Singapore Budget announces corporate tax cut
Singapore is to lower the corporate tax rate from 20% to 18% as from the 2008 year of assessment. Second Finance Minister Tharman Shanmugaratnam announced the change, which closes the gap on Hong Kong’s 17.5% rate, on 15 February as part of the 2007 Budget.
The move, he said, would cost S$800 million (US$521 million) a year, but the government would raise additional revenue of S$1.5 billion (US$976 million) a year by increasing taxes on goods and services by 2% to 7% from 1 July.
The consumption tax increase will also allow the government to offer S$1.8 billion in targeted tax credits and financial aid over the next five years to help reduce income disparity in Singapore.
Shanmugaratnam said the 2007 outlook for the city-state was positive but said a possible US economic slowdown or disruption in global markets posed external risks to the city-state’s S$210 billion economy.
Singapore has raised its 2007 growth target to a range of 4.5% to 6.5% from a previous forecast of 4-6%. The forecast is slower than last year’s 7.9% growth largely due to a projected slowdown in global demand for electronics, Singapore's main export.
Uruguayan government passes tax reform
The Uruguayan Parliament finally approved a tax reform that was initially announced in November 2005. The law, which was promulgated on 27 December 2006, includes the introduction of an economic activities income tax to replace the corporate income tax and agricultural income tax.
The new tax will reduce the tax rate on business entities from 30% to 25% and introduce a 7% withholding tax on dividends paid to non-residents and individuals. The income of non-resident entities will be taxed at a 12% rate, with reduced rates of 3%, 5% and 7% applying to certain types of income.
The carryforward of losses will be extended from three to five years and an OECD-based permanent establishment concept and transfer pricing rules will be introduced.
Under the general tax regime, no new SAFIS (Financial Investment Corporations) will be permitted, and existing SAFIS will be required to modify their status by 31 December 2010.
Other measures introduced by the law include:
· a dual-rate personal income tax system, with progressive rates ranging from 10% to 25%, imposed on wages, salaries earned by dependent employees and other personal income derived by independent workers. A flat rate of 12% will apply to income derived from capital (interest, royalties, leasing, etc.), with reduced rates of 3%, 5% and 7% applying to certain types of income.
· abolition of the salary tax, social security financing tax, bank assets tax, financial system control tax, health services tax, tax on commissions and tax on telephone communications.
· reduction in the basic rate of VAT from 23% to 22%, and in the reduced rate from 14% to 10%. Various VAT exemptions will be abolished.
· tax rates paid by employers in respect of the retirement benefit fund, which currently range between 0% and 12.5%, will be consolidated into a single 7.5% general rate.
The new measures will be effective 1 July 2007. For corporations, the changes to income taxation are effective for fiscal years beginning after that date.
EC requests repeal of preferential Swiss corporate tax regimes
The European Commission requested, on 13 February 2007, that Switzerland amend its preferential tax regimes for management, holding and mixed companies, which the Commission has asserted are a form of state aid that is incompatible with the 1972 free trade agreement between the EU and Switzerland.
Switzerland rejected the Commission's criticism, arguing there are no contractual regulations between Switzerland and the EU that require Switzerland to bring its corporate tax system into line with those of the EU member states and the free trade agreement only covers trade in particular goods and does not provide a sufficient basis for assessing corporate taxation.
The Swiss fiscal system permits the cantons broad autonomy to establish preferential business tax regimes to attract investment. Under the special tax regimes for management, holding, and mixed companies, profits derived from foreign activities, including foreign sales, are partially exempted from the cantonal corporate tax.
This has encouraged multinational companies to base their headquarters and coordination and distribution centres in cantons such as Zug and Schwyz, where they also benefit from privileged access to the EU under the EU-Swiss free trade agreement.
The Commission accordingly reviewed some of the cantonal tax regimes for multinational enterprises and concluded that they constitute public aid that is distorting competition and trade between the EU and Switzerland and are therefore incompatible with article 23(1) of the EU-Swiss free trade agreement.
The Commission observed that all European Free Trade Association (EFTA) countries concluded identical agreements with the European Union in 1972, and similar action against state aid has been taken in the past on the basis of corresponding provisions in agreements with other EFTA countries.
Further, tax regimes similar to those in Switzerland are not allowed inside the EU under the state aid provisions of the EC Treaty (article 87), and the Commission has taken action against member states in breach of that prohibition. Member states also made commitments to abolish similar preferential tax measures in the Code of Conduct for Business Taxation of 1997 and to promote the standards of the Code of Conduct with third countries.
In parallel with the Commission's decision, member states instructed it to negotiate with Switzerland for the modification of the offending cantonal regimes to remove the differential tax treatment of foreign profits in Switzerland and put an end to the resulting distortion of trade. In particular, those regimes that exempt foreign-source income from general Swiss corporate tax levels, or to grant to that income more favourable tax treatment than that applied to domestic-source income. Transition periods can also be established for the phasing out of the existing tax regimes and for restricting the cantons' ability to introduce new incompatible regimes.
Swiss review tax benefits for foreign UHNWs
Swiss cantonal tax officials, on 19 January 2007, agreed to opt for a six-month study comparing their arrangements with wealthy foreigners with those applied by other tax heavens like Luxembourg and Monaco. The review came into response to the controversy sparked by French singer Johnny Hallyday’s move to Gstaad to escape French taxes.
The move prompted a demand, by a spokesman for French presidential candidate Ségolène Royal, for the EU to crack down on Swiss tax breaks for foreign individuals. He likened Switzerland's cantonal tax system to "banditry".
Swiss President Micheline Calmy-Rey dismissed the demand. "The Swiss tax rules are transparent. It is up to the Swiss voters to decide if they should be changed. We don't need any advice," she said.
The debate was further inflamed by comments from Swiss Economics Minister, Doris Leuthard, who had criticised as "discriminatory" a system that, despite similar earnings, permits Hallyday to pay only one-tenth as much tax as the Swiss tennis player Roger Federer.
There are wide variations between Switzerland’s 26 cantons, but the basic tax formula is based on the annual rental value of the foreigner’s home and their living expenses. Some 3,600 foreigners, including musicians, actors and sports stars, currently pay an average of CHF75,000 each in tax, earning Switzerland CHF300 million a year.
Portugal lifts tax penalties for offshore companies
The government Budget for 2007, approved by Law No. 53-A/2006 of 29 December 2006, has reduced the annual Municipal Tax (IMI) levied on property owned by companies based in tax havens (blacklisted) from 5% to 1% - double the rate applied to non-offshore held property.
The property transfer tax (IMT) payable on initial acquisition by a blacklisted company has also been reduced from a flat rate 15% to 8%, which is 2% more than the highest rate for non-blacklisted acquisitions.
The retraction of a good portion of these taxes may help to revive the property market, which suffered a decline since the laws penalizing the use of offshore companies were enacted in 2003. It is also an indication that Portugal no longer considers the use of offshore companies to be the preserve of criminals.
But the government has also given approval in principle to proposed legislation to impose a duty on all consultants to report, “aggressive tax planning” to the tax authorities. This includes banks and financial institutions, lawyers, economists, and auditors.
These changes are a significant reversal to the previous swingeing taxes and could mean that, for those who wish to retain the confidentiality of offshore ownership, this is now at an acceptable cost. Any corporate owners who have "stayed offshore" may now feel it is more convenient to do so but they should consult this office for a full calculation of the future effects of the changes which can be done for a modest fee.
ECJ finds Danish pension breaks in breach of EU law
The European Court of Justice struck down, on 30 January 2007, Danish pension tax relief measures that apply to payments to Danish pension institutions, but not to payments to pension institutions established in other member states.
In European Commission v. Denmark (C-150/04), the ECJ held that Denmark's limitation of tax relief for life insurance and pension payments to "payments under contracts entered into with pension institutions established in Denmark" violates articles 39, 43, and 49 of the EC Treaty.
Welcoming the decision, EU Tax Commissioner László Kovács said: "The Court clearly rules against national tax rules not allowing tax deductibility of pension contributions paid to foreign funds, while they allow such tax deductibility for contributions paid to national funds."
Kovács said that seven member states had already complied with requests to change their pension tax laws and that the remaining member states should now "also modify their legislation."
UK Court refuses to refund overpaid tax
The UK High Court ruled, on 2 February 2007, that a former chief executive of discount clothing retailer could not recover £846,000 in overpaid taxes from HM Revenue & Customs.
