Those going to live in another country face very similar problems, whether they are “tax exiles” or not.
Residence, domicile, citizenship, marital status, source of income, situs of assets, timing, status of beneficiaries – these are factors affecting liability to tax, often in unexpected ways.
The intending exile may wish to acquire a second citizenship. Many countries permit a second citizenship, but require the holder of two passports to use his original passport when entering or leaving the original country.
Candidates for consideration as destination for the exile include the United Kingdom, the Channel Islands, the Isle of Man, Ireland, Switzerland and Gibraltar. Monaco, Malta and Cyprus do not offer citizenship, but can be attractive for residence for those who have citizenship elsewhere. The Cape Verde Islands will offer citizenship to an investor of a modest amount; most other countries presently require a visa. Israel is interesting for those of the Jewish faith.
The United States is, from a tax point of view, most unattractive. Canada is more attractive for new residents, but on the whole unattractive long-term. The Bahamas, Bermuda and Cayman are zero-tax; Costa Rica has a territorial system; the Netherlands Antilles has a programme attractive to Dutch residents; St. Kitts & Nevis offers rapid citizenship to investors in government paper and has no personal income tax or inheritance tax. Peru now has a programme offering citizenship to new residents at a modest fee. Uruguay offers passports without citizenship; this may present problems in filling in immigration forms that are required by many countries.
The St. Kitts and Nevis citizenship program has become much more expensive; and the Cape Verde, Peru and Uruguay programs have been discontinued. However, it is now possible to obtain citizenship and a passport in British Commonwealth countries such as Dominica and Grenada.
The Taiwan economic growth is impressive: it supplies China with capital and is forming links with China. Taiwan, Hong Kong and Southern China form an important economic area with very rapid growth.
Hong Kong has lost some 90% of its manufacturing mostly to China and has become a service centre. The same is happening to Shenzhen. China is becoming a market economy: the trend is accelerating. Luxury products are finding a market there. Office rents are high. By contrast, the state-owned heavy industry is old-fashioned and inefficient; but there are ambitious plans for reconstruction and some privatisation. Marxist principles have been removed from the constitution. There are two stock exchanges.
On 1st July 1997 the sovereignty of Hong Kong moves to China. The Basic Law has its ambiguities, but provides for a continuation of a capitalist system for 50 years. Nevertheless, control of the territory will be in the hands of Beijing. An exciting future is presently clouded by misunderstandings between the Governor and the Chinese government. Leading citizens in Hong Kong are making accommodation with China: Chinese history has few martyrs. Hong Kong will become a Chinese city.
The Eastern provinces boom. Some Western areas are left behind. Strains have developed; inflation is serious, and a property crash may be foreseen. Corruption is widespread. Deng is doing now what he attempted in the 1950’s. But he is not all-powerful: the political establishment in China is extremely complex. On his death, there may be a shift of power to the economically successful provinces; but no disintegration of the country itself is in prospect.
Prominent Hong Kong families are under some pressure to invest in China. No confiscation of assets is to be foreseen, but Hong Kong may suffer some form of exchange control and increased taxation. A VAT or sales tax would not be acceptable. The Basic Law foresees a “low-tax” regime, but the tax base is dangerously small and government spending is increasing. An income or dividend tax is being talked about. If only for this reason, clients resident elsewhere should not use a Hong Kong-incorporated company.
Alternative jurisdictions for central management and control are not numerous. Labuan is embryonic. The Caribbean is distant. Procedures need to be put in place to preserve independence, safety and confidentiality of a client’s assets in a way that would enable central management and control to move out of Hong Kong with ease should this ever be necessary.
Labuan and its nearby islands cover 92 square miles. It is a freeport. It is not subject to earthquakes and its harbour is safe from typhoons. It has the facilities required for an offshore financial centre.
On 1st October 1990, the OFC was announced. It now has 21 licensed offshore banks and over 200 other offshore companies. Telecommunications and other infrastructure facilities have been upgraded.
An offshore company pays 3% tax or alternatively a flat 20,000 Ringgit. There is no stamp duty and there are incentives. Under normal circumstances, incorporations can be achieved in 3 days. Applications for an offshore bank or insurance company will be processed in 2-4 weeks.
An offshore trust may be established in Labuan. The degree of confidentiality is high, but government is determined to ensure that the door will be shut to scandal, money-laundering and fraud.
The Speaker first gave a profile of Mauritius and an overview of the Mauritian Economy.
