Owen, Christopher: Offshore Survey – January 2007

Singapore and Qatar sign tax treaty
28 November 2006, Singapore and Qatar signed a tax treaty that clarifies the taxing rights of each country on all forms of income, and provides for the elimination of double taxation. It will enter into force when ratified by both countries. Singapore has now signed tax treaties with 59 countries.
Belgium abolishes dividend withholding tax for treaty countries
27 October 2006, the Belgium government announced plans to abolish dividend withholding tax in respect of payments made to corporate shareholders resident in treaty countries from January 2007.The corporate shareholder must have a shareholding of at least 15% in the Belgian subsidiary and have held this for an uninterrupted period of 12 months – the same conditions as apply under the EU Parent Subsidiary Directive. This exemption is currently only available for dividend payments made to corporate shareholders resident in the EU. The domestic exemption is not subject to a limitation on benefits provision as is the case in the treaty arrangements, and the 15% participation requirement is more favourable than some of the new treaties Belgium has concluded. The proposal will make the withholding tax exemption accessible for all qualifying treaty country corporate investors. Using Belgium as a holding location for investments into Europe will allow them to repatriate European profits exempt from dividend withholding taxes, without a limitation on benefits.

Commonwealth finds compliance costs outweigh benefits for IFCs
A Commonwealth Secretariat study has found that small island states are finding compliance costs substantially outweigh any benefit to their reputation as international financial centres. The study, entitled “Developmental Implications of Anti-Money Laundering and Taxation Regulations” and presented at the Commonwealth Finance Ministers’ meeting in Sri Lanka in September 2006, looked at Barbados in the Caribbean, Mauritius in the Indian Ocean and Vanuatu in the Pacific. “In the three international finance centres under consideration, the costs of meeting new multilateral regulatory standards have exceeded the short-to-medium term benefits for both the public and private sectors,” the report said. It found that offshore centres had lost business in spite of improving their reputations by complying with standards drawn up by the Organisation for Economic Co-operation & Development (OECD) and the Financial Action Task Force (FATF). According to the study, “increased public revenue of these three developing island jurisdictions has been diverted toward regulating their international financial services sectors. The majority of private firms and banks operating in international financial services sectors in these states have experienced a significant increase in compliance costs, in some cases sufficient to threaten their future business viability.” The FATF reported in July that US service providers have successfully lobbied against raising standards, while Delaware actively promotes itself as more secretive than so-called offshore centres. “If the efforts to raise standards are to succeed, these must apply evenly to large and small countries. Dominant countries, including those in the Commonwealth, must also share market access opportunities with those small states that meet higher standards,” said Richard Hay, co-chairman of the International Committee of the Society of Trust & Estate Practitioners.

Australian Senate approves CGT exemption for foreign investors
6 December 2006, the Australian Senate approved the Tax Laws Amendment (2006 Measures No. 4) Bill, which exempts foreigners from paying capital gains tax on Australian assets, excluding items such as real estate and mining rights. The government argued that the measure was needed to boost investment in the Australian economy and bring the country into line with laws in other OECD countries. Treasurer Peter Costello said: “The amendments will encourage more investment in Australia by aligning Australian law more consistently with international practice.” The bill faced stiff opposition with many contending that it was unfair to expect Australians to continue to pay capital gains tax while foreigners benefited from a significant tax break on the sale of their investments.

UK Revenue considers partial amnesty
HM Revenue & Customs (HMRC) is understood to be considering a partial amnesty to UK tax evaders who have money hidden in undisclosed offshore accounts. The proposed concession, which is understood would cap penalties at a tenth of their current maximum, has not yet been discussed at government level and was not mentioned in Gordon Brown’s pre-Budget Report on 6 December. Intended to encourage individuals to disclose their offshore holdings, the scheme would be timed to coincide with a legal ruling that is expected to force a group of UK banks with international branches to divulge information on clients’ with overseas accounts. Under the scheme, these banks would be asked to write to their customers, telling them about the Revenue’s voluntary disclosure offer at the same time as informing them that their details had been handed to the revenue. The court decision, due to be handed down in 2007, is likely to have a similar impact on the banks as a landmark judgment against Barclays bank last April. By forcing Barclays to hand over records of its customers with offshore accounts, the Revenue said it expected to collect an extra £1.5 billion in unpaid tax. It estimates that UK residents are holding more than £180 billion in 13 offshore financial centres. The government is expected to avoid using the term “amnesty”, because it will reserve the right to prosecute in the most serious cases. Investors will also face significant financial costs as the Revenue, which has powers to recover unpaid tax going back 20 years, is not expected to offer any concessions on the interest costs. The offer is likely to be extended for a limited period, after which account holders would face heavy penalties if accounts were uncovered by a subsequent investigation.

