Geneva 1977 meeting

Meeting Summary
  • Developments in International Tax Planning TechniquesGerard Horton, Marshall Langer, Anthony Murty & Michael Edwardes-Ker
    • Gerard Horton

      There are difficulties in Australia in obtaining accurate and up to date information about exchange control.

      While lawyers’ advice is till privileged in Australia, advice from other professional advisers may not be.

      Trusts, drafted only with a view to tax saving, can have unfortunate practical effects.

      Exchange control and other restrictions are becoming increasingly important to tax planners. In Australia the Foreign Takeovers Act and the Exchange Control Regulations are of particular significance.

      Tax planning based on treaties may be short-lived: tax clearance and other procedures are in many cases pre-requisites to operations overseas.

      Marshall Langer

      The US Revenue in some recent cases have obtained information from the client in order to prosecute his attorney.

      The BVI/US double tax treaty is based on the old (1945) UK/US treaty. A company incorporated in the BVI is a `BVI corporation’. A BVI resident company suffers a 15% withholding tax on its US dividends and takes full credit against its liability to BVI tax (at 15%), so that no BVI tax is in fact payable. No further BVI tax is payable on the dividend declared by the BVI company. Eurobonds, royalties, US real estate investment and insurance business may utilise a BVI company.

      Anthony Murty

      Costs have risen. The Bahamas Companies Registry has lost a good deal of business to that of the Turks & Caicos Islands, even in cases where the actual management remains in Nassau.

      The use of an independent stepping stone can be cheaper than the incorporation of a separate company for each client.

      Michael Edwardes-Ker

      There is more than one way of looking at a problem; indeed there may be more than one way of looking at past fact.

      Cyprus has extensive legislation for no-tax shipping companies, and 6 treaties; a branch and a partnership can be set up on a no-tax basis; the authorities are flexible.

  • Developments in the Tax Laws of SwitzerlandKamen Troller & Richard Pease
    • Kamen Troller

      The present proposals envisage a Federal law requiring the cantons to harmonise their tax laws. It may be 8 or 10 or even more years before this can be achieved. The `lump sum’ treatment may be abolished: it arose as a way to tax refugees of World War I. Everything is becoming more difficult in Switzerland: the days of the re-invoicing or commission companies are numbered.

      Richard Pease

      The first issue to be voted on at the referendum is a double issue: the introduction of VAT and the raising of the thresholds and rates of federal tax.

      The second issue is that of harmonisation. The present draft provides for the continuance of the holding company privilege, and for exemption related to foreign `qualifying income’ -which will include dividends, interest and royalties, but probably not sales income*. (*The referendum was held on 12 June 1977 – VAT rejected but harmonisation approved.)

      There are three new tax treaties, not yet ratified. In the treaty with Canada, a Swiss Partnership is treated as a resident of Switzerland.

      The right of Canada to impose its branch profits tax does not apply to profits resulting from activities outside Canada; these profits do not suffer tax in Switzerland.

      There is a projected treaty with the UK, and an existing treaty with Singapore. A treaty with Italy awaits ratification: it incorporates anti-avoidance provisions.

  • Doing Business “in and with” AustraliaGerard Horton, Harvey McGregor & Marshall Langer
    • Gerard Horton

      Tax in Australia is levied by reference to what the legislation generally calls `assessable income’, but sometimes calls `profits’. There are also provisions taxing certain capital gains.

      A company is resident in Australia if it is incorporated there, or controlled by resident shareholders or (probably) if it is managed and controlled there. There are no provisions preventing changes of control or residence of companies. The existence of a permanent establishment in Australia may give rise to Australian tax on interest or royalty payment and on manufacturing profits of connected enterprises.

      The general rate of withholding tax on dividends is 30%; the normal rates under double tax agreements is 15%. `Primary tax’ on company profits is 42%, and the overall rate can therefore be as much as 80%. This has led to the use of trading trusts: accumulated income is taxed at 50% or the highest personal rate (whichever is greater). There are certain drafting problems, and trusts involve stamp duty when established; the trusts have advantages as regards carry-forward of losses and in avoidance of the application of s.260 (the `anti-avoidance’ section).

