The 1945 UK/US tax treaty was extended to the BVI. It was discovered in the 1970s, and the BVI became an important centre for investment in the US. The treaty was terminated by the US. The IBC was introduced and the territory leapt from the 19th century to the 20th century. The legislation left very many issues unaddressed. Income tax was retained and the IBC was ring-fenced. The IBC was a great success, the territory benefiting from problems experienced in other jurisdictions. But it proved a lightening-rod for the OECD initiative. The adverse publicity was paradoxically helpful in marketing the IBC. New legislation is dealing with the unfinished business and provides for a permanent company law review committee. Several types of company are now permitted, notably the mysterious unlimited company with no shares. Other entities are under consideration e.g. the limited liability company, the cell company. Other unfinished business remains: should there be a register of general powers of attorney corresponding to the register of directors? The concept of beneficial ownership remains opaque. A VISTA trust can effectively limit the responsibility of the trustee. A quick succession trust avoids probate and reserves wide powers to the settlor. Only BVI company shares can be included in the trust fund, but there are proposals to permit a wider variety of assets. A good deal of regulation is unnecessary but seems to be inevitable in todays climate. The BVI, like other jurisdictions, have to deal with the international initiatives.
Several Dutch companies transferred their domicile to Curaçao in 1939. After the War, the Antilles encouraged them to stay by introducing a low-tax regime. The Dutch Sandwich became fashionable in the 1950s. This came to an end in the 1980s. There have been many changes since then; currently new constitutional arrangements are under discussion. Tourism and the financial industry are the main sources of income. Currently, Dutch companies paying a dividend to the Antilles withhold 8.3%, which is a final tax and is shared with the Antilles treasury. The Antilles was on the OECD blacklist and under considerable pressure to introduce a new fiscal framework. Effective 1 January 2002, no distinction is made between onshore and offshore companies. The foreign participation rules result in a 1.7% local tax. There is no withholding tax on outgoing dividends. The Private Foundation was introduced in 1998. It is a legal entity. Only individuals can be members of the board. Assets may be transferred by way of gift or in return for a loan or an annuity which is later cancelled. It functions as an alternative to a trust or Liechtenstein Anstalt or foundation. Companies trading in the E-Zone are taxed at 2% and are exempt from turnover tax and import duties. It appears that this regime is EU-compliant. Aruba introduced its Exempt Company in 1980. It has not been a great success. Changes have been made under OECD pressure. The Exempt Company has the option to become a transparent vehicle. The regular Aruba company remains in existence. It is initially taxed at 34%, and most of this is reimbursed, leaving an effective tax rate of 1.5%. Many changes are under discussion, including the split-up of the Antilles.
Bermuda is a very small territory, a British Overseas Territory, with the Privy Council its final court of appeal. The legal system is based on English law. Tourism is important, but financial services are the major income source. There are ten accounting firms and thirty-eight law firms. There is a payroll tax but no income tax or capital gains tax. The Bermuda Monetary Authority is an independent regulatory body. Exempted companies are incorporated by non-residents for the purpose of doing business abroad. Bearer shares are not permitted, and shelf companies are not used. The Bermuda Stock Exchange is a fully electronic securities market. Insurance is Bermudas most significant business. The Territory pioneered the captive concept and is now the third largest reinsurance market in the world. Trust law is substantially the same as in England. There are plans to abolish the rule against perpetuities. Purpose trusts were introduced in 1989. Private trust companies do not require a licence. They are sometimes formed by a licensed trust company, with the aim of reducing its possible liabilities arising out of the administration of trusts. The EU Savings Tax Directive is not applicable to Bermuda: this has been good for banking and for the private client, but bad for mutual funds. The Partnership Amendment Act 2006 enables a partnership to acquire legal personality. The is a TIEA with the US and Australia; negotiations are on foot for an agreement with Mexico and the United Kingdom.
Is there any advantage for the US citizen in going offshore? The Philippines and Eritrea are the only countries apart from the US which tax by reference to citizenship. There are few advantages to the US citizen in going offshore. Exceptionally, there are life insurance products offering tax deferral; the offshore policy permits a wider range of investment than the domestic policy. The offshore charity does not have to comply with the onerous rules governing a US charity. It is taxed in the US as a non-resident alien. The donor is not entitled to a deduction. The foreign charity may employ the settlor at a fee. A corporate form is to be preferred to a trust. Non-US persons with US connections have greater flexibility and have only a mild exposure to US tax. Exceptionally, US real property involves a greater exposure to US tax notably to estate tax (which is expected to survive, but at a lower rate). In theory, non-US persons are exposed to estate tax on publicly-traded stock. The usual solution to this problem is to hold the US assets through an offshore company. Where there are US beneficiaries, an irrevocable trust may be preferred: it may even save some tax, but tends to be very complicated. Asset protection is an important consideration in the famously litigious US. Offshore jurisdictions offer liberalised fraudulent conveyance rules, non-enforcement of US judgements, self-settled spendthrift trusts and other features. US persons have other reasons for going offshore e.g. in search for lighter regulation. The US client will prefer an offshore jurisdiction which is less subject to US pressure.
