Owen, Christopher: Offshore Survey - January 2011

7 December 2010, the EU’s Economic and Financial Affairs Council (ECOFIN) noted and accepted the report of the EU Code of Conduct Group on Jersey and the Isle of Man’s “zero-ten” business tax regimes, which proposed a review by the High Level Working Party on tax issues.
In November, the Code Group considered a paper by EU Commission officials that was concerned solely with whether the deemed distribution provision and the combined effect of taxation at company and shareholder levels came within the scope of the code as business taxation.

The commission’s view was that measures to ensure that in certain circumstances resident individuals pay tax on their company profits come within the definition of business taxation rather than personal taxation, are discriminatory and therefore in conflict with the code. Jersey and the Isle of Man maintain that these anti-avoidance measures are personal taxation and not within the scope of the Code.

The working party will determine what the Code means by business taxation, whether the scope of the Code goes beyond company tax to include shareholder taxation and whether this impacts on the regimes.

Jersey and the Isle of Man have both asserted that the zero-10 tax regime used by the islands is not in breach of European tax laws. But an email written by the press officer to the UK Economic Secretary suggested that the UK government might not be in full agreement.

The email, addressed to the Guernsey Press, said: “Following a discussion of the [EU] Commission’s evaluation, the [Code of Conduct for Business Taxation] Group agreed that Jersey’s Zero-Ten Corporate Tax Regime and the Isle of Man’s New Tax Legislation give rise to harmful effects. This was duly noted by ECOFIN.

“Under the terms of the Code of Conduct for Business Taxation, the UK is committed, within its constitutional arrangements, to ensuring that the principles of the Code are applied in its dependent and overseas territories.

“Both Jersey and the Isle of Man made voluntary commitments to abide by the Code in 2002. The Government expects Jersey and the Isle of Man to abide by those commitments and implement the abolition of the harmful measures. We are ready to offer support to Jersey and the Isle of Man in implementing the changes necessary.

“Although Guernsey operates a Zero-Ten Corporate Tax regime similar to those operated by Jersey and the Isle of Man, its regime is not being assessed as Guernsey was deemed by the Group to have made a strong enough public commitment to move away from its current regime. The UK is supportive of Guernsey’s efforts to move towards a normal, internationally acceptable business tax regime.”

A statement from Jersey’s Chief Minister’s department said that Jersey has “been informed that there has not yet been a formal assessment by the Code Group and there is a further process to go through before a final conclusion is reached.”

Isle of Man Treasury Minister Anne Craine that the statement [issued by the press officer to the UK Economic Secretary] was “highly misleading” and did “not accurately reflective of the outcome of the ECOFIN meeting”.

Guernsey has already announced its zero-10 strategy is to be scrapped, possibly in favour of a 10% corporation tax. Its policy council said it had received confirmation that the code group had ‘agreed with unanimity’ that the zero-10 corporate tax regimes have harmful effects.

16 November 2010, the Spanish government’s challenge to Gibraltar’s right to institute a more lenient tax regime than the UK was heard in the European Court of Justice’s Grand Chamber in Luxembourg.
The “joined hearing” involves an appeal by the European Commission against a 2009 decision that found in favour of Gibraltar’s tax system – specifically in respect of “State Aid principles of both regional selectivity and material selectivity”. Gibraltar argued that the Commission’s appeal, on the grounds of material selectivity, “no longer has any consequence” because “it relates to a tax scheme that Gibraltar has not pursued”.

Spain’s separate argument is that the 2009 decision concerning Gibraltar’s tax structure was flawed because it treated Gibraltar as “de facto … a new (EU) member state for the purposes of taxation”. It contends that since Gibraltar was “ceded by the King of Spain to the British Crown” in 1713, it has never ceased to be a part of Britain. But last year’s judgment, Spain argues, was “tantamount to treating Gibraltar as a member state” on its own, and thus entitled to certain financial advantages that would not ordinarily be accorded to a “tax haven”.

