Seville 2001 meeting

Handling claims
Market trends
Criminal proceedings
The market is cyclical : supply of capacity goes up and down, though the demand is fairly constant. Most PI insurance is either placed or re-insured at Lloyds. The market became “hard” in the mid-80’s : Hurricane Betsy had moved premiums up generally, and clients had been discovering the possibilities of suing their advisers. Earlier, Lloyds underwriters had been trying to produce capital gains for their Names, and this was most easily done by writing liability insurance which required the retention of substantial reserves, whether or not the insurance itself was profitable. At the same time Munich Re were supporting the market by offering re-insurance. But all this changed in the 80’s : bad losses and diminished capacity put up rates. The “horror years” at Lloyds followed. In 1987 the oil platform Piper Alpha caught fire, hurricanes and European storms followed, and latent asbestos, pollution and health claims began to surface. But syndicates without long-tail North American liabilities and unaffected by the LMX Spiral were in good shape : they tended to be writers of PI, and they benefited from the “flight to quality” on the part of Names. By the mid-90’s Lloyds was doing well: the market softened, and the scope of cover expanded.

In the present market, the corporate capital providers are more influential : the dynamic of the market has changed, and the market is becoming harder. The tips to the professional seeking insurance are:

Use continuity to your advantage
Give yourself and your broker time
Consider increasing your self-insured excess
Determine and emphasise the areas of your business which have low risk.
The policyholder must bear in mind the need to inform his insurer promptly about any circumstance which may give rise to claims – including small claims. Handling a large claim is an important and difficult business : communication is vital.

Identifying the exposure: scope and impact of duty
Classification of goods for duty purposes
Origin and tariff preference
Value for duty:
Problem areas and planning opportunities
The customs duty dimension in transfer pricing
Cross-border movement of personal property
Customs Duty are strictly not a tax, but a trade protection measure; they nevertheless function as taxes. International agreements lay down the principles and the details, but there is a pervasive ignorance about them. Duties remain high in many sectors, despite international efforts to reduce them. They are levied on transactions, but are nevertheless susceptible to planning. They are levied on the value of tangible goods moving across frontiers; there are exceptions, and identifying them is important. There should be a person in every large company responsible for managing the exposure to customs duties.

Managing may be simply re-active. Or it may be pro-active, asking how all the aspects of the business can be duty-efficient.

Vehicles, aircraft and yachts present VAT issues but fewer customs issues. The determinants of the liability to customs duty are the classification, the country of origin and the value. The classification structure is for the most part well harmonised. It proceeds by descriptions – of goods or classes of goods : it does not matter what a product is used for; what matters is its nature and composition. The tests can be difficult to apply – e.g. the frontier between health products and medicines can be hard to draw. But the nature of the product can be changed – e.g. from a chip to an electronic assembly.

One can also change the origin of some of the content of a product – e.g. by re-sourcing a US component in the EU.

The value for duty is the aspect which causes the greatest problems, and it offers the greatest scope for planning. The “transaction value” requires to be ascertained : prices must be at arms-length and the transfer price must be acceptable to the importing country. The rules here basically follow the OECD guidelines on transfer pricing. The concept of fully accounted cost plus reasonable profit is not easy to apply in practice.

Royalties and licence fees have to be taken into account : they give rise to many problems, and potential problems are often ignored, until it is too late.

Research and development is another difficult area : if it has taken place in the country of import, it is exempt.

The customs officer and tax inspector have conflicting interests; but there is no conflict between the tax and duty rules However, there may well be conflicts of planning objectives. It should be assumed that customs and tax officials will be in communication with each other.

EU citizens becoming resident in Switzerland – the new rules
The tax implications of becoming resident in the United Kingdom, Monaco or Ireland
i. Switzerland – Richard Pease

There are new rules, coming into effect on 1st January 2002. The agreement on the free movement of persons will give EU citizens the right to move to Switzerland and vice versa. There is presently a quota system for work permits; retirees who have negotiated a forfait basis can become resident without becoming part of the quota. After a five year transitional period, the quotas for workers will cease to apply to EU citizens, but retirees will be free to move to Switzerland immediately. The possibility of forfait arrangements will still be open, and they are likely to be set at a lower level. Inheritance tax is a Cantonal tax, not covered by a forfait agreement.

ii. The United Kingdom – Simon Jennings

Non-domiciled individuals resident in the United Kingdom are taxed on a “remittance basis”. The rules are complicated and are applied with increasing rigour. A credit card issued in the UK creates a UK liability and discharge of it is a remittance; a debit card on a non-UK bank may be a different case.

