15 July 2020, the General Court of the European Union annulled the contested decision taken by the Commission regarding the Irish tax rulings in favour of Apple because it held that the Commission had failed to show to the requisite legal standard that there was an advantage for the purposes of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).
In Ireland v Commission (Case T-778/16) and Apple Sales International and Apple Operations Europe v Commission (Case T-892/16), the Commission had adopted a decision in 2016 concerning two tax rulings issued by the Irish Revenue, on 29 January 1991 and 23 May 2007, in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE), which were companies incorporated in Ireland but not tax resident in Ireland.
The contested tax rulings endorsed the methods used by ASI and AOE to determine their chargeable profit in Ireland, relating to the trading activity of their respective Irish branches. The 1991 tax ruling remained in force until 2007, when it was replaced by the 2007 tax ruling. The 2007 tax ruling then remained in force until Apple implemented a new business structure in Ireland in 2014.
The Commission decided that the tax rulings in question constituted State aid unlawfully put into effect by Ireland that was incompatible with the internal market. According to its calculations, Ireland had granted Apple €13 billion in unlawful tax advantages, which it demanded as recovery of the aid in question.
The General Court endorsed the Commission’s assessments relating to normal taxation under the applicable Irish tax law, in particular having regard to the tools developed within the OECD, such as the arm’s length principle, in order to check whether the level of chargeable profits endorsed by the Irish tax authorities corresponded to that which would have been obtained under market conditions.
However, it considered that the Commission had incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted ASI and AOE an advantage as a result of not having allocated the Apple Group intellectual property licences
held by ASI and AOE, and, consequently, all of ASI and AOE’s trading income, obtained from the Apple Group’s sales outside North and South America, to their Irish branches.
According to the General Court, the Commission should have shown that this income represented the value of the activities actually carried out by the Irish branches themselves, in respect of the activities and functions actually performed by the Irish branches of ASI and AOE on the one hand, and the strategic decisions taken and implemented outside those branches on the other.
In addition, the General Court considered that the Commission had not succeeded in demonstrating, in its subsidiary line of reasoning, the methodological errors in the contested tax rulings that would have led to a reduction in ASI and AOE’s chargeable profits in Ireland. The Court said it regretted the incomplete and occasionally inconsistent nature of the contested tax rulings, but the defects identified by the Commission were not, in themselves, sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU.
Furthermore, the General Court considered that the Commission had not proved, in its alternative line of reasoning, that the contested tax rulings were the result of discretion exercised by the Irish tax authorities and that, accordingly, ASI and AOE had been granted a selective advantage.
While the court expressed sympathy with the Commission that the Irish Revenue agreements with Apple lacked detail and rigour, because the Commission did not produce evidence of the appropriate counterfactual, the procedural failings on the part of Irish Revenue were insufficient in and of themselves to evidence an aid.
The magnitude of the procedural failings by Irish Revenue may have been highly indicative of aid; however, the burden of proof rested with the Commission, and it failed to satisfy it.
Commission Executive Vice-President Margrethe Vestager said in a statement: “We will carefully study the judgment and reflect on possible next steps. The Commission’s decision concerned two tax rulings issued by Ireland to Apple, which determined the taxable profit of two Irish Apple subsidiaries in Ireland between 1991 and 2015. As a result of the rulings, in 2011, for example, Apple’s Irish subsidiary recorded European profits of US$ 22 billion (c.a. €16 billion) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland.
“The Commission stands fully behind the objective that all companies should pay their fair share of tax. If Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU … The Commission will continue to look at aggressive tax planning measures under EU State aid rules to assess whether they result in illegal State aid.”
The Irish Department of Finance said in a statement: “Ireland has always been clear that there was no special treatment provided to the two Apple companies – ASI and AOE. The correct amount of Irish tax was charged taxation in line with normal Irish taxation rules. Ireland granted no state aid and the decision today from the Court supports that view.”
The full judgment of the Court can be accessed at http://curia.europa.eu/juris/document/document.jsf;jsessionid=D424E97FF04D6F63F422F4DB2A60C5C2?text=&docid=228621&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=13449655
24 July 2020, the Bermuda House of Assembly passed the Trusts (Special Provisions) Amendment Act 2020 and the Trusts (Special Provisions) Amendment No. 2 Act 2020, which amend the Trusts (Special Provisions) Act 1989 to strengthen its ‘firewall’ provisions to ensure that Bermudian law is used for Bermudian trusts and to restore settlors’ freedom of disposition in respect of illegitimate children.
The amendments under the Trusts (Special Provisions) Amendment Act 2020 are designed to:
-Clarify the jurisdiction of the Supreme Court in respect of Bermuda trusts and foreign trusts with a connection to Bermuda;
-Enhance and modernise the provisions of the Trusts (Special Provisions) Act 1989 concerning the application of foreign laws and foreign orders to Bermuda trusts;
-Make consequential amendments to the Conveyancing Act 1983 to provide consistency.
The amendment under the Trusts (Special Provisions) Amendment No. 2 Act 2020 is intended to provide freedom of disposition to a settlor of a trust in circumstances where an express intention appears in the trust instrument with respect to beneficiaries who are children of the settlor contrary to the provisions of the Children Act 1998. Specifically, the amendments allow for the terms of a trust to expressly exclude illegitimate children from benefitting from a trust. In the absence of an express exclusion of illegitimate children in a trust deed, Section 18A will continue to apply and the references to children in the trust will be deemed to include illegitimate children.
16 July 2020, the Court of Justice of the European Union invalidated Decision 2016/1250 on the adequacy of the protection provided by the EU-US Data Protection Shield although it also found that Commission Decision 2010/87 on standard contractual clauses (SCCs) for the transfer of personal data to processors established in third countries was valid.
