22 April 2010, Bermuda signed its first full double tax treaty, in Washington DC, with the Kingdom of Bahrain. The treaty includes a provision for full exchange of information on criminal and civil tax matters consistent with the OECD standard for transparency and exchange of information for tax purposes. Bermuda had previously signed 19 tax information exchange agreements (TIEAs) incorporating OECD provisions for the exchange of information but these do not extend to reciprocal arrangements on tax.
4 June 2010, the Brazilian government issued Normative Instruction 1,037 of the Receita Federal do Brasil that expands the 2002 list of jurisdictions considered as “tax havens” and introduces a new list of regimes designated as “privileged tax regimes”.
Article 1 of the ruling identified those countries that do not impose income tax or where the maximum income tax rate is lower than 20% (favoured tax jurisdictions), as well as those whose laws impose restrictions on the disclosure of the shareholding or ownership of the investment (secrecy jurisdictions).
The original tax haven black list dating from 2002 (Normative Instruction 188/2002) included 53 jurisdictions; by contrast, the new list designates 65 jurisdictions as tax havens for Brazilian tax purposes. In total, 14 new jurisdictions have been included: the Ascension Islands, Brunei, French Polynesia, Kiribati, Norfolk Island, Pitcairn Islands, Qeshm Island, Saint Pierre and Miquelon, St. Kitts, Solomon Islands, St. Helena, Swaziland, Switzerland, and Tristan da Cunha.
In Article 2, the list of “regimes fiscais privilegiados” comprises: limited liability companies incorporated in the US in which the equity interest is held by non-residents not subject to US federal income tax; Sociedades Financieiras de Inversiones in Uruguay; Entidad de Tenencia de Valores Extranjeros in Spain; International Trading Companies (ITCs) and International Holding Companies (IHC) in Malta; ITCs in Iceland; offshore KFT companies in Hungary; and holding companies incorporated in the Netherlands, Luxembourg and Denmark. Both Luxembourg and Malta were removed from the tax haven list but now appear on the new privileged tax regime list.
While additional regulations and clarifications from Receita Federal are required before confirming the effects, the anticipated tax consequences of doing business in Brazil from a preferential tax regime are that:
imports and exports of goods, services, and
rights, as well as loans, may be subject to transfer pricing rules;
income paid by Brazilian sources may be subject
to withholding income tax at an increased rate of 25%, instead of the
standard 15% rate;
capital gains earned by non-residents may be
subject to income tax at the increased rate of 25%, instead of the
standard 15% rate;
the deductibility of interest and payments made
abroad may be limited by thin capitalisation rules and by other
deductibility conditions imposed by Law 12,249, of 11 June 2010; and
the favoured tax treatment attributed to qualified investors who invest in the Brazilian financial and capital markets according to rules issued by the National Monetary Council may not be applicable.
Switzerland and the Netherlands requested the Brazilian government to reconsider their inclusion on the list of tax havens. On 24 June the Receita Federal published a new regulation that temporarily suspended Switzerland and the Netherlands from inclusion on the lists.
28 April 2010, the Cayman Islands’ parliament passed the Immigration (Amendment) Bill 2010, which provides 25-year residence to wealthy individuals who invest in businesses on certain conditions. The Bill enables foreign individuals to apply for a Residential Certificate for Investment. This will cost KYD20,000 (USD24,000) and gives the investor, their spouse and any dependents the right to live in the Cayman Islands without a work permit on certain conditions.
“The boost that such direct financial investment would give to our economy cannot be overlooked,” said the Hon Premier McKeeva Bush while discussing the amendment during the Legislative Assembly. ”And incentives must be provided for them also as part of the overall package currently being promoted to encourage investment.”
Under the law, investors must have a net worth of at least KYD6 million and must invest at least KYD2.4 million in licensed businesses with workforces comprising at least 50% Caymanians. They must also: possess a clean criminal record; be of sound health with adequate health insurance; pass checks on business competence; show financial records of their businesses’ stability; and show that they undertake a managerial role in their given area.
It should be noted that the Immigration Law 2003 previously contained provisions to allow residence to wealthy individuals who invested only KYD1 million, but these were withdrawn because they attracted little interest. “The only excuse I have heard for removing such a significant investment incentive from our immigration legislation was that no one was applying for it,” Bush said, “not that it was hurting or damaging the Cayman Islands in any way.”
In December 1997, ECOFIN set out the Code of Conduct for business taxation requiring Member States to refrain from introducing any new harmful tax measures (standstill) and amend any laws or practices that were deemed to be harmful in respect of the principles of the Code (rollback). The Code covered tax measures (legislative, regulatory and administrative) that had, or might have, a significant impact on the location of business in the EU.
