Finance Minister Flaherty’s Federal budget predicts the current deficit in finances to continue until 2016 when he expects a surplus of 6.4 billion.
Like his counterparts around the world his February 11th budgetary statement focused on job creation, innovation and infrastructure.
As a member of the G8, G20 and the OECD, Flaherty also addressed international tax reform in the areas of tax transparency and the prevention of tax base erosion and profits shifting (BEPS).
It is for this reason that Canada’s 2014 budget merits more than a passing interest by treaty-based offshore financial centres (OFCs).
In this regard, Flaherty has called for comments from stakeholders on a series of questions designed to inform a national action plan to combat tax avoidance, including:
- What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
- What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
- What actions should the government take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors?
Following submissions on treaty shopping consultation paper,the budget confirmed that the government now believes that a treaty-based approach would not be as effective as a domestic law rule.
As a result the budget invites comment on what the general outline of such a domestic rule should look like.
Main Purpose Test
Minister Flaherty also confirmed that Canada has opted to use a “main purpose” approach to its treaty shopping rule, rather than the specific “limitation on benefits” approach favoured by the U.S in its treaties.
Under such a provision, a benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain if it is reasonable to conclude that one of the main purposes for undertaking a transaction – or a transaction that is part of a series of transactions or events – that results in the benefit, was for the person to obtain the benefit.
Presumption of ‘Conduit’
Furthermore, in the absence of proof to the contrary, it will be presumed, that one of the main purposes for undertaking a transaction was to obtain a benefit under a tax treaty if the relevant treaty income is primarily used to pay, distribute or otherwise transfer an amount to another person that would not have been entitled to an equivalent, or more favourable benefit, had the other person received the relevant treaty income directly.
Safe Harbour Presumption
Under a safe harbour presumption, and subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if one of the following conditions is met:
- The person carries on an active business in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
- The person is not controlled, directly or indirectly in any manner whatever, by another person that would not have been entitled to an equivalent or more favourable benefit had the other person received the relevant treaty income directly; or
- The person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.
The proposed treaty shopping rules would apply to all of Canada’s tax treaties through inclusion in Canada’s Income Tax Convention Interpretation Act.
It is interesting to note that the new anti-treaty-shopping measures announced in this year’s budget are illustrated using the following examples well-known to onshore and offshore financial centres:
- sub-licensing of royalty income through a favourable treaty jurisdiction,
- payment of dividends through a holding company located in a favourable treaty jurisdiction; and
- the continuation of a company into a more favourable treaty jurisdiction prior to the realization of a capital gain.
To the extent that Canada has rejected a treaty-based approach to treaty-shopping in favour of a domestic route, its OFC tax treaty-partners will want to monitor the continuing national dialogue on how transitional relief and coming-into-force measures could apply.
(Cayman Islands-Australia TIEA signing; Image:IslandJournal)
Of course you already know this but for a recent illustration please read on.
The Tax Information Exchange Agreement (TIEA) between the Cayman Islands and Australia is not retrospective and only applies to tax periods beginning on July 1, 2010 going forward. This is understandable of course because not only would it be against the spirit of international treaties it would be unfair to taxpayers in both countries.
International tax co-operation based on newly forged treaty relations, and absent a culture of information sharing is largely a forward-looking exercise.
The majority of the eight hundred (800) OECD-styled TIEAs now in place are of very recent vintage, with most, less than four years old. Little wonder therefore that they are useless in providing confidential tax payer information ‘on request’ for tax periods prior to the date to which the TIEA applies.
Despite the frenzied TIEA activity by most members of the OECD Global Forum on Transparency and Exchange of Information for tax Purposes over the last four years, largely fueled by threat of economic sanction by the world’s wealthiest countries, few cover tax periods before 2010.
Indeed, this is precisely the case with the Cayman Islands-Australia TIEA and why according to Professor Miranda Stewart, of the Melbourne Law School, the OECD is reviewing whether the domestic laws of TIEA signatories are impeding information exchange.
A Quick Aside
That the OECD would attempt to cast judgement on the domestic laws of a TIEA-signatory and in the process supplant the lawful rulings of the judiciary in either party is another matter which deserves separate consideration in another post.
Suffice it say however that, like all treaties TIEA interpretation is a matter left to the parties to the agreement and the Vienna Convention on the Law of Treaties. Aside from the ready availability of the G-20 as its enforcement arm one cannot imagine how the OECD could assert any jurisdiction over an international contract to which it is not a party.
Back to the case.
