Owen, Christopher: Offshore Survey – September 2008 Supplement

  • Argentina denounces treaty with Austria
    • 22 July 2008, the Argentine government gazetted its formal announcement of the unilateral termination of its tax treaty with Austria. Its provisions will cease to apply on 1 January 2009. The Argentina-Austria treaty was signed in 1979 and became effective on 17 January 1983. It is based on the exemption method, such that income sourced or assets located in one country are taxed only in that country and are exempt in the other country. This method is believed to feature in at least three other Argentine tax treaties. Argentina’s government is understood to want to block the use of Austrian bonds and structured investments by Argentine residents in order to avoid asset taxes in Argentina. Argentina applies significant net worth taxes, including a 1% annual levy on all corporate assets and the personal asset tax ranging from 0.5% to 1.25% per annum. The Austrian government is understood to have been surprised by the decision and is expected to propose a renegotiation of the treaty to preserve a common tax framework for bilateral investment between residents of both countries.

  • Cayman Islands gazettes legislative changes
    • 7 August 2008, the Banks and Trust Companies (Amendment) Law, the Trusts (Amendment) Law and the Mutual Funds (Amendment) Law were gazetted. Among the changes in the Banks and Trust Companies (Amendment) Law is a general provision for trust company licensing exemptions to be made by regulations. Regulations under consideration include a registration regime for private trust companies and expanding the scope of activity for controlled subsidiaries of full trust companies. The Mutual Funds (Amendment) Law includes provision for funds from foreign jurisdictions that may not be on the Cayman Islands Monetary Authority’s approved list to be administered by Cayman administrators, where such funds are otherwise regulated funds under the Mutual Funds Law.

  • Distributions to a trust held to be a “sham”
    • 22 May 2008, the High Court of Australia dismissed a taxpayer’s appeal and allowed the Commissioner’s cross appeal in a case involving the “washing” of AUD 4 million of trust distributions through a loss trust. The ruling confirms that the trust reimbursement agreement provisions of the Income Tax Assessment Act 1936 apply to distributions made to a beneficiary of the taxpayer. In Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21, the High Court upheld the assessments of income tax on Raftland in its capacity as trustee of the Raftland Trust. The principal issue concerned entitlements to certain trust income. The transactions giving rise to the assessments were aimed at securing a fiscal benefit by enabling accumulated tax losses, earlier incurred by a trust estate called the E&M Unit Trust (E&M), to be set off against the income of unrelated profitable businesses controlled by three brothers – Brian, Martin and Stephen Heran. The original trustee of E&M, established in 1986, was E&M Investments whose directors were Mark and Elizabeth Thomasz. The business of the trust was the acquisition and sale of property. The business failed, with the 1991 tax return disclosing losses of more than AUD 4 million. Mr and Mrs Thomasz became bankrupt but had been discharged by the time of the transactions in 1995. Mrs Thomasz’s son, Glen Carey, took over from E&M Investments as trustee of E&M. In May 1995, taxable profits for two Heran companies were forecast to be almost AUD 3 million. Brian Heran contacted solicitor Peter Tobin about the possible acquisition of a trust with accumulated tax losses. Mr Tobin organised for Mr Heran to acquire control of E&M for AUD 250,000. The Heran brothers, who controlled various building development and property rental companies, acquired Raftland, which became the trustee of the Raftland Trust on or before 30 June 1995. Beneficiaries were divided into three classes: primary (the Herans); secondary (Heran relatives, and various associated entities); and tertiary (the E&M trustee). Mr Carey removed himself as trustee of E&M and appointed Raftland as trustee. The Raftland Trust tax return for 1995 asserted the distribution of net income of AUD 2,849,467 to E&M. Raftland did not pay that amount, apart from the AUD 250,000, but applied it for the benefit of certain related parties. In 2002, the Commissioner issues notices of amended assessment for the 1995, 1996 and 1997 tax years. Total taxable income for those years was stated to be AUD 4,015,207 with total tax, including penalty tax and interest, assessed at AUD 4,025,070.30. After Raftland’s objections were disallowed, it appealed unsuccessfully to the Federal Court of Australia. Justice Susan Kiefel found that the AUD 250,000 paid to the Thomasz’s was a one-off payment and nothing further was to take place between the Thomasz’s and the Heran’s. She held that the Raftland Trust deed, which purported to create an entitlement in E&M as tertiary beneficiary, was a sham or façade and the Thomasz’s had no entitlement to trust income. The Full Court of the Federal Court upheld Justice Kiefel’s decision, apart from AUD 57,973 related to 1995-96, which was the subject of an application by the Commissioner for special leave to cross-appeal. On the basis of different reasoning, the Full Court agreed that the net income derived by Raftland fell to be assessed under section 99A of the Income Tax Assessment Act, which provides that in certain circumstances trust income in the hands of the trustee was to be taxed at a special rate. Raftland appealed to the High Court. The High Court unanimously dismissed the appeal. It granted the Commissioner special leave to cross-appeal and allowed the cross-appeal. The Court held that, for the tax scheme to succeed, E&M had to have been entitled to the income of the Raftland Trust. It upheld Justice Kiefel’s conclusion that the intention of both the Heran’s and the Thomasz’s was that AUD 250,000 was all the beneficiaries of E&M were ever to receive or to seek, and that the entitlement under the Raftland Trust deed was not intended to have substantive, as opposed to apparent, legal effect. The Court also upheld her finding that E&M was not entitled to the Raftland Trust income within the meaning of section 100A of the Act, while the Heran brothers were entitled. Therefore the tax was correctly assessed under section 99A. Although it was not strictly necessary to do so, the High Court also considered the finding of the Full Court that no profits could be distributed out of the current year’s income until losses from prior years had been recouped out of those profits. It held that it was a “particular application of the general requirement that a trustee who has two or more beneficiaries is under a duty to deal with each of them impartially”. In this case, where there was only one class of unit holder and one class of units with co-extensive interests in income and capital, the rationale for the principle did not apply.

  • Dubai grants first captive insurance licence
    • 14 July 2008, the Dubai Financial Services Authority (DFSA) awarded the first licence to provide captive insurance management in Dubai to Marsh Management Services (Dubai). The DFSA introduced specific legislation relating to captives, whereby the Dubai International Financial Centre (DIFC) recognises captive insurance companies, which the UAE does not. Abdulla Al Awar, managing director of the DIFC Authority, said: “As DIFC seeks to develop further as a global financial centre, captive insurance is one of the key sectors that we are looking to develop. With the rapid development of the economy and the financial industry, the growth potential for captive insurance in the region is very promising.”

