Category Archives: Company- Management

Internal Tax Revenue Services worldwide are struggling to apply age old taxation rules to the behemoth that is becoming Ecommerce.

Under the current principles of International Tax Law for an Offshore Company to be taxed onshore the company needs to have a “permanent establishment” ie a tangible physical presence onshore.  Lobby groups notably led by the OECD are pushing for this to be changed so that countries can tax Offshore Incorporated Businesses – even if these businesses have no buildings or people in a country – provided they have a website or gather data there.

Moreover in what is becoming something of a conundrum for taxmen worldwide Revenue Authorities are finding themselves faced not only with the challenge of tax collection but also with having to play a major role in realizing the potential of what is already probably the greatest economic force of the 21^st century!

Of late Business Groups have begun to hit back at moves to pile heavier corporate taxes onto digital companies, arguing that governments risk interfering with “one of the great economic success stories of the past 20 years”.

We’ve seen that the Offshore Tax Planning strategies of Amazon, Google etc as revealed have given rise to waves of media hysteria. Hence it was reassuring to read recently that no less than the OECD’s own Business and Industry and Advisory Committee have warned the OECD that, whilst it’s all well and good to bring the aggressive Offshore Tax Avoidance strategies of digital companies under the microscope,  it’s important to avoid introducing tax burdens that would inhibit the growth of a technology that has played a central role in “improving the lot of people around the world through increased cross border trade and investment”. Bravo!

The taxation of Ecommerce profits ultimately depends on the ability of revenue authorities to check reported income and spending against bank and credit card statements. Presently its estimated that as much of 90% of all financial transactions with respect to consumption take place using cash, checks or credit cards which (via banks/credit card companies) leave an audit trail.

Throughout history the great entrepreneurial pioneers have always found ways to extract the greatest return from their efforts. Hence it’s fascinating to see that just as the push has begun to find a way to tax Offshore Incorporated ECommerce businesses a whole new world of electronic cash is beginning to emerge led most noticeably by the rise of Bit Coins.

It stands to reason that the development of this electronic cash will almost certainly further facilitate both electronic commerce and Offshore Tax Avoidance since payment no longer leaves a paper trail but is rather anonymous and untraceable.

Is this surprising?

Not really… as has been stated many times, Capital always flights to where Capital gets the best deal. Which in many cases is Offshore!

Watch this space for developments….

It has been reported that Kentucky Senator Randal Paul on May 7 confirmed via a letter to United States Senate Majority Leader Harry Reid that he will continue to block the passage of five tax treaties that are presently awaiting a move to the Senate floor.

The passage of tax treaties through Congress has been blocked since 2011, largely through the efforts of Paul, who also introduced a bill last year to repeal swathes of the Foreign Account Tax Compliance Act (FATCA). Paul has cited privacy concerns surrounding the exchange of US taxpayer information within both the tax treaties and under FATCA.

In his letter to Reid, Paul again cites his view that five proposed agreements – with Switzerland, Luxembourg, Hungary, Chile and the Organization for Economic Cooperation and Development – would flout the privacy rights of US individuals and US expats.

Previous treaties, he wrote, “were more focused on information specific to suspicions of tax fraud, while requiring that serious allegations of wrongdoing were grounded in evidence. It appears these treaties may end up being the tool that implements FATCA,” which purports to require foreign financial institutions to “send the Internal Revenue Service (IRS) the private records of overseas American bank account holders – no questions asked, and no reasonable suspicion, due process, or court order required.”

While reiterating that he does not “condone tax cheats,” he continued that he cannot “support a law that punishes every American in pursuit of a few tax cheats, … (and he will) object to any unanimous consent request, motion, or waiver of any rule in relation to these treaties or any related measure.”

Was it JFK who said the greatest sin is committed when an honest man does nothing to fight an obvious injustice?

It’s interesting to see that there is someone within the system with the guts to stand up to America’s attempts to bully the entire banking/finance world. It’s every man’s god given right to try and reduce his tax low bill to the lowest possible amount. Moreover anyone with clarity of vision can see that the US’s attempts to create a system enabling them to discover the holder of Offshore Bank Accounts is designed to intimidate persons thinking of deploying what might otherwise be lawful Offshore Tax Minimisation or Offshore Asset Protection structures in a vain (but ultimately futile – see below)  attempt to keep more tax/currency at home.

