Florence 1982 meeting

Meeting Summary
  • Anatomy of a Tax HavenDavid Graham
    • A practitioner must keep up with the changes in his system; he should not abuse the advantageous circumstances he may discover. The client should not be so wrapped up in this tax planning that he forgets to make a profit. The successful practitioner needs a sense of humour. He also needs some luck.
      Bermuda grew from simple beginnings. The Exempt Company brought some international business. The growth of the use of trusts brought some more. The use of Bermuda as a base for shipping was the true beginning of the Colony’s present position as a tax haven.

      A lawyer in a tax haven ought to try to give his international client an objective view of his country. If there are, or threaten to be, political problems, the client needs to be warned.

      There is undoubtedly a growing hostility to tax haven activities; those institutions which are most likely to survive are those – like the Swiss banks – which limit their activities, in a common sense way, to those which are acceptable.

  • Asset ProtectionDenis Catt
    • Most planning in this area is concerned with political risk. With the “splintering” technique, different interests in the same asset may be owned by different entities. Provision may be made for a company to be reincorporated elsewhere: jurisdictions which permit changes of domiciliation include Australia (New South Wales), Canada, Costa Rica Djibouti, Liechtenstein, Nauru, Netherlands Antilles and Netherlands, Panama, St Vincent, Switzerland, Turks & Caicos and Vanuatu. Arrangements may be made for transfer to a “standby” company eg the standby may have a mortgage or option over the assets of the operating company. Undated assignments may be used, but assignments in blank seem unlikely to be effective. “Push-button” liquidation presents a number of problems – often tax problems. A company may give away assets, or the rights in the assets may be split between “thin” companies. In the BVI, Netherlands Antilles and elsewhere, companies may buy in their own shares. Bahamas, Bermuda, Cayman and to some extent Panama, allow the use of merger procedure.
      The value of local assets may be reduced by back-to-back borrowing. A “Phillips” trust may be utilised. Commonly, different locations are used for incorporation, assets, directors and voting and non-voting shareholders.

      Many protection plans are based on trusts. Trustees may be replaced by others in a safe jurisdiction. A trust company with branches in more than one jurisdiction may change the branch at which the trust is administered. The trust provision may be changed or the trust assets may be transferred to the trustees of other trusts.

      Even though many risks must be accepted,it is desirable to do so consciously: one must know as far as possible exactly what the risks are, before one can decide whether they are to be accepted.

  • Captive BankingAnthony Murty, Gunter Rischer & Jeffrey Sharp
    • A Captive Bank is, typically, a bank owned by an international group and established in an offshore money centre. It engages in all the usual banking activities; by grouping funds from all sources it has a banking strength not available to the single companies in the group; the profits accrue in a low-tax or zero-tax jurisdiction. At the same time, funds for expansion can be made available to operating companies in the group – either by way of direct or back-to-back lending, letters of credit, guarantees or confirmation; money may be raised by Eurobond issues. The profit may arise from borrowing “wholesale” and lending “retail”; ancilliary banking services are also a source of profit.
      The exercise is not profitable is small sums. The in-house lending rates must be commercial; if the business expands to lending to third parties, the quality of the borrowers must of course not be lower than that of the group borrowers.

      Deposits must carry a proper commercial interest. A Captive should offer the full range of banking services – e.g. factoring, leasing, bill discounting, hedging of forward exchange cover, etc.

      When looking for a jurisdiction for incorporation, political considerations are important; one is also looking for a low-tax or zero-tax jurisdiction. In Bahamas and Cayman, a licence fee is charged, there are capitalisation requirements, audited accounts must be filed and the Inspector of Banks must be satisfied with them. Other possible jurisdictions include the B.V.I., the Isle of Man, St. Vincent, Turks & Caicos and Anguilla.

      Nauru has no capitalisation requirements or other restrictions on banks. The company must not be owned by Nauruans nor may it do business in or with Nauru. Vanuatu and the Cook Islands may function as the place of incorporation.