  • ECJ Advocate General allows Basque tax breaks
    • 8 May 2008, Advocate General Juliane Kokott recommended in an opinion that the reduced corporate tax rates and other favourable tax rules for investment in Spain’s three Basque provinces do not violate EU state aid rules. In UGT-RIOJA (joined cases C-428/06 et al.) Kokott recommended that the ECJ hold that the Basque provinces are sufficiently autonomous such that their tax breaks could be compared with the regional legal system. The three provinces of Álava, Vizcaya, and Guipúzcoa have adopted a 32.5% corporate tax rate, which is 2.5% lower than Spain’s regular corporate rate. They have also adopted some corporate tax credits that are not available elsewhere in Spain. A Spanish trade union and two bordering autonomous regions brought seven legal actions against the Basque corporate tax rules. Kokott’s opinion reviewed the 2006 ECJ judgment in Portugal v European Commission (C-88/03), which dealt with a similar challenge to reduced tax rates in the Azores. She found that the Basque provinces were sufficiently autonomous because the region defined its own political and economic environment and their institutions, procedures and economy were independent. The opinion may assist Gibraltar, which currently awaits a ruling from the European Court of Justice on its proposed new low tax regime. Gibraltar Chief Minister Peter Caruana indicated that the corporate tax rate to be applied should be no higher than 12%.

  • France backtracks on CCCTB proposal
    • 19 June 2008, French Finance Minister Christine Lagarde said that France would not push for a common consolidated corporate tax base (CCCTB) or EU tax base harmonisation during its EU presidency. The move followed Ireland’s rejection of the Lisbon Treaty in a referendum on 12 June. One of the principal concerns of voter’s was that the treaty might harm Ireland’s tax sovereignty. France has long been a proponent of the CCCTB, with Lagarde stating in April that France was “determined to push” for its adoption. EU Tax Commissioner László Kovács said he would be presenting proposals for the introduction of the CCCTB when France assumed the EU presidency. By setting up a single system for calculating taxes across the 27 EU member states, Kovács believes the CCCTB would simplify cross-border business and reduce tax compliance costs for European companies. Following the referendum, Lagarde said the CCCTB remained on the agenda, but that France would not push other EU member states to accept it during the six-month term of its EU presidency.

  • G-8 calls on OECD to strengthen anti-tax haven effort
    • 14 June 2008, the G-8 finance ministers, meeting in Osaka in Japan, called on the OECD to renew its effort to combat uncooperative ‘tax havens’ in response to the recent tax evasion scandal in Liechtenstein. A joint communiqué said: “In view of the recent developments, we urge all countries that have not yet fully implemented the OECD standards of transparency and effective exchange of information in tax matters to do so without further delay. We welcome the efforts of the OECD in this regard, and ask the OECD to strengthen its work on tax evasion.” The communiqué stated members’ commitment “to fighting money laundering, terrorist financing, and other illicit financing.” It also supported a UN resolution calling for increased scrutiny of transactions with Iranian banks and urged the Financial Action Task Force to “take appropriate action to safeguard the integrity of the international financial system”. The OECD’s blacklist of uncooperative tax havens, which originally named 35 jurisdictions, has now been reduced to include only Andorra, Liechtenstein, and Monaco. All the other jurisdictions have been removed after reaching agreement with the OECD to implement reforms. France and Germany are leading a move to relist some jurisdictions that have not followed through with commitments for reform.

  • Hong Kong approves Revenue Bill 2008
    • 26 June 2008, the Legislative Council approved the Revenue Bill, which includes the 2008-09 Budget proposals to reduce the standard tax rate from 16% to 15% and the corporate profits tax rate from 17.5% to 16.5%. The changes will be introduced by amending the Inland Revenue Ordinance.

  • IMF combines OFC and Financial Sector assessment programmes
    • 30 May 2008, the International Monetary Fund (IMF) agreed to integrate its Offshore Financial Centre (OFC) Assessment Programme with its Financial Sector Assessment Programme (FSAP). The move, it said, would eliminate the need to maintain a potentially discriminatory list of OFC jurisdictions. It would also facilitate a more uniform and risk-based approach to financial sector surveillance and improve coordination of the Fund’s analysis across jurisdictions. Finally, it would provide for a better allocation of Fund resources, with a specific focus on the small number of OFCs that account for the overwhelming volume of offshore activity and could be expected to pose major financial system risks. The OFC programme, inaugurated in 2000, was designed to strengthen regulation and supervision, and to improve compliance with supervisory standards in offshore jurisdictions. Of the 44 jurisdictions initially targeted, 42 were assessed and two jurisdictions received technical assistance. The first phase of assessment, which reviewed compliance with supervisory standards in banking and with the anti-money laundering and combating the financing of terrorism (AML/CFT) was completed in 2005. It found adherence to all four international standards among OFCs was broadly comparable or better, on average, than other countries, reflecting the higher than average incomes of OFC jurisdictions. All but one jurisdiction assessed in the first phase published the results of their assessments. In 2003, the IMF reviewed the programme and decided that monitoring of OFC activities and their compliance with supervisory standards should be a standard component of its financial sector work. Assessments were to be conducted on a four to five-year cycle. Second-phase assessments, which focus on progress in addressing weaknesses identified in previous assessments and issues of cross-border cooperation, began in 2005 – 14 have been completed and three more are underway. The results to date suggest improvement in compliance with supervisory standards in the banking, insurance, and securities sectors, said the IMF. It said progress has also been achieved on prudential cross-border cooperation and information exchange issues. OFCs’ compliance with the 2003 Financial Action Task Force (FATF) 40+9 Recommendations for AML/CFT remains a source of concern. And while compliance is generally comparable to that of non-OFC jurisdictions, relatively low compliance was shown in certain key areas such as customer identification, the monitoring of transactions and international cooperation. In 2004, the IMF also initiated a data collection exercise with OFCs to provide information on the size and scope of activities conducted in offshore jurisdictions. So far 28 jurisdictions are contributing data to the initiative and another seven are planning to participate. The IMF said the majority of offshore transactions are conducted in relatively few centres, although there are a large number of centres with low volumes of activity. The IMF executive board noted that integration of the two programmes would permit a more risk-focused approach to assessments, and would eliminate the need for the Fund to maintain a separate list of OFCs, which has become increasingly difficult to justify in the face of financial globalisation. Directors said that a broader range of issues would be covered under the FSAP compared with OFC assessments, which would strengthen the Fund’s financial sector surveillance and contribute to a more effective oversight of the global financial system. They noted that analysis should be tailored to the risk profile of each jurisdiction, including by focusing on cross-border issues as appropriate. Directors agreed to assess the nine or ten OFCs that account for the overwhelming volume of activity about every five to seven years, and that smaller jurisdictions should be assessed less frequently. But the frequency of assessments should be sufficiently flexible to respond to changing risks and circumstances and to account for information collected through continuous monitoring. Directors noted that, as part of the global arrangements for AML/CFT assessments involving the IMF, World Bank, FATF and FATF-style regional bodies, attention will continue to be paid to money laundering and financing of terrorism vulnerabilities posed by OFCs. The integration of the programmes would not affect the scope or cycle of AML/CFT assessments or the range of jurisdictions to be assessed, either in the context of an FSAP or on a stand-alone basis. They also agreed that, as the FSAP is currently available only to members, its coverage would be extended to encompass the four non-member jurisdictions presently covered by the OFC programme.

