‘Taxpayer Friendly’ IRS Guidance Could Ease Offshore Worries
Barely a week after President Trump signed the Tax Cuts and Jobs Act into law, the U.S. Treasury Department and the Internal Revenue Service issued a guidance that could ease the confusion CFOs might have had about how corporations should calculate the act’s “transition tax” on offshore earnings. In amending section 965 of the Internal Revenue Code, the new law slaps the transition tax on the previously untaxed earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be “repatriated,” or subject to U.S. corporate income tax. Under the act, which became law on December 22, 2017, companies will now be taxed on foreign earnings held as cash and cash equivalents at a 15.5% rate and on the remaining non-cash earnings at an 8% rate. In contrast, companies will see their maximum tax rates on domestic income slashed from a previous maximum of 35% to a flat 21% rate. Companies can string out the transition tax payments in instalments over an eight-year period, according to the act. Prior to the December 29 guidance from Treasury and the IRS, however, it wasn’t clear how companies should calculate the one-time transition tax. (After paying the tax, U.S. companies will no longer be able to defer payment of U.S. tax on foreign earnings. Instead, they will have to decide whether earnings are truly onshore or offshore in the current year, and then be taxed just on the onshore earnings.) The guidance should largely ease CFOs’ worries about complying with the part of the new tax law that concerns offshore earnings, according to Pat Jackman, a principal in the international tax group of KPMG’s Washington national tax practice. Concluding that the guidance is, on balance, “taxpayer friendly,” Jackman points to a provision in the act that had company executives concerned that the new law would require companies to “double count” earnings on transactions made by their subsidiaries — and therefore pay a higher transition tax on them. “There was lots of uncertainty in terms of how certain calculations [would be] done, and, in some cases, there was a concern that the amount of cash would be overstated in the way that the statute was drafted,” Jackman says. “This notice clarifies that the procedure that taxpayers are allowed to employ will avoid overstating the amount of cash.” In terms of double counting (or double non-counting, for that matter), the tax years of two foreign subsidiaries of the same U.S. parent company may end on different dates. Such a situation could result in the parent company having to treat a transaction between the two subsidiaries two times, thereby overstating or understating its taxable income when it repatriates. The guidance provides an example in which USP, a calendar-year taxpayer, wholly owns CFC1, which has a December 31, 2017, year-end, and CFC2, which has a November 30, 2018, year-end. Further, USP’s share of the cash position of each of CFC1 and CFC2 is $100 for each of their taxable years, with the result that USP’s aggregate foreign cash position would be overstated at $200. Under the example, CFC1 might make a payment in, say, interest or royalties, to CFC2. Before the guidance, the parent company might have been expected to pay a 15.5% transition tax on that whole $200. The new guidance provides the IRS with the authority to clarify the situation in favour of the parent company that would halve the taxable cash-based income in the example. The revenue service could now adjust the company’s earnings “to ensure that a single item of a specified foreign corporation is taken into account only once,” according to the guidance. Article compliments IFC Review.
Bitcoin surges above $15,000 after climbing $2,000 in 12 hours
LONDON – Bitcoin rocketed above $15,000 for the first time on Thursday, after adding more than $2,000 to its price in fewer than 12 hours. Bitcoin, the world’s biggest and best-known cryptocurrency, has seen a more than fifteenfold surge in its value since the start of the year. It climbed to as high as $15,344 on the Luxembourg-based Bitstamp exchange around 1420 GMT, leaving it up more than 12 percent on the day, having traded just above $13,000 12 hours earlier <BTC=BTSP>. Many market-watchers said the launch this weekend of bitcoin futures by CBOE, one of the world’s biggest derivatives exchanges, was helping drive up the price on expectations it would draw more investors to the market. “Futures trading will mean more demand…and is a form of ratification of the underlying tech – bitcoin and cryptocurrencies in general. They are now on the main stage,” said Charles Hayter, founder of cryptocurrency data analysis firm Cryptocompare. But some are warning that the launch of bitcoin futures, which will allow investors to take speculative “short” positions on the cryptoccurrency, as well as “long” positions, could cause even greater volatility. “Aggressive traders, such as hedge funds and algorithm-driven funds, (will be able) to use this futures market to enter bitcoin trading with high levels of liquidity for aggressive short-selling and knock the prices really low,” said Think Markets analyst Naeem Aslam. “Players now have an incentive to be on the short side and make profits hedging against the upside.” The latest surge brought bitcoin’s “market cap” – its price multiplied by the total number of bitcoins in circulation – to more than $260 billion, according to Coinmarketcap, a trade website. That, in theory, makes its market value higher than that of Visa. The value of all cryptocurrencies now stands at around $415 billion, according to Coinmarketcap. Bitcoin has more than tripled in price since the start of October, putting it on track for its best quarter since the end of 2013, when it surged above $1,000 for the first time. It slumped in 2014, after Mt Gox, then the world’s biggest bitcoin exchange, collapsed, saying it had been hacked and had 650,000 bitcoins stolen. Article compliments Caribbean Business.com
New Paper Looks At How to Support Developing States on BEPS
The International Centre for Tax and Development has released a working paper on how to best support developing countries in the area of taxation. The paper says that developing countries would particularly benefit from support in the implementation of two areas that were covered by the OECD’s base erosion and profit shifting project: limitations on corporate interest deductions and the introduction of transfer pricing safe harbours. However, it says that it would be misguided to encourage developing nation tax authorities to implement all of the OECD’s recommendations in the area of BEPS without considering whether this is appropriate, particularly in light of any political or technical constraints. Instead, the paper, Assisting Developing Countries in Taxation after the OECD’s BEPS Reports, recommends that developing countries might instead benefit more from technical assistance that would build upon the recommendations from the OECD that are particularly relevant for their circumstances or needs, providing examples. Article compliments IFC Review.
FATCA repeal fails, new efforts focus on government agreements
U.S. senators on Friday rejected an amendment to tax-reform legislation that would have repealed the Foreign Accounts Tax Compliance Act, dashing immediate hopes for a repeal of the controversial 2010 law, reports the Cayman Compass. Kentucky Senator Rand Paul on Nov. 14 introduced his S. 869 bill that would have repealed FATCA. His bill was originally created in 2013 to address concerns about violations of personal privacy, “like NSA [National Security Agency] or snooping on cellphones,” according to Washington, D.C., lawyer and anti-FATCA activist James Jatras, who says he helped Mr. Paul draft the bill. 869 is divided into six sections comprising “repeal of withholding and reporting with respect to certain foreign accounts,” “repeal of information reporting with respect to foreign financial assets,” “repeal of penalties for underpayments attributable to undisclosed foreign financial assets,” “repeal of reporting of activities with respect to passive foreign investment companies,” “repeal of reporting requirement for United States owners of foreign trusts” and “repeal of minimum penalty with respect to failure to report on certain foreign trusts.” The House of Representatives on Nov. 16 passed its own tax-reform bill, which, after Friday’s Senate move, obliges a joint congressional committee to meet this week in an effort to “reconcile” the two, creating unified legislation that will come before each chamber for final passage. Friday’s failure to include S. 869 in the Tax Cuts and Jobs Act means FATCA will remain effective as activists shift their focus to the intergovernmental agreements that bind scores of countries to local enforcement of Washington’s legislation. The Cayman Islands, on Nov. 29, 2013, was among the early jurisdictions to sign a 46-page “IGA,” pledging to report U.S. citizens’ bank accounts and tax information to local authorities, who pass it to the Internal Revenue Service. Any failure to report assets to the IRS can result in substantial fines not only to account holders, but also to banks, insurance companies, brokerages and other entities – dubbed “foreign financial institutions.” Speaking from Washington, Mr. Jatras acknowledged Monday that lobbying for Mr. Paul’s legislation had fallen shy. “Short answer, no, we did not get into the Senate bill,” he said, pointing out that lobbyists introduced Mr. Paul’s bill only days before the Senate vote. “Keep in mind that this was a target of opportunity we did not anticipate. We took a shot; it looked good; we fell short. No info yet on why. Post-mortem efforts,” he said, adding that “since the repeal provision is not in either House or Senate bill, [the reconciliation] conference will not deal with it.” FATCA has long been accused of violating the privacy of U.S. citizens and, in some cases, local banking laws. It has also boosted what critics call a “global compliance industry,” generating fresh bureaucratic structures within FFIs, and expenditures in the millions of dollars. Locally, economist and director of regulatory consulting firm FTS Paul Byles acknowledged growth of a Cayman “compliance industry,” saying foreign financial institutions had “already invested heavily to implement FATCA,” but pointed to similar European requirements that would nonetheless sustain the bureaucracies were FATCA ultimately repealed. “While a repeal would reduce ongoing compliance costs, the general obligation to report tax-related information is already being carried out and certainly will continue in the case of CRS even if FATCA is repealed,” he said. CRS, common reporting standards, designed in 2014 by the Paris-based Organization of Economic Cooperation and Development, are based on FATCA’s Intergovernmental Agreements and oblige FFIs to report the assets of European depositors for purposes of tax and financial information. Mr. Byles said FATCA repeal would have minimal effect on the hundreds of Cayman foreign financial institutions: “The main implication is some reduction in compliance-related costs as the jurisdiction general has already adjusted to this type of reporting and the financial services sector continues to grow.” “In the Cayman Islands, the compliance investment has already been made. When you consider the significant investment firms have had to make to ensure they have systems to deal with FATCA, CRS, beneficial ownership and for anti-money laundering purposes, the repeal of a single initiative such as FATCA, while welcomed, is unlikely to have a major impact from a compliance perspective.” Brett Hill, president of Fidelity Bank, predicted the outcome of the Senate vote and reconciliation efforts. The repeal attempt had been low-profile, he said, and “to be honest, the reality is that the proposed amendment may not pass.” Butterfield Bank said the question “was best addressed in affiliation with CIBA [the Cayman Islands Bankers’ Association], who can respond on behalf of all banks in the jurisdiction.” CIBA said it was best “to address this from a holistic industry perspective should this come to pass,” referring questions to industry organization Cayman Finance, which said it was “not something that CF wants to comment on at the moment.” Pointing to intergovernmental agreements, Mr. Jatras said “there will be other, better opportunities in the future. I am meeting with Treasury [department officials] tomorrow [(Tuesday] and hope to know more after that.” FATCA critics claim intergovernmental agreements, never authorized by the act, are in effect bilateral foreign treaties, illegal because the U.S. Congress has never ratified them, and may be vacated by executive order. Article compliments IFC Review.