“The judgment under appeal, in holding that no comparison can be made between business activity in Gibraltar and that in the United Kingdom, is in breach of the principles of the OECD -according to which measures which may be general in Gibraltar may be harmful to OECD members, (including) the United Kingdom,” Spain said in ECJ court documents.

Although “the consequences of defeat” in the ECJ case “would be severe for Gibraltar, the government is confident of success”, the Gibraltar government press office said in a statement. The court has heard initial submissions from the parties and a decision is not expected until the summer.

The government of Gibraltar announced that starting in 2011, Gibraltar was cancelling the special 1% rate currently enjoyed by e-gaming companies. Firms will then be required to pay the standard corporate levy of 10%, which is itself a new lower rate being introduced on 1 January 2011. Online firms will, however, remain exempt from VAT.

20 December 2010, the agreement for the avoidance of double taxation and the prevention of fiscal evasion between the Hong Kong Special Administrative Region and the UK, which was signed on 21 June, entered into force upon notification of the completion of the ratification procedures.
The treaty, which applies to taxes on income and capital gains, stipulates that dividends are generally exempt from withholding tax, except in the case of real estate investment trusts, for which dividends are taxable at a maximum rate of 15%. Interest payments are generally exempt if the conditions of article 11(3) of the treaty are met. Royalties are taxable at a rate not to exceed 3%.

The treaty will have effect for any year of assessment beginning on or after 1 April 2011. The Hong Kong-UK shipping transport agreement, signed in October 2000, is terminated.

The amending protocol to the 2006 Hong Kong-China tax treaty also entered into force on 20 December and applies from that date. The protocol, signed in Beijing in May, updates the exchange of information article to bring the arrangement into compliance with the OECD standard.

The Hong Kong government signed a double tax treaty with Switzerland in Hong Kong on 6 December 2010 that contains provisions on the exchange of information in accordance with the OECD standard and was negotiated in line with the parameters set by the Swiss Federal Council.

A withholding tax exemption was agreed for dividend payments to companies that hold a stake of at least 10% in the company making the payment, as well as for dividend payments to pension funds and the central bank. In the other cases, the withholding tax rate will be 10%. Interest will generally be exempt from withholding tax, and the limit for the tax the source state is entitled to levy on royalty payments will be 3%.

The treaty was the eighteenth comprehensive double tax treaty signed by Hong Kong and follows similar treaties with Austria, Belgium, Brunei, China, France, Hungary, Indonesia, Ireland, Japan, Kuwait, Liechtenstein, Luxembourg, the Netherlands, New Zealand, Thailand, the UK and Vietnam.

7 December 2010, the Jersey government announced that it was to increase the minimum contribution under the 1(1)(k) housing licence, which enables wealthy people to move to the island, from £100,000 to £125,000, with immediate effect.
In his opening budget statement to the States of Jersey, treasury minister Philip Ozouf, said: “We need a simple and competitive tax regime that encourages high net worth individuals to bring their investment and businesses to Jersey.”

The minister said that he was aiming to propose changing the amount high value residents are taxed in addition to the £125,000.

Senator Ozouf said: “I plan to propose that all future high value residents will be taxed on their worldwide income at 20% on the first £625,000 and 1% thereafter.”

He described this as a different and innovative approach which “does not limit the financial benefits to Jersey, but is more beneficial and lucrative to Jersey”.

Currently 1(1)k residents pay 20% on the first £1 million of worldwide income, 10% on the next £500,000 and 1% on all other income. The current rate of income tax in Jersey is 20%.

According to Senator Ozouf, there are presently around 130 such residents living in Jersey under the 1(1)(k) regime who contribute around £13.5 million per year to the States’ finances.