The really sad part is had the US paid more attention to the principles of sound fiscal management (and effectual financial market regulation) this wouldn’t be happening. Nevertheless one can feel the winds of liberalisation beginning to blow. If the freedom fighters can hold out a bit longer imminent regime change might just save the day.

Lest the arrogant behemoth forget Capital ALWAYS flights to where Capital gets the best deal….

Maybe rather than trying to squeeze a few extra dollars out of those smart enough to Incorporate Offshore, Invest Offshore (or hold their money Offshore) the US lawmakers should be more focussed on reigning in record levels of government debt and offering investment incentives to shift up a gear the slowly idling US economy.

All such country-centric measures do is rob Peter (ie smaller countries) to pay Paul, or should I say Sam (as in Uncle).

Well known Italian fashion design gurus Dolce & Gabbana were reportedly sentenced to a term of imprisonment this week when their Offshore Tax Minimixation plan was deemed by an Italian Appeals Court to amount to Criminal Tax Evasion.

The pair were found to be the underlying beneficial owners of a low tax Offshore Company incorporated in Luxembourg to which 268 million euro in pre-tax profits had allegedly been diverted undeclared. Under Italy’s Tax law it was held that the pair should have declared and paid tax in Italy on the said income.

Most developed countries (including Italy) have passed Controlled Foreign Corporation (“CFC”) Laws which require locals to declare and pay tax at home on income earned by an Offshore Company where they have the capacity to own or control the said Offshore Company. Moreover in most countries failure to declare such reportable income is a criminal offence punishable by jail time.

The good news is that with careful Offshore Tax Planning the risk of jail can usually be averted.

Howso?

By placing management and control of your IBC Offshore and via the use of layered structuring (ie by setting up a non-CFC applicable entity to hold the shares of your zero tax Offshore Company).

There are 2 multi-layered structures which may assist. The first is a tax free Offshore Discretionary Trust. The 2^nd is a nil tax Private Interest Foundation. What these entities do is shift underlying beneficial ownership of the zero tax Offshore Company to a person or entity other than the person who sets up the Company.

In the case of a nil tax Offshore Discretionary Trust what smart people do is make themselves potential or contingent beneficiaries. This can get you around the obligation to declare and pay tax at home on the Offshore entities earnings (as most countries only require “presently entitled” beneficiaries to declare income earned by an Offshore Tax Haven Trust).

In the case of a Foundation (a separate legal entity) the argument goes that it doesn’t matter who the beneficiaries are because at law the Foundation is both legal and beneficial owner of any assets it holds. As such the beneficiaries don’t become presently entitled beneficiaries unless or until such time as the Foundation Council resolves to pay them a distribution.

The bottom line?

If it is ever revealed that you are the beneficiary of a Trust or Foundation (which owns the shares of a profit making nil tax Offshore Company) at least you can raise a valid legal argument as to why you haven’t declared the Offshore entity’s earnings such as should enable you to avoid criminal liability.

You’ll want to get local tax/legal advice before setting up such a structure but presumably the worst case scenario if you’re found out is that you’ll have to pay some back tax/fines.

That sure beats rotting in jail for a couple of wasted years….

Two of the world’s biggest mining Companies BHP Billiton and Rio Tinto have reportedly joined global tech firms in lobbying against efforts to stop major multinational corporations from shifting profits to tax haven jurisdictions.

In submissions to an OECD draft paper, the mining companies said measures to prevent firms from abusing tax treaties would create ”unintended consequences” for dual-listed entities such as themselves.

Multinational firms including big pharmaceutical and global tech firms have made submissions rejecting proposals in the discussion draft. The draft proposes that the hitherto lawful practice of companies ”treaty shopping” for the most tax effective places offshore to bank untaxed profits be blocked.

It follows a push by governments around the world to limit the amount of money lost through offshore tax-minimising structures such as those used by Google and Apple.

Irish law firm Matheson, which advises seven of the top 10 global technology companies and over half of the 50 largest banks, said the proposals unfairly targeted small jurisdictions and big companies.

