Owen, Christopher: Offshore Survey - January 2011 Supplement

2 December 2010, Bermuda signed a tax information exchange agreement (TIEA) with the People’s Republic of China that provides for the exchange of tax related information based upon the internationally agreed OECD principles of transparency and cooperation.

Currently, there are 680 entities in Bermuda with a Chinese interest. Bermuda Premier Paula Cox said: “This treaty is a significant step forward in cementing political and economic ties between Bermuda and China. Bermuda already works very closely with the People’s Republic of China as a fellow Vice Chair of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.”

The TIEA will come into force once both governments have completed their respective domestic procedures for ratification. Bermuda has now signed 23 separate OECD-compliant TIEAs, as well as an OECD-compliant double tax treaty with the Kingdom of Bahrain.

22 December 2010, ANZ, Australia’s third-largest bank, filed a statement of claim in the Federal Court of Australia seeking an order to prevent the Australian Taxation Office (ATO) from accessing the account information of 13,000 customers who hold accounts in its Vanuatu banking subsidiary. A directions hearing on the matter is scheduled for 17 February 2011.

The statement of claim argues that compliance with two notices served by the ATO on 17 December demanding information about some ANZ customers in Vanuatu would violate Vanuatu criminal law and put the bank’s licence to operate in Vanuatu at risk. The bank further claims that the ATO notices are “uncertain and/or oppressive”.

The notices, which request information on ANZ customers in Vanuatu with Australian connections or on customers with accounts kept in any currency other than the vatu, are understood to have been issued as part of an investigation of ANZ under the government’s Project Wickenby, which was established in 2005 to investigate tax avoidance or evasion. The information sought by the ATO concerns the period from 1 July 2008, through 30 November 2010.

Michael Rowland, chief executive of ANZ’s Pacific region, said the bank was seeking guidance from the court on its obligations to comply with the ATO’s notices. “We have cooperated as much as possible with the ATO’s request while meeting our obligations under Vanuatu law,” he said in a statement.

28 October 2010, the European Court of Justice rejected an appeal by Liechtenstein-based company Etablissements Rimbaud against the French authorities’ taxation of property owned by the firm in France. The case addressed the extent to which justifications that are permitted in relations between EU Member States can also be applied in relation to non-EU Member States, in particular Liechtenstein.

In the Etablissements Rimbaud SA case (C-72/09), intermediary companies controlled by Rimbaud owned several properties in the Provence region during the years 1988-2000. Under Article 990 D of the French tax code, the French authorities considered the firm liable to pay a 3% annual levy on the commercial value of the properties.

Companies based inside France are exempt from this property tax; as are companies based in a European Economic Area country that has a tax cooperation treaty with France. Rimbaud claimed that the French law results in non-French EEA firms being taxed more heavily than companies established in France, and therefore contravened the EEA treaty provisions that prohibit discrimination on grounds of nationality.

It contested the tax charge in the Aix-en-Provence Court of Appeal, then in France’s Supreme Court (Cour de Cassation), which referred the case to the ECJ.

The French authorities defended their actions on the grounds that they were unable to force the Liechtenstein tax authorities to disclose all the information about Rimbaud and its owners necessary to corroborate their tax returns. The charge was therefore justified because there was no other way of collecting taxes that may be legally due.

The ECJ rejected Rimbaud’s appeal. It noted that Liechtenstein was under no obligation to supply administrative assistance to the French tax authorities. Although France’s tax legislation did indeed discriminate against Liechtenstein companies, that “must be regarded as justified … for overriding reasons relating to the general interest in combating tax evasion and the need to safeguard the effectiveness of fiscal supervision”.

On 7 December 2010, the EU’s Economic and Financial Affairs Council (Ecofin) agreed to amend the 1977 European Directive on Administrative Cooperation in tax affairs to set the basis for stronger cooperation and greater information exchange between tax authorities in the EU.

The Directive on Administrative Cooperation in the field of taxation provides clearer and more precise rules for cooperation between Member States when it comes to assessing taxes and sets up common mechanisms and rules of procedure for the exchange of information.

One of the key aspects of amendment is that a Member State can no longer use bank secrecy as a reason for refusing cross-border cooperation with another Member State in the assessment of taxes. A member state trying to assess the tax liability of one of its residents will therefore be able to request all relevant information held by any other EU country.

The amended Directive will be more stringent than the OECD convention – now included in most bilateral tax treaties – which requires a request to identify the suspected individual’s bank. A tax authority requesting co-operation under the Directive need only give the individual’s name and the reason for the request. It need not identify the financial institutions that the individual is suspected of dealing with.

