March 2009, a trove of financial secrecy jurisdictions ? Switzerland, Liechtenstein, Austria, Luxembourg, Belgium, Andorra, Monaco, San Marino, Hong Kong, Singapore and Macao ? bowed to international pressure and pledged to cooperate with foreign tax authorities by sharing tax information. The concessions preceded the G20 summit on 2 April at which leaders will discuss ways to combat offshore tax evasion. The Swiss government announced on 13 March that it will adopt the OECD standard on administrative assistance in tax matters, which will permit the exchange of information with other countries in individual cases when a specific and justified request has been made. Finance Minister Hans-Rudolf Merz said: “It’s not an open-door policy. It’s a relaxation to facilitate the contact between the two countries.” Confidentiality will be waived only in cases in which there is “concrete information,” including the name of the bank and the assets involved.Liechtenstein agreed to ease its strict bank secrecy law by committing to OECD standards on 12 March. It will now sign bilateral tax information exchange agreements (TIEAs) with individual states similar to the one it signed with the US in December. The Principality is also offering to sign agreements that go beyond the OECD standards, provided that clients of its banks holding secret accounts can be allowed to bring their money onshore and meet their tax obligations in an orderly manner.The Belgian government said on 12 March that it is to begin exchanging information on interest payments made to individuals under the EU Savings Tax Directive next year. Austria, Belgium and Luxembourg were all permitted to impose a withholding tax on interest income rather than exchange information during the Directive’s transitional period.Austria and Luxembourg announced on 13 March that they are to implement OECD standards for information sharing. The Austrian government said it will now exchange information when there is “compelling suspicion” documented by foreign tax authorities, and the Luxembourg government agreed to “exchange information on request in specific cases and on the basis of concrete proof” provided by foreign tax authorities. Andorra’s head of government Albert Pintat signed an agreement in Paris on 10 March pledging to repeal the Principality’s bank secrecy laws by November 2009 and to enter into TIEAs. The Andorran government is now working with the OECD to put in place a framework for exchanging tax information.Monaco announced on 14 March that it was ready to make access to information on foreign account holders in Monaco available to foreign tax authorities. Access has previously been restricted to judicial investigations, authorised by a judge. A spokesman said that the move coincided with promises made in 2008 by Prince Albert II to implement greater transparency, once larger countries such as Austria, Luxembourg and Switzerland did so. Monaco “won’t remain outside the general movement toward transparency” as defined by OECD standards, the government said.The Republic of San Marino announced, in a letter to OECD on 30 March, that it was willing to enter into bilateral agreements to exchange information in all tax matters in accordance with the OECD standard. It was also prepared to amend its legislation, including that on bank secrecy before the end of September 2009, in order to allow for the effective application of these agreements. San Marino made a commitment to implement the OECD’s principles of transparency and effective exchange of information for tax purposes in 2001.Hong Kong Financial Secretary John Tsang, delivering his second budget speech on 25 February 2009, said the government was proposing to legislate by mid-year to amend Hong Kong’s existing legislation, to accommodate the exchange of tax information provisions contained in the current OECD tax treaty model. Tsang said: ?I believe that the business and professional community generally agrees that Hong Kong should align its arrangements for the exchange of tax information with international standards so that we can enter into such agreements with more economies.?The Singapore Ministry of Finance announced on 6 March that it had also decided to relax its strict bank secrecy laws and adhere to OECD standards. The Ministry is to introduce draft legislative amendments to amend its banking laws in the middle of 2009, adding that Singapore is prepared to provide further assistance for exchange of information. ?Once the legislative amendments are passed in Parliament, Singapore is prepared to negotiate and conclude double taxation agreements that will enable us to provide further assistance for exchange of information.? Lee Kuan Yew, modern Singapore?s founding father, told bankers the city-state could not escape the pressure being applied to Switzerland. ?We must move with the flow,? he said.Macao committed to implement the OECD transparency and information exchange on 21 March 2009 and is now proposing to modify its domestic legislation to enable the exchange of banking information on request by another jurisdiction. The modifications will be introduced before the end of 2009 and will allow Macao to negotiate TIEAs. Orieta Lau, director of the Financial Services Bureau, said: “These steps are being taken as part of Macao’s ongoing efforts to meet international standards to combat all forms of abuse of the financial system.”The OECD has been preparing a new blacklist of uncooperative tax havens in the run-up to the G20 summit. The OECD, having received commitments from 35 jurisdictions, now includes in its list only Andorra, Monaco, and Liechtenstein. But many ?committed? jurisdictions have not yet signed a single TIEA, and last year an OECD sub-committee recommended that the new standard for countries was to have signed a minimum of 12 TIEAs with OECD members. The new list will reportedly name over 30 jurisdictions and OECD Secretary General Angel Gurria said that, while he considered these new pledges to be significant, countries that had only recently committed to weaken their bank secrecy laws would not escape the new blacklist.
