Indian tax stresses source: there is a deemed source concept, which effectively taxes money made in India. But generally, the law and the appeal system follows UK principles. Provisions of tax treaties vary greatly. India now encourages foreign investment, except gambling, lotteries and multi-brand retailing. There is now a Limited Liability Partnership Act. Exchange control still exists, but is no longer a barrier to investment. Dividends are not taxed, but cause the company to pay an additional 17% tax. There are no thin cap rules. Treaty shopping is possible. There are Special Economic Zones. Compliance can be time-consuming. Advance rulings are available. Mauritius, Cyprus, Singapore and the Netherlands are common sites for a holding company: the benefit is the exemption from tax on capital gains, avoiding permanent establishment and lower tax on interest and royalties. There are possibilities for expatriate tax planning; an advance ruling should be obtained. Outbound investment is now possible for individuals as well as companies. Since India has no participation privilege, tax planning involves a foreign holding company e.g. in Mauritius, Cyprus or Singapore. A branch in Poland can be used in the same way, as may a company in Malta or the Netherlands. A merger provides a remittance strategy.
Much tax planning involves doing business in such a way as to take advantage of a tax treaty. An individual may change his residence. Or a company in another jurisdiction may be used for a particular transaction e.g. to take advantage of a more profitable PE provision. The 2003 OECD Commentary deals with improper use or abuse of treaties where a transaction has as its main purpose the obtaining of the benefit of a treaty or is contrary to the object of the treaty. The domestic law may deny a treaty benefit, but the OECD Commentary suggests that there is in any case an implicit anti-avoidance rule in a tax treaty. The general view is that Commentary is evidence of the meaning of treaty provisions: it is thought that the implied anti-avoidance rule is limited to extreme cases. In Azadi Bachao Andolan and Others v. Union of India, 2003 the Indian Supreme Court upheld the use of the Mauritius treaty for investment in India. Opposite decisions are that of the Swiss Federal Court in A Holding ApS v. Federal Tax Administration, 2005 and that of the French Court in Société Bank of Scotland. But the Canadian Federal Court of Appeal in MIL (Investments) SA refused to deny the benefit of the Luxembourg treaty. Beneficial ownership in a treaty context means true ownership: it excludes nominees and bare trustees. Article 10 also excludes a mere conduit: this was the view of the English Court of Appeal in Indofoods, but the Canadian Court of Appeal did not take this approach to a dividend flow in Prévost. The Limitation of Benefits concept appears first in a 1987 OECD Paper: the US takes a mechanical and detailed approach, other countries an object approach.
: HNWIs use best advisers: they are accordingly highly compliant. They often have non-fiscal reasons for using IFCs. To end the war between taxpayer and tax collector requires a cultural change.
JO: The purpose of the OECD programme is to increase the level of trust.
RP: Will there be some kind of amnesty to enable HNWIs to re-adjust their affairs?
JO: Multilateral rulings are part of the OECD programme. The OECD recognises the importance of fairness in taxation, and that there can be good reasons for using an IFC. We accept that zero tax is legitimate: the essence is transparency and fairness; tax competition is a good thing. The OECD approves of the reduction of direct taxes in favour of indirect tax.
RH: Where low-tax jurisdictions agree to share information, they should be entitled in return to a reduction in withholding taxes, and generally to be treated on the same basis as other countries.
JO: Whether or not to have a tax treaty is a matter for the countries concerned.
In the short term, the United States will see modest tax increases, a large budget deficit and increased national debt. In the longer term, the country must eventually inflate its way out of its debt, but will try to avoid or postpone this with higher taxes, including VAT and wealth tax. A further amnesty for repatriated earnings is to be expected, and the enactment of the Stop Tax Haven Abuse Act which authorises sanctions against jurisdictions which impede US tax collection. The new form 90-22 requires any person in or doing business in the US to report foreign bank accounts. Users of the Qualified Intermediary regime are audited every five years: this will look through corporations. We should expect increased enforcement of withholding tax and a clampdown on the use of LLCs by non-US persons. We can forget bank secrecy. Miscellaneous changes are under way all of them calculated to increase taxes.
Under the former regime, there were no risk and substance requirements. New rules were introduced, under pressure from the EU. Group licensing companies now require substance and risk, and need to observe transfer pricing criteria. Alternatively, the royalty stream may run through an independently-owned company. To comply with substance and risk requirements, the directors must have requisite skills and make independent decisions. An entity without economic substance is not recommended. Capital, risk and remuneration are the badges of substance; if these are present, a ruling can be obtained. The VAT position needs to be considered.