In 1998 Angus Monro, former head of the Matalan chain, exercised an option to acquire more than 1.3 million shares in Matalan, then valued at 235p per share, for nothing. He declared a gain on the deal of more than £3 million in the tax return he filed in 2000.
The following tax year, after Matalan’s share price had shot up, Monro sold 900,000 of his shares for more than £7 million. In the tax return for 2001, he declared a gain of more than £5 million after deducting the tax he had already paid on the shares’ acquisition. He paid £2.1 million in capital gains tax (CGT).
But this figure was mistaken. A separate court case, decided 18 months after Monro's 2001 return had been submitted, resulted in a change in the law which meant he had effectively overpaid £846,000 in CGT. Monro’s accountants did not realise that he had overpaid until a Court of Appeal declared that the method of computation was wrong in law. They tried to amend Monro's tax return and reclaim the money as tax overpaid by mistake.
High Court judge Sir Andrew Morritt said that he had "considerable sympathy" for Monro, but added that, as the law stood, he had no hope of reclaiming the money because the time limit to amend payments was one year. He refused permission to take the case to the Court of Appeal because, he said, there was no hope of success.
"It is my function to apply the law as I understand it to be,” he said. “It is ultimately the function of Parliament if it should be altered."
Spanish tax reforms target property ownership
Significant changes to the Spanish tax system came into effect on 1 January 2007 to end discrimination between the tax treatment of non-residents and Spanish residents. Many of these will affect property in Spain and, in particular, foreign or non-resident owners of Spanish property.
On the plus side, following pressure from the European Commission, capital gains tax (CGT) has been reduced from 35% for non-residents to 18%, to bring it into line with the rate paid by Spanish residents.
Withholding tax, which a property purchaser must pay to the tax office on account of the potential CGT liability of a non-resident seller, is also reduced from the 5% of the purchase price to 3%, to take account of the reduction in CGT from 35% to 18%.
However, the new income tax does away with the special system regulating asset holding companies and replaces it with much higher tax rates. These were often property companies owned by at least one person with most of their assets not affected by “economic activities”. The letting of property was not considered an economic activity unless the company had an employee and premises dedicated exclusively to carrying out business.
Under the former system any non-resident owner of real estate in this type of company would benefit from the same CGT tax rate as individual residents, currently 15%, if the company disposed of assets after one year. Under the new regime, companies with a net turnover of less than €8 million will be taxed at 25% up to €120,202 profit and the reminder at 30%.
There will be a transition period so that owners can opt to wind up the company and acquire the property in their individual names. The payment of Stamp Duty is exempted, CGT and the Plusvalía Tax will be deferred up to the moment the individual transfers the property in future. Individual owners can benefit from the 18% CGT rate when they sell.
A new Tax Fraud Prevention Act also requires buyers and sellers of property to include their Fiscal Identification Number when registering property transactions. For the Land Registry to register a transaction, the title deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price.
This Act also includes important changes affecting offshore companies from a list of jurisdictions (the so-called black list), which were subject to an annual tax of 3% on the rateable value of the property. The new law enlarges the list to include all companies with which Spain does not have a tax treaty that provides for exchange of information.
The Law will treat offshore companies as resident in Spain if their main assets consist of real estate property situated in Spain. In respect of CGT, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain.'
Under the new draft bill, if an offshore company is involved, the appraisal of these transactions will be based on the market value of the real estate, regardless of the property price declared and the real estate assets of the company will be affected by the payment of the tax.
Anyone affected by or concerned about these changes should seek advice immediately.
UK Revenue issues brief on yacht VAT schemes
The UK Revenue & Customs issued, on 7 February 2007, a brief to raise its concerns about the validity of the VAT treatment that is being claimed through schemes by which the user acquires a new vessel which purportedly has “VAT paid” status while, in reality, paying no or a minimal amount of VAT.
The schemes fall broadly into two categories – cross-border leasing and artificial chartering to the private funder. Where there was evidence to suggest that a vessel was supplied through one of these schemes, the Revenue said it would carry out a full investigation and take any necessary actions.
Both categories involve a contrived leasing or chartering arrangement of a vessel that is predominantly for the recreational use of an individual and share the following common features:
· The individual provides the funds that are used to pay for the vessel either directly or indirectly (maybe by lending money to an intermediary);
· Registered title to the vessel is held by a special purpose vehicle or “SPV”, which is controlled (directly or indirectly) either by the individual or by the scheme provider;
· The SPV purports to use the vessel in a chartering or leasing business. It does not incur VAT either through a zero-rated export if the SPV is outside the EU, or otherwise by recovering as input tax any VAT charged on the supply;
· The vessel is chartered or leased to the individual. No VAT, or only a minimal amount, is charged on the lease or charter payments.
Australia signs TIEA with Antigua
Australia and Antigua signed, on 30 January 2007, a Tax Information Exchange Agreement (TIEA), which provides for full exchange of information on criminal and civil tax matters between Australia and Antigua.
The agreement aims to improve transparency and to establish effective information exchange for tax purposes and provides important momentum to achieving the aims of the OECD's Harmful Tax Practices Initiative and related Global Forum on Taxation.
It is the second such arrangement entered into by both countries. Australia signed a TIEA with Bermuda in 2005 and Antigua signed a similar accord in 2000 with the US. It will enter into force when ratified by both governments.
Denmark proposes major tax changes
The Danish government submitted a draft bill on 1 February 2007 proposing significant amendments to the taxation of companies and, to a lesser degree, of individuals’ shareholdings. It hopes that the bill will be enacted by 1 April.
The draft bill involves a reduction in the statutory corporate tax rate from 28% to 22%, which would be effective for fiscal years beginning on 1 January 2007. This would give Denmark the second-lowest corporate tax rate, after Ireland's 12%, among the 15 pre-expansion EU countries.
In order to protect the tax take, the draft bill proposes to raise the highest rate of taxation of individuals’ share income so that share income exceeding DKK100,000 (US$17,500) for unmarried individuals and DKK200,000 for married couples will be subject to 47.5% tax. Currently it is 43% for amounts exceeding DKK45,500 and DKK91,000 respectively, and 28% below these thresholds. A similar change is proposed for negative share income by decreasing the allowable tax offset.
The draft bill also contains the government’s response to recent aggressive tax planning conducted by private equity funds and industrial buyers, and to the European Court of Justice's judgment in Cadbury Schweppes in September 2006 which found the UK CFC rules to be contrary to the EC Treaty provisions on the free right of establishment. The Danish CFC rules are to a large extent similar to the UK rules.
The proposed amendments fundamentally change the taxation of interest payments and may severely affect existing structures. Under the Bill, as of 1 April 2007, only 55% of net interest expenses exceeding DKK10 million will be deductible up to a cap equal to 6.5% of the tax value of the operating assets.
Effective 1 April 2007, the CFC regime applies to both Danish and foreign entities predominantly with financial activities. The sole purpose of the change is to attempt to comply with EU requirements. The elimination of the low-tax test would result in any Danish or foreign company meeting the control test and the financial income test being subject to CFC taxation regardless of the level of taxation.
Other significant changes contained in the draft bill are:
· effective fiscal years starting on or after 1 January 2007, taxpayers may elect to be taxed under a patent regime at an effective tax rate of 12.1%. The patent box regime is designed to prevent the migration of patents to low-tax jurisdictions and compete with similar arrangements in France, Hungary, and the Netherlands;
· effective fiscal years starting on or after 1 January 2008, tax depreciation on long-life assets is to be tightened;
· effective 1 June 2007, dividends will not qualify for the participation exemption if the subsidiary is resident outside the EU or European Economic Area (EEA), or is resident in a non-treaty partner country. A tax credit for underlying taxes will, however, be granted;
· effective 1 April 2007, liquidation proceeds will no longer be tax-exempt for a foreign corporate shareholder resident outside the EU/EEA or a tax treaty country.
China clamps down on import of luxury goods
The Ministry of Finance (MOF) of the People's Republic of China announced that, as of 1 January 2007, the collection of import tax on certain newly purchased luxury goods brought into China from abroad is to be enforced.
Since China increased the rates of its consumption tax in April 2006, the gap in the prices in China and Hong Kong of some foreign-brand cosmetics and watches with their country of origin has grown by as much as 50%.
To combat illegal imports, the MOF has decided to tax all travellers from abroad who bring in luxury products with a value that exceeds a prescribed threshold – approximately US$645 for P.R.C. residents and US$258 for foreigners. The tax rate on golf equipment and high-priced watches has been raised from 10% to 30 %, and the rate for cosmetics has increased from 20% to 50%.