Algirdas Semeta, EU Commissioner for Taxation, Customs, Anti-Fraud and Audit, said: “In the current economic climate, when public budgets are under such pressure, we need to work together as a Union and ensure that each Member State can collect the revenue that it is due. That is what today’s agreement is about. It sends a strong signal to the world that the EU is serious about the fight against tax fraud and evasion, and that we will continue to insist on good governance, both at home and internationally.”

Ecofin also agreed to amend the Directive to cover taxes of all types except those, such as VAT and excise duties, already covered under specific EU legislation. It will require tax information requests to be answered within a fixed time limit.

At the same meeting Ecofin agreed a staged move to automatic exchange of tax information. It will start in 2015 with partial automatic exchange and will be reviewed two years later.

In a speech in Belgium on 16 November, Semeta criticised those EU member states that have made bilateral tax information exchange agreements with third countries. His comments followed the recent agreements made by the UK and Germany to pursue deals with Switzerland. Under these agreements, the Swiss government will not routinely disclose information about UK and German taxpayers, but instead will impose a withholding tax on assets they own in Switzerland.

Semeta insisted that the Commission would be satisfied only when “close neighbour” third countries, particularly Switzerland, agree to exchange taxpayer information automatically with all EU countries, as specified in the EU Savings Directive.

He said it was logical to expect close neighbours to cooperate more closely with the EU on the exchange of information. “It is not sufficient that individual EU member states conclude bilateral agreements with third countries which provide for the OECD standards of transparency and exchange of information,” he said.

“It is much more interesting for a tax authority to receive comprehensive information about the assets owned by its residents abroad than to receive only a withholding tax on the income produced by such assets [which] does not allow Member States to assess the overall tax base of their residents.”

20 October 2010, the UK Supreme Court ruled that Katrin Radmacher’s prenuptial agreement with her former husband was binding. The court found in favour of the German heiress who had sought to protect her £106 million fortune in the eventuality of a marriage breakdown.

Radmacher and her French ex-husband, former investment banker Nicolas Granatino, had signed a prenuptial agreement before their wedding in London in 1998. The agreement stipulated that neither party would benefit financially if the marriage ended.

Granatino had given up his banking job to become a biotechnology researcher at Oxford University in 2003, the year the marriage began to deteriorate. When the couple divorced in 2006, Granatino claimed that at the time they married he had no idea of his wife’s wealth and had not received proper legal advice, nor had the German prenuptial agreement been translated for him before he signed.

In 2008, a High Court judge awarded Granatino £5.85 million but, on appeal a year later, this was cut to a lump sum of £1 million in lieu of maintenance, plus a £2.5 million fund for a house that was to be returned to Radmacher when the youngest of the couple’s two daughters reached the age of 22. Radmacher had earlier agreed to pay off his debts of £700,000. Granatino appealed.

Dismissed his appeal by a majority of eight to one, the Supreme Court judges said that after their ruling “it will be natural to infer that parties entering into agreements will intend that effect be given to them”.

The judges agreed that in the right case a prenuptial agreement could have decisive or compelling weight. Lord Phillips, the president, said the courts would still have the discretion to waive any pre- or postnuptial agreement, especially when it was unfair to any children of the marriage.

Radmacher, an heiress to a German paper company and understood to be one of the richest women in Europe, said in a statement: “For Nicolas and I, in our homelands – France and Germany – these agreements are entirely normal and routine. We made a promise to each other that if anything went wrong between us, both of us would walk away without making financial claims on each other. The promise made to me was broken … It was a natural part of the marriage process. In my case, my father insisted upon it to protect my inheritance.”

26 November 2010, the German Bundesrat passed the Annual Tax Act 2010. The legislation included an amendment to the German controlled foreign corporation (CFC) rules in the Foreign Tax Act that specifically targets taxpayers that earn passive income via corporate entities in Malta, because these entities currently fall outside the rules. The amendment takes effect on 1 January 2011.

German CFC rules provide that if a foreign intermediary company is (more than 50%) controlled by a German shareholder or shareholders, yields passive income and is located in a low tax jurisdiction (subject to a tax rate of less than 25%), then deemed distributions are not granted the same relief that applies to genuine dividends. The Maltese tax rate of 35% takes a subsidiary there out of the CFC net although subsequent refunds directly to shareholders can reduce the ultimate tax burden significantly.

The law change is aiming to get Maltese finance companies into the reach of the CFC rules. The definition of what constitutes “low taxation” for German CFC purposes will now be broadened to take into account tax credits and refunds at the shareholder level when determining whether the effective tax rate abroad falls below the 25% threshold.