Barristers are themselves little involved in money-laundering, but those giving tax advice are affected. The origin of the term is mysterious, and little is known about the amounts and figures involved. All advisors need to be conscious of compliance requirements and alert to suspicious activity. In the UK, customer due diligence, record-keeping and staff training are stated to be the crucial requirements. The 2007 rules introduced the risk-sensitive concept: the meaning in a particular case can be hard to ascertain. The English Chancery Bar adopts a simple box-ticking approach; a more complex approach may be required elsewhere. Establishing a relationship, and dealing with a transaction of more than €15,000 are occasions when the identity of the customer must be established, as well as that of the beneficial owner (as determined by the Regulations). The beneficial owner includes the holder of 25% of the shares in an unlisted company or in a partnership, or the holder of a vested interest in a trust fund, or the holder of various powers under the trust a very wide category indeed, and the task of identifying all the beneficial owners even on a risk sensitive basis can be very onerous. Verification may be made ex post facto, but that can in practice be hard to achieve. Listed companies and their subsidiaries and public authorities need not be verified, but extra diligence is required for politically exposed persons e.g. a charity with a member of the royal family on its board. A barrister can rely on the due diligence of the instructing solicitor, but is still personally responsible an apparent conflict. There is a list of countries whose diligence is regarded as having regulations equivalent to those of the United Kingdom. In the UK, the Proceeds of Crime Act creates offences concealing, using and possessing criminal property. This is property derived from an offence which is criminal in the UK or would be criminal if committed in the UK. This may not extend to profits which should have been taxed abroad, but it is dangerous to rely on this. Disclosure must be made not only where money-laundering is suspected but also where there are reasonable grounds for supposing it.
There are inevitable disparities between the tax systems of 27 countries. The number of ECJ decisions relating to direct tax has grown, and the time taken has grown longer. The role of the ECJ is in interpretation of EC-Law, protection of basic freedoms and providing an overall approach. There is also inevitable conflict between member states and the ECJ. Cases decided in 2008 include Jäger v. F A Kusel-Landstuhl, NV Lammers & Van Cleeff v. Belgium, Deutsche Shell v. FA Hamburg, CFC and Dividend Group Litigation v. Commissioners of IR, Lidl Belgium v. FA Heilbronn, OESF v. Staatssecretaris van Financien, Burda v. FA Hamburg-Am Tierpark, and Cartesio Oktató és Szolgáltató. During 2009, the ECJ will be considering the Acte Clair doctrine, withholding taxes, presumption of tax residency and limitation of justifications.
The OECD is an organisation of 30 member countries. It is a forum for senior policy makers in the tax field. It publishes a model Convention, and has done so for many years. The number of members is growing. The HNWI Project is intended to eliminate aggressive tax planning and tax evasion. The emphasis is on voluntary compliance. The project on harmful tax practices began in 1996. There was a further Report in 1998. This identified tax havens. Most were co-operative: Andorra, Liechtenstein and Monaco remain unco-operative although Andorra and Liechtenstein have given a clear commitment to adopt OECD standards. Transparency and exchange of information are the keys: exchange is on request, confidentiality is maintained, fishing is not permitted. Countries retain the right to tailor their tax regimes to their own requirements. There is a new political momentum, down to the recent G20 statement. A new G20 summit is scheduled for April, G8 for July and G20 finance ministers for November; the next joint Franco-Germany meeting is in June.
The 1998 Report sought to achieve a level playing field, but permitted regulatory arbitrage, in some cases favouring OECD members, e.g. the LLCs of the US. Offshore jurisdictions were prepared to depart from the Government of India rule and expected the onshore jurisdictions to recognise this by the usual protocol of lowering tax barriers in exchange. The OECD has been a powerful force for globalisation, has promoted better regulation and has a commitment to tax competition. The HNWI programme is a voluntary programme, taxpayers are concerned with privacy. Data disks have been lost or made public, which undermines confidence. Will taxpayers accept this bear hug? International Financial Centres attract international capital. Poorly regulated jurisdictions are failures e.g. Nigeria. IFCs enhance liquidity in the global economy. Low tax rates can increase the amount of tax collected. Tax havens typically take 20% of the GDP in tax, but by way of indirect tax. Will the OECD recognise that those jurisdictions assuming the burdens of globalisation are entitled to receive its benefits (i.e. reduced non-resident withholding tax under double tax treaties)?