Gaines-Cooper ruling threatens UK residency status quo
31 October 2006, the UK Special Commissioners ruled against British-born businessman Robert Gaines-Cooper, who sought to establish he was resident and domiciled in the Seychelles for the tax years 1992/93 to 2003/2004. If upheld on appeal, the ruling means that many “exiles” could be stripped of their non-resident status. In Robert Gaines-Cooper v Revenue & Customs, the appellant, who had business interests across the world, purchased a house in the Seychelles in 1975 and obtained a residency permit in 1976. He indirectly retained a house and assets in England and latterly his wife and son resided in England. He often visited his family in the UK at weekends, but he judged he was not liable to tax because he had moved his domicile to the Seychelles and spent fewer than 90 days a year on average in the UK. Since 1993, days of entry and departure have been disregarded when calculating whether an individual has spent an average of more than 90 days in the UK during four consecutive tax years – or more than 183 days during any single year. Anyone who exceeds either limit is liable to income tax. The Special Commissioners acknowledged that Gaines-Cooper had based his assessment of the days spent in the UK on Revenue guidance, but agreed with Revenue & Customs that ignoring both the dates of arrival and departure would create a distorted picture. It therefore adjusted the time spent in the UK to include nights spent in the UK. The tribunal rejected Gaines-Cooper’s claim that he had moved his domicile on the grounds that he retained connections with the UK. As well as educating his son in the UK and visiting his wife who was mainly based in the UK, he visited regularly for pheasant shooting, Royal Ascot and the Rolls-Royce Enthusiasts Club rally. It held that Gaines-Cooper was resident and ordinarily resident in the UK. It is understood that Gaines-Cooper intends to appeal the decision.

EU urges Asian compliance with savings tax directive
31 October 2006, the European Commission pressed Hong Kong and Macao to comply with the EU savings tax directive in respect of tax interest earned by Europeans in the two Chinese special administrative regions. It has a mandate to start formal exploratory talks on the savings tax with Hong Kong, Singapore and Macao. Thomas Roe, the Commission’s envoy to Hong Kong and Macao, made the latest appeal only a fortnight after Hong Kong’s deputy financial services secretary Martin Glass stated that the territory was legally and constitutionally constrained in its ability to share information with other tax authorities, including China. “The powers of the government and the commissioner of inland revenue are relatively limited and extend only to information which is required for our own tax purposes,” said Glass. “There might be huge ramifications that compliance with such a savings directive would have for our future as an international financial centre, which is also guaranteed under the Basic Law. “Even if we were so minded, we would need to enact legislation which would be a significant departure from our existing tax legislation,” he added. “For that reason I would rate chances of us being included in the Savings Directive in the near future as being exceedingly small.” Singapore has refused to discuss the issue. Benita Ferrero-Waldner, the EU’s commissioner for external relations, said the EU had wanted to include the savings directive as part of wider ranging negotiations with the city-state over a potential economic partnership and co-operation pact. But Singapore had refused to include the issue on the agenda. Laszlo Kovacs, the EU tax commissioner, wants to bring both Hong Kong and Singapore into Europe’s tax net by persuading them to apply the July 2005 Savings Directive, which aims to tax the interest on European citizens’ offshore savings. Third countries can either exchange information with EU tax authorities or levy a withholding tax, which they then pass back to the saver’s European home state. Switzerland chose the latter route because of its banking secrecy laws. The Commission estimates that, as of August, there were more than 37,000 EU citizens resident in Hong Kong – a figure that does not include Hong Kong citizens who also hold EU passports. In July a Commission memo, citing 2005 data from the Bank of International Settlements, noted that there were “external” – or non-banking sector – deposits of US$158.1 billion in Singapore and US$82 billion in Hong Kong.

Isle of Man introduces New Manx Vehicle
1 November 2006, the Isle of Man Companies Act 2006, which introduces a new simplified corporate vehicle into Manx Law, was brought into force. Royal Assent was received on 14 October. The Act provides a streamlined process for setting up and running a company and complements the zero rate company tax strategy introduced in April 2006. The New Manx Vehicle (NMV) is based on the international business company (IBC) model and is fully in line with recognised benchmarks. It is introduced alongside previous Isle of Man Company Legislation (the Companies Acts 1931-2004). Companies formed under the 1931 Act are permitted to convert to the 2006 version in the future. Key elements of the new Act include: Greater flexibility of use; · simplified reporting; · use of regulated corporate directors/one Director individual or corporate; · use of registered agents, in place of company secretary (a role performed by licensed corporate service providers); · unlimited corporate capacity, but restricted objects permissible; · no preclusion of financial assistance; · pre-incorporation contracts can be adopted; · simple merger and consolidation procedures; · introduction of protected cell companies for general business use; · simplified corporate redomiciliation from other jurisdictions. The Act has been designed for a range of corporate transactions and is likely to be particularly useful for public offerings, securitisations and project finance.