      Partnerships are not taxed as such; the tax is levied on the income of the partners, but partnerships nevertheless offer a number of tax planning possibilities.

      When doing business in Australia, one should always avoid direct transactions with tax haven entities. Deductions by way of interest or royalties may be allowed. Interest to non-residents is generally taxed by way of a 10% withholding tax; certain charitable and other funds are exempt. Royalties are subject to ordinary income tax; tax treaties limit

      this to 10%. Many royalties are treated as having an Australian source: the effect of these provisions may often be avoided by the use of an additional company. Sections 38-43 and 136 (and proposed new provisions) are designed to prevent profit-shifting, by inter-company pricing: The provisions may sometimes be circumvented by use of a double tax treaty. Transactions involving invoicing-on may need Reserve Bank approval.

      Those doing business in Australia must also have regard to the Banking (Foreign Exchange) Act, the Foreign Takeovers Act and the Financial Corporation Act.

      Harvey McGregor

      The UK rule is a simple one: a non-resident trading with (as opposed to trading in) the UK, is not subject to UK tax. Mere purchase in the UK cannot be trading in the UK; as to selling, the early `champagne case’ (Grainger v. Gough) decided that, to solicit orders in the UK does not constitute trading in the UK, if the contract is made outside the UK. But the fact that the contracts are made outside the UK is not conclusive: the question is, where are the profit-making activities truly carried out? The effect of this rule may, in the absence of a permanent establishment in the UK, be nullified by a double tax agreement.

      Marshall Langer

      The test of `mind and management’ is not relevant in the US: companies incorporated outside the US are generally taxed on US source income. Sections 861-864 of the Code set out the rules for determining where income has its source. The place of contract is not material: the place of passage of title is. The rules were tightened up in 1966: foreign source income `effectively connected’ with a business carried on in the US – eg royalties, financing or banking income and sales of inventory property – became liable to US tax. Some of the double tax agreements – that with the Netherlands Antilles, for example – provide some useful exceptions to this rule.

  • International Tax Planning and the Pharmaceutical IndustryAnthony Murty, Michael Edwardes-Ker, Ronald Edwards & Kamen Troller
    • Anthony Murty

      There is a distinction between `market value’ and `arm’s length price’ in cases where the supplier has a monopoly position.

      The `bulk chemical’ is the active ingredient in a pill: traditionally, pharmaceutical companies have located the production of the bulk chemical, as well as the thought, design and research, in a low-tax area, and charged their operations in high tax territories for the use of trademarks, know-how and management expertise.

      Use of royalties requires careful consideration of the source of the royalty: it is an areas where different countries have different rules. Double tax relief may be restricted in cases where there is a `special relationship’ between the parties – eg under a number of Irish treaties.

      Many such problems may be solved by the use of an independent `stepping stone’. Where a patent has been developed in Ireland, there is an express exemption from Irish tax, under their 1973 Finance Act, on the royalties and other income derived from it; no relief under the US/Eire treaty is given where this exemption applies. In an appropriate case, an independent Irish company may be used to develop the invention and subsequently sell the Irish patent to a tax haven vehicle.

      Michael Edwardes-Ker

      Published information shows (i) pharmaceutical companies incur massive research costs (ii) raw materials are cheap, (iii) government pressure on prices of existing drugs increases, (iv) prices of new drugs must go up and (v) a large added value is possible in tax havens. Subpart F in the US does not normally hit the pharmaceutical industry, because the process can be brought within the category of `manufacture’.

      The UK Revenue takes the view that a transfer of a patent is a transfer of a business within s.482. The section does not affect new business; Treasury consent may often be obtained for joint ventures with balance of payments advantages.