15 October 2010, Malaysian Finance Minister and Prime Minister Mohamed Najib bin Abdul Razak introduced new tax incentives as part of the 2011 budget that are designed to establish Malaysia as a leading Islamic financial centre.
Malaysia launched the world’s first sharia-compliant commodity trading platform, known as Bursa Suq al-Sila, in August 2009. The platform facilitates commodity or asset-based Islamic financing and investment transactions that follow sharia principles. To promote Bursa transactions, expenses incurred in the issuance of Islamic securities under certain principles will be eligible for an income tax deduction. The issuance of sukuk bonds must be approved by either the Securities Commission or the Labuan Financial Services Authority. The effective period for this incentive is from year of assessment 2011 until year of assessment 2015.

Malaysia has also introduced a double deduction for takaful-based export credit insurance premiums. The term takaful refers to a form of life and general Islamic insurance. In Malaysia, takaful operations are licensed by the Takaful Act 1984. The incentive for the takaful-based export credit insurance premium is not restricted to a specific tax period and is granted with effect from year of assessment 2011 to encourage the export of Malaysian goods overseas.

Such an incentive has been in place since 1986 but was previously restricted to payment of insurance premiums based on conventional concepts. The new incentive therefore provides equal tax treatment between conventional insurance and Islamic insurance concepts.

14 September 2010, the Maltese government published regulations for the application of the income tax exemption available for royalties derived from patents on inventions. The exemption was introduced into Maltese tax law in April.
Under the exemption, royalties and similar income, including any amounts paid for the grant of a licence to exercise rights, derived from registered patents on qualifying inventions, whether registered in Malta or elsewhere, are exempt from tax in Malta as from 1 January 2010. The exemption applies regardless of where the underlying research and development was carried out.

Royalties and income derived from non-patented intangibles continue to be taxed in Malta at the statutorily guaranteed maximum overall effective rate of 5%. This rate falls to zero when the Malta-resident entity is not incorporated under the laws of Malta and the income is not physically received in Malta.

23 November 2010, the US Treasury Department announced that the Malta-US income tax treaty entered into force and would apply from 1 January 2011. The treaty was signed in Valletta in August 2008.
Provisions of the tax treaty include: reduced source-country withholding tax on dividend, interest and royalty payments; a comprehensive limitation on benefits provision; and a comprehensive provision allowing for full exchange of information between the US and Maltese revenue authorities.

With respect to taxes withheld at source, the new treaty will have effect for amounts paid or credited on or after 1 January 2011. For all other taxes, the new treaty will generally have effect for taxable years starting on or after 1 January 2011.

On 22 October, the Maltese government signed a new tax treaty with the People’s Republic of China, which will replace the current 1993 treaty. The treaty will enter into force after ratification by the treaty partners.

The treaty is based on the latest OECD model tax treaty, incorporating enhanced tax information exchange measures to curb tax evasion, and will also decrease the withholding tax rate from the current 10% to 5% on dividends paid by the subsidiary companies of one country to the corporate parents in the other country. The withholding tax rate on cross-border royalties would be reduced from 10% to 7%.

6 December 2010, the Isle of Man High Court found in favour of Australian model Elle Macpherson in a claim brought against her by the liquidators of Kaupthing Singer & Friedlander (KSF), the Isle of Man arm of the failed Icelandic bank’s UK division.
Two years before Kaupthing’s 2008 collapse, Macpherson had taken out a mortgage with KSF. In order to protect her privacy, she had set up an Isle of Man-registered “nominee” company in 2006 so she could buy the house in London while keeping her address confidential. She also put some of her personal cash into the bank.

In October 2008, the UK Treasury seized control of KSF in the UK after the Icelandic Financial Supervisory Authority took control of its Icelandic parent. When Macpherson decided to sell the house in September 2009, she sought to offset the amount she had personally deposited with KSF against the money her company still owed on the mortgage.

The bank’s liquidators refused her request because the borrower was technically a company – albeit one owned by Macpherson – while the deposits were held in her personal capacity.

The Isle of Man High Court found in favour of Macpherson on the basis of English case law and a 300-year-old legal principle known as ‘equitable set-off’ that had not been used successfully in this way on behalf of a claimant since the 1870s.

