Owen, Christopher: Offshore Survey – September 2007 Supplement

On 23 May 2007, the Andorran business confederation (CEA) agreed to set up a technical and fiscal commission to put proposals to the government on amending the current fiscal legislation. Andorra is one of three territories listed by the OECD as a tax haven and the government circulated, in June 2006, a proposed tax package designed to secure its removal, which includes:
A new corporation income tax law with a tax rate of about 10%;
An accounting law that would adapt to the European General Accounting Plan and would require annual accounts and trigger audits based on the volume of turnover and the number of employed workers;
A foreign investment law that would establish limits for free foreign investment in Andorra and specify sectors that are protected in accordance with Andorran economic interests.
CEA general director, Conxita Mora, said the commission would evaluate the texts of the tax package, with particular regard to tax treaties and the Foreign Investment Law. The plan to end Andorra’s qualification as a tax haven is partly due to the Andorran government’s desire to negotiate income tax treaties with Spain, France and Portugal. It is anticipated that the tax package will be presented this year. If approved, the OECD will be required to reconsider Andorra’s status as a tax haven.

24 July 2007, Antigua and Barbuda asked the World Trade Organisation to authorise US$3.4 billion in commercial sanctions against the US for its failure to comply with a ruling that its Internet gambling restrictions are illegal. The WTO has set up an arbitration panel to rule on the matter. The US government acknowledged that its online betting ban was ruled illegal by the WTO, but has challenged Antigua’s right to retaliate because it says it is in the process of changing the details of its obligations under the 1994 General Agreement on Trade in Services. It also rejected the amount requested by Antigua as “patently excessive?. The US made the unprecedented move to explicitly remove online betting from the services agreement after losing a WTO ruling earlier this year. Australia, Canada, Costa Rica, India, Macao, Japan and the 27-nation European Union have all joined Antigua in filing compensation claims as a result, but those are separate from the former British colony?s ongoing WTO dispute with the US. Last year, the US government stopped US banks and credit card companies from processing payments to online gambling businesses outside the country. The decision closed off the most lucrative region in a market worth US$15.5 billion last year. About half of the world’s online gamblers are based in the US. The WTO?s March ruling upheld the US right to prevent offshore betting as a means of protecting public order and public morals. But it said it was illegal to target online gambling, without equally applying the rules to American operators offering remote betting on horse and dog racing. Antigua has 32 licensed online casinos, employing 1,000 people and generating yearly revenue of around US$130 million. Seven years ago, its casinos had an annual income closer to US$1 billion.

On 15 June 2007, the Austrian Constitutional Court held that Austria’s gift tax is unconstitutional. The Court did not nullify the gift tax with immediate effect, but granted a grace period for reform until 1 August 2008. If action is not taken by that date, the gift tax will be removed from the statute books. The court?s decision came just three months after it declared Austria’s inheritance tax to be unconstitutional. It is not clear at the moment whether the tax will be amended or dropped entirely. The legislative process requires the cooperation of both government parties and one of them has already come out in favour of dropping the gift tax.

3 July 2007, the BVI Financial Services Commission made an order to establish simplified provisions for the transition of bearer share companies to non-bearer share companies. The transition date has also been brought forward by one year to 31 December 2009. The BVI Business Companies Act (BVIBCA), enacted in 2004 in response to OECD demands that the BVI eliminate the ring fencing of non-resident entities, brought in a single company registration regime which included transitional arrangements for existing companies. It also included provisions for transitioning bearer share companies to non-bearer share companies were originally enacted for International Business Companies (IBCs) in 2003. The existing transitional provisions require companies to fully immobilise their shares by 31 December 2010. To encourage companies to begin that process sooner, the provisions provided for increases in the annual fees of bearer share companies commencing next year. The increased annual fee would be payable by any company unless its memorandum prohibited it from issuing bearer shares. This would have affected the majority of IBCs that had been automatically re-registered under the BVIBCA, even though most had never actually issued bearer shares. The Commission therefore sought to find an alternative solution. The new order deems that on 31 December 2009, the memorandum of every former IBC will be automatically amended to prohibit the issue of bearer shares, unless a company specifically elects that this deeming provision should not apply. It also abolishes the staged increases in annual fees between 2008 and the transition date.