The EU General Data Protection Regulation (GDPR) provides that the transfer of personal data to a third country may, in principle, take place only if the third country in question ensures an adequate level of data protection. In the absence of an adequacy decision, such a transfer can take place only if the personal data exporter established in the EU has provided appropriate safeguards – in particular, from standard data protection clauses adopted by the Commission – and if data subjects have enforceable rights and effective legal remedies.
Maximillian Schrems, an Austrian national residing in Austria, had been a Facebook user since 2008. As in the case of other users residing in the EEU, some or all of his personal data had been transferred by Facebook Ireland to servers belonging to Facebook in the US for processing. Schrems lodged a complaint with the Irish supervisory authority seeking to block such transfers on grounds that US law and practices did not offer sufficient protection against access by the public authorities to the data transferred.
This complaint was rejected on the ground, inter alia, that in Decision 2000/5205 – the ‘Safe Harbour Decision’ – the Commission had found that the US did ensure an adequate level of protection. In a judgment delivered on 6 October 2015, the Court of Justice, to which the Irish High Court had referred questions for a preliminary ruling, declared that decision invalid in the Schrems I judgment (Case: C-362/14).
Following the subsequent annulment by the referring court of the decision rejecting Schrems’s complaint, the Irish supervisory authority asked him to reformulate his complaint in the light of the declaration by the Court that Decision 2000/520 was invalid. In his reformulated complaint, Schrems claimed that the US did not offer sufficient protection of data transferred to that country. He sought the suspension or prohibition of future transfers of his personal data from the EU to the US, which Facebook Ireland now carried out under to the SCCs set out in the Annex to Decision 2010/87. After the initiation of those proceedings, the Commission adopted Decision 2016/1250 on the adequacy of the protection provided by the EU-US Privacy Shield.
In its request for a preliminary ruling, the referring court asked the CJEU whether the GDPR applied to transfers of personal data under the SCCs, what level of protection was required by the GDPR in connection with such a transfer, and what obligations were incumbent on supervisory authorities in those circumstances. The High Court of Ireland also raised the question of the validity of both Decision 2010/87 and Decision 2016/1250.
The CJEU stated that it had, after examination of the SCCs in light of the Charter of Fundamental Rights, found nothing that affected the validity of the SCCs and Decision 2010/87. The requirements for the transfer of personal data to third countries set out by the GDPR in respect of appropriate safeguards, enforceable rights and effective legal measures must be interpreted in such a way that data subjects whose personal data is transferred into a third country must be afforded a level of protection essentially similar to the level of protection granted within the European Union by the GDPR. Data Protection Authorities must, unless an adequacy decision has been ruled by the Commission, be required to suspend or prohibit a transfer of personal data to a third country that does not meet these requirements.
The CJEU held that SCCs were still effective mechanisms that made it possible to ensure compliance with a level of protection required by the EU. They imposed an obligation on the data exporter and the recipient of the data to verify, prior to any transfer, whether that level of protection was respected in the third country concerned, and to suspend the transfer of the personal data if it was not.
The CJEU also concluded that the EU-US Privacy Shield was not adequate protection for transfers to the US because far-reaching US surveillance laws were in conflict with EU fundamental rights and the US limited most of its protections of personal data from governmental surveillance to US citizens but not to the personal data of citizens of other countries. By the principle of proportionality, the surveillance programmes based on those provisions were not limited to what was strictly necessary.
As regards the requirement of judicial protection, the Court held that, contrary to the view taken by the Commission in Decision 2016/1250, the Ombudsperson mechanism referred to in that decision did not provide data subjects with any cause of action before a body which offers guarantees substantially equivalent to those required by EU law, such as to ensure both the independence of the Ombudsperson and the existence of rules empowering the Ombudsperson to adopt decisions that are binding on the US intelligence services. On all these grounds, the Court declared Decision 2016/1250 to be invalid.
Unless an empowerment and independence of the Ombudsperson takes place, which would give the competence to adopt decisions which are binding on US intelligence services, there are no substantial cause of actions for data subjects before a body which gives legal guarantees in the way that is required by European law for transfers to be equivalent in protection.
The full judgment of the CJEU can be accessed at http://curia.europa.eu/juris/document/document.jsf?text=&docid=228677&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=13635385
20 July 2020, the Singapore Ministry of Finance published the draft Income Tax (Amendment) Bill 2020 for public consultation. The Bill proposes legislative amendments to effect tax measures previously announced in the Unity Budget on 18 February 2020, as well as amendments arising from the COVID-19 crisis measures in the three later Budgets.
In addition, the draft Bill contains measures to enhance the Comptroller of Income Tax’s powers to safeguard public monies and to improve tax administration and the clarity of existing legislation. These measures include a proposal to implement a new surcharge for tax avoidance. This would introduce a 50% fine for those who avoid paying tax, which would take effect when the Comptroller of Income Tax (CIT) imposes a tax liability on a person under the section 33 of the Income Tax Act, or when it recalculates any gains, profit, loss, capital allowance or deductions for donations made by an individual.
The penalty will be equal to half the tax sum imposed on the avoider, which will then be recovered by the CIT as a debt to the Singaporean government. The draft legislation provides that the fine must be paid within a month of a notice being issued to the taxpayer, regardless of whether the individual wishes to object or appeal.
This measure is scheduled to come into force from the 2023 tax year. A similar measure has been proposed for the stamp duty anti-avoidance provisions.
Public consultation on the draft Bill closed on 7 August and the Ministry of Finance stated that a summary of the main comments and responses is to be published by the end of September 2020.
