Governments and many people are nowadays hostile to tax planning. There is a general feeling that any kind of tax advice is improper. But the criminalisation of legal advice is an odd concept: it could never apply to areas of the law apart from tax. The tax code is complex and has grown up over many years. In the UK, the Criminal Finances Act 2017 punishes failure to prevent tax evasion. The mechanism of the legislation may be questioned, but the purpose is generally approved. The firm is prosecuted if an individual facilitates tax evasion and will require internal processes to prevent this. Professional services firms are particularly affected by this new legislation.
The news from London is the inheritance tax liability of property and changes in the taxation of non-domiciled individuals. This has been accompanied by a huge growth in the volume of tax legislation. Inheritance tax now “looks through” non-UK companies, though earlier capital gains tax and the annual tax on enveloped dwellings have not been repealed. The non-domiciled regime is little understood by the media, but is still attractive to intending residents, though there are nowadays advantages for new residents on offer in other countries.
The deferral regime is effectively obliterated: there is now a minimal tax applicable to foreign income. The 37% corporation tax is reduced to 21%. The retained income of foreign subsidiaries is taxed at 10.5%, but this does not apply to foreign companies owned by individuals. It is expected that the present regime would stay in place under Trump’s successor, though the rate may be increased.
The US is surprisingly uninterested in non-residents aliens, but cash purchases of real estate in certain locations are reportable. Non-US income of partnerships and LLCs is not reportable if owned by non-residents aliens. The US bank operating a trust account focuses its KYC on the trustee.
The notion of single taxation has been used as a theoretical underpinning of the BEPS project, but it is questionable whether all of the OECD BEPS proposals achieve a theoretically sound result. For example, one of the proposals in the Action 2 Final Report on hybrids is that a company making a hybrid payment should not be allowed to deduct it if the payment is not taxed in the hands of the recipient company. This solution leads to tax being imposed on the wrong person, by the wrong state and on the gross payment rather than any measurement of net profit, suggesting that the BEPS outcomes are more concerned with patching up the current international order in order to deal with loopholes than with a principled consideration of the current system.
In a wider context, including the taxation of individuals, applying the notion of single taxation reveals issues that can be characterised as system flaws in the current international tax order. Income may be subject to tax twice because, for example: two states both attribute the income to a person they consider to be resident; because one person is taxed as resident on the same income in two states but at different times; or because two states regard themselves as the geographical source of the income. The question here is whether the notion of single taxation should be taken as a general principle requiring states to coordinate their tax systems.
Tax is only one of the factors in choosing a new destination to live. Recently, countries have been creating incentives for new residents. Residence and/or citizenship may be on offer. As regards tax, Switzerland and Italy have a lump sum regimes. There may be a territorial basis, a remittance base, a beneficial regime for a limited time, or low tax or zero tax. Typically, a person moving may be an entrepreneur, a global executive or a retiree.
Many cantons in Switzerland still offer the forfait. Italy has a new lump sum regime, with a 15-year duration. Singapore and Hong Kong have British-derived territorial bases. The UK, Ireland and Malta have similar (but not identical) remittance-based systems. Some countries offer a favourable regime for a limited time – Portugal (10 years), France (6 years), Spain (6 years), Israel (10 years), Cyprus (10 years), Australia (for the duration of their stay on a short-term visa) Austria (10 years) and New Zealand (4 years). Zero-tax countries include Dubai, Monaco and the Bahamas. There are always questions about the durability of these advantages.
The Baltic States are members of EU. Estonia and Latvia are OECD members; Lithuania joins this year. Estonia is well-known to tax planners. Latvia is developing a share of tax planning business. Estonia does not tax undistributed company profits; its judicial system is robust. Latvia had a classic system, imposing 15% on corporate profits and 10% on distributions to natural persons, but now tax (at 20%) levied only on dividends is under consideration. Lithuania encourages establishments of small banks.
In Estonia, distributed profits are taxed at 20%. There is no CAP rule, and the rate of tax on regular distributions is reduced to 14%. Estonia and Latvia impose tax on hidden profit distributions, but dividends from other EU countries enjoy a participation exemption. Estonia has a good network of tax treaties – eg with the UAE, so that Estonian dividends can be distributed free of tax. Significant tax savings can be achieved by various schemes involving transitions between Estonian, Latvian and Lithuanian companies. There are planning possibilities related to transfer pricing. Substance is required in every case.
The new rules are intended to give effect to the rights to privacy conferred by the EU charter. They come into force in May. The earlier Directive of 1995 required some updating. The new regime has substantial penalties for non-compliance. The GDPR requires to all “establishments” in the EU it applies to “processing” of personal data: much data will be disclosable – eg disclosure to beneficiaries of reasons for decisions. Anonymised data is not within the scope of the GDPR. The data controller has specific obligations. Data processors must retain records of data processing.
There are seven principles – (1) lawfulness, fairness and transparency, (2) purpose limitation, (3) data minimisation, (4) accuracy, (5) storage limitation, (6) data security and (7) accountability. Data subjects have rights. Sanctions are wide-ranging, including substantial fines. Conflict with exchange of information under treaties and other legislation is foreseen. Practical steps need to be taken before the implementation in May.
Aggressive tax planning is the top target of many fiscal authorities. HMRC take the view that avoidance and evasion are the much same thing, but there is a difference – in the state of mind of the taxpayer. From the perspective of tax authorities, tax planning must stay within the intention of the law. Tax fraud involves an element of concealment. Sanctions are audits, penalties, allegation of criminality. Challenge involves intensive questioning, demands to see legal advice, request for interview, use of bulk information – e.g. from CRS. In the UK, penalties are not applied in avoidance cases, if taxpayers follow personalised legal advice. Bigger penalties are imposed where there is an offshore element, or where information in the tax return is deliberately wrong. There are new penalties for enablers of “abusive” tax avoidance or deliberate or careless offshore non-compliance. Companies are liable for the acts of employees.
The OECD’s BEPS programme’s proposed rules for punishing aggressive avoidance have now been adopted by the EU – following the pattern of the UK’s DOTAS scheme, and including CRS avoidance. Unsuccessful tax avoidance nowadays runs the risk of criminal prosecution, if the scheme lacked credibility. There is a public perception that anything offshore is improper. The tax authority in the UK is focussing on purpose: “deliberate” and “careless” have replaced “fraudulent” as the criteria for criminal liability. HMRC is pushing an aggressive interpretation of ‘deliberate conduct’ in avoidance cases, especially where the taxpayer fails a substance or ‘purpose’ test.
In the UK, a bill proposes new taxes on imports and export and extensions relating to VAT and excise duty, and introduces power to enter into a customs union with the Crown Dependencies. It is an enabling law, facilitating a tax regime which will have, to a large extent, to be established by secondary legislation. The EU is also preparing for the withdrawal of the UK and the establishment of a “level playing field”, including the EU’s concept of “good tax governance” – which may not be compatible with the concept of “the European Singapore” which many Brexiteers support.
The problem of the Irish border is acute, and will not be solved by a customs union. The EU has a list of “non-cooperative” jurisdictions: the real purpose of the EU is a level playing field throughout the world. In the Panayi case, the ECJ protected the integrity of the trust, treating it as entitled to freedom of establishment within the single market. The UK’s EU bill provides for EU Law to be retained to some extend after Brexit. A general principle of EU Law recently reaffirmed is that you may not abuse your right: a transaction must have some purpose other than the avoidance of tax and be substantial. Member States and also abuse their tax systems, as is shown the state aid cases.