Offshore Survey – January 2006 Supplement by Christopher Owen
EU announces Transfer Pricing Code of Conduct The European Commission adopted, on 10 November 2005, a proposed code of conduct on transfer pricing that is intended to standardise the documents that companies must provide for cross-border intra-group transactions. Developed on the basis of work in the EU Joint Transfer Pricing Forum, the proposal is designed to reduce the tax complications that companies face when trading with associated enterprises in other Member States. “This Code will ensure greater certainty and reduced compliance costs and risks of documentation-related penalties for multinationals,? said European Taxation & Customs Commissioner László Kovács.Guernsey proposes zero-ten tax regime The States of Guernsey published last September a second consultation document in respect of the proposed Zero-Ten company tax regime. This will apply a 0% income tax rate on company profits and a 10% rate to some financial services companies in order to comply with the EU Code of Conduct on harmful business taxation. According to the latest document, the government proposes to compensate for the loss of revenue through an increase in social security contributions for employees and employers, rather than the introduction of a sales tax. Similarly to Jersey, income tax will remain at 20%, but allowances will be cut back. A special meeting of the States is to be held on 8 February to decide official policy.Bermuda signs TIEA with Australia Bermudian Finance Minister Paula Cox and Australian Treasurer Peter Costello signed a Tax Information Exchange Agreement (TIEA) in Washington DC on 10 November 2005. The agreement marks the first treaty that Bermuda has entered into following a commitment to ban harmful tax practices five years ago. The Australian authorities were eager to secure a TIEA with Bermuda after it became apparent that a significant proportion of funds flowing in and out of the country were being transmitted through Bermuda. Talks between the two governments commenced in May 2004, with a second round of discussions taking place last August. The agreement, which takes effect in January, provides for the exchange of information, when requested, on tax matters. Provisions to protect confidentiality of certain information are built into the agreement, a statement said. Ms Cox said that because Bermuda, which does not have income tax, sees ?no direct benefit from an exchange of information regarding its tax system?, the Finance Ministry sought some other ?measurable and reciprocal benefit? for Bermuda, such as provisions for improved commercial relations between Bermuda and Australia. Australia has also agreed a protocol to the Australia-New Zealand tax treaty to provide for updated information exchange provisions. “The protocol updates the information exchange provisions to the new OECD standard and provides mutual assistance in collection of taxes,” said Costello. “It also ensures Australia will have access to lower withholding taxes on dividends, interest and royalties should New Zealand reduce these taxes in a treaty with another country to levels below those in our current treaty.”SAARC members sign multilateral tax treaty Foreign ministers from the members of the South Asian Association for Regional Cooperation (SAARC) signed a limited-scope multilateral tax treaty in Dhaka on 13 November 2005. The 17-article treaty covers cooperation among SAARC members on some aspects of direct taxation, including exchange of information, mutual assistance in tax collection, service of tax-related documents, taxation of academics and students, training of tax officials, and coordination in devising tax policy in the member countries. SAARC groups seven countries: Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. The treaty will enter into force on the 30th day after its publication by the SAARC secretariat. SAARC members must first complete their domestic ratification processes.Isle of Man begins to regulate Trust Service Providers The Financial Services Commission (FSC) has begun granting the first trust services providers (TSPs) licences under the Fiduciary Services Act 2005, which completed its legislative passage on 13 July 2005. Immediately after Royal Assent, all the provisions of the Act were brought into operation by Appointed Day Order, including transitional arrangements to allow existing TSPs to continue in business until such time as their TSP licence application had been decided, provided they had applied for a licence during the application period. This period ended on 31 October, and from 1 November it was illegal to operate as a TSP without a licence unless an application had been submitted. Details of all current licences are published on the FSC website, which now includes a category for trust service providers. The Commission does not, however, publish the names of licence applicants. The FSC said it expected to receive between 130 and 150 applications for TSPs licences. The licensing of TSPs follows the regulation of corporate services providers (CSPs), which began in 2001. There are currently 170 CSPs regulated in the Isle of Man.Guernsey funds expected to reach £100 billion by year end The Guernsey Financial Services Commission reported a 32.7% increase in fund assets managed or administered on the island during the year ending 30 September, to reach a total of £91.7 billion. GuernseyFinance chief executive Peter Niven predicted that the £100 billion mark would be exceeded by the end of 2005. ?Guernsey?s tremendous fund success is not just anecdotal, it is proven quarter-on-quarter by this incredible growth,? said Niven. ?A significant amount of the growth over the last two quarters can be attributed to the 20 Qualifying Investor Funds that have been authorised over the last eight months ? there is every reason to expect that these levels of success will continue.?Luxembourg proposals for withholding tax on savingsA draft law introducing a final withholding tax on savings income for individuals was deposited