Justice Charles Quin of the Cayman Islands Grand Court recently ruled that it was illegal for the Cayman Islands Tax Information Authority to hand over documents about two companies registered in the islands to the Australian Tax Office (ATO). The Cayman Justice decided that the tax authourity was barred from doing this even though the companies – MH Investments and JA Investments – are linked to Australian businessman Vanda Gould who has been charged with tax and money-laundering.
What’s the problem?
The TIEA only applies to tax periods beginning on July 01, 2010, but the case against the two Cayman Islands companies relates to the years from 2000 to 2007.
Interestingly however, this ruling did not prevent Australian Judge Nye Perram from allowing the documents unlawfully obtained by the ATO for use in its USD40m Federal Court case despite a request by Justice Quinn that the documents be returned or destroyed.
A Question of Workablity
Now fresh questions have been raised about the utility of perfectly sound legal instruments which are based on a well established rule of international tax treaty law that treaty obligations between countries apply from the date agreed to by the parties.
The fact that building a case involving the proving of tax fraud, evasion or other criminality may require access to tax information several years predating the agreement and involving companies connected to the principal defendant does not, as a matter of law, call into question the validity of the instrument.
That TIEAs may be unhelpful in some, or perhaps even in the majority of cases involving tax malfeasance before 2009, is not a mark against these agreements or the bona fides of the signatories thereto.
Rather it merely illustrates the point that international tax co-operation is a relationship between tax authourities which does not begin or end with the inking of a model agreement.
AEI, automatic exchange of information, Bermuda, British Virgin Islands, France, G20, g20Russia, Multilateralism, OECD, Offshore financial centre, Organisation for Economic Co-operation and Development, tax avoidance, tax evasion, Tax Information Exchange Agreement, Tax treaty, TIEA
(Bermuda Premier Craig Cannonier)
And so it continues.
Expressing its customary surprise and outrage at the territory’s inclusion in France’s latest tax haven blacklist, Bermuda has argued the following lines of defense:
- It has an existing tax information exchange agreement (TIEA) exchange with France, one of 39 bilateral transparency agreements Bermuda has, including with 90 percent of the G20 countries.
- It is also vice chair of the steering group for the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.
- It anticipates the completion of all of its internal processes for automatic exchange of information instruments such as US and UK FATCA IGA Model 2 and the Multilateral Convention will be by the end of September 2013.
- It has stated publicly that it supports the proposed G5/EU multilateral pilot based on US FATCA and will sign-on when the multilateral exchange of information pilot is ready for adoption.
- It is recognized as complying with the highest international standards on tax transparency and compliance.
- It recently underwent a combined Phase 1 and Phase 2 OECD assessment which was very positive and determined that the Territory not only has the legislative procedures in place but has an active exchange of information regime in place with its tax treaty partners.”
Why is Bermuda surprised?
Why does it envisages that its inclusion on France’s list will be very short-lived or might never have happen if in fact that list is to be effective later than 2013?
I am certain that those of you who have read my blog are not in the least bit surprised by this and are awaiting the release of more 2013 tax haven blacklists.
Read this to understand why being ‘first in class’ provides no immunity from blacklisting: When Offshore Financial Centres Become Chronic Overachievers; the Curse of the Capable.
I hate to tell you that I told you so…but…I did!
The biggest irony is that the Philippines with none of Jersey’s Bermuda’s or BVI’s stellar credentials in transparency and international tax co-operation has been removed from France’s blacklist.
I wonder if now OFCs are beginning to understand what the OECD crafted, G20 supported global transparency and tax information exchange agenda is really about.
Time will tell.
automatic exchange of information, Convention on mutual administrative assistance in tax matters, G20, G8, Government, Multilateral, Multilateralism, OECD Multilateral Convention, Organisation for Economic Co-operation and Development, Tax, tax haven, tax haven blacklist, Tax treaty, TIEAs
Please See Slide show below or access the full Power Point Presentation here:
Android, App Store, Automatic information exchange, Beneficial ownership, G20, G8, international tax, IPhone, OECD, OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, offshore, tax evasion, tax fairness, tax haven, tax justice, Tax treaty, TIEA, transparency
…could be the G8’s Plan ‘B’ in the event they fail to agree on a pubic register of beneficial owners of shell companies.
In fairness to Canada then, that country may not be the only ‘spoiler’ at next week’s meeting, at least with respect to this centrepiece of Cameron’s transparency agenda, since both Putin and Obama are also likely to vote ‘nyet’ on Plan ‘A’.
Depending on the outcome of today’s ‘last lap’ meetings in London, PM Cameron should know whether he has done enough to convince the US to change its vote to ‘yes’ as its support is likely key to bringing others on board.