There have been changes introduced in the fees payable and the filing procedures for some of the offshore entities. The International Financial Services Amendment) Act 2006 has introduced a fee to be paid on application for a licence the amount has not yet been prescribed. The Central Bank may now also impose a charge on licensees to meet expenses relating to an examination or provision of banking supervision services. The International Business (Miscellaneous Provisions) (No 2) Act, 2007 has increased the fees and amended the penalty charges for International Business Companies (IBC) and International Societies with Restricted Liability (ISRL). It has also introduced a charge for the registration of an International Trust. An IBC or an ISRL that does not apply to have its licence renewed before 31 December of the year preceding the licence year; may now apply to have the licence renewed before the following 1st February on payment of a penalty of $1,000. After that date an IBC or ISRL may be reinstated on payment of a fee of $2,100. Reinstatement must be within five years of the expiry of the previous licence. New forms have been introduced by amendments to the regulations and the fees are now not payable with the application but only when the licence has been approved. New practice notes have been issued. The Minister responsible for international Business by Statutory Instruments has now delegated the power to issue IBC or ISRL licences to the Director of International Business or in his absence the Deputy Director. The new scale of fees payable in Barbados dollars are as follows:
New IBC/ISRL licence Bds$ 850.00
Renewal of IBC/ISRL licence Bds$ 850.00
Penalty for late renewal of IBC/ISRL licence Bds$ 1,000.00
Reinstatement of IBC/ISRL licence Bds$ 2,100.00
Registration of International Trust Bds$ 1,100.00
Certified copies of new IBC/ISRL licences, Renewals, reinstatements and International Trust certificates Bds$ 75.00
We are still awaiting the legislation that will apply from 1st January 2007 where a Barbados resident companies, including international business companies, holding at least 10% of the capital of an overseas company, and the shares are not held as a portfolio investment, the dividends derived from the overseas companies will be exempt from tax in Barbados will be exempt from withholding tax on dividends paid from foreign source income to non-resident shareholders of the Barbados companies.

The Chinese Government is understood to be considering a clampdown on the offshore activities of Chinese enterprises, after releasing figures showing that the bulk of investment by Chinese-based companies is flowing to offshore financial centres. Data released by the Ministry of Commerce of China shows that, between January and May 2007, Hong Kong topped the capital investment table, followed by the British Virgin Islands, Japan, South Korea, Singapore, the USA, the Cayman Islands, Samoa, Taiwan and Mauritius. The standings reflect the actual amount of foreign capital invested in the various jurisdictions, which account for 86.16% of China?s total foreign capital. China is currently in the process of overhauling its tax laws, in part to reduce the incentive for domestic companies to ?round trip? offshore in order to qualify for generous tax incentives currently afforded to foreign-backed enterprises based in China. At present, domestic firms pay corporate tax at a rate of 33%, while foreign-owned firms can reduce their rate through various tax breaks down to as little as 13% in some cases.

11 July 2007, Singapore and China completed negotiations on a new tax treaty. When ratified by both governments, the treaty will replace the existing treaty, which has been in force since 12 December 1986. Under the new treaty, withholding tax on dividends will be reduced from the current 7% rate, for corporate shareholders holding at least 25% of the share capital, and 12% for others, to 5% and 10% respectively. Gains from the disposal of shares of Chinese companies will be taxed in China only if the vendor has held at least 25% of the share capital of the company at any time during the preceding 12-months. The treaty will help to restore parity with Hong Kong, which signed a new treaty with China last year.