14 July 2020, the EU Commission recommended that Member States do not grant COVID-19 financial support to companies with links to countries that are on the EU's list of non-cooperative tax jurisdictions. Restrictions should also apply to companies that have been convicted of serious financial crimes, including financial fraud, corruption or non-payment of tax and social security obligations.
The recommendation is designed to provide guidance to Member States on how to set conditions to financial support that prevent the misuse of public funds and to strengthen safeguards against tax abuse throughout the EU, in line with EU laws. By coordinating restrictions on financial support, Member States would also prevent mismatches and distortions within the Single Market.
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: "We are in an unprecedented situation where exceptional volumes of State aid are granted to undertakings in the context of the coronavirus outbreak. Especially in this context, it is not acceptable that companies benefitting from public support engage in tax avoidance practices involving tax havens. This would be an abuse of national and EU budgets, at the expense of taxpayers and social security systems. Together with Member States, we want to make sure that this does not happen.”
The recommendation aims at providing a template to Member States, in line with EU laws, on how to prevent public support from being used in tax fraud, evasion, avoidance or money-laundering schemes, or terrorist financing. In particular, companies with links to jurisdictions on the EU's list of non-cooperative tax jurisdictions should not be granted public support.
Should Member States decide to introduce such provisions into their national legislation, the Commission suggests a number of conditions on which they should make the financial support contingent. The EU list of non-cooperative tax jurisdictions, it said, was the best basis to apply such restrictions because it will enable all Member States to act consistently and will avoid individual measures that may violate EU law. The use of this list to implement the restrictions will also create more clarity and certainty for businesses.
Where Member States adopt measures that provide financial support to eligible undertakings in their jurisdiction, they should make the entitlement to such financial support contingent upon a number of conditions. The undertakings that receive the financial support should not:
In order to verify compliance with the rule prescribing the absence of links to jurisdictions that feature on the EU list of non-cooperative jurisdictions, Member States should ensure that not only the immediate shareholders but also the ultimate owner and all other undertakings under the same ownership are not tax resident in, or incorporated under the laws of, such a jurisdiction. The owners of the undertaking that receives financial support may be legal entities (e.g. corporations, partnerships, etc.), legal arrangements (e.g. trusts) or natural persons.
For the purpose of determining whether an undertaking may be granted financial support, it should be irrelevant how many tiers of legal entities or legal arrangements may sit between the undertaking established in the Member State that grants the financial support and the entity in a jurisdiction that features on the EU list.
At the same time, the Commission said it stood ready to discuss with Member States their specific plans for ensuring that the granting of State aid, in particular in the form of recapitalisations, should be limited to undertakings paying their fair share of tax. It also recommended ‘carve outs’ to these restrictions – to be applied under strict conditions – in order to protect honest taxpayers.
Member States may disregard the existence of links to the listed non-cooperative jurisdictions, when the undertaking provides evidence that one of the following circumstances is met:
Member States should disregard the existence of links to the listed non-cooperative jurisdictions where the undertaking has substantial economic presence (supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances) and performs a substantive economic activity in listed non-cooperative jurisdictions.
Member States should not apply those exceptions if they are not in a position to verify the accuracy of the information. This could be due to the insufficient exchange of information on request with the third country concerned, in particular the absence of a tax treaty allowing exchange of information or the lack of cooperation from the third country jurisdiction concerned.
Finally, Member States should inform the Commission of the measures that they will implement to comply with the recommendation, in line with the EU's good governance principles. The Commission will publish a report on the impact of this recommendation within three years.
The Commission’s recommendation can be accessed at https://ec.europa.eu/taxation_customs/sites/taxation/files/recommendation_state_aid_tax_havens.pdf
15 July 2020, the UK Foreign & Commonwealth Office told parliament it had received commitments from eight Overseas Territories (OTs) to introduce publicly accessible registers detailing who owns the companies in their territory.
The eight UK OTs that have now committed to implement this measure are: Anguilla, Bermuda, the Cayman Islands, the Falkland Islands, Montserrat, the Pitcairn Islands & St Helena, Ascension Island & Tristan da Cunha, and the Turks & Caicos Islands.
The UK Government has led an international campaign to make such registers a global norm by 2023 and is hopeful the only remaining permanently inhabited territory not to make an announcement, the British Virgin Islands, will make a similar commitment soon. The FCO said it was continuing to work with the BVI government to encourage it to take this action.
The UK government already has arrangements with the Overseas Territories under which they provide UK law enforcement authorities access to information on the ownership of companies in their jurisdictions to enable them to detect money laundering and financial crime.
The Sanctions & Money Laundering Act 2018 required the UK government to prepare a draft Order in Council before the end of 2020 to enforce the setting up of publicly available beneficial ownership registers in all OTs. This provision was forced through by MPs against the wishes of the UK government at the time, which did however manage to delay the implementation deadline until 2023.
UK Overseas Territories’ minister Baroness Sugg told parliament: “The 2023 deadline aligns with the [UK] government's international campaign to advance publicly accessible company beneficial ownership registers as a global norm. Meeting this date will be a considerable ask for many [British] OTs, given their limited resources; especially those OTs that do not currently have a company beneficial ownership register … It will involve significant legislative and operational changes.”
The announcements demonstrate the positive action the UK’s Overseas Territories are taking to help tackle illicit finance and follows work by Gibraltar, earlier this year in March, to make its company register publicly accessible. The government expects that beneficial ownership information on businesses registered in the Overseas Territories will be accessible to the public by 2023.