  • IoM brings financial services laws into force
    • 1 August 2008, the Financial Services Act 2008 and the Collective Investment Schemes Act 2008 came into operation. They were approved by Tynwald on 17 June 2008. The main purpose of the Financial Services Act is to consolidate and update existing legislation covering banking, fiduciaries and investment business. The Act also clarifies the Financial Supervision Commission’s remit and contains important new provisions to enhance its transparency and accountability. As part of the arrangements under the new legislation, the Commission will operate under a Memorandum of Understanding with the Treasury, which was formally signed when the Financial Services Act received Royal Assent. The Collective Investment Schemes Act also consolidates and updates existing schemes legislation. Both acts form part of the Consolidation and Review of Financial Services Legislation, known as the CAROL project.

  • IRS set to tighten Qualified Intermediary rules
    • 17 July 2008, the US Internal Revenue Service revealed plans to strengthen the Qualified Intermediary regime in response to increasing evidence that it has been misused to help US clients evade income taxes through offshore entities. Douglas Shulman, the IRS commissioner, told a Senate subcommittee that his agency was strengthening the qualified intermediary programme. He also asked Congress for more time to audit offshore accounts that might have been used for tax evasion. The QI programme, which was created in 2001, permits participating foreign banks to manage accounts for US clients without disclosing their names to the IRS, provided they follow ‘Know Your Customer’ procedures and withhold tax due on US securities in their accounts. More than 7,000 foreign banks have signed on to the programme, of which about 100 banks have been excluded for violations. The IRS proposals include requiring foreign banks in the programme to determine the identities of any US investors using trusts, offshore corporations and shell entities, inform the IRS about such US investors and withhold taxes on dividends in the account at rates of up to 30%. Under the current rules, foreign banks in the programme typically submit to an external audit every three years – but the auditors are not required to notify the client or the IRS of any indications of misuse or fraud. Under the proposals, auditors would be required to root out fraud and report it to the IRS. The IRS also says it will soon allow foreign banks in the programme to use third-party databases, like those from credit reporting firms, to determine who their clients really are and what taxes they should pay. Recent studies have indicated that the programme brings in only a fraction of the taxes that it should because the banks have found ways around its requirements. According to a study by the Government Accountability Office last December, in 2003 banks in the programme sent more than $35 billion abroad to individual investors and various entities, but withheld only 5% of that amount in taxes because the entities receiving the income claimed exemptions under foreign tax treaties. If US investors are behind those entities they are not entitled to the exemptions.

  • Isle of Man Court clarifies rules on standing and mis-joinder
    • 4 July 2008, First Deemster Kerruish in the Chancery Division clarified standing and mis-joinder or non-joinder within the ambit of Order 9 Rule 11 of the Rules of the High Court of Justice of the Isle of Man. The case arose from a dispute between the parties over the ownership and distribution of assets that had allegedly been unlawfully removed from Nigeria and distributed in both the Isle of Man and the UK. Nigeria sought declarations and return of the assets, which allegedly involved Abdulkadir Abacha, the brother of the late Nigerian dictator Sani Abacha, and an Irish-registered company, Rosewood International, in which Abdulkadir Abacha was a director and shareholder and accepted beneficial owner. The Irish, UK and Nigerian governments are all seeking to recover €7.6m owed to Rosewood, which supplied security equipment to the Nigerian government. The firm was struck off the Irish companies register 13 years ago because Irish officials believed the company had ceased to trade. After the company was dissolved, the Irish Minister for Finance secured a High Court order vesting all the assets of Rosewood in the State. A private bank in the Isle of Man has €7.6m in five bank accounts. The money is owed to Rosewood. Last year Abacha won a motion in the High Court in Dublin to restore Rosewood to the companies register, which enabled him to claim ownership of the €7.6m owed to the company. Nigeria subsequently lodged a motion in ongoing proceedings in the Chancery Division of the High Court of Justice in the Isle of Man requiring that Abacha be struck out as a party. Nigeria submitted that the test was twofold: whether Abacha’s presence was necessary to enable the court to adjudicate and settle effectively and completely upon all allegations; and, if so, whether it was necessary for the court to consider whether Abacha should continue as a party. The applicant further submitted that, because Rosewood was a party, Abacha’s continued participation would serve no purpose, given that his interests would be adequately represented by Rosewood. It also claimed his participation was incompatible with fundamental principles of corporate identity, and that to permit Abacha to continue as a party would set an unwelcome precedent. Counsel for Abacha relied on Article 6 of the Human Rights Act 2001 and submitted that it was not disputed that Abacha was the legal and equitable owner of Rosewood and one of two directors, the other being his wife. But it was artificial to distinguish between beneficial ownership of the company and beneficial ownership of the funds. Moreover, Abacha had a clear interest in the subject matter of the proceedings, and any determination of the proceedings in favour of Nigeria would legally and financially prejudice him. Counsel for Abacha further argued that were he not permitted to remain a party, he would have no opportunity to make submissions on what should happen to funds in which he had an interest. It was further submitted that the basis of Nigeria’s claim to the funds rested not on allegations directly against Rosewood or Abacha in his capacity as an officer, agent or servant of Rosewood, but on allegations of dishonesty, concealment, money laundering, breach of trust and breach of fiduciary duties on the part of or owed by Abacha. Counsel for Abacha denied that through Rosewood, he was or would continue to be in a position to conduct the course of these legal proceedings. The motion was dissolved. The Court found that if Abacha’s participation were solely dependent on his indirect claim to the funds as legal and beneficial owner of the whole of the issued share capital in Rosewood, then it would have no hesitation in granting the motion. But his submissions were not restricted to or solely dependent on his beneficial ownership of Rosewood and indirect claim to the funds – they also relied on Article 6 of the Human Rights Act 2001. The court agreed that Rosewood was concerned within the substantive proceedings as the holder and thus owner of the bank accounts in which the funds were held, and as an alleged instrument of Abacha in his alleged wrongdoings and breaches. Further, the court held that Article 6 of the Human Rights Act 2001 was engaged and that serious assertions, claims and allegations were made against Abacha personally and independent of Rosewood. Further, in respect of Abacha and Order 9, Rule 11, the court considered Abacha’s presence necessary to enable it to adjudicate upon and settle effectively and completely all questions involved in this matter.