In July, the European Commission formally requested that Austria and Germany amend their tax laws to remove the discrimination between dividends paid to foreign and domestic companies. Dividends currently paid to resident shareholders in Germany and Austria are generally exempt from tax, whereas outbound dividends are subject to withholding taxes ranging from 5% to 25%. The procedure gives them eight weeks to reform their tax rules, after which the Commission may refer the matter to the European Court of Justice. ?Member states cannot tax dividends paid to shareholders resident elsewhere in the EU more heavily than dividends paid to shareholders resident in their own Member State,? said EU Taxation and Customs Commissioner László Kovács. The Commission has also sent letters of notice, the first step in the EU’s legal infringement procedure, to Italy and Finland which tax dividends paid to foreign pension funds more heavily than dividends paid to domestic pension funds. In May, the Commission made similar requests to the Czech Republic, Denmark, Spain, Lithuania, the Netherlands, Poland, Portugal, Slovenia and Sweden. It said it is, ?still examining the situation in other Member States?.

July 2007, the European Commission has formally requested Luxembourg to change its tax legislation on savings income paid in the form of interest to Luxembourg residents. Existing rules allow for the deduction at source of 10% of the interest paid by a paying agent established in Luxembourg. This provision does not apply to interest paid by paying agents established in other member states, which is subject to Luxembourg?s general rate of income tax. The Commission said the rules are an obstacle to the free movement of capital and the freedom to provide services in the single market. If Luxembourg does not provide a satisfactory answer to the request within two months, the Commission could pursue legal action in the EU Court of Justice.

10 July 2007, EU finance ministers meeting as ECOFIN gave their final approval to the entry of Cyprus and Malta into the euro zone on 1 January 2008. It will bring the number of countries sharing the single European currency to 15. Portuguese finance minister Teixeira dos Santos, chairing the monthly meeting in Brussels because Portugal holds the rotating presidency of the European Union, said: “Cyprus and Malta will join the euro on 1 January next year. I would like to congratulate these two countries for this achievement, which is the result of appropriate policies.” To meet strict EU economic rules for euro nations, the two countries have had to take various measures such as Cypriot workers accepting lower wage rises to avoid inflation, while Malta paid off debt to cut its budget deficit. The ministers also expressed concern at delays in euro zone countries balancing their budgets, which they have agreed to do by 2010.

16 May 2007, the European Commission requested that Portugal apply the same tax treatment to all repatriated assets that individuals declared under the 2005 Portuguese tax amnesty, instead of granting more favourable treatment to assets reinvested in Portuguese government bonds. The Commission considered that the amnesty did not respect the free movement of capital, since it provided for regularisation at a preferential penalty rate of 2.5% for investments in Portuguese government bonds, instead of 5% in any other assets. “The rules of the Internal Market forbid any discrimination of investments made by individuals in other Member States,” said EU Taxation & Customs Commissioner László Kovács. “Investment held in other Member States should be taxed in the same way as investments held in the Member State of residence, even on the occasion of tax amnesties.? If Portugal does not take the necessary steps to comply with the EU law, the Commission may decide to take it to the European Court of Justice.

7 May 2007, the French government introduced a new structure, the Fiducie, which shares some characteristics with an English trust but has a different legal basis and a more limited role. Previous attempts to create trust-like structures in France have failed because they were deemed to deviate from the principles of civil law and because of the implacable opposition of the Ministry of Finance. The fiducie is an agreement whereby one or more constituents transfer assets, rights, or collateral to a fiduciaire who agrees to manage them for a given period of time, not to exceed 33 years, and to return the assets to certain designated beneficiaries on termination. The constituent, the fiduciaire, or third parties may be designated as beneficiaries. Only entities subject to corporate income tax may act as a constituent of a fiducie. The fiduciary assets are not included in the fiduciaire’s estate, as they are part of a separate estate. The French tax authorities were eager to circumvent any potential for tax evasion and the legislation clearly states that any structure that involves a fiducie with a view to achieve a gift of assets shall be null and void. It is designed principally for financial operations and the management of security interests.