Ireland forced to collect Apple’s disputed €13bn tax bill
Ireland is to comply with a European Commission order to collect a disputed €13bn tax bill from the US firm Apple. The money is now being paid into a blocked separate account, while Ireland appeals the Commission’s decision. The Commission ruled last year that Ireland had given Apple illegal state aid by allowing it to pay an effective 1% corporation tax. Ireland was referred to the European Court of Justice after it failed to implement an order to collect the tax. The Irish government says it profoundly disagrees with the Commission’s analysis of the case. The Irish Finance Ministry said: “These sums will be placed into an escrow fund with the proceeds being released only when there has been a final determination in the European Courts over the validity of the Commission’s Decision.” Ireland has lodged an application in the General Court of the European Union for the Commission’s decision to be annulled. Meanwhile Apple is also challenging the Commission’s ruling. Its chief executive, Tim Cook, has called it “maddening”. An Apple spokesperson said the company was confident the General Court would overturn the Commission’s decision: “The Commission’s case against Ireland has never been about how much Apple pays in taxes, it’s about which government gets the money. “The United States government and the Irish government both agree we’ve paid our taxes according to the law.” Why doesn’t Ireland want the money? The case comes out of a two-year investigation by the EU’s competition chief Margrethe Vestager into so-called sweetheart tax deals in 1991 and 2007. In 2016 she said the Commission had found Apple guilty of receiving illegal state aid. The sum now being collected is roughly equivalent to the cost of Ireland’s entire national health budget. Ireland’s reluctance to collect the taxes from Apple is partly because it believes it may damage its reputation as an investment destination which has attracted multi-national companies such as Apple, Intel and Pfizer. Ireland’s corporate tax rate of 12.5% is among the lowest in Europe and it believes this is crucial to that reputation. But the European Commission believes that for Apple the tax rate was much, much lower. The Commissions’s investigation concluded that Apple had effectively paid 1% tax on its European profits in 2003 and down to about 0.005% in 2014. At the time, Ms Vestager said that Ireland had given Apple “selective treatment” enabling it to “pay substantially less tax than other businesses over many years.” Tax uncertainty Another reason for Ireland’s refusal to accept the Commission ruling is that all the funds may not necessarily end up in Irish government coffers. The Commission has said that other countries could claim part of the tax if they believe that sales (and other activities) “could have been recorded in their jurisdictions.” And it added that Ireland’s tax take could be reduced if the US forces Apple to pay more back to the parent company. This leaves Ireland at the centre of an uncertain tax situation on both sides of the Atlantic. Article compliments IFC Review.
Hedge Funds Try a Quant Approach to Tackling Cryptocurrencies
A daring few hedge funds are attempting to apply rules and models to the wildest market out there — cryptocurrencies. There are now more than 100 cryptocurrency hedge funds that have launched in the past two years, but only a handful use quantitative analysis techniques, which rely on numbers crunching to identify opportunities and improve returns. The proliferation of portfolios and trading strategies reflects growing investor interest. One of the most prominent funds taking a quant approach comes from Dan Morehead’s Pantera Capital Management, which started investing in bitcoin in 2014. Its first fundraising round closed on Oct. 31, and it started trading last month. “We expect institutions to get their initial exposure to crypto with this particular fund,” Pantera Vice President Paul Veradittakit said in an email. “We believe that investors have different risk profiles, return expectations and liquidity preferences, so we’ve decided to create a menu of different investments strategies and products to cater to the masses.” The Pantera Digital Asset Fund is the firm’s fourth cryptocurrency portfolio and the first to invest mostly in digital tokens trading in the secondary market. The Pantera Bitcoin Fund invests only in bitcoin, the Pantera Venture Fund is a traditional venture capital fund, and the Pantera ICO Fund buys digital tokens before they’re issued. The firm is managing over $400 million across the four different strategies. Crypto Factor In addition, Pantera is applying factors often used in smart-beta investing, such as low volatility, sizing, betting against beta, and momentum, Veradittakit said. While quant analysis can help traders exploit “massive inefficiencies” in crypto markets, it will be hard to build models because the data’s relatively limited, said Benjamin Dunn, president of the portfolio consulting practice at Alpha Theory, which works with money management firms. “Not sure how you approach a largely unregulated and emotional market where there’s one, very limited history,” Dunn said. “I’d be curious how they’re able to have any kind of predictability around a very limited data set as usually quaint models require a significant amount of data.” Veradittakit declined to disclose Pantera’s quant fund returns, but said the firm tests its models against bitcoin, ether and other top crypto index funds, and “our models have performed very well comparatively,” he said. Bitcoin rallied more than 50 percent in November alone, while the MVIS CryptoCompare Digital Assets Index, which includes the 10 largest cryptocurrencies, soared more than 60 percent. The real challenge for Pantera’s robots will come when the tide turns. Article compliments IFC Review.
Banks May Lose Up to 15% of Europe Stock Trading Revenue under MiFID
The world’s biggest banks may lose as much as 15 percent of their revenue from trading stocks in Europe as a result of new rules overhauling the industry that take effect next month, according to research firm Coalition Development Ltd. Total revenue from corporate and investment banking across Europe, the Middle East and Africa is forecast to slide 2.6 percent as a result of the revised Markets in Financial Instruments Directive, or MiFID II, including the slump in cash equities, the research shows. Fixed-income trading and banking, which account for the vast majority of revenue, will fall 4.2 percent and 1.7 percent respectively under the rules, Coalition said. Many companies are unprepared for the impact of MiFID even as the sweeping overhaul of financial rules threatens to upend business models and add to legal and regulatory costs, analysts have said. The regulations, intended to boost transparency and give consumers better control over the fees they’re paying, could compound challenges faced by executives at lenders including Deutsche Bank AG, Credit Suisse Group AG and Barclays Plc, who are already struggling to boost revenues in an era of negative interest rates and low volatility. “Cash equity revenue will decline across the board. Research will be hardest hit as the buy side will cut how much they pay the industry,” said Eric Li, research director at Coalition. At the same time, the shift to alternative venues will increase banks’ costs, he said. “We will see very painful conversations with banks trying to recover some of these costs via higher fees from their clients.” The decline may take place over two years, the report said. The overall impact of the new rules on banks is limited because cash equities represent just a small part of most companies’ revenue, according to Coalition, which tracks the performance of the largest investment banks. Unbundling Services MiFID will force buy-side firms to pay for research separately, rather than receiving it as part of a bundle of services in return for paying trading commissions, in an effort to ensure fund companies act in their clients’ best interests. The change could reduce incentives for investment companies to trade and prompt them to shop around for the best prices. The stakes are highest for cash equities because research and trading services have historically been more closely intertwined than in fixed income. European institutions paid about $2.9 billion in cash equity commissions for the 12 months through June, according to Greenwich Associates. Of that amount, 46 percent was used to pay for equity research and advisory services. Banks including JPMorgan Chase & Co. have been slashing fees on research to grab a bigger piece of a shrinking pie. Cash equities, the trading of common stock on public exchanges, has generated about $6.9 billion of revenue for the world’s biggest banks so far this year, Coalition data show. Many banks already struggle to turn a profit from the cash equities business, Andrea Orcel, head of investment banking at UBS Group AG, said at an event in London earlier this year. MiFID will make that task harder and is likely to create “concentration” in the market, he said. In a sign that the consolidation is already under way, France’s Natixis SA and Oddo BHF said on Wednesday they’re seeking to combine their teams in cash equities to bolster their position as increasing regulatory burdens weigh on European brokers. Natixis would transfer its equity-brokerage and equity-research activities in France to Oddo BHF, and would absorb Oddo BHF activities that give clients advice on capital increases and listings. “If you think about cash equities, people say the top five clearly break even and everyone else doesn’t,” Orcel said in September. “I actually think it’s inside the top five, the top five doesn’t break even. Now you look at this environment. You’ve just moved the bar up.” Article compliments IFC Review.
