30 January 2007, Antigua and Australia signed a Tax Information Exchange Agreement (TIEA), which provides for full exchange of information on criminal and civil tax matters between Australia and Antigua. It is the second such arrangement entered into by both countries. Australia signed a TIEA with Bermuda in 2005 and Antigua signed a similar accord in 2000 with the US. It will enter into force when ratified by both governments.
12 February 2007, Minister of Commerce Lynette Eastmond announced that Barbados is to set up a Financial Services Commission “to enhance the supervision and regulation of financial institutions in Barbados”. The proposed commission will, she said, integrate regulators of the Co-operatives Department, the Securities Exchange Commission, the Business Development Unit of the Ministry of Economic Affairs & Development and the Office of the Supervisor of Insurance and Pensions.
2 March 2007, Belgian Prime Minister Guy Verhofstadt announced that Belgium and Russia would open negotiations on a new tax treaty to take into account significant changes in Belgian tax law and business practices. He referred to the beneficial Belgium tax treaties with the US and Hong Kong which are the backbone of Belgium’s strategy of positioning itself as the gateway for US investment in the Far East. The current 1995 Belgium-Russia treaty, which replaced the 1987 Belgium-USSR tax treaty, was brought into force in June 2000.
16 March 2007, the Unified Enterprise Income Tax Law, to unify the corporate tax rate at 25% for domestic and foreign investment enterprises (FIEs) and make other significant changes to the corporate tax regime, was finally approved by the National People’s Congress of the People’s Republic of China. The effective date of the new EIT law is 1 January 2008, at which time the former foreign-investment and domestic-investment enterprise income tax laws ? the FEIT law and the old EIT law -? will be officially repealed. Domestic firms, on average, have paid an effective tax levy of 24%; double that of their foreign counterparts, since the introduction of a dual tax regime in 1994. Both domestic and foreign investment enterprises are currently subject to a statutory rate of 33%, but there are preferential tax rates of 24% and 15% for FIEs in some special regions, and reduced tax rates of 27% and 18% for domestic investment enterprises with profits that fall below a specific threshold. The unified EIT would revise the existing preferential tax policies such that, in addition to a new unified tax rate of 25% on all enterprises in China and regardless of the source of the capital, there would be preferential tax rates of 20% for qualified enterprises with profits that fall below a specific threshold, and 15% for some high- and new technology enterprises. The fixed-period tax reduction and exemption policies for manufacturing FIEs and the 50% tax reduction for export-dominated manufacturing enterprises would be eliminated. But to mitigate the impact of the higher tax burden on FIEs under the unified EIT, enterprises that currently receive those tax benefits would benefit from a five-year transition period, during which their benefits would continue. “The corporate tax reform marks the maturity and standardisation of China’s economic system,” Jin Renqing, China’s finance minister, told government press agency Xinhua. The law also granted the State Council the right to alter the tax code without requiring the vote of the NPC, which meets only once a year.
13 February 2007, Cyprus submitted a formal application to the European Commission and the European Central Bank (ECB) for entry into the euro zone. If the request is granted, the euro will become the country’s official currency on 1 January 2008. A final decision will be taken at the EU summit in June. Cyprus joined the EU in May 2004, along with nine other Central and East European countries, and the European Exchange Rate Mechanism 2 in May 2005. Of the ten countries that joined the Union in 2004, Slovenia is the only one to have already joined the euro zone, becoming its thirteenth member on 1 January this year. Finance Minister Michael Sarris said Cyprus met all four of the so-called Maastricht criteria regarding inflation, government financing, the exchange rate and long-term interest rates. Cyprus has implemented an austerity programme since 2004 to reduce its budget deficit from above 6% of GDP to a projected 1.6% in 2007. Euro zone member countries must ensure their annual budget deficit does not exceed 3% of GDP.