In 1998 ECOFIN established a Code of Conduct Group (Business Taxation) to assess the tax measures that fell within the scope of the Code. The following year, the group identified 66 tax measures with harmful features – 40 in EU Member States, three in Gibraltar and 23 in dependent or associated territories of EU Member States. These measures have since been revised or replaced.
The EU is now attempting to bring non-EU countries within the ambit of the Code. Swiss cantons have enjoyed recent success in attracting multinational firms to establish global headquarters in Switzerland by negotiating specific company tax rates and holidays.
ECOFIN also agreed a resolution on anti-abuse provisions in the direct tax field which recommended that member states coordinate controlled foreign corporation and thin capitalisation rules.
26 July 2010, the UK Supreme Court granted Robert Gaines Cooper, the Seychelles-based British businessman at the centre at a long-running dispute with HM Customs & Revenue, permission to appeal the February 2010 decision by the Appeal Court not to allow his claim for judicial review of HMRC’s treatment of his situation.
It is understood that Gaines-Cooper has given notice of his intention to pursue the appeal and the relevant procedural forms have been sent out to both sides. This marks the latest stage in the war of attrition between Gaines-Cooper and HMRC and will be the final stage unless the European courts can be persuaded to become involved.
The entrepreneur left Britain in 1976 but is being pursued for tax backdated to 1982 under an interpretation of UK tax law that could
so be app
lied to other non-residents. The taxpayer, who has homes both in the UK and the Seychelles, had been contending in separate strands that he was non-domiciled and non-resident in the UK. At the first stage, the Special Commissioners found against him. The High Court found against him on appeal in relation to domicile.
The surviving case relates to the interpretation of HMRC’s published guidance in booklet IR20 and the weight that can be placed upon it. Gaines-Cooper claims that since leaving the UK he has obeyed the rule that gives non-resident status and tax benefits to anyone who spends no more than 90 days a year in the country. The Court of Appeal ruled in February that because Gaines-Cooper retained significant ties to the UK, HMRC was justified in denying him non-resident tax status and pursuing him for backdated tax on the grounds that he was still officially resident. The judges held that he had not made a “clean break”, citing his family home in Henley-on-Thames, a UK-based collection of classic Rolls-Royces and trips to Ascot, and said there were therefore “ample” grounds on which HMRC could argue that he had been “resident and ordinarily resident in the UK”.
Gaines-Cooper said he is not attempting to evade tax and that his companies pay tax in 16 countries, including the UK and US, Canada, Italy, Australia, Singapore, Germany, Spain, South Africa and Japan. He has already settled a previous HMRC claim on £30 million corporation tax from his business operations by paying an agreed amount of more than £600,000. But he wants to fight on because it raises important issues of clarity, consistency and fairness that are relevant to all taxpayers.
“The lack of transparency in the UK tax system means that no taxpayer can rely on guidance from the UK tax authorities,” he said in a statement. “Moreover, HMRC’s aggressive approach assumes guilt and leaves taxpayers with the inference that they have deliberately avoided tax. In my case, that is simply wrong.”
16 June 2010, the Gibraltar government published a pre-legislative briefing paper setting out the text of a new, amended and consolidated Income Tax Act, which lays the foundations for the reduction of company tax in Gibraltar from 22% to 10% as from 1 January 2011, to coincide with the definitive abolition of the historical tax exempt company regime.
“The l egislation ends all distinction between
‘onshore’ and ‘offshore’ business,” said a government statement. “Together
with the tax information exchange agreements being entered into by the
government and Gibraltar’s full integration in the EU and compliance with
EU financial services regulation, money laundering and cooperation rules,
the new Tax Act completes Gibraltar’s 14-year transition from tax haven to
mainstream European financial services centre.”
“Only by creating a climate of compliance can low company tax and further lowering of personal taxes be assured. The new Act therefore introduces tough anti-avoidance measures and default financial and legal penalties to help ensure that all pay the taxes that are due – thus making the low rate possible for everyone.”
The government intends to publish the Bill formally in the Gazette in mid-August, so that it may undergo and complete its passage through Parliament during October. The new legislation is based closely on the old Income Tax Act, with major amendments to bring about the changes being introduced. For ease of use the new legislation will take the form of a new, consolidated Act.