      The bank may be located operationally in a jurisdiction other than that in which it is incorporated. The jurisdiction should ideally have available the services of a good regular banking community to ease the flow of funds.

      If the word “bank” is not required in the company’s name, the choice of jurisdiction is much wider – e.g. a non-resident UK or Singapore company may be used. In general, exchange control authorities deal more favourably with “banks”, but the name has no tax significance.

      Some Captive Banks have become well known – e.g. Dow Banking Corporation. The history of this company shows how a Captive can develop into a bank in its own right. In practice, many Captive Banks have no fiscal purpose: they manage consumer credit and manage corporate funds from a high-tax base. A successful offshore operation requires the same level of operational efficiency – something which is not altogether easy to achieve in any jurisdiction, and is perhaps most readily achievable in the Bahamas, which has a considerable banking community.

  • Captive CharitiesLaban Quimby II
    • A Captive Charity may be sited in a zero-tax jurisdiction, but the U.S. or U.K. may most often be more appropriate. One should consider also a charitable trust in Australia or a Swiss Foundation. Privacy, mobility, requirements for filing documents for meetings and other practical considerations may influence the choice of situs. A U.S. charity cannot engage in any political activity; the restrictions in Germany are less stringent.
      A Captive Charity is not required to solicit funds from the public, but such solicitation may help to establish the “substance” of the transaction.

      The tax privileges of charities may extend to freedom from income tax and capital gains tax, to deductibility of gifts or their exclusion from gifts tax or capital gains tax, to immunity from estate taxes. The exemptions accorded to private foundations in U.S. are hedged about with many qualifications, and specific application must be made for recognition as a private charity for tax purposes. They must distribute the whole of this income and are precluded from investing in any business and from having any significant shareholding in a commercial company.

      Charitable ownership of real property in the U.S. may provide a solution to problems of FIRPTA or in the U.K. to problems of Development Land Tax. A Captive Charity may be utilised as a vehicle for accumulation. In the U.S. an individual giving to qualifying charities may take a tax deduction up to 50% of his income, a corporation up to 10%. The U.K. rules favour the corporate giver.

      A Captive Charity may function as a holding company. It has no shareholders but the power may be held by an individual and pass to other generations without any estate tax. In the U.K., an operating company may covenant all its income to its parent charity, with the effect that the trading profits of the business are received by the charity tax free; the Helen Slater case shows that such profits may effectively be accumulated. In the U.S., a charity can donate assets to charities established elsewhere, and thus avoid the penalties attaching to excessive accumulation.

  • International Tax Planning for Entertainers and AthletesPaddy Grafton Green
    • Entertainers have various kinds of income from personal appearance, from recording, writing and films and from sponsorships and merchandising. This may be taxed in the country of source and in the country of residence and may be taxed as business income royalties or otherwise.
      Entertainers are and have been for many years excluded from the benefit of modern Tax Treaties. In 1963 the type of provision was standardised in the OECD Model Double Taxation Treaty published in that year and in 1977 the provision was extended in the revised version of the Model Double Taxation Agreement. Although present in many Treaties concluded before 1963 the standard provision was adopted in Conventions re-negotiated subsequent to that date but in the case of U.S./U.K. Treaty the provision was not included until 1980 as it had been excluded from the 1945 Treaty.

      The definition of “entertainer” is wide but not exhaustive – producers and directors of films, managers and writers and sculptors appear not to be included. Article 17(1) does not seem to extend to royalty income from sales of records, books and merchandising; the Article appears to be concerned only with personal appearance income or other personal services. But it does not define “income” as such. In the United States, the Tax Court held in the Caruso case (1931) that income from recordings made in the U.S. represented income from personal services and because in that case those services were performed in the United States the income arising to Caruso was taxable there irrespective of whether the income was paid in respect of records sold in the U.S.A. or elsewhere. Subsequent cases indicate that possibly the source rule should be otherwise. In the Oppenheim case (1934) royalties paid in respect of U.S. sales of copies of a work written in France were not held to be income from personal services but royalties paid in respect of the exploitation of the copyright. But more recently the U.S. appear to be returning to the proposition that an artist creating and selling his property receives income derived from personal services and the source of that income is where the work was performed or created not where the products or reproductions of it are sold. If this principle were adopted it might have a profound effect on the taxation by the U.S. (and by other countries if they follow suit) as such income would be treated as falling within the scope of Article 17 and not falling within the definition of other Articles i.e. business profits or royalties as has in practice been the case to date.