7 March 2007, the Lower Court of Arnhem found that a Hong Kong company was not resident, and hence not subject to tax, in the Netherlands. The Dutch tax inspector had imposed a corporate income tax assessment because its managing director was a resident of the Netherlands. In case AWB06/290, two individuals who were resident in the Netherlands in 2001 and 2002 each owned 50% of the shares of a company (X Ltd.) incorporated under Hong Kong law. The managing directors of X Ltd were one of the individuals (E) and a trust company, G Ltd. The individuals also indirectly owned shares in a Dutch company (X BV), which carried out activities in the wholesale of products related to gardening. Those products were mainly purchased in China. X Ltd. owned an office and showroom in Hong Kong, and was involved in the quality control of the products manufactured in China, logistic services, order tracing, product development and purchase, and fairs. In China, X Ltd. was treated as a representative office. In 2001, X Ltd only sold products to X BV. But in 2002, 6% of X Ltd’s transactions concerned unrelated parties. X BV paid a consideration to X Ltd, which was equal to the purchase price paid to the Chinese suppliers plus a 10% mark-up, which was included in the sales price charged by X Ltd to X BV. The issue was whether or not X Ltd was resident in the Netherlands because of the guiding and managing role of E, who was a resident of the Netherlands. The Lower Court held that the determination of the place of effective management should be based on the place where the core activities are exercised, for which it is decisive whether the company under its own management performs those activities. The Court observed that the core activities of X Ltd. were carried out by its employees working in the office in China and that those activities were managed there. The Court held that it was irrelevant that E visited the China office a few times per year and paid some attention to the Chinese activities from the Netherlands. Except from E’s role based on his position as shareholder and member of the management board, no indications existed that he was involved with the core activities. Therefore, the Court decided that based on the facts, X Ltd. was not resident in the Netherlands.
21 March 2007, the European Commission agreed to extend the investigation procedure into the tax arrangements for Belgian coordination centres, to allow more time for Belgium and other interested parties to present comments following the European Court of Justice’s decision on 22 June 2006. The Commission ruled on 17 February 2003 that the incentives were incompatible with EC Treaty state aid rules, but allowed existing centres to benefit from 10-year tax breaks, which were already in place, until 2010. But the ruling did not make any provision for those coordination centres whose application for renewal of their authorisation was pending in February 2003. Some of the transitional measures set out by the Commission were annulled in the June ruling and the Commission is now consulting on how coordination centres should be treated. The Commission has also launched a formal investigation into the taxation of interest relating intra-group transactions in Hungary to ascertain whether the arrangements comply with state aid rules or whether they could distort competition. There is doubt surrounding the scheme’s status as a general measure because it is only open to groups rather than private companies and excludes small businesses and financial firms from applying it.
The European Court of Human Rights ruled, on 12 December 2007, that the UK inheritance tax does not violate the EU human rights convention because exemptions for same-sex couples do not apply to cohabitating family members. In Burden & Burden v the United Kingdom, the applicants were two unmarried sisters, Joyce and Sybil Burden aged 88 and 80 respectively, who have been living together in a home built on land inherited from their parents for the past 30 years. The land and house have so appreciated in value that they fear if one died first the other would have to sell in order to meet UK inheritance tax. Surviving legal spouses and civil partners are not subject to inheritance tax in such circumstances. Until December 2005, the Burden sisters had no grounds for a discrimination complaint, since all unmarried cohabitants faced the same concern and the European Convention allows governments to grant special rights and exemptions to married couples. But on 5 December 2005, the UK?s new Civil Partnership Law went into effect, allowing same-sex couples to form partnerships having the same inheritance and tax status as married couples, providing a basis for the Burden sisters to mount a discrimination claim. When the new law was pending in Parliament, the issue of fairness for elderly unmarried couples living together was raised and the House of Lords approved an amendment to deal with the situation. But this did not become part of the final bill, the government arguing that it was an issue to be dealt with separately. It has not done so. The Burden sisters contended that this posed a fundamental unfairness that violated the ban against categorical discrimination in the Convention. The UK government argued that the Burdens had no claim because they had not yet suffered any of the consequences they feared, and it was possible the government would address this problem before either of them died. The court was not willing to entertain this objection, in light of their advanced ages and the rejection of the Lords? amendment. All seven members of the court agreed that the case was properly before them but a bare majority, four to three, concluded that in matters of taxation, government parties to the Convention have a wide “margin of appreciation” and this was a matter beyond the reach of the Convention. It stated that it would not second-guess the government unless its policy choices are “manifestly without reasonable foundation”. The court pointed to Convention principles protecting marriage and effectively banning sexual orientation discrimination as supporting the Civil Partnership Act?s focus solely on same-sex couples. “The State cannot be criticized for pursuing, through its taxation system, policies designed to promote marriage; nor can it be criticized for making available the fiscal advantages attendant on marriage to committed homosexual couples.” But three dissenters were unpersuaded. Judges Giovanni Bonello of Malta and Lech Garlicki of Poland criticised the majority for failing to provide a “full explanation as to how it applied the ?margin of appreciation? concept in this case”. They criticised the UK government?s failure to articulate any logical reason other than loss of revenue for failing to account for situations like the Burden sisters, arguing that “once the legislature decides that a permanent union of two persons could or should enjoy tax privileges, it must be able to justify why such a possibility has been offered to some unions while continuing to be denied to others.” The other dissenting judge, Stanislav Pavlovschi of Moldova, went further, writing: “The case concerns the applicants? family house, in which they have spent all their lives and which they build on land inherited from their late parents. This house is not simply a piece of property ? this house is something with which they have a special emotional bond, this house is their home. “It strikes me as absolutely awful that, once one of the two sisters dies, the surviving sister?s sufferings on account of her closest relative?s death should be multiplied by the risk of losing her family home because she cannot afford to pay inheritance tax in respect of the deceased sister?s share of it. I find such a situation fundamentally unfair and unjust. It is impossible for me to agree with the majority that, as a matter of principle, such treatment can be considered reasonable and objectively justified. I am firmly convinced that in modern society there is no ?pressing need? to cause people all this additional suffering,” he said.
