the Black Swan jurisdiction. As the existence of the jurisdiction was being challenged for the first time on this appeal, the Court was at liberty to render its view on Black Swan.

      The Court thereby concluded that whilst having personal jurisdiction over Broad Idea – as a BVI-incorporated company – the BVI courts had no subject matter jurisdiction to grant a free standing interlocutory injunction against it in aid of foreign proceedings because there is no statutory basis for the exercise of such jurisdiction. If it was to be sanctioned in the BVI, it would have to be done by the legislature.

      The full judgment of the Eastern Caribbean Court of Appeal can be accessed at https://www.eccourts.org/broad-idea-international-limited-v-convoy-collateral-limited/

  • Cayman updates Beneficial Ownership regime
    • 15 May 2020, the Cayman Islands introduced changes to two definitions under the requirements for filing of beneficial ownership information for Cayman Islands companies. The changes, which are due to international requirements, are expected to affect only a relatively small number of companies.

      The threshold for an individual to be recorded as a beneficial owner has been reduced from ‘more than 25%’ to ‘25% or more’. As a result, someone who holds, directly or indirectly, 25% (exactly) or more of the shares of a Cayman Islands company is now considered a beneficial owner and a beneficial ownership report needs to be filed in respect of them. Previously, only persons who held more than 25% of the shares of a Cayman Islands company would be considered a beneficial owner.

      The threshold to qualify as a subsidiary has also been reduced from ‘more than 75%’ to ‘75% or more’ of the shares or voting rights in respect of entities that are ‘out of scope’ of the beneficial ownership reporting requirements because they are subsidiaries of an ‘out of scope’ parent.

      The Cayman Islands’ new online filing system for beneficial ownership (BO) information was launched on 19 May. The launch will entail a phased process. Phase one will be the release of the updated comma separated values (CSV) file and guidance notes. Phase two will consist of in-house training and a pilot test, and phase three will be industry training and sensitisation.

      After the commencement date, all beneficial ownership filings will be made by a corporate services provider directly through the Registrar of Companies’ (ROC) electronic filing system (CAPS).

      Amendments to the Companies Law (2020 Revision) and the Limited Liability Companies Law (2020 Revision) were passed on 22 May.  These amendments, which will come into force on 29 June 2020, pave the way for the introduction of an administrative fines regime in connection with the BO regime.

      The ROC will be granted the power to impose fines on persons in breach of obligations, including companies and limited liability companies that fail to take reasonable steps to identify BOs and provide required particulars of such BOs to their corporate service providers in the Cayman Islands or, where applicable, provide written confirmation of their exemption from the BO regime.

      Beneficial owners and other entities in the ownership and control structures of entities subject to the BO regime (In-Scope Entities) may also attract fines where they fail to co-operate in providing relevant information to In-Scope Entities.

      In all cases, fines will be approximately US$6,100 for an initial breach, with continuing breaches attracting further monthly fines of approximately US$1,220 up to a maximum of US$30,500 for a single breach. Where a fine remains unpaid by a company for 90 days, the ROC can strike the company off the register, which will result in automatic dissolution.

  • Commission looks to digital tax to fund coronavirus recovery
    • 27 May 2020, European Commission President Ursula Von Der Leyen told the European parliament that the Commission was considering bringing back Europe-wide plans for a digital services tax (DST) in order to finance the bloc’s €750 billion recovery fund.

      A communication published by the Commission stated that the executive “actively supports the discussions led by the OECD and the G20 and stands ready to act if no global agreement is reached. A digital tax applied on companies with a turnover above €750 million could generate up to €1.3 billion per year for the EU budget.”

      The OECD is working on proposals covering taxation of digital services according to where revenues are generated, and on setting a global minimum corporate tax level. The OECD is due to deliver its proposals to Group of 20 leaders when they meet in November in Saudi Arabia. The proposals would cover the 137 countries and jurisdictions covered by the OECD/G20 Inclusive Framework on base erosion and profit shifting.

      Commission Vice-President Maroš Šefčovič said the executive was “ready to go at it alone” should there not be an agreement via the OECD. An attempt to introduce a bloc-wide 3% DST levy on companies earning €750 million in revenue, failed last year following opposition from Ireland, Finland and Sweden. New rules on taxation require unanimous agreement between member states. As a result, France, Spain, Italy and Austria all made clear their intentions to push forward with a DST unilaterally.

  • Commission requests Luxembourg and Portugal to amend ATAD legislation
    • 14 May 2020, the European Commission decided to send letters of formal notice to Luxembourg and Portugal asking them to transpose the interest limitation rule of the first Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 or ATAD 1) correctly.