On 25 May 2007, the German Bundestag adopted a key corporate tax reform package that will reduce the overall corporate tax burden on companies in Germany by almost 10%. It will come into force on 1 January 2008. The Bundesrat represents the country’s 16 states and is controlled by Chancellor Angela Merkel’s grand coalition parties. The bill was passed in the lower house, or Bundestag, earlier in the month. The new law effectively cuts the corporate tax rate from the current 38.65% to 29.83%. This is to be done through a cut in the headline corporate tax rate paid by large companies to 12.5% from 25%, with regional corporate taxes, which average about 13%, remaining unchanged. German Finance Minister Peer Steinbrueck said that the tax cut represented “an investment in Germany as a business location”, making domestic and foreign investments more attractive. He noted that, with the reforms, Germany would “finally get into the midfield of tax burdens compared with other European countries”. The ruling coalition parties have also agreed to introduce a 25% capital gains tax from 1 January 2009. This will replace the current system, whereby capital gains are subject to personal income tax, which can be as high as 42%. This will apply to income from earned interest and dividends, and private investors’ share sales.

23 July 2007, the European Commission ordered Germany to change its tax rules for family foundations based outside the country or face legal action and possible fines. Under Germany’s existing tax rules, the founder or beneficiaries of non-resident family foundations are taxed without regard to the amount they actually receive. The beneficiaries of German-based foundations, by contrast, are taxed on gains received. The Commission said Germany’s tax rules restrict the free movement of capital and people, key principles of the bloc’s single market.

Ten years after the handover to Chinese sovereignty, the number of new local companies registered under the Hong Kong Companies Ordinance in the first six months of 2007 totalled 47,417, up 19.12% on the same period last year. Statistics from the Companies Registry show the total of live companies registered at the end of June was 622,318, up 30,374 on the end of 2006. The total number of documents received for filing rose 8.72% to 929,225. In the first half of 2007, 316 new overseas companies established a place of business in Hong Kong and registered under Part XI of the Companies Ordinance, up 12.46% on the same period last year. The total number of overseas companies stood at 7,854 at the end of June, 145 more than last year’s total.

12 June 2007, the final report on the tax reform public consultation was released. Hong Kong Financial Secretary Henry Tang said a total of 2,400 written submissions had been received during the nine-month consultation. In considering the various options for broadening the tax base, the government should take into account the following principles, according to the report:
The option must be effective in broadening the tax base and providing stable and considerable revenue for the government to meet its future needs;
The option must be fair and in line with the ?capacity to pay? principle, and should not widen the wealth gap; and
The option is in line with the territory?s simple low-tax system to attract capital and talent and maintain its competitiveness.
“Although the public cannot accept at this point in time the government’s introduction of a Goods and Services Tax, the public has generally obtained a better understanding of the problems of our narrow tax base during the consultation process and agreed that the government should broaden the tax base to stabilise revenue to enhance fiscal health,” said Tang.

On 23 May 2007, the House of Lords dismissed an appeal by Japanese and US companies that, under their countries’ tax treaties with the UK, they should be compensated for discriminatory treatment they claimed to have suffered under the UK?s advance corporation tax rules. In Boake Allen Ltd, the Lords ruled 5-0 in favour of HM Revenue & Customs. The companies leading the action were based in Japan, the US and Switzerland. The claim arose because the UK subsidiary of a foreign parent that paid a dividend had in effect paid its corporation tax earlier than it would have done if it had a UK parent. The Lords ruled that the tax treaties the claimants were basing their case on were far more limited in their scope than the EU treaty, which businesses with EU parents had successfully used to win a similar claim.