6 July 2020, the European Commission called for proposals for the creation of a new independent and specialised ‘EU Tax Observatory’ to “enhance the involvement of civil society in the advocacy, design and implementation of EU actions to combat tax evasion, tax avoidance and aggressive tax planning and to promote fair taxation”.
The call for proposals represents the first phase for the implementation of a preparatory action initiated by the European Parliament and follows the adoption of the Commission decision on the financing of the preparatory action EU Tax Observatory – Capacity building to support Union policy making in the area of taxation and the adoption of the annual work programme for 2020 on 16 June.
The available budget is €1.2 million. Under this call for proposals, the EU grant may not exceed 95% of the total eligible costs of the action. The winner of the grant is expected to:
-Set up the EU Tax Observatory;
-Perform and promote original, high-quality research in the area of tax evasion, tax avoidance and aggressive tax planning, with a focus on corporate income taxation;
-Create and disseminate a public repository of data and analysis on tax evasion, tax avoidance and aggressive tax planning, with a focus on corporate income taxation;
-Become an active voice in the EU and international debate on tax evasion, tax avoidance and aggressive tax planning.
The Commission’s action follows the creation of a permanent subcommittee on tax matters in the European Parliament. The deadline to apply is the 2 October 2020
15 July 2020, the EU Commission adopted a new ‘Tax Package’ designed to ensure that EU tax policy supports Europe's economic recovery and long-term growth. It seeks to boost tax fairness, by intensifying the fight against tax abuse, curbing unfair tax competition and increasing tax transparency. In parallel, it focuses on simplifying tax rules and procedures, to improve the environment for businesses across the EU.
The package comprises three separate but related initiatives:
-A Tax Action Plan presents 25 distinct actions to make taxation simpler, fairer and better attuned to the modern economy over the coming years. These actions are to make life easier for taxpayers, by removing obstacles at every step, from registration to reporting, payment, verification and dispute resolution. It is intended to help member states to harness the potential of data and new technologies, to better fight tax fraud, improve compliance and reduce administrative burdens.
-A proposal on administrative cooperation (DAC 7) extends EU tax transparency rules to digital platforms, so that those who make money through the sale of goods or services on platforms will also pay their fair share of tax. This new proposal is to ensure that member states automatically exchange information on the revenues generated by sellers on online platforms. The proposal also strengthens and clarifies the rules in other areas in which member states work together to fight tax abuse, for example through joint tax audits.
-A Communication on tax good governance focuses on promoting fair taxation and clamping down on unfair tax competition, in the EU and internationally. To this end, the Commission suggests a reform of the Code of Conduct, which addresses tax competition and tackles harmful tax practices within the EU. It also proposes improvements to the EU list of non-cooperative jurisdictions, which deals with non-EU countries that refuse to follow internationally agreed standards. The Communication further outlines the EU's approach to work together with developing countries in the area of taxation, in line with the 2030 Sustainable Development agenda.
The Commission said it will also work on a new approach to business taxation to address the challenges of the digital economy and ensure all multinationals pay their fair share, and to ensure that taxation supports the EU's objective of reaching climate neutrality by 2050.
Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: “Now more than ever, member states need secure tax revenues to invest in the people and businesses who need it most. At the same time, we need to break down tax obstacles and make it easier for EU companies to innovate, invest and grow. Today's Tax Package takes us in the right direction, helping to make taxation fairer, more user-friendly and more adapted to our digital world.”
The Commission is again looking at the idea of establishing a Digital Services Tax, which it believes could generate up to €1.3 billion per year for the EU budget. It will put forward proposals on a digital levy in the first semester of 2021, with a view to introduction by January 2023 “at the latest”.
However, despite the Commission’s intentions in this regard, the executive is well aware of the challenging road ahead for the EU to establish its own digital services tax, not least because tax legislation requires unanimous agreement in the Council.
Benjamin Angel, the Commission’s director general for tax, told the European Parliament’s Economics Committee that there was “no doubt” that a global agreement on a digital services tax was preferable to “a situation where the EU would move on its own.”
Attempts to introduce a bloc-wide 3% digital services tax on companies earning €750 million in revenue, of which €50 million would need to be EU taxable revenue, collapsed last year after opposition from Ireland, Finland and Sweden.
19 July 2020, the European Commission released its decision to widen the scope of its in-depth investigation into the Netherlands’ tax treatment of the IKEA subsidiary, Inter IKEA Systems. The decision was announced on April 30 but the formal letter was withheld pending resolution of confidentiality issues.
The Commission launched an investigation in December 2017 into whether tax rulings issued by the Netherlands to Dutch subsidiary Inter IKEA Systems in 2006 and 2011 had allowed the firm to reduce its taxable profits in the Netherlands, giving it an unfair competitive advantage in breach of EU State aid rules.
In July 2006, the Commission had concluded that a Luxembourg special tax scheme was illegal under EU State aid rules, and required the scheme to be fully repealed by 31 December 2010. As a result of this decision I.I. Holding, a Luxembourg-based company that was part of the Inter IKEA group, would have had to start paying corporate taxes in Luxembourg from 2011.
In 2011, Inter IKEA changed the way it was structured with Inter IKEA Systems acquiring the intellectual property (IP) from I.I. Holding. The 2006 tax ruling no longer applied but a second Dutch tax ruling endorsed the price paid by Inter IKEA Systems and the interest to be paid under the intercompany loan to the parent company in Liechtenstein, and the deduction of these interest payments from Inter IKEA Systems' taxable profits in the Netherlands.
As a result of the interest payments, a significant part of Inter IKEA Systems' franchise profits after 2011 was shifted to its parent in Liechtenstein. The Commission was concerned that the transfer price of the IKEA IP rights sanctioned in this ruling may have been too high.
