Andre Agassi, the US tennis player, has finally lost a protracted tax dispute with HM Revenue & Customs over sponsorship revenue he earned while working in the UK. Six years after he began litigation, the Law Lords ruled by four to one in favour of the Revenue. The ruling overturns a Court of Appeal decision of 19 November 2004 and means all non-residents must pay UK tax on endorsement or sponsorship deals for the portion of the year that they work here. This includes payments from foreign companies to foreigners where the money never enters the UK. Agassi was originally assessed for £27,500 for back taxes for fiscal 1998-1999. Agassi claimed that, since both himself and the sponsors were based outside the UK, and he was in the country only temporarily to play in tennis tournaments, he was not liable to pay tax on the endorsements. Initially, the Special Commissioners, ruled in favour of the Revenue. Agassi also then lost in the High Court, but won in the Court of Appeal. If Agassi had won, it was estimated that the cost to the Revenue could have been as high as £500m if international sportsmen and entertainers who had toured or made short-term visits to the UK since the 1988 Income & Corporation Taxes Act came into force attempted to claim tax back from the tax authorities. But, as a result of the House of Lords ruling, the Revenue may now be able to collect about £50m of extra tax annually.
The World Trade Organisation (WTO) set up a panel, on 19 July 2006, to examine whether US restrictions on gambling violate international trade agreements. US trade laws banning interstate betting over the internet will be examined by prosecutors who are required to report back to the WTO within 90 days. The investigation was initiated by Antigua & Barbuda, which claims the US on-line gambling prohibitions are hampering its economy. The dispute stems from a June 2003 WTO complaint that a US ban on Antiguan online gambling was in violation of the General Agreement on Trade in Services (GATS). Antigua?s government has invested heavily in the industry in a bid to lessen its reliance on the tourism sector and, it says, US laws are preventing companies from legally accepting bets from the US. Bilateral talks between the US and Antigua failed to resolve the dispute. A previous WTO ruling said that some of the US laws were in line with international commerce laws, but others were not. “The US has been busy passing legislation that is directly and unequivocally contrary to the ruling,” Antigua told the WTO’s dispute settlement body. “The US has taken no measures to comply with the recommendations and rulings of the dispute settlement body.” The WTO decision came two days after US federal authorities charged a internet gambling business based in London and licensed in Antigua, BetOnSports, with racketeering and wire fraud. On 16 July the US police arrested David Carruthers, the British head of BetOnSports, at the Dallas-Fort Worth International airport as he awaited a connecting flight en route from the UK to Costa Rica. US federal agents also arrested another four people, including Gary Kaplan, founder of BetOnSports, a US citizen who was arrested in 1992 for illegal sports betting, after which he moved his operations to Aruba and then Antigua. Trading in shares of BeOnSports was suspended on 17 July. A 22-count indictment, issued on 17 July, charged 11 people and four companies, including BetOnSports, with conspiracy, racketeering and wire fraud for taking bets on sports from people residing in the US and failing to pay taxes. It followed the passing, in June, of the Internet Gambling Prohibition & Enforcement Act by the US Congress. The extraterritorial reach of US jurisdiction to regulate and control on-line gaming has serious implications for the industry, which generates half of its US$12bn annual revenue from US residents. In banning online gambling across international borders, the US invoked WTO provisions allowing nations to override certain rules by claiming a moral objection. But “national treatment” rules demand equal treatment for foreign and domestic products. Should the WTO find for Antigua, US exports there could face sanctions and higher tariffs. But Antigua?s size means these are likely to have little impact.
Belgian Finance Minister Didier Reynders confirmed that dividends from a Hong Kong subsidiary are not excluded from the Belgian participation exemption on the basis of the subjective taxation conditions and that the legal owner of the participation is to be considered the beneficial owner of the dividends received. He was responding to parliamentary questions on the applicability of the 2003 Belgium-Hong Kong income tax treaty in respect of an administrative circular, issued by the Belgian tax authorities on 31 March 2005. In the circular, the Belgian tax authorities confirmed that the Hong Kong corporate tax regime, based on the territorial principle, was not considered “substantially more advantageous” than the tax system in Belgium, and that the Hong Kong offshore regime did not deviate from Hong Kong’s common tax regime. The Belgian participation exemption test requires that a shareholder hold, for a continuous period of at least one year, at least 10% of the capital of the subsidiary, or hold a participation with an acquisition value of at least €1.2 million on the distribution date. The Belgian tax code provides that dividends will not be entitled to exemption if received from a company that is not subject to corporate income tax or to an equivalent foreign tax, or from a company that is resident in a jurisdiction whose normal tax regime is “substantially more advantageous” than the normal Belgian tax regime. The 2005 circular letter was unclear as to whether Hong Kong-source dividends would qualify, but Reynders confirmed that dividends from a Hong Kong subsidiary would not be excluded from the Belgian participation exemption on the basis of the subjective taxation conditions. Questioned on the interposition of a Hong Kong company between a Belgian subsidiary and a foreign parent company, and the subsequent qualification of the Hong Kong company as the beneficial owner, Reynders said the legal owner of the participation was to be considered the beneficial owner of the dividends received. But a person that acted as a representative on behalf of the legal owner of the participation would not be regarded as the beneficial owner and, therefore, would not be entitled to treaty benefits.