Accordingly, the rules on the computation of the income to be allocated will be amended. Tax refunds and credits to which the shareholder is entitled will reduce the amount of local tax incurred on the foreign company’s profits. Since local tax payable generally reduces the profit to be included under the CFC rules, a reduction of local tax payable for tax refunds ultimately should lead to higher profits to be included in the German shareholder’s tax base under the CFC rules. Both amendments will apply to profits earned by foreign CFCs in fiscal years starting after 31 December 2010.

13 December 2010, Guernsey’s Director of Income Tax announced the introduction of the Income Tax Irregularities Scheme (ITIS), with effect from 1 January 2011. Taxpayers have until 31 March 2011, to register their intention to make a full disclosure and until 30 September 2011, to make that disclosure or “face the full implications of their tax evasion.”

The Director said “The ITIS is a disclosure opportunity which I am offering for a limited time in order to assist taxpayers who have omitted income from their income tax returns, or have other tax irregularities, to put their income tax affairs in order, by their own volition, without penalties being imposed or having the matter referred for prosecution.”

The terms of ITIS are: the Director will, provided the disclosure is full and complete, settle the matter without referring it to the law officers for their consideration of instituting a prosecution under the Income Tax Law; no penalty will be imposed, under the Income Tax Law, provided that the disclosure is made within the terms of IT IS; late payment surcharges will continue to be applied but, by law, no surcharge will be due if the total amount of unpaid liabilities is less than £1,000.

12 November 2010, Hong Kong’s highest court ordered that divorced couples must split their assets equally, a landmark ruling which could impact heavily on “big money” divorce cases. Non-working spouses in Hong Kong have traditionally been left with less than half a couple’s assets after they divorce.

Hong Kong’s Court of Final Appeal ruled that an unidentified 47-year-old wife was entitled to half of her ex-husband’s assets, or about 2.68 million Hong Kong dollars (US$345,000). The decision upheld a lower court judgment in 2008. The woman had successfully appealed against a 2006 court ruling which granted her just one third of the couple’s assets.

“To confine a non-working wife’s award to the sum needed to meet her ‘reasonable requirements’ and to permit the husband to keep the remaining assets is patently unfair and discriminatory,” Hong Kong’s Justice Roberto Ribeiro said in his ruling.

The decision, which HK courts will be obliged to follow in future, puts Hong Kong in line with the UK. Ribeiro dismissed concerns about richer divorce settlements for women, saying: “I do not consider the higher level of awards necessarily a bad thing since they may merely demonstrate the inadequacy of (previous) awards,” he added.

But the court also said that not every case would call for a strict 50/50 split of a couple’s assets, with the marriage’s duration a key factor. “The duration of the marriage is highly relevant and an equal division is more likely to be sustained after a long, rather than a short, marriage,” Ribeiro said.

9 November 2010, Hong Kong Financial Services Minister Professor K C Chan set out, in a speech to STEP’s Asia Conference, the Special Administrative Region’s policy on taxation and trust law reform. He said the need for change was urgent as the world’s financial centre of gravity shifted to the East.

A new trust law replacing the “many outdated provisions” of the 1934 Trust Law was central to the reform. Professional trustees are to be given powers to delegate, to employ agents, nominees and custodians; and to take out insurance. They will also have a statutory duty of care, while a statutory charging clause will be introduced so that trustees will be entitled to remuneration. The rules against perpetuities and excessive accumulation of income will be abolished.

The proposals will be enacted through an Amendment Bill to be introduced into the Legislative Council in 2011.

Chan also defended Hong Kong’s reform of banking secrecy law through the Inland Revenue (Amendment) Ordinance 2010. This, he said, had enabled the SAR to sign tax information exchange treaties with other countries.

The new legislation protected individuals’ confidentiality by requiring taxpayers to be notified before the information was exchanged. They could also request a review on the factual accuracy of the information by the Commissioner of Inland Revenue and the Financial Secretary.

Since the legislation was enacted, several tax agreements had also been negotiated which include provisions to reduce withholding taxes. “Hong Kong’s position as an international financial centre has been significantly enhanced,” said Chan.

9 December 2010, Commissioner Doug Shulman said that the Internal Revenue Service (IRS) was considering implementing a new programme of reduced penalties for overseas tax evaders who make voluntary disclosures of undeclared assets.