An IMF study published in April has proposed a new formula for classifying offshore financial centres (OFCs) under which the UK, Latvia, and Uruguay could be added to the IMF’s list of OFCs. In a working paper entitled “Concept of Offshore Financial Centres: In Search of an Operational Definition”, IMF economist Ahmed Zoromé defines an OFC as “a country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy.” “Consistent with the proposed definition, an indicator of the OFC status of a country or jurisdiction would relate the level of its net exports of financial services to a measure of its national income or domestic financing needs,” Zoromé said. “More specifically, it can be considered that the ratio of net financial services exports to gross domestic product could be an indicator of the OFC status of a country or jurisdiction.? “In theory, and as confirmed by the study’s empirical results, a positive correlation exists between the exports of financial services and the accumulation of assets in offshore jurisdictions,” he added.

The Jersey Financial Services Commission and the British Virgin Islands Financial Services Commission have signed a memorandum of understanding that will further co-operation between the two regulatory bodies. The MOU establishes a formal basis for co-operation, including the exchange of information and investigative assistance. It is designed to protect investors and depositors and to promote the integrity of financial services markets in Jersey and the BVI.

23 May 2007, the tax administrations of Australia, Canada, the UK and the US announced that they are to open a second Joint International Tax Shelter Information Centre (JITSIC) office in London in the autumn of 2007. Japan has also accepted an invitation to join JITSIC, and a representative of the National Tax Agency will be present at the London centre. The tax administrations have also made plans to expand the focus of its activities, further sharing best practice on risk assessment and other key areas of interest, and particularly increasing the transparency of cross-border transactions in order to create a level playing field for taxpayers who are voluntarily compliant. JITSIC was established in 2004 to supplement the ongoing work of the Australian Taxation Office, the Canada Revenue Agency, HM Revenue & Customs, and the Internal Revenue Service in identifying and curbing tax avoidance and shelters and those who promote them and invest in them. Based in Washington DC, JITSIC delegates from each of the four countries exchange information on abusive tax schemes, their promoters and investors, consistent with the provisions of bilateral tax conventions.

16 July 2007, a US Federal Court dismissed a criminal indictment against 13 former KPMG executives who were accused of selling fraudulent tax shelters. The decision was a potentially fatal blow to the case, which the US government had billed as the biggest criminal tax prosecution in US history. US District Judge Lewis Kaplan said he was left with no alternative but to dismiss indictments after he found last year that prosecutors had violated the former executives’ rights to counsel by putting undue pressure on KPMG not to pay their defence costs. Judge Kaplan said he did so after “pursuing every alternative short of dismissal and only with the greatest reluctance.” In May, an appellate court rejected a bid by Judge Kaplan to hold a separate proceeding to determine whether the accounting firm was obligated to pay the legal fees. This latest decision is a severe set-back to the long government investigation into the sale and marketing of allegedly illegal tax shelters that allowed wealthy individuals to avoid paying billions of dollars in tax by creating sham investments that generated paper losses to offset capital gains. In an attempt to save the case, prosecutors are expected to appeal Judge Kaplan’s dismissal, hoping the Second Circuit Court of Appeals will reverse his finding of constitutional violations. KPMG had agreed to stop paying fees for its executives and to pay a $456 million penalty as part of a deferred-prosecution agreement with the US government in August 2005.

The Mauritius National Assembly has approved three financial services bills, establishing the independence of the Financial Services Commission and liberalising the international ?global business companies? regime. The Financial Services Bill will replace the Financial Services Development Act 2001 and provide a common framework for licensing and supervision of all financial services other than banking and for the global business sector. The new law specifically provides for the independence of the Financial Services Commission as a regulatory body. It also redefines the concept of global business -? under the new provisions, all resident companies conducting business outside Mauritius may opt for an alternative legal regime. The former restrictions on activities conducted by Category 1 Global Business Companies are to be removed. The Bill also provides for the designation of industry associations in all financial services sectors as self-regulatory bodies. The Securities (Amendment) Bill extends the scope of ?securities? and ?exchanges?, enabling the Commission to approve the trading of a wider range of instruments and license commodity and other exchanges. The Insurance (Amendment) Bill removes certain administrative obligations on branches of foreign insurers operating in Mauritius and provides for greater flexibility in exceptional circumstances. Deputy Prime Minister and Minister of Finance and Economic Development, Rama Sithanen said: ?In line with our philosophy to simplify processes and procedures, to remove hurdles to investment, to facilitate delivery of services, and to achieve international standards in every activity so as to be globally competitive, we are improving and modernising the legal framework that govern the non-bank financial services sector.? The protocol to the 1994 China-Mauritius income tax treaty, signed on 5 September 2006, came into force on 25 January 2007. The new protocol contains two major changes: a new Capital Gains clause and an Exchange of Information Article based on the 2005 OECD model convention. These changes may affect multinationals that hold subsidiary investments in China through intermediary Mauritius holding companies.