Over the last 30 years, international tax planning has become more and more difficult, with increasing and evolving domestic anti-tax planning legislation and administrative initiatives, and with multi-state co-ordinated initiatives, which have been carried out through regional or ad hoc groupings or through broad-based platforms such as the OECD. Opponents to tax planning often confuse it with evasion. Information gathering has become the holy grail. The OECD conducts a continuing campaign. The Canadian government stated on November 9, that Canadian taxpayers have stashed offshore $88 billion, with the innuendo that their activities bear a close relation to unacceptable tax avoidance. A few Caribbean countries have tax treaties with Canada, notably Barbados. A Canadian multinational may have a Barbados IBC subsidiary: it is taxed at a maximum rate of 2.5%; dividends from its active business operations are exempt from Canadian tax even though the IBC is excluded from benefit under the treaty. In this case the advantageous role played by the Canada-Barbados treaty is simply its existence without reference to its particular provisions. In a similar way, the mere existence of the Barbados-US treaty enabled the former FISCs to be established in Barbados. This role is quite different from the conventional role of a treaty (see below re MIL), which is to provide a specific reduction or exemption from source country tax (say Canada) for an investor from the other treaty country (say Barbados). This route could be closed by the modification or termination of the treaty. Section 95(2)(a)(ii) permits the shift of active profit from a high-taxed foreign subsidiary to a low-taxed foreign subsidiary through inter-company transactions such as lending or licensing, and this opens the door to the use of a Barbados finance subsidiary. Again, the exempt surplus treatment depends on the continuance of the Barbados treaty. The 2006 decision in MIL (Investments) S.A. a case which involved a substantial gain on the disposal of Canadian stock is favourable to treaty shopping. Although the court decided the case in favour of the taxpayer, on the basis that the arrangements were undertaken primarily for business and not tax planning (-i.e. treaty shopping) purposes, it made two important comments: even if there had been treaty shopping, there is no clear policy against this for the purposes of Canadas domestic General Anti-Avoidance Rules (s245), and at least for treaties entered into before the 2003 revised OECD Model Treaty Commentary – Canadas treaties do not contain an inherent anti-treaty shopping rule.
Florida, Mexico and the US Virgin Islands stand out as the highest-taxed jurisdictions in the region. At the other extreme, Anguilla, the Bahamas, the Cayman Islands, St. Kitts & Nevis and Turks & Caicos do not levy any income tax at all. The retiree is also effectively free of direct tax in Antigua, Belize, the BVI, Dominica and Panama. Barbados has a remittance basis for the non-domiciled, but the retiree can also use a simple offshore structure. He has a similar option if he becomes resident in the Dominican Republic or St. Lucia. He has income tax to pay in the Netherlands Antilles, but it can be a fixed sum or at a specially low rate of 10%, but no similar concession is offered to retirees in Mexico, where the tax rate is 28% or 29%. Governments everywhere need to raise tax, and where direct taxes are low, indirect taxes tend to be high. The transition from the old jurisdiction to the new can call for very careful planning, but while there are several low-tax options in Europe, low-tax and zero-tax options abound in the Caribbean.
In the 1980s Barbados took two strategic decisions to be a low-tax treaty jurisdiction and to enact legislation for the purpose. Its success as an international business centre is due to many factors, notably its extensive tax treaty network, its infrastructure and its human resources. The concept of domicile applies to corporations. A company resident in Barbados but incorporated elsewhere is taxed on its foreign income on a remittance basis. Corporation tax is 25%, but 2.5%-0% for IBCs; withholding tax is 15-25% but IBCs are generally exempt. There are several international business entities the IBC, the International Society with Restricted Liability (a transparent entity, like the LLC in the US), the exempt insurance company, the qualifying insurance company (taxed at approximately 1.7% and qualifying for treaty benefit), the international bank, the mutual fund (with treaty benefit and income allocated to shareholders being a deduction, on the Canadian pattern) and the segregated cell company. Barbados has exchange control, but these entities are exempt. There are other special incentives, including a reduced tax rate for specially qualified employees. In general, these entities may not do business with residents (though residents may now be shareholders). Licences are required for specific businesses. Barbados has treaties with eleven countries, most recently with Austria. Six of them have Limitation on benefit or Carve-out provisions. If an entity is carved-out i.e. in the Canadian and UK treaties the provisions of the treaty do not apply to it (including those relating to exchange of information). Treaties with Italy, Netherlands, and Mexico are on the way. There are appropriate structures for licensing, captive banking and investment in the CARICOM region and in China.
The resident tax-paying trust the section 40 trust is a useful vehicle: it is fully taxable, but amounts distributed to beneficiaries rank as a deduction. There is also the exempt trust: this requires a non-resident settlor and to be under the management of a licensee. It does not have treaty benefit. By using an unlicensed special purpose resident trust company, a trust may be a section 40 trust, even though the settlor is non-resident. The UK treaty excludes income which is not taxed because it is not remitted. It also excludes IBCs. There is in addition the international trust: this is treated as a non-domiciled entity and its foreign income is taxed on a remittance basis; distribution to beneficiaries are not taxed. It appears that it is a resident of Barbados for the purpose of the Canadian and UK treaties, but may fall foul of the Limitation on Benefits article in the US treaty. By maintaining a bank account abroad income can be timed to coincide with distributions. The UK Court of Appeal decided the Indofoods case in May. It was not a tax case, but a case about the interpretation of a contract. The Court held that a beneficial owner must enjoy the full privilege to directly benefit from the income. This is a very important case, welcomed by tax authorities in the UK and elsewhere, and needs to be taken into account in any treaty-shopping transaction. The s.40 trust receiving a royalty enjoys the full benefit of such income: what it deducts is its distributions, which do not reduce the amount of the royalty.