at the Luxembourg Parliament on 19 October 2005. It also provides that the net wealth tax will be abolished for Luxembourg resident individuals from 2006. Under the draft law, a 10% withholding will apply to individuals who are Luxembourg residents without being resident in another country. The withholding is final in the sense that no further tax is payable on the income and the income is neither required to be reported in the taxpayer?s return, nor is it taken into account in calculating the rates of tax on other income. The withholding tax will apply to savings income as defined in article 6 of the Law of June 21 2005 incorporating the European Savings Directive, to the extent the income is paid or allocated by a Luxembourg paying agent to a Luxembourg individual resident. This definition is intended to encompass interest income and includes interest income and some dividends and gains derived from interest bearing assets, but excludes most dividends and gains. The withholding tax will not apply to income from UCITs, home savings and loan schemes, or income from current accounts where the interest rate does not exceed 0.75% per annum. It will also not apply to income received from abroad unless paid through a Luxembourg paying agent. There is an exemption up to an amount of EUR 1500 of savings income per year and person. Any withholding tax levied on this exempt amount may be reimbursed upon request after the end of the year concerned. Net wealth tax will no longer apply to individuals as from the tax year 2006 but will remain applicable to companies.FATF removes Nauru from NCCT list Nauru has been removed by the FATF from its list of non-cooperative countries and territories (NCCTs) after the jurisdiction abolished its 400 shell banks and therefore eliminated the major money laundering risk. The FATF, meeting in Paris in October last year, said Myanmar and Nigeria remained on its list of NCCTs. It recognised that they had adopted many necessary legal reforms and encouraged further implementation, but continues to call on financial institutions to scrutinise transactions with persons, businesses, or banks in these countries, as per Recommendation 21. The FATF, in partnership with the Asia/Pacific Group on Money Laundering, launched a project to explore the relationship between corruption, money laundering and terrorist financing and how the FATF?s experience could best be used to combat these combined threats. The FATF also welcomed the United Nations Security Council Resolution 1617 (2005), which ?strongly urges all Member States to implement the comprehensive, international standards? embodied in the FATF Forty Recommendations on money laundering and the Nine Special Recommendations on terrorist financing. This formal endorsement, it said, was a major step toward effective implementation of the Recommendations throughout the world. The FATF said it would seek to enhance its partnerships with regional bodies. It has invited members of the Eastern & Southern Africa Anti-Money Laundering Group (ESAAMLG) to participate at its next meeting in February in Cape Town. FATF members will also join with GAFISUD, the South American regional body, in November to study emerging threats in the areas of new payment technologies, the use of corporate vehicles and trade-based money laundering.Netherlands Budget sets out corporate tax reductions The 2006 Dutch Budget, announced on 20 September 2005, proposes to reduce the corporate tax rate from 31.5% to 29.6% in 2006, and to 29.1% in 2007. As previously announced, the Dutch capital tax regime was to be repealed as from 1 January 2006.South Africa to strengthen anti-avoidance legislation The South African government announced, on 3 November 2005, measures designed to strengthen existing anti-avoidance legislation to counter the use of tax avoidance schemes, particularly by corporate taxpayers. A report by the South African Revenue Service (SARS) found that the general anti-avoidance rule, in Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962), remains ?substantially the same today as it was in 1959?, and was proving to be ineffective and inconsistent. The report proposes to amend existing law by introducing a non-exclusive set of factors to be considered in determining abnormality for schemes in the context of business and create a rebuttable presumption of “abnormality” when some of those factors are present. It would require that a scheme’s purpose be determined objectively by reference to the relevant facts and circumstances, and clarify that section 103 may be applied to steps within a larger scheme. It would also introduce, through separate proposed amendments, new penalties for scheme promoters and for taxpayers that substantially underreport their income. The government hopes to include tax law changes in its 2006 Budget, which is due to be announced in February.US brings more charges in KPMG shelter case The US federal government added 10 new defendants to its KPMG shelter conspiracy case along with several new charges, including obstruction and personal tax evasion, on 17 October 2005. Michael Garcia, US attorney for the Southern District of New York, and US Internal Revenue Service Commissioner Mark Everson announced the filing of a superseding criminal indictment charging the tax professionals with conspiracy to defraud the IRS, tax evasion, and obstruction. The new defendants include KPMG’s former chief financial officer Richard Rosenthal, the former partner in charge of KPMG’s professional practice Larry DeLap, and KPMG’s former associate general counsel Steve Gremminger. Together with the nine individuals indicted last August, the defendants are charged with 39 substantive counts of tax evasion on the tax returns of KPMG clients. According to Garcia, the investigation is still ongoing. A US federal judge also refused to grant preliminary approval of KPMG’s proposed US$225 million settlement with shelter investors on 7 October, after objectors alleged the settlement negotiations were marred by collusion and conflict of interest.