Part 8
THE SCHMIDT OFFSHORE REPORT
Vol 1, no 8 - Sep/Oct 2005
Contents
NEWS
- EU savings tax directive update
- UK credit card probe
- An end to the 50/50 rule
- Australian tax office crackdown of offshore schemes
- New OECD powers
- Gibraltar launches new tax breaks
- New Isle of Man corporate vehicle announced
- US ex-pats face fines
- British IFAs under pressure
FEATURE ARTICLES
- Canada: The Ultimate Tax Haven
- Cypriot Holding Companies: The Way Forward
In 2003, the National Audit Office (NAO) published a report entitled Tackling fraud against the Inland Revenue that made particular reference to the use of offshore accounts and structures to commit tax fraud. One of the interesting points made by the report was the fact that around 25% of the cases investigated by the Special Compliance Office involved the use of offshore accounts and structures.
As a result of that particular report, the Offshore Fraud Project Team (OFPT) was established with a budget of £66 million over three years to raise additional revenue of at least £1.6 billion. HMRC have appointed around 50 investigators – mostly financial analysts – to run this project.
As noted elsewhere in this issue of the TSR Offshore Report, one of the key areas of inquiry is that of debit and credit cards issued by offshore banks. However, readers would be wrong to imagine that the HMRC are not looking at other areas as well. It has come to my attention that particular attention is being paid to sundry parties’ accounts. Basically, the OFPT are approaching UK banks for information in respect of customers for whom funds have been moved using sundry parties’ or suspense accounts. HMRC have been trawling their files relating to previous investigations for evidence that financial institutions have used such accounts for the systematic transfer of funds offshore on behalf of customers that bypassed their UK bank accounts and which might represent undisclosed profits or income. This is an area where the Irish tax authorities have had great success. Essentially, they realised that many offshore banks held accounts with onshore banks and used them on behalf of their (i.e. offshore) clients. For instance, someone with an offshore bank account might instruct their offshore bank to pay for their children’s school fees. This would actually be done using an onshore bank. Such transactions previously escaped the attention of anybody but now are likely to be investigated.
HMRC will also be searching for offshore trusts established by UK-domiciled settlors. In particular, they will be looking for income paid by offshore trusts to onshore beneficiaries that may not be being declared. In many cases, they suspect that such trusts will have been set up by the beneficiary’s parents who could well be deceased. Finally, HMRC are currently writing to taxpayers where they hold information at undisclosed bank accounts. They will have gained such information as part of the exchange of information that is now taking place between offshore jurisdictions and the UK.
Clearly, the British Government believe that there is an unacceptable UK tax risk in relation to offshore matters and the OFPT are out to prove it. Will they succeed? I doubt it. The Irish, Italian and even the Swiss tax authorities have all made a lot of noise about the success of their amnesties and investigations into offshore bank account and structures. In practice, they have brought in very little money. There is no doubt that HMRC are going to catch a few people and make an enormous nuisance of themselves… but my bet is that they will not see a substantial return on their investment.
EU SAVINGS TAX DIRECTIVE UPDATE
As readers will be aware, the EU Savings Tax Directive came into effect in July, and 22 different EU members are now required to share information about interest payments regarding the identity of the benefactor, residence, the payer of the interest, account number and the type of debt on which the interest is being paid. Anguilla, Aruba, the Cayman Islands and Montserrat will also exchange tax information on interest payments made to EU residents. Although they won’t participate in exchange of information, Austria, Belgium and Luxembourg are to impose a withholding tax on interest income during a transitional period. Similar arrangements have been put in place in Andorra, Lichtenstein, Monaco, San Marino and Switzerland. The British and Dutch territories of the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles and the Turks and Caicos Islands will also apply the withholding tax over the same period. If you hold funds in any of these locations, and banking confidentiality is important to you, you would be well advised to take action as soon as possible to move those funds elsewhere and to regulate your position. Please contact our ‘Ask the Experts’ panel – anonymously if you wish – if you need any advice on this or any other topic. The reply can be sent to you directly or published in the next issue of the newsletter.