UK investigates Brexit campaign funding amid speculation of Russian meddling
LONDON – Britain’s Electoral Commission is investigating whether a leading anti-EU campaigner breached referendum finance rules, after speculation mounted that Russia may have meddled in the Brexit vote. Arron Banks, a major donor to the anti-EU campaign who was pictured with Donald Trump and leading Brexiteer Nigel Farage outside a gilded elevator soon after Trump’s 2016 U.S. presidential election victory, denied the allegations. The Electoral Commission, which is already looking at whether Banks’ pro-Brexit Leave.EU group received any impermissible donations, said its new investigation would examine whether he was the true source of loans to a campaigner. The investigation cannot overturn the referendum, though Banks, a 51-year-old insurance tycoon, said it was an attempt by the “Remain establishment” to discredit the Brexit result. “Allegations of Brexit being funded by the Russians … are complete bollocks [rubbish] from beginning to end,” Banks said in an emailed statement, signing off “nostrovia”, a version of “na zdorovye”, Russian for “cheers!”. When asked about the investigation, Prime Minister Theresa May told parliament: “We take very seriously issues of Russian intervention, or Russian attempts to intervene, in electoral processes or in the democratic processes of any country.” The announcement of the investigation comes after Ben Bradshaw, a lawmaker from the opposition Labour Party, asked the government to look into reports by advocacy group Open Democracy that the origin of some campaign funds was unclear. Bradshaw said he was also concerned about what he said were significant British connections in the U.S. investigation into whether the Trump campaign colluded with Russian efforts to meddle in the presidential election. Russia denies meddling in Brexit or the U.S. election and Trump denies any collusion with Russia. In the June 23, 2016 referendum, 17.4 million votes, or 51.9 percent of votes cast, backed leaving the EU while 16.1 million votes, or 48.1 percent of votes cast, backed staying, a result that defied opinion polls. VOTER CONFIDENCE The Electoral Commission, which did not mention Russia, said it was looking at whether a company called Better for the Country Limited (BFTCL) – of which Banks was a director – was the true source of donations made to campaigners. BFTCL was not registered as a permitted participant in the referendum but five registered campaigning groups reported receiving donations from it totalling 2.4 million pounds, the Commission said. Banks, who was a registered permitted participant, gave three non-commercial loans to Leave.EU, totalling 6 million pounds. Participants in the referendum were only allowed to accept donations from donors that conformed to a strict set of rules, for example, they could not be based outside the UK. The Commission said in April it was investigating Leave. EU’s funding as well as looking at whether its spending return was complete. “Questions over the legitimacy of funding provided to campaigners at the referendum risks causing harm to voters’ confidence,” said Bob Posner, director of political finance and regulation at the Commission. “It is therefore in the public interest that the Electoral Commission seeks to ascertain whether or not impermissible donations were given to referendum campaigners and if any other related offences have taken place,” he said. The Commission has the power to impose fines and other sanctions if it finds rules were broken. Article compliments Reuters.
U.N. calls again for end of U.S. embargo on Cuba
UNITED NATIONS – The United Nations General Assembly on Wednesday adopted a resolution calling for an end to the U.S. economic embargo on Cuba, with the United States voting against it after abstaining last year for the first time in 25 years. The 193-member General Assembly passed the resolution with 191 votes in favour. Israel, as it has done in the past, voted in line with its top ally. The non-binding resolution urges the United States to repeal the embargo on Cuba as soon as possible. The U.N. vote can carry political weight, but only the U.S. Congress can lift the full embargo, put in place more than 50 years ago. U.S. Ambassador to the United Nations Nikki Haley called the plenary meeting on this subject “political theatre.” “The Cuban regime is sending the warped message to the world that the sad state of its economy, the oppression of its people, and the export of its destructive ideology is not its fault,” Haley told the General Assembly. The U.S. position had been announced on Tuesday at the State Department. Cuba’s Foreign Minister Bruno Rodriguez said Haley and the United States lack “the slightest moral authority to criticize Cuba,” calling her remarks “disrespectful” against Cuba and its government. Tensions have flared recently between Washington and Havana, which forged a closer relationship under former U.S. President Barack Obama and reopened embassies in both countries in 2015. Haley said the diplomatic status between both countries is not changing. U.S. President Donald Trump said earlier this month he believed Havana was responsible for a series of alleged incidents that Washington says harmed 24 of its diplomats, while Cuban officials said last week talk of acoustic strikes was “science fiction.” Article compliments Reuters
Malta Aims to be a Blockchain Trailblazer
Malta’s Parliamentary Secretary, Silvio Schembri, has set out the government’s vision to become a trailblazer in the digital economy. Addressing media at a recent press conference held at the Malta Information Technology Agency (MITA), which drives the use of information and communications technology on the island, he said the government intends to use next year’s budget to provide the necessary tools to make this happen. This includes prioritizing investment in MITA’s first national blockchain lab, funding specialization in blockchain technology, and investing in a “blockchain hub” to help start-ups harness this technology. The aim of these initiatives is to increase the use of blockchain technology across the island, including government, with the long-term plan to turn Malta into a “Blockchain Island.” With regards to the financial sector, Schembri said the island’s government will continue exploring and exploiting the sector’s potential. To this end, Malta’s financial services regulator, the Malta Financial Services Authority, is consulting on the use of virtual currencies by collective investment schemes and plans to issue a study on regulating those who provide services of investment by means of cryptocurrencies. Schembri concluded by saying: “The same way we became successful in the igaming sector, we can be successful in the blockchain sector.” Article compliments IFC Review.
The OECD Releases Comments on Taxing the Digital Economy
Ahead of a November 1 meeting with stakeholders to discuss next steps, the OECD has released the feedback it received on emerging policy ideas on taxing the digital economy. On September 22, 2017, the OECD released a request for input on further work on base erosion and profit shifting Action 1, on addressing the international tax challenges raised by the digitalization of economic activities. The request for input was released shortly after ten EU countries, led by France, Germany, Italy, and Spain, threw their weight behind the concept of an “equalization tax” on digital companies that are subject to a low tax burden or an alternative measure. The OECD’s “Final Report” on BEPS Action 1 report, on addressing the tax challenges of the digital economy, was published in October 2015. It recognized that digitalization, and some of the resulting business models, present challenges for international tax policymakers. However, the report also acknowledged that it would be difficult, if not impossible, to “ring-fence” the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalization. In the context of direct taxation, the 2015 report considered a new tax nexus concept of “significant economic presence,” the use of a withholding tax on certain types of digital transactions, and a “digital equalization levy.” None of these options was recommended for adoption, although it was acknowledged that countries could introduce any of these options in their domestic laws as additional safeguards against BEPS, provided they respected existing tax treaties and international obligations. Instead the OECD recommended instead that other areas of its BEPS Action Plan would address the digital economy, such as Actions 3, 6, 7, and 8-10, and put forward indirect tax proposals instead. However, the OECD is now revisiting the work on direct taxation, which has seen increasing focus from the EU. In its recent consultation, it specifically asked for feedback on the design of an “equalization levy” and proposals for digital permanent establishment rules. It also sought comments on the impact of digitalization on business models and value creation, challenges and opportunities for tax systems, and on the implementation of the measures outlined in the BEPS package. This consultation closed on October 13, 2017. On October 25, 2017, ahead of a November 1 public meeting with stakeholders, which will be streamed online for those not attending in person, the OECD released all the feedback it had received from stakeholders. It received comments from a total of 62 stakeholders – an unusually high number, compared with the responses received in earlier consultations on BEPS Action items – from the private sector, tax professionals, business associations, think tanks, and universities. The November 1, 2017, meeting will be held at the University of California, Berkeley. Speakers and other participants at the public consultation have been selected from those who provided timely written comments on the request for input, the OECD said. No advance registration is required to view the meeting in real-time online, and a replay is to be made available by the OECD after the meeting. Article compliments IFC Review.