22 March 2007, the European Court of Justice held that the freedom of establishment provisions in article 43 of the EC Treaty preclude a national rule such as Belgium’s that sets out minimum tax bases only for non-residents. The ruling followed the opinion published by Advocate-General Paolo Mengozzi on 16 November 2006. Under Belgian tax law, non-resident companies that do not have proper accounting or other conclusive evidence substantiating their taxable income, are taxed on a minimum lump-sum basis set by Royal Decree. The minimum lump-sum tax base depends on the nature of the taxpayer’s activity and is determined on the basis of a number of criteria with an absolute minimum of EUR 9,500. In Raffaele Talotta v État Belge (C-383/05), Talotta was a Luxembourg resident who operated a restaurant in Belgium and was subject to Belgium’s non-resident income tax. The Belgian tax authorities found that he lacked the minimum documentation required to ascertain the exact amount of his taxable income and assessed his tax base at about EUR 45,000. Talotta disagreed with the assessment and took his appeal before the Court of Cassation, Belgium’s highest court, arguing that the minimum tax base was incompatible with the EC Treaty principle of freedom of establishment. The Court of Cassation referred the issue to the ECJ for a preliminary ruling. The ECJ held that the minimum tax base provision could result in a higher tax burden for non-residents compared to residents to which this provision does not apply. Since the minimum tax base is an indirect discriminatory measure based on the nationality of the taxpayer and which cannot be justified, it is not therefore compatible with the principle of freedom of establishment. The Belgian Government argued that the application of the minimum tax bases only to non-resident taxpayers was justified by the need to ensure the effectiveness of fiscal supervision and that it was consistent with the principle of proportionality. The ECJ disagreed, saying it follows that the need to guarantee the effectiveness of fiscal supervision did not justify a difference in treatment, and the treatment applied to non-resident taxpayers must therefore be identical to that provided for resident taxpayers. Belgium anticipated the possible outcome of the ECJ and extended the minimum tax base provision to resident enterprises as of assessment year 2005, but only in the event that they did not file their tax return or did not do so in a timely manner. This extension may not be sufficient to meet the EC requirements.
6 March 2007, the European Court of Justice said Germany’s method of taxing dividends from 1977 to 2001, which allowed income-tax deductions only on domestic investments, was an “unjustified restriction on the free movement of capital?. The court also refused Germany’s request to limit the effect of its ruling, clearing the way for taxpayers to claim back money for the entire period. The German Finance Ministry had argued that unlimited refunds posed a “real danger” for EU governments and reiterated that it may have to refund as much as EUR 5 billion, depending on the number of claims made. The court set no time limit on German liability for refunding to investors in foreign companies, on the grounds that the German government should have been aware, from earlier rulings, that the tax would be deemed illegal. In Meilicke & Others v Finanzamt Bonn-Innenstadt, a German family contested a domestic law that gave a tax credit on dividends paid by German companies, but not on dividends from companies based elsewhere in the EU. Between 1995 and 1997, Heinz Meilicke received dividends for shares held in Dutch and Danish companies. He later died and his heirs in 2000 applied for a tax credit on the foreign dividends. Germany, with the support of France, Greece and Hungary, argued in an earlier court hearing that the expected shortfall in tax income would have severe economic repercussions. But Christine Stix-Hackl, advocate general of the Court, said in an advisory opinion from 2005 that Germany had failed to provide “sufficient evidence” of such a risk. The EU court also rejected the German argument that the legislation was justified by the need to ensure the cohesion of the national tax system. The court said it would be sufficient to grant a taxpayer who holds shares from another EU state a tax credit based on the corporate tax the company pays in its home state. Heinz Meilicke’s son, Wienand, said in statement: ?European countries can no longer pursue a policy by which they breach EU rules as long as possible in the hope that the serious economic effects of a particularly stubborn law infringement will be softened by a limited ruling.?