HMRC have issued ‘production orders’ requiring credit-card companies to hand over records of offshore credit and debit cards. Officials are investigating records for information on UK-domiciled individuals suspected of evading taxes by keeping money in financial service centres such as Guernsey, Jersey and the Isle of Man. They suspect that such individuals are using credit and debit cards issued by banks in offshore jurisdictions to spend money that has escaped the British tax net. Initially, HMRC reportedly have 30,000 names and they intend to focus on some 1,000 individuals for suspected tax evasion.
Switzerland has put an end to two of its longest-standing tax practices designed to make the country attractive to offshore companies. These two tax practices, known as the 50/50 and the 80/20 tax rules, allowed companies to distribute substantial amounts of money in the form of ‘expenses’ without providing any written substantiation. Under Swiss tax law, the burden is on the taxpayer to demonstrate that expenses are tax-deductible, and the tax base is determined according to the commercial balance sheet. The 50/50 practice, which generally applied to re-invoicing companies, estimated deductible expenses to be 50% of gross profit, with the remaining 50% of profit subject to taxation. Under the 80/20 practice, intellectual property (IP) branches were permitted to deduct a lump sum of up to 80% of gross foreign-source income, with the remaining 20% subject to taxation. Under both practices, the taxpayer was not required to substantiate the expenses, although they could choose to demonstrate that their expenses were higher than 50% or 80% respectively.
These two practices were revoked by the Federal Tax Administration as of the 1st July. Under the new tax practice, all expenses must be commercially justified and documented in detail, and must meet the arm’s-length standard.
AUSTRALIAN TAX OFFICE CRACKDOWN OF OFFSHORE SCHEMES
The Australian tax office have made extensive raids around Australia acting on information suggesting that individuals have entered into offshore schemes directed at creating fictitious deductions or concealing income from tax. The Tax Commissioner, Michael Carmody, claimed that the schemes under investigation had relied on the use of offshore structures put in place by scheme promoters. In some cases, deductions were claimed for payments for fictitious expenses and services, in other cases, accessible income derived offshore was not brought to account in Australia but secretly returned disguised as loans, inheritances, gifts or through credit and debit cards. This type of activity is likely to increase in the UK where HMRC are currently remodelling themselves along the same lines as the Australian tax office.
The Organisation for Economic Cooperation and Development published a new model income-tax treaty and commentary on 7th September that increases their powers with regard to determining the criterion by which tax information may be exchanged. Although fishing expeditions by tax authorities are expressly forbidden, it will now be much harder for a treaty partner to decline to provide tax information.
GIBRALTAR LAUNCHES NEW TAX BREAKS
The Gibraltarian Government have announced several new tax breaks designed to attract overseas investors. The new tax measures, coupled with the fact that Gibraltar does not tax capital gains, are intended to strengthen Gibraltar’s position as an EU holding-company jurisdiction. Tax on savings income has been abolished. Taxation of dividends paid by one Gibraltarian company to another local company, and of dividends and interest paid by a company to non-residents, has also been abolished, as has the requirement to withhold tax from dividends paid by a Gibraltarian company to its non-resident shareholders. Other tax relief measures include the abolition of stamp duty on all transactions except real estate and share capital, although the stamp duty on the latter will be a flat fee of £10.
NEW ISLE OF MAN CORPORATE VEHICLE ANNOUNCED
The Isle of Man Government have announced their intention to create a new type of Manx corporate vehicle, the NMV. These new companies are designed to be simple and inexpensive to administer and to meet international obligations. In particular, they will remove the requirement to have Isle of Man-based directors and company secretaries and, in some cases, to make annual returns. They will also remove the requirement for overseas companies to register in the Isle of Man, providing that they are administered by a licensed corporate service provider.
A little-noticed provision of the 2004 American Job Creation Act – basically an attempt to stamp down on the use of offshore companies and trusts – is that any ‘US person’ who has more than $10,000 in an offshore account must declare it to the Treasury Department. The 30th June filing deadline has now passed and taxpayers who have failed to file may face a fine of up to $10,000.