It defended the practice of corporations to set up smaller subsidiaries in offshore locations.

”Multinational groups frequently have intermediate companies in their corporate structure, for various commercial reasons including centralising risk management,” it said.

”The [proposals] should recognise this, and permit treaty access in such situations where sufficiently active business functions are being carried on with respect to such investment management operations.”

BHP and Rio Tinto, both listed on the Australian and London stock exchanges, said dual-listed entities would be unfairly affected. They said they should be exempt from the provisions ”in order to avoid what we believe would be unintended consequences”.

Australian accounting firm Pitcher Partners also made a submission claiming the proposals would result in hefty compliance costs for small-to-medium enterprises and make it ”more difficult for any taxpayer to access the benefits of a tax treaty”.

The OECD paper stands at the vanguard of global efforts to prevent companies who do business in multiple countries from channeling income through legal offshore tax-avoidance or offshore tax minimisation structures. In reality this is but a pathetic attempt by the fat OECD member welfare states to avoid the inevitable political fall out at home that would entail from their committing to reform their dated high spending (and high tax dependent) economies.

The old world welfare states think by frustrating international tax competition they will avoid the sting of the electorate and remain in power?

Like the boy who thought he could hold back the ocean by sticking his finger in the dyke there’s only so long these dinosaurs can hold back the creeping tide of economic reform….

Here’s hoping that more people see the OECD anti tax competition push for what it really is (that is, a con).

In a recent press release the European Parliament has announced that the ultimate beneficial owners of companies and trusts will have to be listed in public registers in EU countries, under updated draft anti-money laundering rules approved by the Economic Affairs and the Justice and Home Affairs committees.

Under the disguise of its being an Anti Money Laundering measure the EU is cleverly almost sneakily hoping to bring Offshore Company’s tax free profits into the EU tax net!

Under the alleged anti-money laundering directive (AMLD), as amended by MEPs, public central registers – which were not envisaged in the initial Commission proposal – would list information on the ultimate beneficial owners of all sorts of legal arrangements, including companies, foundations and trusts.

If you are one of those people who doesn’t wanting competitors or predators (eg no win no fee lawyers) to know what you own a strategic rethink of your Corporate and business structure is called for. What you might want to do is place an Offshore Discretionary Trust or Offshore Discretionary Foundation at the bottom of the EU Company ownership tree.

Why?

In the case of an Offshore Trust or Private Foundation (“PIF”) there are essentially two ways that you can approach the issue of who to name as Beneficiaries (and when). The first (more traditional) method is to clearly set out in the Trust or Foundation Instrument the names of the persons that are to ultimately benefit from the Trust or PIF (which would usually include you and your partner/children).

The second, more creative approach is to set up a Discretionary Trust or Foundation and to maximize the “Discretionary” nature of the structure to avoid any person’s names appearing anywhere in the Trust or PIF Instrument.

One of the key features of Discretionary Foundations and Trusts is that the Trustee or Council/lor retains the power to add or substitute further beneficiaries after the Trust/PIF has been formed. If privacy is key what you can do in this instance is nominate an internationally recognized charity to be the primary beneficiary from the outset.

If you are setting up a Seychelles Foundation this may not really be necessary however as under the Seychelles law (a) The Foundation is deemed to be both legal and beneficial owner of any property it holds (eg shares in a European Company?) and (b) there is no deemed entitlement for beneficiaries.

Let’s assume you set up an Offshore Discretionary Foundation to own the shares of your European company. What this means is (ie if it’s a Seychelles Foundation) even if you or your spouse are named as beneficiaries of the Foundation your names should not have to appear in the EU register as “beneficial owners” of the Company.

Local legal advice should be sought however what’s clear is that timing will be key. Ideally you will want to review and if necessary upgrade your Corporate etc structure before the obligation to record beneficial ownership begins.

The respected English Accounting Group the ACCA (“Association of Chartered Certified Accountants”) has released findings suggesting the onshore Corporate Tax System is NOT being unduly affected by the judicious use of Offshore Companies, Tax Free Companies and Tax Havens.

In a statement issued today the ACCA claimed, according to the findings of a study commissioned by it, the system is neither “broken” nor being eroded.

