Monte Carlo Meeting 2017

Chairman: Milton Grundy
18-20 June 2017

Meeting Summary
  • 1. Transparency vs Privacy: A call to actionFilippo Noseda
    • The CRS and the 4th AML Directive call for the disclosure of much information.  A 5th AML Directive is on its way.  Initiatives of the OECD and US Treasury to curb tax evasion and have called for more disclosure.  The FATCA rules are long and complicated and are reflected in CRS: they look through trusts and companies to ascertain to persons having control of them.  In the ‘Facebook’ case, the ECJ warned against a generalised access to information.  In 2016 the ECJ held that retention of information can breach the individual’s right to privacy.  The issue of privacy goes beyond the prevention of tax evasion to the rights of personal privacy.  It is inevitable that a test case will come before the ECJ.  The FATCA questions are unacceptably complicated, and have been copied for the CRS.  The position of discretionary beneficiaries is contradictory.  The CRS is not really necessary.  It is time to fight back.

  • 2. The EU Anti-Avoidance Package: An updateNicky Gouder
    • ATAD I is applicable from 1st January 2019.  An ATAD II is in the pipeline.  The objective is to ensure that tax is payable where the profits and value are created.  Transfers of assets and income streams is discouraged by an exit tax.  The Directive is applicable to corporate taxpayers.  There are specific values – on interest limitation, exit taxation, general tax avoidance, controlled foreign companies, hybrid mismatches.  Member States have several options in implementing interest limitations.  The exit tax rule applies even to transfers within the EU, which is illogical.  The rule applies to transfers from a head office to a permanent establishment, transfers from a permanent establishment to the head office, transfers of residence or transfers of a PE business.  Member States are required to have General Anti-Abuse (GAAR) Rule and a Controlled Foreign Company (CFC) Rule.  For the CFC Rule, there are direct and indirect ownership tests and an effective tax rate test, rules on non-distributed incomes substance and essential purpose.  There are some opt-outs.  The Directive covers hybrid mismatches.

       

  • 3. The Corporate Service Provider: A glimpse into the futureBart Deconinck
    • Service providers have become larger, devote more time to compliance and have ceased to be a bio-product of banking.  It is a relationship business, produces long-term stable cash flow – trusts having a larger average life than companies.  There is room to broaden the business model and effect operational improvement. It is still a fragmented market.  The business is growing – with GDP, globalisation, outsourcing, growing number of HNWIs, geopolitical instability. Consolidation is the name of the game.  Service providers are a natural investment for private equity: there are high margins, little investment, high cash profits, annuity-driven revenue, network effects and potential for acquisition and broadening product portfolio.   Corporate business has become difficult, but there is still potential for private client business.  But consolidation leads to adverse corporate behaviour – trying to run a client service like a manufacturing company.  The explosion of compliance seems to have stabilised.  There is a threat from newcomers to the industry, from the unpopular reputation of banks and from new technologies.  It is still a highly fragmented market, with some 25 second tier players.  Small players are increasingly unable to compete

  • 4. The Insider Threat in Cyber SecurityAndre Pienaar
    • We have exchanged privacy for consumer convenience.  The collection of private data drives the economy.  Cloud computing has reduced the cost of using computing power and consolidated the provision of cloud computing in a few companies – Amazon in particular.  Tax departments were among the first users.  Cyber security is a large and growing industry.  Law firms and others have under-invested in cyber security.  Most hacks involve an insider: 95% of attacks are readily prevented.    The first step is phishing.  Hackers appeal to vanity or greed to insert information-gathering viruses.  Employees will unwittingly collaborate, or may be driven by resentment.  Employees with privileged access are particularly vulnerable.  Managing cyber risk is important and is becoming more important.

  • 5. Canada: The Hidden Tax HavenPeter Wong
    • Canada’s tax haven aspect is sanctioned by its tax legislation.  Taxability is based on residence.  World-wide income is taxed, but Canada has no gift tax or inheritance tax.  The concept of residency is derived from statute, the common law and tax treaties.  50% of capital gains is treated as income.  Domicile and nationality are irrelevant.  Non-residents are subject to tax an income connected to Canada (s.115), but are not required to report foreign income or assets.  In Vancouver the tax rate for resident individuals is currently 47.7%.  Non-residents with no PE are liable to tax at rates from 25 to 48.54% but dividends are taxable at 25% (or less, if a treaty applies).

      Canada acquired a ‘tax haven’ label by foreigners using Canadian shell companies to hide income, but the country offers legitimate opportunities for tax planning – portfolio investment, private equity investments, investments by a foreign trust in real estate or foreign trust structures employed foreign clients to manage their overseas wealth.

  • 6. Tax Planning in The New ClimateMilton Grundy
    • “Avoidance” is a comparative concept: if there is a route to Nice airport which can be said to avoid the Promenade des Anglais (Route A), there must be a route to Nice airport which does not (Route B).  So with tax: a transaction which has a low or nil tax cost is only avoidance if there is a way of achieving the same result at a higher tax cost – Route B.  This analysis can be applied to transactions which have been proposed at earlier meetings – to the partnership for the UK resident relocating to the United States; to the purchase of units in an offshore accumulating discretionary trust or other asset with no income but potential growth; to the US charity with a UK subsidiary, for UK resident US citizens; to the gift of an insurance policy which limits the donee’s rights or leaves the donor with rights; to treaty shopping and other transactions by offshore trustees; to the “Double British” combination of UK company and non-resident trust; to the acquisition of a high base cost by purchase from a connected person; and to the offshore discretionary partnership.

  • 7. Making Use of Territorial Tax SystemsJames Howes
    • Tax planners were so successful in their use of zero tax vehicles that governments took measures to prevent avoidance.  Many countries treat foreign income more favourably: there is a spectrum of territoriality from a ‘pure’ territorial tax system to countries regarded by the OECD as taxing on a world-wide tax.  It is beneficial to incorporate in a territorial country and have only PEs in world-wide taxing countries – even if the territorial country has a high tax rate.  The UK non-resident company was much used: France offers a similar advantage for companies carrying on business outside France and having a complete business cycle outside France.  France offers respectability, legal certainty and ease of banking. An investment company investing and managed outside France will be free of French tax.  Taxation of dividends and liquidation proceeds do not benefit from the territorial basis.  Non-French trustees should interpose a non-French company between themselves and a French company.  Uruguay, Hong Kong and Gibraltar have territorial systems.  The use of a territorial entity is often preferable to a zero-tax entity.

  • 8. Trusts and Their Treatment in South AmericaGeoffrey Cone
    • Tax amnesties in Latin America had had varying successful. Much of the tax recovered has not been well used, and political uncertainty, corruption and fear of confiscation is the background to the use of trusts: wealthy families had trusts which had to be dismantled and restructured on the basis that interests will be paid and tax paid on distributions – increasing liability to claims by creditors and disaffected spouses. Trusts are not recognised in most countries in South America. This may extend to countries which are signatories to the Hague Convention – to which the USA and New Zealand are no signatories. The succession rules of civil law countries have not been recognised in US or New Zealand. Single-member funds, bank accounts, foundations, single-member unit trusts are likely to be treated as transparent. Some US states offer opportunities for foreign trusts; trustees require licences but there is no registration of trusts, there is asset protection legislation. The Uruguayan Fidei Commisso Law permits the establishment of private trusts

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