8 May 2007, the governments of the Netherlands and the United Arab Emirates (UAE) signed a tax treaty and protocol in Abu Dhabi. It is the first tax treaty between the two states although a bilateral treaty on income and profits derived from international air transport was concluded in 1992. The UAE has concluded 44 income tax treaties, of which 35 are currently in force.

19 June 2007, finance ministers representing the Nordic economies ? Denmark, Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden ? announced plans to seek a number of Tax Information Exchange Agreements over the next few years. In addition to negotiations under way with Aruba, the Isle of Man, Jersey and the Netherlands Antilles, they said they wanted to open negotiations with Bermuda, the British Virgin Islands, the Cayman Islands and Guernsey. Most jurisdictions contacted by the Nordic economies had reacted positively to their request for such agreements. But the Ministers noted that at some stage they might have to consider possible defensive measures against jurisdictions that do not co-operate.

The OECD removed Liberia and the Marshall Islands, on 24 July and 7 August respectively, from its list of Uncooperative Tax Havens, following a commitment by their governments to implement a programme to improve transparency and establish effective exchange of information in tax matters. They join 33 other jurisdictions that have made similar commitments in relation to OECD?s work to curb harmful tax practices. Just three jurisdictions now remain on the OECD blacklist, first published in April 2002. These are Andorra, Liechtenstein and Monaco. OECD Secretary-General Angel Gurría welcomed their commitments and said the OECD would be ready to assist them as they took forward reforms in the tax area.

The Qatari Ministry of Finance is to establish a single integrated financial regulatory body to oversee all banking, insurance, securities, asset management and other financial services. The new regulator will combine the resources currently spread amongst the Qatar Central Bank’s Department of Banking Supervision and its Banking Consumer Services Unit, the Qatar Financial Markets Authority and the QFC Regulatory Authority, to create a single organisation and, in due course, one set of rules which will apply to all financial institutions. The new regulatory body will be fully independent, with management accountable to a board of international and Qatari financial services regulatory experts. An interim board is to be appointed by this year-end. It is expected that all staff from existing regulators will move to the new regulatory body by early 2008.

19 May 2007, Federal Law 76-FZ, which introduces significant changes to Russia?s taxation of dividends, was gazetted. It will enter into force on 1 January 2008. The law introduces amendments to articles 224, 275, and 284 of Part Two of the Russian Tax Code and introduces a zero tax rate, effectively a participation exemption, for dividends received by Russian entities as a result of qualifying participations. Where the new zero rate does not apply, dividends received from foreign entities will be subject to a reduced tax rate of 9%, rather than the current 15% rate. The tax rate applicable under domestic law to dividends paid by Russian entities to non-resident individuals will reduce from 30% to 15%.