      ATAD 1, which was designed to bring the EU regime into line with the OECD's Action Plan under its Base Erosion and Profit Shifting (BEPS) project. It was approved on 12 July 2016 and generally applied as of 1 January 2019.

      The Commission said both member states had made use of the possibility to exempt financial undertakings from the interest limitation rules. However, their respective pieces of domestic legislation went beyond the allowed exemptions and provided unlimited deductibility of interest for the purpose of Corporate Income Tax, including securitisation entities, which did not qualify as ‘financial undertakings’ under ATAD.

      If Luxembourg and Portugal do not act within the next four months, the Commission may send a reasoned opinion to the Luxembourgish and Portuguese authorities.

  • Czech Republic and Korea ratify the Multilateral BEPS Convention
    • 13 May 2020, the Czech Republic and Korea 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.

      Currently covering 94 jurisdictions, ratification by the Czech Republic and Korea brought the number of jurisdictions that have ratified, accepted or approved the MLI to 47. It will enter into force on 1 September 2020 in both countries.

  • Denmark ends Ernst & Young probe in Danske Bank money laundering case
    • 29 May 2020, the Danish Business Authority (DBA) announced that the state prosecutor had dropped an investigation into whether accountant Ernst & Young had violated anti-money laundering laws in connection with its audit of Danske Bank.

      From 2007 to 2015, around €200 billion flowed through the non-resident portfolio of Danske Bank’s Estonia branch, covering around 15,000 customers. An investigation commissioned by Danske Bank in 2017 concluded that most of the payments were “found to be suspicious”.

      In April 2019, the DBA requested that the State Attorney for the Special Economic and International Crime (SØIK) investigate allegations that Ernst & Young had received information about potential money laundering in Danske in 2014, and neither investigated the claims nor alerted authorities.

      According to the DBA, SØIK did not find evidence indicating that the accountant was “aware of specific transactions or patterns of transactions” and had ended the investigation after finding “no reasonable suspicion that any offence has been committed.”

  • Denmark proposes new withholding tax regime for dividends
    • 18 May 2020, the Danish government published an agreement between the Danish Ministry of Taxation and Finance Denmark for a new withholding tax on dividends regime. Under the proposed regime, dividend withholding tax (WHT) will be based on relief at source principles, with custodian banks playing a central role and taking on liability for faulty withholding. The agreement does not state when the proposed model will enter into force.

      Under current law a shareholder is generally subject to 27% statutory WHT on dividends. Non-residents subject to a lower tax rate under a tax treaty or Danish domestic law are eligible to reclaim excess WHT through the filing of a refund application with the Danish tax authorities after a dividend distribution.

      However, the Danish Tax Agency suspended the processing of all dividend WHT refund claims in August 2015 due to alleged dividend reclaim tax fraud of approximately DKK12.7 billion. The Minister of Taxation indicated there were about 62,000 applications on the refund of excess WHT pending.

      The proposed new dividend WHT regime based on relief at source, drafted by the Ministry of Taxation, Finance Denmark and VP Securities (the Danish Central Securities Depository) in collaboration, is designed to prevent reclaim fraud by introducing registration of non-resident shareholders with the Danish tax authorities and liability for banks for faulty withholding.

      Under the proposal, non-resident shareholders will have to register with the Danish tax authorities to benefit from a reduced tax rate. Registration can only be effected by the investor’s custodian bank and will provide the investor with a withholding tax identification number that identifies their custody account and the correct WHT rate.

      A reclaim concept will supplement this relief at source regime and give shareholders that did not register their WHT identification number prior to a distribution the potential to reduce the tax rate by way of refund. To obtain a refund, the shareholder must be registered for filing a reclaim application and registration must be filed within four months of the dividend distribution date.

      Certain shareholders, including pensions funds and sovereign funds, that are eligible for a special reduced dividend WHT rate either under a tax treaty or domestic Danish law will also have to complete a pre-approval process with the tax authorities.

      A non-resident shareholder’s custodian bank will be held liable if a lower rate of WHT is misapplied. According to the draft agreement, the tax authorities can collect tax directly from the Danish banks where an audit concludes that tax was withheld at a faulty rate. A Danish bank may direct a tax claim towards a non-Danish bank in a chain of custodians, inferring that non-Danish custodians will also be expected to sign up.