OECD recommends Sweden cut income tax
The OECD has recommended that Sweden cut taxes on earned income for low-income groups and unify VAT to help boost the labour supply and entrepreneurship, in its 2007 economic survey published on 14 February.
In its report, the OECD found Sweden has relatively high taxes on earned income for low-income earners, which make it difficult for young people, the disabled, immigrants, and other marginalised groups to gain access to the Swedish labour market. A uniform VAT would also help make room for more fully financed tax cuts intended to help increase work and entrepreneurship.
But despite projections that Sweden's economic growth is expected to exceed 4% of gross domestic product in 2006, "positive fiscal surprises should not be allowed to trigger permanent spending increases or underfinanced tax cuts”. Swedish employment rates are high in comparison to other OECD member states, but further reforms may be necessary to help it manage labour reallocations better.
In its first budget in October 2006, Sweden's coalition government proposed SEK 42 billion in employment-related tax cuts in 2007 to ease marginalised groups' entry into the labour market. To maximise the hours worked by those already employed, the OECD recommended that Sweden consider expanding the in-work tax credit targeted at low- and middle-income workers together with a benefit reform, lowering the rate of state income tax, or increasing the income tax threshold.
The OECD endorsed the government's proposed phase out of the country's wealth tax, starting with an initial 50% reduction of the 1.5% tax on financial assets. Abolition of the tax, said the OECD, might lead to a repatriation of capital, possibly making more investment capital available for new small companies.
It also urged Sweden to address distortions in its housing market, which it says contribute to labour market exclusion. Besides making a broad effort to match housing supply and demand, Sweden should consider introducing a local real estate tax or land tax linked to property valuations in tandem with the government's plans to end the real property tax in 2008.
Malta in negotiations for 10 tax treaties
Malta is currently negotiating ten income tax treaties, including one with the US. Malta has been expanding its treaty network and has 44 tax treaties in force, 24 of them with other EU member states. Malta has stepped up efforts to finalise tax treaties with EU countries and prospective members to ensure that it has a complete range of treaties to avoid double taxation in trade relations with other EU countries.
Cyprus applies to join Eurozone
Cyprus submitted, on 13 February 2007, its formal application to the European Commission and the European Central Bank (ECB) for entry into the eurozone. If the request is granted, the euro will become the country's official currency on 1 January 2008.
The EC and the ECB are expected to issue a report by mid-May and EU foreign ministers will make their recommendations prior to the EU summit in June. A final decision will be taken at the summit.
Cyprus joined the EU in May 2004, along with nine other Central and East European countries, and the European Exchange Rate Mechanism 2 in May 2005. Of the ten countries that joined the Union in 2004, Slovenia is the only one to have already joined the Eurozone, becoming its thirteenth member on 1 January this year.
Finance Minister Michael Sarris said Cyprus met all four of the so-called Maastricht criteria regarding inflation, government financing, the exchange rate and long-term interest rates. Cyprus has implemented an austerity programme since 2004 to reduce its budget deficit from above 6% of GDP to a projected 1.6% in 2007. Eurozone member countries must ensure their annual budget deficit does not exceed 3% of GDP.
Hong Kong Budget sets out a HK$20 billion relief package
Hong Kong Financial Secretary Henry Tang presented the Legislative Council with the draft 2007 budget on 1 March 2007. It proposes a HK$20 billion package of tax concessions and other one-off relief measures, including HK$4.9 billion cuts in salaries tax by reverting marginal tax rates and tax bands to their 2002-03 levels, and by waiving 50% of salaries tax and tax under personal assessment assessed for 2006-07, subject to a ceiling of $15,000.
In addition, there will be an HK$250 million reduction in stamp duty on property transactions between HK1 million and HK$2 million with the introduction of a fixed HK100 charge, HK$8.1 billion in salaries-tax rebates, HK$5.2 billion in rates waivers and HK$1.5 billion in extra social-security payments. The Financial Secretary will also allocate about HK$900 million to provide more assistance to the disadvantaged.
Due to the economy's performance over the past 12 months, Tang said that investment income and revenue from land premiums, stamp duty, profits tax and salaries tax alone are about HK$31 billion higher than the original estimates. He predicted a consolidated surplus of HK$55.1 billion for 2006-07, higher than the original forecast. An operating surplus of HK$7.2 billion and a consolidated surplus of HK$25.4 billion are forecast for 2007-08, while government spending has been reined in below HK$200 billion for three years running. Tang estimates operating expenditure for 2006-07 will be HK$195.7 billion, up just 1.7% per cent over the 2005-06 figure.
Tang said recent public consultation had revealed division on the government's proposed goods and services tax but agreement over government intentions to broaden the tax base and stabilise government revenue. He said the government would prepare a report on the matter after the consultation period, which ends later in March.
Tang also emphasised that Hong Kong's continuing economic integration with mainland China was key to its future growth and competitiveness.
Netherlands Antilles signs TIEAs with Australia and New Zealand
The Netherlands Antilles signed tax information exchange agreements with Australia and New Zealand in Canberra on 1 March 2007. The Netherlands Antilles signed a similar accord with the US in 2002.
Alex Rosaria, State Secretary of Finance of the Netherlands Antilles, said: “With the signing of these tax information agreements we have made another step forward in our joint efforts to implement the principles of transparency and our commitment to high international standards regarding the global financial markets.
Rosaria hopes that the Netherlands Antilles can sign a TIEA with Spain in April.
Luxembourg replaces 1929 companies with SPF
The Luxembourg government launched the "Société de Patrimoine Familiale" (SPF) to replace the 1929 holding company regime which was terminated on 1 January 2007 after it was found by the European Commission to be in violation of state aid rules for providing "unjustified tax advantages" to providers of certain financial services who set up holding structures in Luxembourg.
The SPF, or "Family Wealth Company", has the approval of the European Commission. Shareholders will be restricted to a small group of individual shareholders and SPFs will not be available to listed corporations or large groups of unconnected shareholders. They will be prohibited from commercial activity and limited to private wealth management, such as the holding of financial instruments such as shares, bonds and other debt instruments, in addition to cash and other types of bankable asset.
The new regime is to be exempt from corporate income tax, municipal business tax and net-worth tax, and from withholding tax on distributions. But these exemptions can be affected by the SPF's participation in non-resident, non-listed companies, if those companies are located in a country not subject to an equivalent corporate tax regime.
Companies participating in the new scheme must have a minimum capital level of €12,500, one associate and one director in order to participate in the new regime. SPF shares can be nominative or bearer, but may not be quoted. If it is used to hold voting rights in other companies, it must ensure that it does not involve itself in the running of those companies, and it is prohibited from providing any kind of service.
There are about 14,000 existing 1929 Holdings in Luxembourg and those formed before 20 July 2006 will be able to keep their present status until 2010. Certain restrictions on transfer of ownership of the shares of those companies still need to be clarified. The new law is expected to apply to around 80% of 1929 Holdings and Luxembourg is apparently drawing up a further draft law to replace the remainder.
Isle of Man reviews funds sector
A review of the Manx funds sector has recommended the introduction of a new specialist, unrestricted fund category with a US$100 million initial subscription. The key strategic report had identified "huge potential for growth", said Treasury Minister Allan Bell in the 2007 Budget speech on 20 March, and would be followed by similar high level reviews of the Island's banking and captive insurance sectors.
With Isle of Man funds under management rising by 50% from £15 billion in 2005 to around £21 billion in 2006, the report, chaired by former global head of HSBC's Alternative Fund Services Division Paul Smith, is intended to secure the sector's long term prospects by capitalising on market opportunities.
The report identified opportunities to position the Isle of Man as a leading location for the domiciliation of specialist institutional funds in the alternative and closed ended fund sectors and further, as a preferred location of the establishment of front and middle office operations for global fund managers.
The key recommendation was the introduction of a new specialist fund category with US$100 million initial subscription and the ability to base management and/or administration in other acceptable jurisdictions. There would be no restrictions on investment strategies and a "light touch" regulatory approach.
Other recommendations include a focus on the target market of front and middle office functions of London-based alternative fund managers, as well as managers in other key fund centres, and a revised offering to fund managers to include a tailored business proposition for location to the Island, and a set up assistance package.
As part of the Budget, the Isle of Man also announced the establishment of a £20m Economic Development Fund to extend the financial support available to new businesses to include new categories, prioritising those high value opportunities that provide the best prospects for fostering economic growth and inward investment.