The Arrangement between Hong Kong and China for reciprocal enforcement of certain civil court judgments was finally signed on 14 July. The Arrangement will only apply in commercial cases where judgment was delivered pursuant to a written exclusive jurisdiction agreement. Legislative changes must be made in Hong Kong and the Mainland in order to implement the Arrangement. The Arrangement is limited to judgments rendered pursuant to an agreement between the judgment creditor and judgment debtor “in written form… in which a people?s court of the Mainland or a court of the HKSAR is expressly designated as the court having sole jurisdiction for resolving any dispute which has arisen or may arise in respect of a particular legal relationship.” It also only applies to “civil and commercial contracts between the parties concerned, excluding any employment contracts and contracts to which [an individual] acting for personal consumption, family or other non-commercial purposes is a party.” The limitation period for applying to enforce is very short ? one year if either the judgment creditor or the judgment debtor is an individual, and six months in the case of disputes between companies ? and certain important categories of dispute fall outside the scope of this Arrangement. In Hong Kong, the only court with jurisdiction to deal with enforcement or recognition applications is the High Court. In the Mainland, jurisdiction lies with the courts of the respondent’s domicile or ordinary residence, as well as with the courts of any place where the respondent has property. An applicant must elect to file in only one such court. A commencement date has yet to be announced. The Arrangement is non-retrospective and whether it will apply to judgments on or after the commencement date or only to agreements entered into after the commencement date has not been clarified.
The European Commission sent the UK, on 10 July, a formal request to end discrimination of foreign charities. The UK currently allows tax relief for gifts to charities, but only if they are established in the UK. Charities in other Member States are excluded, which the Commission considers to be discriminatory and contrary to the EC Treaty. The request is in the form of a ?reasoned opinion? under Article 226 of the EC Treaty. If the UK does not respond satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the European Court of Justice. EU Taxation and Customs Commissioner László Kovács said: “The rules of the Internal Market forbid discrimination of charities in other Member States. Gifts to bona fide charities in other Member States should get the same tax treatment as gifts made to domestic charities.” According to the Commission, the difference in treatment between gifts made to charities in the UK and charities in other Member States constitutes an obstacle to the free movement of capital. Cross-border gifts are explicitly mentioned in Council Directive 88/361/EEC, which provides for a Community definition of capital movements. The discrimination, it considers, is also contrary to the free movement of persons, as workers and self-employed persons moving to the UK might wish to make gifts to charities established in their home Member State. Finally, it said, the rules are contrary to the freedom of establishment, as foreign charities are forced to set up branches in the UK in order to benefit from the favourable tax treatment.
The OECD Global Forum on Taxation issued on 29 May a progress report, entitled Tax Co-operation: Towards a Level Playing Field, to review the legal and administrative tax systems in the 82 participating OECD and non-OECD countries. The Forum was set up to include 33 jurisdictions that the OECD originally classified as tax havens under its Harmful Tax Practices initiative but which then made commitments on transparency and information exchange. It enables them to work together with OECD members to ensure common standards on transparency and information exchange for tax purposes so as to permit fair competition between all countries. All the OECD and non-OECD participating countries and territories in the Forum have endorsed these principles and agreed to their legal and administrative frameworks being reviewed. Other significant non-OECD economies ? Argentina, China, Hong Kong, Macao, the Russian Federation and South Africa ? have also endorsed these principles and agreed to work with the Global Forum. The principles of transparency and effective exchange of information for tax purposes, as reflected in the Global Forum?s 2002 Model Agreement on Exchange of Information on Tax Matters, can be summarised as:
existence of mechanisms for exchange of information upon request.
exchange of information for purposes of domestic tax law in both criminal and civil matters.
no restrictions of information exchange caused by application of dual criminality principle or domestic tax interest requirement.
respect for safeguards and limitations.
strict confidentiality rules for information exchanged.
availability of reliable information (in particular bank, ownership, identity and accounting information) and powers to obtain and provide such information in response to a specific request from a treaty partner.