EU Would be Wrong to Blacklist Guernsey says Former Chief Minister
Guernsey lawmaker and former chief minister Lyndon Trott has said he will deliver a clear message that Guernsey is a reputable international financial center, with real economic activity and substance, in his forthcoming meeting with the EU. Trott said it is vital Guernsey takes a strong stance when engaging with EU member states, not least given the EU’s ongoing “screening process” of third countries to establish a new “tax haven blacklist.” “The EU Code of Conduct Group is currently assessing about 90 non-EU jurisdictions on tax transparency and economic substance – though, to date, their panel has not shared its assessment of jurisdictions with those they are looking at. The Code of Conduct Group should remember that only a few years ago Guernsey voluntarily submitted its tax regime for evaluation, and it was found fully compliant with EU rules. If it isn’t now, then the goalposts have been moved and no one has told us,” said Trott. “Guernsey is not and never has been a ‘brass plate’ jurisdiction. We do not host corporate business unless it has substance in Guernsey, and by that we mean our view is the same as any expert – real people making real decisions in real time. Moreover, we have committed ourselves to the principles of the OECD’s anti-base erosion and profit shifting (BEPS) plan.” “Guernsey does not facilitate tax evasion – we have a General Anti-Avoidance Rule in place – and it does not make tax rulings for corporates. We also have a beneficial ownership register in place that facilitates timely and verifiable information exchange with other jurisdictions – and we are one of the very few jurisdictions in the world to regulate trust and corporate service providers, having done so since 2000.” Trott concluded: “These are crucial facts about Guernsey that need to be understood by EU Member States. I aim to use my trip to Brussels to ensure that message is heard loud and clear.” Article compliments IFC Review.
OECD Considering How to Tax Online Sales: Tax Chief
The OECD may look to revise controversial rules on how to define a taxable branch, with an eye toward online transactions, the organization’s tax chief said. Pascal Saint-Amans, the Organization for Economic Cooperation and Development’s director for tax policy and administration, said the OECD would consider expanding the definition of permanent establishments—recently tweaked in the organization’s base erosion and profit shifting (BEPS) project—as it develops a 2018 report to the Group of 20 on tax issues in the digital economy. “That’s what we’re working on, with the idea of further expanding the PE definition that includes something that would track the digital presence of a company,” Saint-Amans said during an Aug. 28 panel discussion at the International Fiscal Association Congress in Rio de Janeiro. He added that the OECD would also look at profit attribution rules and possible interim measures such as an alternative tax on e-sales. He suggested “ALES” as a potential acronym for the alternative tax. How to source taxation in the online world has become an increasingly difficult and controversial topic among tax administrations. While the BEPS project aimed to address many of those concerns, Saint-Amans conceded the project had not produced a complete agreement. After the panel, Saint-Amans told Bloomberg BNA that he hopes the OECD can help provide some measure of agreement as countries consider unilateral actions to tax online sales—but he wasn’t optimistic. “Will there be any sort of agreement on an interim solution? I don’t think so, because there’s a big divide between the U.S., the Europeans, and Japan,” he said. The 2018 report is being developed by the OECD Task Force on the Digital Economy, and follows a G-20 communique, issued July 8, which emphasized the “tax challenges raised by digitalisation of the economy.” Inconclusive During the panel, Saint-Amans admitted that the work of the BEPS on Action Item 1, which dealt with the digital economy, hadn’t produced a strong consensus. “Action 1 was conclusive, but not that well conclusive as regards the corporate income tax,” he said. “And we can see there is no stability here.” The Action 1 BEPS report laid out new principles for collecting general service and value-added taxes, including a rule stating that difficult-to-pinpoint transactions should be taxed at the normal location of the consumer. But on stickier corporate income tax issues related to online transactions, the OECD neglected to write specific rules, claiming that it was impossible to separate the digital economy from commerce in general. A separate BEPS report on Action 7 rewrote the rules for defining a permanent establishment. The report targets structures that allow companies to do business in a country without triggering taxation. But the report stopped short of declaring that digital activity alone could create a taxable presence for income. India’s Perspective Akhilesh Ranjan, principle chief commissioner of income tax at India’s Ministry of Finance who spoke on the IFA panel, said he supports revising the permanent establishment and digital economy rules, blasting the current regime as failing to recognize reality in today’s business environment. “The current tax rules, we believe, are not prepared to take into account the role the market plays in this,” Ranjan said. “Market conditions do create value, and this value is not captured by standard methods of transfer pricing.” Ranjan said in the context of digital services, “there is a distinct element of value creation or addition which is created by the market itself, and that is something which must be compensated and remunerated.” Attributing Profits Ranjan also criticized the OECD’s rules on attributing profit to a permanent establishment, which rely on using transfer pricing principles to tax the branch as if it was a distinct subsidiary. “An attribution scheme which is only based on a functions, assets and risks analysis is heavily lopsided for the supply side, and not considering demand-side factors, which also create value,” he said. Ranjan said India’s recently enacted equalization levy, which imposes a withholding tax on outbound payments for advertising when there isn’t a permanent establishment, was “sort of an interim” measure until the OECD develops stronger rules on these issues. “We really strongly believe that the world must realize that we have to consider the challenges posed by the digital economy, whether or not it’s a BEPS risk in the technical sense of the term,” he said. Article compliments IFC Review.
Misleading Claims about Multi-National Corporate Tax Avoidance
Global political leaders can’t seem to agree on much these days, except perhaps for one thing: cracking down on corporate tax avoidance. Over the past few months, more than 100 countries have signed the Inclusive Framework sponsored by the Organisation for Economic Cooperation and Development (OECD), which sets common rules for addressing base erosion and profit shifting, commonly known as BEPS. Despite the stampede to address this issue, it is still an open question as to how much corporate tax avoidance is actually draining government coffers and what harm, if any, it is having on the global economy. Activist groups that have pushed for these rules, such as the Tax Justice Network and Oxfam, say BEPS is denying developing countries of the resources they need to grow and deliver important services such as health care and education. The recent Oxfam report “Making Tax Vanish”, claims that “tax avoidance hits the poorest the hardest…Reduced quality and accessibility of these essential services means that women and girls often fill the gap through unpaid or low-paid work. Societies become more unequal, as it becomes harder for those at the bottom to improve their lives and escape poverty.” So how much is tax avoidance by multinational enterprises (MNEs) costing developing nations? Estimates vary widely, but Oxfam points to a 2015 report by the United Nations Conference on Trade and Development (UNCTAD) which estimates that BEPS cost developing countries $90 billion in 2012. Developed countries, by contrast, lost an estimated $110 billion. While $90 billion is surely a lot of money, it turns out that MNEs already contribute quite a lot to developing nations through corporate income taxes, social insurance taxes, and natural resource royalties. These taxes are in addition to the capital investments MNEs make in developing countries. UNCTAD estimated that the foreign affiliates of MNEs paid as much as $730 billion in total taxes on the profits generated by some $5 trillion in capital investments they had in developing countries as of 2012. Corporate income taxes amounted to $220 billion in revenues, taxes on trade and social insurance contributions added another $210 billion, while taxes on property and natural resource extraction totaled roughly $300 billion. Relative to their profits in these countries, the amount of taxes paid by MNE foreign affiliates is not trivial. UNCTAD estimated that “the total contribution to government revenues represents about 50 percent of foreign affiliate commercial profits, with minor variations by region.” So foreign firms are basically splitting their profits with developing nations. As large as these tax payments are in cash terms, they represent a very small share (10 percent) of the $6.9 trillion in total tax revenues collected by developing nations in 2012. If countries were to capture the $90 billion in revenues “lost” to tax avoidance, it would lift that share to 11 percent, equal to adding one more penny of tax revenues to every $1 collected by these developing nations. Domestic corporations are far more important taxpayers in developing countries, contributing more than one-third ($2.5 trillion) of the total tax revenues collected. These facts run completely contrary to the narrative maintained by development activists that raising taxes on multinational firms is key to funding essential public services. Another revealing finding of the UNCTAD report is that tax avoidance seemingly has no impact on reducing the effective tax rates (ETRs) paid by foreign firms relative to their domestic counterparts. UNCTAD’s own firm-level analysis “finds that the ETRs for foreign affiliates and domestic firms are substantially aligned. Other studies have also found no evidence of a substantial difference in ETR between domestic companies and MNEs.” If foreign and domestic firms have the same ETRs despite all the alleged tax avoidance, what does this say about profit shifting being a “problem”? It could mean that domestic firms are as adept at tax avoidance as foreign firms. (Which is plausible in some developing countries where corruption is a major issue; although the same findings hold for developed countries as well.) More likely, it means that BEPS is not as big of a problem as the activists and bureaucrats at the OECD suggest it is. This is sort of like caffeine in coffee. There is such a thing as a lethal dose of caffeine. But a few cups of coffee a day is not going to kill you. As if to undermine the significance of their own estimates of tax avoidance, UNCTAD researchers issued this warning to global leaders: “[A]ny policy action aimed at increasing fiscal contribution and reducing tax avoidance, including the policy actions resulting from the BEPS project, will also have to bear in mind the first and most important link: that of tax as a determinant of investment.” In other words, taxes matter a lot to investment decisions. Therefore, development activists and global tax collectors have a choice: they can try to collect that last penny of tax revenue from MNEs, or they can have the investment projects that MNEs make possible. They just can’t have both. It may be too late. With more than 100 nations committed to addressing BEPS, it seems as though the global community is speeding down the path of creating a solution more harmful than the “problem” itself. If global investment stalls as a result, the poor will then truly suffer. Article compliments IFC Review.