      Under the U.K./Swiss and U.K./Hungarian Treaties entertainers performing in those countries are exempt from tax if their performance is pursuant to a cultural agreement or supported by government funds.

      Tax is charged sometimes on the remuneration actually paid to the entertainer or on the gross sum paid for the services of the entertainer and the tax may be charged either at graduated income tax rates or at a flat rate the entertainer sometimes being permitted to claim deductions. Certain countries require the artist to make a return and others do not and certain countries collect the tax by imposing an obligation on the promoter to levy a withholding tax and account for it. In the U.S. Revenue Officials sometimes collect the tax from the gate if prior satisfactory arrangements for the payment of the tax have not been made. For a U.S. appearance a U.S. corporation is desirable, the corporation undertaking the presentation of the entertainer for its own account, paying all expenses and concluding a withholding tax agreement with the IRS so as to limit the withholding tax to the net sums paid for the services of the entertainer as opposed to withholding on the gross sums paid by the local promoters. This can be more difficult to arrange in European countries but in Germany either use of a local company or at least splitting the provision of services between artistic services and technical and production services may achieve a similar result.

      The entertainer should endeavour to ensure that he is treated for tax purposes in both the overseas country and his country of residence on a consistent basis so as, in particular, to obtain a credit in his country of residence for taxes paid abroad either by means of double taxation relief or unilateral relief. Credit may not be given for certain taxes including sales taxes, certain U.S. state taxes and in Austria the subway tax although these may be allowed as deductions.

      Article 17(2) of the 1977 Model Convention permits countries in which entertainers perform services to tax the income of the companies furnishing the services of the entertainers but the domestic laws of some states may not enable those states to tax the company furnishing the services of the entertainer. Clearly a Treaty cannot impose taxation in line with the principle that a Treaty should not increase the taxation burden on residents of the contracting states.

      A difficult issue which may be raised is that of “effectively connected” income namely the extent to which income from other sources for example recordings or merchandising might be said to be “effectively connected” with income from public appearances. If that were to be held to be the case then a portion of that income might be held to be taxable as performance income. The question of how income is defined for the purposes of Article 17(1) may be relevant in reaching the final determination on this issue.

      In the area of withholding taxes on royalties consideration should be given to the eligibility of a recipient to claim relief against for example corporation tax for taxes withheld at source, to the limitations on that relief where a portion of those royalties is paid to a third party, to the ability of the recipient to pass on a portion of any tax credit to a third party and the ability of that third party to claim a credit to a third party and the ability of that third party to claim a credit for a credit so passed on. In addition consideration should be given to the threat which the Gordon Report may pose to the present use of certain Double Taxation Treaties to avoid U.S. withholding tax on royalties and to the present anti-avoidance provisions incorporated into Double Taxation Treaties of which Article 12(5) of the Anglo/Dutch Double Taxation Agreement is an example.

  • Renumerating the International ExecutiveRichard Chapman
    • Expatriates rarely take or are offered positions for tax reasons, but the tax consequences of their appointments should at least be neutral in effect – either by tax equalisation (the usual US approach) or the “net” basis (the usual European approach). Major problems include the cost to employer (generally at least 150% of domestic employment due mainly to the allowances necessarily paid to international executives), remuneration out of line with local rates (sometimes ameliorated by retaining a portion of salary in the home country), fluctuation of exchange rates (overcome to some extent again by paying part of the salary in the employee’s home country) and transferability of pension plans.
      The employee himself is often badly in need of professional advice. The professional adviser should begin by taking note of the employee’s income from all sources, his capital situation as well as his status in the organisation (whether his services are dependent or independent), his income tax liability (continuous if he is a US citizen), whether he retains a house in his home jurisdiction, his exchange control position and the timing of his appointment. It is important always to establish how and when his residence changes in the relevant jurisdiction; he must of course avoid being regarded as resident in two jurisdictions at the same time. If he is to keep up his pension contributions in his home country, this should not give rise to tax liability in his working country. Countries do not have universal rules about the deductibility of alimony payments or insurance premiums; an employee with tax shelter deductions in his home country should not lightly assume that these will be available to him in his working country. The Canadian “Deemed Departure Rules” present a pitfall, as does the potential incidence of capital gains taxes, generally; employees with interests in trusts, or stock options need to know how the tax and exchan