In its latest decision, the Commission said that since it had launched the 2017 investigation, Inter IKEA Systems had began to amortise the IKEA IP rights and the Dutch tax authorities had confirmed the deduction of the amortisation in their annual assessments of the firm’s tax returns.
The Commission said it has therefore extended the scope of its investigation to cover the Netherlands’ annual tax assessments of the amortisation deductions of the IKEA IP rights. The Commission says that it has provisionally determined that the Dutch tax administration’s income tax assessments created an advantage to IKEA in breach of the State aid.
18 July 2020, G20 finance ministers and central bank governors said they remained committed to achieving consensus on new rules for taxing multinational group income by year-end, despite the disruptions created by the Covid-19 pandemic.
In a communiqué released after a virtual meeting hosted by Saudi Arabia, ministers said the goal was to continue work on both ‘pillars’ of the reform. The ‘pillar one’ reform would allocate additional taxing rights over multinational group income to countries where the multinational group’s customers reside. The ‘pillar two’ reform would impose a new, internationally coordinated minimum tax on multinational group income.
However, agreement on the pillar one reform proposal was proving difficult because the US decided late into the negotiations to oppose the ‘unified approach’ proposed by the OECD.
“We stress the importance of the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to continue advancing the work on a global and consensus-based solution with a report on the blueprints for each pillar to be submitted to our next meeting in October 2020,” said the communiqué. “We remain committed to further progress on both pillars to overcome remaining differences and reaffirm our commitment to reach a global and consensus-based solution this year.
“We welcome the progress made on implementing the internationally agreed tax transparency standards and the progress made on the established automatic exchange of information, as well as its advancement, marked by the agreement on the model reporting rules for digital platforms for interested countries. We welcome the annual BEPS Progress Report of the G20/OECD Inclusive Framework on BEPS. We also welcome the Progress Report of the Platform for Collaboration on Tax and continue our support to developing countries in strengthening their tax capacity to build sustainable tax revenue bases.”
The OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors can be accessed at https://www.oecd.org/tax/oecd-secretary-general-tax-report-g20-finance-ministers-july-2020.pdf
9 July 2020, the Legislative Council passed the Limited Partnership Fund Bill to provide for the establishment of a limited partnership fund regime that enables funds to be registered in the form of limited partnerships in Hong Kong. The new Ordinance will come into operation on 31 August 2020.
Secretary for Financial Services and the Treasury Christopher Hui said the new Ordinance made impressive strides in attracting investment funds, including private equity and venture capital funds, to set up and operate in Hong Kong. This would further promote Hong Kong's private equity market and strengthen Hong Kong's position as an international financial centre.
The limited partnership fund regime is an opt-in registration scheme administered by the Companies Registry. In a limited partnership, the general partner with unlimited liability in respect of the debts and liabilities of the fund and the limited partner(s), who are essentially investors, with limited liability will have freedom of contract in respect of the operation of the partnership.
The LegCo also passed the Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-related Businesses) Bill 2019 on 15 July. The Ordinance seeks to amend the Inland Revenue Ordinance (Cap. 112) to reduce the profits tax rate by 50% (to 8.25%) for all general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected insurance brokerage business.
Hui said that the new Ordinance would promote the development of the marine and specialty risk insurance businesses of Hong Kong and enhance the development of high value-added maritime services. Going forward, the government and the Insurance Authority will proceed with the next stage of preparatory work, including formulation of implementation details and drafting of subsidiary legislation. The target is to give effect to the tax concessions by the end of 2020 or early 2021.
15 July 2020, Hong Kong’s Inland Revenue Department issued revised guidance setting out the Hong Kong government’s interpretation and practice relating to advance pricing arrangements (APAs) following the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018.
Departmental Interpretation and Practice Notes (DIPN) No. 48 replaces the previous guidance issued in 2012 and introduces an application for unilateral APAs. Taxpayers can now apply for unilateral, bilateral and multilateral APAs in Hong Kong.
An APA will generally cover a period of three to five years. The Hong Kong Inland Revenue Department may allow rollback of transfer pricing methodologies adopted in bilateral or multilateral advance pricing arrangements to previous tax years.
The revised DIPN No. 48 also specifies thresholds for APA applications. The threshold for an application on purchase and sale of goods is HK$80 million per year, for example, while an application on provisions of services is HK$40 million per year and on royalties of intangible assets is HK$20 million per year. For APA applications related to the attribution of profits to a permanent establishment in Hong Kong, the annual business profits threshold is HK$20 million.
The process of APAs has also been revised to reflect a principle-based approach and a more streamlined process that has been reduced from five stages to three stages – early engagement, APA application, and monitoring and compliance. The approximate timeframe is six months for the early engagement stage and 18 months for the application stage. More complex cases may require a longer timeframe.
14 July 2020, the Jersey States Assembly passed the Financial Services (Disclosure and Provision of Information) Law, which provides for the creation of a new central register of beneficial owners, controllers and significant persons. The law has been delayed by the coronavirus epidemic and is now not expected to come into force until 1 December 2020.
Jersey already has a central register of beneficial owners and controllers of entities, but the new legislation will centralise all of the mandatory disclosure of information in one place. The information contained on the fully digital central register will extend to all 'significant persons' and include company directors and nominee shareholders. It will capture information on companies, foundations, Limited Liability Companies, Limited Liability Partnerships, and incorporated and separated limited partnerships. Limited partnerships will remain exempt.
The central register will be divided into an open register and a closed register with information such as company directors' details being made publicly available, while beneficial ownership remains private until 2023.