Switzerland to recognise trusts in 2007
Switzerland is to ratify the Hague Convention on Trusts in 2007 following the approval of domestic trust legislation in December. The tax treatment of trusts will then have to be harmonised by the 24 Swiss cantons and the federal government. The new Swiss regime will not include certification or regulation of trustees who will be subject to the same rules as independent asset managers.

China signs treaty Protocol with Mauritius
5 September 2006, the People’s Republic of China and Mauritius signed a protocol amending the existing 1994 treaty to provide for an expanded exchange of information article. The protocol, which will enter into force on completion of legal procedures in China and Mauritius, may impact on foreign groups that hold subsidiary investments in China through intermediary Mauritius holding companies. The Chinese revenue believed the inability of the source country to tax capital gains on the transfer of a significant shareholding in a Chinese company allowed scope for tax avoidance. Under the new protocol, China has followed the UN model and added a clause that permits the source country to tax capital gains on the transfer of a 25% or more shareholding of a company resident in the source country. The protocol also incorporates the changes in the 2005 OECD model to expand the scope of the treaty’s exchange of information article. The information exchanged can include particulars about non-residents and can be applied to the administration or enforcement of taxes other than income taxes. A treaty partner also has an obligation to obtain the requested information even though the requesting treaty partner may not need the information for its own tax purposes.

Malta-Spain tax treaty comes into force
12 September 2006, the Malta-Spain tax treaty, signed on 8 November 2005, was brought into force. The treaty, which follows the OECD model, will apply to residents of one or both contracting states, except for tax-exempt entities formed under the Maltese Merchant Navy Act of 1973. It entered into effect as of 1 January 2007. In Spain, the treaty will apply to the individual and corporate income tax, non-resident income tax and local income taxes. In Malta, the treaty will apply only to the income tax. Dividends paid by a company that is a resident of Spain to a resident of Malta, will be subject to Spanish withholding tax at a maximum rate of 5% of the gross amount of the dividends. Spain will further exempt from withholding tax dividends that are paid to a company that is a resident of Malta, provided that the company holds at least 25% of the capital of the company paying the dividends. Interest and royalties are taxable only in the payee’s state of residence. The treaty contains an exchange of information article. Malta is currently included on Spain’s list of tax havens – the so-called black list – but, under Spanish law, a country or territory is automatically excluded from this list when it signs a tax treaty or an exchange of information agreement with Spain. Malta joined the EU on 1 May 2004 and it was believed that this would automatically secure its exclusion from the Spanish black list. But the Spanish tax authorities took a different view and, in a ruling of 25 January 2006, confirmed that Malta was still to be considered a tax haven. Cyprus is also on the Spanish list.

Australia to expand tax information exchange network
The Australian Taxation Office (ATO) said it plans to expand the number of tax information exchange agreements (TIEAs) with offshore financial centres in a bid to restrict corporate tax avoidance. A TIEA with Bermuda was finalised in November 2005 and similar agreements with nine other countries are well advanced, said ATO Commissioner Michael D’Ascenzo. Preliminary discussions are also being held with several countries in the Pacific Region. “We also want to extend our comprehensive treaties so that they will cover information exchange not just on direct taxes but also GST (goods and services tax), and other indirect taxes,” D’Ascenzo said. The Commissioner said the majority of tax avoidance by Australian companies occurred through transfer pricing by companies selling their own goods and services to divisions of their own company set up overseas so that most of a company’s profit could be made in a country with low taxes.