The Inland Revenue have initiated a crackdown on independent financial advisors. Basically, they suspect IFAs of facilitating tax evasion – knowingly or unknowingly – by recommending that their clients invest in offshore vehicles. If an independent financial advisor is shown to have advised clients to open accounts offshore to hide profits, income or gains, or set up structures to hide the nature of transactions, they could face prosecution. The OFPT – part of HMRC – have now set up a specialist unit that will be concentrating solely on IFAs.
FEATURE ARTICLES
CANADA: THE ULTIMATE TAX HAVEN
If you are thinking of becoming non-resident, and you are trying to decide which country to move to in order to gain the greatest tax advantage, you may like to consider immigrating to Canada. Although Canada is a high tax jurisdiction, it is possible for new residents to escape the tax net for up to five years. This can be achieved by setting up a special offshore trust prior to taking up residence, the effect of which will be to shield your worldwide assets and income. Furthermore, you don’t, necessarily, actually have to spend very much time in Canada in order to use it as a tax haven. This is an important point for anyone keen to seek protection from the tax authorities of another jurisdiction.
Emigration is as easy as 1, 2, 3
Given how hard it is to immigrate to the United States, it may surprise you to learn that Canada is very keen to attract new residents. In order to gain permanent-residence status in Canada, you will need to apply for an immigrant visa. This will allow you to live and work anywhere in the country. Once you’ve had a permanent resident visa for a minimum of three years, you can, if you wish, apply for Canadian citizenship. Applications for permanent-residence status can take up to a year to process, although in certain instances the application will be fast-tracked by the Government. As with most developed countries, potential immigrants are assessed and awarded points on a number of criteria including: education, training, experience, occupation, arranged employment, demographic factor, age, language skills and familial links with the country. These criteria are standardised throughout the country, with the exception of the province of Quebec, where greater emphasis is placed on French-language skills and familial ties with the province. Potential immigrants must also undergo, and pass, a medical examination to demonstrate that neither they nor their dependents will represent a danger to public health and safety, nor have any ongoing conditions that could place excessive demands on the health or social services in Canada.
If you are a reasonably well-off individual (with assets of £250,000 or upwards), you should have no trouble gaining permanent-residence status, providing you agree to invest in a business. However, if you do not have this kind of wealth, or if you would prefer not to declare this level of wealth, there are other methods. For instance, you can apply under the ‘entrepreneur’ or ‘self-employed’ categories. These are both very liberal since Canada wishes to attract people who will start and run their own businesses – even small businesses. Another easy way to gain permanent-residence status is to become a farmer. You can purchase a farm in Canada for as little as £50,000, making this a relatively inexpensive option.
The importance of being resident
You may, or may not, actually wish to spend much time in Canada having gained your permanent-residence status. If you actually intend to actually live there, clearly you are not going to be worried about any other countries claiming you for themselves. However, if you are a perpetual traveller or you have reason to be worried about a particular country chasing after you, you will be interested to hear how residence for tax purposes works in Canada. Broadly speaking, you must fit one or more of the following profiles:
- You must be present in the country for more than 183 days.
- You must regularly, normally or customarily reside in Canada in a settled routine.
- You must have established residential ties in Canada such as a dwelling place, husband or wife, dependents, personal and real property or social ties.
Other indices of tax residence include: habitual visits to Canada, location of fixed and liquid assets, location of personal belongings such as clothing and location of immediate family. Non-residents will usually only pay a federal income tax on certain types of Canadian-source income (e.g. income from employment in Canada, income from business activities there and taxable gains from the disposal of taxable Canadian property) and provincial tax on a similar source basis.
Canadian taxpayers, however, are liable for income tax on their worldwide income and also a provincial tax that is usually around 50% of the federal rate. The full basic income-tax levels for Canadian residents in 2004 are:
- 16% on taxable income up to Can$35,000
- 22% on taxable income between Can$35,000 and Can$70,000
- 26% on taxable income between Can$70,000 and Can$113,804
- 29% on taxable income over Can$113,804.