Bell said: "In order to secure the future, each sector of the economy needs to take a strategic view of the opportunities and threats it faces and define its vision and strategic direction."
EU court ruling on dividends could cost Germany €5 billion
The German authorities may have to refund as much as €5 billion to taxpayers after the European Court of Justice said Germany's method of taxing dividends from 1977 to 2001, which allowed income-tax deductions only on domestic investments, was an "unjustified restriction on the free movement of capital”.
Handing down its decision on 6 March 2007, the court also refused Germany's request to limit the effect of its ruling, clearing the way for taxpayers to claim back money for the entire period. The German Finance Ministry had argued that unlimited refunds posed a "real danger" for EU governments and reiterated that it may have to refund as much as €5 billion, depending on the number of claims made.
The court set no time limit on German liability for refunding to investors in foreign companies, on the grounds that the German government should have been aware, from earlier rulings, that the tax would be deemed illegal.
In Meilicke & Others v. Finanzamt Bonn-Innenstadt, the case was brought by a German family who contested a domestic law that gave a tax credit on dividends paid by German companies, but not on dividends from companies based elsewhere in the EU. Between 1995 and 1997, Heinz Meilicke received dividends for shares held in Dutch and Danish companies. He later died and his heirs in 2000 applied for a tax credit on the foreign dividends.
Germany, with the support of France, Greece and Hungary, argued in an earlier court hearing that the expected shortfall in tax income would have severe economic repercussions. But Christine Stix-Hackl, a court advocate general said in an advisory opinion from 2005 that Germany had failed to provide "sufficient evidence" of such a risk.
The EU court also rejected the German argument that the legislation was justified by the need to ensure the cohesion of the national tax system.
The court said it would be sufficient to grant a taxpayer who holds shares from another EU state a tax credit based on the corporate tax the company pays in its home state.
Heinz Meilicke's son, Wienand, said in statement: “European countries can no longer pursue a policy by which they breach EU rules as long as possible in the hope that the serious economic effects of a particularly stubborn law infringement will be softened by a limited ruling.”
South Africa to axe Secondary Tax on Companies
South Africa’s 2007 Budget, presented by Finance Minister Trevor Manuel on 28 February 2007, provides for the secondary tax on companies (STC) to be replaced with a 10% withholding tax on dividends.
Initially the STC will be replaced with a dividend tax at company level and the rate will be reduced from 12.5% to 10%, as from 1 October 2007. During 2008, the tax will be converted to a dividend tax on shareholders with administrative enforcement through a withholding tax at company level. The implementation of this phase will depend on the renegotiation of several international tax treaties. There is no mention of the introduction of an imputation system to provide credit for taxes imposed on profits out of which the dividends are declared.
To provide equitable treatment between large institutions and individuals, and certainty in distinguishing capital from revenue profits, all shares disposed of after three years will be on capital account and trigger a capital gains tax event. Gains realised on the sale of shares are currently taxed either as ordinary income or capital gains, but the government said the “facts and circumstances” test had become "problematic".
Foreign companies, depending on their legal form, are currently subject to different rates of tax – subsidiaries of foreign companies pay tax at a 29% rate while a branch of a foreign company will pay tax at a 34% rate. The higher rate will now apply to all forms of foreign business entities in South Africa.
Measures to remedy the potential loss of intellectual property and the impact on the tax base will be introduced to try to prevent certain SA companies from shifting intellectual property offshore as exchange controls are lifted. We will watch this closely as we are involved in some of this work at the moment.
Amendments will also be introduced to combat a perceived loophole where loans are made by emigrating SA residents who then become non-resident immediately after the loan is made. The changes will again have implications for planning outbound clients.
Eurostat publishes 1995-2005 tax figures
The European Statistics Office (Eurostat) has published figures examining tax revenue in the EU and the Member States between 1995 and 2005, and on the breakdown of tax revenue across Member States by main tax category.
According to the Eurostat report, tax revenue in the 27 EU member states stood at 40.8% of GDP in 2005, compared with 40.4% in 2004, while in the euro area tax revenue was 41.2% of GDP in 2005, compared to 40.9% in 2004. Over the longer term, tax revenue as a percentage of GDP in both the EU and the euro area were in 2005 slightly below the levels recorded in 1995.
There were substantial differences in the tax-to-GDP ratio among the EU Member States. In 2005, Sweden (52.1%) recorded the highest ratio, followed by Denmark (51.2%), Belgium (47.7%), France (45.8%), Finland (44.0%) and Austria (43.6%). The lowest ratios were recorded in Romania (28.8%), Lithuania (29.2%), Slovakia (29.5%), Latvia (29.6%), Estonia (31.0%) and Ireland (32.2%).
In 2005, tax revenue as a proportion of GDP rose in 19 Member States, fell in six and remained stable in Germany and Greece, as compared with 2004. The highest increases in the tax-to-GDP ratio were recorded in Cyprus (from 34.1% to 36.2%), Malta (from 36.2% to 37.7%), Poland (from 32.7% to 34.2%) and Denmark (from 49.9% to 51.2%). The largest reductions were found in Austria (from 44.4% to 43.6%), the Czech Republic (from 36.8% to 36.3%), Estonia (from 31.5% to 31.0%) and Slovakia (from 30.0% to 29.5%).
In the 27 EU Member States, the three main categories of taxes contribute roughly equally to total tax revenue: in 2005 taxes on production and imports, such as VAT, import and excise duties, accounted for 34% of the total tax revenue, taxes on income and wealth for 31%, and actual social contributions for 32%.
But the structure of taxation varies considerably between Member States. In 2005, Bulgaria (19.0%), Denmark (17.9%) and Cyprus (17.4%) had the highest ratios of taxes on production and imports to GDP, against the EU average of 13.8%. On the other hand, Lithuania (11.5%), the Czech Republic (11.9%) and Germany (12.1%) recorded the lowest ratios.
With regard to taxes on income and wealth, Denmark (31.2%), Sweden (20.1%) and Finland (17.5%) recorded the highest ratios to GDP, against the EU average of 12.8%, while Romania (5.3%), Bulgaria and Slovakia (both 6.1%) registered the lowest ratios.
For social contributions, the highest ratios to GDP were observed in Germany (16.7%), France (16.4%) and the Czech Republic (15.1%), against the EU average of 13.0%, whereas Denmark (1.1%), Ireland (4.8%) and Malta (7.2%) recorded the lowest ratios. Denmark's social security system is almost exclusively financed by general taxation.
UK Budget cuts corporate tax rate
UK chancellor Gordon Brown cut the basic rate of income tax by 2p to its lowest level in 75 years yesterday as he used the climax to his eleventh and final budget on 21 March to prepare the ground for the political battle with the Conservatives at the next election.
The cut, theatrically held back by the chancellor to the end of his speech, sought to nullify criticism of previous Labour stealth taxes by streamlining the tax system and using the £8bn raised from abolishing the 10p tax band to fund the £8bn cost of cutting the basic rate to 20p.
He adopted a similar approach to business taxation, responding to pressure from industry by cutting the main rate of corporation tax from 30p to 28p from April 2008, but clawing money back through less generous capital allowances. The small business rate will also increase progressively to 22% in 2009.
Overall, the Treasury red book showed that the budget was neutral, with Brown raising as much revenue as he intends to give away. Of the £2.5bn being spent on personal tax cuts, the Treasury said £1bn would come from motorists through above-inflation increases in fuel duty and vehicle excise duty; £1bn from tougher tax treatment of business properties left empty and £500m from anti-avoidance measures.
Steps announced dealt with avoidance in the buying and selling of companies to gain a tax advantage by using their gains and losses, the sale of lessor companies and stamp duty land tax. The government had already announced other avoidance measures in the two pre-budget reports in December and March.
Gibraltar gives evidence to ECJ on proposed tax regime
Gibraltar Chief Minister Peter Caruana travelled to Luxembourg on 14 March 2007 to give oral evidence to the European Court of Justice in support of Gibraltar’s challenge to the European Commission’s 2004 decision that, under EU law, Gibraltar is not permitted to have a tax regime different to the UK’s.
The two issues identified for adjudication by the ECJ are whether a new corporate tax regime proposed for adoption by Gibraltar to replace the existing exempt-company regime is in compliance with EU state aid rules and whether Gibraltar, which is regarded as part of the UK for purposes of some aspects of EU membership, is to be permitted to have a tax regime separate from that of the UK.