      The liability of banks will cover all circumstances where an incorrect tax rate has been applied, an incorrect registration of a shareholder with the tax authorities or where the registered shareholder is not accepted as the correct beneficial owner for Danish tax purposes. A ‘beneficial ownership statement’ signed by the dividend receiving shareholder will be introduced.

  • EU court rules on Italy-Portugal tax treaty pension scheme treatment
    • 30 April 2020, the European Court of Justice, addressing a challenge to the legality of the pension scheme under the 1982 double tax treaty between Italy and Portugal, ruled that EU law does not preclude a tax treatment resulting from a double tax treaty concluded between two member states.

      In HB and IC v Istituto nazionale della previdenza sociale (INPS) – joined cases C-168/19, C-169/19 –  Italian nationals HB and IC were former Italian public sector employees who were receiving a pension from the INPS. After moving to Portugal, they requested the INPS in 2015 to remit – in line with the Italian-Portuguese double tax treaty – the gross amount of their pension without deduction of tax at the source by Italy, so as to be able to benefit from the tax advantages offered by Portugal.

      The INPS rejected these requests, arguing that these rules only applied to Italian pensioners from the private sector who had transferred their residence; and to public sector pensioners who had, in addition to moving to Portugal, taken on Portuguese nationality.

      HB and IC brought actions before the Italian Court of Auditors in Puglia. It had requested the CJEU to rule on whether the Italian taxation system, as designed, constituted an obstacle to the freedom of movement of Italian public sector pensioners, and whether that obstacle constituted discrimination on the grounds of nationality.

      In reaching its decision, the CJEU again evaluated the compatibility of conventional rules, specifically the nationality criteria and EU principles, such as the non-discrimination article (Article 18 TFEU) and the free movement of persons (Article 21 TFEU).

      The CJEU answered both questions in the negative. Member states it said, were free within the framework of double tax treaties to lay down the criteria for the allocation of tax jurisdiction between them, and double tax treaties were not intended to ensure ‘equivalence’ of taxation in different member states. This was not a matter of prohibited discrimination of nationality; the CJEU concluded that the difference in treatment was a consequence of there being different tax systems in Portugal and Italy, which was not contrary to EU law.

  • EU issues Cyprus with notice over LLC accounting rules
    • 14 May 2020, the European Commission send a letter of formal notice to Cyprus on the grounds that it considers that Cypriot law does not comply with EU rules on the publication of financial statements, management reports and audit reports by limited liability companies.

      Under EU law – Directive 2013/34/EU ‘Accounting Directive’, in conjunction with Directive 2017/1132/EU ‘Company Law Directive’ – the publication of LLCs' accounting documents must take place within a reasonable period of time, not exceeding 12 months after the end of their fiscal year.

      The Commission has determined that Cypriot law may entail publication beyond this period. Based on exchanges with the Cypriot authorities and other investigations, it also appeared that the accounting documents of several Cypriot investment firms were not yet publicly available via the Cypriot business register for fiscal years ending more than 12 months ago.

      Cyprus has four months to respond to the arguments raised or the Commission may decide to send a reasoned opinion.

  • EU proposes three-month delay to DAC6 disclosure deadline
    • 9 May 2020, the European Commission proposed a postponement to implementation of the sixth version of the EU Directive on administrative cooperation (DAC6) until at least 30 November due to the challenges businesses and regulators are facing with COVID-19.

      DAC6 requires EU intermediaries (including banks, accounting firms, law firms, corporate service providers and certain other persons) involved in cross-border arrangements to make a disclosure to their tax authority if certain requirements are met.  Where no intermediary is required to make a filing the taxpayer may need to disclose instead.  Failure to comply can result in penalties.

      The Directive provided an initial one-off reporting deadline of August 2020 for arrangements implemented between 25 June 2018 and 1 July 2020. From then onwards a 30-day rolling window for reporting new arrangements is to apply. This has now been deferred by three months. Depending on the progression of the coronavirus pandemic over the coming months, the Commission said it might extend the deferral period one more time, for a maximum of three further months.

      The Commission’s changes to DAC6 were as follows:

      -The definition of ‘historical’ arrangements has not changed; all cross-border arrangements from 25 June 2018 to 30 June 2020 are subject to DAC6

      -The date for the reporting ‘historical’ cross-border arrangements (i.e. arrangements that became reportable from 25 June 2018 to 30 June 2020) has changed from 31 August 2020 to 30 November 2020

      -Arrangements that become reportable between 1 July 2020 and 30 September 2020 must be reported by 31 October (30 days after 1 October)

      -Arrangements that become reportable after 1 October must be reported within 30 days


  • European Commission blacklists a further 12 high-risk third countries
    • 7 May 2020, the European Commission added a further 12 countries to its blacklist of high-risk third countries with strategic deficiencies in their regimes for anti-money laundering and countering terrorist financing. It also delisted six, which brings the total number of currently listed countries to 22.