      Puerto Rico offers 10 to 30 years’ tax holiday; this is an advantageous location where the company is a US corporation. Ireland is also very popular with pharmaceutical companies. West Berlin offers reduced corporation tax, finance and VAT advantages. In the Panama free zone, assembly operations may be conducted at a very low tax rate. `Pioneer relief` is given in Singapore for 5 to 15 years.

      In the US, the recent regulations under section 861 provide for allocation of receipts and expenditure between domestic and foreign operations.

      There is a `lack of symmetry’ in – eg UK tax: the ale of a patent is treated as income spread over 6 years, but the purchaser must write off over 17 years (or the life of the patent). All situations where the payer gets no deduction but the payee is taxed, must be avoided: the converse will of course be advantageous.

      It may pay to associate royalties with a permanent establishment, so that they are treated as business income: a 50% tax on the net profit may be lower than a 25% withholding tax on a gross royalty.

      Ronald Edwards

      The `arm’s length’ provisions in each country have the same aim. In the UK and Canada, the attack is on particular transactions; in the US and Germany, the tax authorities concentrate on profits; in Switzerland, Italy and the Netherlands, the Revenue rely on general provisions to achieve this aim. Since 1972 there has been an increasing number of laws in this field – notably in Germany, France, the UK and the US. One effect of re-allocating expenses to foreign companies is to reduce the amount of available tax credit. A side-effect in the US is to encourage companies to develop sources of low taxed income to maximise the available tax credits.

      Competition between rival taxing jurisdictions can create economic double taxation. In France and Belgium, where a tax haven is involved in a transaction, the tax authorities require the taxpayer to justify the prices charged. An allocation under s.482 in the US effectively moves the burden of proof on to the taxpayer.

      As a practical matter, a taxpayer should keep full record and generally be prepared to substantiate the prices charged. The mutual agreement provisions of double tax agreements have not proved very valuable to taxpayers.

      The moves favourable to taxpayers have occurred. First, there is the proposed addition of the new paragraph 2 of Article 9 of the OECD model (to which Switzerland and Japan have objected); this is not a mere `best endeavours’ provision. Secondly, the European Commission has proposed a directive which would require governments to eliminate double taxation within the Community, by a meeting between the tax authorities – and, if that fails -by the establishment of a commission with independent members.

      Kamen Troller

      Specialised companies are required for obtaining approval of pharmaceutical products by Health Authorities: they may be sited in low tax countries and charge fees for their services. Similarly, charges may be made for the provision of representative and sales offices.

      There are a number of non-problems in this area. A trademark can only be owned by a person carrying on the relevant business. The title to a patent is protected like a trademark only on a country-by-country basis (except for some new developments which try to make one unique patent for several countries together). An invention must be new in order to be patentable. It is most important that countries from which one wants to file a patent application are members of the Paris Convention which allows one year for registration during which time the invention is deemed to be new. The Cayman Islands, like most tax haven countries , are not a party to the Paris Convention. The Bahamas, Liechtenstein, Netherlands Antilles and Cyprus are. It is also important to see that a proposed transaction does not offend any anti-trust or similar law.

      A non-US person may sell a patent to a US purchaser without suffering any withholding tax on the proceeds of sale.

  • Present Trends in Double Tax AgreementsHarvey McGregor & Marshall Langer (updated 1998)
    • Harvey McGregor

      U.K. double tax agreements are already numerous, and the network of treaties is currently being extended in Asia, North Africa, Eastern Europe and South America. There are two styles of treaty – pre and post OECD model: 1966 is the dividing line for U.K. treaties. The U.K. practice today is to base treaties on the OECD model; the current trend can be seen from the treaties signed from 1974 on – viz. those with Cyprus, Indonesia, Sudan, Roumania, Fiji, the United States and the Philippines.