Trump’s populist message on taxes comes with heavy dose of corporate rate cuts
Trump’s speech didn’t mask the fact that lawmakers still face a wide range of knotty questions when they return to Washington next week, reports Politico. President Donald Trump kicked off his efforts to sell a big tax package to voters on Wednesday, calling for a “pro-American” system that would cut tax rates for businesses and offer a boost to the middle class. Trump maintained that a new tax system was crucial to ushering in a new prosperity in the U.S., in a speech that White House officials acknowledged beforehand would be light on policy details. The president laid out several principles for tax reform, including cleaning the code of tax breaks and offering tax relief to middle-class families. But in a speech meant to put a populist polish on tax reform, Trump also spoke repeatedly about the need to lower the statutory corporate tax rate — which, at 35 percent, stands among the highest in the industrialized world — and to give companies more opportunity to bring back profits they’ve stashed offshore. “Instead of exporting our jobs, we will export our goods. Our jobs will both stay here in America and come back to America. We’ll have it both ways,” Trump said at a Springfield, Mo., manufacturer, adding that millions of people would move from welfare to work and “will love earning a big fat beautiful paycheck.” “We believe that ordinary Americans know better than Washington how to spend their own money and we want to help them take home as much of their money as possible and then spend it,” he said. “So they’ll keep their money, they’ll spend their money, they’ll buy our product.” But Trump’s speech also underscored just how big a challenge he and a Republican Congress will face in pulling off a true overhaul of the tax code. The president only briefly touched on policy details, saying that businesses would “ideally” be taxed at a top rate of 15 percent and that the tax code would contain incentives for child care — a top priority of his daughter, Ivanka Trump. The president also laid bare some of the tensions that have erupted between the White House and GOP lawmakers following the implosion of their efforts to repeal Obamacare. “I am fully committed to working with Congress to get this job done,” Trump said. “And I don’t want to be disappointed by Congress. Do you understand me?” Trump’s speech was aimed at showing that Republicans have the message down on tax reform, but lawmakers have yet to confront the monumental task of turning the rhetoric into reality. Senior White House officials this week repeatedly billed the president’s speech as an address focused on why tax reform needs to happen, not how it will materialize. That’s the sort of big-picture cover on taxes that Trump didn’t offer congressional leaders in their doomed efforts to repeal and replace Obamacare. But while congressional leaders undoubtedly welcome the president making the broad case for a tax revamp, Trump’s speech doesn’t mask the fact that lawmakers still face a wide range of knotty questions when they return to Washington next week. Republicans still have to figure out how to pass a budget this fall, a process that will play a big role in deciding how generous a tax plan they can write. They also have to decide whether tax changes should be permanent or temporary, or a mix of the two, and whether their plan should be a net tax cut that would add to the deficit. And that’s before they will feel the full brunt of a massive lobbying push on what would be the first major tax overhaul in more than 30 years. Already, GOP lawmakers are starting to hear from industries that might be the losers in a tax overhaul, such as big corporations that don’t want a minimum tax on foreign earnings and a retirement sector wary of potential changes to savings plans. The hurdles won’t be limited to policy, either, after a summer that saw both sides of Pennsylvania Avenue grow increasingly wary of the other as the GOP’s health care efforts imploded. Republicans on Capitol Hill steamed privately in July that Trump’s obsession with White House infighting and the Russia controversy was a major factor in the death of the repeal effort. They’re crossing their fingers that he won’t be so easily distracted on tax reform. That’s because Hill Republicans will need Trump to use his bully pulpit for tax reform to cross the finish line, and GOP leaders believe Trump is uniquely able to reach the entire electorate in a way Hill leaders never could. As one House GOP leadership aide put it, the speech shows the White House is rowing in the same direction as the Hill, reassuring lawmakers that tax reform is possible. But the ultimate test will come when the House, which is expected to move first on taxes, drops its bill. There are questions, following the health care debacle, over whether the White House will embrace the legislation as its own — or distance itself from the plan as a House effort once the critics and special interests start getting louder. GOP leaders on the Hill say the weekly tax reform meetings with administration officials suggest that the White House and Congress will stand firm in their unity behind the jointly laid plan. Meanwhile, top Trump aides and advisers, like Gary Cohn, the director of the National Economic Council, have made it clear that lawmakers will take the lead on actually writing the tax bill. “The administration has been very well represented in this process,” a senior White House official said Tuesday. That unity will be tested, however, when various interests start picking apart the plan. Plenty of powerful industries could be hurt by a tax overhaul, which will undoubtedly complicate efforts to get lawmakers on board with the effort. The housing sector, for instance, is concerned about chatter that Republicans would consider both capping the mortgage interest deduction and ending the deduction for state and local taxes. The GOP is also looking at curbing the pre-tax benefits for contributing to retirement accounts, raising anxiety among that industry. All sorts of businesses are also worried that Republicans might end the long-standing deduction for business interest, something the House GOP proposed in its blueprint last year. Trump to seize populist mantle for pitching messy tax overhaul The Alliance for Competitive Taxation, a coalition that includes Google, IBM and Pfizer, warned against across-the-board limits on the interest deduction in a new paper this week while also coming out against a minimum tax on offshore earnings that has gained traction since the death of the House GOP’s border adjustment. “Imposition of a foreign minimum tax on the active business income of U.S. companies would have unintended and adverse consequences,” wrote the group, which also wants Washington to drastically cut the corporate tax rate from 35 percent and to generally limit the taxation of offshore income for multinational corporations. Beyond the policies that have yet to be ironed out, Hill Republicans still have to pass a budget in order to tackle partisan tax reform — a major hurdle in itself. House Republicans, divided among moderates and conservatives, have been unsuccessfully trying to reach a budget deal for months. But while GOP insiders believe they’ll finally advance their fiscal blueprint in September, they’ll still need to strike a deal with Senate Republicans, whose fiscal blueprint is likely to look entirely different, sending the House back to square one. Without a budget, Republicans would need Democrats to pass any tax bill — an uphill battle for an increasingly unpopular president, especially considering that 45 Senate Democrats have vowed not to back any measure that includes tax cuts for the wealthy or adds to the deficit. “The millionaires and the billionaires in this country are doing just fine, God bless them, don’t have any problem with that,” Senate Minority Leader Chuck Schumer said Wednesday in a conference call ahead of Trump’s speech. Article compliments IFC Review.
Isle of Man joins Commonwealth body in strategic Brexit move
The Isle of Man, one of the UK’s crown dependencies, plans to strengthen its economic links with Commonwealth countries ahead of Brexit by becoming a strategic partner of the Commonwealth Enterprise and Investment Council (CWEIC), reports International Adviser. The move was announced by Howard Quayle, chief minister for the Isle of Man, as one of a series of measures aimed at preserving – and possibly strengthening – the crown dependency’s economic status after Britain’s planned withdrawal from the European Union. Home to 2.4 billion people, The Commonwealth is a voluntary association of 52 independent and equal sovereign states that are mostly former territories of the British Empire. “Looking ahead to a world beyond Brexit, the Commonwealth offers a global network of markets and opportunities that the Isle of Man is particularly well placed to support,” said Quayle, who will represent the crown dependency on the organisation’s advisory board. “We specialise in facilitating international trade and investment and we look forward to making a positive contribution to the work of the CWEIC.” As a crown dependency, the Isle of Man cannot be a member of the Commonwealth in its own right. However, by becoming a strategic partner of the cross-governmental association, it “will build on existing business links with Commonwealth members such as South Africa and India and help to open up new opportunities for the island,” the government of the Isle of Man said in a statement. The Council is also responsible for the Commonwealth Business Forum, part of the biennial Commonwealth Heads of Government Summits which is to be held in the UK next year. “We are delighted to welcome the Isle of Man as a Strategic Partner of CWEIC,” Lord Marland, chairman of the Commonwealth Enterprise and Investment Council, said. “It is a great testament to the Isle of Man’s government that they see the fantastic opportunity within the Commonwealth for trade and business, and to play a central role at the Commonwealth Business Forum to be held in London next April.” Article compliments IFC Review.
