Category Archives: Double Tax Treaties

HOW FATCA REPORTING IS MAKING FOREIGN INVESTMENT CHALLENGING

U.S. citizens and permanent residents are required to report all income wherever earned together with the existence of foreign accounts and certain investments. In an effort to prevent U.S. citizens and permanent residents from avoiding taxation of foreign held assets, the U.S. government has obtained the agreement of many foreign governments to require local financial institutions to report account existence and activity.  FATCA, the Foreign Account Tax Compliance Act requires financial institutions that offer accounts to U.S. citizens and permanent residents identify and report account information to the Internal Revenue Service.  As a result, FATCA has made it increasingly more difficult to open a foreign account since it requires foreign financial institutions to undertake these reporting efforts, at their own expense, effectively making opening such an account extremely difficult and, often, those accounts are now unavailable.

Financial institutions, including, banks, stock brokers, insurance companies, mutual fund companies, are now required to report the following assets owned by U.S. citizens and permanent residents: cash accounts, stocks, bonds, options, derivatives, mutual funds, interests in foreign partnerships, pension plans and any financial instrument that has a foreign issuer, and real estate held by a foreign entity.  Financial institutions that do not participate in will be penalized by a withholding tax of an additional 30% on all U.S. source fixed and determinable, annual or periodic income. Other penalties may also apply making foreign financial institutions shy away from offering accounts to U.S. citizens and permanent residents.

There foreign assets that are exempt from the FATCA reporting requirements. Cash accounts with less than $10,000, gold, silver or other tangible assets held in foreign safety deposit boxes, real estate held in the name of the individual, personal property located in foreign countries provided these are owned directly in the individual’s name and some foreign investments held by a retirement plan, IRA, SEP or 401(k).

Investments in foreign countries are a very good way to diversify your portfolio and can provide excellent returns. If this strategy is attractive to you, consider investing in real estate or obtaining a safety deposit box where you can accumulate gold, silver or other tangible asset, such as diamonds or other gems. Please contact us if you have any questions or would like to discuss your options to discover great returns through foreign investment.

 

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Double Irish Take Break to End in 2020.

Bowing to pressure from the OECD and the European Commission, Ireland has agreed to close a loop hole that exploited the differences between U.S. and Irish tax law. France, too, has been particularly outspoken in its attempt to bring attention to unfair tax competition. The Double Irish loophole is used by large companies with significant royalties arising from intellectual property holdings. Ireland recognizes a company’s tax residence as the place where the company is operated from, while the U.S. focuses on where a company is registered. Thus, an Irish registered company being controlled from a tax haven like Bermuda, is considered, by Ireland, to be tax-resident in Bermuda. However, the U.S. considers that same company to be a tax resident of Ireland. Leaving royalty payments made to the Irish company untaxed or minimally taxed.

Starting in 2015, newly registered Irish companies will be regarded as Irish tax resident. The tax rate for an Irish tax resident company is either a 12.5% rate on trading income or otherwise 25%. This is still one of the lowest tax rates in the EU. Pre-existing companies using the double Irish structure can maintain that structure and its advantages until 2020, after which all Irish registered companies will be deemed Irish tax resident.

Because of its already low corporate tax rates, you may not see a rush to move from Ireland. Ireland’s Minister of Finance has also hinted at additional potential tax breaks or credits that might ease the loss of this loophole.

 

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South Africa and U.S. Sign Agreement over Tax

Earlier this month, South African Finance Minister and the U.S. Ambassador to South Africa signed an inter-governmental agreement between the two nations that brought South Africa into the many jurisdictions that exchange information with the IRS under the Foreign Account Tax Compliance Act (hereinafter “FATCA”).

FATCA, enacted by the U.S. Congress in 2010, attempts to cast more transparency over the foreign accounts of U.S. citizens living in foreign countries. With this agreement made with South Africa, no longer will individual banking institutions have to make agreements for exchanging information with the U.S. government.

The impact for Americans living in South Africa will be that their banking information will be shared with the IRS and, as the agreement signed by the nations is reciprocal, the banking information of South Africans living in the U.S. will also be shared back with the South African Government and the Tax Office. The U.S. Ambassador noted upon signing: “The signing of these agreements is an important step forward in the collaboration between the United States and South Africa to combat tax evasion.”