23 March 2009, Prime Minister Michael Misick resigned after a probe found “clear signs” of corruption in the UK overseas territory and the UK Foreign Office said it would suspend much of the Turks’ constitution and hand power over to the Governor. A draft order was laid before the UK Parliament on 25 March. Misick is alleged to have built up a multi-million dollar fortune since coming to power in 2003. The UK move followed an interim report by a Commission of Inquiry ? led by former Lord Justice of Appeal Sir Robin Auld ? that pointed to the “high probability of systemic corruption” in its administration. It also concluded there were “clear signs of political amorality and immaturity and of a general administrative incompetence”.UK Foreign Office Minister Gillian Merron said the draft order would seek a suspension of parts of the Islands’ constitution and transferring powers to Governor Gordon Wetherell, who succeeded Richard Tauwhare last year. Tauwhare instigated the inquiry, but was criticised by the Foreign Affairs Select Committee for not acting sooner to tackle what it said last year was “a climate of fear” on the islands. Once a dependency of Jamaica, the islands become a crown colony when Jamaica gained its independence in 1962.
26 February 2009, the Canadian Federal Court of Appeal denied the Canada Revenue Agency’s (CRA) appeal of a decision concerning the meaning of the term “beneficial owner” under the Canada-Netherlands tax treaty within the context of dividends paid by a Canadian corporation to a Dutch holding corporation.In 2006, following the Indofoods decision in of the UK, the CRA announced that it would challenge dividends, interest, and royalties paid by a Canadian company to a holding company in a favourable tax jurisdiction if the holding company did not have an office or employees and did not retain the funds. In The Queen v Prévost Car, the case concerned the meaning of beneficial owner under the Canada-Netherlands tax treaty within the context of dividends paid by a Canadian corporation Prévost Car (PC) to a Dutch holding company, Prévost Holding (PH) ? a joint venture between UK and Swedish shareholders which held all the shares in PC. PH, although incorporated in the Netherlands, had no physical office or employees. During the course of a six-year period, PC paid 12 dividends to PH. The Canadian Court overturned the decision of the Canadian Revenue Agency (CRA) and held that PH was in fact the beneficial owner of the dividends because PH had discretion as to the application of the dividends. PH was said to have both received the dividend for its own use and assumed both the risk and control of the dividends received from PC. The CRA appealed to the Federal Court of Appeal on the basis that the judge gave the term “beneficial owner” a common-law definition, not a meaning consistent with civil and international law.The Federal Court of Appeal noted that there is no settled definition of the term “beneficial ownership” or “beneficial owner” in the OECD model, the Canada-Netherlands tax treaty, or the Income Tax Act (Canada). The Tax Court judge, having examined the term, determined that the beneficial owner of the dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend that he or she has received. The Federal Court of Appeal agreed saying it “captures the essence of the concepts of beneficial owner” as it emerges from considering the general, technical, and legal meanings of the term, as well as the statements in the OECD commentaries.The Federal Court of Appeal rejected the Crown’s position that the beneficial owner of a dividend is “the person who can, in fact, ultimately benefit from the dividend”. The Court noted that this definition did not appear anywhere in OECD documents and stated that the Crown was asking the Court “to adopt a pejorative view of holding companies which neither Canadian domestic law, the international community nor the Canadian government have adopted”.
2009, the leaders of the G-20 countries called for the end of bank secrecy and threatened sanctions against uncooperative jurisdictions identified by the OECD in a new, tiered “progress report?. But, despite lobbying from the French government, it is yet to be seen what sanctions may be deployed.The summit in London dealt primarily with questions over the financial crisis. Leaders agreed to create an additional $1 trillion IMF loan and guarantee facility to boost the global economy. They also made commitments toward strengthening international financial supervision and regulation, and agreed, “to take action against non-cooperative jurisdictions, including tax havens.””We stand ready to deploy sanctions to protect our public finances and financial systems,” the G-20 leaders wrote in a communiqué. “The era of bank secrecy is over.”A Declaration on Strengthening the Financial System states: ?It is essential to protect public finances and international standards against the risks posed by non-cooperative jurisdictions. We call on all jurisdictions to adhere to the international standards in the prudential, tax, and AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism) areas. To this end, we call on the appropriate bodies to conduct and strengthen objective peer reviews, based on existing processes, including through the FSAP (Financial Services Action Plan) process.?We call on countries to adopt the international standard for information exchange endorsed by the G20 in 2004 and reflected in the UN Model Tax Convention. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of information. We welcome the new commitments made by a number of jurisdictions and encourage them to proceed swiftly with implementation.?We stand ready to take agreed action against those jurisdictions which do not meet international standards in relation to tax transparency. To this end we have agreed to develop a toolbox of effective counter measures for countries to consider, such as:
Increased disclosure requirements on the part of taxpayers and financial institutions to report transactions involving non-cooperative jurisdictions;
Withholding taxes in respect of a wide variety of payments;
Denying deductions in respect of expense payments to payees resident in a non-cooperative jurisdiction;
Reviewing tax treaty policy;
Asking international institutions and regional development banks to review their investment policies; and,
Giving extra weight to the principles of tax transparency and information exchange when designing bilateral aid programs.