PM Cameron will fight hard for this third but arguably most important limb of his legacy as G8 Chair because it does seem that agreement on the other two; a new mechanism to track where multinationals make their money and where they pay their taxes; and the launch of negotiations for a landmark trade deal between the EU and the United States, will be announced.
Perhaps one of the reasons behind the apathy for Cameron’s Plan ‘A’ is that the phrase ‘beneficial owner’ is imprecise. Indeed, according to UK Justice Harman in the Appellate discussion of Wood Preservation Ltd. V. Prior, these owners are the companies, entities or persons “who do not have mere legal ownership by the mere fact of being on a register but those with the right, at least to some extent, to the deal with the property as if it were their own.”
Importantly however, speaking in the same case, Lord Donavan cautioned that while “a company which does not have the rights of selling or disposing or enjoying the fruits of the company’s shares cannot be called their beneficial owner, any attempt to find an exhaustive definition of the phrase would be rash.'”
Assuming however that a workable definition of ‘beneficial owner’ can be found, there is yet another complication with Cameron’s Plan B.
Although this plan would allow the world’s eight wealthiest countries to set up a private register of beneficial ownership information, it would only be accessible to law enforcement and tax authorities, meaning that the world’s poorest countries, and most in need of the information, won’t be able to get it.
If Cameron cannot get agreement for a ‘public’ register and is forced to support a ‘private’ one, then as made clear by Brendan Cox, a spokesman for the IF global hunger campaign which is backed by 200 pressure groups; “The G8 would have a very difficult time justifying a summit that is supposed to focus on transparency coming up with a system of private registers.” http://www.independent.co.uk/news/uk/politics/david-cameron-may-be-forced-to-water-down-key-g8-aim-over-public-disclosure-of-shell-companies-to-stop-tax-evasion-8654509.html
The G8 meets in four days time.
Apple, Carl Levin, Corporate tax, Dublin, Exchange of information, Government of Ireland, Ireland, John McCain, Netherlands, Organisation for Economic Co-operation and Development, tax avoidance, tax haven, Tax rate, Tax treaty, TIEA, United States
..and frankly there is nothing wrong with that.
Forgetting for the moment, and yes I know it is near impossible, strictly speaking, if according to the research findings of Professor James Stewart, from Dublin’s Trinity college, companies in Ireland paid tax of 4.2% on more than $100bn of net profits in 2008, that, I am afraid is proof positive.
Before getting defensive; which is perfectly understandable after hearing the U.S Senate refer to you by what the rest of the world calls the State of Delaware, that is, a tax haven, consider this.
You along with the Netherlands and Luxembourg, have been named among the six countries which account for 60% of all global US profits; and your present rate of corporate income tax is a paltry 12.5%, which is markedly lower than the average tax rates worldwide which hover between 20% to 35%.
To be clear, I have no quarrel with competitive tax rates once buttressed by a legal and regulatory regime that supports and fosters sensible and effective rules on transparency; and the sharing of confidential taxpayer information, in accordance with agreed disciplines.
For the record, it is important to be aware that according to the OECD Global Forum (GF),Ireland has 89 agreements which provide the basis for the legal exchange of tax information, including 68 tax treaties and 21 tax information exchange agreements.http://eoi-tax.org/jurisdictions/IE#determinations_ea4957c24b73a483e863118e2c78c8e0
I am the first to admit that numbers alone do not tell the whole story; so what else has the OECD Global Forum (GF) concluded about Ireland?
Ireland’s peers in the GF, including the U.S, adopted a 2011 report on Ireland’s Combined Phase 1 and 2 Assessment of the laws and rules which give effect to the global standards on information exchange. It concluded that among other things Ireland ensures that:
- ownership and identity information for all relevant entities and arrangements is available to their competent authourities;
- reliable accounting records are kept for all relevant entities and arrangements;
- banking information is available for all account holders; and
- its exchange of information mechanisms covers all relevant partners.
This is the finding of the body mandated by the G-20 in 2009 to expose the world’s tax havens, based on their inability to pass their Phase 1 and 2 assessments conducted by the Peer Review Group of the GF. Recall that even before undergoing this detailed examination of its regime, Ireland was ‘whitelisted’ and deemed largely compliant when measured against parameters designed to exclude countries from the list of tax havens.
How then is it that the U.S Senate, in discussing the corporate, and in particular, the tax saving activities of Apple concluded that Ireland, despite its stellar credentials, is a tax haven.
This must seem patently wrong, after all in the latest OECD Progress Report on the Jurisdictions Surveyed by the OECD Global Forum Implementing the Internationally Agreed Tax Standard, Ireland is listed as a jurisdiction that continues to substantially implement the standard. http://www.oecd.org/tax/transparency/progress%20report%205%20december%202012.pdf
In fact, the only tax haven referred to in this document is Nauru, still regarded as a jurisdiction, though committed to the internationally agreed tax standard, has yet to substantially implement it.
