Cannes 1988 meeting

The draft treaty was negotiated in secret but has now been published. Existing tax treaties commonly provide for exchange of information – automatic, on request or spontaneous; this is routinely done and the IRS at least is now making more use of incoming information. A new form developed by the OECD provides for such information to carry the taxpayer’s reference number. Simultaneous examinations are made by the us and other authorities, notably in transfer pricing of multinationals, pursuant to the bilateral tax treaties.
The OECD treaty was opened for signature in January of this year: it may be signed by 28 member countries of OECD and the Council of Europe. So far, no country has signed it. It is expected the United States will sign it shortly: the IRS is much in favour of the information-gathering provisions of the treaty, but whether the service favours the provisions for the service of documents and the enforcement of judgement debts for foreign taxes is not clear. This last power provides for measures of conservancy to prevent a taxpayer from removing assets while a tax case is still pending in foreign courts, and this may conflict with the “due process” provisions of the US constitution.

This multilateral treaty has become known as “Interfipol” – a kind of fiscal Interpol. A disturbing aspect of the treaty is that it may be applied to the dependent territories of the signatory powers – eg by the United States to Puerto Rico and Guam, by the Netherlands to the Netherlands Antilles and Aruba and by the United Kingdom to the Channel Islands, British Virgin Islands, Gibraltar etc.

In the United States, the Burbank case decided that the IRS had power to obtain information simply for the purposes of providing it to the authorities of a treaty partner country. Interfipol will extend this role to the countries which are parties to this treaty.

The treaty imposes on the tax authorities an obligation spontaneously to provide information in a number of circumstances where the information is relevant to any foreseeable tax liability in the other jurisdiction.

Computers are much used in preparing tax returns and managing a client’s domestic tax affairs. In international tax planning, computers offer access to information and rapid calculation of the effect of options. The essential elements of a successful programme include a dedicated central research group, worldwide committed back-up, an ability to draw on expertise of international tax consultants from major financial centres, commitment to regular maintenance and update and – not least – programmes which are easy to use and understand.
A system provides information of all the kinds likely to be required and shows what impact tax systems and treaties have on actual or projected situations. As with other computer-based systems the World Tax Planner asks the user questions as to what information he requires and answers with information or more detailed questions; the user may ask the system for the general or specific information he requires. In the result, the user may find eg the best possible route for a royalty, dividend or interest flow or the optimum structure for an acquisition.

There have been a number of instances in the United Kingdom where the Revenue authorities have brought pressure to bear on professional advisers and others in order to obtain tax or even merely information from their clients. There have been cases of assessments on solicitors who dealt with the conveyancing of properties belonging to non-residents. Ex parte Goldberg decided that copies made for the purpose of obtaining the advice of a barrister were privileged, but information may be required from a bank without the customer knowing that it is being given.
Tax authorities may invoke the criminal law and extradition procedures as an indirect way of collecting tax or information. It appears that the issue of an invoice for non-existent services rendered by an offshore company may constitute the crime of forgery. The Revenue authorities may not press criminal charges if the tax is paid or the information given.

Simple denial of treaty relief is an effective way for the Revenue to discover information about a foreign company: in order to demonstrate its residence, minutes of its directors’ meetings may need to be produced and one or more directors may have to give evidence (and submit to cross-examination) – with consequences which are not always happy.

The computer may be used to send and to maintain documents at remote sites in coded form. A key – like a password – must be used if the document is to be read.
A hash number proves a document to be a valid instrument. A confidential document may be encrypted, sent via a modem over the telephone system and be stores in a remote computer. Absolute security cannot be achieved, but security may be maximised: once encrypted and stored, the hard copy may be destroyed.

Where a client has one confidential document, all his documents should be treated as confidential. Once printed, the print-out must go to its proper destination or be destroyed. A computer does not delete a document; it merely deletes the directory entry, so that the record of the document cannot be found. A protector is desirable. A back-up system is essential. An error-free protocol should be used, and one which verifies the hash number of the document. The computer should support at least three levels of encryption. Encryption at least at double level should be routinely done; to encrypt after a lawful demand for a document has been made may amount to obstruction of justice.

An “electronic signature” may be used.

The approach of 1992 offers new opportunities for international tax planning in the EEC. The single market was foreseen in the Treaty of Rome. It is now an urgent necessity, to enable Europe to compete with the United States and the Pacific Basin. Customs transit documents will still be necessary, but all non-tariff barriers will be removed and indirect taxes harmonised. Laws on drugs and armaments will become harmonised. Capital markets will be liberalised, industrial co-operation enforced.
VAT rates are to be approximated, excise duties to be harmonised. VAT is to be centrally co-ordinated though a “clearing house system” which would compensate member States which are net exporters. In practice, much power will be lost to national government: applications for derogation must be made directly to the Commission, but in fiscal matters unanimity of all member States is still nevertheless required, so that an objection by one state to new proposals will prevent them from coming into effect.