Legal challenge against Fatca shut down by US appeals court
A group of US citizens living abroad “lack standing” to challenge the US Treasury Department’s taxes on their foreign bank accounts, the country’s Court of Appeals for the Sixth Circuit ruled on Friday. The taxes were established by the Foreign Account Tax Compliance Act (Fatca) in 2010 and have been described by attorneys representing several US citizens as “draconian”, reports legal news site Courthouse News Service. Fatca requires foreign banks to report all accounts held by US citizens to the country’s Internal Revenue Service (IRS) or risk being hit with a 30% withholding tax. Taxpayers wilfully failing to file a foreign bank account report also face a penalty of 50% of the value of the account or $100,000 (£77,674, €85,051), whichever is greater. US senator Rand Paul was among the plaintiffs in the original lawsuit in July 2015 that accused Fatca of being a financial surveillance programme that encouraged Americans living abroad to give up their citizenship. Along with five US citizens living overseas, Paul also claimed that foreign banks purged accounts held by Americans to avoid being taxed by the IRS. “…no plaintiff claims to hold enough foreign assets to be subject to the individual-reporting requirement.” The lawsuit was dismissed by US District Court judge Thomas M. Rose, who ruled that all of the plaintiffs lacked standing to bring their claims because none had been adversely affected by Fatca. On appeal, Jim Bopp, the plaintiffs’ attorney, argued before the Sixth Circuit in January that even though Fatca has not been enforced against his clients, the US Supreme Court allows for a pre-enforcement challenge of the law under Susan B. Anthony List versus Driehaus. But the Sixth Circuit affirmed judge Rose’s decision Friday, finding that the plaintiffs have no standing to challenge Fatca. “First, no plaintiff has alleged any actual enforcement of Fatca such as a demand for compliance with the individual-reporting requirement, the imposition of a penalty for noncompliance, or [a foreign financial institution’s] deduction of the Passthru Penalty from a payment to or from a foreign account,” judge Danny Boggs said, writing for the three-judge panel. “Second, no plaintiff can satisfy the Driehaus test for standing to bring a pre-enforcement challenge to Fatca because no plaintiff claims to hold enough foreign assets to be subject to the individual-reporting requirement,” the 28-page opinion continues. A foreign bank’s refusal to accept US clients may be related to Fatca’s reporting requirements, but it is the bank’s decision and that injury cannot be imputed to the US Government, the panel ruled. The Cincinnati-based appeals court also rejected Paul’s claim that he has been denied the opportunity to vote against the Fatca intergovernmental agreements (IGAs) negotiated by the Treasury Department and IRS. “Any incursion upon Senator Paul’s political power is not a concrete injury like the loss of a private right, and any diminution in the Senate’s law-making power is not particularised but is rather a generalised grievance,” Boggs said. “Senator Paul has a remedy in the legislature, which is to seek repeal or amendment of Fatca itself, under the aegis of which Treasury is executing the IGAs.” Paul did, in fact, introduce a bill to repeal Fatca in April. It has been referred to the Senate Finance Committee. Article compliments IFC Review.
New investment rules to curb China’s foreign acquisition binge
The Chinese government has officially put the brakes on Chinese companies pouring big money into overseas property development, issuing rules likely to have a significant impact in Australia, reports The Sydney Morning Herald. China’s State Council, or cabinet, issued the first rules on overseas investment by Chinese companies on Friday. US President Donald Trump has authorised an inquiry into China’s alleged theft of intellectual property. A new banned list includes casinos and defense technology, while overseas property development and hotels are classified as “restricted”. Chinese companies bought 38 per cent of all the residential property development sites sold in Australia last year, spending $2.4 billion, according to a Knight Frank report this year. But China’s National Development and Reform Commission declared on Friday that the property sector was “not the real economy” and companies investing overseas in real estate could be harming China’s financial stability by increasing capital outflows. The commission has labelled the overseas buying spree by China’s biggest private companies in recent years as “irrational”. Companies that violate the foreign investment rules would be punished, the State Council statement said. The average size of property development sites sold to Chinese companies in Australia last year was 21,045 square metres, an 18-fold increase from four years ago, according to Knight Frank’s January report. Chinese regulators had recently put the four biggest Chinese offshore private investors, HNA, Dalian Wanda, Fosun International and Anbang under greater scrutiny. But Friday’s rules signal for the first time the crackdown on overseas property development and hotel purchases would extend beyond these big four. The film industry, sports, and entertainment investments are also now classified as “restricted” investments. Dalian Wanda a fortnight ago began restructuring its business, which includes two $1 billion Australian apartment … Dalian Wanda a fortnight ago began restructuring its business, which includes two $1 billion Australian apartment projects at Circular Quay in Sydney. Photo: Supplied Dalian Wanda a fortnight ago began restructuring its business, which includes two $1 billion Australian apartment projects at Circular Quay in Sydney and the Gold Coast, plus the Hoyts cinema chain. HNA has a stake in Virgin Australia, and a convention centre in Victoria, and has indicated it will continue to invest in airports and airlines overseas that have synergy with its core business, Hainan Airlines. But there are many other Chinese companies active in the Australian property and hotel market. Dahua Group last year spent $347 million in Melbourne and $400 million in Sydney to buy multiple suburban sites to develop as master planned estates. Shanghai-based Dahua had made an unsuccessful billion-dollar unsolicited bid to the NSW government to redevelop the Sydney Fish Markets in 2015. Greenland Group and Country Garden also have major Australian property projects. All three companies have real estate as their core business in Shanghai, and it is unclear how the new restriction on offshore property development will impact them. The State Council said China will instead encourage companies to invest in projects that contribute infrastructure to its hallmark foreign policy, the Belt, and Road Initiative, which is seeking to build new rail and shipping links for trade. Australia hasn’t signed a Belt and Road memorandum of understanding with China. Australian Trade Minister Steve Ciobo said this year the Free Trade Agreement with China meant bilateral trade was already developing well outside of the BRI. Minister of trade, tourism, and investment Steven Ciobo says trade links are already developing. Minister of trade, tourism, and investment Steven Ciobo says trade links are already developing. Photo: Sanghee Liu The new rules encourage prudent investments in oil and gas exploration, minerals and energy, areas where Chinese companies have traditionally and continue to invest in Australia. Agriculture and fisheries investment is also given the green light, as is joint investment with foreign companies in technology and advanced manufacturing. The official China Daily reported: “Officials should guide overseas investments according to different categories, providing support to those on the encouraged list, offering tips to those on the restricted list, while strictly managing those on the banned list.” Chinese outbound investment fell 44 per cent in the first seven months of 2017 as the Chinese government began cracking down on capital flight, and criticised Chinese companies buying trophy assets such as European football clubs, iconic hotels such as Club Med, and Hollywood studios. Article compliments IFC Review.
Netherlands and UK are biggest channels for corporate tax avoidance
Almost 40% of corporate investments channelled away from authorities and into tax havens travel through the UK or the Netherlands, according to a study of the ownership structures of 98m firms. The two EU states are way ahead of the rest of the world in terms of being a preferred option for corporations who want to exploit tax havens to protect their investments. The Netherlands was a conduit for 23% of corporate investments that ended in a tax haven, a team of researchers at the University of Amsterdam concluded. The UK accounted for 14%, ahead of Switzerland (6%), Singapore (2%) and Ireland (1%). Every year multinationals avoid paying £38bn-£158bn in taxes in the EU using tax havens. In the US, tax evasion by multinational corporations via offshore jurisdictions is estimated to be at least $130bn (£99bn) a year. The researchers reported that there were 24 so-called “sink” offshore financial centres where foreign capital was ultimately stored, safe from the tax authorities. Of those, 18 are said to have a current or past dependence to the UK, such as the Cayman Islands, Bermuda, the British Virgin Islands and Jersey. The tax havens used correlated heavily to which conduit country was chosen by the multinational’s accountants. The UK is a major conduit for investments going to European countries and former members of the British Empire, such as Hong Kong, Jersey, Guernsey or Bermuda, reflecting the historical links and tax treaties enjoyed by firms setting up in Britain. The Netherlands is a principal conduit for investment ending in Cyprus and Bermuda, among others. Switzerland is used as a conduit to Jersey. Ireland is the route for Japanese and American companies to Luxembourg. In terms of the purpose, on paper, of the corporate structures, the Netherlands specialises in providing holding companies. The UK provides head offices and fund management and Ireland offers financial leasing and the provision of head offices. “Our results show that offshore finance is not the exclusive business of exotic small islands far away,” the researchers write in an article for the academic journal Scientific Reports. “Countries such as the Netherlands and the United Kingdom play a crucial yet previously hidden role as conduits of offshore finance on its way to tax havens.” Dr Eelke Heemskerk, who led the research, said that the work showed the importance of developed countries cleaning up their financial sectors. He said: “In the context of Brexit, where you have the UK threatening, unless they get a deal, to change their model to be attractive to companies who want to protect themselves from taxes, well, they are already doing it. “The Netherlands says they won’t let the UK be an offshore tax haven. That’s because they don’t want them taking their business.” Article compliments The Guardian.