8 January 2007, foreign institutional investors (FIIs) investing directly in Indian stocks are facing a 10% short-term capital gains tax on their portfolio investments following a ruling by the Authority for Advance Ruling (AAR) that the income from sale of Indian equities by 38 offshore funds is to be treated as capital gains. The sub-accounts of US fund manager Fidelity had sought the AAR’s views on tax liability from their portfolio investments in India. Fidelity now faces a clear liability on future transactions although it has the option to challenge the ruling in the Supreme Court. Investments in stocks, if held for a year or more, are exempt from long-term capital gains tax. The AAR’s ruling contradicts its own previous ruling of 2004 when it deemed that profits from Fidelity?s Advisory Series-8 fund were to be considered as business income. Since the fund did not have permanent establishment in India, it said, the income could be treated as exempt under the Indo-USA tax treaty. At the recent hearing, the Income Tax Department argued that it should not be bound by its previous ruling. It argued that Fidelity’s group entities, which used to classify income as capital gains, had started declaring it as business income from 2003-04. Some of its sub-accounts had even applied for refunds on the basis of this change in the classification of income. The ruling will not affect FIIs routing investments through Mauritius or Singapore. Mauritius does not tax capital gains and Mauritius-based FIIs are exempt from Indian capital gains tax. This benefit has now been extended to Singapore-based FIIs under the improved protocol on double taxation between India and Singapore, subject to certain conditions.
14 March 2007, the German government adopted draft proposals for reform of corporate taxation that would result in a substantial cut in rates from 38.7% to 29.8% from 2008. Finance Minister Peer Steinbrueck said that while Germany will initially run a deficit as a result of the tax cuts, he expects corporate tax revenues to increase as the tax base broadens. He also rejected criticism that companies were likely to invest the money they saved on their tax bills abroad instead of in Germany. The proposed measures seek to broaden the tax base and reclaim potential tax revenue by limiting the amount of interest companies can deduct from their corporate taxes, thereby restricting their ability to move profits abroad. “We want to make Germany more attractive as a site for investment and stop the erosion of the tax base. Some people argue that we’ll lose from this reform. But we’ll lose those revenues if we don’t implement it,? said Steinbrueck.
31 January 2007, the Federal Constitutional Court found the country’s inheritance tax to be in violation of the German constitution. Inheritance tax regulations assess liquid assets at their full market value, while property and company assets are taxed at half of their market value. The ruling obliges the German parliament to adjust inheritance tax regulations by 31 December 2008.
23 March 2007, HM Revenue & Customs (HMRC) provided written confirmation that gifts put into absolute or bare trusts for minors will avoid tax charges by being classified as Potentially Exempt Transfers rather than Chargeable Lifetime Transfers. There had been concern that gifts to minors through absolute or bare trusts would be treated as CLTs, and therefore be liable for entry, exit and 10-yearly periodic charges, because the child could only access the trust when they reached 18 and not immediately. Bare trusts are commonly used to allow gifts to be made for minors who cannot easily hold property in their own name, and a bare trust ensures the funds can be appropriately managed until the child reaches adulthood. In January, insurer Skandia claimed HMRC had deemed that gifts into trusts in these circumstances would be CLT, which would mean an immediate inheritance tax (IHT) charge of 20% where the value of the gift exceeds the nil rate band, compared to a PET where there is no upfront IHT charge regardless of the value gifted. HMRC has now written to trade bodies including the Association of British Insurers (ABI) and the Society of Trust & Estate Practitioners (STEP) to confirm it is not intending to change the status of these gifts.
15 January 2007, an action agenda for Hong Kong drawn up by specialist focus groups in response to the publication of China’s 11th Five-Year Plan in September last year was issued by the Special Administrative Region?s (SAR) chief executive Donald Tsang. The agenda comprises four sections based upon the work of four focus groups: financial services; trade and business; maritime, logistics and infrastructure; and professional services, information and technology, and tourism. ?When economic strategies were formulated in the past,? said Tsang, ?it was a usual practice for the government to deliberate and draw up specific recommendations behind closed doors before presenting to individual industries for discussion. This is the first time that collective wisdom has been drawn from various industrial, commercial and professional sectors to map out a detailed action agenda and an implementation timetable as the blueprint for Hong Kong’s economic development.? The action agenda sets out 50 strategic recommendations and 207 specific measures to cover all major economic sectors. It outlines a blueprint and sets a direction, but also lists a detailed schedule of division of labour and a timetable to enable implementation by the government, public corporations, industrial and commercial sectors, professionals and the community. The recommendations by the financial services group are understood to include: increasing use of the Yuan; increasing the SAR’s involvement in financial services on the mainland; opening more channels to improve the outward mobility of mainland investors and fund-raisers; and allowing financial instruments issued in Hong Kong to be marketed on the mainland.