      Double taxation arises because of the competing claims of the tax authorities of a person’s country of residence (nationality in the U.S.) and those of the source of income. Generally, the country of source gives way to the country of residence; income from land and income from government service give rise to exceptions to this rule, tax in such cases being levied in the country of source and the country of residence giving credit for the source country’s tax. The OECD model provides for resolution of conflicting residence status: this is Article 4. A provision of this kind will undoubtedly feature in future U.K. agreements. Resolution of conflicts relating to source of income is much less common, but Article 11 provides – broadly – that its source is the country of the payer.

      Article 6 declares that profits from land may be taxed where land is situated: this ensures that credit will be given in the country of residence. Articles 7 to 9 deal with business profits: these are completely exempt, in the absence of a permanent establishment, from tax in the country of source. Article 10 deals with dividends. The OECD model has no separate Article relating to holding companies corresponding to Article 16 of the U.S. model. In the U.K. treaties, the normal foreign withholding tax for dividends is 15%, which is reduced to 5% for a direct investment, but more elaborate provisions are needed at the U.K. end to deal with the problems presented by the tax credit system now adopted in the U.K. All U.K. agreements with European countries have an interest article, generally Article 11. Interest is exempt under the OECD model and under the U.K./U.S. treaty, but the trend is towards a partial exemption only. The same is true of royalties. Independent services are exempted under Article 14 – in the absence of a `fixed base’ – but the U.S. model has a 183-day limitation similar to that appearing in all the Articles dealing with dependent services (generally Article 15). The U.K. agreements give exemption to visiting teachers; this is not provided for in the OECD model. Under the OECD model, directors’ fees are taxable in the country of residence of the company: this is not a feature of a number of U.K. treaties. In the context particularly of the use of the `stepping stone’ referred to in previous talks, it should be noted that relief under recent agreements is only given to beneficial owners, and that some treaties deny relief in the field of interest and royalties if the transaction is entered into to obtain the advantage of the treaty article and not for commercial purposes.

      Marshall Langer

      The older the treaty, the more advantageous it is to the taxpayer. The new US model treaty was released on 18 May 1976*. (*A revised model was published on 17 May, 1977.) The US has some 35 treaties; five are pending; at least 25 are in course of negotiation. The model does not provide for imputation tax, nor for tax sparing. There are almost no US treaties with Latin America, since the Senate has always refused to approve tax sparing (except with Puerto Rico). Provisions relating to State taxes may be introduced into the model if the UK/US treaty is ratified in its present form.

      The old UK/US treaty still applies to many UK Colonies and ex-Colonies; this is not affected by the new treaty.

      The US model treats as a resident – in addition to actual residents – a US citizen (wherever resident), as well as former citizens who have abandoned their citizenship for tax avoidance purposes. A former citizen may still take advantage of old treaties – eg that with Canada. Article 4(6) would deny the benefit of the treaty to those who are taxed on the remittance basis.

      The net election under Article 6 is unfavourable to taxpayers.

      No treaty already signed has followed the model, but those under negotiation are based on the model. The model includes film royalties in the business profits article. The dividends article in the older treaties provides exemption from second dividend tax; the new model offers no such exemption – Article 10, para.5(c). The interest and royalty articles provide for total exemption from withholding taxes.

      The effect of Article 16 – which denies treaty relief to companies owned outside the other country – will, if it is ever adopted, be far-reaching. Article 26 provides for information exchange relating to all taxes – not merely income tax.

  • Retirement in Another CountryMilton Grundy, Ronald Edwards, Gerard Horton, Marshall Langer, Kamen Troller & Michael Edwardes-Ker
    • Milton Grundy

      Individuals resident in the UK, who have and retain a domicil outside the UK, enjoy a particularly advantageous tax regime. It is important for a person intending to take advantage of this regime to maintain the `outward and visible signs’ of his foreign domicil -the grave space, the will, the associations and other links with the community in the country of his domicile, and the citizenship or other legal right to carry into effect his intention ultimately to return to that country. Much may turn also on the kind of statements he makes to the press, the Home Office and, of course, the Revenue.