Capital gains tax is less severe than it was, but there is no uplift on becoming resident. A trust is commonly used for avoiding the tax. Proceeds of certain life assurance policies are treated as income and are not protected by the remittance basis. Nor is Irish income, nor the proceeds of offshore roll-up funds nor share options treated as income.

The source of investment income must be extant in the year of assessment if ithe income is to be taxable. The import of a non-cash asset is not a remittance until the asset is sold. In very rare cases an ad hoc arrangement may be reached with the UK Revenue.

The system has been under threat in the past. Nothing is currently being said on the subject by the Labour Government, but pressure from EU governments may force change – e.g. by extending the Irish position to other countries. And greater expertise in FICO is leading to the remittance basis being enjoyed by fewer people and claims for retained foreign domiciles being scrutinised in greater depth.

iii. Monaco – William Easun

Monaco is a member of the UN but not of the EU. It is an independent sovereign state, linked to France by various treaties.

It attracts new residents – nowadays young people, and rich people seeking safety from physical attack. The infrastructure is run by France. The principality has VAT but no taxes on income or capital.

There is a lack of space. There are no tax treaties, other than with France.

iv. Ireland – Charles Haccius

A person born in Ireland, or either of whose parents was born in Ireland, is entitled to Irish citizenship as of right. Applicants for naturalisation must demonstrate one year’s continuous residence in Ireland prior to naturalisation, and four (out of eight) years residence in Ireland previous to that year.

A naturalisation certificate may be withdrawn in certain specified cases (e.g. concealment of material facts, disloyalty to the State etc.). If the naturalised individual subsequently takes up residence outside Ireland, his naturalisation certificate may be withdrawn, unless he makes an annual declaration of his continuing intention to hold Irish citizenship.

‘Buying one’s way in’ to Irish citizenship by financing projects in Ireland is no longer possible.

Residence in Ireland for tax purposes is more cut and dried than in the United Kingdom. An individual is resident in Ireland in a fiscal year in which he is present there for 183 days or more, or if he has been present for 280 days or more in the period of that fiscal year and the preceding fiscal year. Certain individuals are happy to be resident in Ireland, e.g. artists and inventors, whose earnings are expressly exempted by Irish domestic law. Individuals who are resident, but not domiciled in Ireland, whose foreign source income is taxed (as in the UK) by reference to the remittance basis, will also be happy to be regarded as Irish residents for tax purposes. Foreign income in this context includes a salary paid by a non-resident company under a contract of employment enforceable outside Ireland. A lump sum payment on the termination of employment under such a contract is exempt from Irish income tax even if remitted to Ireland.

Salaries paid to resident of certain treaty partner countries (e.g. the Netherlands, Belgium, Germany, Luxembourg etc.) by foreign resident companies under contracts of employment enforceable outside Ireland, in respect of employment exercised in Ireland, are exempt from Irish income tax under Irish domestic law, and are also exempt from income tax in the employees’ countries of residence under the relevant tax treaties with Ireland.

A round-up of recent developments – the OECD initiative
This project began in 1996, and the Report was issued in 1998. Its French title describes tax competition as a “world problem.” In the Report, four factors are identified as defining a tax haven : no or nominal tax, no exchange of information, lack of transparency and no requirement of substance. Switzerland and Luxembourg abstained and submitted minority reports. A committee was established, to engage in dialogue with countries affected.

Certain key factors were identified as indicating harmful tax competition – a nil or low tax rate, ring-fencing, lack of exchange of information. Further factors included lack of transfer pricing principles, non-taxation of foreign income, secrecy provisions, access to treaties and promotion of the jurisdiction as a tax-avoidance vehicle. Strangely, Hong Kong is not mentioned : perhaps the truth here is the OECD does not think it can bully China.

The OECD has established a “Forum” to implement the Report. (The name conveys a false suggestion of participation.) Guidelines have been issued – no new harmful measures, a review and roll-back of existing ones, reference of harmful practices engaged in by other countries, encouraging non-OECD countries to “associate with” these guidelines. This language raises questions which we are hard to answer. How does it affect the Netherlands or Luxembourg?

The Forum identified 47 tax havens. It invited them to consultation. “Defensive measures” were expressed to be in prospect. The havens were invited to enter into commitments. Some did, and the list is now reduced to 35 “unco-operative” ones. The consultation process is to concern exchange of information, consideration of harmful tax practices and transitional assistance. Again, the practical consequences of “co-operation” seem hard to predict : so far, the co-operative jurisdictions are committed primarily to dialogue.