20 March 2007, a review of the Manx funds sector recommended the introduction of a new specialist, unrestricted fund category with a USD 100 million initial subscription. The key strategic report had identified “huge potential for growth”, said Treasury Minister Allan Bell in the 2007 Budget speech, and would be followed by similar high level reviews of the Island’s banking and captive insurance sectors. With Isle of Man funds under management rising by 50% from GBP 15 billion in 2005 to around GBP 21 billion in 2006, the report is intended to secure the sector’s long-term prospects by capitalising on market opportunities. The key recommendation was the introduction of a new specialist fund category with USD 100 million initial subscription and the ability to base management and/or administration in other acceptable jurisdictions. There would be no restrictions on investment strategies and a “light touch” regulatory approach. Other Budget announcements included a change in the collection of company fees. It is proposed that, for the 2007/2008 year, the responsibility for collection of the corporate charge of GBP 250 will transfer from the Income Tax Division to the Companies Registry at the Financial Supervision Commission and form part of a single payment with a company?s annual filing fee. This will avoid the need for two separate payments and minimise administration costs. Where a company has a liability to income tax, arrangements will be made so that the charge will be credited against income tax. Exempt Companies were abolished and all other special regime legislation was repealed with effect from 5 April 2007. But, said Treasury Minister Allan Bell, nearly 3,500 companies were incorporated in the whole of 2006, the highest number since 1999. The new Manx Corporate Vehicle, brought in by the Companies Act 2006, has been a factor in this increase with over 400 incorporated in the first three months of operation. Once the impact of this legislation had been assessed, other company legislation and associated issues would be reviewed. Bell said the Isle of Man would seek bilateral tax agreements with other countries based on international norms; namely double taxation agreements. It had been negotiating actively with a number of countries on bilateral tax agreements but stand-alone tax information exchange agreements (TIEAs) were not appropriate unless they could be coupled with benefits for the economy.
6 March 2007, legislation to provide a framework for Jersey?s new Goods & Services Tax (GST) was lodged in the States Assembly. The States Assembly agreed in 2005 to introduce a broad-based GST as from 2008. It is one of a package of measures that will fundamentally reform Jersey?s tax structure in line with the move to a zero/ten system of corporate taxation. Jersey?s proposed GST will be the lowest rate in the world ? pegged at 3% for the first three years ? and it will have one of the highest thresholds in the world, with only those businesses with a turnover above £300,000 per annum needing to register, thereby simplifying administration.
The Liechtenstein government has launched a review of “The Future of the Liechtenstein Financial Centre”, which will examine both financial industry views and Liechtenstein as an overall business location. The first results are expected at the end of 2007. The move followed a first working meeting with the Egmont Group of national Financial Intelligence Units (FIUs) at the beginning of March. The government said it had made “great efforts” since 2001 in combating money laundering and the financing of terrorism, strengthening national defensive measures and expanding international cooperation. But it was now entering a “consolidation phase”. Prime Minister Otmar Hasler said: “Now the government is working on a second track so that the financial industry can make use of the opportunities afforded by an integrated Europe: for instance the EU passport for investment funds and building up Liechtenstein as a new location for pension funds.?
20 February 2007, the Court of Appeal ruled that taxpayers should have more time to establish whether losses from non-UK subsidiaries can be set against UK profits. This effectively means that a company can claim group relief as long as there is no ‘practical possibility’ of claiming the relief in the country where it was generated. The case dates back to the accounting periods from 1998 to 2001 when Marks & Spencer plc (M&S) claimed to offset losses generated in a number of overseas territories, namely Germany, France, Belgium, against UK profits. Claims were made for losses totalling GBP 99 million, reducing M&S? UK tax liability by approximately GBP 30 million. M&S claimed that the UK loss relief rules were in breach of EU law, on the basis that a UK resident company that was a member of a group might claim to offset its profits against losses incurred by another member of the same group. As the UK rules stood, only losses generated by UK group companies were eligible for offset. Non-resident UK companies did not qualify for group relief. The M&S challenge prompted 300 similar claims to be filed against HM Revenue & Customs (HMRC), which are thought to total billions of pounds worth of tax returns. About 70 other companies are part of a group litigation order seeking tax rebates for foreign losses. In December 2005, the ECJ ruled that the UK?s group relief rules were invalid, but only insofar as they prevented cross-border claims where the possibilities of making a claim outside the UK had been exhausted. It referred the matter back to the UK courts to interpret and give effect to the ruling. In Halsey v Marks & Spencer plc, the High Court subsequently held that the UK?s group relief rules should survive, except in situations where, under the ECJ?s ruling, they are invalid. Both parties appealed: HMRC against the time at which the question of exhausted possibilities had to be considered; and M&S against the High Court?s strict interpretation of the exhausted possibilities test. The Court of Appeal has essentially dismissed both appeals: it has confirmed both that the test should be considered at the time a group relief claim is made and that the High Court?s interpretation of the exhausted possibilities test conforms with the principle of effectiveness. HMRC said it would appeal against the decision in the House of Lords.