UK Government Delays Making Tax Digital
The UK Government has delayed the mandating of digital record-keeping and quarterly reporting by small businesses and landlords for income tax purposes until at least April 2020. Under the Making Tax Digital project, it had originally aimed to introduce mandatory digital record keeping in April 2018. The government said that under the new timetable only businesses with a turnover above the value-added tax (VAT) threshold, currently GBP85,000 (USD110,000), will have to keep digital records and only for VAT purposes. Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes, it added. “Businesses agree that digitizing the tax system is the right direction of travel,” said Mel Stride, Financial Secretary to the Treasury and Paymaster General. “However, many have been worried about the scope and pace of reforms.” “We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.” The Chartered Institute of Taxation (CIOT) said the delay means that smaller businesses will have much longer to familiarize themselves with digital record keeping and find the right software and processes suitable for their business. “This deferral will give much more time for businesses, supported by their advisers, to identify for themselves, at their own pace, the benefits of digital record keeping,” said CIOT President John Preston. “It will also ensure that many more software products can be developed and tested before mandation is reconsidered.” Whilst the requirement has been deferred for income tax, the Government is still planning to mandate digital reporting for VAT in April 2019. From this point VAT-registered businesses with a turnover in excess of GBP85,000 per annum will be obliged to maintain digital records and provide quarterly updates (VAT returns) to HMRC. Article compliments Tax News.
G20 leaders seek international agreement on tax policy to enhance growth
G20 leaders affirmed their commitment to international cooperation in the area of tax policy, in a communique released after their July 7–8 summit in Hamburg, Germany, reports MNETax. “We can achieve more together than by acting alone,” the leaders asserted, stating that their highest priority is “strong, sustainable, balanced, and inclusive growth.” The leaders said they welcomed international cooperation on pro-growth tax policies. They also pledged to work together to achieve a “globally fair and modern” international tax system. The leaders again expressed their commitment to the implementation 2015 OECD/G20 base erosion and profit shifting (BEPS) package, which is a series of measures designed to curtail multinational tax avoidance and improve international tax dispute resolution. The G20 leaders urged all countries to join the “BEPS Inclusive Framework,” adopting “minimum standards” devised by OECD and G20 countries in the 2015 BEPS plan. The G20 leaders also said they were working with the OECD to enhance tax certainty. Tackling the tax challenges raised by digitalisation of the economy is also on the G20’s agenda. The leaders reiterated their support for assistance to developing countries in building their tax capacity. The leaders also said they would advance the effective implementation of the international standards on tax transparency and beneficial ownership of legal persons and legal arrangements, including the availability of information in the domestic and cross-border context. Article compliments IFC Review.
Why Is No–one Listening To Repeal FATCA Calls?
Campaigners lobbying for the repeal of FATCA in the USA are demanding to know why President Donald Trump and Republicans in Washington are ignoring their call to axe the controversial tax law, reports iExpats. Around 24 separate lobby groups have come together under the Repeal FATCA banner. They want to abolish FATCA and have spoken with Republicans in Washington DC to support them. But despite the Republicans listing the repeal of FATCA as one of their presidential election policies, no mention has been made of FATCA since President Trump has entered office. Washington silence Since January, when he moved into the White House, the Trump administration has made several announcements about tax changes, but said nothing about FATCA. At the forefront of the campaign is Nigel Green, CEO and founder of world leading expat financial advice firm deVere Group. “President Trump should now make good on his promise that he will be ‘president for all Americans’ including ‘the forgotten men and women of our country who will be forgotten no longer’ by abandoning this achingly un-American policy once and for all,” he writes online at Newsmax Finance. “Americans live under one of the worst tax systems in the entire world. It’s now time that the President should recognize the embarrassment of this draconian regime and join the rest of the civilised world, which has long acknowledged that residence and/or territoriality are the only criteria upon which a fair income tax system should be founded. Tax shackles “The American tax policy is not the global norm. And there’s a reason for this: it is fundamentally unjust to tax a people for their national identity alone.” FATCA demands foreign financial institutions report the financial details of accounts held by US taxpayers to the IRS each year. More than 100 countries and tens of thousands of financial institutions hand information to the IRS under the law. “It is beyond the time that America releases her citizens from the rusty tax shackles and implements a new, modern fairer tax system so that all US citizens can enjoy the same freedoms and prosperity as everyone else in the world,” wrote Green. Article compliments IFC Review.
The UK has led the charge for a fairer worldwide tax landscape
With the UK’s place and influence in the world being much debated, it’s been easy to overlook one of the most significant international tax achievements of recent decades and the leading role the UK played in it, reports City A.M. Last month, at the OECD’s Paris chateau, 68 ministers, ambassadors and senior officials signed a multilateral convention to modify 1,100 bilateral double tax treaties. It was the result of the G20 and OECD’s Base Erosion and Profit Shifting (Beps) project, which was kicked off in 2012 by former chancellor George Osborne and German finance minister Wolfgang Schaeuble. Initially, it was seen as a project to bolster corporate tax revenues of major economies by changing international corporate tax, but it has morphed into a global project, adopted so far by almost 101 countries. So why does it matter? These reforms put the global tax system on a sustainable footing. They establish the core principle in 101 countries that corporate profits should be allocated to, and taxed in, countries based on the value generated there by the key employees of the multinational. In the past, legal agreements could allow profits to be earned in locations with few, if any, people. Second, it addresses so-called “treaty abuse” with regards to withholding tax. Withholding tax is a deduction on a gross payment of interest or dividends to an investor, common in developing countries. In the past, investors in developing countries have got around this fee by interposing a company in a corporate structure in a third country which has a treaty agreement to lower or remove withholding tax. This loophole will come to an end once the multilateral convention takes effect, in 2018 and 2019. The treaty benefits of low or zero withholding taxes will be granted only when envisaged by the treaty countries. This will, for example, benefit developing countries which often rely on these withholding taxes as part of their tax revenues. Third, it sets broad limits on tax deductions for finance costs, recognising that sometimes debt can be used more to deliver tax savings than bring finance to commercial operations. This last rule is a blunt instrument and is likely to catch some commercial activities with high debt levels, but has been chosen by governments as the easiest approach to apply across a broad range of businesses. Finally, the convention introduces new approaches to dispute resolution, where countries cannot agree which state is entitled to tax the profits, underpinned by binding arbitration. New global tax reporting rules, where multinationals must hand over to tax authorities details of sales, profits, employees and taxes by country, will help tax authorities understand risks and target their tax audits. The UK has played a key part in delivering these tax reforms. One of our leading Treasury officials chaired the group that negotiated the multilateral convention. Some of the Beps measures are based on existing British concepts. The UK is implementing measures quickly – perhaps too quickly for some – and has worked with EU partners to implement measures across Europe from 2019. The UK is also the leading global provider of aid to help developing countries build more effective tax administrations, so they can benefit from the reforms. Considering its scale, the Beps project has been devised and implemented incredibly rapidly. There are some rough edges, needing further work, but within a couple of years we should see global corporate taxation put on a sustainable basis. Article compliments IFC Review.
Ecuador Approves Tax Haven Law As Opposition Breaks Alliance
Ecuadoreans voted to approve a historic law banning public officials from having assets or capital in tax havens, reports teleSUR. Ecuador approved on Friday a historic law prohibiting public officials from hiding wealth in offshore tax havens after voting on it in a public ballot, stirring the political alliances of the opposition. Ecuador’s Right-Wing Candidate Linked to 49 Tax Haven Companies The leftist government of former President Rafael Correa proposed the legislation earlier this year, aiming to combat tax havens and increase the accountability of public officials. The law was approved with 107 votes in favor and 18 abstentions, including votes of the right-wing opposition, and SUMA, the political party of Quito Mayor Mauricio Rodas. Former banker and right-wing presidential candidate Guillermo Lasso from the CREO party created an alliance with SUMA for the 2017 presidential elections. CREO abstained from voting in the popular mandate, which was voted on by more than 55 percent of Ecuadorians. After the vote, Lasso announced that the CREO-SUMA alliance had “lost its meaning,” since “it had not brought to the legislative practice the principles that inspired it. Lasso himself is connected to 49 companies in offshore tax havens. Between 1999 and 2000, when Lasso served as minister of finance, his fortune went up from US$1 million to US$31 million dollars, according to an investigation by Pagina 12. The banker — who promoted tax cuts for the rich, downsizing of government institutions and privatization of social programs — lost the election against Correa’s former vice president, Lenin Moreno. In his public role almost 20 years ago, Lasso oversaw a significant increase in the sales tax on basic goods. He then resigned in the wake of a massive banking and dollarization scandal, and the country’s worst-ever economic crisis, which led to the forced migration of almost three million Ecuadoreans. Lasso was never charged in connection with the banking scandal and his involvement in political and economic corruption. As part of the approved law, all public servants and elected officials now have one year to bring any offshore investments back to the country or they will be removed from office for violating the policy. Article compliments IFC Review.