      A non-domiciled individual taxpayer is subject to UK tax on his income and capital gains only to the extent that they are remitted to the UK; by remitting his capital to the UK and accumulating his income abroad, he can live for many years before he becomes liable to income tax, although capital gains tax presents rather more difficult problems, because of the difficulties surrounding the concept of `remittance’ of a capital gain.

      The non-UK assets of a non-domiciled individual do not attract capital transfer tax, until the time comes when he has resided in the UK for 17 our of the previous 20 years. Although a resident will become liable for UK exchange control, an individual with foreign nationality who is designated resident for these purposes will be exempt from exchange control as regards all the foreign assets he then has.

      Ronald Edwards

      Monte Carlo is accessible and agreeable. It has no personal income tax. But it has no double tax agreement, and the Monaco resident may therefore transfer a holding to a foreign holding company in order to take advantage of double tax agreements with that country, or he may invest in deposits or bonds not subject to withholding tax. There may be an estate tax liability on local assets.

      Monaco is part of France for exchange control, but a resident foreigner is not required to report his existing assets. Monaco enjoys common market advantages for customs duties, but it is not part of the common market.

      Application for residence is first made to the French authorities; a place of abode in Monaco is required at this stage. Armed with a French visa, an intending resident must satisfy the Monegasque authorities that he really intends to live there, if he is to get his permit.

      Gerard Horton

      The individual should stop off on his way to Australia to do his tax duty and exchange control planning. This `cleansing process’ may involve the creation of trusts, and here one has to remember that different rules apply in different states, and an Australia-wide trust tends to be a complicated document.

      There are three interesting areas as regards income tax:-

      1. Section 23(q) exempts foreign-source income (not dividends) which is taxed at its source. Exemption does not apply to interest and royalty income protected by certain double tax agreements. It may be possible to interpose a vehicle in a low tax country to give the interest or royalty a low tax at source. The source is ascertained in accordance with Australian rules.

      2. Trustees are not liable to tax on non-Australian income. Whether a beneficiary is liable on a distribution out of accumulated income, is not clear.

      3. Section 26(d) provides for relief on retirement benefit. Australian death and estate taxes are still voluntary taxes, and, moreover, dispositions can be made by an individual before he acquires a domicil or residence in some part of Australia.

      Marshall Langer

      US estate tax legislation refers to `residence’ but in that context (though not in the income tax legislation) it has the same meaning as `domicile’. The non-US property of non-domiciliaries is not liable to US estate tax.

      Aliens may in some circumstances remain non-resident for US income tax purposes, even though they spend considerable period in the US.

      Kamen Troller

      Switzerland is an expensive country. A permis de sejour is required. This can generally only be obtained if the foreigner is over 60 years old. A number of permits is allocated to each canton. In many parts of Switzerland, a foreigner must reside 5 years before he can buy a house. Switzerland has the usual income and capital and consumption taxes, which are not noticeably lower than those in the surrounding countries. However, a newcomer can agree with the tax authorities a lump sum based on estimated living expenses.

      Michael Edwardes-Ker

      France has acquired the reputation that those retiring there pay little tax. But Law 76-1234 has introduced a strict regime. A person has a `fiscal domicile’ in France if

      a) his base (foyer) or his permanent residence is in France, or

      b) he exercises a professional activity (not a secondary activity in France, or

      c) he has his centre of economic interests in France.

      The French tax treatment of US citizens is under negotiation. UK domiciled individuals can acquire an immediate domicil in France under the UK/France treaty; but they must file a French tax return. There are provisions whereby taxable income may be estimated in accordance with exterior signs of wealth. Capital gains tax seriously affects only short-term transactions in property and works of art. Gift and inheritance taxes also apply.

      An immigrant becomes a resident for exchange control after two years – but this breathing space is of little practical importance now in view of the provisions of the new law.

