Offshore Survey – January 2005 by Christopher Owen
Aruba-US Tax Information Exchange Agreement enters into force The tax information exchange agreement (TIEA), signed in Washington on 21 November 2003 by the Netherlands in respect of Aruba and the US, entered into force on 13 September 2004. As of then, Aruba is considered part of the “North American area” for purposes of determining if US taxpayers may deduct expenses incurred as a result of attending conventions, business meetings, and seminars there. The US-Aruba TIEA affords Aruba the same tax status in relation to meetings as Canada, Mexico, Antigua, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Dominican Republic, Grenada, Guyana, Jamaica, St Lucia, and Trinidad & Tobago. Meetings held in Puerto Rico and the US Virgin Islands are tax-deductible because of the islands’ US status. Only meeting expenses that are incurred for meetings in areas designated as part of the North American area are deductible as ordinary and necessary business expenses, unencumbered by the limitations to deductions for expenses associated with foreign conventions. ECJ rejects different treatment for foreign shares The European Court of Justice held that tax credit discrimination was a clear breach of the EU treaty. As a result, individual and corporate taxpayers in some states may be able to reclaim tax already paid on cross-border dividends. Petri Manninen, a Finnish taxpayer, owned 2,000 shares in a company quoted on the Stockholm Stock Exchange. He complained that his dividend income would have been virtually free of tax if the company had been Finnish but, because it was based in Sweden, was taxed at the full rate of 29%. Manninen, who was supported in court by the European Commission, argued that, because dividends are simply distributed profits, the refusal to allow a tax credit against income on which corporation tax had already been paid was a form of double taxation ? even though the initial tax payment had been made in another member state. Manninen was opposed by the Finnish government, which was backed by France and the UK. They argued that discriminatory taxation was justified by the need to maintain the cohesion of national tax systems; that tax revenue would be reduced if double taxation were outlawed; and that equal treatment of domestic and non-domestic dividends was impossible in practice because of differences in national tax systems. The court disagreed. It found that denying tax credits on non-domestic dividends did amount to double taxation because corporation tax had already been paid in another member state. The court said it was perfectly possible to devise systems for assessing the relevance of tax, and added that “possible difficulties in determining the tax actually paid cannot . . . justify an obstacle to the free movement of capital.” The discriminatory tax credit system is already being challenged in the UK High Court in a number of class actions brought by corporate shareholders in companies based in other member states. The ECJ ruling suggests that the litigants will ultimately be successful. Individual taxpayers should start to claim tax credits immediately. Privy Council applies Ramsay doctrine The UK Privy Council, sitting as the final court of appeal in Jamaica, applied the Ramsay doctrine in ruling that a firm must pay transfer tax arising from a transfer of shares in a company in exchange for a debenture. In the case of Carreras Group Ltd v The Stamp Commissioner, on 1 April 2004 (Appeal No. 24 of 2003), Carreras had transferred its shares in the Jamaica Biscuit Company in 1999 to Caribbean Brands, a subsidiary. Caribbean issued a debenture in favour of Carreras for a total of US$37.7 million, which was redeemed for cash 14 days later. The debenture was not secured, nor was it transferable. The Stamp Commissioner found that the transaction was really a sale of shares disguised to look like a re-organisation. Accordingly transfer tax amounting to J$110 million was charged. Carreras challenged the finding. The Revenue Court ruled in Carreras? favour in November 2001 and ordered the Commissioner to repay the sum with interest. The Commissioner appealed. By a majority decision, the Court of Appeal held in July 2002 that transfer tax was payable. Carreras appealed to the Privy Council. The Privy Council followed the line in Ramsay v Inland Revenue Commissioners  AC 300, which held that the courts can disregard the significance of individual steps that are incompatible with the commercial unity of a series of transactions. It agreed with the Court of Appeal that, taken as a whole, the transactions could not be appropriately characterised as an exchange of shares for a debenture. Agassi wins return match with UK Revenue US tennis star André Agassi won his battle with the UK Revenue, when the UK Court of Appeal held in November that section 555(2) of the Income & Corporation Taxes Act 1988, which applies to entertainers and sportsmen not resident in the UK, should not be given extraterritorial effect. The Court of Appeal ruled that Agassi was not liable to UK tax on income paid by German sportswear makers Nike and Head Sports to his US-based company, Agassi Enterprises Inc, because none of them was resident or had a “tax presence” in Britain. Agassi’s appeal was based on his tax liability for the year 1998-99, which the Revenue had assessed at £27,500. He has not yet paid the money because the case is still under revue by the courts. In the High Court, Mr Justice Lightman had held that payments Agassi received while playing in the UK from Agassi Enterprises Inc., a US company that entered into contracts for his endorsement of sportswear, constituted the carrying on of a trade within the UK. He noted that sections 555 and 556 were intended to prevent entertainers and sportsmen from avoiding the tax on income earned in the UK. This meant that a connection with the UK of the person making the payment “must be irrelevant?. He said it would be “absurd” to construe the Act so as to allow tax to be avoided by the simple expedient of channeling payments through a foreign company with no presence in the UK. “If this were the case, the tax would effectively become voluntary,” he said. But Lord Justice Buxton, sitting with Lords Justices Sedley and Jacob in the Court of Appeal, disagreed. He held that tax was only chargeable on payments made directly to the entertainer or sportsman or made to an associated company by a person with a UK tax presence. In this case, the money had been paid, not to Agassi, but to Agassi Enterprises ? a separate legal entity ? by two German companies with no UK tax presence. It might well be that Parliament, if it reviewed the statute, would extend its scope, said Buxton. But as the Act stood, the situation was not “absurd or an invitation to tax evasion” and came nowhere near to providing grounds for disapplying the general principle that UK statutes had no effect in foreign countries. The Inland Revenue is to petition the House of Lords for leave to appeal.