Download OECD 2004 Progress Report on the Project on Harmful Tax

OECD 2004 Progress Report on the Project on Harmful Tax Practices
The OECD reported that members had made substantial progress in eliminating harmful tax
practices, by modifying or abolishing more than 30 of the 47 preferential tax regimes identified by
the OECD in 2000 as potentially harmful.
According to the 2004 Progress Report on the Project on Harmful Tax Practices, issued by the
OECD’s Committee on Fiscal Affairs in March, 18 regimes have been, or are in the process of
being, abolished,. A further 14 have been amended so as to remove potentially harmful features, and
13 have been found not to be harmful after further examination.
Only two regimes, Switzerland’s “50/50 practice” (formerly the Administrative Company regime)
and Luxembourg’s 1929 Holding Company regime, for which proposals for modification are before
the Luxembourg Parliament, are to be the subject of further discussion this year. Both these
countries abstained from approving the OECD’s original report on harmful tax competition in 1998.
Following criticism from non-OECD countries and a shift in US government policy under the Bush
administration, the OECD modified its original criteria; low or no taxes and ring fencing were
dropped, leaving lack of transparency and no effective exchange of information as the determining
criteria.
The full list of the 47 potentially harmful regimes identified in 2000 and the conclusions drawn by
the OECD are summarised below, grouped according to industry designation. In cases where a
regime is in the process of being eliminated, the OECD has deemed it to be abolished provided that:
no new entrants are allowed into the regime, a definite date for complete abolition of the regime has
been announced; or where the regime was transparent and permitted effective exchange of
information.
Insurance
Australia (offshore banking units) – not harmful;
Belgium (coordination centres) – abolished;
Finland (Aland captive insurance regime) – abolished;
Italy (Trieste financial and insurance centres) – abolished;
Ireland (international financial centres) – abolished;
Portugal (Madeira international business centres) – abolished;
Luxembourg (provisions for fluctuations in reinsurance companies) – amended to remove
potentially harmful features;
Sweden (foreign non-life insurance companies) – abolished.
Finance and Leasing
Belgium (coordination centres) – abolished;
Hungary (venture capital centres) – not harmful;
Hungary (preferential regime for companies operating abroad) – abolished;
Iceland (international trading companies) -- abolished;
Ireland (international financial service centres) – abolished;
Ireland (Shannon airport zones) – abolished;
Italy (Trieste financial services and insurance centres) – abolished;
Luxembourg (finance branch regime) – amended to remove potentially harmful features;
Netherlands (risk reserve regime for international group financing) – abolished;
Netherlands (intragroup financing regime) – amended to remove potentially harmful features;
Netherlands (finance branch regime) – amended to remove potentially harmful features;
Spain (Basque Country and Navarre coordination centres) – abolished;
Switzerland (administrative companies) – still under review.
Fund Management
Greece (mutual fund and portfolio investment companies) – not harmful;
Ireland (international financial service centres) – abolished;
Luxembourg (management companies, 1929 holdings) – still under review;
Portugal (Madeira international business centres) – abolished.
Banking
Australia (offshore banking units) – not harmful;
Canada (international banking centres) – not harmful;
Ireland (international financial service centres) – abolished;
Italy (Trieste financial service centres) – abolished;
Korea (offshore activities of foreign exchange banks) – abolished;
Portugal (external branches in Madeira business centres) – abolished;
Turkey (Istanbul offshore banking regime) – abolished.
Headquarters Regimes
Belgium (coordination centres) – abolished;
France (headquarters centres) – amended to remove potentially harmful features;
Germany (monitoring and coordinating centres) – amended to remove potentially harmful features;
Greece (offices of foreign companies) – abolished;
Netherlands (cost-plus rulings) – amended to remove potentially harmful features;
Portugal (Madeira international business centres) – abolished;
Spain (Basque Country and Navarre coordination centres) – abolished;
Switzerland (administrative companies) -- under review;
Switzerland (service companies) – amended to remove potentially harmful features.
Distribution Activity
Belgium (distribution centres) – amended to remove potentially harmful features;
France (logistic centres) – amended to remove potentially harmful features;
Netherlands (cost-plus and resale minus rulings) – amended to remove potentially harmful features;
Turkey (Turkish free zones) – not harmful.
Service Centres
Belgium (service centres) – amended to remove potentially harmful features;
Netherlands (cost-plus rulings) – amended to remove potentially harmful features.