The ECJ has already received full written submissions from both sides, and the oral hearing is expected to be the final stage of the litigation. The Commission’s intervention led Gibraltar to postpone several planned tax changes and to scrap plans to move to a zero-tax regime in place of the exempt company regime that is being phased out because it was found to be in violation of the EU state aid rules.
Gibraltar had hoped the ECJ would hand down its decision in time for the new regime to be incorporated in the 2007-2008 fiscal year that begins in July, but an unexpected intervention by Spain extended the oral hearings and may also lengthen the deliberations of the court. The Spanish government is concerned about the possible effect of any court ruling on tax regimes already operating in areas such as the Basque region of Northern Spain.
A favourable ruling also will remove the uncertainty that has affected Gibraltar's financial services sector since the European Commission first intervened in 2004. The Gibraltar' government believes its case has been strengthened by a decision handed down by the ECJ last year, which confirmed Portugal's right to make separate tax arrangements for the Azores without infringing EU state aid rules.
Gibraltar argues that while the Azores is an integral part of the Portuguese state, Gibraltar is not part of the UK and, under its new constitution that came into effect at the beginning of this year, enjoys a non-colonial relationship with the UK.
If Gibraltar obtains a favourable ruling in time for the 2007 budget, it is also expected to reduce personal tax levels significantly. If not, the government may have to reconsider its tax plans and postpone the introduction of new structures for another year.
South Africa signs tax treaty with Saudi Arabia
The South African government signed a tax treaty with Saudi Arabia on 13 March 2007 during a visit to Riyadh by South Africa's President Thabo Mbeki to strengthen economic ties and encourage investment between the two countries
China unifies corporate tax rates
The Unified Enterprise Income Tax Law, to unify the corporate tax rate at 25% for domestic and foreign investment enterprises (FIEs) and make other important changes to China's corporate tax regime, was finally approved by the National People's Congress of the People's Republic of China on 16 March.
The effective date of the new EIT law is 1 January 2008, at which time the former foreign-investment and domestic-investment enterprise income tax laws – the FEIT law and the old EIT law – will be officially repealed.
Both domestic and foreign investment enterprises are currently subject to a statutory rate of 33%, but there are preferential tax rates of 24% and 15% for FIEs in some special regions, and reduced tax rates of 27% and 18% for domestic investment enterprises with profits that fall below a specific threshold. The varying tax rates had led to big gaps between the nominal and actual tax rates.
The unified EIT would revise the existing preferential tax policies such that, in addition to a new unified tax rate of 25% on all enterprises in China and regardless of the source of the capital, there would be preferential tax rates of 20% for qualified enterprises with profits that fall below a specific threshold, and 15% for some high- and new technology enterprises.
The fixed-period tax reduction and exemption policies for manufacturing FIEs and the 50% tax reduction for export-dominated manufacturing enterprises would be eliminated. But to mitigate the impact of the higher tax burden on FIEs under the unified EIT, enterprises that currently receive those tax benefits would benefit from a five-year transition period, during which their benefits would continue.
The new law, which passed with a 98% majority, is regarded a progressive move. Domestic firms, on average, have paid an effective tax levy of 24%, double that of their foreign counterparts, since the introduction of a dual tax regime in 1994.
"The corporate tax reform marks the maturity and standardisation of China's economic system," Jin Renqing, China's finance minister, told government press agency Xinhua. The law also granted the State Council the right to alter the tax code without requiring the vote of the NPC, which meets only once a year.
EU summit paper sparks clash over taxation
EU finance ministers clashed over a German presidency paper on the bloc's future economic policy prepared for the March summit of European leaders, with some member states opposing a reference to business taxation and to joint EU efforts to tackle "harmful tax practices."
Several countries – such as Denmark, Sweden, the Netherlands, the UK and the Czech Republic – opposed the paragraph in a draft paper about economic goals which said the functioning of the bloc's internal market "may be improved through measures at the European level on business taxation."
"There should also be action taken to tackle fiscal fraud and continued efforts to tackle harmful tax practices," the controversial document said.
Some new member states as well as the UK supported the Czech Republic's argument that tax competition can be positive, with several delegations - including Sweden and the Netherlands which previously supported an EU push towards a common company tax base - also asking for the suggestion to be dropped.
Meanwhile, the European Commission is preparing to unveil a second, more concrete document on plans to harmonise the corporate tax base in the EU in May. The plan, proposed by EU tax commissioner Laszlo Kovacs and opposed so far by the UK, Ireland, Estonia, Lithuania, Slovakia, and the Czech Republic, would introduce a set of common rules on what share of businesses' profits are taxed, taking special tax breaks and exemptions into account.
Kovacs intends to unveil the full proposal on tax bases next year, with a special working group including national experts, currently focusing on the method of calculation of a base which would be acceptable by all countries.
Sweden to curb release of personal tax information
Swedish tax authority head Mats Sjöstrand said he will stop delivering the tax authority's information to credit rating companies, unless these companies can guarantee that the person whose income details are being requested are informed.
He is seeking to put a stop to websites which enable searches for people's income, wealth and other sensitive details. The details come initially from the tax authority but are passed on to credit rating agencies.
It has long been possible to request anonymously the income details of anyone living in Sweden simply by calling the tax authority itself. Sjöstrand did not indicate any plans to change this practice.
Swedish call to simplify tax declarations
The Swedish tax authority has demanded simpler rules for tax declarations, after it emerged that more than half of those who declared earnings from the sale of homes or shares filled in the forms incorrectly. Tax deductions claims for travel to and from work and for other costs were also wrong in more than half of declarations.
Last year, the tax authority made 1.3 changes to peoples tax declarations following checks or following new information from the taxpayer in question.
Sweden deems golf non-deductible
A parliamentary tax committee decided on 15 March not to add golf to Sweden's list of tax deductible keep-fit activities. Acceptable tax-break activities include: gymnastics, weightlifting, bowling, racquet sports, volleyball, football, yoga, tai chi, qi-gong, stress management, massage, jive, folk dancing, square dancing and jazz dancing.
Swedish statute raises treaty override concern
The Austria-Sweden tax treaty protocol, signed on 21 August 2006, has yet to be ratified by the Austrian parliament, but the recent statute implementing the protocol in Sweden has raised treaty override concerns.
Under the pending protocol, Sweden may tax capital gains on Swedish shares that are realised in the 10-year period following the resident's departure from Sweden. According to the new Swedish law, the new wording of article 8 of the 1959 income tax treaty between the two countries will apply from 1 January 2007. This would seem to constitute a treaty override because the Austrian parliament has still not ratified the protocol.
Sweden has opened tax treaty renegotiations with Algeria, Brazil, Ghana and Peru. The previous Peru treaty was terminated by Sweden on 1 January 2007. The existing Brazil-Sweden treaty has to be revised -- the provisions on dividends, interest, and royalties have terminated under a sunset rule. Sweden expects to sign new tax treaties with Azerbaijan and Lebanon during 2007.
EU requests that Germany change non-resident tax regime
The European Commission formally requested that Germany should modify its withholding tax system for certain categories of non-resident taxpayers – particularly artists and sportsmen. The request was in the form of a reasoned opinion under Article 226 of the EC Treaty on 26 March 2007.
Under German law, a withholding tax is applied at source to income paid to certain non-residents – artists, sportsmen, journalists and similar categories – without provision for business expenses to be deducted. A subsequent refund procedure allows non-resident taxpayers to apply for reimbursement of the overpaid tax, but only business expenses directly economically linked to the activity in Germany are deductible.
The Commission believes that this regime constitutes an obstacle to the cross-border provision of services as guaranteed by Article 49 of the EC Treaty. In many cases, the prohibition of the deduction of business expenses and indirect expenditures can result in higher taxation of non-residents than residents.
The Commission holds the tax deduction at source and refund procedure incompatible with the principle of freedom to provide services in the internal market. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may refer the issue to the European Court of Justice.
Austrian Court finds inheritance tax unconstitutional
The Constitutional High Court ruled, on 7 March 2007, that Austria's inheritance tax is incompatible with the constitutional principle of equality. It has also now begun to review the compatibility of gift tax. Both taxes are contained in the Inheritance & Gift Tax Act (IGTA) and follow similar principles, but different exemptions and deductible amounts apply.
In its decision, the Court found there were no specific exemptions for real estate that is donated or bequeathed, but tax was levied on the special assessed value of the property. Because that value was last assessed on 1 January 1988, the assessed value did not represent a fair market value and, as a result, property was taxed favourably.