If you are an American living or banking in South Africa or a South African living or banking the U.S. and require more information about the impact of the signing of this agreement, then please feel free to contact us for more information specific to your situation.

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Africa Takes a Stand Against Base Erosion and Profit Sharing.

Africa has historically been a place where foreigners come and take; take people, take land, take resources and opportunity. Unfortunately, even as we progress into modern times, Africa is still a place where foreigners come and take advantage. Tax avoidance is not unique to Africa or other developing countries, but African nations recently banded together to take a stand against tax avoidance by foreign nationals and domestics as part of a worldwide new global tax agenda action plan set out by the Organisation for Economic Cooperation and Development (hereinafter “OECD”).

The OECD’s 15-point action plan was recently considered in a historic meeting by the council of the African Tax Administration Forum (hereinafter “ATAF”).  The ATAF joined twenty-nine African nations to deliberate the action plan assuring Africa’s participation in the new rules of the global tax agenda.

High on the list of matters discussed by at the ATAF conference was the developing nations’ struggle with base erosion and profit shifting (hereinafter “BEPS”). BEPS is a practice usually associated with large, multinational corporations where taxable income is shifted to other low-tax locations thus eroding the taxable base of the country. This practice has resulted in overall lower prices for natural resource in Africa paired with tax incentives to multinational corporations working in those industries. The result is that African nations are robbed of good prices for their resource wealth, and taxes they would have been able to collect if profit shifting had not been occurring, thus keeping them as developing nations always reaching for developed status.

South Africa, in particular, has come up with three measures to defend against foreign tax evasion. The first, transfer pricing rules to ensure that any foreign debt is introduced at a reasonable interest rate and that the capitalisation of the local company does not rely too heavily on that debt. Second, an interest withholding tax that will impose a tax rate of 15-percent on non-resident South African earnings. Finally, a new rule applying to interest earned by non-residents where the debtor in the arrangement is a connect person to the creditor and where the non-resident creditor is not subject to South African tax on the interest earned. There may be a specific exemption for the non-resident depending on the double tax agreements between their country and South Africa.

If you are involved with a multinational corporation with ties to Africa or specifically South Africa and would like more information about these changes and their coming impact, then please contact us for help navigating the ever-changing domestic and global tax agenda.

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Introduction of VAT in the Bahamas

Effective July 1, 2014, a Value Added Tax (VAT) is being introduced in the Bahamas.  The VAT will offset reductions in import duty rates and will provide a path to accession to the World Trade Organization and potentially new regional trade agreements.  The new VAT rate will be 15% on goods and services.  Currently over 130 countries impose VAT with rates ranging between 5% and 27%.  In the Caribbean, a number of countries have imposed a VAT including, Trinidad and Tobago, Saint Kitts and Nevus, Guyana and Barbados.

As the time for implementation quickly approaches, the financial services industry, in the Bahamas, is lobbying for a ‘zero rated’ status rather than VAT ‘exempt’.  The zero rating would allow the financial services industry to avoid collecting the 15% VAT from their customers, while reclaiming the VAT paid on their input costs.  If declared exempt, financial services companies, including banks, would avoid collecting the VAT from customers, but would not be permitted to reclaim the VAT on their input costs.

An exempt rating could reduce profits, drive costs up and the financial services industry is concerned about losing a competitive advantage.  It is relatively certain, however, that services provide to overseas clients would be zero rated since such services are being exported.  This means that trust and fund administrators, and attorneys will be zero rated.  While banks, as deposit taking institutions are supplying services within the Bahamas and therefore, may therefore be treated as exempt, rather than zero rated.  The decision is not yet final, but the Minister of Finance is confident that the impact on the financial services industry will be minimal.

The significance of the introduction of this VAT should not be understated.  Income tax free countries where the financial services industry enjoyed a brisk business for many years are losing the advantage they once held.  With the imposition of back breaking withholding tax penalties and the weakening of secrecy laws, these countries now must become more creative and adjust to economic realities.  Nevertheless, the Bahamas should continue to grow and maintain its place as a leading offshore jurisdiction.

