Monte-Carlo 1998 meeting

Meeting Summary
    • Government of India v. Taylor is the authority in the UK for the rule that one jurisdiction will not enforce the taxes of another. There are some exceptions – eg in insolvency, or where executors have a duty to discharge tax debts or where the foreign tax department is entitled to assistance under an international convention. Can a person be extradited for a fiscal offence? Traditionally no, but the Nuland case shows that nowadays the answer can be “yes”. The multilateral European Convention on Extradition acquired a 1978 Protocol permitting extradition where the foreign offence is similar to a domestic offence. The special machinery for extraditing between the UK and Ireland is simple to use and is soon to apply to fiscal offences: it also applies to the Channel Islands and the Isle of Man as it applies to the UK. Again, dual criminality is required. England recognises several offences with fiscal aspects – conspiracy to defraud, forgery, false accounting, cheating the public revenue. In 1993, the Criminal Justice Act of 1988 was amended by the addition of provisions relating to fiscal offences. The legislation applies to activities taking place anywhere in the world if they would have constituted an indictable offence in the United Kingdom. Anyone knowing or suspecting criminal conduct commits an offence unless he reports it to NCIS. “Tipping off” is also an offence. Does this apply to foreign tax crimes? The position is not clear – either in the law or in the Parliamentary debate. Does anyone have “proceeds” of a fiscal offence? STEP has taken the opinion of Michael Brindle Q.C. who said the legislation only applies if another offence is also committed. The Guidance Notes of the Joint Money-Laundering Steering Group propound the same view, but other QC’s are known to take a different view. Similar legislation is finding its way into offshore jurisdictions – Cayman, Bahamas, Isle of Man, Jersey, Guernsey. The “ostrich” approach is no longer tenable. But it is hard to be certain. And the problem for trustees can be more acute, with a conflict between their duty as trustees and their position under the law.

    • Several high-tax countries – notably the US and Germany – are bringing pressure on the offshore centres. No specific reference has been made to VAT however, and for the time being the use of offshore vehicles continues to be advantageous. If an Italian company is selling to Jersey which sells to France, and the Jersey company registers for VAT e.g. in the United Kingdom, its profit is free of any EU tax but its purchases and sales are not subject to VAT in Italy, the UK or France. For an import into the EU, the offshore exporter does not require to be registered: the end customer acting as EU importer in effect pays all the import VAT. But import duty may be saved if the offshore company registers for VAT, pays the import VAT. For an export from the EU, the offshore distributor need not be registered, and this exporter needs no VAT registration. A UK VAT registration is available to an offshore company with a minimum presence, and an “acquisition” – e.g. of some samples – gives a right under the Sixth Directive to VAT registration in the country to which they are sent; and in practice a VAT number can be obtained in advance of such acquisition. The user-friendly jurisdictions include UK, Madeira, Isle of Man and the Netherlands, but note that a holding company does not, as such, carry on a business for VAT purposes, nor does banking or insurance business in itself support VAT registration. When the VAT-registered intermediary – e.g. in Madeira – is selling to private purchasers, the VAT is payable on the ultimate arrival of the goods into their country – but only if they exceed the local threshold (£50,000 a year in the UK). Triangulation does not “work” where there are more than three parties, so beware of “chain” transactions.The new VAT system for the next millennium is being given a target date of 2001/2002 by the European Commission, but 5 to 8 years from now seems a more likely introduction date. A close understanding of the current system should therefore prove of value for some years to come.