Last year, in a joint statement, Jersey, Guernsey and the Isle of Man committed to align themselves with EU anti-money laundering standards introduced in the 4th and 5th Anti Money Laundering Directives. The three Crown Dependencies will interconnect corporate beneficial ownership registers with similar databases in the EU, enabling law enforcement officials and financial intelligence units to access the information in 2021. The following year they will open access to the registers for financial service businesses and other companies obligated to conduct corporate due diligence for compliance purposes. The registers will eventually be made public following the introduction of legislation permitting the disclosures by 2023.
Secondary legislation is required to specify what ownership information must be provided to the regulator, and what subset of this information will be publicly available when the register of significant persons is opened up in accordance with the recommendations of the Financial Action Task Force (FATF).
Not all of the information submitted by companies is intended to appear on the public part of the register and, in some cases, some of the items can be withheld from the open register by special request. The public register of significant persons will not contain details of minors, company secretaries or significant persons of share transfer companies.
The Jersey government is reviewing amendments to Article 27 of the law, which had to be withdrawn from the vote because it included a prohibition on entities acting as nominee directors. The government is continuing to liaise with the industry to adjust the precise requirements in relation to nominee directors, in order to mitigate any associated risks and still achieve compliance with the FATF recommendations.
The draft regulations now under consultation also contain consequential amendments that will re-introduce the other provisions of Article 27, including a prohibition on issuing bearer shares and an ability for the registrar to maintain a record of disqualified directors.
9 July 2020, the government of Mauritius passed the Anti-Money Laundering and Combatting the Financing of Terrorism (Miscellaneous Provisions) Act (AML-CFT Act), which amends 19 existing pieces of legislation to align Mauritius with the recommendations of the Financial Action Task Force and the European Commission.
The Financial Action Task Force placed Mauritius on its list of “jurisdictions under increased monitoring”, commonly referred to as the “grey list”, on 21 February. The government gave a high level political commitment to the FATF to implement an Action Plan within agreed timelines and has been taking all necessary measures to honour this commitment.
Under the FATF Action Plan, Mauritius does not have technical compliance issues. The AML/CFT legal framework has been extensively revamped and Mauritius was largely compliant or compliant with 35 out of the 40 FATF Recommendations, as compared to 14 largely compliant or compliant ratings at the time of the publication of its Mutual Evaluation Report in September 2018.
As a consequence of the FATF listing, however, the European Commission also included Mauritius on its list of ‘high-risk third countries’ on 7 May. These are countries that have been identified as having strategic deficiencies in their AML/CFT regimes which pose significant threats to the EU financial system. Subject to approval by the European Parliament and Council, the change will apply on 1 October 2020.
The Mauritian government indicated that it would seek to comply with FATF Recommendations and to exit both the FATF ‘grey list’ and EU ‘high risk’ list by August 2020. The new AML-CFT Act introduces the following amendments, among others:
-New companies, limited liability partnerships, limited partnerships and foundations must provide their beneficial ownership information to the Registrar of Companies upon incorporation and registration, and later when making certain mandatory filings. Existing entities will have to provide this information when requested by a competent authority;
-Regulated persons now have only five days from the discovery of a suspicious transaction, or from the reasonable belief that a suspicious transaction has been made, to file a suspicious transaction report to the Financial Intelligence Unit;
-Regulators, notably the Bank of Mauritius, have been given broader powers to supervise and examine the operations and affairs of their licensees. The Registrar of Companies and the Financial Services Commission are making increasingly frequent inspections of regulated entities' books and records.
-Fines for non-compliance have been increased to a maximum of MUR10 million, with five-year prison sentences for serious offences.
8 July 2020, the OECD released new data providing aggregated information on the global tax and economic activities of nearly 4,000 multinational enterprise (MNE) groups headquartered in 26 jurisdictions and operating across more than 100 jurisdictions worldwide.
The data, released in the OECD’s annual Corporate Tax Statistics publication, is a major output based on the Country-by-Country Report (CbCR) requirements for MNEs under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
The BEPS Project has seen more than 135 jurisdictions collaborating to tackle tax avoidance strategies by MNEs that exploit gaps and mismatches in international tax rules to avoid paying tax. Large MNEs are required to disclose important information about their profits, tangible assets, employees as well as where they pay their taxes, in every country in which they operate.
The anonymised and aggregated CbCR statistics for 2016 contain a vast array of aggregated data on the global tax and economic activities of MNEs, including profit before income tax, income tax paid (on a cash basis), current year income tax accrued, unrelated and related party revenues, number of employees, tangible assets and the main business activity (or activities) of MNEs.
The OECD said that while the new data contained some limitations and it was not possible to detect trends in BEPS behaviour from a single year of data, the statistics suggested a number of preliminary insights:
-There was a misalignment between the location where profits are reported and the location where economic activities occur, with MNEs in investment hubs reporting a relatively high share of profits compared to their share of employees and tangible assets;
-Revenues per employee tend to be higher where statutory CIT rates are zero and in investment hubs;
-On average, the share of related party revenues in total revenues is higher for MNEs in investment hubs;
-The composition of business activity differs across jurisdiction groups, with the predominant business activity in investment hubs being “holding shares and other equity instruments”.
Noting the limitations of the data and that these observations could also reflect some commercial considerations, the OECD said they were indicative of the existence of BEPS behaviour and reinforced the need to continue to address remaining BEPS issues as part of the Inclusive Framework’s work on Pillar 2 of the ongoing international efforts to address the tax challenges arising from digitalisation.