  • Italian government posts taxpayer information on Web
    • 30 April 2008, the Italian Revenue Agency posted the income and tax details of every citizen on its Website as part of what the outgoing government said was an effort to combat tax evasion. The Italian Privacy Authority, which said it had been unaware of the government’s planned disclosure, ordered that publication be suspended and requested that the media refrain from republishing the information. The move came as the centre-left government of former Prime Minister Romano Prodi prepared to hand over power to the centre-right government of Silvio Berlusconi in May. Italian Tax Office Director Massimo Romano said the disclosure was “in the public interest in order to allow the free circulation of information in a framework of transparency,” according to a news report on 30 April.

  • Jersey begins consultation on Trusts Law revision
    • 22 July 2008, the Economic Development Department issued a consultation paper on proposed amendments to the Trusts (Jersey) Law 1984. It is designed to ensure that Jersey’s trusts law remains up to date and reflects recent international developments. The consultation paper covers ten discrete areas of possible reform:
      Amendments to clarify the extent of the application of the law of Jersey to trusts. The proposed amendments are intended to ensure that decisions in relation to Jersey trusts are made in accordance with Jersey law (as opposed to foreign law).
      The possibility of removing the prohibition on trusts of Jersey immovable property.
      The possibility of clarifying what will constitute a valid purpose for non-charitable purpose trusts.
      The possibility of reform to the ‘Prudent man rule’. It is proposed that it be made clear that trust property should be considered as a portfolio in relation to the trustees’ duty to preserve and enhance its value.
      Trustees’ remuneration and expenses. It is proposed that, since most Jersey trustees are now professionals, the law should provide for payment of a reasonable fee where the trust deed is silent.
      The rights of beneficiaries to information under a trust. It is proposed to clarify that these are subject to the terms of trust, provided that the principle of accountability is maintained.
      The position of an outgoing trustee. It is proposed that an outgoing trustee shall have a non-possessory lien over the trust property and also that deeds of indemnity for trustees should be enforceable by retired trustees even when they are not party to the deed.
      Various issues of limitation and prescription.
      Certain difficulties that may be faced by a trustee who acts in relation to several different trusts.
      The possibility of introducing a statutory definition of the word ‘charitable’.
      Senator Philip Ozouf, Minister for Economic Development, said: “The Trusts Law has been to a great extent the engine for the growth of our financial services industry in the last 20 years. Our law was the first in the market place and others have followed our lead. Subsequently, trusts laws in other places have evolved and in some cases moved ahead of our own product. This consultation is designed to see how we should develop our Trusts Law so as to hone our competitiveness.”

  • Jersey reviews Limited Liability Partnerships Law
    • 22 April 2008, Jersey’s Economic Development Department issued a consultation paper to review the Law on Limited Liability Partnerships (LLPs) to decide if it should be amended or replaced in order to make the product more competitive and useful as a vehicle of choice for local and international businesses. LLPs were a relative innovation when introduced in Jersey in 1997 but a number of other jurisdictions have subsequently introduced their own LLP laws. The consultation paper set out a number of different options for developing the Jersey LLP structure. These included: the legal status of an LLP; the registration process, including the current requirement to lodge a £5 million bond; disclosure and accounting requirements; tax and insolvency treatment; and migration. The review is part of the Economic Development Department’s ongoing work to examine the Jersey’s corporate structures.

  • Luxembourg to abolish capital duty
    • 22 May 2008, Prime Minister Jean-Claude Juncker announced various tax measures aimed at maintaining and improving the tax environment in Luxembourg in his state of the nation speech before parliament. The most anticipated tax measure is the abolition of the 0.5% capital duty in 2009. This follows the reduction of the capital duty from 1% to 0.5% in 2008. Luxembourg was one of the few EU countries still levying a tax on capital contributions. The abolition had been announced previously by the government but the timing had been rendered uncertain by European Council Directive 2008/7/EC of 12 February 2008, which did not include a timeframe for EU member states to abolish capital duty regimes. A decrease of the global income taxation of companies – corporate income tax and municipal business tax – from 29.63% to 25.5% has also been announced. In 2007, Luxembourg’s rate of 29.63% was approximately 3% higher than the EU average and approximately 4% higher than its worldwide competitors. Juncker said the reduction would be effected in two steps and would probably be accompanied by measures to enlarge the taxable basis of companies. The timing has not been confirmed but it is expected that there will be an initial reduction of the rate in 2009, and a second in 2010.

  • New Guernsey Companies Law comes into force
    • 1 July 2008, the new Companies (Guernsey) Law was brought into force. The Law consolidates existing company legislation and introduces substantial changes following consultation within Guernsey and consideration of the development of company law in other jurisdictions, including New Zealand, Jersey, the Isle of Man, the Cayman Islands and the UK. The new Law sits alongside a new administrative Companies Registry run by the independent Registrar of Companies. Since the start of July 2008, companies can be incorporated in less than 24 hours. The key changes include streamlining the incorporation process through the new Companies Registry. The requirement for advocates to incorporate companies is removed. Company formation agents are to be designated Corporate Service Providers (CSP) and must be licensed by the Guernsey Financial Services Commission. The ‘pre-vetting’ regime of the beneficial ownership and objects of a company prior to incorporation is to be abolished. Guernsey companies must instead have a Resident Agent in Guernsey, who can either be a CSP or a locally resident director. It is the ongoing duty of the Registered Agent to determine the beneficial ownership and to ensure that all information regarding beneficial ownership is up to date. The Register of Beneficial Interests is not available for public inspection. The incorporation process is simplified by the creation of standardised articles of incorporation that apply unless the company specifically chooses to adopt different articles. Single member companies are permitted. A company has unlimited objects as a default position unless it elects specifically to limit its objects. The Registrar of Companies is a statutory official. All company information will be held electronically, with standard documents being received in an electronic form. Standard forms and processes will be available to be completed on line, as well as the ability to undertake searches. Capital maintenance is replaced by a solvency test as a precondition to the payment of dividends, distributions, reductions of capital, redemption of shares and the giving of financial assistance. The criminal sanction from making a pre-incorporation contract is removed. Contracts may be ratified by means of a board resolution and notification to the other party. A company will not be able to indemnify any directors who have acted negligently or breached their duty to the company, although it may purchase professional indemnity insurance for them. Options are available under the new Companies Law to convert, amalgamate and migrate companies. Companies can be converted quickly from one type of company to another in a single process. The Law will also introduce the UK concept of a ‘shadow director’ – a person who is not a director but whose directions or instructions the directors of a company are accustomed to follow and who is treated as a director for certain purposes under the Law. Members may, by resolution, waive the requirement that companies must always hold an annual general meeting. The Law also enables Guernsey companies to choose exemption from the requirement for audited accounts and to introduce ‘squeeze-out’ provisions for minority shareholdings.