About 15,000 people made voluntary disclosures last year as part of an IRS offer of reduced penalties and no criminal prosecution, with an additional 3,000 coming forward subsequently. “To be fair to those who came in before the deadline, the penalty – and thus the financial cost to participate – will increase,” Shulman said.

“Collecting additional revenue for past misdeeds, as important as that may be, is not the only important consideration here,” he added. “It is equally important that we are bringing 18,000 US taxpayers, and counting, back into the system, back into compliance so they properly report and pay their taxes for years to come.”

Last year’s offer was made as the IRS stepped up efforts to go after US taxpayers hiding money overseas, particularly through Swiss bank UBS. The IRS is using information gathered from those who came forward to go after others. Fewer than 100 people apply for the programme in a typical year, in part because, depending on how long the account holder has evaded US taxes, the penalties can far exceed the value of the hidden account.

16 December 2010, Liechtenstein’s LGT Bank agreed to a 50 million euro settlement in a case brought by German authorities over the alleged role played by the bank in helping German taxpayers hide assets to avoid paying tax.

Bernd Bienoissek, prosecutor in the German city of Bochum, North Rhine-Westphalia, where the case was being heard, announced that with the settlement in place, the proceedings against LGT had been suspended and would be closed once payment was complete.

Payment of the settlement will be shared between the bank and its employees. LGT Bank, which is wholly owned by Liechtenstein’s ruling royal family, is to pay 46 million euro and a group of 45 employees is to pay the remaining 3.6 million euro.

The case was triggered when German tax authorities bought stolen data from informants in Liechtenstein. The stolen data lead to a number of arrests in Germany, among them the high profile case of former Deutsche Post chief executive Klaus Zumwinkel.

10 September 2010, the Netherlands Antilles and the Netherlands signed a final declaration completing the process of constitutional reform in the Antilles. The signing took place at a concluding round table conference held in the Ridderzaal in The Hague.

These agreements entered into force on 10 October when Curacao and St Maarten, previously part of the Netherlands Antilles, became autonomous countries within the Kingdom of the Netherlands with statuses comparable to that of Aruba and, previously, the Netherlands Antilles.

They will have their own governments and parliaments and are responsible for most of their internal affairs, including taxes, with some exceptions such as foreign affairs and defence. For the time being, both St. Maarten and Curacao have effectively adopted the previous legal systems, including tax, of the Netherlands Antilles.

Bonaire, St Eustatius and Saba (BES) became special municipalities of the Netherlands. They will also remain part of the Kingdom of the Netherlands but will become integrated in the Netherlands as a public body, comparable with – but not identical to – a Dutch municipality.

The BES islands are not part of the European Union and will have a legal system, including a tax system, of their own. The Dutch government has devised a new tax system to replace the previous Netherlands Antilles tax system on 1 January 2011.

“The conclusion of this last round table conference marks a historic moment in the constitutional history of the Kingdom of the Netherlands,” said Jan Peter Balkenende, the Dutch Prime Minister. “Five years ago we embarked together on an intensive process that today has reached its conclusion. The process has culminated in the most far-reaching revision of the Statute of the Kingdom of the Netherlands since 1954.”

16 December 2010, the Swiss Financial Market Supervisory Authority (FINMA) announced that a new anti-money-laundering ordinance, which combines the three existing ordinances, would enter into force on 1 January 2011.

FINMA has harmonised three former anti-money laundering ordinances drawn up by its predecessor institutions – the Swiss Federal Banking Commission, the Federal Office of Private Insurance and the Anti-Money Laundering Control Authority – and combined them into one single ordinance.

The FINMA Anti-Money Laundering Ordinance is directed at all financial intermediaries falling under the Anti-Money Laundering Act. A number of rules from the former ordinances were adopted unchanged and the ordinance text has been simplified, where possible, and changes have been made to eliminate unjustified unequal treatment between the supervisory areas.

Notable changes include the waiver of the duty to perform due diligence for low-value assets, the provisions relating to delegation and the appointment of third parties, and the provision on correspondent banking relationships.

12 November 2010, OECD Deputy Secretary-General and Chief Economist Pier Carlo Padoan presented a report on the progress made by the OECD against international tax evasion to the G-20 Summit meeting in Seoul.

Padoan said that more than 500 tax information exchange agreements had been signed and more than 40 peer reviews had been initiated of which eight had been completed. He commended India which had volunteered to be one of the first jurisdictions to be reviewed and was considered as meeting all the requirements to achieve effective exchange of information.