Using historic assessment values, said the Court, infringed the principle of non-discrimination under constitutional law. As a result, it found not just the assessment of the value of real estate but the whole inheritance tax as infringing the constitutional principle of non-discrimination.
The Court did not repeal the inheritance tax with immediate effect, but allowed time for the legislature to change the tax regime to make it comply with constitutional law. This period will end on 31 July 2008. Should the government fail to change the law to comply with the requirements set by the Court, the Austrian inheritance tax will expire at the end of July 2008.
Because the Austrian gift tax system is similar to the inheritance tax regime, similar doubts have been raised about its compatibility with the non-discrimination principle. Certain specific exemptions do not apply to donations, and there are concerns about the taxation of property that is valued at “historic” assessed values. The Court has therefore started separate proceedings concerning the compatibility of the gift tax with constitutional principles.
Austria-Barbados tax treaty enters into force
The tax treaty signed between Austria and Barbados in Brussels on 27 February 2006 was brought into force on 1 April 2007. The first income tax treaty concluded between the two countries, its provisions will apply beginning 1 January 2008.
Central Bank of Brazil sets timeline for reporting foreign assets
The Brazilian Central Bank has set a filing period of 19 March to 31 May for the mandatory reporting of foreign assets valued at over USD 100,000, or the equivalent in other currencies, as of 31 December 2006. For the first time, taxpayers are required to disclose not only the initial destination of funds remitted out of Brazil, but also their final destination.
Under Circular 3,345/2007, published in the official gazette on 19 March, Brazilian individuals and companies with substantial foreign assets must file an annual return (Declaração Eletrônicados Capitais Brasileirosno Exterior, or CBE) with the Central Bank, declaring all foreign assets held during the preceding year.
This is in addition to the legal obligation to file annual income tax returns and the information reported in the CBE must include: deposits abroad; cash loans; financing; leasing; direct, portfolio and derivative investments; real estate and other assets.
This is the sixth year of the CBE. The first related to tax year 2001 and was filed in 2002. CBE data filed in 2006 showed that 12,366 Brazilian individuals and companies held USD 111.7 billion of assets in 140 different countries. Companies held USD 87.4 billion and individuals held USD 24.3 billion.
Russia’s tax amnesty gets underway
The Russian Tax Amnesty Law, signed by President Putin on 30 December 2006, came into effect on 1 March 2007. It introduces a special regime for declaring income and paying individual income tax on undeclared income received before 1 January 2006. The amnesty will close on 31 December.
The new law permits individual taxpayers to calculate the necessary tax return payment on a self-assessment basis. A 13% tax rate should be applied to all individual income on which tax was not previously paid, regardless of which tax rate was originally applicable. The tax return payment should be made between 1 March 2007 and 1 January 2008, and confirmation of payment should be kept until 1 January 2012.
The law states that tax payments should be made without the provision of documents confirming the sources, types and amounts of income. Taxpayers who make the tax payment in accordance with the law, it states, will be considered to have “fulfilled their obligation in respect of tax payment and tax return filing”.
In a bid to encourage declarations, the amnesty does not require that taxpayers have any contact with tax officials, and payments can be made directly into a special Federal Tax Service bank account. According to the government, this information will not be used as evidence against individuals in criminal of administrative cases. Taxpayers previously convicted of tax evasion and other fiscal offences are prohibited from using the amnesty.
The government is hoping that the amnesty will help to reverse the capital flight from Russia and lead to the repatriation of at least some of the USD 160 billion in capital that has left the country since the collapse of the Soviet Union in the early 1990s.
Swiss bank clients exposed by Cayman leak
A number of customers of Swiss bank Julius Baer are being investigated by German tax authorities acting upon information sent to them by a former bank officer based in the Cayman Islands who is accused of stealing secret client files.
The former employee sent details including client addresses and account balances from USD 5 million to over USD 100 million to Germany's tax office, which last year opened a probe into possible tax evasion by "individual customers”, according to the Zurich-based newspaper SonntagsZeitung. The data theft, which occurred outside Switzerland in 2002, would be illegal under Swiss banking secrecy rules.
The clients, who may be forced to repay millions in taxes and in some cases could lose their entire investments, regard themselves as victims of a conflict between the bank and its former employee. The unidentified person has been sending bank clients anonymous letters signed by "Teddy Baer" or the "tax fraud revealer", said the newspaper.
The bank has reconstructed the stolen data, which covers the period between 1997 and 2002.
Spain-UAE tax treaty comes into force
The tax treaty signed between Spain and the United Arab Emirates in Abu Dhabi on 5 March 2006 was brought into force on 2 April 2007. The first such treaty concluded between the two countries, its provisions became applicable as of 2 April.
US TIEA with Netherlands Antilles enters into force
The Netherlands Antilles-US tax information exchange agreement (TIEA), which has been pending since 2002, entered into force on 22 March 2007 following an exchange of letters between the respective governments. Former US Treasury Secretary Paul O'Neill and former prime minister of the Netherlands Antilles Miguel Pourier signed the TIEA on 17 April 2002.
The agreement is the latest US TIEA to enter into force. The British Virgin Islands-US TIEA entered into force on 10 March 2006; the Cayman Islands-US TIEA entered into force on 10 March 2006; and the Jersey-US TIEA entered into force on 26 June 2006.
Spanish-Switzerland treaty protocol to come into force
The protocol to the 1966 Spain-Switzerland tax treaty has been ratified by both countries and will enter into force on 1 June 2007. The most important changes concern the tax treatment of dividends, interest and royalties, and the introduction of an exchange of information provision.
The protocol will apply immediately to withholding taxes, but for royalties it will not apply before 1 July 2011, which corresponds to the transition period contained in the Swiss-EU Tax Savings Agreement (TSA).
Article 15 of the TSA, which sets out withholding tax exemptions under certain conditions, is suspended pending application of a bilateral exchange of information agreement between Switzerland and Spain. That provision will be fulfilled with the entry into force of the protocol on 1 June, bringing article 15 of the TSA into operation from that date.
For taxes levied periodically, including income taxes, the protocol will apply to any tax year beginning on or after 1 June 2007.
The 1966 treaty is the only Spanish tax treaty that does not contain an information exchange provision. A new article 25 provides for the exchange of information that covers tax fraud and similar tax offences, even in cases in which criminal procedures have not yet been initiated. Information is also permitted for civil tax matters, as well as for criminal matters.
The exchange of information will include information regarding holding companies if it is available to the requested party without further inquiries. This was agreed with Spain based on concessions made by Switzerland to the OECD in connection with the harmful tax practices initiative.
Denmark sets out revised Corporate Tax Bill
Danish Minister of Taxation Kristian Jensen on April 2 announced that a revised corporate tax bill has been negotiated between the government and its coalition partners in Parliament. The corporate tax rate is to be reduced from 28% to 25%, rather then the 22% announced in earlier proposals released in February 2007.
The specifics of the revised measures have not been published, but the main proposals include:
• strengthening the thin capitalisation rules;
• introducing a maximum interest deduction of 80% of earnings before income tax (EBIT);
• strengthening the tax depreciation of long-life assets;
• revising the controlled foreign corporation regime to bring Denmark in line with the European Court of Justice's ruling on Cadbury-Schweppes;
• dividends would not qualify for the benefits of the participation exemption if the subsidiary is resident outside the European Union or European Economic Area, or is resident in a country that has not concluded a tax treaty with Denmark; and
• liquidation proceeds would be deemed to be dividends for withholding tax purposes.
The new bill does not include the patent box regime for patent income and expenses that was included in the previous draft. The government intends to enact the bill by 1 July 2007.
Swiss Revenue benefits from foreign taxpayers
The 4,175 foreign retirees residing in Switzerland who are subject to the lump sum tax system account for 1.3% of direct national tax revenues, according to a survey by KPMG Switzerland. This means that, as net contributors, lump-sum taxpayers pay as much on average as the comparable category of top earners who are taxed by normal standards.
The absolute number and their contribution to total tax revenues differ widely from region to region, ranging from two individuals in Schaffhausen to 1,000 people in Waadt. The southern cantons (Waadt, Geneva, Valais, Ticino and Graubunden) top the list.
"This finding is surprising since lump-sum taxpayers are not usually regarded as major tax contributors," says Patrick Burgy, KPMG Switzerland partner.
At a cantonal level, lump-sum taxpayers contribute as much as 2% of the total private tax revenue. Graubunden receives over 3% of its tax revenues from individuals who are taxed on expenditure, while in Valais the figure is 5.2%.