July 2007, President Sarkozy’s flagship tax package was approved by the French parliament. Drawn up at speed and submitted to an extraordinary session of parliament, the measures represent some of the key pledges made during his election campaign and include tax breaks on overtime pay and mortgage interest rate payments. Applicable from 1 October 2007, it will exempt overtime pay from income tax and lower social charges levied on overtime on both employers and workers ? at an estimated cost of about €6 billion euros, according to Economy Minister Christine Lagarde. The cap on the amount of direct tax that can be levied on income will also be lowered to 50% from the current 60%. The lower house of parliament also adopted a tax break that will offer tax relief of up to 20% of mortgage interest rate repayments during the first five years. The fiscal package will offer some tax breaks to those paying the wealth tax known as the ISF. Those subject to the ISF will be allowed to invest in small- and medium-sized enterprises and be credited with an equivalent amount against the ISF they are due to pay. An amendment introduced during the debate in the lower house of parliament will mean that tax exemption on the value of primary residences will rise to 30% from the current 20% for the purposes of calculating the ISF. Sarkozy insists the measures are part of wider structural reform and will lift households’ confidence and purchasing power, thus delivering stronger growth and extra tax revenues.

On 23 July 2007, the Swiss Federal Tribunal rejected an appeal by German cyclist Jan Ullrich to block the transfer of details of his Swiss bank account to German prosecutors investigating his alleged involvement in fraud following a doping scandal. German prosecutors are investigating allegations of fraud against the 1997 Tour de France winner, following a legal complaint by T-Mobile about €1.3 million in advertising revenues paid to the rider in 2004 and 2005. Hans Ruedi Graf, chief prosecutor in the canton of Thurgau where Ullrich is resident, said bank documents would be handed over to Germany. Swiss banking secrecy laws can only be lifted in criminal investigations.

25 July 2007, the Law Lords issued a landmark ruling in the Arctic Systems case that IT consultant Geoff Jones and his wife Diana should not have to pay thousands of pounds in back taxes claimed by the UK Revenue. But the UK Treasury immediately issued a statement to Parliament indicating that income splitting would be outlawed in the name of maintaining fairness in the tax system. Announcing the intention to legislate, Secretary to the Treasury Angela Eagle said: ?It is the government?s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.? The long-running legal case centred on whether Mrs Jones’ share of the profits of their company, Arctic Systems, paid to her in the form of a dividend, should be taxed as part of her husband’s income. The tax advantages of drawing earnings as dividends rather than salary were that National Insurance was not payable and the dividend received by Mrs Jones was taxable at a lower rate than it would have been if added to her husband’s income. This meant Mrs Jones was effectively sharing income with Mr Jones and HMRC argued that he should therefore be assessed for tax on the whole of his wife’s dividend. In September 2004, a specialist tax tribunal found in the HMRC’s favour, a decision that was subsequently upheld by a High Court judge. But the Court of Appeal overturned that ruling in late 2005. Lord Justice Carnwath said the Revenue wanted a “significant extension” of the rules that determine whether income is being illegally diverted to avoid tax. The House of Lords agreed, finding unanimously in favour of Arctic Systems and dismissing HMRC?s appeal. In their judgment, the Law Lords ruled that the Jones?s were creating an arrangement in the nature of a settlement when they subscribed for one share each, and set up their company Arctic Systems Ltd. But the exemption for gifts between spouses also applied and dividends paid to Mrs Jones were therefore not income arising under a settlement.

The UK Treasury has agreed to revise the definition of ?beneficial ownership? in relation to trusts in the draft Money Laundering Regulations 2007. The EU guideline requires that due diligence checks should be performed on anyone with a significant stake in a trust of 25% or more, but industry practitioners have argued that this is not a concept which make sense under UK law. In a letter to the Law Society, Economic Secretary to the Treasury Ed Balls admitted that requiring the regulated sector to identify all those who have influence over a trust is a ?disproportionate response? to implementing the Third EU Money Laundering Directive, and instead suggested limiting identification requirements only to those individuals with legal control. He said: ?Given the risks associated with control of a trust it is important for the regulated sector to seek to identify all those in a position of control be it direct or indirect and exercisable in relation to capital or income. We propose to take into account different aspects of control including powers of veto and powers to add beneficiaries. We also propose removing the 25% limit for control.? The letter also highlights potential issues with discretionary trusts. Balls said he did not believe that the Directive envisaged the identification of discretionary beneficiaries who receive distributions from the trust, other than those with vested interests. The government therefore proposed to address the risks by ensuring ?all those who have legal control over a trust are identified, and that ongoing monitoring of such trusts is undertaken.?