Denial of deduction of payments to unco-operative jurisdictions, reporting requirement, transfer pricing, CFC rules, penalties, denial of foreign tax credit – these are the “defensive measures” proposed.

A document described as a Memorandum of Understanding has been produced by the OECD : the 35 jurisdictions are invited to commit to it. Three have done so. The MOU envisages transparency, exchange of information and a requirement of substantial business. By the end of 2002, information is to be made available as to beneficial ownership and activities of companies. Information on criminal tax matters is to be shared by the end of 2003.

Meetings have been held – the first one in Barbados. There was an ‘exchange of views’ on transparency, non-discrimination and exchange of information. There was a further meeting in London in January and one in Paris in February. We have now seen some change of language, but, more importantly, the role of the United States may be changing : it seems that exchange of information will still be pursued, but the rest of the OECD initiative may fade away. The high-tax countries have plenty of ways of preventing tax leakage, provided they have the information.

The nature of privilege
The impact of human rights law
Privilege and the Taxman
Revenue override powers:
search warrants
statutory overrides
Before the English Courts there are many disputes about the extent to which the Inland Revenue can obtain access to privileged documents. Most legal systems have a concept of the nature of privilege – which enable a client to consult a lawyer in complete confidence. The common law recognises two types of privilege – the advice privilege and the litigation privilege. Documents covered by privilege can be disclosed to the court or to an opponent only with the consent of the client.

The concept has recently come into prominence. It began as a rule of evidence, but it has developed into a substantive – and now a human – right. The “advice” head covers any communication between a lawyer and his client in the course of seeking or giving advice, regardless of the subject-matter of the document. Such privilege is not conferred by any other profession : this principle is of long standing, but is not easy to defend. The main exception to privilege arises where the client is committing or attempting a crime or “iniquity”, whether the lawyer appreciates what is happening or not.

In 1996, the House of Lords re-examined the doctrine, and concluded that privilege is the “cornerstone of the legal system.” The rights to a fair trial and the right to privacy, imported into the UK legal system, have bolstered the doctrine.

Does privilege apply only in the courtroom? In the United Kingdom, powers are conferred on the Revenue and on other administrative bodies to seize documents. In almost every case, the statute expressly reserves the right of privilege. Exceptionally, the Bank of England, the Inland Revenue and the Weights and Measures Office have powers which override privilege. The Taxes Management Act 1970 (as amended) confers on the Revenue two main rights – one under s.20, which gives the Revenue the right to require from a taxpayer – or a third party – documents concerned with his liability to tax, and the other under s.20(c), which confers powers of entry and search. These powers are being increasingly used. The s.20 power cannot be used to obtain privileged documents from a lawyer; but whether this exception extends to the taxpayer himself is currently a matter of debate. The s.20(c) power is similarly circumscribed: the circumstances in which it is exercisable are circumstances to which the crime exception will apply : in the Tomosius case, the Court held that the Revenue is entitled to see a doubtfully privileged document, but subject to a possible claim in damages if the document proves to be privileged. In the Morgan Grenfell case, the Revenue sought to obtain from the bank the tax advice the bank had obtained : the Court of Appeal has supported the Revenue.

Evolution of Spanish Corporate tax law. General aspects of latest legislation concerning inward and outward investment
Description of the regulations concerning the following issues:
Measures to avoid double taxation
Transfer pricing
Thin capitalisation rules
R.D. benefits
Other tax benefits
Special regimes
Spanish holdings
CFC regulation
Tax havens: List. Description. Anti-avoidance measures
Mergers, spin-offs, contributions of assets and exchanges of securities
Administrative procedures
Obtaining security: APA and other procedures
Tax audits
The first case study is of a Spanish holding company (an ETVE) acquiring a Target Company with equity and debt. The interest on the debt is deductible and the holding company has the benefit of the participation privilege, so long as the Target Company is a non-resident company paying foreign taxes on its income. If the Target Company were Spanish the holding company would enjoy no special regime, but a similar consequence would follow, and the interest would be deductible. There are thin capitalisation rules, but any arms-length structure is acceptable. Interest payable to an EU company is payable gross. Spain has a special regime for participation loans – i.e. where interest is variable, by reference to the business success of the borrower, but the favourable treatment is denied in avoidance cases.