The reviews of Bermuda, Cayman, Jamaica, Monaco and Qatar identified a number of deficiencies that require action. Deficiencies identified in Botswana and Panama were considered sufficiently serious to stop them from moving onto the next phase of the review. The OECD was working with these jurisdictions to address these problems. It also aimed to have 70 further reviews ready by the 2011 Summit.

Membership of the Global Forum on Transparency and Exchange of Information for Tax Purposes had grown to 95 jurisdictions and much of its work had been undertaken in the broader context of the OECD’s work to improve tax compliance. This had included: the adoption by the Forum on Tax Administration, which brings together the tax commissioners of all G20 countries with those of another 23 OECD and non-OECD countries, of a framework for a voluntary code of conduct for banks to improve compliance; updating the multilateral convention on administrative assistance in tax matters; and issuing guidance on the design of voluntary compliance initiatives.

By increasing tax transparency these initiatives, said Padoan, had already helped countries to increase their revenues through one-off gains. By OECD estimates Germany had already collected 4 billion euro from offshore evaders, while the UK had collected an extra £600 million and expected this figure to increase to at least £7 billion. France had collected an extra 1 billion euro; Italy 5 billion euro and Greece estimated it could collect an extra 30 billion euro in revenues. Argentina, Brazil, China, India, Russia, and South Africa were also using these initiatives and would see significant increases in revenues from tax evaders that have decided to “come clean”.

Equally important, said Padoan, were the long-term impacts on revenue. Once wealth held in tax havens or bank secrecy jurisdictions was declared, it remained in the tax net and yielded an ongoing revenue flow.

“Let me conclude by saying that our work is not limited to improving tax compliance. We are also focusing on how to redesign tax systems to “enhance productivity” by removing distortions and improving incentives to work, save, invest and innovate. We would like to invite all G20 Finance Ministers to participate in a high-level roundtable on 13 April on how to achieve pro-growth tax reforms,” said Padoan.

30 November 2010, US Treasury Secretary Timothy Geithner and Panamanian Vice President and Foreign Minister Juan Carlos Varela signed a tax information exchange agreement (TIEA) between the US and Panama in Washington. The agreement was the first of its kind concluded by Panama, which had previously only negotiated income tax treaties.

The TIEA provides for the exchange of information on request, including information related to bank accounts in Panama, regarding all US federal taxes and all Panamanian national taxes in both civil and criminal tax matters for tax years beginning on or after 30 November 2007.

Information exchanged under the TIEA will be used for tax purposes but may also be used for other purposes as permitted under the provisions of the Treaty on Mutual Legal Assistance in Criminal Matters between the US and Panama provided that the tax authorities of the country providing the information consents to such use in writing.

The accompanying diplomatic note states that the US and Panamanian governments intend for the TIEA to enter into force “as soon as is practicable” following the enactment of any legislation necessary under Panama’s domestic laws for it to comply with the terms of the agreement. That will include legislation requiring the identification of the owner of bearer shares.

The Panamanian government expects to have the legislation enacted before the end of 2011. The diplomatic note also states that the entry into force of the TIEA will not prevent the parties from discussing the possibility of entering into a full income tax treaty.

“Today, we are ushering in a new era of openness and transparency for tax information between the US and Panama” said Geithner. “This bilateral agreement to provide for the exchange of tax information between our two countries reflects the commitment of the US and Panama to the importance of transparency of tax information.”

On 30 September the Global Forum on Transparency and Exchange of Information for Tax Purposes said its peer review group had found “serious deficiencies” in the tax information exchange practices of Panama that would delay the jurisdiction’s progress in the review process.

The report cited “significant problems” in the availability of ownership information, particularly regarding joint stock corporations, and in the availability of information on entities not in receipt of Panamanian income.

It also noted that there were “uncertainties regarding the Panamanian authorities’ powers to obtain information for exchange purposes and the availability of sanctions for failure to keep or produce information for exchange purposes.” Another criticism was that Panama appeared reluctant to enter into TIEAs.

On 6 October, Panama signed an income tax treaty with the Netherlands, which included provision for exchange of tax information. It was due to enter into force in 2012 following ratification.

Dutch Minister of Finance Jan Kees de Jager said: “The main purpose of the treaty with Panama is to regulate the tax part of the mutual economic links. It prevents for instance Dutch entrepreneurs who are doing business in Panama from being taxed twice. Dutch companies which want to invest in Panama now know what they can expect, and, reciprocally, that applies to Panamanian companies too … The net around the people who do not declare their savings is closing in further and further.”

7 October 2010, Cyprus and Russia signed a protocol to the existing 1998 tax treaty between the two countries. Most of the changes were agreed in April 2009, but it was not until 27 September 2010 that the protocol was finalised and approved, after minor changes were made during a visit of the Cypriot Minister of Finance to Moscow.