It will be several years before corporate tax rates become uniform, but the corporate tax base is to be harmonised. There will be scope for corporation tax planning by choice of location, but less opportunity for obtaining VAT advantage. VAT uniformity is ensured by the rule that Community legislation takes priority over national law. But member states may take special measures against tax avoidance and evasion. (It seems likely from reading the Advocate General’s opinion that the taxpayer will not succeed in the Direct Cosmetics case.) National legislation favouring local enterprises or otherwise distorting competition may be avoided by further legislation of the European institutions.

The Daily Mail trust had built up a potential capital gain. It wanted to migrate to the Netherlands, where its capital assets would acquire a new base cost. Such migration is unlawful without Treasury consent, which was not forthcoming. The question has been referred to the European Court: do the provisions of the Treaty of Rome relating to freedom of establishment override the prohibition of UK law, or does the tax avoidance aspect of the case allow the national law to prevail?

Andorra is one of the few zero-tax jurisdictions in the world. In Europe, it shares that status with Sark and, like Sark, Andorra is difficult to reach. The nearest airports are in Barcelona and Toulouse, more than 3 hours away by motorcar.
Of the population of about 60,000, some 80% are foreigners of whom only a few are there primarily to take advantage of the favourable tax situation.

The “discovery” of Andorra is largely a post-World War II phenomenon, which owes a great deal to tax-free shopping. The main town has a multitude of shops selling cigarettes, whisky, etc to day trippers. This may well come to an end in the next few years: Andorra has to come to terms with the EEC.

For the wealthy retiree, obtaining a residence permit is still relatively easy. He must show adequate assets, a clean police record and proof of intent actually to reside. Preference is rumoured to be given to white mature applicants. In acquiring property, foreigners are restricted to a single dwelling per family, the land area acquired not to exceed 1000 sq. metres.

While nothing in Andorran law prevents the co-principality from developing into an international financial centre, there appears to be great reluctance on the part of the authorities to see it happen. Clearly, the Andorrans are anxious not to antagonise the protecting powers, France and, to some extent, Spain (through the latter’s influence over the Bishop of Urgell).

Andorran limited companies may be formed but must be under Andorran majority control and beneficial ownership. Their use by foreigners is thus restricted. Branches of foreign companies cannot be formally registered. Of course, there are no tax treaties with any country.

In brief, Andorra can be recommended as a tax haven for individuals not in gainful employment. It may also be considered for “low-profile” management and control activities of non-Andorran companies.

The Customs House Dock Area is a 27 acre site in the middle of Dublin, which has been designated the International Financial Services Centre. To qualify for the benefits, it is necessary to carry on the trading activities within the IFSC and obtain a certificate from the Minister of Finance. The Minister must be satisfied that the activities will contribute to the development of the Centre. The trade must be one of the types specified in the Finance Act 1987. Pending the construction of the premises within the CHDA, temporary premises may be occupied.
The tax benefits were approved by the EEC in 1987; they will be reviewed again in 1990 but companies which have obtained a certificate will continue to benefit to the end of the century.

All transactions must be with non-residents and in foreign currency. No permission will be given to brass-plate activities: there must be an active business, employing staff. Qualifying businesses are taxed at the rate of 10% – on income and capital gains, up to 31 December 2000. The “Section 84″ loan achieves a lower funding cost for a 10% company. Companies operating within the IFSC are not required to withhold tax on outgoing interest and may therefore function as international financing vehicles.

The main island is a 1½-hour flight from Lisbon. Madeira is an autonomous region, with an elected legislature, a local government and power to regulate large areas of its own economic life. There is a well-established tourist industry and traditional agriculture and craft activities.
The designated free zone or, preferably, International Business Centre, was established to diversify the economy; it has the approval of the European Union and goods produced or services rendered by entities licensed to operate in the Centre have access to the European Single Market with no restrictions.

Financial services and other service activities need not be located in the area delimited for the manufacturing industries and they can take advantage of the tax-free facilities. In general, qualifying activities are authorised by the regional authorities, but financial activities require approval in Lisbon. The legislation for industrial and service activities, including trusts and shipping registration, is in place and duly tested; legal amendments to improve the efficiency of the financial services are expected shortly.

In economic terms, Madeira was relatively unaffected by the Portuguese revolution and enjoys a high level of political stability. A large investment has been made in telecommunications with the latest technologies. Geographical location, availability of labour and widespread knowledge of English and other European languages, favour the establishment of industry and services in the region.

Qualifying activities enjoy almost complete freedom of tax until the year 2011 and freedom from exchange control. Subsidies towards staff training are available and the policy on bringing in staff from abroad is rather liberal.