Denmark and Switzerland sign agreement on funds
Denmark and Switzerland signed, on 22 March 2007, a mutual agreement regarding the refund of withholding taxes to Danish or Swiss collective investment vehicles. Based on Article 25 of the Denmark-Switzerland tax treaty, it replaces the memorandum of understanding concluded on 14 June 2004. The simplified procedure will apply for the first time to dividends and interest paid in 2003.
Hong Kong and China sign information sharing agreement
The Hong Kong Securities & Futures Commission (SFC) signed, on 10 April 2007, an agreement with the China Banking Regulatory Commission (CBRC) for co-operation and information sharing between Hong Kong financial institutions and Mainland China’s commercial banks.
The agreement concerns Hong Kong financial institutions that provide services to mainland commercial banks, which in turn, conduct overseas wealth management business for their clients.
SFC chairman Eddy Fong said the agreement would enable Hong Kong “to play a more active role in the development of overseas wealth management business of mainland commercial banks on behalf of their clients, further enhancing Hong Kong’s role as an international financial centre for the country.”
CBRC chairman Liu Mingkang said the mutual assistance and information sharing provisions would enable it to “promptly identify risks, and take timely regulatory measures to protect the interests of investors.”
EC consults on strengthening EU Savings Tax Directive
EU Tax Commissioner Laszlo Kovacs has begun a series of consultations aimed at strengthening the EU savings tax directive, which contains numerous loopholes and exemptions. Introduced in July 2005, it requires EU taxpayers to pay tax to their home country on earnings from savings held in third countries. Certain non-EU countries such as Switzerland and Liechtenstein also agreed to apply a withholding tax.
But early evidence has shown that the Directive is not as effective as intended – Switzerland raised only EUR 100 million in the first six months of the Directive’s operation. Kovacs is also concerned that many savers have switched to jurisdictions not covered by the Directive, such as Hong Kong and Singapore, and is now seeking reciprocal deals with these countries as well.
Kovacs has to report on the operation of the directive by June 2008, but EU officials say he could make proposals before that date to close some of the more obvious loopholes. A Commission working paper proposes that the tougher definition of "beneficial ownership" used for anti-money laundering obligations should be adopted for the savings Directive. This would bring discretionary trusts and companies into its scope.
It also suggests imposing a new obligation on EU banks to report or withhold interest payments made through non-EU branches. Banks are currently able to assist customers to avoid the Directive by paying interest through other jurisdictions, while providing access to the untaxed income through a credit card.
Further, the paper questions the exclusion of innovative financial products, such as structured products or derivatives. It suggests the principle of "substance over form" might be applied to consider whether the products could be considered as generating interest payments.
It suggests reconsidering whether interest-generating securities "wrapped" within life insurance, pension or annuity contracts should be exempt from the Directive. Although these products were deliberately excluded, it says it would be worth considering their inclusion to prevent distortions and undermining the Directive.
Officials are due to hold two further consultative meetings with industry experts before making a decision on their next steps to tighten up the Directive.
UK Revenue offers a one-off offshore disclosure facility
The UK Revenue and Customs (HMRC) announced, on 17 April 2007, that it was setting up an “Offshore Disclosure Facility” for those who hold or have held, either directly or indirectly, an offshore account that is in any way connected with an undisclosed tax liability. This includes irregularities connected with an offshore trust or company.
Under the Facility, undisclosed tax liabilities will be subject to a maximum penalty of 10% of the outstanding tax, in addition to paying the total tax and interest due. The primary target is offshore accounts but anyone making a voluntary disclosure of past tax irregularities, not just those connected with an offshore account, can expect similar treatment.
For a limited period – intention to make a disclosure must be registered by 22 June 2007 – those wishing to take advantage of the Facility can voluntarily make a full disclosure of all undeclared liabilities going back a maximum of 19 years to the tax year 1987/88. Those who have registered must quantify their disclosure by submitting tax, interest and penalty calculations, and pay in full by 26 November 2007.
HMRC reserves the right to check the accuracy of the disclosure later, particularly when further offshore bank account details become available. Taxpayers will know whether or not their disclosure has been accepted by 30 April 2008 at the latest.
This Facility is not strictly an amnesty. Financial penalties, albeit capped at 10%, are to be imposed and making a disclosure will not afford immunity from prosecution by the tax authorities. Other prosecuting authorities may also have an interest in the matter.
The Facility follows a series of recent court actions by which HMRC won the right to obtain information from UK high street banks and other financial institutions about their UK-based customers with offshore accounts.
HMRC is offering the Facility to help it clear as many of these cases from its files as possible. At the end of the notification period, HMRC says it will target those with offshore bank accounts and undeclared tax liabilities that have chosen not to come forward to make a disclosure.
Sweden to abolish wealth and property taxes
A proposal to abolish the Sweden's 1.5% net wealth tax as part of the 2007 Budget were announced by Swedish Prime Minister Fredrik Reinfeldt and three other members of the coalition government as part of the Budget presented on 16 April.
The measure, which applies a 1.5% tax on individual assets of SEK 1.5 million (USD 215,000) or more, netted SEK 4.8 billion (USD 685 million) in revenue in 2005. But many taxpayers have sought to avoid the tax by moving their assets offshore. To offset the revenue lost, the maximum deductible amount for private pension investments would be reduced to SEK 12,000 for those earning up to SEK 400,000 per year.
The joint announcement was co-signed by Maud Olofsson of the Centre Party, Lars Leijonborg of the Liberals and Göran Hägglund of the Christian Democrats. "We're doing this because we see a need to increase access to investment capital, but also because we view the tax as random," said a statement.
A number of European countries have dropped wealth taxes in the last few years, including Denmark, the Netherlands and Finland. Luxembourg and Spain are the only other EU countries that impose a wealth tax according to the Swedish government, although the Forbes Index also records a wealth tax in France, Italy, Greece, Norway, Switzerland and India.
Swedish officials have also announced plans to eliminate the property tax beginning in 2008. In order to compensate for the loss of revenue, the capital gains tax on property sales would be increased from 20% to 30%.
The property tax is currently assessed at 1% of a property's value, including land and housing, and 0.5% for apartments. It raises SEK 16 billion (about USD 2.3 billion) in annual revenues. Under the proposals, it would be replaced with a flat charge of SEK 4,500 (USD 650) for single-family homes and SEK 900 for individual apartment units.
The OECD has criticised the decision because it argues there is a greater need for tax cuts that address employment problems.
Scandinavia leads the way in e-readiness
Scandinavia dominates the list of the world's most technology-savvy countries according to the annual “e-readiness” survey published by the Economist Intelligence Unit in partnership with the IBM Institute for Business Value. Denmark came out on top, while Sweden tied with the US in second place and Finland and Norway were rated tenth and twelfth respectively.
The survey considered not only the number of computers, broadband connections and mobile phones in a country; but also citizens' ability to use various technologies, the transparency of the business and legal systems and the extent to which the government encourages the use of technologies.
E-readiness continues to improve around the world in 2007, but achieving it is becoming more complex. To reflect this, the Economist Intelligence Unit raised the bar of e-readiness by modifying its ranking methodology such that several countries, particularly in Asia, saw their positions improve. At the same time, the fundamental tenets of e-readiness remain unchanged, and nine of last year’s top ten countries remained in that bracket.
Denmark and the US retained their number one and two spots in the rankings, with scores of 8.88 and 8.85 out of a maximum of 10 respectively, while Sweden tied for second, up from fourth in 2006. The remainder of the top ten countries were Hong Kong, Switzerland, Singapore, the UK, the Netherlands, Australia and Finland. Malta entered the rankings for the first time in 24th position with a score of 7.56. Iran slipped to the bottom of the pile in 69th place with a score of 3.08.
Several top-tier countries experienced a shift in their overall e-readiness performance as a result of the methodology changes. This was mainly due to a sharpened focus on the policy environment and e-government, as well as education and innovation. Among the countries affected were Switzerland (5th), Canada (13th), Germany (19th) and Ireland (21st). Their e-readiness had not declined, but the model refinements uncovered areas where they and other countries need to improve to maintain progress.
"Technology leadership in the world is becoming a fast-moving target," observes Robin Bew, Editorial Director of the Economist Intelligence Unit. "Those at the top of today's league table cannot be complacent – changing technologies, and attitudes to technology usage, mean that hard-won advantages can be quickly eroded by nimble-footed rivals."