The main changes include updating the provisions of the Exchange of Information and Assistance in Collection of Taxes articles in line with the latest versions in the OECD Model Tax Convention. As a result Cyprus should be removed from Russia’s “black list”, enabling Russian companies to benefit from Russia’s participation exemption on dividends received from Cypriot companies.

The black list was introduced in 2007 in conjunction with Russia’s participation exemption. Under the participation exemption, dividends received by a Russian company from a foreign subsidiary are exempt from tax provided the Russian recipient holds at least 50% of the charter capital of the payer company for at least 365 calendar days and the subsidiary is not resident in a country included on the black list.

The protocol does not make any changes to the rates of withholding tax on dividends but the application of the 5% rate will require a direct investment of at least 100,000 euro in the capital of the company paying the dividends, instead of US$100,000 under the existing treaty. The 0% rates on interest and royalties provided for in the treaty have not been changed.

Dividends have been given a broader definition to include payments on shares of mutual investment funds or other similar collective investment vehicles and depository receipts for shares. A new Limitation on Benefits article has also been introduced to disallow benefits accruing to any company that is not registered in either the Russian Federation or Cyprus and that is deemed to have been created for the specific purpose of obtaining such benefits.

The capital gains article has been amended to permit a contracting state to tax capital gains from the sale of shares in companies that hold more than 50% of their assets in Russian immovable property.

The protocol was expected to enter into effect on 1 January 2011 provided it could be ratified by both Russia and Cyprus before the end of 2010. The amendments to the capital gains article will come into force four years after ratification and the Assistance on Collection of Taxes article will come into effect at such time as Cyprus amends its domestic tax legislation. Current Cypriot tax legislation permits such assistance to be extended only to other EU Member States.

16 November 2010, French president Nicolas Sarkozy said he was considering scrapping the wealth tax and the fiscal shield to bring the country’s tax system in line with Germany’s and close the competitiveness gap with France’s primary euro zone trading partner.

The wealth tax generates around 3 billion euro of receipts for the government, while according to recent data from the Senate, the fiscal shield cost the government around 600 million euro last year.

Under the French fiscal shield mechanism, no taxpayer is meant to pay more than 50% of their revenues in taxes. Originally designed to encourage wealthy people to stay in France, it has faced increasing unpopularity. Budget minister Francois Baroin said it had come to be perceived as a symbol of France’s tax injustice.

Sarkozy said the wealth tax was causing capital to flow out of the country and companies to migrate. He called for harmonisation of France’s tax system with Germany’s, where the corporate tax is lower than in France but has a wider base.

“When Germany got rid of its wealth tax it also got rid of its tax shield … If there is no wealth tax then there is no need for a tax shield. We have to create a tax system in which our taxes would be comparable and compatible,” with taxes in Germany, Sarkozy said.

Instead, Sarkozy said the government could create a new tax on capital, but repeated that he was not planning a general increase in taxes, stressing that France had among the highest tax rates in the European Union.

Several European countries, including Germany and Spain, have scrapped their wealth tax in recent years. Euro zone leaders have pledged to close competitiveness gaps within the region as part of increased fiscal surveillance in the bloc.

28 November 2010, Switzerland’s voters rejected a proposal to introduce minimum taxes on income and wealth. Residents would have paid taxes of at least 22% on annual income above SFr250,000 ($249,000), according to the proposed changes.

In a referendum, 59% of voters turned down the proposal by the Social Democrats. Switzerland’s executive and parliamentary branches had already rejected the proposal, saying it would interfere with the cantons’ tax autonomy regulations. The government also said before the vote that the changes would damage the nation’s attractiveness.

15 December 2010, the protocol to amend the tax treaty between Switzerland and the UK, signed in London on 7 September 2009, entered into force upon completion of the ratification procedures in both countries.

Aside from a provision on the exchange of information in accordance with the OECD standard, the inclusion of an arbitration clause was also agreed. The provisions of the Protocol on the exchange of information will have effect for tax years that commence on or after 1 January 2011. The provisions on arbitration will be applicable from 15 December 2013.

The Swiss Federal Council must submit signed agreements to parliament for approval. Under the current practice, treaties that provide for significant additional obligations are subject to an optional referendum. The first ten treaties with an extended administrative assistance clause were approved by the Swiss parliament on 18 June 2010. The deadline for the optional referendum expired unused on 7 October.