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The Busiest Tax Havens

In a recovering economy revenues might be on the rise, but profits are still the key to success.  Global structuring continues to hold its place as a one method of increasing profits.  U.S. tech companies implement the most aggressive global structuring position.  Tech companies, in particular, can easily operate across borders, locating the head office in low tax jurisdictions.  According to the Organization for Economic Cooperation and Development (OECD), 37 of the top 50 U.S. tech companies use a global structure that effectively realizes greater profits in countries with lower than average corporate tax rates.

Both low tax jurisdictions and no-tax jurisdictions can be considered tax havens.  Surprisingly, low tax jurisdictions often result in a lower combined corporate tax rate than, no-tax or zero tax jurisdictions.  The busiest tax havens currently are Ireland, Switzerland and the Netherlands.  I predict this will change, perhaps before the end of 2014, but more likely significant changes are at least five years out.  One reason for the change will be plans by the OECD to redefine the “permanent establishment” concept.  It is expected that any revision of the attribution of profits rules including permanent establishment will impact other areas of global structuring, including transfer pricing.

So will no-tax jurisdictions, the true “offshore” countries create competition for low tax jurisdictions?  The answer is “yes.”  Tax free jurisdictions will gain in popularity as low tax jurisdictions are forced to adopt the changes the OECD has in mind.  International companies will once again tweak their structures to reduce overall tax burdens.  Tax free jurisdictions tend to have a lower population and lower tax base.  These jurisdictions need to attract business to create jobs and boost their economy, which can be accomplished without imposing income tax liability.

Need assistance with your global structuring?  Contact me at wkcantab@cantab.net

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Bermuda, Malta, the Netherlands, Jersey, Guernsey and the Isle of Man join FATCA

The Foreign Account Tax Compliance Act (“FATCA”) is gaining momentum with Bermuda, Malta, the Netherlands, Jersey, Guernsey and Isle of Man signing bilateral agreements with the U.S.   The FATCA bilateral agreements target U.S. taxpayers with foreign accounts and allow for more comprehensive information reporting and imposes a 30% withholding tax on certain payments to accounts held by U.S. taxpayers.  FATCA was enacted as part of the HIRE Act, to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts.

With such momentum FATCA is gaining international support.  Offshore jurisdictions are facing a dilemma, since payments made from a U.S. financial institution to a foreign account will be subject to a withholding tax if the information on the U.S. account holder is not provided.  Foreign financial institutions may enter into FATCA agreements individually, if permitted by local government.  But once signed, will the FATCA cause a decrease in business for the these countries?  Isle of Man, for example, is addressing the need for increased awareness of its availability of skilled talent in the financial services sector, hoping to forestall any downturn should foreign companies relocate to avoid information reporting requirements.

Additionally, a conflict could arise between FATCA and local data protection laws, which limit the cross border transfer of personal information.  Consent is often required before a such a transfer can be made, foreign financial institutions will be put in the position of closing accounts where consent is not provided.  Foreign financial institutions will be required to obtain consent to the transfer from the U.S. account holder.  This conflict will continue to arise and its complexity increase.

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Google Tax? The Birth of an Indirect Tax on Internet Advertising Companies

The Italian Parliament just passed a new law requiring Italian companies to purchase web-based advertising solely from companies with a registered Italian VAT number.  This is clearly aimed at large web-advertising companies such as Google, Amazon.com or Apple, that sell web-advertising from subsidiaries based in other countries.  Google, for example, sells EU advertising from its subsidiary in Ireland, minimizing income subject to Italian income tax.  Corporate income tax in Ireland is 12.5% on trading profits, whereas Italy corporate income tax is a much higher 31.4%.

Generally speaking, VAT is taxed in buyer’s location or the place tangible goods are delivered; however, VAT on electronic goods and services are charged in the seller’s location.  This new law requires Italian companies to purchase web-advertising from local companies, thereby capturing VAT on the transaction.  To register for an Italian VAT number the company would have to maintain a local presence, thus increasing the income taxable in Italy.  If enforceable, this would be a win-win for Italy, by increasing its revenues twofold.

