There is a substantial and rapidly growing demand in the region for international estate planning. Restrictions on foreign investment have been eased; wealth is highly concentrated; there are still some concerns about domestic political stability; local professional advice is domestically oriented. There are pressures on governments to increase tax collection. The Latin client wants to maintain control over assets. He is anxious not to make public the extent of his wealth. He is less concerned about cost and about tax exposure. He is still concerned about political risk. He likes to invest outside the region; much local investment is made by non-resident investors, who enjoy the benefits of investment protection agreements (which can also be utilised by e.g. trustees in other countries). He should also be concerned to avoid CGT on establishment of an overseas structure and to avoid estate tax liabilities in the investment jurisdiction. Latin tax systems were traditionally territorial. Mexico led the way to the world-wide basis in 1997. CFC rules have been adopted for blacklisted jurisdictions: New Zealand and UK trusts, Scottish partnerships, Delaware LLCs and Singapore companies came to be used. Mexicos tax collection as a percentage of GDP is the lowest in the OECD: their system is being upgraded. Present mitigation techniques are: (i) giving up direct control over his foreign structure; (ii) using non-blacklisted vehicles; (iii) having contractual rights rather than ownership; and (iv) use of insurance. Although insurance is attractive in tax terms, regulatory restrictions often pose constraints in selling insurance to Latin Americans, and holding a foreign insurance policy is unlawful in some jurisdictions. There is increasing demand for compliant structures and this is likely to continue throughout the region.
The world of Islam is widespread, but it is in the Middle East that one finds the greatest concentration of wealth. Middle Eastern clients have objectives similar to those of clients elsewhere protection of wealth, establishing banking connections, confidentiality, taxation to some extent and fulfilling family obligations. They also want their investments to be compliant with Islamic rules. A trust can be compatible with Sharia law. The recent Cayman and BVI legislation facilitates greater settlor control, which the client will generally require. This may be achieved also by use of a Protector or a private trust company. Some clients prefer non-trust vehicles the Foundation in Liechtenstein, and now in Panama, St Kitts and Bahamas, and perhaps in the future in the Channel Islands. In many countries, the Waqf permits family beneficiaries, as well as charitable purposes. A limited partnership may be formed between the settlor and his trustees. Sharia law derives from the Koran, with tribal law. Traditionally, inheritance followed the male line, ascendent or descendent. The Koran introduced a wider class of beneficiaries, including women. There are four schools, including the Shia and Sunni. The Sunni school has four sub-schools. A Muslim may freely dispose of one third of his estate, but not to an heir. A non-muslim can benefit from such disposition, but cannot be an heir. Clients very rarely wish to depart from the Sharia testamentary rules. Gifts are not clawed back, unless made during the death sickness. Islamic banking is a growth area. Investment may not be made in alcohol, gambling, life insurance or bonds or in companies which significantly hold such investments. There has been great progress in devising investment and financing transaction compliant with Sharia law.
Ramsay was decided in 1981: it signaled a significant change in the Courts attitude to tax avoidance. Formerly, the attitude of the Court was more neutral. It hardened somewhat during the War, but the tax avoidance industry flourished after the War. This became something of a scandal, and the Courts took it upon themselves to put an end to it. The Ramsay principle was restated in Furniss v. Dawson in 1984. The House of Lords pretended that the principle was simply one of statutory construction; but it is not: it is a way of looking at the facts in tax avoidance cases. In February 2001, in Westmoreland, Lord Hoffman introduced a distinction between a legal concept and commercial concept. This enabled the Court to decide an avoidance case as it pleased! In Westmoreland the sympathies of the House of Lords were with the taxpayer. In DTE Financial Services the Courts sympathies were no doubt deservedly hostile to the taxpayer. InWestmoreland, payment was held to be a legal concept (to which Ramsay did not apply), but in DTE, the Court of Appeal held that payment in that case was a commercial concept so that the Ramsay principle was applicable. In Arrowtown, in 2003, Lord Millett held that there was no basis in law for Lord Hoffmanns distinction between legal and commercial concepts. This was a decision of the Court of Final Appeal in Hong Kong, which only has persuasive authority in the United Kingdom. In Barclays Mercantile, the taxpayer claimed capital allowances on the purchase of a pipeline. The transaction was one which was common in the financial services industry. The House of Lords wanted to find for the taxpayer. It delivered a single judgement, politely dismissing the distinction between legal and commercial concepts (although Lord Hoffman was one of the Law Lords in the case) and held that revenue statutes are to be construed purposively. The decision lacks intellectual honesty, selectively quoting a passage from Lord Wilberforces speech in Ramsay in support of purposive construction, which Lord Wilberforce was not supporting. InScottish Provident (2005), the House of Lords was determined to do down a no doubt unmeritorious scheme, and did so by inventing a new rule as to what is meant by pre-ordained series of transactions, even though the same Court, on the same day, had said that there was no such thing as a Ramsay principle. Judges can in effect decide perceived tax avoidance cases as they wish.