According to the 2006 Report, all but 12 countries now have exchange of information arrangements that permit them to exchange information for both civil and criminal tax purposes in the form of double tax treaties or TIEAs. The exceptions are: Andorra, Anguilla, Cook Islands, Gibraltar, Guatemala, Liechtenstein, Nauru, Niue, Panama, Samoa, Turks & Caicos Islands and Vanuatu. Only Cyprus, Hong Kong, Malaysia, Philippines and Singapore have reported being unable to respond to a request for information where they have no domestic tax interest. Only Andorra, Cook Islands, Samoa and Switzerland still apply the principle of dual incrimination to all information exchange relationships concerning the administration or enforcement of domestic tax law. A further group of countries apply this principle in connection with exchange of bank information. About 90 % of all double tax treaties have ?broad? exchange of information clauses that allow for information to be provided in cases where the request relates to the enforcement or application of domestic law, rather than being limited to cases where the correct application of the provisions of the particular double tax convention is at issue. All countries except Guatemala and Nauru reported having legal mechanisms in place to permit the exchange of information in criminal tax matters in certain circumstances. In a number of countries, the report said, the exchange mechanisms based on either mutual legal assistance treaties or domestic law are very restrictive and permit information exchange in criminal tax matters only in a very narrow set of circumstances. As a result, countries, such as Panama, are rarely, if ever, able to exchange information in criminal tax matters. All countries that are able to exchange information, report having safeguards in place to protect the confidentiality of any information exchanged. In respect of bank information, governmental authorities in 77 countries have access to bank information or information from other financial institutions for at least some tax information exchange purposes. Only Guatemala, Nauru and Panama have indicated an inability to access information for any exchange of information purposes. Another 17 countries grant access to bank information solely for the purpose of responding to a request for exchange of information in criminal tax matters. Of these Andorra, Austria, Cook Islands, Luxembourg, Samoa, San Marino, Saint Lucia, Saint Vincent & the Grenadines and Switzerland apply the principle of dual criminality. The Cook Islands, Niue and Vanuatu leave the question of whether to provide information at the discretion of the attorney general. In respect of access to ownership, identity and accounting information, of the 82 countries reviewed, 78 ? including all the OECD countries – have powers to obtain information that is kept by a person subject to record keeping obligations that may be invoked to respond to a request for exchange of information in tax matters. In addition, 71 countries reported that they also have powers, which may be invoked to respond to a request for information, to obtain information from persons not required to keep such information. But Anguilla, Montserrat, Panama and Turks & Caicos Islands have very limited powers to obtain information for criminal tax matters. In respect of the availability of ownership, identity and accounting information for companies, 77 of the countries reviewed require companies to report legal ownership information to governmental authorities or to hold such information at the company level. More stringent ownership reporting requirements exist in the financial sector in certain countries. Bearer shares can still be issued in 48 countries. Of these, 39 have adopted mechanisms to identify the legal owners of bearer shares in some or all cases. Ten of these countries also require bearer shares to be immobilised or held by an approved custodian, while the remaining 29 rely mainly on anti-money laundering rules, investigative mechanisms or a requirement for the holders of shares to notify the company of their interest in the shares. Bearer debt instruments may be issued in 52 countries and 40 of these have adopted mechanisms to identify the owners of such instruments. In general, these mechanisms relied on anti-money laundering rules, on investigative powers or, in the case of EU Member States and their associated or dependent territories, on procedures set out in the EU Savings Tax Directive and savings tax agreements. All but five countries ? Aruba, Guatemala, Hong Kong, Macao and Singapore -?indicated that applicable anti-money laundering legislation would normally require corporate service providers or other service providers to identify the beneficial owners of their client companies. In 75 countries, all domestic companies are required to keep accounting records. No such requirements exist for international business companies in Belize, Brunei and Samoa, or for limited liability companies in Anguilla, Montserrat and Saint Kitts & Nevis. In the Bahamas, only public companies are required to keep accounting records. Mandatory accounting records retention periods of five years or more exist in 63 countries. In respect of the availability of ownership, identity and accounting information for trusts, 54 countries have trust law. Of these, Macao and the Seychelles have trust law only applicable to non-residents. Information on the settlors and beneficiaries of domestic trusts is required to be held under the laws of 47 countries. In 36 of the countries with trust law, a domestic trustee of a foreign trust is also required to have information on the identity of settlors and beneficiaries, in some or all cases. Of the 28 countries that do not have trust law, 18 indicated that their residents might act as trustees of a foreign trust. In all of these, except for Luxembourg, there is a requirement on resident trustees to identify settlors and beneficiaries of foreign trusts. Of the 54 countries that do have trust law, 45 countries report requiring all trusts formed under their law to keep accounting records. The Report said that both OECD and non-OECD countries have implemented or made considerable progress towards implementing standards for transparency and effective exchange of information. But it recognises that further progress is required in relation to the following issues in certain countries in order to address:
constraints placed on international co-operation to counter criminal tax abuses;
those instances where a domestic tax interest is needed to obtain and provide information in response to a specific request for information related to a tax matter;
strict limits on access to bank information for tax purposes;
that competent authorities have appropriate powers to obtain information for civil and criminal tax purposes;
the lack access to beneficial ownership information and the permissibility of bearer shares; the need for the keeping of accounting records for international company regimes.