Chief Minister Peter Caruana said: “Thousands of local jobs, much government revenue and thus our public services, depend on Gibraltar having an internationally competitive tax system. Many previously tax exempt banks, insurance, investment, gaming and other companies will begin to pay profit tax in Gibraltar for the first time on the same basis as all other companies. These companies are vital to our economy and to the social prosperity of all of us in Gibraltar.
“The climate of compliance sought to be created by the new Act is also intended to enable the government to continue and proceed further with its long established programme of tax cutting for individuals as well. Low tax must come hand in hand with an end to our historically benign tax administration and enforcement system.”
8 July 2010, the UK Court of Appeal held that the UK/Mauritius tax treaty did not provide protection from a UK capital gains tax (CGT) charge arising on the disposal of shares by an offshore trust that had UK resident trustees for part of the year, because the trust was effectively managed and controlled in the UK.
In Revenue & Customs Commissioners v Smallwood & Another  EWCA Civ 778, Trevor Smallwood, a UK resident individual, settled shares into a trust. A Mauritian corporate trustee was appointed in December 2000 and the trust sold the shares in January 2001. The Mauritian trustee then resigned in March 2001 and Smallwood and his wife Caroline, who were both UK residents, were appointed as trustees.
HMRC argued that the Smallwoods were liable to UK CGT on the gain under section 86 of the Taxation of Chargeable Gains Act 1992 and issued two closure notices on 31 January 2005 in respect of the taxpayers’ tax returns for the year ending 5 April 2001. The Smallwood’s appealed, contending that Article 13(4) of the UK/Mauritius treaty prevented the UK from taxing the gain on t
he shares because it provided that capital gains were only taxable in the contracting state where the person disposing of the asset was resident.
The Special Commissioners had decided, on 19 February 2008, that “resident” in Article 4(1) of the treaty meant chargeable to tax. The concession allowing a person to be resident for only part of the year could not be applied when the taxpayer was seeking to avoid a tax liability, so the trustees were therefore resident in both Mauritius and the UK. The residence tie-breaker in Article 4(3) of the treaty was based on place of effective management (POEM). They found that, although trustee meetings took place in Mauritius, the top level management of the trust was carried out in the UK through its UK tax advisors. The trust was therefore UK resident and Article 13(4) did not provide any protection from UK tax. The Smallwoods appealed.
Upholding their appeal, the High Court held, on 8 April 2009, that a “snapshot” approach should be used when interpreting Article 13(4) of the treaty. On this basis it was only necessary to consider the residence of the trust at the date of the disposal of the shares. Since the trust was clearly resident in Mauritius at the date of disposal, the gain arising on the sale of the shares was only taxable in Mauritius, and there was no need to consider the treaty tie-breaker test based on the POEM of the trust. HMRC appealed.
The Court of Appeal held that the “snapshot” approach was not the correct way to interpret Article 13(4). The trust was resident in both the UK and Mauritius in the year in question, so it was necessary to look at the residence tie-breaker test in Article 4(3) based on the POEM of the trust. However the three judges failed to agree on how to apply the POEM test.
Patten LJ considered that the POEM test should be based on whether the decision of the Mauritian trustee to implement the tax scheme and sell the shares was taken by the board of directors of the Mauritian trustee company or whether the directors were merely carrying out the instructions of the UK tax advisors. In his view, the function of the board of directors had not been usurped by the UK tax advisors and the Special Commissioners had therefore made an error of law and no UK tax would be payable.
But the remaining two judges, Hughes LJ and Ward LJ, disagreed. They held that the question was not where was the POEM of the individual Mauritian trust company trustee at the time of the disposal but the POEM of the trustees as a continuing body. Based on the facts they concluded that the POEM, and therefore the residence of the trust, was in the UK. Hence the trust was liable to UK tax in respect of the gain on the disposal of the shares.
22 July 2010, the Hungarian parliament approved legislation to reduce the 19% corporate income tax rate to 10%, the lowest general corporate income tax rate in the European Union. The new rate will apply to income up to HUF 500 million ($2.25 million) with the 19% rate continuing to apply to income that exceeds this.
The rate change, which was proposed by the new government to attract investment, was adopted under an expedited procedure and applies retroactively from 1 July. Because the rate change became effective mid-year, 2010 tax calculations will have to be made on a divided tax year basis.
13 April 2010, the Indian government notified its intention to enter into accords with nine offshore financial centres (OFCs) to share information. Section 90 of India’s Income Tax Act was amended last year to enable the government to enter into an agreement with any specified territory outside the country. Finance Minister Pranab Mukherjee has also ordered re-negotiation of all India’s 77 existing tax treaties to include provisions for exchange of and assistance in collection of tax information.