      The Commission said it had a legal obligation to identify high-risk third countries under the Anti-Money Laundering Directive (AMLD). The revised list took into account developments at international level since 2018 and was now better aligned with the lists published by the Financial Action Task Force (FATF).

      The 12 countries that have been newly-listed are: The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe. They joined Afghanistan, Democratic People's Republic of Korea (DPRK), Iran, Iraq, Pakistan, Syria, Trinidad & Tobago, Uganda, Vanuatu and Yemen. Meanwhile Bosnia-Herzegovina, Ethiopia, Guyana, Lao People's Democratic Republic, Sri Lanka and Tunisia were all delisted.

      The revised list will now be submitted to the European Parliament and Council for approval within one month. Given the Coronavirus crisis, The Commission said the date of application of the regulation listing third countries – and therefore applying new protective measures – would only apply as of 1 October 2020 to ensure that all stakeholders had time to prepare appropriately. The delisting of countries, however, will enter into force 20 days after publication in the Official Journal.

      At the same time, the Commission published a new Action Plan for consultation setting out concrete measures to be taken over the next 12 months to better enforce, supervise and coordinate the EU's rules on combatting money laundering and terrorist financing. The aim is to shut down any remaining loopholes and remove any weak links in the EU's rules.

      Executive Vice-President Valdis Dombrovskis said: "Today we are further bolstering our defences to fight money laundering and terrorist financing, with a comprehensive and far-reaching Action Plan. There should be no weak links in our rules and their implementation. We are committed to delivering on all these actions – swiftly and consistently – over the next 12 months. We are also strengthening the EU's global role in terms of shaping international standards on fighting money laundering and terrorism financing.”

      The Action Plan is built on six pillars, which are to be combined to ensure that EU rules are more harmonised and therefore more effective. These six pillars are as follows:

      1. Effective application of EU rules: The Commission will continue to monitor closely the implementation of EU rules by member states to ensure that national rules are in line with the highest possible standards. In parallel, the Action Plan encourages the European Banking Authority (EBA) to make full use of its new powers to tackle money laundering and terrorist financing.
      2. Single EU rulebook: To combat diverging interpretations of the rules by member states, which lead to loopholes that can be exploited by criminals, the Commission will propose a more harmonised set of rules in the first quarter of 2021.
      3. EU-level supervision: Currently each member state supervises EU rules in this area and gaps can develop. The Commission will propose to set up an EU-level supervisor in the first quarter of 2021.
      4. Co-ordination and support mechanism for member state Financial Intelligence Units: FIUs in member states play a critical role in identifying transactions and activities that could be linked to criminal activities. The Commission will propose establishing an EU mechanism to help further coordinate and support the work of these bodies in the first quarter of 2021.
      5. Enforcing EU-level criminal law provisions and information exchange: Judicial and police co-operation, on the basis of EU instruments and institutional arrangements, is essential to ensure the proper exchange of information. The private sector can also play a role in fighting money laundering and terrorist financing. The Commission will issue guidance on the role of public-private partnerships to clarify and enhance data sharing.
      6. EU's global role: The EU is actively involved within the FATF and other multinational fora in shaping international standards. It is determined to step up these efforts and become a single global actor in this area. In particular, it proposes to adjust its approach to third countries with deficiencies in their regime that might put the Single Market at risk via a new methodology issued alongside the Action Plan.

      Alongside the Action Plan, the Commission published a new methodology to identify high-risk third countries that have strategic deficiencies in their national anti-money laundering and countering terrorist financing regimes, which pose significant threats to the EU's financial system. The aim of this new methodology is to provide more clarity and transparency in the process of identifying these third countries.

      The key new elements concern: (i) the interaction between the EU and FATF listing process; (ii) an enhanced engagement with third countries; and (iii) reinforced consultation of member states experts. The European Parliament and the Council will have access to all relevant information at the different stages of the procedures, subject to appropriate handling requirements.

      The Commission's Anti-Money Laundering Package of July 2019 had highlighted a number of weaknesses in the EU's anti-money laundering and countering the financing of terrorism framework. In response, the European Parliament and the Council invited the Commission to investigate what steps could be taken to achieve a more harmonised set of rules, better supervision, including at EU level, as well as improved coordination among FIUs.