The research was conducted by the RMIT University School of Economics, Finance and Marketing, and published in a final report, Multinational corporations, stateless income and tax havens. The report asserts that there is no evidence to support the belief that UK or US corporate income tax bases are being worn away by the use of tax haven companies. It acknowledges that some multinational companies do not pay as much tax in their host economies as consumers and voters might expect, but stresses that this does not necessarily imply any wrongdoing on the part of these companies.

Report author Sinclair Davidson was quoted as saying “It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate income tax base. To the extent that corporate income tax revenues have fallen in recent years, this is more likely to be a result of poor economic conditions than aggressive tax planning.”

The report also apparently takes issue with the concept of “stateless income.” According to Davidson, there is no such thing as stateless income. Instead, there is “income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, ‘Why do the owners of intellectual property not locate their property in your economy?’”

Davidson does nevertheless note that the “stateless income doctrine may be used as a catalyst for re-writing the corporate income tax system.” Going forward, governments will need to think about the potential consequences of expanding the definition of source for corporate tax purposes.

“To the extent that stateless income is really a return on the development and ownership of intellectual property, then increasing taxation will have allocative efficiency consequences. At the same time it would also adversely affect the Irish and Dutch tax bases,” the report warns.

Davidson said: “It is not clear that tampering with the tried and tested norms of corporate income tax to (possibly) generate more corporate income tax revenue while reducing the corporate income tax collected in foreign economies, and possibly reducing investment at home, employment at home and consumption at home, is good policy.”

It’s refreshing to see sound research based logic being applied to the tax haven debate for once as opposed to hysteria. Let’s hope this marks the beginning of a rational dialogue on the merits of the flawed “income tax” focussed international tax system.

With the US having recently taken steps to restrict the ability of its citizens to trade forex we have noticed more and more US residents looking to incorporate Offshore.

If you fall into that category you may be interested to know that a combination of a tax free Offshore Company and a tax free Offshore Foundation can gift you the ability to trade more freely.

In terms of how that can work structurally and practically:
• The shares of the Company would be held by the Foundation; and
• The beneficiaries of the Foundation would be whoever you nominate.

And if you choose a Seychelles Foundation when the bank or brokers asks who is the beneficial owner of the company/account you can lawfully answer “the Foundation” as section 71 of the Seychelles Foundation Law clearly states that the legal AND beneficial owner of any asset transferred to a Seychelles Foundation is the Foundation itself. That can get you access to brokerages/trading platforms that won’t accept US residents as customers.

How does it work from a practical perspective?

In terms of structure the Offshore Company would be set up with a Nominee  Director and with the Private Foundation as shareholder. Commercially, the company would do the buying and selling, ie it would generate the income. Ideally, you would be appointed as Consultant or as an arms’ length adviser to the Director of the Company with certain areas of responsibility (eg you could be an authorized Trader or Trading Manager) for which you would be paid a commission (eg a percentage of profits) or Consulting fees.

As part of your brief you might also be given signing power on a bank account reporting/answerable to the Director. However that relationship is structured for legal reasons, it would need to be seen to be commercially realistic. The income you generate from this would be paid to you or your local i.e. US company which, I imagine, would then pay a dividend to you, which would be assessable income at home for you.

And as a Foundation arguably is not caught by Controlled Foreign Corporation (or Controlled Foreign Trust) Rules the remainder of the profit could be held (and/or reinvested) offshore potentially tax free.  (Though that’s something you should speak to your tax adviser about).

What is clear however is that a combination of a Tax Haven Company and an Offshore Foundation can gift you more freedom to trade (and give you a wider choice of brokers).

Austrian Vice Chancellor Michael Spindelegger has stated that  Austria will support the proposed (as revised) European Union Savings Tax Directive, provided that third states such as Switzerland and Liechtenstein also agree to must participate in the Directive.

The aim of the new Directive is to close loopholes and prevent individuals from evading taxation on interest income by enhancing the existing automatic information exchange system for EU tax authorities.

Austria made its adoption of the text conditional. The Government said from the outset that it would not relinquish its banking secrecy for Austrian nationals, but will agree to exchange information automatically concerning EU residents with accounts held in Austria.