  • Some Aspects of German Tax of Interest to International Tax PlannersWalter Lappann
    • The German law has provisions similar to those found in s.482 in the US; profits allocated to a German company under these provisions suffer tax at 112%, and such adjustment may be made may years after the tax year – so that, for example, a US corporation may lose the opportunity to obtain credit for the tax (a situation which promises to be eased by double tax treaty provisions).

      Exchange control does not exist in Germany. Non-residents and foreigners may freely form companies in Germany (though there are strict conditions to be complied with in the case of banks and insurance companies).

      There is an old double tax treaty with Italy, and many in the newer (and tougher) form.

      Companies pay a trade tax at 10-15% to the municipality where they do business; it is deductible for corporate income tax – which is chargeable (since 1st January 1977) at the rate of 56% on retained profits or 26% for distributed profits (which is credited in computing a resident shareholder’s tax).

  • The Far EastGerard Horton, Stephen Goh & Graham Hill
    • Gerard Horton

      Hong Kong taxes are )apart from Estate Duty_ simple: only profits tax and interest tax are relevant to this talk. The rate is 17% for companies, 15% for individuals. Tax is levied only on income whose source is in Hong Kong. Where a series of operations is involved, it may be dissected, but otherwise the source is where the operations take place in which the profits in substance arise. Income from a trade, business or profession in Hong Kong, has a Hong Kong source. There are also certain items whose source is deemed to be Hong Kong – viz. income from the use of film, tapes or recordings, or from the use of patents, copyrights or know-how: in these cases, where the income is not otherwise chargeable to profits tax, tax is levied on a notional profit equal to 10% of the gross receipts. Income from rent of moveable property in Hong Kong is also deemed to have a Hong Kong source, but only the net profit is chargeable. There are provisions to prevent profit-shifting and for collection of tax from agents of non-resident.

      Interest tax comes under another part of the Ordinance: it is not always possible to set off losses incurred under one part against profits taxable under another. The rate is 15%. Interest paid by and to a licensed bank is exempt from interest tax: in the hands of the bank it is charged to profits tax. Tax is withheld by the payer. Borrowing through Hong Kong is dangerous: interest paid is not always deductible against interest received. The anti-avoidance provisions (which apply to all kinds of tax) are rather simple.

      Losses may be carried forward for profits tax purposes, despite any discontinuity of shareholding.

      Stamp duties are significant – notably on exchange contract cancellation notes, on bills of exchange (even those payable on demand) and on telegraphic transfers abroad.

      Hong Kong has complex estate duty provisions. The rate is only 18%, but chains of companies can effectively increase this rate, and special provision apply to `controlled’ companies.

      A recent government report indicates that Hong Kong will remain a low-tax areas, with a territorial basis.

      A use for the New Hebrides is for carrying on business by companies incorporated elsewhere; this can also be done in Nauru – which has the special merit that it has no stamp duty. Nauru also has `disappearing’ shares and certain other peculiar features attractive from an exchange control point of view.

      Stephen Goh

      The tax laws in Malaysia are comparatively simple. Income tax and estate duty are both modelled on the UK systems. There are several other taxes – eg special tax on property transactions, a petroleum income tax and a tin and timber profits tax.

      Malaysian income tax is levied on a territorial basis – ie on income arising in or accruing in Malaysia and also on income arising elsewhere which is remitted to Malaysia. A company pays tax on its profits, and no further tax arises when this profit is distributed by way of dividend; but if the distribution exceeds the taxable profits, tax is charged on the excess.

      There is a 15% withholding tax on interest; but non-residents are exempt on interest on certain loans. There is pioneer relief, which is carried through the dividends, and there are various tax incentives.

      Exchange and borrowing control exist, but are liberal. There are two tax planning possibilities in Malaysia: (i) the use of non-resident companies incorporated there whose income does not arise in or accrue in Malaysia, and (ii) taking advantage of the 13 double tax agreements to which Malaysia is a party. (Agreements with Australia and other countries are in course of negotiation.) In many cases, relief under a double tax agreement is only given if the foreign income is subject to Malaysian tax, but in some cases relief from foreign tax may be available under the treaty even though the income is free of Malaysian tax because of the territorial basis.