Deemster Andrew Moran QC noted in his 53-page judgment: “In this case, for the first time anywhere in the world (I am told), where this form of Bankruptcy Set-Off provision exists, the facts have thrown up a novel situation and question.”

The Deemster ruled that Macpherson and her company were “in-equity” one and the same. He held that “the parties who were throughout and in truth, notwithstanding the interposition of [the nominee company], the real and substantial parties to the transactions… were the Bank and Miss Macpherson.”

PricewaterhouseCoopers, the administrators for KSF, said: “The liquidators are currently considering grounds for an appeal.”

30 September 2010, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes issued, at a meeting in Singapore, the phase one peer reviews covering the legal and regulatory frameworks for transparency and exchange of tax information in Bermuda, Botswana, the Cayman Islands, India, Jamaica, Monaco, Panama and Qatar.
The reviews examined each jurisdiction’s rules for ensuring that information is available, how it can be accessed by competent authorities and the mechanisms in place to exchange it with foreign tax authorities. The reports included recommendations on how these jurisdictions could improve their co-operation in international tax matters.

A total of 64 recommendations for improvement were made in the eight reports. The deficiencies identified commonly related to the availability of ownership information, in particular for nominees and trusts, and information on holders of bearer shares was not available in some jurisdictions. All but two jurisdictions had some deficiencies in the availability of accounting information and two jurisdictions were constrained by the existence of a domestic tax interest.

Botswana failed its review because of “a number of serious deficiencies that make it impossible to engage in effective exchange of information.” Panama also failed. The report said it had “significant problems” in the recording of ownership information, the authorities’ lacked real powers and sanctions. It had also showed a reluctance to sign tax information exchange agreements.

Cayman was criticised for failing to require trustees to maintain identity and ownership information for all trusts, and for its weak sanctions against breaches of company ownership rules. But the review team deemed it sufficiently compliant to move on to the next stage of the review.

A second stage of the reviews, examining the eight countries’ exchange of information practices, will take place by 2012. Botswana and Panama will have to adequately address the phase 1 recommendations before proceeding to a phase two review.

Chairman of the Global Forum, Mike Rawstron of Australia, said at the end of the meeting: “Jurisdictions are taking the standards seriously. These reports show that this is not just a numbers game, it is about having in place a legal and regulatory framework which enables an effective exchange of information.”

The Global Forum now comprises more than 100 jurisdictions and observers. All these jurisdictions, as well as others identified by the Global Forum as relevant to its work, are participating in reviews of their systems for the international exchange of information in tax matters.

Botswana, Jamaica, Qatar and Kenya were welcomed at the meeting as the newest members. The Forum has also identified two further jurisdictions – the Lebanon and Macedonia – as “relevant to its work”. The two have been invited to join and will undergo the peer review process in the first quarter of 2011. The next meeting of the Tax Forum will be held in Bermuda in May 2011.

6 October 2010, the Qatar Financial Centre Authority announced that the new tax regime and regulations for the Qatar Financial Centre (QFC) had been enacted. The tax regime was originally announced in 2006 and replaces the temporary tax holiday that expired on 31 December 2009.
Under the new regime, with effect from 1 January 2010, all QFC registered companies are subject to 10% corporation tax to be charged on locally sourced profits. Companies outside the QFC pay a 2.5% social contribution in addition to corporate tax, which is applied to social, cultural and sports promotion. Companies outside the QFC are also limited to 49% foreign ownership, while there is no such limitation for QFC companies.

Ian Anderson, QFC Authority Director of Finance and Tax, said: “We believe the 10% rate is competitive with other onshore financial centres and this makes Qatar and the QFC specifically a very attractive location for local, regional and global organisations. The new regulations will ensure QFC inclusion within any tax treaties the government of Qatar might negotiate with other countries, which is a critical factor for the success of an international financial centre.”

He said the regime has been designed as part of the QFC’s plan to provide an attractive environment for financial services firms to invest in Qatar, providing clarity of law and transparency of administration, while ensuring that firms contribute to the tax income of the State of Qatar.

