by Anthony Murty
The amendments to the Income Tax Act announced in the 2009 Budget statement have now reached the statute book. A new relief to encourage non-domiciled residents to remit their offshore earnings to the country is contained in new section 12I that specifically refers to earnings remitted into the banking system. Earnings are not defined but on the basis that the word “emoluments” is not used, it can be assumed that the relief will also apply to profits from business, profession or trade.The section works in conjunction with section 17, which provides that non-domiciled persons are taxable on local source income and foreign income to the extent that it is remitted to Barbados. A person can become ordinarily resident if he gives notice to the Commissioner that he has a home which is permanently available for his use in Barbados and is not a vacation home, that he intends to reside in Barbados for at least two years and that he wishes to be deemed ordinarily resident. (Sec 85(6), (7))The new provision is not an exemption or relief from assessment but a set off against the tax payable on the taxable income. The remittances are fully taxable, but an allowance is made against the tax payable. The relief is not directly related to the exact amount of the earnings remitted. In some cases this will have an advantage when considering relief under the provisions of some double taxation agreements. For example the treaty with the United Kingdom where the treaty only applies to that income remitted to Barbados. Other countries’ treaties require the income to be taxable in the country of residence.Calculation of the rebate of income tax is contained in the Sixth Schedule.
Foreign earnings as a percentage
of total earnings
Rebate of income tax, expressed as
a percentage of income tax on
20% and under 35%
over 20% and under 41% 45%
41% but under 61% 64%
61% but under 81% 79%
81% an over 93%
For the purpose of this calculation the income tax applicable to foreign earnings shall be deemed to be the foreign earnings multiplied by the total tax payable on all earnings (local and foreign), divided by the total earnings. It will be seen that if there are no local earnings then the tax rebate will be 93% of the tax payable on the income remitted. If the foreign income represents 75% of total earnings then the tax rebate is 79% of the pro rata amount of the tax payable on the total earnings.What is not clear from the Schedule is how you ascertain the amount of total tax payable that relates to earnings when there is other income and the exemptions and lower rates of tax. We will have to await a practice note from the Commissioner or an amendment to the Act.(Anthony Murty is the Barbados Jurisdiction Editor for the Barbados section of the Portfolio of Laws on the website, which includes the Income Tax Act as amended by the Income Tax (Amendment) Act 2010)
December 2009, the Belgian Parliament debated a Bill containing new obligations for taxpayers subject to resident or non-resident corporate tax to report all direct or indirect payments to persons established in “tax havens”.Tax havens are identified as states that are, during the entire taxable period in which the payment is made, on the OECD Global Forum’s lists of countries that have not substantially applied the OECD standard on exchange of information.Alternatively, the definition of “tax havens” is also extended to cover states that either do not impose corporate income tax or impose a “nominal” corporate tax rate of less than 10%. This second list will be determined by Royal Decree and will be updated every two years. EU Member States are excluded from the list.The reporting must only be done if the total of payments during the taxable period amounts to at least €100,000 and must be submitted on a separate form that is attached to the corporate tax return.If payments are not reported, they will automatically be considered as disallowed expenses, at least to the extent that the payments relate to “expenses”. If the payments are reported and the company is audited, the company will need to prove that the payments relate to “genuine business expenses” and have not been made in relation to an “artificial arrangement”. It can be expected that the tax authorities will also check whether similar payments were made during previous tax years.The new measures could be brought into force as of assessment year 2010 and be applicable to payments made as from 1 January 2010.