      The Commission said the new Action Plan was its response to this call for action and the first step to achieve its priority of delivering a new, comprehensive framework to fight money laundering and terrorist financing. The new methodology would further equip the EU to deal with external risks. To ensure inclusive discussions on the development of these policies, the Commission has opened a public consultation on the Action Plan. Authorities, stakeholders and citizens will have until 29 July to provide comment.

  • European Commission notifies Estonia of failure to transpose AML4 correctly
    • 14 May 2020, the European Commission sent a letter of formal notice to Estonia on the grounds that it had incorrectly transposed the 4th Anti-Money Laundering Directive (AML4).

      Estonia had notified a complete transposition of the Directive into national law on 14 January 2019, but the Commission had concluded that Estonia had failed to correctly transpose the Directive in relation to some important issues, including the treatment of politically exposed persons (PEPs), beneficial owners, the performance of risk assessments and risk management systems, and access rights of the Financial Intelligence Units (FIUs) to information.

      The Commission said legislative gaps occurring in one member state could have an impact on the EU as a whole and, for that reason, EU rules had to be implemented and supervised efficiently

      This is the first time that an assessment on the transposition of AML4 have been communicated formally to a member state. Without a satisfactory response from Estonia within four months, the Commission may decide to address a reasoned opinion.

  • European Commission presses eight member states on AMLD compliance
    • 14 May 2020, the European Commission sent letters of formal notice to Belgium, Czechia, Estonia, Ireland, Greece, Luxembourg, Austria, Poland and the UK for failing to fully transpose the 5th Anti-Money Laundering Directive into their domestic legislation by the 10 January 2020 deadline.

      The Commission said it regretted that these member states had failed to transpose the Directive in a timely manner and encouraged them all to do so urgently for the EU's collective interest. Without a satisfactory response within four months, the Commission may decide to send reasoned opinions.

      The Commission has previously also addressed letters of formal notice to Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain because these member states had not communicated any transposition measures.

  • FATF issues Mutual Evaluation Report on the UAE
    • 30 April 2020, the Financial Action Task Force (FATF) published a Mutual Evaluation Report on the United Arab Emirates (UAE). While the UAE had recently strengthened its anti-money laundering and counter terrorist financing (AML/CFT) legal framework, as a major global financial centre and trading hub it needed to take urgent action to stop criminal financial flows.

      The UAE’s understanding of the risks it faces from money laundering, terrorist financing and funding of weapons of mass destruction was still emerging. The risks, said the FATF, were significant due to the UAE’s extensive financial, economic, corporate and trade activities, including as a global leader in oil, diamond and gold exports.

      The UAE's strategic geographical location between continents, in proximity to conflict zones and its own jurisdictional complexity of seven Emirates, two financial free zones and 29 commercial free zones further increased the UAE's risk of attracting funds with links to crime and terror

      With 39 separate company registries, the misuse of legal persons was a real risk. The UAE also faced a significant risk of exposure to proceeds of crimes conducted abroad, but the authorities had not made sufficient use of formal international legal assistance processes to pursue money laundering or the financing of terrorism and proliferation, although they had demonstrated better capacity in using informal processes.

      The UAE had achieved positive results in investigating and prosecuting the financing of terrorism, but its limited number of money laundering prosecutions and convictions, particularly in Dubai, were a concern given the country’s risk profile. The UAE authorities did not fully exploit financial intelligence to go after money laundering or trace the proceeds of crime. Improvements to the Financial Intelligence Unit’s role and capacity were positive, but too recent to demonstrate better operational outcomes.

      The UAE has extremely large and diverse financial and non-financial sectors and the report identified issues in the supervision of some of the higher risk sectors, such as banks, the Dubai property market, dealers in gold and other precious metals and stones and hawaladars.

      The FATF said the UAE must urgently deepen its understanding of the risks it faces at national and individual Emirate-level and take action to strengthen the effectiveness of its measures to stop money laundering, terrorist financing and proliferation financing.

      In view of the COVID-19 pandemic and related lockdown measures that countries have adopted, the FATF has agreed to temporarily postpone all remaining FATF mutual evaluations and follow-up deadlines because the situation made it impossible for assessed jurisdictions and assessors to conduct on-site visits and in-person meetings.

      The FATF has also decided on a general pause in the review process for the list of high-risk jurisdictions subject to a call for action and jurisdictions subject to increased monitoring, by granting jurisdictions an additional four months for deadlines. Mongolia and Iceland however requested not to extend their deadlines, and continue on their current schedule. The FATF is closely monitoring the situation as it evolves and will review the deadlines where necessary.