It would seem therefore, that according to the creators of the term ‘tax haven’, by every agreed measure, Ireland is not a tax haven, along with over a hundred others included on the 2012 whitelist.
So why this persistent bother about ‘tax havens’.
Here’s the reason.
Despite protestations to the contrary, it does not matter what metric is used or conclusions reached about the definition of tax haven by countries, as a matter of international law, that it to say, what states have said in global fora about tax havens and their characteristics. When as a matter of domestic law, practice and inclination, a tax haven is defined not only by reference to whether a country is sufficiently transparent, or exchanges tax information ‘on request’. Instead what remains as the defining feature of a ‘tax haven’, is its low and competitive corporate income tax rate.
To be precise, it is not just this type of tax competition that gives rise to this label; it is also the success of the country engaged in it that will, ten times out of ten, result in the appellation, tax haven.
The bottom line is, so long as your country’s tax rate is in the single or low double digits and you are attracting customers interested not only in the tax rate, because clearly this must be backed up by highly specialised local expertise, then, I am afraid, as far as the countries who are losing their taxpayers to you, are concerned, and even if it is because their tax systems are in need of a overhaul, you are a tax haven.
That said, it is far better to be just a tax haven than an uncooperative tax haven.
In closing, let me also say that it is right and proper to explain what type of tax haven you are as many other tax havens have and continue to do, but if this machinery is activated only at the whisper of ‘tax haven’ and rendered immobile when opportunities arise to reinforce the legitimacy and imperative of responsible tax competition, then let me congratulate you in advance for your enviable accumulation of frequent flier miles.
automatic exchange of tax information, blacklist, Convention on mutual administrative assistance in tax matters, exchange of tax information, Financial services, G-20, Hong Kong, money laundering, MYOB, OECD, OECD Global Forum on Tax, OFCs, offshore banks, Offshore financial centre, Singapore, Switzerland, Tax avoidance and tax evasion, Tax Information Exchange Agreements, Tax treaty
Asia-Pacific, Boston Consulting Group, HNWI, Hong Kong, OECD, offshore, offshore banks, offshore wealth, Organisation for Economic Co-operation and Development, private banking, secrecy, Singapore, Tax Information Exchange Agreement, Tax treaty, UHNWI
Offshore wealth is now at 8.5 trillion dollars – a rise of 6.1 percent – and is expected to reach 11.2 trillion dollars by 2017.
According to the Boston Consulting Group the top three destinations for this money are Switzerland, Singapore and Hong Kong; who together have only managed to muster a total of one Tax Information Exchange Agreement (TIEA) out of the 800 currently in force.
Read the full report here:
Is there a correlation between this fact and the increasing popularity of these countries among High Net Worth and Ultra High Net Worth Individuals?
Besides the fact that they, along with their competitors in the rest of the offshore world offer discretion; and a broad, specialised and diversified suite of private banking services and expertise; these countries have a large and growing network of double taxation agreements.
They know that tax treaties are integral to providing asset solutions to the rich and mobile. TIEAs, on the other hand, add nothing to the profile of these destination countries for offshore wealth. Instead they know that in the marketplace TIEAs serve only to dilute their business brand.
This is especially so since the global standard on tax information exchange, contained in TIEAs, is reflected in their tax treaties, most of which, over the past five years, have been systematically updated in line with the OECD standard.
Why else would they have secured a passing grade in their OECD Phase 1 Assessments which determines whether a country has the requisite number and type of agreements demonstrating their commitment to the international standard.
Search OECD Reports here: http://eoi-tax.org/jurisdictions/CH#agreements
The moral of this story is:
OFCS need to stop diverting their national wealth, which is after all the collective wealth of their people on TIEAs that were never expected to provide the definitive solution to lack of access to confidential taxpayer information.
OFCs need to stop blindly fuelling the work programme of the OECD especially when these plans seem only to gain momentum, even among its own membership, under threat of sanction by the G-20.
By now, OFCs ought to have recognised that, in the past five years since the TIEA programme was re-launched, precious little has changed; and what was before has only been reinforced. Indeed the OECD itself has said it is still too early to gauge the success or otherwise of these agreements and now has its eyes firmly fixed on populating its own multilateral convention on information exchange and the global FATCA+ agenda.
Most importantly, however, OFCs need to note that with the rise in HNW and UHN individuals projected to come from the Asia-Pacific region and not the West, it is unlikely that they will gain any part of this new market if they continue to focus their attention and resources on trying to measure up to shifting OECD standards and not minding their own business.