  • OECD proposes to update tax haven listing system
    • 8 April 2008, the OECD said it was proposing to change the way it classifies jurisdictions in terms of transparency and exchange of information. The move follows the exposure of tax evasion on a massive scale in Liechtenstein. The OECD currently lists only three jurisdictions – Andorra, Monaco, and Liechtenstein – as uncooperative tax havens. All other jurisdictions previously on its blacklist have been removed after making commitments to implement some level of transparency or exchange of information. Pascal Saint-Amans, the OECD’s head of the International Co-operation and Tax Competition, said that the OECD was interested in moving away from the current listing system in favour of a more fluid ranking system. Speaking in Washington D.C., he said jurisdictions would receive a grade that reflected not only their commitments to OECD principles, but also the extent of implementation. Such a system would more accurately reflect what is really happening around the world. Saint-Amans said not all jurisdictions that had signed commitments had adequately carried them out, such that the current list did not necessarily provide an accurate reflection of which jurisdictions currently meet the OECD’s criteria.

  • The Seychelles updates Mutual Funds legislation
    • 8 July 2008, the Central Bank of the Seychelles said the Mutual Funds Act had been redrafted to plug the gaps in the previous legislation and allow local financial service providers to tap into the mutual funds industry. “The original legislation came into force in 1997 when the whole of Seychelles’ financial services sector was in its infancy,” said Conrad Benoiton, Director General of the Central Bank’s new Securities and Financial Markets division. “Since then the industry has become far more advanced and sophisticated and it is essential that our legislation caters for these developments and allows us to keep pace with other jurisdictions around the world.” The redraft has extended the powers of the regulator by introducing new rights to request periodical audits, request information for inspection and grant powers to enter, search and take copies of any licensed operations, and by guaranteeing compatibility with international standards. It will also allow expatriate employment levels of up to 50%, replicating existing regulations for the offshore sector. Increasing international concerns over money laundering and terrorism funding has led to additional security measures being introduced into the new legislation. “As with all areas of the financial services industry it is essential that we achieve the appropriate balance in the legislation between providing local firms with the competitive advantage they require, at the same time as ensuring that it is a well regulated industry which conforms to the international standards required to maintain investors’ confidence,” said Benoiton in a statement. The newly drafted legislation is also intended to bolster banking and legal services necessary for mutual fund operations.

  • Trust effectively managed in UK, no treaty tax relief applies
    • 19 February 2008, the UK Special Commissioners held that a trust with trustees in Mauritius was effectively managed in the UK and was not therefore eligible for capital gains tax relief under the treaty. In Trevor Smallwood Trust v HM Revenue & Customs, a Jersey-based trust held shares that would realise a £6.8 million gain on disposal. If realised, this would have been assessed on the UK resident settlor. On the advice of UK tax advisors, new trustees, who were resident in Mauritius, were appointed. Under the scheme, the Mauritian trustees sold the shares and subsequently, but in the same UK tax year, resigned in favour of UK trustees. Under the tax treaty with Mauritius, the gains were therefore be assessable in Mauritius – where no tax was payable – rather than in the UK. But a closure notice issued by the UK Commissioners on 31 January 2005 amended the trust’s tax return for the year ending on 5 April 2001 to include the full amount of a gain of £6.8 million arising on the disposal of shares, and of a gain of £17,378 arising on the disposal of further shares, and disallowed the claim for £2.7 million of double taxation relief. The trustees appealed. The scheme relied on a tiebreaker clause in the treaty, which referred to the Place of Effective Management (POEM) of the trust. The UK Commissioners found that, despite the fact that all the actions of the trustees were “carried out correctly and were well documented”, the “guiding hands” of the UK tax advisors were “evident throughout”. They took into account the fact that the settlor, who had the power to appoint trustees, was UK resident. The Commissioners also made reference to the fact that there was no engagement letter between the Mauritian trustees and the UK tax advisors confining their engagement to tax advice. This decision appears to be limited to cases involving relief under a double tax treaty, but could have implications for determining the residence of trustees generally. Although not relevant to this case, the Commissioners compared POEM with the Central Management and Control (CMC) test that is used to determine whether offshore companies are resident in the UK for tax purposes.

  • UK Committee reports on offshore financial centres
    • 6 July 2008, the UK Commons Select Committee on Foreign Affairs published its seventh report on the UK’s overseas territories and financial offshore centres. It said seven of the Overseas Territories currently have financial services industries and, in all cases, the National Audit Office had found that they faced a challenge in responding “adequately to growing pressures to reinforce defences against money laundering and terrorist financing”. Bermuda, the British Virgin Islands (BVI) and the Cayman Islands were the largest financial centres. Bermuda was the international leader in insurance, BVI was a leading global player in licensing international business companies and the Cayman Islands was a leading world player in financial services, particularly banking and hedge funds. The Committee said it received mixed evidence about the quality of financial regulation in these territories but the UK Foreign Office (FCO) had provided some support to the Territories, saying: “We need to recognise that there is significant international pressure to limit the role of the Overseas Territories in providing international financial services. The Overseas Territories are often expected to apply higher standards of regulation than some OECD countries.” Gibraltar’s financial services industry, said the report, was not large by international standards, but it provided a wide range of services, including banking, insurance, fund management, trusts and advisory business and was increasing its share of this market. For many years, it said, Gibraltar was the object of allegations of financial impropriety, mostly but not only from Spain. Its firm rebuttals of these allegations were not helped by the opacity of its system of financial regulation. But the government of Gibraltar had overhauled its regulatory framework in 1989 and set up a Financial Services Commission. Gibraltar received very good assessments for compliance from the International Monetary Fund in 2001. The financial services industries of Anguilla, Montserrat and the Turks & Caicos Islands, for which the UK retains direct responsibility, remained small. The National Audit Office found that Bermuda, BVI, the Cayman Islands, and Gibraltar, were “leaving in their wake the weaker regulatory capacity” of these three financial centres. The Public Accounts Committee (PAC) had concluded that the FCO, the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, needed to “deploy their expertise and capacity jointly to manage the risks better”. In particular it highlighted a lack of investigative capacity properly to scrutinise suspected money laundering activity. The Committee found that the governors in the three smaller financial centres had not used their reserve powers fully and described it as “complacent” for the UK to allow these Territories to manage the risk themselves. It recommended that the FCO and UK agencies should bring in more external investigators or prosecutors to bolster capacity until the Territories could be self-sufficient in this area. The PAC noted that the FCO had accepted that standards needed to improve and had employed a financial services adviser based in the Caribbean and provided assistance in drafting legislation to allow the Territories to retain and reinvest the confiscated proceed of crime, but argued that it was “improbable” that a single specialist was “sufficient to address the scale of the risk”. The report also received evidence from St Helena’s Banking Supervisor, Alan Savery, who had a contract with the UK Department for International Development (DFID) to draw up a financial services ordinance for the Island. He had warned: “Although St Helena has banking legislation and a regulatory regime for banks it has at present no legislation relating to other financial services or money laundering. There have been indications that certain parties would like to take advantage of this situation and one website described St Helena as the ‘last unregulated financial centre in the world’.” St Helena’s Legislative Council told the Committee that a draft Financial Services Bill and a Money Laundering Bill had been published in December 2007 and argued that enacting such legislation was important both to protect St. Helenians from “falling victim to unscrupulous financial service providers” as the economy begins to develop in preparation for tourism and to ensure the Territory complied with its international obligations. The Committee recommended that the FCO should encourage Bermuda, the BVI the Cayman Islands and Gibraltar to continue to make progress in improving financial regulation, in particular in arrangements for investigating money laundering. But it was concerned by the National Audit Office’s finding that the FCO has been complacent in managing the risk of money laundering in Anguilla, Montserrat and the Turks and Caicos Islands, particularly as the UK was directly responsible for regulation in those Territories and therefore most exposed to financial liabilities. It agreed with the Public Accounts Committee’s recent recommendation that governors of those Territories should use their reserve powers to bring in more external investigators or prosecutors to strengthen investigative capacity. The report also recommended that the FCO should continue to work with DFID to introduce a financial services regulatory regime in St Helena that was appropriate to its local economy and development.