?We also agreed that consideration should be given to further options relating to financial relations with these jurisdictions.?We are committed to developing proposals, by end 2009, to make it easier for developing countries to secure the benefits of a new cooperative tax environment.?We are also committed to strengthened adherence to international prudential regulatory and supervisory standards. The IMF (International Monetary Fund) and the FSB (Financial Stability Board) in cooperation with international standard-setters will provide an assessment of implementation by relevant jurisdictions, building on existing FSAPs where they exist. We call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions.?We agreed that the FATF (Financial Action Task Force) should revise and reinvigorate the review process for assessing compliance by jurisdictions with AML/CFT standards, using agreed evaluation reports where available.?We call upon the FSB and the FATF to report to the next G20 Finance Ministers and Central Bank Governors? meeting on adoption and implementation by countries,? said the Declaration. The OECD’s new list assesses the implementation of information exchange standards among jurisdictions surveyed by the OECD Global Forum. An unnamed US official is reported as saying the communiqué’s language was a compromise brokered by President Obama between French President Nicolas Sarkozy and Chinese President Hu Jintao after the meeting came to a halt over Hu’s objection to Sarkozy’s call to endorse the list, which could have included Hong Kong and Macau.Hong Kong and Macau are notably absent from the list but are mentioned in a footnote as having committed to implement the OECD standards on information exchange.The Global Forum’s progress report breaks the jurisdictions down into those that have substantially implemented OECD standards, those that have made commitments but have not yet substantially implemented the standards, and those that have not committed to OECD standards. Barbados, Guernsey, Isle of Man, Jersey and the US Virgin Islands were identified by the OECD as uncooperative tax havens in 2000 but are now believed to have substantially implemented the OECD standards. Bermuda, the Cayman Islands and San Marino had avoided inclusion in the 2000 list but now are listed as jurisdictions identified as tax havens that have not yet substantially implemented the standards.Costa Rica, Malaysia (Labuan), the Philippines and Uruguay are now the only jurisdictions that have not committed to OECD standards. A recent flurry of commitments brought 11 jurisdictions, ? Switzerland, Liechtenstein, Austria, Belgium, Luxembourg, Andorra, Monaco, San Marino, Hong Kong, Singapore and Macao ? into the ?committed? category. The report shows that more than half of the committed jurisdictions have not yet entered into any tax information exchange agreements.”We have agreed that there will be an end to tax havens that do not transfer information on request. The banking secrecy of the past must come to an end,” said UK Prime Minister Gordon Brown at the close of the summit. “We have agreed [on] tough standards and sanctions for use against those who don’t come into line in the future.””This is the start of the end [of tax havens], because country after country is now signing up to the principles that have been set forward internationally. The principle is you have got to be prepared to exchange information about tax on request,” Brown added.”Now I think you are going to find other countries wanting to join this group, and the reason is that people are going to increasingly see that it is unsafe to be in a country that still wants to declare itself as a tax haven,” Brown said. “There will be no guarantee about the safety of their funds if they are there, and if tax information is exchanged on request as now these countries are agreeing to, then the benefits that come from being in these countries become diminished every day.”
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3 December 2008, the Mumbai High Court held that the transfer of share capital from one non-resident company to another non-resident company with the sole intention of acquiring interests in India would amount to a transfer of capital assets and would hence be liable for capital gains tax. In Vodafone International Holdings BV v Union of India, Vodafone acquired a stake in CGP Investments, a company incorporated in the Cayman Islands and wholly held by Hutchison Telecommunications International (HTIL). CGP, both directly and indirectly through downstream subsidiaries, held a 67% stake in HEL (India), a joint venture between Hutchison as foreign investor and its Indian partner Essar. The transaction involved the sale of all shares held by HTIL in CGP to Vodafone. Following the acquisition, the assistant director of Income Tax issued a notice to Vodafone for its failure to withhold income tax in respect of the purported capital gains earned by HTIL from the sale of the 67% controlling interest in Vodafone Essar.Vodafone appealed against the applicability of Indian tax law to a non-resident-to-non-resident transaction. It claimed that in such a transaction it was under no obligation to withhold tax from HTIL, as the purported transfer was of share capital of one non-resident company to another non-resident company and not a transfer of a capital asset situated in India. The controlling interest was not an asset separate and distinct from the shares, but an incidence arising from the holding of a particular number of shares in a company.The court disagreed, holding that through the joint venture Vodafone had not only become the successor in interest to HTIL, but it had also acquired a beneficial interest in the licence granted by the Department of Telecommunications in India to its group companies, now known as Vodafone Essar. ?The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by the other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act,? it said.The consequences of not withholding have also been addressed through the government’s introduction of retrospective tax law in 2008. If the Supreme Court of India upholds this ruling, such an interpretation may expose many previous buyers and sellers of shares outside India to significant amounts of tax.