Switzerland’s first DTA with the OECD standard on administrative assistance, with France, entered into force on 4 November. A similar agreement with Spain also entered into force on the same date due to the most favoured nation clause.

26 October 2010, the UK and Switzerland signed a declaration to begin negotiations on tax issues as a step towards making UK taxpayers with Swiss bank accounts pay tax on the interest they earn. The goal will be to achieve regularisation of previously undeclared assets as well as a final withholding tax for future income.

Treasury sources said negotiations were in the early stages and no details of tax rates had been agreed. Formal negotiations, which were expected to start this year, will cover the possibility of implementing a withholding tax, which would see Swiss authorities levying a tax on interest earned in their accounts on behalf of HM Revenue & Customs.

It is understood that the UK will push for this to be a retrospective tax. It will also seek that the Swiss authorities provide more information on accounts held by UK taxpayers. “This is a sensible and pragmatic approach by the chancellor to ensure we get money in that would otherwise not be collected,” said a Treasury spokesman.

The Swiss government, however, said in a statement that any agreement on information sharing would apply only from the date of the agreement and could not be enforced retroactively. At present, Switzerland will only provide details of interest earned by UK nationals on Swiss bank accounts if the UK tax authorities first send the Swiss complete details of the relevant accounts.

Two days after signing the declaration with the UK, Switzerland signed a similar agreement with Germany to open negotiations concerning tax issues. “Switzerland and Germany are confident that the negotiations will lead to a fair and lasting solution in the interests of both states,” the Swiss and German finance ministries said in a statement.

The agreement was struck as the two countries formally signed a revised tax treaty, paving the way for the broader talks. The new tax treaty is one of a series of bilateral deals that Switzerland has been signing to comply with tougher international standards on exchange of information in tax cases.

The Swiss Federal Council has appointed Michael Ambühl, head of the State Secretariat for International Financial Matters (SIF), as lead negotiator. It is understood that France and Italy are also likely to seek to negotiate similar tax deals with Switzerland.

4 November 2010, the UK and Liechtenstein signed a Second Joint Declaration intended to clear up ambiguities in their existing Memorandum of Understanding relating to taxes between Liechtenstein and the UK, the so-called Liechtenstein Disclosure Facility (LDF).

The original LDF, signed in August 2009 for a period of five years, grants a partial tax amnesty to UK taxpayers who voluntarily declare their Liechtenstein assets to HM Revenue & Customs. HMRC has already published two sets of guidance about the amnesty conditions, but admitted there was still uncertainty.

The main ambiguity related to any individuals who possess untaxed assets in other jurisdictions that are moved to Liechtenstein banks or trusts to take advantage of the LDF. The new agreement has not yet been published in full but is likely to state that the benefits of the amnesty will not be extended to those who shift only “token” assets into Liechtenstein, or who move them only temporarily. The assets shifted must be “meaningful and of sufficient value and permanence”.

The new agreement also deals with the situation where a Liechtenstein institution is not satisfied that a UK customer is tax-compliant, but must continue to deal with the customer because of “exceptional circumstances” – such as where one beneficiary of a trust has not complied with the certification rules but a Liechtenstein trustee has obligations to the other beneficiaries. The original LDF agreement set out a client retention procedure for such cases, but this is to be reviewed. The new agreement is further expected to state unambiguously that an individual cannot use the LDF after an investigation into his affairs has started.

The International Tax Enforcement (Liechtenstein) Order, SI 2010/2678, made on 10 November, brings into effect an agreement for the exchange of information. The two states also announced that they are to discuss a “comprehensive convention on taxation of income and capital”. The treaty discussions will consider “the incidence of double taxation, transfer pricing issues, and tax obstacles or areas of mutual cooperation.”

26-29 October 2010, the UK Crown Dependencies – the Isle of Man, Guernsey and Jersey -signed tax information exchange agreements (TIEAs) with China during visits by Xiao Jie, the Commissioner of the State Administration of Taxation of the People’s Republic of China, to each jurisdiction.

Anne Craine, Isle of Man Treasury Minister, said: “The visit of Minister Xiao and the signing of the agreement are important steps in building closer relations between China and the Isle of Man. The announcement last week that the Isle of Man is now an approved jurisdiction for the purposes of listing companies on the Hong Kong Stock Exchange, the fact that Chinese businesses regularly use Manx companies for raising capital on the London AIM and research showing that the Isle of Man could increase the profitability of Chinese exporters to the UK and Europe, all indicate that economic ties between our countries will grow.”