However, providing the structure is set up prior to immigration, new expatriates can shelter foreign-source investment and other income in an ‘immigrant trust’ usually established in a suitable offshore jurisdiction for the first five years of residence, after which it becomes liable for Canadian taxation. However, the trustees must not be Canadian residents.
Clearly, if you add federal and provincial tax together, you could be paying around 44% as a higher taxpayer. On top of this there are various other, lesser, taxes as well as a capital gains tax (CGT) of 50%. Clearly, as a new immigrant you do not wish to be caught by any of these taxes on your worldwide income or assets.
Reporting requirements
Canadian foreign-reporting requirements mean that residents must report ownership of foreign property worth in excess of Can$100,000, transfer or loan money, or property held in a foreign trust or company and distributions or loans from foreign trusts in which they are beneficially interested. This means that the aforementioned immigrant trust must be reported, but at the moment is still protected from Canadian taxation.
Although the above reporting requirements apply to both expatriate residents and Canadian citizens, there are, in fact, some reporting exceptions for expatriates. These include: property used in an active business, interests in trusts where the expatriate is the beneficiary but not the settlor (e.g. family trusts), any interests in retirement plans that are qualified plans in the country of establishment (and therefore tax exempt) and personal-use property (including cars, boats and holiday homes strictly for personal use).
Immigrant trusts for new residents
As I have already explained, the foreigner becomes resident in Canada for tax purposes if he stays more than 183 days in the jurisdiction during tax year or if he qualifies as resident for one of the other reasons above. As such, you will be subject to Canadian tax on your worldwide income from the time Canadian residence is obtained. The taxation year of immigration is divided into two parts: the non-resident part, in which only Canadian-source income is taxed, and the resident part, which is fully taxed.
Non-Canadian property owned at the time of immigration is deemed to have a fair market value on the date the Canadian residency is obtained. Any new immigrant coming to Canada with a degree of personal wealth is likely to use an immigrant trust to avoid taxation for the first 60 months of Canadian residency. Such trusts do need to be reported, but their tax status has not yet been attacked.
With a view to deterring tax exiles, the Inland Revenue imposes a departure tax on individuals (including expatriates) seeking to change residence. Individuals who have been resident in Canada for less than five years are exempt from departure tax. Under the departure tax, all the individual’s capital assets are deemed sold at a fair market value on which CGT is payable. In Canada, an individual’s capital gains are included as part of his annual assessment to income tax.
So, in plain English, it is possible to move to Canada and avoid taxation on anything except your Canadian income for up to five years. Stay a day longer and you can expect to pay the same level of tax as a Canadian-born individual.
In conclusion
Is Canada a good location for international expatriates? The answer is it offers the following key benefits:
- It is ‘respectable’. Unlike moving to somewhere such as Vanuatu or the Isle of Man, it does not sound alarm bells with other tax authorities around the world.
- It is relatively easy to become a tax resident, providing you have a certain amount of wealth or that you can show that you are an entrepreneur or are willing to purchase and run a farm.
- You will benefit from all sorts of double-tax treaties that will provide you with added protection from threats by other tax authorities.
- You don’t necessarily have to spend a lot of time in Canada to become tax resident.
- You can pretty much avoid tax on all your worldwide income and assets for up to 60 months.
In other words, if you are looking for a medium-term home, Canada could be perfect. What do you do after five years? Move somewhere else!
CYPRIOT HOLDING COMPANIES: THE WAY FORWARD
In this article, we will be looking at the benefits offered by a Cypriot holding company. These have been available since the introduction of new tax legislation on 1st January 2003. As a result, Cyprus can now compete with the Netherlands and Luxembourg as offering significant tax benefits to multinational companies.
Perhaps it is worth starting by considering exactly what a multinational group requires from a holding company. First, the holding company must be able to take dividends out of the operating company free of withholding tax or at a lower rate of withholding tax than it would otherwise pay. Also, it must be able to dispose of its investment in the operating company without any liability to CGT or to its equivalent in the operating country. Secondly, some provisions in the domestic laws of a holding company’s jurisdiction should wholly or largely exempt such dividends and capital gains from local tax. Thirdly, the multinational should have the ability (and this, traditionally, has been the most difficult step) to take dividends out of the holding company without giving rise to any charge to tax in the holding company jurisdiction.