The nine OFCs specified are: Bermuda, British Virgin Islands, Cayman Islands, Gibraltar (all British Overseas Territories); Guernsey, Isle of Man, Jersey (all British Crown Dependencies); Netherlands Antilles (an autonomous part of the Kingdom of Netherlands); and Macau (a Special Administrative Region of the People’s Republic of China). A further notification recognising Hong Kong, a Special Administrative Region of China, as a “specified territory” was published in India’s official gazette on 21 April.
“Now the central government can initiate and negotiate agreements for exchange of information for the prevention of evasion or avoidance of income tax and assistance in collection of income tax with these nine specified territories,” an official statement said.
On 31 July, India concluded talks with Switzerland to widen the ambit of its existing tax treaty to provide access information on Swiss bank accounts.
16 April 2010, the Maltese Parliament approved several amendments to Malta’s tax laws, including an extension of the participation exemption, an expanded opportunity to claim a step-up in base costs, introduction of a royalty income exemption, extension of Malta’s unilateral double tax relief and the reduction of the tax rate applicable to expatriates.
Under Malta’s participation exemption, dividends and capital gains are exempt from tax if derived by a company from an “equity holding” in a qualifying subsidiary resident outside Malta. An equity holding was defined as entitling the holder to votes, profits available for distribution and surplus assets on a winding up. The amendment, effective from years of assessment commencing on or after 1 January 2009, has broadened application of the participation exemption by requiring the satisfaction of only two of these criteria. Consequently, income and gains derived from previously non-qualifying holdings – such as preference shares who are not entitled to vote – can now benefit from the application of th
As of 1 January 2009, persons transferring their residence and/or domicile to Malta, as well as companies resulting from a merger under the EU merger directive, became entitled – but not obliged – to claim a step-up in the tax base cost of assets situated outside Malta without adverse tax consequences in Malta. They can opt, for Malta tax purposes, to revalue the assets from historic costs to fair market value at the time of the shift of residence/domicile to Malta, or at the time of the merger, with the result that previously accrued profits would be exempt from Malta income tax. Persons electing for a step-up in the base cost must not have been resident or domiciled in Malta before their transfer of residence and/or domicile to Malta, and, in the case of a merger, the assets must not have been owned by a merging company that was a company resident/domiciled in Malta before the merger.
With immediate effect, royalty and similar income derived from patents for inventions will be exempt from Malta income tax subject to conditions to be prescribed. Double taxation relief for underlying taxes incurred on the profits out of which a dividend is distributed, which was previously only granted for foreign taxes in multi-tier situations involving companies resident outside Malta, has been extended, with effect from 1 January 2009, to include taxes incurred in Malta.
With immediate effect, individuals not ordinarily resident in Malta deriving qualifying employment income received for work or duties carried out in Malta, or for any period spent outside Malta in connection with such work or duties, may opt to be taxed at a flat rate of 15%. Conditions and restrictions have yet to be prescribed.
22 July 2010, the OECD Council approved the 2010 versions of the OECD’s Model Tax Convention, the 1995 Transfer Pricing Guidelines and the 2008 Report on the Attribution of Profits to Permanent Establishments. The updates are the result of several years of work to improve these core OECD instruments in the area of international taxation.
The 2010 update to the Model Tax Convention includes a new Article 7 (Business Profits), which completes the Committee’s work on the attribution of profits to permanent establishments. It also introduces new text relating to the granting of the benefits of tax treaties with respect to the income of collective investment vehicles, the application of tax treaties to State-owned entities (including sovereign wealth funds), tax treaty issues relating to common telecommunications transactions, and the application of Article 15 (Income from Employment) to employees who work for a short duration in a foreign country.
The 2010 revision to the Transfer Pricing Guidelines is the first major revision to this document since the Guidelines were first released in 1995. It contains new, more detailed guidance on how to perform comparability analyses in practice in order to compare the conditions of transactions between associated enterprises with those of transactions between independent enterprises. It also includes new guidance on how to select the most appropriate transfer pricing method to the circumstances of the case and on how to apply in practice two of the OECD-approved transfer pricing methods, referred to as “transactional profit methods”, namely the transactional net margin method and the transactional profit split method. This update also includes a new chapter providing detailed guidance on the transfer pricing aspects of business restructurings.
The Report on the Attribution of Profits to Permanent Establishments, approved in its original form by the OECD Council on 17 July 2008, provides guidance on the manner in which the arm’s length principle can be used in determining the profits attributable to a permanent establishment under Article 7 of the OECD Model Tax Convention. It has been revised to bring the text into line with the text of the new Article 7 and the revised Transfer Pricing Guidelines.