Countries are encouraged to review their current polices and to report the outcome of their review at the next Global Forum meeting.
Over the next year, said the Report, the most crucial issue would be whether further progress was made in the TIEA negotiations with non-OECD Participating Partners. Some progress has already been made. The USA had, for example, since 2000 signed TIEAs with Antigua & Barbuda, Aruba, The Bahamas, the BVI, the Cayman Islands, Jersey, Guernsey, Isle of Man and Netherlands Antilles. Three of these agreements ? BVI, Cayman Islands and Guernsey ? had entered into force. The Netherlands had also signed a TIEA with the Isle of Man on 7 October 2005 and Australia signed a TIEA with Bermuda on 11 November 2005. Over 40 such negotiations were currently under way and due to be completed before the end of the year. These agreements closely followed the Model Agreement, and many more agreements were currently under negotiation between OECD and non-OECD participating partners.
A Bill to ratify the 1985 Hague Convention on the Law Applicable to Trusts has been passed by the lower chamber of the Swiss Parliament. Adopted by the Federal Council last December, the Bill is due to go before the second chamber of parliament over the summer. If passed, the Convention will be brought into force in 2007. Designed to give greater legal certainty to trusts, the Bill will amend Swiss federal legislation on international private law (the IPRG), which currently contains no special provisions on trusts, adding specific provisions on court jurisdiction and the recognition of decisions made abroad. The federal debt enforcement and bankruptcy act (the SchKG) will also be revised to take account in Swiss debt enforcement proceedings of the distinction between the personal assets of the trustee and the trust.
The governments of Gibraltar, Spain and the UK issued a joint statement on 26 July announcing that they had reached a preliminary agreement concerning flights to Gibraltar’s airport, and issues concerning telecommunications and the border with Spain. A joint communiqué by the Tripartite Forum of Dialogue on Gibraltar said: “The three participants confirm that the necessary preparatory work related to agreements on the airport, pensions, telephones and fence/border issues, carried out during the last 18 months, has been agreed. Accordingly, they have decided to convene in Spain the first Ministerial meeting of the Tripartite Forum of Dialogue on Gibraltar on 18 September 2006.? Among the issues considered was whether flights from Spain to Gibraltar would be considered ‘internal flights'; the sharing of security at the airport between Spain and Gibraltar; the border; and telephone services, which are severely restricted in Gibraltar. The Financial Services & Markets Act 2000 (Gibraltar) (Amendment) Order 2006, which amends the 2001 Gibraltar Order to give certain Gibraltar investment firms the right of establishment and provision of services in the UK, was brought into force on 31 July. The rights correspond to the “passport rights” of firms authorised in other EEA States under the investment services directive. On 5 July, the governments of Gibraltar and the UK published draft texts of the proposed new Constitution for Gibraltar. The move followed a statement to the UK parliament by Minister for Europe Geoff Hoon in which he said that the new Constitution provides for a “modern and mature relationship” between the UK and Gibraltar. The Constitution, agreed in April by then UK Foreign Secretary Jack Straw and Gibraltar’s Chief Minister Peter Caruana, will see the UK retaining international responsibility for Gibraltar, including its external relations and defence, and as the Member State responsible for Gibraltar in the European Union. ?The new Constitution does not in any way diminish British sovereignty and gives Gibraltar much greater control over its internal affairs and that degree of self-government compatible with British sovereignty and the UK’s continuing international responsibilities,? said Hoon. ?The UK’s long standing commitment that the UK will never enter into arrangements under which the people of Gibraltar would pass under the sovereignty of another state against their wishes will be unchanged. ?HMG recognises that the act of deciding on their acceptance of the new Constitution in the forthcoming referendum will be an exercise of the right of self-determination by the Gibraltarian people in that context,? he added. The government of Gibraltar welcomed the statement. Caruana said the fact that it recognised a referendum to be an act of self-determination cleared the way for the Gibraltar to convene the referendum on the new constitution.