  • High Court declines to rescind appointment of trustee with CGT charge
    • 18 May 2020, the High Court ruled that a trustee remained liable for a £1.6 million capital gains bill that arose as a result of her predecessor’s actions. Although acknowledging the apparent unfair consequences of the decision, it was unable to rescind the trustee’s appointment.

      In Mackay v Wesley [2020] EWHC 1215 (Ch), Nicola Mackay became a trustee of the Ellen Morris 1990 Settlement in 2003, at the instigation of her father David Wesley. The gross value of the trust fund was then £3.6 million but it held considerable retained gains or potential gains for UK CGT purposes, amounting to a potential CGT liability of £1 million.

      The trust's sole trustee had taken specialist advice suggesting that these liabilities could be mitigated by embarking on a 'round the world' tax avoidance scheme. This required the trust to become Mauritian-resident for tax purposes, with newly appointed Mauritian trustees who would dispose of the assets and realise the gains free of tax, distributing the proceeds to the UK-resident beneficiaries via an Isle of Man trust. UK-resident trustees would then be appointed in place of the Mauritian trustees in the same UK tax year of assessment to avoid being caught by s.86 Taxation of Chargeable Gains Tax Act 1992.

      HMRC later decided that the arrangements were substantially similar to those in R & C Commissioners v Smallwood & Anor. [2010] BTC 637, where the Court of Appeal confirmed that a Mauritian trust that has been arranged and orchestrated in the UK was ultimately controlled and managed in the UK. As a result Nicola Mackay, her father and their solicitors were found jointly and severally liable for a net CGT tax charge of £1.6 million.  The trust now had minimal assets and the liability became that of the trustee.

      This tax charge is currently subject to challenge at the First-tier Tax Tribunal (FTT), but in the meantime Mackay sought to have her appointment as trustee nullified on the grounds of her father's undue influence, even though she had signed four deeds indicating her acceptance of the appointment at the time. The FTT referred her claim to the EWHC.

      In an initial decision concerning Mackay's application for summary judgment, the EWHC expressed great sympathy for her predicament, but did not accept that she did not know what she was signing or had been misled or that she lacked capacity. Nor was the doctrine of trustee mistake applicable.

      Although it accepted that Mackay had placed trust and confidence in her father in relation to the management of her financial affairs, the Court decided that her claim was undermined by her failure to disclaim the appointment when she signed the deeds. It therefore refused to rescind her appointment as trustee.

      Whilst the High Court noted the unfortunate result of the decision, it was bound by previous case law and unable to come to any other decision. The claimant is to appeal.

  • Hong Kong gazettes tax treaty with Macao
    • 20 May 2020, Hong Kong’s Chief Executive in Council made an order under the Inland Revenue Ordinance (Cap. 112) to implement the Comprehensive Avoidance of Double Taxation Arrangement (CDTA) with Macao. The order was gazetted on 22 May and tabled at the Legislative Council on 27 May for negative vetting.

      "Under the Macao CDTA, investors will not have to pay tax twice on a single source of income. It will bring tax savings and greater certainty on taxation liabilities for the residents of both sides when they engage in cross-boundary trade and investment activities," a Hong Kong government spokesman said.

      The Macao CDTA was signed in November 2019 and is the 43rd comprehensive avoidance of double taxation agreement/arrangement signed by Hong Kong. It will enter into force after both sides have completed the ratification procedures.


  • Italy halves minimum corporate investment for residency by investment
    • 13 May 2020 the Italian government approved a new Law Decree, informally named ‘Decreto Rilancio’, containing a number of measures aimed at relaunching the Italian economy following the first phase of the Covid-19 lockdown. These included a 50% reduction in the minimum investment requirements for two of the investment options under the Italian residency by investment scheme.

      The ‘visa for investors’ regime, which aims to attract foreign investors and high-net-worth individuals to Italy, was part of the 2017 Budget Law, which entered into force on 1 January 2017. It grants the right to a two-year residence permit, which can be extended for an additional three-year period. A foreign national can apply for permanent residency after legally staying in Italy for five years.

      The investment options were:

      -Invest at least €2 million in bonds issued by the Italian government, and maintain that investment for at least two years;

      -Invest at least €1 million in an Italian company, or €500,000 in an ‘innovative start-up’ Italian company, registered in the special section of the Italian Chamber of Commerce, and to maintain that investment for at least two years;

      -Make a philanthropic donation of at least €1 million in support of an Italian project of public interest in the field of culture, education, immigration or scientific research.