The Dutch Ministry of Finance said it is currently negotiating tax treaties or protocols to treaties with 30 countries: Algeria, Australia, Azerbaijan, Brazil, Canada, China, Costa Rica, Cuba, Cyprus, France, Germany, Ghana, Hong Kong, Indonesia, Iran, the Isle of Man, Japan, Kenya, Kyrgyzstan, Libya, Malaysia, Mexico, Peru, Saudi Arabia, South Korea, Switzerland, Turkey, Turkmenistan, the United Arab Emirates and the UK. The Netherlands is also currently negotiating tax information exchange agreements (TIEAs) with a further four countries: Bermuda, the Cayman Islands, Guernsey and Jersey.
1 March 2007, the Russian Tax Amnesty Law, signed by President Putin on 30 December 2006, came into effect. It introduces a special regime for declaring income and paying individual income tax on undeclared income received before 1 January 2006. The amnesty will close on 31 December. The new law permits individual taxpayers to calculate the necessary tax return payment on a self-assessment basis. A 13% tax rate should be applied to all individual income on which tax was not previously paid, regardless of which tax rate was originally applicable. To encourage declarations, the amnesty does not require that taxpayers have any contact with tax officials, and payments can be made directly into a special Federal Tax Service bank account. According to the government, this information will not be used as evidence against individuals in criminal of administrative cases. Taxpayers previously convicted of tax evasion and other fiscal offences are prohibited from using the amnesty. The government is hoping that the amnesty will help to reverse the capital flight from Russia and lead to the repatriation of at least some of the USD 160 billion in capital that has left the country since the collapse of the Soviet Union in the early 1990s.
15 February 2007, the corporate tax rate is to be reduced from 20% to 18% from 2008 year of assessment. It closes the gap significantly on Hong Kong?s 17.5% rate. Announced by Second Finance Minister Tharman Shanmugaratnam as part of the 2007 Budget, the move will cost SGD 800 million (USD 521 million) a year, but the government is to raise additional revenue of SGD 1.5 billion a year by increasing taxes on goods and services by 2% to 7% from 1 July. The consumption tax increase will also allow the government to offer SGD 1.8 billion in targeted tax credits and financial aid over the next five years to help reduce income disparity in Singapore. Singapore signed new tax treaties with Morocco and Ukraine, on 9 and 26 January 2007 respectively, which will enter into force after ratification by both treaty partners.
28 February 2007, South Africa?s secondary tax on companies (STC) is to be replaced with a 10% withholding tax on dividends, it was announced in the Budget presented by Finance Minister Trevor Manuel. The STC will be replaced with a dividend tax at company level and the rate will be reduced from 12.5% to 10%, as from 1 October 2007. During 2008, the tax will be converted to a dividend tax on shareholders with administrative enforcement through a withholding tax at company level. The implementation of this phase will depend on the renegotiation of several international tax treaties. To provide equitable treatment between large institutions and individuals, and certainty in distinguishing capital from revenue profits, all shares disposed of after three years will be on capital account and trigger a capital gains tax event. Gains realised on the sale of shares are currently taxed either as ordinary income or capital gains, but the government said the ?facts and circumstances? test had become “problematic”. Foreign companies, depending on their legal form, are currently subject to different rates of tax ? subsidiaries of foreign companies pay tax at a 29% rate while a branch of a foreign company will pay tax at a 34% rate. The higher rate will now apply to all forms of foreign business entities in South Africa. Amendments will also be introduced to combat a perceived loophole where loans are made by emigrating SA residents who then become non-resident immediately after the loan is made.
1 February 2007, the streamlined consent process for Guernsey registered close-ended investment funds came into effect. Close-ended funds can now be registered within three working days provided that a Guernsey fund administrator makes the appropriate certifications to the Guernsey Financial Services Commission. These funds cannot be marketed to Guernsey residents and it must be stated in the prospectus that the GFSC has not reviewed the offering documentation.