Shipping
Canada (international shipping regime) – not harmful;
Germany (international shipping regime) – not harmful;
Greece (shipping offices) – not harmful;
Greece (shipping regime law 27/75) – not harmful;
Italy (international shipping regime) – not harmful;
Netherlands (international shipping regime) – not harmful;
Norway (international shipping regime) – not harmful;
Portugal (international shipping register of Madeira) – not harmful.
Miscellaneous Activities
Belgium (ruling on informal capital) – amended to remove potentially harmful features;
Belgium (ruling on foreign sales corporation activities) – abolished;
Canada (non-resident-owned investment companies) – abolished;
Netherlands (ruling on foreign sales corporation activities) – amended to remove potentially harmful
features;
Netherlands (ruling on informal capital) – abolished;
United States (foreign sales corporation regime) – abolished.
The OECD reviewed a number of new regimes introduced since 2000. The Netherlands' advance
pricing agreement/advance tax ruling practice and the Belgium advance tax rulings practice were
examined and found not to be harmful.
UK High Court finds Agassi liable to tax
The High Court held that international tennis player Andre Agassi could be assessed to income tax
under section 556 of the Income and Corporation Taxes Act 1988 in respect of payments connected
with his sporting activities in the UK made by foreign companies with no tax presence in the UK to
a foreign company with no UK tax presence which he owned.
In Agassi v Robinson [2004] EWHC 487, Agassi was ordinarily resident and domiciled outside the
UK. During the relevant tax years he was a resident of the USA. He set up a company, Agassi
Enterprises Inc., through which he entered into endorsement contracts with two manufactures of
sports clothing and equipment, Nike and Head Sports, neither of which was resident or has a tax
presence in the UK.
Agassi visited the UK for a limited number of days a year in order to play in tournaments, and
received from those manufacturers payments that derived (at least in part) from playing in those
tournaments. On 15 November 1999, Agassi submitted a UK self-assessment tax return that showed
a loss in the UK of £63,689 on a gross income of £54,601. This included endorsement income of
£7,206 from Head and £35,755 from Nike.
On 6 December 1999, the Inland Revenue opened an enquiry under section 9A of the Taxes
Management Act 1970 (TMA) and, on 7 April 2000, issued a closure notice under section 28A(5) of
the TMA based (in part) on income calculations of £23,750 from Head and £102,158 from Nike. A
notice of Revenue Amendment setting out a charge of £27,520.40 was issued on 2 June 2000.
Agassi appealed to the Special Commissioners. The Commissioners dismissed the appeal. Agassi
then appealed to the High Court.
Mr Justice Lightman noted that UK law imposes tax on the income of "any person . . . from any
trade, profession or vocation exercised within the UK," regardless of the person's residence or
nationality, regardless of where the payment is made, and regardless of whether the payment is
made by someone connected to the UK. It was always possible for people, especially "sportsmen
and entertainers", to "come [to the UK], earn, get paid and leave before and without ever paying the
tax."
As a result, he said, UK law contained two sections dealing with "Entertainers and Sportsmen" in
particular. Section 555 requires those who pay non-resident entertainers and sportsmen for
performances in the UK to deduct and pay to Inland Revenue the taxes owed on those payments,
and Section 556 provides that where a payment is made to someone other than the performer, the
performer "shall be treated for [tax] purposes . . . as the person to whom the payment is made . . ..”
The Inland Revenue argued that these provisions covered Nike and Head's payments to Agassi's
corporation, and meant that Agassi himself was treated for tax purposes as the person to whom those
payments were made. But section 556 was contingent on section 555 applying, and Agassi argued
that section 555 did not apply to Nike and Head because neither they nor Agassi Enterprises had any
connection with the UK, and UK tax law applies only on British territory.
The High Court was not persuaded. It acknowledged that it is "broadly correct that English
legislation (and in particular English tax legislation) is to be construed as territorial . . . ." But it also
said that, "on many occasions statutes have been held . . . to have extra territorial effect . . . ."
In this case, the Court noted that the general rule is that tax is imposed on income earned in the UK
by entertainers and sportsmen "irrespective of the connection of person making the payment with
the UK," and that sections 555 and 556 were intended to prevent entertainers and sportsmen from
avoiding the tax. This meant that a connection with the UK of the person making the payment "must
be irrelevant."
Dismissing Agassi's appeal, Justice Lightman said "it would be absurd to attribute to the legislature
the intention that liability could in any and all cases be avoided by the simple expedient of
channeling the payment through a foreign company with no tax presence here. It this were the case,
the tax would effectively become voluntary."