      The amendments introduced under the ‘Decreto Rilancio’ mean that applicants may in future qualify by investing only €500,000 in an Italian limited company (previously €1 million) or €250,000 in an Italian ‘innovative start-up’ (previously €500,000). The remaining two routes – €2 million investment in government bonds or a €1 million philanthropic donation are unchanged.

      The Decree was gazetted on 19 May and will need to be converted into law within 60 days of publication, potentially with amendments to be approved by the Italian parliament.

  • Netherlands announces new dividend withholding tax proposal
    • 29 May 2020, the Dutch government announced plans to introduce a new withholding tax on dividends paid to low-tax jurisdictions starting in 2024. The tax would be applied on payments to countries with a corporate tax rate of less than 9% – even if they have a tax treaty with the Netherlands – or those on the European Union list of non-cooperative jurisdictions for tax purposes.

      In 2018, €37 billion euros in interest, royalty, or dividend payments flowed through the Netherlands to low-tax jurisdictions, said State Secretary for Finance Hans Vijlbrief in the statement. “This additional withholding tax represents another major step in our fight against tax avoidance. Financial flows channelled from or through the Netherlands to another country where they are not or not sufficiently taxed, will soon no longer go untaxed.”

      The Netherlands is to start applying a conditional withholding tax on interest and royalties to low-tax countries in 2021. It currently imposes a 15% withholding tax on dividends, which the government tried to replace in 2018 with a “conditional withholding tax” on dividends distributed to low tax jurisdictions and in certain abusive situations. The proposal faced strong opposition.

      The government is also considering a “source state tax” to ensure developing countries receive more tax revenue, the statement said. Under an agreement, a developing country rather than the Netherlands would be able to levy the tax when a Dutch person performs technical services. Under current tax treaties, such services would be taxed by the Netherlands.

  • Supreme Court disapplies deeming provision in UK tax act from tax treaty
    • 20 May 2020, the UK Supreme Court unanimously overturned a majority decision of the Court of Appeal and found in favour of HMRC by concluding that a provision in a UK Income Tax Act treating an employed diver as self-employed did not affect the interpretation of the UK/South Africa double tax treaty.

      In Fowler (Respondent) v Commissioners for HMRC (Appellant) [2020] UKSC 22, Martin Fowler was a qualified diver who was resident in the Republic of South Africa. During the 2011/12 and 2012/13 tax years he undertook diving engagements in the waters of the UK’s continental shelf. HMRC said Fowler was liable to pay UK income tax for this period.

      Whether he was liable depended on the application of the double tax treaty between the UK and South Africa. Article 7 of the Treaty provided that self-employed persons should be taxed only where they were resident (i.e. South Africa), whereas article 14 provided that employees could be taxed where they worked (i.e. the UK).

      For the purposes of the appeal, the parties had assumed that Fowler was an employee. Fowler claimed he was nevertheless not liable to pay tax in the UK. His case centred on a ‘deeming provision’ in section 15 of the UK’s Income Tax (Trading and Other Income) Act 2005 (ITTOIA), which provides that an employed seabed diver is ‘treated’ as self-employed for the purposes of UK income tax.

      A previous provision of this kind was originally enacted in the 1970s in order to allow employed seabed divers, who commonly paid for their own expenses, to access the more generous regime tax-deductible expenses which was available to the self-employed.

      Fowler argued that, since he was treated as self-employed for income tax purposes, he must be treated as self-employed under the Treaty and was therefore only taxable in South Africa. HMRC, on the other hand, said ITTOIA did not affect whether someone was an employee, but only regulated the manner in which an employee was taxed.

      The issue has divided the courts below. The First-tier Tribunal (FTT) was persuaded by Fowler’s arguments but the Upper Tribunal had allowed HMRC’s appeal. The Court of Appeal had been divided on the question, but the majority had agreed with Fowler in [2018] EWCA Civ 2544. HMRC then appealed to the Supreme Court.

      The Supreme Court held that expressions in the Treaty such as “salaries, wages and other remuneration”, “employment” and “enterprise” should be given their ordinary meaning unless domestic legislation alters the meaning which they would otherwise have. Section 15 of ITTOIA provided that a person who would otherwise be taxed as an employee was “instead treated” as self-employed for the purposes of domestic income tax.