The OECD analysis also showed that corporate income tax remained a significant source of tax revenues for governments across the globe, accounting for 14.6% of total tax revenues on average across the 93 jurisdictions in 2017, compared to 12.1% in 2000. Corporate taxation was even more important in developing countries, comprising on average 18.6% of all tax revenues in Africa and 15.5% in Latin America and the Caribbean, compared to 9.3% in the OECD nations.
This second edition of Corporate Tax Statistics collected (for the first time) information on controlled foreign company (CFC) rules, which are designed to ensure the taxation of certain categories of MNE income in the jurisdiction of the parent company in order to counter certain offshore structures that result in no or indefinite deferral of taxation (BEPS Action 3); as well as new data on interest limitation rules, which can assist in understanding progress related to the implementation of BEPS Action 4.
1 July 2020, OECD Secretary General Angel Gurria said the US remained committed to global talks on the taxation of big digital companies despite the suggestion by US Treasury Secretary Steven Mnuchin that a break was required in negotiations.
“To be clear, contrary to some earlier media reports, the US has not pulled out of the negotiations,” Gurria told delegates meeting online for the latest round of talks among nearly 140 countries. “Indeed, the presence of the US delegation here today, notwithstanding the US request for a delay on pillar one, confirms their ongoing engagement in this important work.”
Pillar one refers to the talks to update international tax rules for the digital era, where big companies like Facebook and Google can legally book profits in low-tax countries regardless of where their end-clients are. These talks are running in parallel to a second pillar of negotiations.
“Pillar two will ensure that a minimum level of tax will be paid, no matter how much clever tax planning is undertaken by multinationals,” Gurria said. “This is why we need to reach an international agreement, whether partly in October and then later in 2021, or any other possible combination driven by the political agenda.”
3 July 2020, the OECD released a new global tax reporting framework, the ‘Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy’ (MRDP). Under the MRDP, digital platforms are required to collect information on the income realised by those offering accommodation, transport and personal services through platforms and to report the information to tax authorities.
With the digitalisation of the economy transactions that take place on platforms may not always be reported to tax administrations, either by third parties or by the taxpayers themselves. The platform economy also means increased access to information for tax administrations because it brings activities previously carried out in the informal cash economy onto digital platforms.
The MRDP are designed to help taxpayers stay compliant with their tax obligations, while ensuring a level-playing field with traditional businesses, in key sectors of the sharing and gig economy. They further seek to avoid a proliferation of different and unilateral reporting regimes, allow for the use of novel technology solutions and help create a sustainable environment supporting the growth of the digital economy.
"The approval of the MRDP by the G20/OECD Inclusive Framework on BEPS proves that multilateral solutions to address tax challenges in the digital economy are possible and that they are to the benefit of tax administrations, taxpayers and businesses alike,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration.
The MRDP are part of a wider strategy of the OECD to address the tax challenges arising from the digitalisation of the economy and are designed to serve as a basis for further policy developments in increasing tax transparency to create a stable environment for the growth of the digital economy. They were developed in response to calls for a global reporting framework for digital platforms.
To support the swift and coherent implementation of the MRDP, the OECD will now take forward work on the international legal and technical framework to facilitate the automatic exchange of the information collected under the MRDP.
The full document can be accessed at https://www.oecd.org/ctp/exchange-of-tax-information/model-rules-for-reporting-by-platform-operators-with-respect-to-sellers-in-the-sharing-and-gig-economy.pdf
27 July 2020, the OECD issued the ninth round of Stage 1 peer review reports on dispute resolution, which assess a country's efforts to implement the Action 14 minimum standard as agreed to under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
This nine reports – covering Andorra, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Faroe Islands, Macau (China), Morocco and Tunisia – contain around 185 targeted recommendations that will be followed up in Stage 2 of the peer review process. The peer review reports also incorporate mutual agreement procedure (MAP) statistics from 2016 to 2019, as reported under the MAP Statistics Reporting Framework.
The OECD will continue to publish Stage 1 peer review reports in batches in accordance with the Action 14 peer review assessment schedule. In total, 69 Stage 1 peer reviews and 21 joint Stage 1 and Stage 2 peer reviews have been finalised, with the third batch of Stage 2 due to be released soon. Many countries are already working to address deficiencies identified in their respective reports.
7 July 2020, Oman deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI) with the OECD. The MLI will enter into force on 1 November for Oman.
With 94 jurisdictions currently covered by the MLI, ratification by Oman brought the number of jurisdictions that have ratified, accepted or approved it to 49.
21 July 2020, the UK government launched a consultation on a series of legislative changes to existing anti-avoidance regimes to strengthen HMRC’s ability to further clamp down on the market for tax avoidance.
The proposals, announced by the government at Budget 2020, are designed to strengthen the existing anti-avoidance regimes, which provide a mechanism for ensuring there is transparency for taxpayers and others around avoidance schemes, and to change the behaviours of those involved in promoting and enabling schemes.
The government said it was “aware that promoters (and others in the avoidance supply chain) are increasingly failing to comply with their obligations voluntarily and are using every available opportunity to delay, obstruct or sidestep HMRC compliance activity while they continue to sell their schemes.”
The proposals include:
-Ensuring HMRC can more effectively issue stop notices to promoters, under the Promoters of Tax Avoidance Scheme (POTAS) rules, to make it harder to promote schemes that do not work;
-Preventing promoters from abusing corporate entity structures to avoid their obligations under the POTAS rules;
-Ensuring HMRC can obtain information about the enabling of abusive schemes (for the purposes of the Enablers Penalty Regime) as soon as they are identified and ensuring enabler penalties are felt without delay when a scheme has been defeated at tribunal;
-Ensuring that HMRC can act quickly and decisively where promoters fail to provide information on their avoidance schemes under the Disclosure of Tax Avoidance Schemes (DOTAS).