  • Secrecy and ConfidentialityIan Paget-Brown
    • The issue of a subpoena in Florida against a resident of the Cayman Islands travelling through Miami in 1976, requiring him to give in evidence to a grand jury confidential information about a bank’s customers in Cayman, led to the passing of the Confidential Relationships (Preservation) Law 1976 in the Cayman Islands. Confidentiality exists at common law; the Cayman law introduced a penal sanction – following the example of Switzerland, Austria and Luxembourg. Other common law and civil law countries also require banks to keep information about their customers confidential notwithstanding they do not treat a breach of confidentiality as a criminal offence. This obligation is part of the contract between the bank and its customer. Accordingly, a customer can give his consent to the release of information – either expressly, or impliedly. A customer impliedly consents to disclosure to a guarantor. It is generally thought that a customer impliedly consents to such disclosure as may be necessary for his bank to give a credit report.
      A bank may disclose information where it has an interest in so doing – e.g. where it needs to sue the customer for the recovery of money. The extent of this liberty is not altogether clear: it is presently the subject-matter of some debate in Switzerland, where the U.S. authorities are seeking information on insider trading. In Swiss terms, the question is whether the disclosure is “necessary” under Article 34 of the Penal Code.

      The Court may order disclosure, or disclosure may be required by statute. Frequently, the statute is a taxing statute. Nothing in Swiss law requires a bank to make any disclosure to the tax authorities, though the Court will nevertheless make an order where tax or other fraud is involved.

      In a French case, the Court of appeal held that customs authorities were only entitled to information from a bank if they could show its relevance to their enquiries into exchange control violations. In Germany, information obtained by the tax authorities in a random search on the offices of a major German bank in Hamburg, was held not to be in violation of bank secrecy. In Holland, the tax authorities were permitted to search the records of an insurance company for the owners of luxury yachts. In Sweden, the tax authorities, having discovered that Swedish residents had Danish bank accounts, were held to be entitled to use the information to recover tax, but not entitled to pass the information to the exchange control authorities.

      The powers of the I.R.S. in the U.S. and of the Inland Revenue in the U.K. are relatively wide. In the Clinch case, the Court of Appeal held that the London representative of a Bermudian bank was bound to hand over information to the U.K. Revenue under S.481 of the Income and Corporation Taxes Act 1970.

      In the Bank of Tokyo case, the U.S. Court held that the I.R.S. were entitled to obtain information for the purpose of furnishing it to the Canadian tax authorities, even where the United States itself had no interest in the case. In X v. the Federal Tax Administration of Switzerland, the Court ordered disclosure sought by the I.R.S. investigating a U.S. tax fraud. The duty of the Swiss tax authorities under the U.S. tax treaty has been held to be limited to the furnishing of information, and not to extend to complying with requirements as to the form of the information. In Cayman, the Court refused to make an order for the provision of information for the purposes of a criminal fraud enquiry: the Confidentiality Law took precedence over the Hague Convention on the Taking of Evidence in civil and criminal matters. The terms of the Hague Convention were enacted by the United Kingdom in the Evidence Proceedings in Other Jurisdictions Act 1975, extended to the Cayman Islands by the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978.