There is a Central Bank and 13 commercial banks; the insurance sector is well-established; there are many UK-qualified lawyers and accountants and a stock exchange. There is no control on foreign exchange. Several factors have led to impressive economic growth.
To diversify the economy and to integrate the local with the world economy, the offshore business sector and freeport facilities have been established. The region offers opportunities; Mauritius is a member of the African Preferential Trade Agreement. The country has numerous trade treaties and has tax treaties with France, UK, Germany, India, Italy, Zimbabwe, Malaysia, Sweden and South Africa.
The Companies Act and Offshore Trust Act are modelled on English law. Offshore entities can opt to pay tax at 0-35%. Profits may be freely repatriated. Shares in offshore companies are free of estate duty and transfers free of stamp duty. Government keeps a sharp eye on the country’s competitiveness in this area; the development of the offshore business is an extension of the country’s development of its sugar, textile and tourist industries.
Mauritius intends to develop as a quality offshore centre; regulation is strict and government is interested not in numbers but in quality. The Mauritius Offshore Business Activities Authority (“MOBAA”) is a “one-stop shop” for clients of the offshore industry. Mauritius is especially well-situated to function as an investment gateway to Africa.
Legislative proposals are under consideration, to provide for zero-tax International Business Company and to amend the Income Tax Act to give further credit for foreign tax. The Free Port offers freeport facilities with no tax on profits.
Opportunities for offshore investment by Australian residents were substantially circumscribed by the 1990 and 1993 legislation. The non-resident trusts, the entities with no shares and the life policies considered at the ITPA meeting in Hong Kong now present few opportunities.
Structures which have not survived are:-
Non-resident discretionary trust – not effective.
Non-resident, non-discretionary trust (i.e. accumulating) – no attribution provided no transfer of property by Australian resident after a date in 1989; now caught.
“Converted” trust – discretionary converted into non-discretionary trust; now caught.
Acquired trust – i.e. acquisition of interests by Australian resident; effective before 1993; now caught.
Equity-linked life policy – effective then but no longer.
Testamentary trust – survived Div 6AAA and Pt XI; now governed by new provisions which are difficult to interpret; beneficiary may now be caught.
Entities not having a share capital – may still be structured so that no Australian has attributable income. It is undesirable to use an entity which has no juridical counterpart in Australia – the danger is that such an entity may be treated as a trust. A company limited by guarantee may be suitable for this purpose. There is attribution to a member; no Australian should be a member. Membership should be limited to unrelated individuals. There should be no power to pay dividends to members but gifts to non-members are permissible. A ‘principal’ may nominate persons [but not himself] for membership and retain power to determine when the company is to be wound up and the destination of its assets on a winding-up [but not so as to benefit himself] subject to the limited rights of members.
Structures which have survived are:
(i) phantom stock arrangements
(ii) the Australian trust – it is fiscally transparent, so that foreign income may flow to foreign beneficiaries without attracting Australian tax
(iii) the Australian partnership.
Singapore has probably the best infrastructure in the region, and for this reason alone is attractive as a base for regional operations, quite apart from its political stability and pleasant environment.
The economic outlook in Singapore has changed considerably in the last few years: the government has introduced incentives and changes in tax law to encourage the Singaporean export of capital and services to the newly developing countries in the region, and to those countries with a larger labour force than Singapore.
The result is that Singapore’s present tax regime makes it a much better base for regional operations than it was in the 1980’s, although it is by no means a tax haven.
Singapore has a territorial type of tax: a resident company is liable to tax on its income derived from Singapore plus whatever foreign source income it receives in Singapore from outside Singapore. A non-resident company is taxed only on Singapore income, with minor exceptions.
Consequently, the source of income is most important. There are no specific rules, however, and the determination of source would depend on relevant (mostly British and Commonwealth) case law. If the principles can be summed up briefly, the dictum that “the source of a given income is a practical, hard, matter of fact”, expresses it best. This depends on the totality of the facts, and upon the precise nature of the income.
Singapore has an imputation system of taxing dividends – the corporate tax is effectively passed to the shareholders pro rata by way of franking credits. To avoid these credits exceeding the corporate tax which reached the Singapore Revenue, Section 44 was enacted, so that if dividends were paid out of unfranked corporate income, a Section 44 charge was imposed.
Indirectly, Section 44 virtually precluded the use of Singapore as a base for foreign operations. If a resident company had foreign income, it would be taxed again in Singapore if received in Singapore. If it was not received in Singapore, it was not taxed, but if it was used to pay dividends it attracted a Section 44 charge, equivalent to the deemed tax on the net dividend grossed-up at the corporate tax rate.