The new law, however, is highly criticized.  As drafted, the new law is contrary to EU fundamental freedoms and laws such as the EU Distance Selling Directive, and the principles of non-discrimination found in the double tax treaties in which Italy is a party.  Thus, its enforcement is doubtful as currently adopted.  But its introduction will be carefully watched since many other EU Member States are struggling to find new methods of capturing income within their borders in order to increase their tax base.  The Organization of Economic Cooperation and Development is scheduled to study the issue in 2014.

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Russia To Tax Offshore Companies

Once again President Vladimir Putin is putting pressure on Russian owned offshore companies to pay taxes.  In his state of the nation address, Putin announced Russia would be taxing offshore companies.  This continues the government’s crusade against offshore-declared income.  In 2012, the Federal Tax Service developed draft amendments to the Tax Code which would effectively terminate previously held deductions for costs paid to offshore companies, thereby reducing taxable income.  The amendments allowed for the recapture of the deductions if the taxpayer could prove that they had no control over the recipient of the payment.  There was significant push-back and watered-down versions were subsequently proposed to ease the burden on large companies and maintain an attractive market for foreign investors.

But Putin seems intent on pushing for further amendments that will result in retaining capital in Russia and minimize tax evasion.  Currently, gains and profits arising from assets held by offshore companies that are not repatriated to Russia are not taxed.  The use of offshore companies to hold assets has become more commonplace.  The use of a holding company in a country with a double tax treaty, Cyprus, for example, provides the benefits of minimal withholding rates.

The question remains, whether new tax laws imposing stricter control on Russian controlled offshore companies, if vigorously applied, will lead to a mass exodus of businesses from Russia and keep foreign investors away.

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Taxing the Internet: The Rise of a Digital Media Tax

For a number of years, France, and others, (remember, the byte tax originally proposed by the Netherlands) have been raising the idea of a digital media tax.  We can all appreciate that the internet has revolutionized the way in which business is conducted and revenues are generated.  Gone at the static business models with very identifiable revenue streams.  Current tax laws are inadequate to capture the value digital activities being undertaken by multinational technology and digital media companies are creating.  To address this issue in a more formal way, France, in early 2013, commissioned a study on the taxation of the digital economy.  And more recently the European Commission has begun a study of its own by appointing a committee of experts to look at ways to tax internet companies.

The perceived, and currently untaxed, value created by internet companies is the difference between what is taxable without the presence of a permanent establishment (very little, if anything) and the revenues or value arising from user generated data and information.  Under the permanent establishment concept, present in most double tax treaties, a company that has no physical presence in a particular country is not subject to income tax on income arising from customers or users located in that country.  Internet companies are free to locate primary revenue generating activities in low or no tax jurisdictions, and use double tax treaties and other optimization methods to reduce worldwide income tax.

One justification for taxing the internet, was set out in the French commissioned report “L’Age de la Multitude” which pointed out that in order to reach its users, collect and market the data, companies like Google, Apple and Samsung, for example, rely on the infrastructure built by local public investment.  These internet companies, use the infrastructure and local technology networks without participating in its costs, by creating jobs or otherwise contributing to the local economy.

The question being raised, is whether companies profiting from the user data collected should pay tax on that value created, where it is created.  India may be have taken the first step to creating a system to tax the internet, by imposing a duty to pay income tax on companies that have an economic nexus rather than a physical one.  Applying this concept, a company who has collected, combined and monitored users’ personal data would pay a tax on the value of that information.  Could this conundrum be resolved by requiring internet companies to register in each country in which they collect personal information from its users?  It must abide by local data protection laws anyway, registration could be imposed by minor amendments to data protection laws; or perhaps redefine the double tax treaty concept of permanent establishment to trigger a permanent establishment each time a user’s data is collected by the internet company.

There will be many more studies, reports, discussions and negotiations around how to tax the internet.  Although I would not expect imminent across the board acceptance of a tax on digital media, I do expect that a few countries will push to amend local tax laws to capture some of this value within its borders. Watch for the results of the EC study, expected to be out mid-2014, and further steps to be taken by France who may be the front runner in imposing a tax on internet companies.

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