The 4th Money laundering Directive is part of a world-wide initiative. The UK is establishing a register of persons having significant control of UK companies. The implementation of the Directive in the UK is expected to be by amending the Persons of Significant Control Register legislation. The definition is designed to look through partnerships and trusts, and to include individuals having voting control of a foreign holding company. A UK company has to take reasonable steps to ascertain the relevant individuals and there are provisions for serving notices on lawyers and others to furnish information, with criminal and civil sanctions for non-compliance.
Listed companies are not, in general, required to comply. There are also exceptions where there is threat of violence. There are also some gaps: in an overseas discretionary trust, disclosure may not extend to beneficiaries, and it may be possible to separate economic benefit from control.
Trustees of express trusts come within the Directive, but (in the UK) only insofar as the trust has “tax consequences”. Access to information about trusts is more limited than access to information about companies. The regime does not apply to branches.
February 2013 saw the BEPS Report, September 2013 the “Action Plan” and October 2015 “Mandatory Disclosure Rules”. The rules are required to be clear, not over-burdensome, effective and useful. Eight countries have such a regime – the US, Canada, South Africa, Portugal, Ireland, Israel and Korea. The UK DOTAS regime has driven the large firms out of the market. Both the promoter and the taxpayer may have reporting requirements – e.g. in the US and Canada. “Promoter” can be widely defined.
Reportable schemes have defined hallmarks – generic or specific. Generic hallmarks include confidentially, premium or contingent fee, contractual protection and standardised documentation. Specific hallmarks include schemes involving loss generation, leasing, employment, converting income, low-tax jurisdictions, hybrid instruments or book/tax differences.
Rules provide for disclosure of Promoter’s details, expected tax benefits and details of all parties. There are time limitations for reporting. Identifying users of a scheme is important. The OECD recommends the use of scheme reference numbers. There are penalties for non-compliance – monetary and non-monetary. Tax authorities can make use of information collected to make legislative changes, to audit the taxpayers more frequently and to publicise its success.
The legal systems in many Asian countries reflect their colonial past. Ethnicity is important. The Chinese own businesses everywhere. Japan and Korea (North and South) are single-culture countries; Taiwan, India and Indonesia have cultural differences. Singapore and Hong Kong are multicultural; China is focussing on establishing a single Mandarin culture. Stability in the region is an issue, but economic growth of 5-7% [5.7%] is a reality – no longer primarily based on real property.
The UK has been a great magnet for international families. Many wealthy Chinese families are investing in Western countries. The USA and China dominate the billionaire market. With the Chinese, Confucius is still important, but less influential than formerly and children educated in the West have an influence. For Muslims, Sharia Law is important in determining succession. Death duties are unusual in the region, but have now been introduced in Thailand. The law governing succession gives rise to many problems, including multi-jurisdictional problems – who owns property, are gifts valid, what are the rights of “left hand” families. In Islam, interest is haram. Islamic investing has been developed to overcome this difficulty. In China, wealth is a recent phenomenon and is a learning exercise both for the family and the advisors. Often the principal earner stays in China and members of the family go live abroad. The outlook for China is favourable, for Japan and India less so.
The UK now has a statutory residence test (SRT). Self-assessment requires the individual to decide his residence. The SRT is intended to make the rules clearer, but not essentially different from the earlier regime: physical presence is the important factor. Often a taxpayer’s wish to emigrate is not shared by his wife. The tests look at a connection of “ties”. The number of days in the UK and presence of other ties are taken into account. The rules make provisions for exceptional days, transit days, deemed days, and define “places to live”. Arrivers are treated more generously than leavers. HMRC are taking a more strict view about claims to be non-domiciled. The rules are to change in April 2017, allowing 15 years residence before becoming deemed domiciled for all tax purposes – but with cost rebasing for capital gains tax. The “boomerang” rule is anomalous, and may be changed. HMRC take an aggressive attitude to residence disputes.
The corporate tax rate is 10% up to 500 million HUF and 19% on the excess. There is an IP regime with close to 0% and many treaties with 0% withholding on royalties. There is now a trust regime, which adopts the English trust to Hungarian law. It is merely a contract and confers no interest in trust property in any beneficiary. The maximum duration is 50 years. Registration is not required if the trust is professionally managed. There is no tax on transfer of assets to the trustee. The trust us taxed as a corporation, but is not a taxpayer for VAT and is not required to publish accounts. Distribution of capital is tax free, but there may be a stamp duty charge.
Bulgaria is a mid-shore jurisdiction within the EU, its currency tied to the Euro. Labour cost is low. There are tax incentives aimed at attracting business and investment. The big European banks are represented here. Tax is simple and low, with a 10% rate for personal and corporate tax (plus 5% dividend tax – subject to treaty relief). Dividends received by a holding company are tax exempt.
People have legitimate reasons for avoiding reporting, and there is no moral obligation to prevent their doing so. Privacy is a fundamental human right. Personal security may be a reason for maintaining privacy. Inter-governmental agreements favour the United States but provide for exchange of information about interest in US cash accounts held by individuals and other US-source income, but without looking through entities: if a US bank account is held or US securities owned by a BVI company, the reporting does not look through the company. This is not covered by US anti-avoidance provisions. The US has not signed up to CRS. The foreigner can use a US entity – trust or company – to hold US or foreign assets. Few countries treat the US as a CRS jurisdiction.
Many people are angry – not least about the amount of tax paid by multinationals. Any form of taxation of income raises questions of quantification. A turnover tax is quite different from a tax on income and can have unfortunate consequences. It is a tempting solution to the problem posed by the low level of tax paid by Google, but the potential complications outweigh the benefits. It may be that a consumption tax will be imposed in the future. But if we are to tax profits, we need to ascertain what profits are. Increasing sophistication of accounting practice, however, can result in the ascertainment of “profit” which is not appropriate for levying tax.
The UK taxes income which has a UK source or belongs to a UK resident. For a corporation, residence is largely a matter of choice, though there are provisions for deeming the income of non-resident companies to be income of individuals or related companies. UK policy is to fully tax worldwide income of residents; this policy is not generally followed elsewhere.
The “champagne cases” established the rule for deciding when a non-resident is trading in the UK: the non-resident can choose whether or not his profit arises in the UK. Until recently, this has been generally accepted. Google has taken advantage of this phenomenon, and of the protection of the tax treaty with Ireland. As a result untaxed money has ended up in Bermuda. It seems in fact that it is US tax which is being avoided, and this is no reason for anger in the UK. It would be helpful if HMRC had explained this to the public, to MPs and the OECD.
A fund is a collective investment vehicle for a large or small number of investors. They are generally recognised as a good thing, though they have their critics. An international fund enables investors in many countries to invest in a diversified fund. It may take the form of a partnership, a company or a unit trust. Tax may be levied at the fund level, but this is not usual. Tax is commonly withheld on dividends and interest. Location is crucial, and the fund must ensure that the location is where it is expected to be. A fund can still be resident in a treaty country even if the country dies not actually impose any tax on it. Cyprus became a popular location for investment in Russia and Mauritius for investment in India. The recent OECD Report approves of widely-held funds.