US tax rates have fallen recently. There are proposals to abolish estate tax. For Alternative Minimum Tax purposes, credit for foreign tax is now 100%. The Foreign Personal Holding Company provisions have been repealed. But Rabbi Trusts and other deferred compensation schemes have been attacked. Tax rates on capital gains and dividends were reduced in 2003; credit for foreign tax is subject to the condition (which may sometimes be satisfied by interposing e.g. a Cyprus company) that the income has a source in a treaty country. Section 654 provides that a transfer to a trust is not generally an income tax event, though there may be gift tax consequences. When the settlor of a grantor trust (e.g. an asset protection trust) dies, there is now an income tax charge, because the trust changes to a non-grantor trust. The USVI has its own tax system. This includes a business development programme, which offers a 90% concession on locally-generated income. Section 937 provided a harsh residence test; this was modified by regulations in April 2005. The non-resident alien moving to the United States has opportunities for tax planning. But note that the tie-breaker provision in a treaty does not protect the individual who has spent 183 days in the United States. Passports issued after October 2005 have to be biometric if a visa is not to be required. The E visa does not affect the holders residence; the immigrant visa does. Residence for income tax is a year-by-year status, though US source income is taxed on a three-year basis. A non-US partnership not engaged in trade or business in the United States may be transparent for income tax but opaque for estate tax. Chattels should be owned by a non-US company. Planning for non-residents with family members in the United States is a complicated matter.
Marshall Langer: The EU Savings Directive may not come into force on July 1st. But when it does, although it will immediately affect only individuals, it will doubtless be extended shortly to companies, trusts and foundations. Abusive tax planning is treated in the United States and elsewhere as belonging to evasion rather than avoidance. As in the United Kingdom, a smell test is applied by US judges: the taxpayer loses some 80-90% of cases which go to the Tax Court; he stands a better chance by paying the tax and going to the District Court for a refund. A new Bill attacks abusive schemes. Reporting has been introduced in the United States and the United Kingdom. Its scope is expected to get wider. The IRS used questionable techniques to prevent US taxpayers from abusive use of tax breaks in the USVI; they have been using criminal proceedings in cases which are not truly criminal; US citizens have been convicted of wire fraud in a case where Canadian tax had been evaded. Burton Kanter was a distinguished tax adviser. He was found to have committed tax fraud by a Tax Court judge, although the special trial judge who actually heard all of the testimony found that there was no fraud. Stephen Gray: While there are occasional setbacks in tax planning, their overall significance should not be exaggerated. The legal system in the United States is basically functioning well. The business of tax planning is legitimate and promising.
The European Union has taken a sympathetic attitude to the use of holding companies. Making a decision in this area is not just a matter of comparing the figures, but the figures are important. Belgium, Luxembourg and the Netherlands have offered facilities for holding companies for many years. There are now many others, and prospective changes in Switzerland seem promising. Some countries levy no tax on dividends; some do not tax outgoing interest; some do not tax outgoing royalties; some have no thin capitalisation rules; some no CFCs; some offer rulings. There are some traps anti-abuse provisions, blacklists, wealth taxes. Separate exercises are required to ascertain optimum structures for dividends, capital gains, interest and royalties. EU countries need to be looked at separately Austria, Belgium, Cyprus, Denmark, Estonia, Ireland, Luxembourg, Portugal (Madeira), Malta, Netherlands, Slovakia, Spain, Sweden and the United Kingdom. It appears that Switzerland is to benefit from the EU parent-subsidiary directive.
There are several ways in which the services of an individual can be provided to a user. In general, a wider range of expenses is available to the self-employed than to those in employment. There are badges of employment the contract of service, management and supervision of duties, regular remuneration regardless of profits. The domestic personal services company can have a number of advantages a lower rate of corporate tax than individual tax, a lower overall tax on dividends than on salary through avoidance of social security contributions. In the United Kingdom, some of these advantages have been counteracted by IR35. Offshore personal services companies present other problems the location of their management and control, confusion with the role of agent, blacklisted jurisdictions. But there is still scope for the use of genuine arms length employment companies, even in the context of US tax: the company needs to be able to show that it is a true source of added value. A Professional Employer Organisation (PEO) is owned by a third party and acts jointly with the employees company. It needs to have substance. The IRS has warned against abuses. The Global Employer Company (GEC) providing commercial substance and added value is an extension of the PEO for executives, entertainers and sportspeople. Details can be found on a number of websites. In the United Kingdom, the Inland Revenue has taken steps to discourage the split contract and published Tax Bulletin 76. Tax regimes bear harshly on entertainers and sportsmen. Art 17 of the OECD Model Treaty introduces some uncertainties. What is performance of his personal activities as such? The recent Agassi case in the United Kingdom indicates some limitation on taxability of receipts for services of sportsmen. There is scope for the use of the GEC in relation to performances of services by residents of France and Italy.
Treaty-shopping takes advantage of unintended anomalies in the treaty network, where income is given treaty relief in the source country but not for some reason taxed in the recipients country of residence. The recipient may function as a stepping stone, which is fully subject to tax in its country of residence, but whose tax liability is substantially reduced by the deduction of a payment e.g. of a fee or royalty to a zero-tax vehicle elsewhere. The Netherlands provides the classic example, but Ireland, Jersey and the United Kingdom are also used. Or the stepping stone may enjoy some particular tax exemption or privilege in its country of residence. The Netherlands Antilles pioneered this kind of treaty-shopping. The idea was widely copied in other jurisdictions; the opportunities nowadays are few, but Cyprus now offers a similar facility. Two treaty-shopping vehicles of particular interest notably in the light of the Limitation on Benefits articles to be found in treaties with the United States are the trust and the policy of life assurance.