Australia issues draft ruling on UK and US withholding tax exemptions The Australian Taxation Office issued a Draft Ruling (TR 2004/D16) on 1 September 2004 concerning the exemption from Australian interest withholding tax for interest paid by Australian residents to UK and US financial institutions. The interest withholding tax exemption was introduced as part of the renegotiation of Australia’s tax treaties with the UK and US. The exemption lowers the cost of borrowing from these countries, as borrowers normally bear the cost of interest withholding tax on offshore debt. The draft ruling attempts to provide guidance on the operation of article 11(3) of both the 2003 Australia-UK income tax treaty and the 2001 Australia-US income tax treaty protocol. The text of the article is identical in both cases, stating that, subject to some conditions, interest paid by an Australian resident to a UK or US resident may not be taxed in Australia if the interest is derived by a financial institution which is unrelated to and dealing wholly independently with the payer. The draft ruling provides guidance on offshore borrowing by Australian banks and other corporations but fails to clarify the issue of borrowing through subsidiaries of offshore institutions.Belgium introduces new International Private Law Code The Belgium government brought the International Private Law Code into force on 1 October 2004. The code contains a comprehensive set of rules determining the international jurisdiction, the recognition and the execution of foreign decisions and authentic instruments, including trusts. The Code is intended to clarify a number of grey areas regarding the applicability of Belgian law vis-à-vis foreign laws and is intended to provide foreign investors with greater certainty as to which jurisdiction’s law applies where a cross-border transaction or relationship is concerned. As a part of the Code, Belgian law addresses the concept of trusts for the first time, even though Belgium has not yet signed the 1985 Hague Convention on the Law Applicable to Trusts and on Their Recognition. As a result, Belgian courts now have jurisdiction to hear claims arising from disputes involving trusts and to apply foreign law, provided that certain rules of Belgian public policy are respected.Caribbean Court of Justice inauguration delayed The opening of the Caribbean Court of Justice (CCJ), which is due to replace the UK Privy Council as the final appellate body for 13 countries across the region, has been delayed because more time is required to recover from Hurricane Ivan, recruit judges and finish the court’s headquarters in Trinidad. Caribbean Community (CARICOM) members had agreed on 6 November 2004 as a start date but operations are now scheduled to commence in March. Justice Michael de la Bastide of Trinidad & Tobago was sworn in as the first President of the CCJ on 18 August last year. The Court will function in two jurisdictions – an original and an appellate. In its appellate jurisdiction, the Court will apply the laws of the Member States from which they are hearing appeals. In the exercise of its original jurisdiction, the CCJ will perform the role of an international Court, applying rules of international law.China issues report into economic impact of OFCs Offshore financial centres (OFC) have become important sources of foreign investment into China, according to a recent report by a research group in the Chinese Academy of International Trade & Economic Cooperation (CAITEC), a part of China’s Ministry of Commerce (MOC). By actual investment amount, the British Virgin Islands ranked the second largest source of foreign investment for Mainland China in 2002 and 2003. Western Samoa and the Cayman Islands came eighth and ninth respectively. Dr Mei Xinyu, author of the report, noted that China could not afford to neglect the effect of OFCs on cross-border capital flow in China. He identified the five principal motives as: the removal of non-performing assets; to obtain an overseas listing; avoid domestic controls; concealing beneficial ownership; and tax avoidance. He also noted the considerable “negative impact” and “potential risks” posed to China by the rise of OFCs. In particular he warned that OFCs could: provide an “effective avenue” for embezzling state-owned assets and public properties; create a ” transit depot” for capital flight from China; increase potential disputes over investment; facilitate fraud by companies; and make it easier to shift financial risks. The report recommends that China should take preventative action by: improving the monitoring of capital flow; restricting the provision of offshore financial services in the mainland; stepping up financial regulation to inhibit the shifting of overseas financial risks to China; loosening control of capital flow to facilitate cross border business operations; annulling preferential treatment for foreign businesses; and improving the tax system. China and South Africa have accepted the offer of full observer status in the OECD’s Fiscal Affairs Committee (CFA) and took up their new role during meetings in June in Paris. The CFA brings together senior tax officials and provides a forum for exchanging views on tax policy and administration issues, including tax treaties, statistics, the taxation of multinational enterprises, combating tax avoidance and evasion, and consumption taxes. China and South Africa joined Argentina and the Russian Federation as permanent observers. CFA chairman Bill McCloskey said: ?This will enable both countries to participate in the work of the CFA more closely in all its aspects and also provide CFA member countries with access to the views of, and developments in countries which have a leadership role in the regions.?Mauritius to reform financial services legislation Finance Minister, Pravind Kumar Jugnauth, announced a major reform of financial services legislation in his budget speech on 11 June. New bills are to be introduced to regulate the accounting, securities and insurance sectors, and to provide for limited partnerships and corporate insolvency. The Ministry of Finance has also published draft versions of three new bills to regulate the financial sector: a Banking Bill 2004 to amend and consolidate the laws relating to banks and other financial institutions; a new Bank of Mauritius Bill to repeal and replace the law establishing the Bank of Mauritius; and an Investment Promotion (Miscellaneous Provisions) Bill to amend the Investment Promotion Act and provide for the streamlining of licensing procedures.Isle of Man reduces redomiciliation fees The Financial Supervision Commission has reduced fees for companies applying to redomicile to the Isle of Man under the Companies (Transfer of Domicile) Act 1998 to £300, effective from the 1 August 2004. The fees payable by companies applying to redomicile out of the Isle of Man remain unchanged. The Income Tax (Amendment) Bill 2004, which provides the Assessor with additional powers to obtain information, including documents and information required to enable the Island to comply with international commitments, has received Royal Assent.Hong Kong consults further on offshore funds? exemption The Financial Services and the Treasury Bureau (FSTB) issued a consultation paper on 4 January 2005, seeking comments on a revised approach to exempting offshore funds from the Hong Kong profits tax. Anti-avoidance measures are also proposed. The proposed exemption would exempt both fund and non-fund entities that reside outside Hong Kong from profits tax on income from securities trading transactions conducted inside Hong Kong through an agent, who is either a broker or an approved investment adviser. Non-residents that carry on a trade, profession or business in Hong Kong would not be covered by the exemption. Hong Kong’s Inland Revenue Ordinance (IRO) currently exempts specified investment funds from profits tax, but many offshore funds do not qualify for the exemption and are thus subject to tax at a rate of about 17%. Exemption for offshore funds is intended to reinforce Hong Kong’s status as an international financial centre and boost its fund management and hedge funds sectors. The government first announced plans to exempt offshore funds from profits tax as part of the 2003-2004 budget and issued a first consultation paper in January 2004. Under the latest proposals, brokers and investment advisers are no longer to be required to maintain records to verify the non-resident status of each of the investors in offshore funds. A proposal to limit the exemption to non-residents with at least 80% ownership by non-resident beneficial interests has also been removed. The anti-avoidance measure takes the form of deeming provisions under which resident investors holding, either alone or with associates, 30% or more of the interest in the tax-exempt non-resident will be deemed to have derived taxable profits in respect of the securities trading transactions carried out by the non-resident in Hong Kong and liable to tax. But the profits tax charge on the resident investor will not cover any non-taxable capital gains or offshore profits of the non-resident. Resident investors in a non-resident fund that is genuinely widely held, or that is currently exempted from tax under the IRO, will also not be subject to the deeming provisions.