It is important to bear in mind, from the start, that the management and control of a holding company must take place in Cyprus. Registration in Cyprus alone is not sufficient to subject companies to tax in Cyprus. How do you ensure that ‘management and control’ is where you want it to be? You should make sure that:
- all the decisions effecting the holding company are made, and can be shown to have been made, by its board of directors in Cyprus
- decisions must be made by the board, exercising its powers independently of any particular director or shareholder
- the board should have a majority of Cypriot-resident directors; frankly, you should not consider using a Cypriot holding company if you cannot arrange the group’s affairs so that a reasonable amount of administration takes place in Cyprus.
So what are the main advantages offered by Cypriot holding companies? The key benefits are as follows:
- Incoming dividends should, under most circumstances, be exempt from local taxation. This means that dividends received by a holding company from its local and foreign subsidiaries should be tax-free.
- There should be no CGT. You shouldn’t pay CGT on the sale of shares.
- No withholding taxes. You shouldn’t pay any withholding tax on outgoing dividends being paid, for instance, to a separate parent company.
- Plenty of double-taxation treaties. Not only are there double-taxation treaties with most countries in the world but the EU interest/royalty Directive has been transposed into Cypriot domestic legislation and therefore the tax laws provide for exemption at source of interest where the beneficial owner is a non-resident.
- Interest expenses payable by a Cypriot company are fully tax deductible.
- The company may be capitalised with loans without any risk that interest paid at arm’s length to the parent company will not be deductible.
Basically, a Cypriot holding company is liable to be taxed in Cyprus on its worldwide income, providing that it is managed and controlled in Cyprus. As such, it should be able to take advantage of all sorts of double-taxation agreements and thus avoid a high level of tax in all the countries where it operates from. Even a relatively small multinational should be able to take advantage of the new Cypriot holding-company legislation as costs within Cyprus are relatively low.
Q – My offshore financial advisor has suggested that I establish a VISTA Trust. Could you please explain what this is, and what benefit it might offer me, in plain English?
A – One of the primary problems with discretionary offshore trusts is that the settlor has to accept (as do the beneficiaries) that the trustees are in full control of the trust’s assets. There are various things one can do to ensure that the trustees follow the wishes of the settlor/beneficiaries. However, at the end of the day, the trustees must be independent or else the trust becomes useless.
Entrepreneurs using a combination of offshore company and offshore trust to control their empires are often unhappy with the role that the trustees play in managing the businesses they are responsible for. Recognising this, the Government of the British Virgin Islands recently enacted the Virgin Islands Special Trusts Act. This enables special trusts, which are known as VISTA trusts, to be created. The law enables a shareholder to establish a trust of his company but disengages the trustee from managerial responsibility and permits the company and its business to be retained as long as the directors see fit. Essentially, it provides opportunities for individuals who wish to set up trusts to hold shares in their companies, but hitherto felt disinclined to do so as a result of the rigidity of such structures, to take advantage of the tax and other benefits offered by the BVI.
Q – Up until now, I have used alternative remittance systems – such as Western Union – to transmit cash around the world. I have read in the newspaper that such systems are now being monitored by the various tax authorities and that attempts are going to be made to close them down. Can you please advise me what is happening?
A – As readers will be aware, alternative remittance systems – such as the one operated by Western Union – offer terrorists and criminals the perfect opportunity to move cash from country to country without being detected by the appropriate authorities. Various attempts have been made to prevent alternative remittance systems from being used in this way. The main thing which has happened is that anyone sending or receiving money must be able to provide extensive evidence of their identity. Of course, as was seen in the recent London bombings, where a terrorist doesn’t make any attempt to hide his identity such rules make absolutely no difference. Another way in which the authorities monitor alternative remittance systems is by putting an upward limit on the amount of money that can be sent this way. However, by sending multiple amounts to different people from different locations, it is possible to circumvent these safeguards too. Finally, it must be remembered that not every country controls and monitors its alternative remittance systems with equal diligence.