15 July 2007, UK Treasury Minister Jane Kennedy told the House of Commons? Treasury Select Committee that the 100,000 individuals who claim non-domiciled status in the UK paid £3 billion in tax on the £9.8 billion they earned in the UK in the 2004/2005-tax year. Non-domiciled status, which allows individuals who reside in the UK but who retain an overseas domicile to avoid paying UK tax on foreign income, has become an increasing source of controversy. The UK Treasury announced a review of the non-domicile rules at the end of 2002, but has yet to report its findings. It said it did not calculate how much tax was lost as a result of the exemption. Kennedy said: ?The government is mindful that any changes to the current system would need to balance carefully the rules of ensuring fairness and of promoting the UK?s international competitiveness.? Labour MP Jim Cousins, a member of the Treasury Select Committee, said the government would come under pressure from MPs to issue the conclusions of its review. ?Parliament will be saying that it?s time to come clean on this and produce some proposals,? he said.

22 June 2007, the UK?s partial tax amnesty programme, known as the Offshore Disclosure Facility, expired. Some 60,000 taxpayers with undisclosed offshore holdings registered to qualify for reduced penalties after a last-minute rush. The ODF was introduced after the Her Majesty?s Revenue & Customs obtained information about holders of offshore accounts from banks through successful legal actions, as well as through the EU savings tax directive. Taxpayers who disclosed offshore income during the amnesty period now have until 26 November to pay any unpaid taxes on that income, along with interest, duties, and penalties. Disclosures accepted by the Revenue under the ODF will be subject to a fixed penalty of 10% of the underpaid taxes or duties and no penalty for untaxed amounts under £2,500. The Revenue will notify taxpayers of its decision to accept or deny their disclosures by 30 April 2008. It is understood that of those who registered, just over half were customers of banks that had handed over information to the Revenue. The remainder involve taxpayers whose offshore accounts were not previously reported to the tax authorities. Taxpayers with undeclared income in offshore accounts that did not participate in the ODF face the possibility of penalties ranging from 30% to 100% of the tax due. The Revenue has said it would begin investigations on those accounts after the amnesty deadline closed.

26 February 2007, a US district court dismissed a petition to enforce a US IRS summons issued against a Cayman Islands bank because the Internal Revenue Code confers jurisdiction only if the bank “resides” or “is found” within the court’s judicial district; doing business with US citizens was not sufficient. In Cayman National Bank v United States, before the court of the Middle District of Florida, Tampa Division, a Cayman bank applied to dismiss the US petition to enforce a summons for lack of subject matter jurisdiction, or failing that for a stay of enforcement. The IRS was conducting an investigation of a taxpayer, Robert Penrod, when it found that he had guaranteed a loan made by Cayman National that went into default. Cayman National obtained a judgment against Penrod and another guarantor in the Grand Court of the Cayman Islands. On 3 May 2006, the IRS served a summons on Cayman National for documents relating to the transaction that resulted in Cayman National’s judgment against Penrod. Cayman National filed a petition to quash the summons and, in response, the US filed a petition to enforce. The point at issue was whether Cayman National was ?found? in the Middle District of Florida under the “resides” or “found” provisions in ss7402 and 7604 of the Code. Cayman National argued that it was a subsidiary of a Cayman-based corporation, and did not have any branches or offices in the US, nor any agents for service of process in the US. The US claimed that the bank could be found within the district because it chose to do business with US citizens, retained a Tampa law firm in order to pursue collection efforts, and had filed its petition to quash the summons in this district. The Court rejected the US argument. It found that the branch office test was an appropriate test for determining whether a summoned party was found within the district, because it required a physical presence within the district. There was no evidence that Cayman National had an actual physical presence within the district, so the Court held that it could not be ?found?.