  • Taxes on Non-residentsEdo de Vries
    • The test of non-residence varies from one jurisdiction to another; there are proposals to change the test of residence of companies in the United Kingdom. It is also proposed – ostensibly for reasons to do with exchange control – to repeal S.482 (which prevents U.K. resident companies from changing their residence); the section is probably now unenforceable.
      Liability to tax on non-residence depends on the existence of some nexus between the taxpayer and the jurisdictions concerned; the nature of the nexus may vary from one jurisdictions to another. The application of these concepts in thirteen countries is summarised in the Working Papers – to which members of the Association in each of those countries have very kindly contributed. A summary of this kind can never be definitive: rather it serves to indicate what the fiscal result of a transaction is likely to be. No practitioner would allow his client to proceed on this information alone. He will want to take advice from a colleague practising in the relevant jurisdiction; the information is intended to enable him to obtain a general picture of the tax consequences of the proposed transaction, and to formulate the more detailed questions he needs to ask.

      In most countries (but not all), the nexus in the case of taxes on income consists of the existence of a source of that income in the taxing country. In a large number of countries the source of trading income is the trade and not its various components.

      Interest is generally regarded as having its source where the debtor resides. The U.K. Revenue used to be content to treat income as having a non-U.K. source, if it were payable under a deed and the deed kept abroad, even though the debtor resided in the U.K., but they are more and more reluctant to do so. It seems that interest payable under a promissory note has a non-U.K. source if the note is kept abroad.

      The tables in the Working Papers indicate where the taxes generally imposed on non-residents are reduced or eliminated by the provisions of treaties. A resident of a treaty country cannot of course take advantage of an exemption from foreign tax while omitting to return the income for domestic purposes, and such omission may create problems for the payer of the income who may be called upon by his own Revenue to account for tax which should have been deducted at source.

  • The Dangers of Artificiality in Various JurisdictionsVibert Kesler
    • History affords numerous examples of heavy taxation leading taxpayers to demand tax planning from their advisers. What is regarded as legal or legitimate in one jurisdiction may be regarded as illegal or abusive in another. Jurisdictions with liberal legislation counter avoidance in broad and simple terms (e.g. Sweden, Netherlands); this goes with a judicial concept of “abuse of law” (e.g. in Germany, Belgium). More middle-of-the-road jurisdictions will have more detailed anti-avoidance measures, but leave their application interpretation to the Courts (e.g. France, Belgium); those jurisdictions with conservative leanings will have anti-avoidance provisions of more precision (e.g. the U.K.). In such jurisdictions, the Court will tend also to apply criteria of “economic substance”. In strictly conservative jurisdictions, the law will be detailed (e.g. the U.S.A., Canada, Germany), and the Court will look at economic substance and even social purpose, and infer from the facts the state of mind of the taxpayer (U.S.A., Canada).
      At present, there is a shift in many jurisdictions away from artificiality, and a tendency towards determining the tax implications of transactions according to their economic substance. To state a set of guiding principles – first, a transaction should have a genuine business purpose or motive; secondly, a transaction should have substance and not be merely artificial; thirdly, the tax benefit should be supported by the commercial benefit derived from the transaction; fourthly, the practitioner should foresee that a degree of administrative discretion will be exercised by the tax authorities in deciding whether the transaction is abusive or not; lastly, the transaction which is too widespread is more likely to be attacked by the tax authorities.

      The practitioner must maintain his objectivity, and be able to give the client a true view of the probability of the fiscal success of the transaction. He should examine the extent to which the jurisdictions concerned will require full disclosure of the facts. The business purpose of the transaction should be carefully considered, fully developed and then documented. The practitioner must consider carefully its non-tax implications. It is recommended that the advantages and disadvantages of the tax minimisation plan be reduced to writing. Finally, it is important to retain local advisers to consider the fiscal effect of the transaction in each of the jurisdictions concerned.