      Graham Hill

      Singapore is not a tax haven: taxes are levied at a substantial rate. The standard corporate rate is 40%; personal rates go up to 55%.

      Singapore has a network of double tax agreements. It has a strong, authoritarian government; the facilities are sophisticated and efficient; its time zone enables communication to be made both with London and with Sydney. The exchange control machinery still exists, but wide general consents have been given and express consents are almost always available.

      Tax arrived in Singapore in 1947: it was founded on the 1922 Colonial Office model draft. As in Malaysia, tax is levied on income from local sources, but foreign-source income is taxed only to the extent that it is remitted to Singapore.

      Tax at 40% is deducted on the declaration of a dividend. This is normally franked by the tax already paid on the income of the company: foreign income must be remitted for this purpose. There are anti-avoidance provisions. Changes in shareholding may deprive a company of its right to carry-forward losses. Stamp duty is significant.

      Much of the benefit of double tax agreements – with one significant exception, namely, Japan – is conditional on tax being paid in Singapore, and does not therefore extend to foreign dividends, interest or royalties not remitted to Singapore. There is no double tax agreement with the US: the Singapore government always wants a tax sparing provision in a double tax agreement. There is a withholding tax on interest payable to non-residents, but double tax agreements provide for a reduction to 10-15% in the rate of tax on interest.

  • The International Tax Planners Library
    • Marshall Langer drew particular attention to the following publications – the loose-leaf version of Harvard World Tax Series on Germany and the book in this series on Switzerland, the new HMSO booklets, the Cashiers of the International Fiscal Association, Tax News Service, Overseas Tax Developments, Intertax, Tax Notes, Cole’ Tax Aspects of Foreign Direct Investment in the US, Morrison’s Legal Regulation of Alien Land Ownership in the US, Diamond’s International Tax Treaties of All Nations, the Handbook on the US/German Tax Convention, African Tax Systems, the Arthur Andersen Pocket Guides, the Bibliography of How to Use Foreign Tax Havens in Tax Planning International, and Owen’s and Hovermeyer’s Bibliography.

  • The Middle EastWilliam Ballantyne, Nabil Al Nakib, A.M. Hegazy, Kamen Troller & Ronald Edwards
    • William Ballantyne

      Kuwait, Bahrain, Saudi Arabia, Oman, Quatar and the United Arab Emirates are all sovereign states. In Bahrain and Kuwait, legislation is at the present time made by the Council of Ministers and the Ruler. In saudi Arabia and Quatar, the legislative authority is the Ruler. In the UAE the legislative authority is the Federal, but tax laws are in practice still made by the Ruler in each Emirate. In Oman the supreme authority is the Sultan acting through his Council of Ministers.

      The origin of taxation in this area goes back to the 1950’s: taxation was substituted for royalties, so that the oil companies could obtain a tax credit at home. The 13 states have very similar taxation. The tax is applied to companies: there is no taxation on individuals. Tax is imposed by reference to trade or business carried on in the state concerned; losses are to be carried forward (quaere the position in Saudi Arabia); disputes are to be referred to arbitration.

      In Saudi Arabia, the law of 2nd November 1950 (as amended 14th May 1975) imposes income tax on income of companies; returns are required promptly; profits of supply contracts, carried out partly in Saudi Arabia and partly elsewhere, are apportioned. Taxes are collected, but do not apply to Saudi individuals nor to Saudi companies but foreign companies, and the foreign element in Saudi companies are liable to tax.

      The US Revenue accepted that tax levied in Bahrain on oil production only should be available for credit. For this reason there is no general income tax in Bahrain.

      In Quatar, tax is levied on companies only; it is usually enforced. In the UAE the tax jurisdiction is in practice reserved to each of the Emirates. In Abu Dhabi, the law dates from 1965: a corporation is only a taxable person if it carries on business in the Emirate (unless it is entitled to an exemption). Tax is not collected. Similar provisions exist in other Emirates, and in Oman, but, as always, every country’s laws must be looked at separately.

