Monte-Carlo 2013 meeting

Image rights have no statutory definition. But from a tax perspective, income from e.g. playing tennis is different from income from e.g. endorsing a watch. The Lady Goo Goo case illustrates the weakness of trademarks. In the Hebrew University case, the image rights were held to expire at the end of a fixed period after death.

The new Guernsey law aims to introduce some clarity. Personality rights can attach to persons, joint personalities, groups or fictitious persons. Rights can be registered and are renewable. Infringement entitles the holder to damages. Separation of image right income and performance income opens the way to tax planning – using separate companies, separate cells of a cell company, separate trusts. Dealing with image rights requires careful thought, drafting, valuation, tax analysis and supervision.

The OECD Model Art 6 deals with the use of immovable property and Art 13 with the alienation of immovable property. On a sale of shares, Art 13(5) gives the general taxing right to the alienator, but Art 13(4) gives the right to the source country, where the company is holding real estate. Art 13(4) raises many questions – questions of value, timing of valuation, debts, asset ratios, definitions, indirect holdings, attribution of gains, domestic liability to tax, location, residence and triangular cases. Art 13(4) does not feature in all treaties.

Offshore Trusts – Jonathan Conder
In managing a trust fund, the trustees have a duty to investigate a complaint of a beneficiary, to facilitate the settlement of a dispute between beneficiaries, to educate investment managers in the requirements of the fund. Trustees should keep the fund as simple as possible but need to diversify. Issues arise when trustees hold shares in trading companies. The trustees need to supervise without interfering. A private trust company can be useful: the principal may own its shares and chair the board, and its constitution may make provision for succession. Or the shares in the PTC may be owned by a commercial trust company.

Management of real property requires a different approach – issues of taxation and confidentiality arise. Loans to the trustees should be on a limited recourse basis.

The holding of “toys” – boats, jets, works of art – carry risks, A boat needs to comply with registration requirements. Import of a boat into the EU can trigger a VAT charge. Collections of cars and art need to be supervised.

Trustees need to avoid and resolve disputes. The recent Futter and Pitt decision in the UK Supreme Court severely limited the Court’s ability to correct mistakes. Jersey, and perhaps other jurisdictions, will not follow this decision.

The UK has advantages – its non-tax haven image, its EU membership, its legal system, low incorporation costs and flexible and stable company law, and its treaty network. Many long-standing arrangements still work – the use of agency companies, sub-contractor companies, holding companies, non-resident companies, limited partnerships, nominee companies, trusts (with one trustee offshore) and companies with bearer shares. Bearer shares can be recorded in the public register.

The UK trustee treated as non-resident because the settlor was non-resident will be treated as resident for treaty purposes and entitled to a certificate of residence, if a resident person is entitled to the trust income. UK holding companies are now exempt on foreign dividends from treaty countries; the corporation tax rate will drop to 20% next year; disposal by the company of a 10% + holding in a trading company is exempt from tax on a capital gain.

A UK holding company owing an EU trading company may have controlling shares with minimal equity, so that it is ‘‘controlled’’ by UK shareholders. Certificates of UK residence are available according to published rules. VAT registration has become easier. Investment limited partnerships are now available.

For obtaining a residence certificate, UK directors are needed. UK individual shareholders are also needed, with full minutes of meetings. Tax transparent entities cannot get certificates. Re-domiciliation is difficult; change of residence is easier. Scottish partnerships have a legal identity: a limited liability partnership gets a tax reference number even if it is outside the charge to tax.

ADR – alternative dispute resolution – includes arbitration as well as mediation. The UK Revenue have established two pilot schemes. Their policy is to fight cases with an estimated likelihood of wining, but the door is to be open to mediation. In facilitated mediation a neutral third party is introduced; evaluative mediation will be more unusual, but the use of an HMRC employee as a facilitator has proved successful. Mediation has a number of advantages and little downside, but not all cases are suitable for it. HMRC has power to compromise a dispute with a taxpayer, but has an overriding duty to behave fairly to all taxpayers. The mediation process is confidential, but in some cases certain matters may require to be disclosed. The new Tax Assurance Commissioner’s responsibility is to oversee the resolution of disputes with taxpayers. The Jackson reforms make changes in the costs regime in civil cases, but these do not (yet) apply in tax cases.

In managing a trust fund, the trustees have a duty to investigate a complaint of a beneficiary, to facilitate the settlement of a dispute between beneficiaries, to educate investment managers in the requirements of the fund. Trustees should keep the fund as simple as possible but need to diversify. Issues arise when trustees hold shares in trading companies. The trustees need to supervise without interfering. A private trust company can be useful: the principal may own its shares and chair the board, and its constitution may make provision for succession. Or the shares in the PTC may be owned by a commercial trust company.

Management of real property requires a different approach – issues of taxation and confidentiality arise. Loans to the trustees should be on a limited recourse basis.

The holding of “toys” – boats, jets, works of art – carry risks, A boat needs to comply with registration requirements. Import of a boat into the EU can trigger a VAT charge. Collections of cars and art need to be supervised.

Trustees need to avoid and resolve disputes. The recent Futter and Pitt decision in the UK Supreme Court severely limited the Court’s ability to correct mistakes. Jersey, and perhaps other jurisdictions, will not follow this decision.

The international focus is moving away from the tax havens to the companies which make use of them. Low taxation of non-residents and ease of incorporation are characteristic of tax havens. Their existence has been well-known for some time; only recently have people realised how significant is the role they play in international business. Jim Henri estimates that 18-20% of the world’s financial assets are located in the tax havens. The figure could be higher: information is hard to find. Tax avoidance and evasion have become normalised.

The financial crisis led to a sovereign debt crisis and is turning into a political crisis, and governments are turning to unpaid taxes to solve their problems.

The world needs tax havens. The national systems inhibit international business; the tax havens lubricate it. Major investors need a tax-neutral platform for collectivising their funds. The BVI is the biggest investor in China: investors avoid corrupt places; they appreciate the rule of law – using British-based laws to govern arrangements between each other. The offshore world does not store money; it facilitates its movement.
Tax havens are better regulated than most onshore countries but have not invested enough in explaining their worth. FATCA and other financial surveillance initiatives are being instituted for the collection of information, now disconnected from the requirement of taxable interest in the country receiving the information.

South America is going to play a greater part in world affairs. In 1980, there were only three democracies and money was flowing out. Now capital is coming in and autocracies are few. Latins live life to the full. There are few workaholics. Brazil is the largest country and in some sense not part of it. It is the world’s sixth largest economy. It has huge offshore oil reserves. China has replaced the US as its largest customer. Brazilians have grandeza; Latins generally see a prosperous future for themselves. The family business predominates; business is not rushed – it follows old world patterns. There is no direct translation of “compromise” in Spanish or Portuguese. Long-term relationships are important.

Tax systems are in need of overhaul. The quality of tax department varies hugely. Governments are shifting towards direct taxation and away from indirect taxation. The super-rich still contribute a very small percentage of the tax collected. The level of evasion is high: governments are not trusted to spend money wisely. The tax systems are over-complicated, and taxpayers spend huge amounts of time in dealing with their tax. Small firms are hard to tax; most of the tax is collected from large companies, state-owned enterprises and import duties. This discourages small firms from expanding. Doing business in Latin America is not easy: litigation is protracted and regulations many and changing. The law is little respected. It is based on the Napoleonic Code, to which the trust is a stranger – except in Panama.