Chairman: Milton Grundy
The avoidance of tax is a recurrent feature of human society. Dutch tax planning uses established concepts – the participation exemption, the Dutch sandwich etc. The emphasis has shifted to due diligence and compliance. The Netherlands tax system seeks to provide a level playing field. There are companies (BVs), special financial institutions (BFIs), advance price agreements (APAs), and advanced tax rulings (ATRs). The contribution of the financial sector to the Dutch economy is substantial. The OECD has recently launched its Action Plan against Base Erosion and Profit Shifting. The FATCA requirements are widely observed. Disclosure of beneficial ownership of companies is on its way in the EU. Other tax transparency initiatives have been launched by the European Commission. Competition between States has been prevalent since the Middle Ages – even in tax matters, but this is now under pressure. A common corporation tax base in the EU is under discussion.
The issue of where cross-border transactions are to be taxed is of long standing. Governments want to attract innovative business. There are many jurisdictions offering tax relief for R&D, but only a few offer a lower tax rate on the resulting royalties – the “Patent Box” – for embedded income or direct income. The Box offers a deduction in computing trading profits, rather than a lower rate of tax; there are conditions on ownership, development (sometimes), active management and computation of profits. The OECD has been looking at the Patent Box with a view to eliminating its “harmful” effect: it is proposed that relief will be related to R&D taking place in jurisdiction and that there should be reporting requirements and limitation to patents and their functional equivalents. There are problems in valuing IP: valuation may be based on market prices, cost or income. The OECD emphasis is on substance. The Seven Network case in Australia considered the nature of a royalty for tax treaty purposes. There is pressure from the BEPS project to limit tax planning possibilities for royalties.
The new government in India has a clear majority, and we may expect positive changes. In the 1970s, the restrictions on foreign ownership caused foreign companies to leave. The black economy continues to thrive. The appeal process is slow. Foreign investment has been encouraged since the 1990s. The Direct Taxes Code is commendably short but very unsatisfactory; revised versions have included a GAAR. In Vodafone, the sale of the operating company took the form of a sale of a Cayman company by a BVI company; the assessment was made on Vodafone, the purchaser. Vodafone won in the Supreme Court, but the decision was reversed – retrospectively – by legislation. In 2012, the Shome Committee recommended changes, some of which were enacted in 2015, but there are still reporting requirements and not all the proposed exemptions were enacted. The GAAR is of wide application and is expected to come into force on 1st April 2017. This postponement presents opportunities for both new and existing treaty structures. Both India and Mauritius have announced their commitment to the tax treaty. A new POEM test for residence comes into effect next April. The rules affecting foreign investors have been eased w.e.f. April 2015, but only to a limited extent. There is a new tax on evasion, with a limited opportunity for voluntary disclosure. While the Finance Ministry wants to attract investment and the Courts apply the Duke of Westminster principle, the Tax Administration has difficulty in distinguishing avoidance from evasion.
An individual can reduce his tax exposure by change of residence, but may still need tax planning to moderate his exposure to withholding taxes on foreign dividends, trading profits and royalties. A capital gains tax free sale of a successful enterprise needs to be planned well in advance. A group of “Thin Trusts” may be partners in an offshore partnership; if shares of partnership profits are not ascertainable until a future date, the beneficiaries cannot be taxed until the shares are ascertained. Treaty benefits may be enjoyed by a Swiss partnership with little connection with Switzerland. For UK tax purposes, shares in an offshore company purchased from a stranger enjoy tax benefits not enjoyed by shares for which the taxpayer has subscribed. This also applies to trusts.
Some clients are nowadays asking to have trusts which are taxed at a reasonable rate, perhaps to seek treaty benefit, or for reputation reasons – avoiding accusations of tax avoidance. In Canada, Italy and Hungary, trusts are themselves tax subjects; “mid-shore” jurisdictions do not tax trust income referable to non-resident beneficiaries. The exemption in New Zealand depends on the residence of the settlor. Switzerland and Luxembourg are not suitable: trusts are not taxed in their own right. In Canada, trust income is deemed income of an individual, but the rate of tax is at least 26%. In Italy, trusts are taxed on accumulated income, but since 2014 the effective tax rate on dividends of 21.36%. The new Hungarian Civil Code makes provision for a kind of trust taxable at 10% on the first HUF 500 (ca € 1.6m) and 19% thereafter. There is the possibility of withholding tax for non-Hungarian residents. Singapore taxes trust income, but foreign source income only to the extent of remittance. There is an exemption for a “prescribed trust fund”. Hong Kong is not dissimilar. In Australia, trusts are treated as taxpayers. Local income is taxed at rates up to 45%, but non-Australian income appointed to non-residents is only taxable when paid. The foreign non-grantor trust in the US requires special attention. It can be a “foreign trust”: there is a control test and a court test, which may be satisfied by the inclusion of a non-US co-trustee or a non-US protector with appropriate powers.
Since the 1990s, there has been an outflow of capital, following rising inflation and the arbitrary use of state power. Offshore assets and structures are required to be reported annually, but only a small proportion of taxpayers do so – perhaps 50%. Austria is the preferred jurisdiction for offshore investment, with the Cayman Islands as the preferred jurisdiction for investment funds and the Netherlands in third place – also used (along with the US) for inward investment. The BVI, Bahamas and Cayman have most of the offshore investment of Brazilians; there are no personal holding company rules, but these are now on the horizon. The law does not recognise trusts, but beneficiaries are required to report their interests and trustees may make reports on behalf of the beneficiaries. There is a council (the COAF) responsible for collecting information. Many wealthy families are considering trusts, foundations and other vehicles in substitution of the simple BVI, IBC etc.; on which they have formerly relied. The level of wealth is high and the need for advice great.
The EU’s Fourth Anti-Money Laundering Directive is a further step in the recent invasion of privacy. The UK Act of 2015 requires small companies to make public the beneficial ownership of their shares. The Directive has to be implemented within two years. A “beneficial owner” of a company is an individual who owns or controls 25% of the shares or is a senior management official. With a trust, the class extends to the settlor, trustee, protector beneficiary or “controller”. There are similar rules for foundations, extending to the founder (and perhaps another person who adds funds), a protector (or similar) and the beneficiaries. There is a separate registry for corporate and legal entities (Art 30) and for trusts (Art 31). Access to the corporate register is available to a wide range of persons, for the time being, depending on national rules of Member States. Access to the trust register is more limited: it applies to express trusts which generate tax consequences; there is access for competent authorities; there will be no access for others, even if they show a legitimate interest. It seems that the trust rules will apply to foundations. The Directive arguably conflicts with the EU’s charter of fundamental rights.
The OECD’s Harmful Tax Practice Report generated a good deal of pessimism. The greater transparency it requires in the future will itself produce work for professionals. The “Accidental American” needs professional advice. Greater record keeping is going to be required. Complex structures may need simplification. Professional advisers will need to focus on substance and an evidence of residence.
Is the registration of trusts a bad idea? It is common in Liechtenstein and South Africa. It may be a way of making the trust more acceptable in civil law countries. Trust registration has been available in the Cayman Islands since the enactment of the ground-breaking Trusts Law in the 1960s. Major banks are retreating from trust management. But discretionary settlements appear to have a future. A protector company or no protector may be a preferred feature. Asset protection may be more important than tax. Trusts can take advantage of IPPAs. The Netherlands has the largest number of IPPAs. Mauritius has many IPPAs with African countries. Barbados also has IPPAs. Non-resident Canadian trusts can take advantage of the Canadian IPPAs while being non-resident for tax: since Fundy, the place of effective management is the test for trust residence.