  • UK Court finds pilot with UK property is not a resident
    • 29 January 2008, the UK Special Commissioners held that a British Airways’ pilot with a house in South Africa and property in the UK was not a UK resident for tax purposes. In Lyle Dicker Grace v Revenue & Customs ([2008] UKSPC SPC00663), Lyle Dicker Grace appealed against a notice of determination dated 10 June 2004 that he was ordinarily resident in the UK for the six years from 1997/98 to 2002/2003 inclusive. He was born on 18 May 1952 in South Africa and regarded himself as domiciled in South Africa. His parents went to Kenya when he was five years old and while there they opted to become naturalised British citizens. He therefore became a naturalised British citizen while a minor and still travelled on a British Overseas Citizens passport, which he had renewed in October 1998. Dicker Grace first arrived in the UK in 1979 and obtained a UK pilot’s licence in 1980. He started working for Loganair in the same year. In 1982 that contract was terminated and he returned to South Africa. Dicker Grace returned to the UK in 1986 and obtained a higher commercial pilot’s licence. In April 1987 he was employed as a long haul pilot by British Caledonian, which was taken over in 1988 by British Airways. The long haul flights commenced from Gatwick or Heathrow airports. In 1987 he purchased a house in Crawley, which he sold in 1990 when he purchased another house in Horley. This house was his principal residence from 1990 to 1997. In 1997 Dicker Grace’s marriage was dissolved and he set up home in Cape Town, South Africa while continuing his employment with BA. Initially he rented an apartment and then moved into a house, which was transferred to him a year later. Since 1997 he had retained the Horley house in the UK, which he used in order to rest before or after flights. He planned to retire when he was 60 years old and did not intend to make any visits to the UK after he retired. Dicker Grace claimed that he had departed from the UK on 6 August 1997 to live outside the UK permanently and that thereafter he was not resident in the UK. He had removed the centre of his life to South Africa in 1997 since when he had kept his visits to the UK to a minimum. He kept his private aeroplanes in South Africa and did no private flying in the UK. He had retained the house in Horley as an investment but could have stayed in hotels. He did not agree that the South African house was in the nature of a holiday home. He argued that section 334 of the Income and Corporation Taxes Act 1988 did not apply because he was in the UK for a temporary purpose only to rest before or after his flights. His visits to the UK were short and only on three occasions were they longer than seven days. He argued that he was a temporary resident in the UK within the meaning of section 336 of the 1988 Act and that he had not spent more than six months in the aggregate in the UK during any of the years in question. Special Commissioner Dr Brice agreed. He held that although Dicker Grace was resident in the UK before 1997 in that year there was a distinct break and since then his settled mode of life has been in South Africa. In 1997 he had set up home in South Africa and purchased a house there. The home was near his parents and brother. He was very attached to his private aeroplanes and it was significant that they were all in Cape Town and that there were none in the UK. He intended not to return to the UK when he retired. Since 1997 he had returned to the UK but only for the purpose of his employment. It concluded that Dicker Grace was not resident in the UK and then turned to consider whether he was ordinarily resident in the UK in the relevant years of assessment. “The authorities establish the principle that ordinary residence means part of the regular order of a man’s life, adopted voluntarily and for settled purposes. Also, if an individual is not resident in the UK, then it is difficult to find that he is ordinarily resident here. I have concluded that the Appellant was not resident in the UK and also conclude that he was not ordinarily resident here,” said Dr Brice. Considering sections of the 1988 Act which contained provisions about the residence of individuals, he said the relevance of section 334 was that as Dicker Grace’s ordinary residence was in the UK before September 1997 he remained liable to tax if his presence abroad after that date was for the purpose of occasional residence abroad. “However, in my view his presence abroad after that date was not for the purpose only of occasional residence abroad but for the purposes of continuous and settled residence in his house in Cape Town punctuated only by the need to visit the UK for the purposes of his work,” said Dr Brice. “In my view, leaving aside the availability of living accommodation, all the factors point to the conclusion that after September 1997 the Appellant was in the UK for temporary and occasional purposes only. He was here in order to do his work and for no other reason. He had no intention of establishing his residence here and his intention was to establish his residence in South Africa. Thus in my view section 336 applies to the Appellant so that he is not to be treated as resident in the UK.” Dr Brice said whether the Appellant was resident and ordinarily resident in the UK in the years in question were matters of fact and degree. Taking into consideration the evidence before him, especially having regard to the Appellant’s past and present habits of life, the reasons for his visits to the UK, the temporary nature of his ties with the UK, the more permanent nature of his ties with South Africa, and the distinct break made in 1997, he came to the conclusion that from 1 September 1997 he ceased to be resident and ordinarily resident in the UK. “After that date this was not where he dwelt permanently nor where he had his settled or usual abode which was in South Africa. Residence here did not have a settled purpose. I also conclude that the Appellant was not ordinarily resident here,” he held. “My decision on the issue for determination in the appeal is that the Appellant was not resident or ordinarily resident in the UK in the six years from 1997/98 to 2002/2003 inclusive.”