Barclays Bank will be forced to hand over details of thousands of its customers’ offshore accounts after the Her Majesty?s Revenue & Customs (HMRC) won a landmark legal case that it believes could yield £1.5bn in unpaid tax. Barclays said that it would hand over details of customers’ offshore bank accounts by 24 June as it does not intend to appeal against the Special Commissioner’s judgment, which granted the Revenue powers, which are expected to affect all banks, to force disclosure of British residents’ accounts overseas. The Special Commissioner dismissed Barclays’ claim that this would amount to “a fishing trip” contravening its customers’ human rights and ruled there were grounds to investigate widespread tax evasion. The Revenue said suspicions had been aroused when it found 688 Barclays’ customers were claimants of tax credits and had paid these directly into offshore bank accounts. It told the Commissioner it knew of 9,300 Barclays’ customers with addresses in the UK and accounts outside the UK, but less than a fifth of them had filed UK tax returns and, of those that did, only a tiny percentage declared any foreign income. Barclays Bank said: “We genuinely believe that the majority of our customers are using these accounts for legitimate reasons. For example, they could be expatriates working overseas who do not want to move their whole family abroad and so keep a UK address. ?Another example would be inward expatriates from overseas working in the UK for a few years who want to keep their income from foreign sources separate. However, these accounts are opened on a purely execution-only basis. We do not give tax advice on them. This is an industry-wide issue; it is not specific to Barclays.” Paul Tipping, a director of the British Bankers’ Association, said: “The other banks will follow in due course. The Revenue is already talking to them.” John Avery Jones, special commissioner, said he had sided with the Revenue because “in my view, the information that it has already obtained raises serious questions that merit investigation and cannot be investigated by any other means”. Earlier this year, following another ruling by the special commissioners, the Revenue won the power to require financial institutions to hand over customers’ credit card details to help them track down undeclared income from offshore savings accounts. This latest ruling forces financial institutions to hand over customer data held on their computer systems as well.
The US District Court for the District of New Jersey approved a class settlement for a claim for damages against investment and tax advisors who gave the plaintiffs abusive tax strategies that were not approved by the IRS. In Simon v KPMG, a class action, more than 200 clients of accountant KPMG and law firm Sidley Austin Brown & Wood sued for damages, alleging that the defendants sold them tax strategies that the defendants knew were abusive and would not be approved by the IRS. The IRS audited the clients for use of the tax strategies, even though the clients paid large sums of money for the tax shelters. The parties came to a settlement agreement under which the defendants would pay US$153,920,847.60 into a settlement fund together with costs and US$24,624,750 in fees. The parties moved for approval of the settlement, and the district court granted preliminary approval. An earlier US$195 million deal, brokered in September, collapsed after dozens of the more than 260 eligible investors chose not to take part. In issuing his opinion, on 2 June 2006, US Judge Dennis Cavanaugh said that if he had not approved the settlement, the plaintiffs suing KPMG could have faced a number of obstacles in front of a jury, including “the prospect that a jury would not sympathise with the plight of the high-net-worth individuals who make up the class,” or that the investors would be held liable for having originally agreed to buy the suspect shelters. Last year, KPMG agreed to pay US$456 million to avoid prosecution for the tax shelters that it sold between 1996 and 2005, which, the US government alleges, helped taxpayers unfairly avoid more than US$11 billion in taxes. Eighteen defendants, including 16 former KPMG executives, remain under indictment.