It also said that third states such as Switzerland and Liechtenstein must participate in the Directive, and warned against a European and a global standard operating in tandem.

The EU Council of Economic and Finance Ministers agreed at a recent meeting in Brussels that banking secrecy could remain in place for Austrian nationals.

So the game of cat and mouse between the EU and the EU tax (and Banking Privacy) Havens continues as it has since 2003.

One doubts the EU will get their way. Countries like Austria Switzerland and Liechtenstein (with their lucrative banking and financial services sectors) have too much to lose…  If I was a betting man my money would be on them agreeing to apply a 20% Witholding tax on interest earned in local accounts by non-nationals rather than hand over account owner info…

Foundations & Absolute Privacy

Recently the question was put to my firm as whether it would be possible to set up an Offshore Company with a Nominee Director and open an account for the Company without having to declare the client to the bank as the “beneficiary” of the account (or as the  “beneficial owner” of the Company applying for the account).

Interestingly (as the client lived in a country with Controlled Foreign Corporation ie“CFC” laws) the fellow in question (an Ebusiness owner) had already opted for the option of first registering a Seychelles Private Interest Foundation to hold the shares of the Offshore Company. (The Foundation was set up via a Nominee Founder and was managed by a Nominee Councillor).

We’d reached the stage where the Company was applying for a bank account and the client was unsure who/what should be entered in the Corporate Account application where “beneficial owners” details were supposed to be inserted.

My opinion was sought. Here’s the conclusion I came to after pouring over the Seychelles Foundations Act for many hours…

Bottom line is notwithstanding that an individual or individuals (or a class of beneficiary) may be named as beneficiaries in a Seychelles Foundation’s Regulations:

1. The beneficiaries have no legal or beneficial interest in property owned by the Foundation (unless or until such time as that property is transferred to the them – refer section 71 of the Seychelles Foundations Act 2009-2011 as amended).
2. The Foundation is deemed to be the legal AND beneficial owner of any property held by it (again section 71)
3. The Foundation is a legal entity in its own right not a mere Trustee (See section 23)
4. The Councillor of the Foundation owes no Fiduciary duty to the beneficiaries (see section 63)
5. As such there is no “beneficial owner” of a Seychelles Foundation. The beneficial owner of any property/asset owned or held by the Foundation is the Foundation itself.

The net result?

We didn’t have to provide the names of (or DD to the bank as regards) the Foundation’s beneficiaries.

A victory for financial privacy!

US attempts to strongarm Swiss Banking giants Credit Suisse into giving up the names of American account beneficiaries appears to be stagnating.

Senator John McCain was quoted yesterday expressing frustration at the lack of success by the US who have, in 5 years of trying, thus far only managed to elicit from Credit Suisse the names of some 238 undeclared Swiss accounts held for or by US Beneficiaries.

The Senator reportedly said that the US Justice Department had decided to tackle the issue by filing treaty requests, with little success. About time!

It should be noted as a matter of International Law that the necessary mechanism in order to compel any country to give up the names of non-resident company owners or account holders is to file an application pursuant to a mutually agreed and signed Tax Information Exchange Agreement (which it is noted the US does not hold with the Swiss). America’s use of bully boy tactics to try and force banks and others into giving up ownership information in the absence of such a treaty smacks of disrespect (if not outright contempt) for the rule of law.

If US legislators are so concerned about Americans keeping money offshore in privacy havens one wonders why they aren’t spending time investigating and rectifying the root cause of such motivations that is:

(a)   excess government intrusion into and overregulation of private investment (& business) practices

(b)   a legal system which all but encourages frivolous law suits; &

(c)    consumer concerns about the stability of the American banking/monetary systems etc.

The age old rhetoric of painting anyone who holds an Offshore Company or Offshore Account as a tax evader is starting to wear a bit thin. In my experience (14 years specializing in International Corporate Structuring) the vast majority of Americans looking to set up non-American companies or accounts are motivated to do so by one of the above 3 reasons, not by the desire to avoid taxes.

Full marks to Credit Suisse for standing up to the bully boys.

But that more states/businesses were to show such courage….