  • UK Court of Appeal overturns domicile ruling in Barlow Clowes case
    • 23 May 2008, the UK Court of Appeal held that where a person abandons his domicile of choice by ceasing to reside in the relevant country and giving up his intention permanently to reside there, his domicile of origin revives as a matter of law and persists until he acquired a domicile of choice elsewhere. In Barlow Clowes International Ltd (in Liquidation) and Others v Henwood, the Court of Appeal allowed an appeal against a decision in the Bankruptcy Court on 4 July 2007 that Peter Henwood, a key player in the Barlow Clowes fraud, was not domiciled in England and Wales when they presented a bankruptcy petition against him. Barlow Clowes collapsed in 1988 after it emerged that Peter Clowes, its co-founder who was jailed for ten years for his role in the scam, had spent more than £100 million of clients’ money on cars, homes and a luxury yacht. Investors had believed that they were putting their savings into risk-free government bonds. In 2001, the liquidators of Barlow Clowes obtained a judgment debt against Peter Henwood in respect of his dishonest assistance in the disposal of monies stolen. Some of the investors’ funds were paid away during 1987 through bank accounts maintained by companies administered from the Isle of Man by a company providing offshore financial services which was then called International Trust Corporation (Isle of Man) Ltd, subsequently known as Eurotrust International, of which Henwood was a principal director. On 10 October 2005, the UK Privy Council upheld an Isle of Man High Court ruling which found Henwood liable for payments after 1987 because ” … by that time Henwood knew enough about the origins of the money to have suspected misappropriation and that he acted dishonestly in assisting in its disposal”. This ruling enabled the Barlow Clowes’ receivers to pursue Henwood for the judgment debt and, in December 2005, he was served with a bankruptcy petition for £9,370,537 plus interest. In March the following year, Henwood applied for a declaration that the court had no jurisdiction to hear the petition on the ground that he was not domiciled in England and Wales. In the High Court, it was not disputed that Henwood’s domicile of origin was England, but he had travelled extensively throughout his adult life, owning a number of foreign properties and living for some years in the Isle of Man. In 1992, Henwood had let his Isle of Man property on a long lease, and had taken a lease of a villa in Mauritius. He renewed the lease over a period of 14 years, developing the villa and holding a Mauritius residency permit and work permit. He spent little time in Mauritius because of extensive travel and because of substantial periods of time spent at his French property. Henwood’s work permit in Mauritius had ended around the same time as the judgment debt was obtained, as did his residency permit. In May 2006, his wife bought a further property in Mauritius, which enabled them both to obtain a right of permanent residence. Mr Justice Evans-Lombe said that decision was “very likely” influenced by “the attractions of Mauritian bankruptcy law”. It was “common ground that the law [in Mauritius] does not allow for bankruptcy proceedings against an individual who is not carrying on business in Mauritius and that thus the judgment obtained against Mr Henwood would not be enforceable against him”. The liquidators of Barlow Clowes appealed. Lord Justice Waller said that Henwood had a domicile of origin in England. He then acquired a domicile of choice in the Isle of Man. His case was abandonment by acquisition of domicile of choice in Mauritius but the evidence did not establish that. The evidence did, however, establish abandonment of his domicile of choice in the Isle of Man. Thus his domicile of origin revived. The High Court judge, he said, was in error in thinking that a domicile of choice could be lost only by the acquisition of another domicile of choice. A domicile of choice could be abandoned and, if abandoned, the domicile of origin revived. Because the domicile of origin revived there was no compulsion to find the acquisition of another domicile of choice. The evidence did not establish the requisite intention by Henwood to establish a domicile of choice elsewhere. The weight of evidence required to prove that he had acquired another domicile of choice was no greater than that which was required to show that one domicile of choice had superseded another. Where a person maintained homes in more than one country, however, the question had to be decided by reference to the quality of residence in each of those countries to ascertain in which country he had an intention permanently to reside.

  • UK sisters lose European inheritance tax battle
    • 29 April 2008, the European Court of Human Rights in Strasbourg ruled that two elderly British sisters do not face unfair discrimination under the UK inheritance tax regime. In Burden and Burden v the UK, Joyce and Sybil Burden ‘ aged 90 and 82 respectively ‘ had lived together all their lives. Under UK inheritance tax rules, when one of them died the other would have to sell their house in Wiltshire, valued at £875,000, to pay the 40% inheritance tax on its value above £300,000. Since 1976, the sisters have written to the UK Chancellor of the Exchequer the day before every Budget, pleading for recognition under the tax rules as a cohabiting couple. When the UK Civil Partnership Act of 2004 first recognised gay and lesbian couples for inheritance tax purposes, the sisters applied to the European Court of Human Rights for a ruling that cohabiting siblings should enjoy the same tax rights as married and gay couples. They argued that the Act violated Human Rights Convention articles outlawing discrimination and guaranteeing the “protection of property”. The UK government contended that there was a difference in the relationships between siblings and couples because couples enjoyed a relationship of choice, whereas siblings enjoyed a relationship of consanguinity. In its decision of 12 December 2006, the European Court of Human Rights found narrowly in favour of the UK by a majority of four to three, with strong dissenting judgments that described their inheritance tax plight as “awful” and “particularly striking”. The sisters were given leave to appeal before the Grand Chamber in Strasbourg on 12 September 2007. But the appeal hearing, before a larger panel, produced a more decisive 15 to two majority against the sisters and upheld the earlier ruling that national governments were entitled to some discretion when deciding taxation arrangements. The judgment said: “The absence of such a legally-binding agreement between the applicants rendered their relationship of co-habitation, despite its long duration, fundamentally different to that of a married or civil partnership couple.” The ruling marks the end of the sisters’ legal bid. After losing the first human rights case in 2006, Joyce Burden said: “If we were lesbians we would have all the rights in the world. But we are sisters, and it seems we have no rights at all.”

  • Ukraine to rescind Cyprus tax treaty
    • 4 June 2008, the Ukrainian parliament rejected a draft law to terminate the tax treaty between with Cyprus after the coalition government failed to secure the required votes. The government initiated the draft law for termination the treaty, which was originally signed in 1982 between the former USSR and Cyprus, because it contends that the treaty promotes the ‘avoidance of taxation’. In contrast to other tax treaties, the treaty provides for zero withholding tax rates for almost all forms of passive income ‘ dividends, interest, rents and royalties ‘ without any conditions. When combined with the Cypriot tax regime for holding companies, the treaty offers highly advantageous opportunities to foreign investors doing business in Ukraine. A new treaty was agreed with Cyprus in 2006 but Cyprus has delayed signing the treaty because it wishes to amend the draft treaty to provide for a zero tax rate for dividends and capital gains. The Ukrainian government believes that terminating the current treaty will be an incentive for the Cypriot government to accelerate the conclusion of the new treaty. Russia has terminated the similar tax treaty with Cyprus. If the treaty is terminated, all revenues paid to the residents of Cyprus from the territory of Ukraine will be taxed at 15%. As of January 2008, Cyprus-based companies boasted US$5.9 billion of investment into Ukraine or 20% of total investments. At the same time Ukrainian businesses invested US$5.8 billion into Cyprus (94% of Ukraine’s total investment abroad). In 2007 Ukrainian companies made payments of around US$1 billion of income to Cypriot companies.