Now, changes in the Section 44 legislation, including the introduction in 1993 of a unilateral foreign tax credit on foreign dividends (but not interest or royalties) have almost completely solved the Section 44 problems – especially as the foreign tax credit applies to the foreign underlying company tax where the recipient owns more than 25% of the shares of the company.
This opens the way for Singapore manufacturers to hive off labour intensive operations to neighbouring countries, for example. In addition, there is a long list of incentives for specific financial and other activities, which are taxed in Singapore at only 10% (eg offshore leasing and insurance), or are exempt (eg international shipping), or qualify for double tax deductions (eg expenses on the promotion of export services).
However, the incentives are very specific and very sharply focussed and must be applied for and approved (usually by the Economic Development Board) on a one-off basis.
In brief, Singapore has changed: it is now a good base of operations in the region – if they fit into one of the approved niches created by the tax incentive legislation – but it is at pains to avoid becoming a tax haven, in the generally accepted sense of the term, or a stepping stone for treaty shopping, despite its long list of tax
A New Zealand trust settled by a non-New Zealand resident can function as a “tax haven” entity as the trust will not be liable to tax in New Zealand on income earned outside New Zealand. Such a trust is classified as a “foreign trust” under New Zealand domestic law, and can be contrasted with an ordinary domestic trust (known as a “qualifying trust”) settled by a New Zealand resident. The third category of trust is a “non-qualifying trust” which is generally an offshore trust settled by a New Zealand resident.
New Zealand resident trustees of a “foreign trust” are not subject to New Zealand tax on non-New Zealand source income nor are non-New Zealand resident beneficiaries subject to tax on distribution of it.
One of the quirks of the legislation is that whilst the foreign trust is not subject to tax on non-New Zealand source income, if the trust has New Zealand trustees, then it will still be categorised as a New Zealand tax resident. This raises the interesting possibility of utilising New Zealand’s extensive range of double tax treaties to obtain treaty relief in respect of tax liabilities in other jurisdictions.
The definition of settlor for taxation purposes is very broad, and consequently care must be taken to ensure that no inadvertent settlements are made by a New Zealand resident upon the foreign trust, otherwise the trust may then become classified as a non-qualifying trust. The consequence of classification as a non-qualifying trust can be severe, as the trust may be exposed to taxation at higher than usual rates (45%, the usual rates being between 21.5% and 33%), and also capital gains which are not ordinarily taxable can be taxed at the 45% rate.
The New Zealand trust taxation regime also provides a tax planning opportunity for migrants who establish offshore trusts prior to taking up tax residency in New Zealand. As long as no further settlements are made upon the trust after residency, the trust can function as a tax deferral entity so that no tax is payable in New Zealand unless and until funds are drawn from the trust.
Malaysia has a network of tax treaties and does not have a reputation as a “tax haven”.
The attitude of Malaysian government is positive to use of Labuan and to use of operational headquarters provisions; the attitude to other forms of international tax planning appears to be broadly neutral. There is an anti-avoidance provision, which would be involved where there is no commercial basis to a transaction – a very rare occurrence.
Certain royalty and loan agreements require approval. Exchange controls affect large transactions. Books must be kept in Ringgit – a currency which has not always been stable.
Singapore may be considered as an alternative. However, the Malaysian business environment and company law, while not ideal, is acceptable.
The corporate rate of tax is now 32%. The system is based on the UK pre-1965 system, and includes the “remittance basis”, so that a company’s unremitted foreign income is not taxed. There is no tax on capital gains. But dividends paid out of untaxed income give rise to a tax charge at the corporate tax rate. There are a number of minor “nuisance” taxes.
Tax credits are given only against mainstream corporate income and do not affect the liability occasioned by a dividend.
There are three possible solutions to the problem of distributing untaxed income:
a) There is no tax on liquidation
b) A company incorporated elsewhere but resident in Malaysia by virtue of
management and control considerations may move its residence from Malaysia
c) There is no tax on an upstream loan.
Future anti-avoidance legislation may limit these possibilities.
A trust is treated as a separate entity and taxed at 32%. But it is not a “person”: does it qualify for treaty benefit? The treaty with the Philippines expressly allows it to do so.
Tax treaties are numerous but not all that attractive. Treaties do not necessarily reduce the tax imposed by s.4A – which imposes withholding taxes on certain outgoing payments.