14 October 2009, the European Commission formally proposed a new regulation to simplify the legal process in cross-border succession cases. The aim is to lay down common rules enabling the competent authority and law applicable to the body of assets making up a succession, wherever they may be, to be easily identified.In addition to providing more effective guarantees for the rights of heirs, legatees and other interested parties, the proposed regulation will enable people to choose the law that will govern the transmission of all their assets. The Commission is also proposing the creation of a European Certificate of Succession enabling an heir or the administrator of a succession to prove their capacity easily throughout the EU.Vice-President Jacques Barrot, Commission Member for Justice, Liberty and Security said: “It is imperative that citizens and legal practitioners be able to understand and, to a certain extent, choose the rules applicable to the assets making up a succession, wherever they may be located. By proposing that the place of habitual residence determine the competent authority and the law applicable by default while allowing a person to opt to have their succession governed by the law of their country of nationality, we are offering greater legal certainty and greater flexibility, enabling people to contemplate the future more serenely. As for the European Certificate of Succession, it will enable people to prove that they are heirs or administrators of a succession without further formalities throughout the EU. It brings us one step closer to a genuine European Civil Judicial Area.”The Commission said the 450,000 international successions in the EU every year are estimated to be worth more than €120 billion, but the rules governing jurisdiction and the law applicable vary considerably from one Member State to another. The proposed Regulation pursued a threefold objective: to increase legal certainty by guaranteeing the predictability and consistency of the rules applicable; to offer people greater flexibility in the choice of the law applicable to their succession; to guarantee the rights not just of heirs and/or legatees but of other interested parties, such as creditors.The regulation specifies the deceased’s “habitual place of residence” as the single criterion for determining both the jurisdiction and the law governing a cross-border succession. Expatriates will however be able to choose to have the law of their own country apply instead. A European Certificate of Succession will also be created to enable a person to prove their capacity as heir or their powers as administrator or executor of a succession without further formalities.But the Commission noted that the initiative in no way alters the substantive national rules on successions. Issues such as who is to inherit or the share of assets going to children or spouses continue to be governed by national rules. Property law and family law in a Member State are not affected either. Nor does the proposed Regulation change the tax arrangements for assets making up a succession, which remain a matter of national law.The Swedish presidency of the European Union promised to begin immediate negotiations on harmonising cross-border succession, following the Commission’s adoption of a draft regulation.18 December 2009, UK Justice Secretary Jack Straw told Parliament that the UK government had decided not to opt in to the regulation. As a result, the UK will not be bound by this regulation. The UK government said it strongly supported the project in principle because the diversity of rules and systems that apply to succession in different member states could make for considerable complications where a person owns property across borders. Efforts to simplify and clarify the rules that apply to international successions could therefore produce huge benefits for UK citizens, but two potentially significant problems had been identified in the published proposal.The first was “claw back”, which describes a legal mechanism where gifts made during a person’s lifetime can be recouped after their death. The introduction of this concept into the UK could create major practical difficulties, particularly for the recipients of such gifts including charities.The second was the proposal’s reliance on “habitual residence” as the sole connecting factor to determine when the regulation’s other rules applied. This could mean that the relatives of someone who lived abroad for even a short period of time and then died there, would find their estate was subject to a law with which they had no real connection. That could lead to unforeseen and unfair outcomes.The UK government concluded that the potential benefits of the proposal were outweighed by the risks and therefore decided that the best course of action was not to opt in to it and be bound by the outcome. It intended, however, to engage fully with the forthcoming negotiations between member states on the proposal.
29 October 2009, the European Commission requested that Portugal amend its tax provisions that impose an exit tax on individuals as being incompatible with the free movement of persons. The request is in the form of a “reasoned opinion”, the second stage of the infringement procedure provided for in Article 226 of the EC Treaty. If Portugal does not respond satisfactorily to the reasoned opinion within two months, the Commission may refer the matter to the European Court of Justice.According to Article 10 (9) a) of the Código do IRS, capital gains or losses arising in case of an exchange of shares will be included in the shareholder’s taxable income of the calendar year in which he ceases to be resident in Portugal. The gain or loss will be determined by calculating the difference between the market value of the shares received and the book value of the shares handed over. But if the shareholder who engages in an exchange of shares maintains his residence in Portugal, the value of the shares received is the value of those handed over; a taxable gain will only arise if there is an additional payment in cash.In addition, Article 38 (1) a) of the Código do IRS provides that the transfer to a company of assets and liabilities related to an economic or professional activity by a natural person is tax exempt if the legal person to which the assets and liabilities have been transferred has its seat or place of effective management in Portugal, whereas such a transfer is taxed if the legal person has its seat or place of effective management abroad.The Commission considers that such immediate taxation penalises individuals who decide to leave Portugal or transfer assets abroad, by introducing less favourable treatment for them compared to for those who remain in the country or transfer assets to a resident company. The Portuguese rules in question are therefore likely to dissuade individuals from exercising their right of free movement and, as a result, constitute a restriction of Articles 18, 39 and 43 EC and the corresponding provisions of the EEA Agreement.The Commission’s opinion is based on the EC Treaty as interpreted by the Court of Justice of the European Communities in its judgment of 11 March 2004, in Case C-9/02, De Lasteyrie du Saillant, as well as on the Commission’s Communication on exit taxation of 19 December 2006.