  • US Court grants IRS summons targeting Swiss account holders
    • 2 July 2008, a US Federal Court approved a summons that will allow the Internal Revenue Service to obtain information from Zurich-based bank UBS on the US holders of Swiss accounts. “The order clears the way for the IRS to take the next steps against wealthy individuals who don’t pay their taxes,” IRS commissioner Doug Shulman said in a statement. “People should take notice that the secrecy surrounding these accounts is rapidly fading.” The court order, signed by US District Judge, directs UBS to produce records identifying US taxpayers that sought to have information related to their UBS accounts hidden from the IRS. The Federal Court in Miami approved a so-called ‘John Doe’ summons – to obtain information about people whose identities are unknown – the day after the US Justice Department requested it. In response, UBS said it will work with the IRS to address the summons: “UBS takes this matter very seriously and is working diligently with both Swiss and US government authorities, consistent with Swiss law and the legal frameworks for intergovernmental cooperation and assistance.” Former UBS banker Bradley Birkenfeld had earlier pleaded guilty in a Florida court to conspiring to defraud the IRS by helping UBS clients avoid US reporting requirements on income in Swiss bank accounts. He said the bank had about $20 billion of assets under management in “undeclared” accounts for US taxpayers. US prosecutors are expected to confront Swiss banking giant UBS with a broad subpoena for the names of wealthy US clients who may have used its services to avoid income taxes, according to a Wall Street Journal report. The subpoena follows the indictment, in a Florida federal court on 13 May, of former UBS private banker Bradley Birkenfeld and. Birkenfeld was charged with conspiring to defraud the US by creating fictitious trusts, bogus corporations and other false entities to hide some $200 million in assets. He pleaded not guilty. Birkenfeld, a US citizen, was employed by UBS from 2001 to 2006 and worked as a director in the bank’s private banking unit. In 2001, UBS agreed to provide US tax officials with information on any customers receiving taxable US income under the new Qualified Intermediary Agreement. The same year, according to the Florida indictment, Birkenfeld teamed up with Mario Staggl, a Liechtenstein-based trust specialist, to assist clients to circumvent the agreement. One such client, California-based property developer Igor Olenicoff, pleaded guilty last December to a charge of filing a false 2002 tax return and agreed to cooperate with investigators. The Justice Department investigation is now expected to pursue other US clients. Martin Liechti, the head of UBS’s wealth management arm for the Americas, was detained in April in Miami by US authorities under a “material witness” warrant.

  • US Senate Panel urges crackdown on tax havens
    • 24 July 2008, the US Senate Finance Committee called for greater Internal Revenue Service powers to combat offshore tax evasion after reviewing a report into US-related activity in the Cayman Islands. The Committee has asked the US General Accounting Office (GAO) to find out how many US taxpayers had set up Caymans’ entities, and what kind of business they did there. A study by a separate Senate panel calculated that offshore abuses cost the US government $100 billion a year in lost tax revenue. Investigators from the GAO visited the Cayman Islands earlier this year to investigate the activities at Ugland House, an office building on Grand Cayman that has been referred to repeatedly in US congressional debates on US tax issues They also interviewed the occupier, law firm Maples & Calder, and met with representatives from the government, the Cayman Islands Monetary Authority, Financial Reporting Authority, Tax Information Authority and the General Registry. The report said that, as of March 2008, Ugland House was home to 18,857 business entities. That was up from 12,748 reported tenants in August 2004 ‘ an increase of four tenants a day. Some 5% were US-owned and another 40 to 50% had a US billing address or other connection. About 38% of all these entities were hedge fund or private equity-related. Cayman-based hedge funds offer US tax-exempt entities like pension funds and foundations the ability to invest without paying a US tax that applies to leveraged investments. They also serve foreign investors who prefer not to invest in US-domiciled funds for tax, regulatory or political reasons. Another 24% of firms registered at Ugland House were related to structured finance. The remaining 38% were corporate entities such as holding companies and wholly owned subsidiaries. Some of these were legal entities set up by US firms to facilitate cross-border business. But others were created for the purpose of tax fraud or evasion, the GAO said. GAO identified 21 civil and criminal cases brought by US authorities against Caymans entities. The GAO report noted that Cayman authorities have a good record of cooperating with US law enforcement authorities where illegal activity is suspected. But it concluded that “as long as the US government is chiefly reliant on information gained from specific inquiries and self-reporting, the Cayman Islands and other similar jurisdictions will remain attractive locations for persons intent on engaging in illegal activity.” US Senator Max Baucus, who chaired the hearing of the Senate Finance Committee, said: “When you see a huge spike in tenancy in a place like the Ugland House, where no one’s really sure what’s going on, decent oversight demands that you ask more questions. If we strengthen transparency for US holdings in places like the Caymans, it will be a lot easier for the IRS to tell who’s not playing by the rules.” Maples & Calder said in a statement that there were legitimate reasons for companies to register in the Caymans, such as its tax-free status. It also said, “it is not unusual” for thousands of businesses to use the same address, pointing out that more than 200,000 entities are registered at one address in Wilmington, Delaware. Baucus said he wanted to improve the IRS’s ability to enforce existing requirements that US taxpayers disclose their interest in foreign financial accounts. He also wants to extend the statute of limitations to six years from three years to give IRS more time to obtain information on whether a taxpayer has met his filing obligations. Kurt Tibbetts, Leader of Government Business in the Cayman Islands, said: “We believe that the report generally presents an accurate description of the Cayman Islands’ legal and regulatory regime and also assists in clarifying the nature of activity that takes place in the Cayman Islands in its role as a global financial services centre, to the benefit of both US and non-US persons.” “Another key finding in the report which again reiterates our position is that registered office services provided by Cayman Islands’ firms accord with the general nature of such services and, in fact, are subject to regulation not applicable to such services under the governing US state laws.” “As the report recognises, however, the US Congress and those who are responsible for drafting and enforcing US tax laws and regulations necessarily must play the principal role in enhancing compliance with those laws and regulations by US taxpayers,” he said.

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