21 March 2007, UK chancellor Gordon Brown announced a 2p cut in the basic rate of income tax as he sought to nullify criticism of previous Labour stealth taxes by streamlining the tax system and using the GBP 8 billion raised from abolishing the 10p tax band to fund the GBP 8 billion cost of cutting the basic rate to 20p. He adopted a similar approach to business taxation, responding to pressure from industry by cutting the main rate of corporation tax from 30p to 28p from April 2008, but clawing money back through less generous capital allowances. The small business rate will also increase progressively to 22% in 2009. Overall, the Treasury red book showed that the budget was neutral, with Brown raising as much revenue as he is giving away. Of the GBP 2.5 billion being spent on personal tax cuts, the Treasury said GBP 1 billion would come from motorists through above-inflation increases in fuel duty and vehicle excise duty; GBP 1 billion from taxation of business properties left empty and GBP 500 million from anti-avoidance measures. These measures include preventing the buying and selling of companies to gain a tax advantage by using their gains and losses, the sale of lessor companies and stamp duty land tax. The government had already announced other avoidance measures in the two pre-budget reports in December and March.
21 December 2006, the UK High Court held that an individual who was the beneficial owner of 91% of a company’s issued capital and who sold the shares before leaving the UK cannot, as a result of planning to avoid tax, defer capital gains tax (CGT) on the sale. In Vincent Snell v Revenue & Customs Commissioners, Snell sold his holding in Sovereign Rubber plc in 1996 in exchange for GBP 6.5 million in loan stock. Snell subsequently emigrated to the Isle of Man. After leaving the UK, he redeemed GBP 5.6 million of the loan notes and avoided GBP 2.6 million in CGT. Sections 135 and 136 Taxation of Chargeable Gains Act 1992, provide that no CGT arises on a paper for paper exchange. But the UK tax code also provided that such relief was only available if a transaction was carried out for bona fide commercial reasons and where none of the main purposes was for the avoidance of CGT. The Special Commissioners decided that Snell always had the purpose of becoming non-resident and the exchange of shares for loan stock had not been ?effected for bona fide commercial reasons? within section 137(1) of the Act. It therefore found that Snell could not claim the benefit of section 135. Snell appealed. The UK High Court found that the commissioners had not misdirected themselves in relation to the relevance of Snell?s purpose or intention, and the evidence was more than sufficient to justify the inference that they drew. Section 137 was concerned with the terms on which a CGT liability might be deferred. It provided for a right of deferral to be lost if it was to be used for the purpose not of deferral but of avoidance altogether. If that was the main purpose of the scheme or arrangements, it did not matter whether the scheme was formed for the purposes of tax mitigation, avoidance or evasion. It was clear that the scheme?s main purpose in this case was the avoidance of a CGT liability. The word ?liability? in section 137(1) could not be limited to an actual liability. By definition, such a liability could not be avoided, only evaded. Where, as in this case, the liability might be deferred on certain conditions, there was no reason to restrict the ambit of the word ?liability? so as to exclude that which had been deferred. The decision of the commissioners was correct and Snell?s appeal was dismissed.
2 February 2007, the UK High Court ruled that the former chief executive of discount clothing retailer could not recover nearly GBP 1 million in overpaid taxes from HM Revenue & Customs. In 1998 Angus Monro, former head of the Matalan chain, exercised an option to acquire more than 1.3 million shares in Matalan, then valued at 235p per share, for nothing. He declared a gain on the deal of more than GBP 3 million in the tax return he filed in 2000. The following tax year, after Matalan?s share price had increased, Monro sold 900,000 of his shares for more than GBP 7 million. In the tax return for 2001, he declared a gain of more than GBP 5 million after deducting the tax he had already paid on the shares? acquisition. He paid GBP 2.1 million in capital gains tax (CGT). But this figure was mistaken. A separate court case, decided 18 months after Monro’s 2001 return had been submitted, resulted in a change in the law which meant he had effectively overpaid GBP 846,000 in CGT. Monro?s accountants did not realise that he had overpaid until a Court of Appeal declared that the method of computation was wrong in law. They tried to amend Monro’s tax return and reclaim the money as tax overpaid by mistake. High Court judge Sir Andrew Morritt said that he had “considerable sympathy” for Monro, but added that, as the law stood, he had no hope of reclaiming the money because the time limit to amend payments was one year. He refused permission to take the case to the Court of Appeal because, he said, there was no hope of success. “It is my function to apply the law as I understand it to be,? he said. ?It is ultimately the function of Parliament if it should be altered.”
