Singapore 2004 meeting

Investment in China has many problems. Corruption is endemic. There is an energy crisis. The banks are bankrupt. There is environmental pollution. There is no social security. There is a real estate boom and there will be a crash. Court judgements are easy to get, but hard to enforce. There is no uniformity in tax treatment. An investment will take years to gel, but the opportunities are huge. The financial growth is unparalleled – in energy, automotives, logistics and distribution, banking, medical biotechnology and pharmaceuticals, telecommunications. A representative office is the easy way to start. A new Tax Act will certainly be introduced within three years. There are opportunities to make portfolio investment in China. Corporate governance is improving, but still has some way to go to meet western standards. It is important for the direct investor to be sensitive to the culture. There are several helpful books and videos. The PRC has several tax treaties. There are strategies for getting the best tax treatment, although the nominal rate of tax is high – up to 40% for individuals, 30% for enterprises, together with turnover and other taxes.

Where the insurance element (life or other) is relatively small, a bond or MEP functions as a “wrapper” for investments. The income and gains arising from the investments are those of the insurance company, not those of the policyholder. A review to the tax position of policyholders in various jurisdictions can be found in the Publications on Line section of the ITPA website: it is generally more favourable than that of the direct investor, if only by virtue of deferral.The ultimate value of the policy is of course optimised if the tax suffered by the insurance company on its income and gains is nil. This is the case in many offshore jurisdictions, but it can also be found in some onshore jurisdictions – Ireland, Luxembourg and the United Kingdom, and these have the advantage of the European Directive on dividends and the various tax reliefs offered by the tax treaties to which they are party – even those offered by the relevant treaty with the United States. The United Kingdom – and several other onshore jurisdictions – are however unsuitable for “wrapper” policies, because of the diversification requirements and other investment regulations. A captive insurance company may be formed offshore, where investment regulations are more liberal; this may be combined with treaty benefit if the company is formed onshore but operated offshore.

In recent years, personal assets of European and US residents have fallen in value; those of Asian residents have risen. Asian financial centres are poised for further growth. Singapore has several advantages – even over its rival, Hong Kong. It is stable and well-regulated, and has a flexible tax system. Singapore taxes on a territorial basis. For individuals, foreign income is exempt (whether or not remitted). Local bank interest is exempt. The corporate tax rate is to be reduced to 20%. There are many tax treaties (though none with the United States). Dividends are to be free of tax in the hands of the shareholder, wherever resident. Foreign income of companies is only exempt if it has suffered foreign tax of at least 15% and if such exemption is beneficial to the company. The income of foreign trusts, and investment companies owned by them, is exempt. Non-domiciled individuals are exempt from estate duty, except on local real property. The rate is low, and there are exemptions – e.g. on a residence, up to S$9million. Banking secrecy is supported by statute, and a bank’s reputation depends on strict compliance. Tax treaties (except with Switzerland) have provisions for information exchange, but the Revenue does not have power to “fish” for information. Singapore has a new and modern Trustees Act (of 2004). It confers wide powers of investment on trustees.

Local perceptions of trusts and other structures can be different from what the rest of the world is accustomed to. In China, reference to death is to be avoided: to mention death is thought to invite it. The fulcrum of the trust is dual ownership: it is not readily accepted in the region – though more accepted than it was a decade ago. The tension between ownership and control is very marked in Hong Kong and Singapore: most wealthy people are self-made. The family is central to Asian culture: it is patriarchal, patrilocal and patrilineal. Respect is paid to the living old and ancestors. This tradition goes against any inclusion of a wider class of beneficiaries and any admission of strangers to family secrets. Despite the aversion to contemplation of death, life insurance is popular. The wrapper offers little tax advantage. Tax regimes vary throughout the region. In Hong Kong, Singapore and Malaysia the regime is based on the British colonial model. Tax is relatively low in relation to GDP. In the Philippines it is said to be cheaper to pay the tax inspector than the tax adviser. Exchange control concerns are dominant in India. Malaysians and Singaporeans are concerned to take advantage of territoriality. Islam is widespread. Few Muslims are rich, but the number is growing, and advisers now need some acquaintance with Sharia law. Its source is in the Koran, the Hadis, the Ijmaa and the Quiyas: it is a divine revelation and therefore immutable. There is no prohibition against lifetime gifts. There is a one-third free share and a two-third compulsory share. A non-Muslim may not inherit the compulsory share. An apostate may not inherit at all. There are elaborate rules for the division of the compulsory share. There are Sharia-compliant trusts. The family is free, after the death of the testator, to vary the distribution from that proscribed by law. The Sharia rules are embodied in statutes in both Singapore (Administration of Muslim Law Act) and Malaysia.