      Deeming provisions of this kind created a “statutory fiction” that should be followed as far as required for the purposes for which the fiction was created. The courts would recognise the consequences of that fiction being real, but not where this would produce unjust, absurd or anomalous results. Although section 15 used the expressions “income”, “employment” and “trade”, it did not alter the meaning of those terms but took their ordinary meaning as the starting point for a statutory fiction.

      Properly understood, it taxed the income of an employed diver in a particular manner that included the fiction that the diver was carrying on a trade. That fiction was not created for the purpose of rendering a qualifying diver immune from tax in the UK, or for adjudicating between the UK and South Africa as potential recipients of tax, but to adjust the basis of a continuing UK income tax liability.

      Since the Treaty was not concerned with the manner in which taxes were levied, it would be contrary to the purposes of the Treaty to redefine its scope by reference to ITTOIA. It would also be contrary to the purpose of ITTOIA and would produce an anomalous result. The Supreme Court unanimously allowed HMRC’s appeal, holding that – if the parties’ factual assumptions were correct – Fowler should be treated as an employee and subject to UK income tax.

      The full judgment of the Supreme Court can be accessed at: https://www.bailii.org/uk/cases/UKSC/2020/22.html 

  • UK and US open talks for comprehensive trade agreement
    • 5 May 2020, US Trade Representative Robert Lighthizer and UK Secretary of State for International Trade Elizabeth Truss announced the formal launch of trade agreement negotiations between the US and the UK. Both parties said they shared a commitment to secure an ambitious agreement to boost trade and investment, and had committed the resources necessary to progress at a fast pace.

      In view of the ongoing Covid-19 pandemic, the first round of negotiations were to be conducted virtually over a two-week period to 15 May, with nearly 30 different negotiating groups covering all aspects of a comprehensive trade agreement. Over 200 staff from US and UK government agencies and departments are expected to take part in the negotiations.

      Truss said: “The US is our largest trading partner and increasing transatlantic trade can help our economies bounce back from the economic challenge posed by Coronavirus. We want to strike an ambitious deal that opens up new opportunities for our businesses, brings in more investment and creates better jobs for people across the whole of the country. As the Prime Minister has said, the UK is a champion of free trade and this deal will make it even easier to do business with our friends across the pond.”

      The US and UK are the first and fifth largest economies in the world, respectively.  Total two-way trade between the two countries is currently worth about $269 billion a year.  Each country is the other’s largest source of foreign direct investment, with about $1 trillion invested in each other’s economies.

      The negotiations build on the work conducted through the US-UK Trade and Investment Working Group, which was established in July 2017, partly to lay the ground work for these negotiations.

  • US Court of Appeals affirms client identity not privileged in IRS probe
    • 24 April 2020, the US Court of Appeals for the Fifth Circuit upheld a District Court order enforcing an Internal Revenue Service (IRS) summons directed to law firm Taylor Lohmeyer to provide information about clients who used its services to create and maintain foreign bank accounts and entities. It rejected the law firm’s ‘blanket’ claim that all responsive materials were protected by attorney-client privilege.

      In Taylor Lohmeyer Law Firm PLLC v. United States, No. 19-50506 (5th Cir. 2020), the Internal Revenue Service (IRS) had sought records, including client lists, “that may reveal the identity and international activities” of individuals who used the firm’s services to “create and maintain foreign bank accounts and foreign entities that may not be properly disclosed on tax returns” between 1995 and 2017.

      The IRS said the information could be relevant to an underlying investigation to identify those who used Taylor Lohmeyer for offshore tax evasion, in light of the fact that the firm was known to structure offshore entities for tax purposes,. The IRS had already prosecuted one client who had earned unreported income of over $5 million through eight offshore entities and five offshore accounts set up by the firm in the British Virgin Islands and the Isle of Man.

      Taylor Lohmeyer moved to quash the summons in the Western District of Texas, arguing compliance with the summons would violate the attorney-client privilege. Although a client’s identity generally is not privileged, the firm argued that an exception should apply because such information was protected where “revelation of a client’s identity would also reveal a privileged communication”.

      The District Court rejected this argument, holding that the attorney-client privilege could not be used to excuse disclosure of an entire category of documents, but rather, must be evaluated on a document-by-document basis. However the law firm was free to object to the production of specific documents via a privilege log.

      In affirming, the Court of Appeals also found Taylor Lohmeyer’s proposed exception inapplicable because the IRS summons and supporting affidavit made no reference to particular legal advice that would automatically be revealed by identifying the clients who engaged in the types of transactions the summons described.   The privilege only protected confidential communications – not the fact that such transactions had occurred.

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