Hong Kong signs new tax treaty with China
The People’s Republic of China (PRC) and the Hong Kong Special Administrative Region signed their first comprehensive income tax treaty on 21 August 2006. The new treaty extends the scope of the existing 1998 agreement, which was limited to business profits and income from personal services, and will strengthen Hong Kong’s competitiveness as the investment gateway to the Chinese mainland. Based on the OECD model, the new treaty covers direct income earned by businesses and individuals, such as operating profits and employment income, as well as indirect income, such as dividends, interest and royalties. It also contains new administrative provisions, including an exchange of information article. Under the new treaty, China-sourced passive income – including dividends, interest, royalties and capital gains – received by Hong Kong investors would generally be afforded preferential treatment by way of reduced withholding tax rates or, if specific conditions are satisfied, a tax exemption. This compares favourably with China’s domestic tax law and many of China’s bilateral income tax treaties, including those with Macao and Singapore, and is particularly attractive because the items of income covered are not subject to Hong Kong tax, resulting in a net benefit to the Hong Kong investor. A capital gains tax exemption should facilitate cross-border restructuring and merger and acquisition activities because capital gains derived from the disposition of shares in a Chinese company by Hong Kong investors would otherwise be subject to a 10% withholding tax. This exemption would not apply if the Chinese company is mainly a property holding company or the ownership interest disposed of represents an ownership interest of at least 25% in the Chinese company. China does not currently tax dividends paid by foreign investment enterprises in China to foreign investors, but that exemption may be curtailed as part of China’s proposed tax reform. If this were the case, the new treaty’s 5% withholding tax rate on dividends would be preferential to a possible 10% or higher rate. The new treaty’s 7% withholding tax rates on interest and royalties received by Hong Kong investors from Chinese sources compare favourably with the standard 10% rate under China’s domestic law and the PRC-Macao income tax treaty. The treaty contains an exchange of information article, but the information to be exchanged is limited to that which is necessary for carrying out the provisions of the domestic laws concerning taxes covered by the new treaty.

ECJ rules against Azores’ tax breaks
On 6 September 2006, the European Court of Justice (ECJ) dismissed the Portuguese government’s challenge to a 2002 European Commission decision which found the reduced income tax rates applied in the Azores Islands prohibited state aid and was contrary to EC rules. Dismissing the action, the ECJ said: “The court finds that the Portuguese government has not proved that the adoption of the measures at issue was necessary for the functioning and effectiveness of the general tax system.” Portugal had permitted the regional assembly of the remote, mid-Atlantic chain of nine volcanic islands to set their own income and corporate tax rates well below those of the mainland, with cuts of as much as 30% in corporate income tax. Portugal argued that the tax cuts were a matter of sovereignty and motivated by the geographical isolation, difficult climate and economic dependence of the Azores on dairy farming, fishing and tourism. Both the UK and Spain intervened on the side of Portugal in the case. The European Commission ruled in December 2002 that the tax cut was prohibited state aid in that it gave the Azores an economic advantage at the expense of other EU areas. It tax cut, it said, constituted “operating aid” in that it was ongoing, rather than being one-off aid to assist an industry or region. It also found that the reductions were not justified by their contribution to regional development, holding that “their level is not proportional to the handicaps they are intended to alleviate”. It ordered the region to raise its rates. Portugal appealed. In supporting the appeal, the UK said a decision against the tax cuts would raise “regional autonomy issues of considerable constitutional importance.” In particular, it said, the UK’s “asymmetrical” constitutional system of devolution could be called into question, having regard to the position of Scotland and Northern Ireland. Spain also said the decision could affect the special tax powers granted to its northern Basque Country and Navarre regions, as stipulated in the Spanish constitution. In October 2005, the ECJ Advocate General Leendert Geelhoed of the Netherlands said the purpose of the tax reductions was to compensate for disadvantages of doing business in the Azores, but that did “not constitute a valid justification based on the nature and economy of the Portuguese tax system”. “The Portuguese Republic has not shown (or attempted to show) that the Azores receive no countervailing funding from state finances to compensate for the lower tax revenue,” he said.

Mauritius to cooperate with India over tax treaty abuse
29 August 2006, Mauritian Minister of Finance Ram Sithanen confirmed that Mauritius was willing to cooperate with India to prevent misuse of the 1983 India-Mauritius tax treaty. The treaty has attracted growing criticism as a way for Indian companies to avoid paying capital gains tax in India. In May, Indian Finance Minister Palaniappan Chidambaram said that he would not bow to opposition demands to reintroduce both capital gains tax and tighten the tax treaty with Mauritius to make foreign institutional investors pay more tax in India. But pressure on India to re-negotiate the Mauritian tax treaty has increased; particularly after stronger residence qualifications were included in a similar treaty signed recently with Singapore. The new proposals are understood to include a rule that only companies listed on a recognised stock exchange will qualify for the treaty’s capital gains tax exemption, and that a company should have a minimum operating expenditure of $200,000 in the state of residence for at least two years before the date on which a capital gain arises. Sithanen also said Mauritius was negotiating a preferential trade agreement and a comprehensive economic cooperation and partnership agreement with India and hoped to conclude it by the end of this year. Figures from the Reserve Bank of India for Foreign Direct investment into India in 2004-2005 place Mauritius as the largest external investor into India, accounting for US$820m out of a total US$2,320m.