Guernsey Chief Minister Lyndon Trott said: “For some considerable time, Guernsey has been making new relationships in, and creating a better economic relationship with, China. Guernsey and China see the signing of the TIEA as another, but very significant, step on a journey strengthening the economic links between China and Guernsey.”

Jersey Chief Minister Terry Le Sueur said: “China is a very important source of business and a beacon of economic success in a world economy that is still feeling the effects of the global financial crisis. Through the financial services that we offer, Jersey can be a valuable facilitator for China’s growing engagement in international investment.”

The new TIEAs are the seventeenth signed by Jersey and the Isle of Man, and the nineteenth by Guernsey. They will come into force once the governments have completed their respective domestic procedures for ratification.

12 November 2010, UK Treasury officials said the government initiative on tax evasion in offshore financial centres was expected to raise £10 billion in this parliament, far more than previously forecast. The revised estimate follows negotiations between national governments and the British tax authorities.

The Treasury had only budgeted to raise £1 billion across the parliament, mainly from an agreement with Liechtenstein but was now expecting to raise £2 billion to £3 billion from bank accounts in the principality alone from taxing accounts and demanding back payments of unpaid tax. A further £3 billion was expected to be raised from Swiss bank accounts after an agreement was signed with Swiss tax authorities on 26 October.

The Treasury said three further tax havens had also asked to open negotiations on information disclosure. Officials declined to identify the three countries amid concerns money might be shifted out before any agreements can be signed. Each of the havens, one of which is in the Caribbean, was expected to raise a further £1 billion.

A Treasury official said: “These agreements, by allowing us to get information from tax havens, means British tax authorities are gaining complete access to details of bank accounts. We are discovering much more than we had assumed we would.”

15 November 2010, the US Internal Revenue Service (IRS) fully and definitively withdrew the John Doe Summons served on Swiss bank UBS. The move followed the last substantial delivery of administrative assistance cases by Switzerland.

By the end of August, the Swiss Federal Tax Administration (FTA) had examined approximately 4,450 UBS client accounts under the agreement with the US. The delivery of data by Switzerland to the US was largely completed by mid-November after expiry of the appeal periods. Overall, approximately 4,000 cases had been supplied to the US.

Subject to the outcome of pending appeals before the Swiss Administrative Court or in the case of no appeals, information on a number of additional accounts covered by the Agreement and the Treaty request will be delivered to the IRS over the course of the coming months.

In the administrative assistance agreement of 19 August 2009, Switzerland and the US had defined criteria for examining the administrative assistance request concerning tax offences. The IRS submitted this request to the FTA on 31 August 2009.

23 November 2010, the Bombay High Court deferred to 8 February 2011, a hearing of UK-based telecom giant Vodafone’s petition against a move by Indian tax office to treat it as an agent of the seller in its acquisition of Hutchison Essar, one of India’s largest mobile phone companies, in 2007.

The Bombay High Court had ruled on 8 September 2010 that Indian tax authorities had jurisdiction to seek more than $2 billion in taxes from Vodafone International Holdings BV, which it claims had failed to withhold taxes on the $11 billion acquisition.

Vodafone filed a writ with the court on 15 October saying the tax office’s treatment was an “unusual move”. The tax office asked Vodafone to pay $2.53 billion within 30 days, but the UK firm said it “strongly disagrees” with the calculation.

The previous month Vodafone filed an appeal with India’s Supreme Court against the lower court ruling. On 15 November India’s top court directed Vodafone to deposit $550 million within three weeks in relation to the tax dispute. It also directed the firm to make a bank guarantee worth $1.9 billion within eight weeks.

In May 2007, Vodafone International Holdings BV, a Dutch subsidiary of the British firm, acquired a 67% stake in CGP Investments, a Cayman Islands company, which held the India telecom assets of Hong Kong’s Hutchison Telecommunications International. Vodafone maintains that it did not owe tax on the $11 billion transaction because it took place between two foreign entities.

But the Bombay High Court rejected Vodafone’s argument that the Indian tax authorities lacked jurisdiction in the case because the transaction entailed the transfer of shares in a non-resident company from one non-resident company to another. It said Vodafone was liable for an estimated $2.6 billion in taxes.

The court held that the essence of the transaction was a change in the controlling interest of Hutchison Essar, which constituted a source of income in India, and that the transaction covered within its sweep diverse rights and entitlements.

The diverse rights and entitlements acquired by Vodafone had sufficient nexus with India for tax authorities to initiate proceedings against the company, the court said. “The Indian tax authorities acted within their jurisdiction,” said judge D.Y. Chandrachud in a 196-page judgment.