27 February 2007, the UK Special Commissioners ruled that certain expenses paid to discretionary trust managers can be attributed to both income and capital under section 686(2AA) of the Taxes Act 1988. In Peter Clay Discretionary Trust v Revenue & Customs (SPC00595), the trustees appealed against a closure notice, dated 30 November 2005 and relating to the year 2000-01, which disallowed certain trustees’ expenses in the computation of the tax rate applicable to trusts. At issue was whether any, and if so what proportion, of the various fees for administering the trust ? trustees fees, investment management fees, bank charges, custodian fees and professional fees for accountancy and administration ? were properly chargeable to income, so that they did not attract the higher rates of tax due on the income of discretionary trusts. The Commissioners decided in principle that, in accordance with the requirement to achieve a fair balance between income and capital beneficiaries, a proportion of all the expenses in issue, with the exception of the investment management fees, were attributable to income and was properly chargeable to income for the purposes of s 686(2AA). They adjourned the hearing to enable the parties to try to agree the correct proportion, failing which either party could apply to the Commissioners for determination. It also said the accruals basis adopted in this case was a proper way of allocating expenses to a particular year of assessment.
27 December 2006, the Uruguayan Parliament finally approved a tax reform that replaces the corporate and agricultural income tax regimes with an economic activities income tax. Under the general tax regime, no new SAFIS (Financial Investment Corporations) will be permitted, and existing SAFIS will be required to modify their status by 31 December 2010. The new tax, initially announced in November 2005, will reduce the tax rate on business entities from 30% to 25% and introduce a 7% withholding tax on dividends paid to non-residents and individuals. The income of non-resident entities will be taxed at a 12% rate, with reduced rates applying to certain types of income. Carry forward of losses will be extended from three to five years, and the concept of permanent establishment and transfer pricing rules will be introduced. The new measures will be effective as of 1 July 2007.
Three US Senators, including Democrat presidential hopeful Barak Obama, introduced legislation designed to stop offshore tax haven and tax shelter abuses, citing USD 100 billion in revenue drained from the US Treasury, including USD 40 to USD 70 billion from individuals and another USD 30 billion from corporations engaging in offshore tax evasion. Abusive tax shelters add tens of billions of dollars more, they claimed. For more than four years, the other two sponsors Senators Carl Levin and Norm Coleman, respectively the Chairman and senior Republican on the Permanent Subcommittee on Investigations, have led an Subcommittee investigation into offshore tax havens, abusive tax shelters, and the professionals who design, market and implement tax schemes. ?With a USD 345 billion annual tax gap and a USD 248 billion annual deficit,? said Levin, ?we cannot tolerate a USD 100 billion drain on our Treasury each year from offshore tax abuses. We cannot tolerate tax cheats offloading their unpaid taxes onto the backs of honest taxpayers. Offshore tax havens have declared economic war on honest US taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans. This bill provides a powerful set of new tools to clamp down on offshore tax and tax shelter abuses.? The Stop Tax Haven Abuse Bill is a strengthened version of a tax reform bill that Levin, Coleman, and Obama introduced in the last Congress. The legislation was strengthened as a result of a yearlong Subcommittee investigation that resulted in a hearing and report on 1 August last year, examining a series of case studies showing how US taxpayers are using offshore secrecy jurisdictions to avoid US taxes. Among other measures, the 68-page bill would:
Establish presumptions to combat offshore secrecy by allowing US tax and securities law enforcement to presume that non-publicly traded, offshore corporations and trusts are controlled by the US taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise;
Impose tougher requirements on us taxpayers using offshore secrecy jurisdictions by listing 34 jurisdictions that have already been named in IRS court filings as probable locations for US tax evasion;
Authorise special measures to stop offshore tax abuses by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement;
Strengthen detection of offshore activities by requiring US financial institutions that open accounts for foreign entities controlled by US clients, open accounts in offshore secrecy jurisdictions for US clients, or establish entities in offshore secrecy jurisdictions for US clients, to report such actions to the IRS;
Close offshore trust loopholes by taxing offshore trust income used to buy real estate, artwork and jewellery for US persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets;
Strengthen penalties on tax shelter promoters by increasing the maximum fine to 150% of their ill-gotten gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine on them to $1 million per violation of U.S. securities laws;
Stop tax shelter patents by prohibiting the US Patent and Trademark Office from issuing patents for ?inventions designed to minimize, avoid, defer, or otherwise affect liability for Federal, State, local, or foreign tax?; and
Require hedge funds and company formation agents to know their offshore clients by requiring them to establish anti-money laundering programs like other US financial institutions, under regulations to be issued by the Treasury Department.