      Sharjah will shortly have a new company law, designed to attract offshore business.

      Tax exemptions may be granted, but they are only effective if they are granted by or under the authority of the legislative authority concerned. There is one tax trap: the belief that there is no tax.

      There are opportunities for tax haven activities in Bahrain and in Sharjah and the other Emirates. There are no double tax treaties (except the 1975 Convention, to which the UAE and Kuwait are parties), but credit for taxes paid in all these countries is given unilaterally in the UK and the US.

      Nabil Al Nakib

      Every company in Kuwait is of Kuwaiti nationality, and 51% of the shares must be owned by Kuwaiti nationals.

      Tax was introduced in 1955. A directive of 1956 limited its application to foreign companies. Despite the introduction of a corporations law, this directive has not been changed, and has the force of law. There has never been any income tax charge on individuals.

      A M Hegazy

      The Egyptian tax system has been adopted in Libya, Sudan and Syria. Egypt has passed through three states. Before the 1952 revolution, agriculture accounted for the bulk of the national income. In 1939, the income tax system was begun: there are schedular taxes on different types of income. In 1949, a progressive general income tax was introduced.

      After the revolution came agrarian reform, and Egyptianisation, and a socialist policy based on a mixed economy developed an important public sector: rates of taxes were increased and reforms in collection instituted. As a result, there are national security and defence taxes of about 23%, which are added to the basic income tax of 17%. A kind of VAT was also introduced.

      The third, and present stage, is that of the `open door’ policy: it involves foreign investment and encouragement of the private sector. This is embodied in the Arab and Foreign Investment Law of 1974. Projects could qualify for a 5-year tax holiday; some projects could qualify for an 8-year holiday. There is now a move to extend these in certain cases to 10 to 15 years.

      The free zones are of two kinds. There are public free zones, namely the cities of Alexandria and Port Said. There are also private zones – one for each project. The projects are free of all tax, but pay a levy of 1% on goods entering or leaving the zone, or of 3% of the added value. Salaries of foreign employees are exempt from the general income tax and pay only the schedular tax – up to a maximum rate of 26%.

      Egypt has 14 double tax agreements signed or initialled – mostly in OECD form. There are at least 32 banking and financial institutions with presences in Egypt.

      Kamen Troller

      Although no tax is levied on individuals, the territories around the Gulf are not suitable for retirement. They are not much used as tax havens because they are very expensive, and because the establishment of any structure is also very complicated and takes a long time. Nevertheless Bahrain and Sharjah are beginning to attract some offshore business.

      Ronald Edwards

      Iran is not an Arab country. Relative to its neighbours, it is comparatively developed. The policy of the Shah is to industrialise the country before the oil runs out. There are many problems in doing business in Iran, apart from tax problems. The maximum equity participation of foreign holders is nowadays generally limited to 15 to 25%; the law requires a measure of employee participation.

      Goods or services may be imported into Iran without liability to tax. Companies operating in Iran are liable to significant tax – a lower rate being charged on retained profits than on distributed profits.

      There are many incentives. There are double tax agreements with France and Germany: a French or German company might be used as a stepping stone or for establishing a local branch. Certain industries – construction companies in particular- can arrange to be taxed on a `deemed income’ basis.

      The problem of corruption has diminished. But government revenue requirements are high. There can be problems in getting proper expenses or losses allowed.

      The `deemed income’ basis can be a trap: the books must always show a much lower level of profits, otherwise tax may be based on the book profits instead.

      Taxes on interest and royalties can be high; dividend taxes may be reduced by splitting the shareholding; taxes on profits may be reduced by splitting it among companies.

      All expatriate employees require work visas: such employees are fully taxable (at rates up to 55%) on salaries and fringe benefits in respect of services in Iran. Salary-splitting is risky: the law imposes tax on the total salary.

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