Greater China is a large, populous and prosperous region. Hong Kong’s taxes are on a territorial basis: residence is irrelevant. The tax systems in China and Taiwan are very different. In Taiwan, trusts are largely limited to mutual funds and public investment. The position of private trusts is unclear. Controls on capital movement make it difficult to migrate a business out of Taiwan. Singapore functions as a “bridge” between Taiwan and China – and the rest of the world. There are provisions to curb transfer pricing; “related parties” is very widely defined. Advance Pricing Agreements are available. Taiwan has the potential to be a financial centre, but its’ political future is uncertain. Tax reform is under consideration in Hong Kong. Estate duty may be abolished, but is more likely to be reformed and retained. Hong Kong has a tax treaty with Belgium and a less extensive agreement with China; negotiations with the Netherlands are taking place. Macao has an Offshore Law: this was intended to attract capital, not to accommodate tax planning. Hong Kong has recently amended its Companies Ordinance. Tax reform is on its way in China. The preferential rate accorded to foreign companies is to be phased out. Offshore companies are responsible for much inward investment, but a good deal of it is simply recycled income of Chinese residents – including income derived from tax evasion and corruption. Transfer pricing regulations are in place; they do not appear very effective, but Advance Pricing Agreements are available.

High-tax jurisdictions have felt the need for anti-avoidance rules: they have been established by statute in Canada, in Australia and by the courts in the UK and US. A statutory GAAR does not achieve greater certainty. Despite this uncertainty, a degree of planning is open to the intending immigrant to or emigrant from Australia. An immigrant will have (i) assets he will bring to Australia or continue to own, (ii) assets left in some external vehicle giving him access to their income stream and (iii) assets left in an external vehicle to whose income he has no access. The immigrant gets a stepped-up base cost for assets not having the “necessary connections” with Australia. Similar rules apply to immigrant trusts and companies: where they hold income-yielding assets, a change of residence to Australia may be desirable, in order to avoid Australia’s draconian anti-avoidance provisions. Australia recently enacted measures designed to make the country attractive for holding companies. Dividends from foreign direct investment are tax-free. Active foreign branch profits and gains are also exempt. The immigrant may take advantage of these rules for assets in category (ii) – e.g. by placing his income-yielding non-portfolio holdings in a company resident (but not necessarily incorporated) in Australia, retaining in the external vehicle non-income-yielding shares. If he subsequently emigrates within five years, there is no tax consequence. If he has stayed longer, CGT on the retained shares is postponed until disposal. Income from assets in category (iii) will be attributed to the immigrant individual. This rule does not apply to accumulating trusts created by others. Where the rule would apply, possible solutions are indicated in the Working Papers – using a company limited by guarantee or superannuation fund.

Dubai is the commercial capital of the UAE. The region is prospering, and the higher price of oil will increase GDP. Most investments are made outside the region. Bahrain has a free trade agreement with the United States: restrictions on investment by foreigners have to be reduced. All the Gulf countries have strict money-laundering laws. It is now recognised that foreign direct investment is desirable. Trade zones have been established, where investment rules are less restrictive and tax exemptions are available. Islamic finance is growing. There is no pension industry. In Dubai, 70% of income comes from the non-oil sector. Singapore is its role model. It has a thriving tourist industry. Over 80% of its population is expatriate. The DIFC was established by a Decree of September 2004, after many years of preparation. It has its own company law and other laws. It will have its own Court. The aim is to build a wide-ranging financial market. The region suffers from high unemployment and has a young population; market liberalisation is expected to create local jobs and create opportunities for local investment. Islamic finance is growing and evolving. The UAE has tax treaties with 43 countries. No local income tax is levied. In Dubai, a law of 1967 levies tax on foreign companies, but this only applied to profits of foreign banks and oil exploration companies. The Indian Advance Tax Ruling Authority has construed “liable to tax” as “liable to tax, if any”. It has since taken the opposite view. But subsequently, the Indian Supreme Court affirmed the former view.

The UK Revenue came to the conclusion that the tax avoidance industry was out of control – particularly gilt-strip schemes and schemes for employment remuneration. The remedy has been provisions requiring disclosure. The legislation, followed by regulations and guidelines, is far from clear, but the target is marketed schemes in which the promoter takes a piece of the action. There is an exception for the case where there is no “premium fee” and the scheme is not confidential. A film scheme involves a loan – which will involve a financial instrument; it will, in principle, be caught, but will generally escape, because of the absence of premium fee and confidentiality. The “Ramsey” principle derives from a case of that name decided 30 years ago: a pre-ordained step inserted for tax purposes may be ignored for tax purposes. It was held that the loss thereby created was not the sort of loss the legislation has in mind. In Westmoreland, the company was owned by a pension fund and had suffered losses. The pension scheme lent Westmoreland the money to pay the overdue interest, so that the company could be sold. The House of Lords held that the transaction was not susceptible to Ramsey; but the distinction between “legal” and “commercial” meanings made by Lord Hoffmann was not well received; especially by Lord Millet, who, in Arrowtown, returned to the Ramsey question “What meaning did the legislators intend the statute to have?” A similar approach was accepted by the Privy Council in Carreras.