Panama Papers: Germany ‘pays millions’ for leaked data
BBC — Germany has paid millions of euros for the so-called Panama Papers revealing offshore tax evasion, reports say. The Federal Crime Office (BKA) said it would put the multi-million-file inventory into electronic form to allow for detailed evaluation. It did not confirm the sum, but government sources told German media 5m euros (£4.4m; $5.7m) had been paid. The documents leaked last year exposed rich and powerful people, who had used tax havens to hide their wealth. The leaks put heads of state, businessmen and celebrities under pressure, with some resigning over the revelations. Months of investigation Some of the approximately 11.5m documents from Panamanian law firm Mossack Fonseca were leaked initially to Germany’s Süddeutsche Zeitung and then to other news organisations in co-operation with the International Consortium of Investigative Journalists. Süddeutsche said it had refused to pass on the documents to protect its sources and reported that a team of federal police and prosecutors had travelled to Panama City last week to meet local officials. Police said that reviewing the data was likely to take several months. While paying large sums for unlawfully obtained data has been ruled legal by Germany’s constitutional court, it remains controversial. When Denmark paid a smaller sum to buy data allegedly implicating up to 600 Danish citizens last September, opposition parties attacked the decision as “deeply reprehensible”. The Panama Papers leak was the biggest in history. Some of the documents have been published by various media organisations but many remain unpublished. Germany, France and the UK are all believed to have paid for data on bank customers in the past in an attempt to crack down on tax evasion. “These data are being looked into and evaluated with Hesse state’s tax authorities to pursue criminal and fiscal offences,” the BKA said in a joint statement (in German) with Hesse’s finance ministry and the public prosecutor’s office in Frankfurt. As well as tax fraud, investigators will also be looking for evidence of arms trafficking and organised crime. A huge leak of confidential documents has revealed how the rich and powerful use tax havens to hide their wealth BBC Panorama and UK newspaper The Guardian were among 107 media organisations in 76 countries which analysed the documents. The BBC does not know the identity of the source The documents show how the company helped clients launder money, dodge sanctions and evade tax Mossack Fonseca says it has operated beyond reproach for 40 years and never been accused or charged with criminal wrongdoing. Article compliments IFC Review.
Australia: ATO signals tax windfall for wealthy
The tax office has potentially opened the floodgates for family investment companies across the country to claim back hundreds of millions of dollars in company tax, after issuing a landmark ruling that signals a wave of future refunds, reports The Australian. The likely refunds would extend tax cuts implemented for active trading companies earning up to $25 million in income to passive family investment vehicles that are designed to warehouse, or retain, family wealth. Since 2015, the federal government has reduced the company tax rate for smaller companies by 2.5 per cent to its current level of 27.5 per cent. The Australian Taxation Office’s ruling could mean significant refunds and ongoing reductions for hundreds of thousands of passive family investment companies. For example, one warehousing $1m of taxable income per year could save $25,000 for each tax year. The Australian understands that the little-known refund issue and the key ATO draft ruling were discussed at length at a high-powered meeting of the National Tax Liaison Group in Melbourne late last month — a meeting attended by some of the most senior officials from the ATO, federal Treasury and the tax industry. News of what was discussed at the meeting has in recent days spread through the top echelons of the accounting profession. As BDO senior tax partner Tony Sloan notes: “Everyone is talking about it. The issue is massive. It affects a lot of our clients.” However, there could be a sting in the tail if family companies don’t plan their affairs properly. Mr Sloan warned that mum-and-dad shareholders of low-tax companies could be hit if the companies chose to distribute fully franked dividends to them. However, he said many of those types of companies and their shareholders would benefit from the new ruling, particularly wealthy families, as their companies tended to warehouse profits “over years and decades”, and were frequently used as a form of “family bank”. The apparent change of ATO policy emerged in the fineprint of an unrelated draft tax ruling on whether offshore companies were resident in Australia. In it, the ATO appeared to open the way to a broader interpretation of company tax cuts introduced from last year, which saw the tax rate fall from 30 per cent in 2015 to 28.5 per cent in the 2016 financial year and 27.5 per cent in the 2017 financial year and future years. Until the ATO’s draft ruling was issued in March, it had been thought that Australia’s many passive investment vehicles — those mainly used by families and investors to take advantage of a corporate tax rate lower than the general income tax rate — would not be entitled to this cut. When the tax cuts were announced a few years ago, it was made clear they would only apply to companies that carried on a business. However, the ATO has taken a much more generous stance than expected for passive family companies. Its draft ruling states that “generally, where a company is established or maintained to make profit or gain for its shareholders it is likely to carry on business … This is so even if the company only holds passive investments, and its activities consist of receiving rents or returns on its investments and distributing them to shareholders.” Sources at the meeting said the ATO had indicated it was working on more detailed guidance on the issue, which would be published “very soon”. “The ATO is aware there is a lot of interest in this topic,” the source said. Mr Sloan said most family investment companies would already have filed a return for the 2016 year at the full 30 per cent company tax rate. He is advising these entities to consider seeking a refund for the 2016 financial year and to review the position for the 2017 financial year. “Even for my own family company, which has a range of passive investments, I filed my return in 2016 at the 30 per cent company tax rate,” Mr Sloan said. “Once the ATO issues its final guidance on this matter that clarifies that passive companies are indeed carrying on a business, I will be looking for a refund as well. I went to a meeting the other day with 10 people in the room, where this issue was discussed. Every person in the room had a family investment company.” The tax cuts affected companies that earned up to $10m in income in 2016-17, rising to $25m this financial year. Article compliments IFC Review.
FERMA Calls For Consistent BEPS Rules For Captives
The Federation of European Risk Management Associations has released detailed guidance, aimed at supporting countries to develop consistent and appropriate base erosion and profit shifting responses with respective to captive reinsurance arrangements, reports Tax News. FERMA said the aim of the report is to allow OECD members to assess, in a consistent manner, the compliance of captive (re)insurance arrangements with the BEPS recommendations. Drawing on contributions from its 22 member associations, the guidance presents compiled data on premiums, profitability, and taxation levels from a sample of 462 captives owned by European-resident multinational companies. It explains why and how risk management practitioners are using captives in their daily activities as risk management tools; and explains in detail the role of the risk manager in an EU-based multinational group and the importance of using a captive reinsurance vehicle. The guidance provides statistics about captives to demonstrate that the main financial ratios of the captive insurance industry are in line with the traditional insurance market. It includes practical examples and explains the application of captive arrangements in multinational groups. It emphasizes that captives are not primarily used for tax avoidance purposes. An earlier statement from FERMA said many aspects of captive operations, such as the payment of insurance premium tax in source countries, demonstrate their genuine, non-tax functions. FERMA President Jo Willaert said: “The objective of such guidelines is mainly to avoid creating a patchwork of diverging national legislations inspired by BEPS. Captives serve an important Enterprise Risk Management role with true business purposes for European businesses and other organizations. Although captives are only a very small portion of BEPS, FERMA believes that national authorities should be guided in how to assess captive arrangements according to BEPS recommendations.” Carl Leeman, leader of the captive project group and a FERMA Board member, stressed: “Our document demonstrates that the main financial ratios of the captive insurance industry are in line with the traditional insurance market. The paper, enriched and approved by our 22 national associations, represents a strong consensus within the European risk management community on how captives are supporting the operations of their parent organizations.” Article compliments IFC Review.
New Zealand-Hong Kong tax treaty updated
Revenue Minister Judith Collins has today signed a new tax protocol between New Zealand and Hong Kong. The protocol updates the existing double tax agreement between New Zealand and Hong Kong, to allow full exchange of information on tax matters between the two jurisdictions, reports Business Scoop. Once in force, the updated double tax treaty will require both Hong Kong and New Zealand to automatically exchange tax information with each other, in line with the G20 and OECD Automatic Exchange of Information global standard. “This will allow New Zealand to meet its international obligations to complete the first automatic exchange of information by 30 September 2018,” Ms Collins says. Under the global standard, New Zealand financial institutions must review their accounts and compile information to be reported. New Zealand’s existing double tax agreement with Hong Kong was signed in 2010 but was limited to exchanges of information on request. “The protocol will remove this limitation to allow automatic and spontaneous exchanges of tax information to take place,” says Ms Collins. The Second Protocol will come into force once both signatories have completed their respective legal requirements. Article compliments IFC Review.