BVI sets out procedures to restrict bearer shares
Legislation to restrict the transferability of bearer shares and make them subject to anti-money
laundering and customer due diligence requirements has been passed under the Financial Services
Commission (Amendment) Act 2004 and the International Business Companies (Amendment) Acts
2003 and 2004. The acts are in the process of being brought into force but, for existing IBCs, there
will be a lengthy period before the new rules become effective.
The International Business Companies (Amendment) Act requires holders of bearer shares to
register them with licensed financial institutions and keep information on directors within the
territory. The registers will be private, not public. It is believed that IBCs incorporated before 31
December 2004 will have until 31 December 2005 to comply with this requirement.
IBCs incorporated before 1 January 2005 which have the power in their Memorandum and Articles
of Association to issue bearer shares, even if they have not actually issued any bearer shares, will be
subject to an increased licence fee of US$1,000 pa, up from $300 pa. The date of increase has not
yet been made public but is believed to be 2008. The BVI Financial Services Commission has
indicated that the fee at that stage may be an interim increase only. Any bearer shares in issue will
eventually have to be lodged with licensed custodians, but not until 31 December 2010.
For IBCs incorporated on or after 1 January 2005, an increased government incorporation fee of
$1,000, up from $300, and an increased annual licence fee of $1,000 pa will be payable from 1
January 2005, for any companies which have the power to issue bearer shares, even if bearer shares
have not been issued. Any bearer shares that are issued will have to be lodged with licensed
custodians immediately on issue.
This means that until the end of 2004, it will be possible to incorporate BVI IBCs with the power to
issue bearer shares, and those IBCs will be continue to be subject only to the lower licence fee until
perhaps 2008. They will not have to immobilise their bearer shares with a licenced custodian until
31 December 2010.
Under the new legislation there will be two types of custodians — authorised and recognised.
Authorised custodians include those based in the jurisdiction as licensed service providers.
Companies incorporated outside the BVI that do not have a place of business in the BVI must obtain
a licence from the Financial Services Commission (FSC) to act as an authorised custodian.
Recognised custodians are investment exchanges or clearing organisations that operate securities
clearance or settlement systems in a jurisdiction that is an FATF member.
The BVI government has set up a Financial Investigation Agency (FIA) to investigate financial
crime. The agency was established as an independent body under the Financial Investigation
Agency Act (2003), which was brought into force on 1 April 2004.
The agency’s functions will include the processing of requests for legal assistance from international
judicial and law enforcement bodies. It will also be responsible for collecting, analysing and
investigating suspicious transaction reports filed under the Proceeds of the Criminal Conduct Act.
The new agency takes over the duties previously performed by the financial investigations unit of
the Royal Virgin Islands Police Force.
Harrods’ owner loses Scottish appeal over special tax status
Harrods’ owner Mohamed Al Fayed lost his appeal to overturn a Scottish court ruling which
removed his special tax status.
In the original Court of Session ruling in May 2002, Lord Gill said the Inland Revenue was wrong to
agree a "forward tax" agreement with the Egyptian-born businessman in 1997, under which Al
Fayed only had to pay £240,000 a year in tax.
In his written judgement, Lord Gill said: "In a true sense the Al Fayeds thereby became a privileged
group who are not so much taxed by law as untaxed by agreement."
Al Fayed challenged the ruling but Lord Cullen, Lord Kirkwood and Lord MacLean published an
opinion on 29 June 2004 which backed the initial decision.
In 2001 Al Fayed sought a judicial review of a decision by commissioners of the Inland Revenue not
to abide by the terms of the agreement dated 22 April and 28 April 1997.
Al Fayed and his two brothers, regarded by the Inland Revenue for tax purposes as resident but not
domiciled in the UK, agreed voluntarily in 1997 to pay a fixed sum in respect of tax annually until
2003. But in 2000, the Inland Revenue returned Al Fayeds' cheque for payment of tax, claiming that
it had never had the legal authority to enter into the agreement and cancelled it.
The three men immediately sought a judicial review arguing that the Inland Revenue had always had
the full power to enter into a legally binding agreement and it was "unfair and improper" for it to
argue otherwise.
Al Fayed's lawyers said the agreement was valid and argued that suddenly cancelling it was an
abuse of power.
But Lord Gill rejected that argument and said the agreement had not been based on any objective
calculation of tax risk.
Al Fayed said he intends to take the case to the House of Lords.