    • In the late 1970s, the Hong Kong Government found that its relatively simple tax code was being side-tracked by tax-avoiders coming from countries with much higher tax levels and therefore introduced a general anti-avoidance rule. (“GAAR”). The English courts have come to distinguish between tax-avoidance which is acceptable and that which is not. Lord Nolan in IRC v Willoughby referred to “a course of action designed to conflict with evident intention of Parliament”. This approach is reflected in Part IVA (replacing s.260) in Australia. The judicial approach in the UK has led to some uncertainty and is of course retrospective in nature. But the “smell” test is clear: it distinguishes the facts in McGuckian and Willoughby. Revenue authorities take very badly to any attempt to keep them in the dark, and in such case will prosecute the advisers, as well as – or instead of – the taxpayer. The Australian Revenue have been very tough and perhaps unscrupulous in this regard. Many Commonwealth countries have GAAR provisions and the British colonial draft included a simple anti-avoidance provision. Australia, New Zealand, Canada and Hong Kong have a GAAR. Lifting the veil of incorporation is implied by the power to reconstitute the transaction. The power of the UK court comes close to, but is not exactly, a power to reconstitute. A statutory GAAR allows a transaction to be reconstituted. The Australian and New Zealand GAAR provide additional penalties for the taxpayer who is found to fall within them and who unsuccessfully disputes an assessment made under the GAAR.

    • The key factors in imposing income tax are residence (and, in anglo-saxon countries, domicile) citizenship (eg in the US, Philippines and Eritrea). Domicile and permanent residence are of significance in relation to estate and gift taxes. Several countries now have a form of departure tax – Canada, Denmark, Australia. The new US tax maintains the taxability of ex-citizens; this law is full of loopholes but a new information-gathering form is on its way. The IRS has thus far not made a serious effort to enforce the tax charge on expatriates. The French adopted a similar approach in 1957 to their citizens coming to Monaco, and Spain is passing legislation to similar effect. In the UK, while residence is easy to lose, domicile is more difficult. Russia is having a crackdown on tax evasion by the wealthy. It can sometimes be effective for an expatriate to spend some time in another country before moving to his final destination. Considerations of “image” may favour a high-tax country as the intermediary one. Many ultimate destinations suggest themselves – UK or Ireland, with their “remittance basis” (which appears to have survived the change of government in UK). It is possible to obtain citizenship in both countries; it is easier in Ireland. Becoming a US citizen is rarely a good idea, and a “green card” should also be avoided – an “E-visa” is to be preferred, since the anti-expatriation rules will not apply when the individual leaves. A USVI green card could be the preferred option for those who feel they must have a green card. A residence permit in Canada is relatively easy to acquire and special tax regime applies for the first five years. Further reporting requirements, however, are on the way. Residence in a Schengen-Group country enables the individual to travel among these countries without any visa – whatever his passport. Residence in Belgium or Spain may be useful for the individual wanting to realise a capital gain.

    • The recovery of stolen works of art can involve the use of private sector institutions and agencies alongside the public authorities. In a well-known case, the proceeds of theft entered the banking system via a brass-plate bank in Antigua; Citibank helped with the investigations. By making transactions extremely complicated and using locations all over the world, the fraudster will endeavour to cover his tracks. In 1993 the money-laundering law in the United Kingdom was extended beyond drugs to all crimes. The rules are draconian. The punishment is up to 14 years’ imprisonment. Money laundering provisions are now in force throughout the EU, requiring record-keeping, customer identification and disclosure. Auctioneers are, for the moment, outside their scope. Practitioners in the offshore field need to adapt themselves to dealing with the threat of money laundering by co-operating with the appropriate law enforcement agencies.

    • Proper tax planning stimulates trade and investment: treaty shopping (eg the case of a South African licensing into the Ukraine via Cyprus) has the same effect. The problems of the mobile executive may be illustrated by the case of the Austrian working for a Danish group in France, UK, Germany and the US. Social security can be a heavy burden. The International Employer Company “IEC” provide a solution. As a location, Netherlands, UK, Luxembourg, US and Switzerland come to mind; all these countries have an extensive network of tax treaties. The executive is likely to be resident in the country in which he is working, but he may choose to reside in the UK, Belgium or Holland (which offers the 35% ruling) and make trips to other countries. But he must consider any departure tax to which he is liable. Stock options may give rise to huge problems: the UK has an “approved scheme” which permits the employee to postpone payment of tax until the shares are ultimately disposed of; the rules in Sweden are more strict, but an offshore structure may be established to turn the income gain into a capital gain. Pension plans also lend themselves to the use of the IEC. It is important that the premiums are deductible: this indicates a high-tax company as the recipient. The taxability of the pension when received also needs to be examined. Sometimes, a self-administered scheme may be exported. Deferred compensation is taxed differently in different jurisdictions.