Under the new US model tax treaty, due to be published later this year, zero-rated withholding is to be made contingent upon a treaty partner?s level of cooperation in exchanging information on civil and criminal tax matters. The US model treaty was last revised in 1996. Addressing the international committees of the American Bar Association Section of Taxation on 5 May, US Treasury international tax counsel Hal Hicks said that, despite its inclusion in recent high-profile treaties, a zero withholding provision would not be a standard component of an updated US model tax treaty. “Exchange of information on civil and criminal tax issues is key to all treaty negotiations,” he said. He expected another tranche of treaties and protocols, including the recently signed Denmark-U.S. protocol, to go before the Senate Foreign Relations Committee in the autumn. Other treaty negotiations currently nearing completion include agreements with Canada, Finland, Germany and Norway.
A report entitled ?Tax Haven Abuses: the enablers, the tools and secrecy? was released by the Permanent Subcommittee on Investigations of the US Senate Homeland Security & Governmental Affairs Committee on 1 August 2006. The report, based on a 12-month investigation, examines tax havens, detailing case histories that give insight into how they function and including recommendations for reducing their influence. The business of promoting, developing, and administering offshore financial services, said the report, has become a massive and complex industry. The range of services and products available offshore now parallels what is available domestically, but offshore service providers typically advertise a level of secrecy and tax avoidance that cannot be found onshore. The Report presents a number of case studies to illustrate the roles played by offshore promoters and service providers, the products and services they offer, and how they interact with US persons to hide assets and shift income offshore. According to the report, components of the offshore industry can be summarised as follows:
Offshore Jurisdictions ? First and foremost, the offshore industry relies upon jurisdictions that promise secrecy and anonymity to persons doing business in their territories. At least 50 such jurisdictions are operating in the world today, and the extent to which an offshore jurisdiction maintains secrecy laws and practices is typically used as a key selling point for persons considering moving their assets offshore. These jurisdictions typically provide several layers of secrecy protections to persons transacting business with their residents. US law enforcement typically is not even aware that an offshore entity or account exists. Once a regulatory or law enforcement agency does become aware of the entity or account, most offshore jurisdictions require a long and cumbersome process in order to gain access to any important information, such as the identities of an offshore corporation?s beneficial owners or a trust?s grantors and beneficiaries. In many offshore jurisdictions it is a crime for a bank or other financial institution to divulge the names of account holders or client-specific financial transactions outside of this prolonged process. Moreover, a private party with a claim against an offshore entity, such as a plaintiff with a civil judgment, faces huge legal and logistic hurdles to find or access offshore accounts and assets. In addition to corporate, financial, and trust secrecy, the legal regimes of offshore jurisdictions typically place restrictions on assisting international tax enforcement efforts. Most of these jurisdictions impose little or no taxes on non-residents. Until recently, many offshore jurisdictions refused to cooperate with international law enforcement requests for information related to tax matters, because tax evasion was not considered a crime within the jurisdiction itself. In addition, offshore regulators do not have the ability to monitor individual transactions by the offshore service providers easily. International organisations have expressed concern over the lack of information exchange on tax matters, as well as poor cooperation with international anti-money laundering investigations, and have taken action to pressure non-cooperative jurisdictions. In response, in recent years, some offshore jurisdictions have improved their anti-money laundering laws and signed tax information exchange agreements with other governments. However, the heavy dependence of offshore jurisdictions on their financial sectors invites poor implementation of these reforms and weak government oversight.
Offshore Promoters ? The transfer of funds offshore often begins with an offshore promoter. Promoters are individuals and firms who work to bring new clients offshore and facilitate the offshore movement of their assets. Promoters typically use the Internet, seminars, books, mailings, and other means to advertise the benefits of taking assets offshore. They typically provide advice on the types and relative advantages of available offshore structures and connect individual clients to offshore service providers that may suit their needs. Often this advice includes recommending an offshore jurisdiction whose laws and regulatory structure best advance the client?s objectives. Some promoters also act as an intermediary between their clients, the offshore governments, and local service providers. Promoters typically earn income through fees charged to clients and referral fees paid by the offshore service providers and financial institutions to which they refer clients. Client fees are generally either a commission based on the value of assets going offshore, an overall charge for an offshore ?package? of services, or flat fees for specific services.