  • The Role of the Professional AdviserHuw Griffith
    • The professional adviser will counsel his client against evasion partly for professional reasons, partly for moral reasons, but also for the very practical reason that the lay client tends to under-estimate the dangers involved in transgressing the law.
      The adviser needs, of course, a good deal of knowledge of the kind which may be obtained by reading books. But he cannot have a detailed knowledge of all the tax systems which affect his clients’ affairs; here he needs to rely on colleagues in other jurisdictions, with whom – ideally – he should enjoy a friendly personal relationship. The duty of the adviser is to choose those colleagues carefully and well.

      He also needs to educate his client: the client should concentrate on making his profit and not on tax schemes; the client needs to have confidence in his adviser, and especially in his adviser’s judgement in choosing the appropriate specialist on the occasions when specialist advice is required.

      The U.K. provides opportunities for non-residents to establish non-resident companies, or even resident companies, which, because of capital allowances or other deductions, may not have a significant exposure to U.K. tax.

      Non-domiciled individuals resident in the U.K. enjoy a particularly favourable tax regime. It is now possible for non-residents to become members at Lloyds; the capital gains tax risk is best minimised by use of a bank guarantee; exposure to income tax is more limited than is generally supposed. The adviser should of course carefully explain to the client that liability of members is unlimited.

  • The US Tax Haven ReportMarshall Langer
    • The US Treasury has embarked on a crusade to eliminate “treaty shopping” – the use of tax treaties by residents of third countries. Fundamental changes are coming shortly; they are prefigured in the Gordon Report. Following a Congressional hearing, Richard Gordon and a small staff conducted a year-long study on the use of tax havens by US tax payers – including their use by non-resident aliens investing in the US.
      It seems likely that most other developed countries will follow the lead of the US. Richard Gordon is now the key legal adviser in international tax matters to Congressmen of both parties: this powerful position has already enabled him to ensure that a number of his recommendations are being carried into effect.

      The Report indicated numerous treaties utilised for “shopping” purposes. For example, a Canadian company wishing to invest in a US subsidiary would not do so directly (which would give rise to a 15% withholding tax) but through a Dutch subsidiary (which limits the withholding tax to 5%). Again, by using a Netherlands Antilles finance subsidiary, a US borrower may avoid the 30% withholding tax on interest paid to non-residents. The “Dutch Sandwich” (an Antilles company owning a Netherlands company, in turn owning a US company) may remain effective to avoid FIRPTA (the new US tax on real property profits) down to the end of 1984; even after that, the rate of the tax may be reduced by the use of companies in jurisdictions with which the US has either a tax treaty or a treaty of friendship, commerce and navigation.

      Chapter 8 of the Report deals with treaties with tax havens. It describes current practices in the use of treaties, and suggests what options may be open to the US government. Instead of payment of eg interest gross, tax may be required to be deducted, the recipient being left to claim repayment. The US may seek to collect a “second royalty” tax (eg where a Dutch company receives a royalty from the US, out of which it pays a royalty to Hong Kong). Or a “branch profits” tax may be imposed on non-residents, from which exemption would be given only in very limited circumstances.

      Other chapters propose other changes – piercing bank secrecy and identifying the holders of bearer shares. Simultaneous examination in high-tax jurisdictions may reveal the functions and profits of a tax haven vehicle with which the high tax companies are doing business.

      The new US/Jamaica treaty has powerful anti-treaty-shopping provisions. Negotiations with the BVI are presently under way, in which the US is seeking to introduce similar provisions in the US/BVI treaty. The most recent form of such provision is to be found in the Treasury Discussion Drift which was the subject matter of a public meeting in January 1982. Under the more stringent versions a company in a treaty country will qualify for treaty benefits only if it has more than 75% ownership in the hands of residents of that country and if it is not being used as any kind of conduit for the transmission of income to residents of third countries.

      Serious negotiations are currently pending for new treaties with the Netherlands and Germany, as well as with many treaty-shopping jurisdictions. The US Treasury intends to bring to an end all the extensions of the old UK treaty as of the end of this year or next year. The next round of discussions with the Netherlands Antilles in due in August or October of this year: it seems probable that existing Eurobonds will be “grandfathered” so that interest on them can still be paid gross. Further negotiations with the Swiss have been postponed until 1983.

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