The second case study shows a UK company owning Spanish real estate, its shares being owned by a UK trust, and paying interest to a sister company. The Spanish tax authorities require to know the identity of the beneficiaries of the trust. If the lending company is not just a conduit, the interest will be deductible, provided that the UK company is regarded as having a permanent establishment in Spain – non-residents being taxed on their gross income.

The third case study presents a Jersey IBC (taxed at 2%) owned by an ETVE with a Spanish parent. The ETVE privilege is not available, because Jersey is on the tax haven blacklist. But the favourable provisions of the general law will apply if the Jersey company can show that its income is “active”. Generally, e-commerce activities where proper management is undertaken in Jersey will be acceptable.

In the fourth case study an individual who has exchanged private company shares for shares in a UK plc moves to Spain and sells his plc shares. What is the base cost of his shares? In Spain the base cost is the market value at the time of acquisition, even though for UK purposes the base cost may be the original cost of the private company shares. This rule also permits UK expatriates to avoid the UK 5 year CGT rule by taking advantage of the Spain/UK tax treaty. The same result would not follow for a Spaniard in reverse, since Spain has an exit tax.

In the last case, an employee receives a bonus in respect of services rendered in Spain. If at the time the bonus is paid the employee is non-resident, tax is payable only at 25%, provided that the employee has not been absolutely entitled to the bonus whilst still resident in Spain.

The new regime in the Canaries
Background. The Canary Islands and their Special Economic and Tax Regime
The Special Zone of the Canary Islands (the “ZEC”):
Legal framework
Definition
Geographical area
The ZEC Consortium
The ZEC “entities”:
Requisites
Registration process
Mercantile specialities
Special tax regime:
Corporate tax
Sales tax
Stamp duty
Local taxes
Eligibility for other tax benefits in the Canaries
Registration and maintenance costs
Tax liability of the shareholders
Some examples of tax planning structures through the use of ZEC entities
Other tax advantages of the Canary Islands (Canarian “Holding” Companies)
The approval of the EU has been slow in coming, but it was finally given in January 2000. Many ETVE’s are incorporated in the Canary Islands, to save the 1% capital tax.

The ZEC regime aims to diversify the economy from tourism. It is a low-tax regime to last until the end of 2008, but it is expected to be extended. A ZEC company may not offer financial services, but a wide range of manufacturing, commercial and service activities is permitted. Services may be located in any part of the Islands, but manufacturing and commercial activities must be in designated areas. A ZEC company must be newly incorporated.

The minimum investment is €100,000. At least five new jobs must be created. The company must show that its activities are of genuine economic benefit to the Islands. It will enjoy the general exemption from stamp duties and certain other taxes. Tax treaties and EU Directives apply to ZEC companies. The rate of tax on profits is from 1% to 5%, depending on the number of jobs created, the year of establishment of the company and the size of the investment; profits in excess of those to which this regime are taxed at the general Spanish rate of 35% (30% for smaller companies).

Alternatively, a company may take advantage of the Special Tax Regime – the “REF”, which offers investment tax credits and tax rebates on production of goods. The two regimes may be used in tandem.

Choosing an exchange; obtaining and managing the listing
The market for new stocks is presently very poor. Many high-tech companies were recently floated, and markets competed for them, lowering the hurdles to admission; there has been a sharp reaction.

Reasons for an IPO are to raise capital, to create paper for acquisitions, getting a high price on a sale or creating liquidity . Markets are littered with companies which have been floated for the wrong reasons. Attention has to be given to regulatory aspects, the need for financial reports, the prospect of sustaining the price, the liquidity – especially of shares in small companies, the prospect of future sales by existing shareholders, the reputation of the management team, “skeletons in the cupboard”, the need to reorganise the group structure. The market likes to see golden handcuffs and motivation. A lot of careful – and expensive – planning is required.

The success of an IPO depends on a number of factors – a long-term business strategy and adequate capital to match it, and co-operation between members of the team. The requirements for a full listing are extensive; they vary between exchanges, though some attempt is being made to harmonise them in Europe. The US Rule 144 has been widely adapted – notably by high-tech companies seeking access to US capital markets.

The key document – called a prospectus in the United Kingdom – is basically the same in all markets. There are differences between markets, but the biggest factor in choosing one is investor presence. There are available markets for smaller, technology led businesses, but wherever a company is listed it will have to meet continuing obligations, if it is to maintain the confidence of its investors. Dual listings are cumbersome, but depository receipts can be an attractive alternative.