    • Offshore jurisdictions have seen an outpouring of new legislation. More important even than the quality of the law is the quality of the professional services available in the jurisdiction. The Jersey Law of 1984 set the trend; currently, the Cayman Islands are making the pace. The “STAR” Law of 1997 permits benefit to be conferred not only on a purpose but also on individuals; it enables (but does not require) beneficial interest to be uncoupled from right of enforcement. Will the courts in other jurisdictions recognise a STAR trust? In English law, a beneficiary with a fixed interest is entitled to be informed of the nature of his interest but trustees are not required to seek out a merely discretionary beneficiary. Disclosure by trustees is much argued about and litigated over, but Armitage v Norse talks about an “irreducible minimum” of trustees’ obligation. Is the Cayman law too permissive? Section 83 of the pending Bahamas Trustee Act sets out the trustees’ disclosure obligation in some detail. In Liechtenstein, however, the Court has upheld the right of the board of a foundation to withhold information from beneficiaries. The Hague Convention has been ratified in seven states. The UK ratification extends to dependent territories, except Cayman. The Dutch needed to change their law to accommodate the separation of legal and “equitable” rights: the Italian recognition may have been a mistake. The company limited by guarantee can function as a substitute for a trust. It is free from perpetuity rules. It can be controlled by the founder. It is more acceptable in civil law countries. It may come outside CFC legislation. The law in Liechtenstein is far from new. But the Anstalt and Foundation are much used: they are very user-friendly and their geometry can be designed to suit a particular case. The foundation in Panama follows the Liechtenstein model, but with some of the features of a modern trust law. There is a discernible trend for beneficiaries to bring proceedings against trustees. The liberty to exclude trustees’ liability for negligence supported in Armitage v. Norse has not been followed elsewhere – notably in the Channel Islands. The apparent enlargement of settlors’ powers expressed by the new Cayman law may do no more than re-state the rules of equity.

    • Offshore shipping registers developed as a way of minimising tax on shipping profits. Yacht registers developed later. Cost, efficiency, privacy, compliance requirements and “respectability” are features which influence choice. The British flag is popular, with Jersey and Guernsey in Europe being principal offshore registries. For larger yachts registered under the British flag, Category 1 jurisdictions – notably the Cayman Islands – permit registration of vessels of any size. Panama is now less popular, but the Bahamas is increasingly popular. Barbados is a newcomer; Cyprus established its registry in 1963 – a local company is needed. In the Isle of Man, registration for VAT is available, as it is in Luxembourg. Use of the yacht in the US for not more than nine months is not an import. The position in the EU is more complicated. Since 1993, temporary importation facilities are limited to six months. But many EU countries permit longer periods for overwintering. A yacht remaining in EU waters must be able to show payment of VAT in some EU country. But at 31 December 1992, on the change of regulations, it was estimated that some 50,000 yachts were present in the South of France and along the Mediterranean coast with VAT to be paid. Many have still not complied, and various methods of watering down the VAT requirements are under consideration. The current position is uncertain and unpredictable. The Atlantic ports are stricter than those in the Mediterranean. A yacht in use before 1985 is exempt. Some charter schemes seem to work; others not. Registration as a “commercial” yacht requires compliance with e.g. stricter safety standards. The standard rate of VAT varies from 25% in Denmark to 12% in Madeira. Methods of valuation also vary – and EU countries do not necessarily accept other countries’ valuation; the physical presence of the yacht in the country of importation is important and gives an official stamp of credibility to the VAT valuation. The French accept VAT on chartering in French waters by non-EU vessels. This is illogical – typical of the confusion surrounding the whole subject.

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