13 October 2009, Jersey, Guernsey and the Isle of Man were informed, at a meeting with UK Financial Secretary Stephen Timms, that their “zero-ten” tax regimes may not comply with the EU’s Code of Conduct for Business Taxation.The regime imposes a zero rate on corporate income, with the exception of financial service companies, which are assessed a 10% tax rate. The regime came into effect on the Isle of Man on 5 April 2006; in Guernsey on 1 January 2008; and in Jersey on 1 January 2009.In an October 13 meeting following the annual dinner for the three crown dependencies, chief ministers Terry Le Sueur of Jersey, Lyndon Trott of Guernsey, and Tony Brown of the Isle of Man reportedly met with Stephen Timms to discuss recent EU developments.Timms told the chief ministers of the three jurisdictions that the EU Code Group had specifically considered the zero-ten regime, with some members suggesting that it does not comport with the Code of Conduct. But rather than launching a formal complaint, the EU has simply stated that the regime “does not meet the spirit” of the code.Le Suer said that the EU had declared the zero-ten regime compliant in 2006 and was now therefore “backtracking”. “It is not easy“ he said, ”but I think that we have got to be realistic and say we live in a climate where things change from time to time and I am prepared to accept that we are in for another change within the next few years.”Guernsey Finance said in a statement that the zero-ten system is “compliant with international standards and the EU Code of Conduct” and that the systems of Jersey and the Isle of Man” follow a similar approach. It added:”However all three Crown Dependencies recognise that the recent and unprecedented changes in the world economy have led to shifts in perceptions and attitudes across the globe. [It is now] apparent that these changes in attitudes mean that other EU Member States are now unlikely to accept the stance of the UK that our fiscal regimes are code compliant.”
10 December 2010, the US Tax Court decided in favour of the taxpayer in a significant transfer pricing case, rejecting the IRS’s adjustment of the taxpayer’s income under IRC section 482 as “arbitrary and capricious”.In Symantec v Commissioner (133 T.C. No. 14), the case arose from Symantec’s US$10.25 billion acquisition in 2005 of Veritas Software Corp. Veritas had been the subject of a US Internal Revenue Service (IRS) investigation in respect of its tax assessment for 2000 and 2001. In 2006 Symantec reported that it had received a Notice of Deficiency from the IRS, which originally claimed US$900 million in additional taxes, plus interest and penalties relating to the transfer pricing of a technology license agreement between Veritas and its foreign subsidiaries in Ireland.The cost-sharing agreement (CSA) comprised two distinct elements; one related to research and development activities, the other a technology licence. The IRS originally challenged both parts of the CSA but eventually resolved the portion of the dispute relating to research through a stipulation filed in 2007.The court found that the taxpayer’s required buy-in payment under the CSA, based on the comparable uncontrolled transaction transfer pricing method, was consistent with the arm’s-length method and the best available method for determining the requisite buy-in amount. Judge Maurice Foley ruled that the IRS calculations in determining how much Veritas owed were “arbitrary, capricious and unreasonable.”While the Court agreed with the company’s transfer pricing valuation methodology, the ruling made some adjustments in the application of the methodology and provided guidance as to how the resulting incremental Veritas tax liability should be computed. The ruling saves the company about US$545 million in contested back taxes, excluding interest.