Corporate Formation Agents and Trust Companies ? A key group of offshore service providers is made up of corporate formation agents and trust companies. These service providers are the individuals or firms who establish the offshore corporations and trusts that serve as the recipients of assets transferred offshore. These offshore service providers, sometimes in conjunction with a promoter, fill out the paperwork, file it with the appropriate government agencies, pay fees, and often provide trustees, nominee directors, or nominee officers for the required documentation. The client generally never needs to travel to the jurisdiction, and the client?s name typically appears nowhere on the formation documents. Most offshore corporations and trusts are shell operations that exist only on paper and function without their own employees or offices. They usually have little more than an offshore mailing address and an offshore individual empowered to sign documents on behalf of the entity. Once a trust or corporation is created, the client can open banking or brokerage accounts in its name, rather than in their own name. This trust or corporation can then be listed on US bank transfers and other documents as the owner of the funds, even if the client is the only person with authority over the accounts. Real estate, stock, artwork, or other property can similarly be held in the name of the offshore entity. Some clients are satisfied with a single offshore corporation or trust. Others pay for the formation of a more complex offshore structure consisting of several related corporations and trusts to disguise the client?s relationship to the offshore assets they hold. For example, an offshore service provider may create one or more offshore corporations to serve as the owner of record for different client assets and offshore accounts, and it may form one or more offshore trusts to wholly own the corporations. Many corporate formation agents and trust companies will also supply trustees and nominee corporate directors and officers to give the entities the appearance of independent, functioning entities, while ensuring that the client?s name is in no way attached to them. In some cases, the offshore service provider and client may sign a side letter agreement or other document attesting to the fact that the client is the beneficial owner of the offshore assets, since no other document evidences the client?s ownership. As the offshore industry has expanded, competition among corporate formation agents and trust companies has increased. This competition has led to lower fees and quicker turnaround times in the establishment of new offshore entities. In addition, it has further weakened compliance with fiduciary duties and regulations associated with creating and managing offshore entities.
Corporate and Trust Administrators ? In addition to forming new offshore entities, offshore service providers typically offer to manage the trusts and corporations they create, for an annual management fee. These management services include filing annual reports and paying fees to the government, authorising corporate or trust actions, operating bank and securities accounts, keeping records, and handling correspondence. Administrators typically maintain records offshore under secrecy laws that keep them out of the reach of regulatory personnel and other onshore investigators. As the case histories demonstrate, offshore corporate and trust administrators typically ensure client control over the assets held by the offshore entities. Control is assured through various means. For example, administrators may appoint a nominee director of an offshore corporation in order to have the name of a natural person other than the client on the incorporation documents, but then place all of the corporate assets in an account for which the client is the sole signatory. Trust administrators also often appoint a trustee who agrees to follow all client recommendations for trust activities.
Trust Protectors ? For the management of trusts, some service providers also supply individuals who serve as so-called ?trust protectors?. The role of trust protector is generally not defined in law, and these persons can provide a wide range of services. In some cases they serve to safeguard trust assets from misappropriation, while in others they effectively manage the trust assets. Some clients select a US person who the client knows and trusts; others select offshore personnel outside the reach of US law. Many offshore trusts are established with the intention of maintaining client control, and in such cases trust protectors can serve as conduits of the client?s instructions to the trustees, with the trustees merely rubber-stamping the protectors? directions. Such an arrangement permits greater client control while maintaining the appearance of trustee independence. Financial Institutions. Financial institutions are also crucial players in the offshore services industry. Offshore banks and securities firms open accounts for the shell entities that hold the clients? offshore assets. These firms typically have correspondent accounts with one or more US financial institutions that function as gateways into the US financial system. The US institutions then provide international wire transfer services, financing, and brokerage services for the offshore financial institution, often without knowing the identity of the clients whose funds are involved. Many US banks and securities? firms open accounts onshore in the name of the offshore entities. These offshore entities then make use of the US financial system.
Law Firms ? Law firms are still another set of key players in today?s offshore industry. Lawyers help establish offshore structures, draft financial instruments, and provide legal opinions justifying offshore transactions. In some cases, law firms take an even more active role, designing offshore structures for their clients, identifying offshore service providers, and conducting negotiations with these providers on the clients? behalf.
Tools for Transferring Assets ? Onshore promoters and offshore service providers have devised a wide range of techniques for transferring assets offshore and then bringing funds back into the US for the client?s use. Some of these techniques are well established. For example, offshore banks typically issue ATM or credit cards in the name of a shell corporation or trust. Clients can then use these cards in the US to access their offshore funds, just as if the assets were in a domestic bank. Clients can also make sham loans to their offshore entities to move funds offshore or accept loans from offshore entities to bring funds back into the United States. Similarly, clients and their offshore entities can pass funds by billing each other for fictional services. Assets can also be moved in and out of offshore jurisdictions through shell intermediaries to disguise their source and destination. Recently, offshore service providers have developed new methods to transfer assets between onshore and offshore entities, including the use of annuities, mortgages, and offshore insurance companies.