-Making further technical amendments to the POTAS regime so that it continues to operate effectively and to ensure that the General Anti Abuse Rule (GAAR) can be used to counteract partnerships as intended.
HMRC published a consultation document alongside the draft legislation, which provides additional detail about the proposals, and invites interested parties to respond to the consultation by 15 September.
HMRC further published a policy paper setting out proposals to introduce a new Financial Institution Notice (FIN) that will be used to require financial institutions to provide it with information when requested about a specific taxpayer, without the need for approval from the independent tribunal that considers tax matters.
HMRC said the measure was required because, as the biggest exporter of financial services in the world, the UK receives a relatively large number of requests for third party financial information from other tax authorities. It currently takes an average of 12 months to obtain this information when an information notice is needed, whereas the target under international standards is six months. The new FIN will bring the UK into line with international standards on tax transparency and on the quality and speed of exchange of tax information. It will also support HMRC’s domestic compliance activity by helping to establish an individual’s tax position, including any tax debt.
The FIN will be balanced by a number of taxpayer safeguards, including:
-The information sought will have to be reasonably required for the purpose of checking a known taxpayer’s tax position. For international requests the information in the FIN will need to be relevant to the administration or collection of tax and the jurisdiction requesting the information would need to have exhausted all reasonable domestic ways to get the information;
-Documents subject to legal professional privilege cannot be requested;
-HMRC will be required to tell the taxpayer why the information is needed, unless a tax tribunal rules this condition should not apply;
-An authorised officer of HMRC will need to approve the decision to issue a FIN;
-If a financial institution does not comply with a FIN, it will be able to appeal against any penalties imposed by HMRC as a result;
-HMRC will be required to report to parliament annually on the use of the FIN.
It is proposed that legislation to introduce the new FIN to allow HMRC to obtain information and documents from financial institutions for the purposes of checking the tax position of a taxpayer will be introduced in Finance Bill 2021. It will also introduce a rule to prevent a third party telling the taxpayer about a third party information notice, where the tribunal has decided that is appropriate. If approved, the measure would have effect on and after the date of Royal Assent to Finance Bill 2020-21.
26 June 2020, the United Nations (UN) Committee of Experts on International Cooperation in Tax Matters met for its 20th session, conducted for the first time entirely virtually. The discussions, in the context of Covid-19, made clear a renewed urgency for global collaboration to address the longstanding challenges of corporate and personal tax avoidance and evasion, while encouraging investment through fair distribution of taxing rights.
The committee agreed to consider adding new provisions addressing the taxation of the digital economy to the UN Model Double Taxation Convention between developed and developing countries. It has tasked a drafting group to produce a draft proposal for an optional UN model provision by July 31 for review by the full committee. The guiding principles for this work include avoiding double taxation and non-taxation, preferring taxation of income on a net basis where practicable, and simplicity and administrability.
The committee also adopted new and revised chapters for the UN Practical Manual on Transfer Pricing for Developing Countries and approved changes to the UN model tax convention’s commentary. New chapters were further approved for inclusion in UN handbooks on tax dispute avoidance and resolution and on environmental taxation.
30 June 2020, the US Court of Appeals Fifth Circuit ruled that the privacy protections of the Fourth Amendment to the US Constitution do not apply to virtual currency transactions and records held by cryptocurrency exchanges.
In United States v Gratkowski No. 19-50492, federal agents had analysed the publicly viewable Bitcoin blockchain and obtained a 'John Doe' judicial order against the Coinbase digital currency exchange for account information of customers who had sent Bitcoin to an illegal website. In response to the subpoena, the trading platform identified Gratkowski as one of these customers. Federal agents then obtained a search warrant for Gratkowki’s house, which resulted in the discovery of illegal material in his possession.
Charged with federal crimes, Gratkowski moved to suppress the evidence. He challenged both the Bitcoin records obtained from the public blockchain and the Bitcoin records obtained from the exchange. Gratkowski's motion was denied, and he appealed.
Gratkowski argued that his Bitcoin information should receive the same protections as those set out in Carpenter v United States 138 S. Ct. 2206 (2018), which expanded Fourth Amendment protections by limiting the applicability of the third-party doctrine in the context of cellphones. Gratkowski contended that the government had violated his reasonable expectation of privacy in the records of his Bitcoin transactions recorded on the Bitcoin blockchain that were executed at the crypto trading platform.
The Fifth Circuit Court of Appeals disagreed, holding that Gratkowski had no reasonable expectation of privacy in information he had voluntarily turned over to third parties. Courts had applied this ‘third-party doctrine’ to customer financial records kept by banks and it reasoned that Bitcoin records kept by an exchange should be treated the same way. Both banks and exchanges were regulated financial institutions that kept “records of customer identities and currency transactions”. Third-party doctrine also applied to records found on the blockchain, where every Bitcoin user "can see every Bitcoin address and its respective transfers." Since Gratkowski had no privacy interest in his publicly-available Bitcoin records, the government did not need a warrant to run those records through forensic software.
Finally, the Fifth Circuit declined to follow the Supreme Court's 2018 decision in Carpenter v United States. Unlike cellphone location records, which provided an "all-encompassing record of the holder's whereabouts”, Bitcoin records had a limited financial scope more akin to traditional bank records. And unlike the cellphone location records, which transmitted automatically from the phone to the wireless carrier, the records in Gratkowski had resulted from his own affirmative acts when he conducted Bitcoin transactions.
The full judgment can be accessed at http://www.ca5.uscourts.gov/opinions/pub/19/19-50492-CR0.pdf