8 February 2009, the Swiss canton of Zurich voted to abolish the flat ? or ?lump sum ?? tax, which is individually negotiated by foreign residents provided that they do not work in Switzerland. The canton voted by a majority of 52.9% to do away with the privileges. The decision will apply only to cantonal and community taxes, not to federal taxes. Zurich’s government and parliament opposed the change, warning it could prompt an exodus. The campaign to end the tax regime was spearheaded by the Alternative List, a left-wing party.Most of Switzerland’s 26 cantons offer highly beneficial flat taxes to wealthy foreigners and as many as 4,100 wealthy foreigners are understood to benefit. In Zurich, 137 people qualified for special tax rules at the end of 2006, the last year for which information is available. They included singers Tina Turner, Shania Twain and James Blunt, Russian oligarch Viktor Vekselberg, German milk mogul Theo Müller, and motor racing drivers Lewis Hamilton and Kimi Raikonnen.
18 March 2009, Lord Adair Turner, chairman of the UK’s Financial Services Authority, in his Review of global banking regulation, found that offshore financial centres did not play a central role in the origins of the current crisis. But he noted that, “tighter effective controls in offshore centres will, however, become more important over time as regulation is improved in the major onshore locations and as the incentives for regulatory arbitrage through movement offshore therefore increase.?Turner said: “It is important to recognise the role of offshore financial centres was not central in the origins of the current crisis. Some SIVs were registered in offshore locations; but regulation of banks could have required these to be brought on-balance sheet and captured within the ambit of group capital adequacy requirements. And many of the problems arose from the inadequate regulation of the trading activities of banks operating through onshore legal entities in major financial centres such as London or New York.?Turner also added that greater regulation of hedge funds may be required if they became more systemically important, and this should be extended to offshore financial centres. ?If it ever did become appropriate to extend prudential regulation to hedge funds,? said Turner, ?the issue of the geographic coverage of regulation could become important, given that many hedge funds are legally domiciled, among other reasons for tax purposes, in offshore financial centres, even if the asset managers are legally domiciled and located in the UK, the US, or Switzerland. Global agreement on regulatory priorities should therefore include the principle that offshore centres must be brought within the ambit of internationally agreed financial regulation (whether relating to banking, insurance or any other financial sector).?
19 February 2009, the Department of Justice filed a lawsuit seeking to force UBS to disclose the holders of accounts with about $14.8 billion in assets. It claims 52,000 American customers hid UBS accounts from the authorities in violation of tax laws. The suit came a day after UBS reached a landmark settlement with the US government under which the Swiss bank admitted having enabled US clients to evade taxes, agreed to pay $780m in fines and turn over about 250 client names to the US authorities.Swiss Finance Minister Hans-Rudolf Merz said it was ?very clear? that the 250-300 dossiers involved tax fraud but the deal would not compromise the confidentiality of the Swiss banking industry. Appeals to Switzerland?s top court against the handing over of bank records to the US justice department are still pending, he said. It seems, however, that the Swiss government bowed to US pressure and effectively told UBS to settle rather than risk an indictment that would not only damage the bank but also Switzerland?s global financial role and economy.On 6 November last year, a grand jury in Florida indicted Raoul Weil, chairman of global wealth management at UBS, on one charge of conspiring to help US citizens hide assets from the IRS to maintain a ?profitable’? business for the Swiss bank. Weil, who denies being aware of, engaged in or tolerating any illegal conduct in the operation of UBS?s US cross-border business, was declared a fugitive from US justice on 13 January.The DoJ is also understood to have expanded its investigation to include three Swiss individuals who are alleged to have worked with UBS employees to help US taxpayers set up offshore accounts and entities, according to a report in The New York Times on 19 March. It named the three individuals as Beda Singenberger, an accountant who runs Zurich-based Sinco Trust, and brothers Matthias and Andreas Rickenbach of Rickenbach & Partner, a law firm with offices in Zurich and Geneva. US prosecutors, said the report, suspect that they travelled with Swiss UBS bankers to the US to assist clients. The expanding investigation may also lead prosecutors back to US law and accounting firms that worked with UBS.UBS has been under scrutiny by the Department of Justice since at least 2004, when it began investigating US billionaire Igor Olenicoff for tax evasion, which officials suspected was facilitated by former UBS banker Bradley Birkenfeld. Both Olenicoff and Birkenfeld have since pleaded guilty to tax evasion charges.