The Permanent Subcommittee issued the following findings in the report:
Control of Offshore Assets ? Offshore ?service providers? in tax havens use trustees, directors, and officers who comply with client directions when managing offshore trusts or shell corporations established by those clients; the offshore trusts and shell corporations do not act independently.
Tax Haven Secrecy ? Corporate and financial secrecy laws and practices in offshore tax havens make it easy to conceal and obscure the economic realities underlying a great number of financial transactions with unfair results unintended under US tax and securities laws.
Ascertaining Control and Beneficial Ownership ? Corporate and financial secrecy laws and practices in offshore tax havens are intended to make it difficult for US law enforcement, creditors, and others to learn whether a US person owns or controls an allegedly independent offshore trust or corporation. They also intentionally make it difficult to identify the beneficial owners of offshore entities.
Offshore Tax Haven Abuses ? US persons, with the assistance of lawyers, brokers, bankers, offshore service providers, and others, are using offshore trusts and shell corporations in offshore tax havens to circumvent US tax, securities, and anti-money laundering requirements.
Anti-Money Laundering Abuses ? US financial institutions have failed to identify the beneficial owners of offshore trusts and corporations that opened US securities accounts, and have accepted W-8 forms in which offshore entities represented that they beneficially owned the account assets, even when the financial institutions knew the offshore entities were being directed by or were closely associated with US taxpayers.
Securities Abuses ? Corporate insiders at US publicly traded corporations have used offshore entities to trade in the company?s stock, and these offshore entities have taken actions to circumvent US securities safeguards and disclosure and trading requirements.
Stock Option Abuses ? Because stock option compensation is taxed when exercised, and not when granted, stock options have been used in potentially abusive transactions to defer and in some cases avoid US taxes.
Hedge Fund Transfers ? US persons who transferred assets to allegedly independent offshore entities in a tax haven have then directed those offshore entities to invest the assets in a hedge fund controlled by the same US persons, thereby regaining investment control of the assets.
The Report also made a number of recommendations:
Presumption of Control ? US tax, securities, and anti-money laundering laws should include a presumption that offshore trusts and shell corporations are under the control of the US persons supplying or directing the use of the offshore assets, where those trusts or shell corporations are located in a jurisdiction designated as a tax haven by the US Treasury Secretary.
Disclosure of US Stock Holdings ? US publicly traded corporations should be required to disclose in their SEC filings company stock held by an offshore trust or shell corporation related to a company director, officer, or large shareholder, even if the offshore entity is allegedly independent. Corporate insiders should be required to make the same disclosure in their SEC filings.
Offshore Entities as Affiliates ? An offshore trust or shell corporation related to a director, officer, or large shareholder of a US publicly traded corporation should be required to be treated as an affiliate of that corporation, even if the offshore entity is allegedly independent.
1099 Reporting ? Congress and the IRS should make it clear that a US financial institution that opens an account for a foreign trust or shell corporation and determines, as part of its anti-money laundering duties, that the beneficial owner of the account is a US taxpayer, must file a 1099 form with respect to that beneficial owner.
Real Estate and Personal Property ? Loans that are treated as trust distributions under US tax law should be expanded to include, not just cash and securities as under present law, but also loans of real estate and personal property of any kind including artwork, furnishings and jewellery. Receipt of cash or other property from a foreign trust, other than in an exchange for fair market value, should also result in treatment of the US person as a US beneficiary.
Hedge Fund AML Duties ? The Treasury Secretary should finalise a proposed regulation requiring hedge funds to establish anti-money laundering programmes and report suspicious transactions to US law enforcement. This regulation should apply to foreign-based hedge funds that are affiliated with US hedge funds and invest in the United States.
Stock Option-Annuity Swaps ? Congress and the IRS should make it clear that taxes on stock option compensation cannot be avoided or deferred by exchanging stock options for other assets of equivalent value such as private annuities.
Sanctions on Uncooperative Tax Havens ? Congress should authorise the Treasury Secretary to identify tax havens that do not cooperate with US tax enforcement efforts and eliminate US tax benefits for income attributed to those jurisdictions.
The Subcommittee said it had consulted experts in the areas of tax, securities, trust, anti-money laundering and international law. It had also issued 74 subpoenas and conducted more than 80 interviews with a range of parties related to the issues and case histories examined.