For the sending customer (the originator of the money/value transfer), a transaction begins by the payment or handing-over of funds to the ARS operator. At this point, the originator also specifies the recipient or beneficiary for the transaction along with his location. The funds can be paid in cash, cash equivalent, cheques and other monetary instruments or in stored-value cards. In certain situations, the originator may pay funds directly into a bank account belonging to or controlled by the ARS operator. Cash remains the most prevalent form of funds at this stage. In large ARS networks, the customers generally have access to the ARS’s services through local (sub)agents.
The originator usually receives a unique reference to identify the transaction. This is then passed to the beneficiary. The originator’s only other role in the transaction will be to follow up with the originating ARS provider if the beneficiary reports a failure of the transaction.
The ARS provider at the originator’s location receives the funds and then sends an instruction for payment to a counterpart at the location of the beneficiary of the transfer. This communication may occur directly or through an intermediary as well as through different communication channels (e.g. fax, telephone or the Internet). ARS providers normally have a record of their partner ARS providers in the beneficiary’s location, who make payments on their behalf. With more-organised multinational operators, this list of partner ARS providers is usually available to the public; in some circumstances, it may be provided on request.
The operator may assign a code to the transaction. In an internationally franchised operation, this will usually be an easily recognisable multidigit unique number. In a hawala transaction, it may be a banknote serial number. This unique number will be communicated to his customer (originator) and the disbursing agent. The originating customer will usually communicate this unique number to his intended beneficiary, who will then be able to be identified by the disbursing agent.
The ARS operator at the destination for the remittance makes the corresponding payment on instructions from the originating ARS operator to the beneficiary specified by the originator, who meets the identification criteria. This may be a formal and recorded identification procedure or simply the person who knows the unique reference number. The ARS operator may have to satisfy two standards of compliance, depending on differences in compliance regimes in the sending and receiving country.
The money, once received at its destination, may be delivered directly to the beneficiary or else the beneficiary will be notified to go to the premises of the destination ARS operator to receive payment. Payments may be received in local currency, hard (international) currency or in the form of a cheque or bank draft. An identification code may be used to validate the payment. In a jurisdiction with money-laundering controls, the ARS operator could apply CDD-procedures to the beneficiary.
There are some interesting merging trends in this sector. Indeed, operators are flexible and progressive in finding new, profitable and efficient methods of transmitting money. For example, one new product is that of debit cards that can be bought for cash and then the value moved or paid out via automated teller machines and purchases made by anyone holding the personal identification number. This is an efficient way to move money securely and provides a flexible way for the money to be stored and retrieved. Mobile-phone companies are using the availability of SIM cards to be loaded with value and have that value removed to use phones as a method of storing, exchanging and remitting value in countries with developing mobile-phone infrastructures. Also there are various Internet-based remittance agencies that, sometimes in conjunction with major credit-card service providers, transfer funds to any beneficiary worldwide through the issuance of an ATM card.
To answer your specific question, if you wish to remain anonymous when using an ARS, you cannot possibly afford to use your own identity. Both anti-terrorist, criminal and tax authorities inspect the records of ARS operators and you cannot expect any degree of confidentiality. Frankly, you would be better off either arranging for someone else to send the funds for you, using alternative forms of ID or some other system of moving value around the world (such as bullion).
It is our intention to be as accurate in fact, detail, analysis and comment as possible. However, publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The Schmidt Offshore Report is sold on this understanding. The Schmidt Offshore Report is commissioned and published by Wentworth Publishing Ltd, 17 Fleet Street, London EC4Y 1AA. Email: wentworth@online.rednet.co.uk Tel: 020 7353 6606. © Wentworth Publishing Ltd 2005. All rights strictly reserved. This publication may not be lent, hired, reproduced (in any way whatsoever) or re-sold. This information is authorised for personal consumption only.
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