He also said that the new regime would support QFC’s three-hub strategy announced in February by providing additional incentives for asset management, reinsurance and insurance captive companies.

29 November 2010, UK Chancellor George Osborne set out proposals for restoring the UK’s tax competitiveness, which included changes to the controlled foreign companies (CFC) regime, a “Patent Box” to encourage corporate investment in research and development and the timetable for cutting the rate of corporation tax to 24%.
Under the existing CFC rules, companies are charged UK corporation tax on all profits, wherever they are made, and must claim back a credit to recompense for any foreign corporation taxes they have paid. As a result, several companies – including advertising conglomerate WPP, pharmaceuticals company Shire, United Business Media and fund manager Henderson – have moved their tax domicile abroad, notably to Ireland, in recent years.

The government therefore announced a consultation that intends to introduce an entity-based system that will target a CFC charge on the proportion of overseas profits that have been “artificially diverted” from the UK. Exemptions will be designed to minimise compliance burdens and focus attention on industries at a higher risk of avoiding corporation tax. Specific rules will be designed for the banking, insurance and property industries.

The government intends to introduce new CFC rules in the Finance Bill 2012. As an interim step, the 2011 Finance Bill will contain an exemption for “foreign-to-foreign” group transactions that do not pose a risk to the UK tax base.

Osborne also made a commitment to introduce a “Patent Box” in April 2013 with a lower 10% corporation tax on profits from patents. This rate would not apply to a wider range of intellectual property such as royalties and brands.

The coalition government, elected last May, has set out to improve the UK’s corporate tax regime, announcing that corporation tax will be reduced from 28% to 24%, reducing it by 1% a year starting in April 2011, a move it calculates will save businesses about £2 billion a year.

15 December 2010, the Uruguayan parliament approved a bill to add new grounds for lifting bank secrecy and to amend the source rules for the individual income tax (IRPF) regime. The new law will come into force on 1 January 2011.
As of 2007, bank secrecy could be lifted for tax purposes only if the tax authorities applied to the courts to attach the taxpayer’s bank accounts without the need to identify them specifically, or in the context of criminal proceedings for tax fraud.

The new law incorporates two new grounds for lifting bank secrecy at the tax authority’s request – either if necessary to verify the veracity and completeness of taxpayers’ tax declarations, or within the framework of tax information exchange agreements.

Bank secrecy can therefore be lifted at the request of foreign tax authorities, but only for countries with which Uruguay has signed a TIEA. The new grounds for lifting bank secrecy will apply only to transactions performed on or after 1 January 2011.

In 2009 Uruguay was included by the OECD on its blacklist of jurisdictions that had not “committed to the internationally agreed tax standards”. Then-Finance Minister Alvaro Garcia sent a letter to OECD Secretary General Angel Gurria pledging to adopt OECD standards on transparency and exchange of tax information.

On 18 August 2010 the OECD upgraded Uruguay to its so-called “grey list” of countries that “have committed to implement the internationally agreed tax standards, but have not yet substantially implemented” them. Uruguayan banks had $18 billion in deposits in September, about 17% of which is held by foreigners, according to a report by the central bank on 15 October.

The individual income tax (IRPF) regime is also amended. Individuals residing in Uruguay will pay IRPF at a rate of 12% on income from deposits, loans and placements of capital or credit with entities abroad. Residents are persons who remain in national territory for more than 183 days during the calendar year or whose principal base of activities or interests is in Uruguay.

When income is derived from placements, loans, or deposits abroad by foreign companies that pay taxes at a rate of less than 12%, those companies are considered to be “pass through” entities and the shareholder will be taxed as if the company did not exist and the shareholder had received the income directly. Dividends distributed by Uruguayan companies that derive income from taxable investments abroad will also be subject to the 12% IRPF.

These changes affect only individuals. Uruguayan companies will continue to pay taxes in Uruguay solely on Uruguayan-source income.