23 Jul 2010, Singapore and China signed a protocol to incorporate the internationally agreed standard for the exchange of information for tax purposes upon request into their existing tax treaty. The protocol was signed in Beijing and will enter into force after its ratification by both countries.
17 July 2010, the Maltese Finance Ministry announced that the US Senate had approved a tax treaty with Malta, which will soon be ratified. The treaty follows the OECD Model Tax Convention and was signed in Valetta on 8 August 2008.
The treaty provides for reduced withholding rates on cross-border payments of dividends, interest, royalties and other income, as well as the elimination of withholding taxes on cross-border dividend payments to pension funds. It applies to all taxes on income, including gains – irrespective of the manner in which they are levied. Most state and local taxes, including property taxes, do not fall within the scope of the proposed treaty.
It also contains rigorous protections designed to protect against ”treaty shopping,” which is the inappropriate use of a tax treaty by third-country residents, and provisions to ensure the exchange of information between tax authorities in both countries.
There is currently no income tax treaty currently in force between the US and Malta. The previous US-Malta tax treaty, dating from 1980, was terminated by the US on 1 January1997, due to concerns that changes to Maltese tax law provided an incentive for ”treaty shopping” and that Malta was unable to satisfactorily exchange tax information. The current treaty was concluded after Malta changed its tax law in an effort to address these concerns.
22 July 2010, mobile phone operator Vodafone announced that it had reached agreement with the UK tax authorities in respect of its long-running controlled foreign company (CFC) tax case. Vodafone said it would pay £1.25 billion to settle all outstanding CFC issues from 2001 to date and had also reached agreement that no further UK CFC tax liabilities will arise in the near future under current legislation.
UK CFC tax legislation is designed to stop UK companies avoiding tax by diverting income to subsidiaries in low-tax countries. The settlement, which comprises £800 million in the current financial year with the balance to be paid in installments over the next five years, was well below than the provision of £2.2 billion carried in Vodafone’s accounts.
Last December, Vodafone lost its battle to appeal against a court ruling that it was liable to pay the tax. The UK Supreme Court said Vodafone’s application to appeal “did not raise an arguable point of law of general public importance”. It followed a Court of Appeal ruling that had overturned an initial ruling that the firm would not have to pay corporation tax on a holding company owned in Luxembourg.
Vodafone had argued that its subsidiary, set up following its acquisition of Mannesman in 2000, should not have to pay UK corporation tax because UK rules on taxation of profits on CFCs were incompatible with EU law. The Court of Appeal found that CFC rules applied to companies operating outside the European Economic Area and also to EEA companies without genuine economic activities. But the question of whether the rules should apply to Vodafone’s Luxembourg subsidiary was not decided.
The settlement coincides with new UK Chancellor George Osborne’s pledge to make Britain “open for business” by reforming “the complex CFC rules that have driven business overseas”. The government’s planned reforms are aimed at stemming an exodus of more than 20 UK multinationals that have left for smaller countries, such as Ireland, which had no CFC rules.
The Vodafone deal has implications for some 150 other companies that are locked in similar disputes concerning an estimated £2.5 billion of tax. Signs of greater flexibility by the Revenue are expected to encourage many of these companies to settle.
Meanwhile, Vodafone announced, on 7 June 2010, that it had filed an appeal in the Bombay High Court against the Indian Income Tax Department’s order of 31 May claiming tax jurisdiction over Vodafone’s 2007 merger with Indian mobile phone company Hutchison Essar. The order asserted that India has full jurisdiction to levy withholding tax on the merger because most of the assets were in India, the deal was subject to Indian CGT and, under Indian law, the buyer must withhold CGT and pay it to the government.
The tax authorities also sent a new show-cause notice to Vodafone on 4 June requesting the firm to justify why it should not be held liable for its failure to withhold INR 120 billion ($2.52 billion) in capital gains tax when it paid Hong Kong-based Hutchison Telecom International $11.2 billion in February 2007 for the entire share capital of CGP Investments (Holdings), a Cayman Islands entity that indirectly held a 67% stake in Hutchison Essar.
“Vodafone does not believe that the tax authority has jurisdiction to seek to tax the transaction with Hutchison,” the company said in a statement. It “remains confident that there is no tax to pay on this transaction” and that it will be meeting with the tax authorities on 14 June “to discuss the potential quantification of any tax on the Hutchison acquisition”.