The digital divide continued to narrow, even with the model changes. Notwithstanding the decline of some countries' scores, the world’s overall e-readiness was improving perceptibly: a global average score of 6.02 in 2006 rose to 6.24 this year. And the gap between "haves" and "have-nots" was decreasing: the distance between the highest and lowest scoring countries dropped from 6.08 points to 5.80 points this year. The score differentials between the top, middle and lower tiers also continued to decline.
The survey found that broadband was increasingly affordable, and almost everywhere. One factor in the narrowing divide was the absence of a large gap between developed and developing markets in broadband affordability, one of the new indicators introduced in 2007. The lowest speed of DSL service available in west European and North American markets costs 1% or less of a household's median monthly income. In other regions, broadband affordability levels are not substantially lower (between 3% and 10% of household income). The expanding global use of mobile devices and applications, meanwhile, continues to provide a technology "leveller" of sorts between developing and developed countries.
"The role of governments in laying the structural and policy groundwork for an Internet-ready economy is essential today as business and society adapt to ongoing globalisation," said George Pohle of the IBM Institute for Business Value. "This groundwork, as reflected in this year's rankings, provides a critical path for individuals and businesses to apply these new digital channels in innovative applications—spurring further economic development.”
The six categories used for the survey were connectivity and technology infrastructure (20%); business environment (15%); social and cultural environment (15%), legal and policy environment (10%); government policy and vision (15%); and consumer and business adoption (25%).
Malta signs final agreements for Smartcity Malta
The Government of Malta and SmartCity, a joint venture between TECOM Investments and Sama Dubai, signed the final agreements to establish SmartCity Malta, a media business community based on the successful models of Dubai Internet City and Dubai Media City, on 23 April 2007.
Ahmad bin Byat, Executive Chairman of TECOM Investments, said: “Malta was our choice for this project as it is very similar to Dubai in several respects. In terms of strategic location, size, connectivity, access to key markets, and high tourism orientation - both Malta and Dubai share a natural affinity.”
Austin Gatt, Malta’s Minister for Investment, Industry and Information Technology, said the project would also lead to the regeneration of Ricasoli and neighbouring towns in the southern area of Malta’s Grand Harbour.
The Malta facility will be the first European outpost for SmartCity. It is expected that global players, a number of which have already demonstrated significant interest in the project, will be able to focus their European operations and business through SmartCity Malta.
Under the terms of the agreement, the Government of Malta has agreed to make available nearly 358,000 sq. m. of land to develop the knowledge-based township. SmartCity Malta will attract an investment of at least USD 300 million, making this project the largest foreign investment initiative in the ICT sector in Malta.
Jersey FSC signs memorandum with Cyprus Central Bank
The Jersey Financial Services Commission (FSC) and the Central Bank of Cyprus signed a memorandum of understanding, on 15 May 2007, to promote and assist co-operation between the two regulatory bodies.
The MoU sets out a general framework of mutual regulatory co-operation and exchange of information, with a view to facilitating the consolidated supervision of cross-border establishments and ensuring the sound functioning of banks in the two jurisdictions. The MoU also establishes procedures and liaison points to handle requests for information.
Both the Jersey FSC and the Central Bank of Cyprus pursue an active policy of signing MoUs in order to improve co-operation between regulatory bodies. There is currently only one bank incorporated in Jersey that operates a branch in Cyprus.
Netherlands signs tax treaty with Emirates
The governments of the Netherlands and the United Arab Emirates (UAE) signed a tax treaty and protocol on 8 May in Abu Dhabi. It is the first tax treaty between the two states although a bilateral treaty on income and profits derived from international air transport was concluded in 1992.
The new treaty will make investing more attractive for Dutch companies that wish to invest in the UAE and for UAE companies that wish to invest in the Netherlands. It will provide companies with more certainty and will help to avoid double taxation.
The UAE has concluded 44 income tax treaties, of which 35 are currently in force, including Germany, France, Belgium, Italy, Austria, Canada, and New Zealand
IMF says Finnish Budget plans are worrisome
Finland's economic situation is "enviable" but the government's budget plans for 2008 to 2011 imply a worrisome deterioration of the country's fiscal position, according to the International Monetary Fund.
"Growth continues to outpace the euro area average, inflation is among the lowest in the European Union, and the government budget and external current account are both comfortably in surplus," the IMF said in a report published on 31 May 2007. But it said, "The (Finnish government's) recently adopted budget framework for 2008 to 2011 implies a worrisome deterioration of the fiscal position."
The new centre-right Finnish government, which came to power in April, has said its budget surpluses will shrink in the coming years due to planned tax cuts and spending increases. Finland posted a budget surplus of 3.8% of gross domestic product last year.
"A general government surplus of about 4% of GDP, only slightly above the 2006 level, would be an appropriate target in both 2007 and 2008," the IMF said. "Otherwise, excess demand could translate into inflationary pressures, raising concerns about competitiveness."
The IMF said a more prudent fiscal policy would also help Finland prepare for rising pension costs, which the fund estimates at about 5% to 6% of GDP. It also predicted that Finnish GDP growth would slow to about 3% this year from 5.5% in 2006.
The fund commended the country for its improved unemployment figures, but said a tightening labour market would put upward pressure on wages. Finland's unemployment rate has fallen steadily to 7.2% in April from 8.4% in 2005.
European Commission gives overview of direct tax priorities
European Commissioner for Taxation and Customs, Lásló Kovács, has recently set out his views on what the next steps should be for direct taxes in the European Union. These broadly reflect the aims contained in the EC communication of December 2006 entitled “Coordinating Member States’ direct tax systems in the Internal Market”.
Overall, he states that the aim of the EU tax policy is to “improve the performance of existing national direct tax systems”, particularly the problems arising from the number of different tax systems in operation in the EU – currently 27 – such as the high costs of compliance, double taxation and business restructuring.
Kovács has given three specific aims to be met by direct tax proposals, as follows:
· The removal of discrimination and double taxation, which can currently apply when taxpayers operate in cross border situations;
· Protection of the tax bases of the EU Member States, reducing the potential for tax loss either inadvertently or through specific avoidance planning;
· Reduction of the compliance costs for companies operating in more than one EU jurisdiction.
Kovács believes that the best way to tackle these problems is not through unilateral action on the part of individual Member States but through cooperation and coordination at the EU level. “Coordination does not mean harmonisation. Harmonisation is not always necessary or desirable,” he said. He proposes using a “twin-track approach” with more immediate measures to tackle the most significant problems, as well as a more general long-term solution.
In the short term, two areas have been identified in need most urgent action:
· Exit taxation (charges imposed in certain circumstances on taxpayers changing their tax residence from one country to another). Cases in the European Court of Justice (ECJ) have addressed this point several times in recent years, driving the need for further action;
· Cross-border loss relief (again driven by ECJ litigation such as the recent Marks & Spencer ruling) – specific action is needed to set out a “minimum standard” for cross-border loss relief, possibly “vertical upward relief”, which would allow losses of subsidiaries to be relieved at parent company level.
The long-term solution, according to the Commissioner, would be adoption of a Common Consolidated Corporate Tax Base (CCCTB). This would allow a corporate group to calculate a single consolidated profit for tax purposes, which would then be apportioned between the different companies and therefore the different jurisdictions in which they operate. Kovács argues a CCCTB would provide reduced compliance costs, reduced need for thin capitalisation and transfer pricing rules, and automatic cross-border offset of losses as part of the consolidation process.
A CCCTB would not address cross-border tax issues for individuals or other non-corporate entities. In these situations, the Commissioner sees coordination of any solutions at an EU level as being of continuing importance.
There will be no EU-imposed requirement for groups to join the CCCTB regime, but there will be a minimum period for which groups must operate the scheme. The EC’s aim is to draft legislation providing for the creation of a CCCTB in 2008.
Kovács said a CCCTB would need to be implemented by all Member States. He noted the possibility that there would not be unanimous agreement and, in that case, the Commission may present further proposals to a smaller group of interested Member States.
New Chair of the OECD Forum on Tax Administration
The OECD announced, on 28 May 2007, the appointment of Paul Gray, chairman of the UK Revenue & Customs, as the new chair of its Forum on Tax Administration (FTA). Gray, who replaced IRS Commissioner Mark Everson of the US, took up his role on 1 June 2007.
The FTA brings together Commissioners from 30 OECD member countries and selected non-OECD countries to share information and to develop best practices for tax administration in the areas of taxpayer service and compliance.
UK appoints FATF president
UK Chancellor Gordon Brown has appointed James Sassoon as the new president of the Financial Action Task Force (FATF), the intergovernmental organisation established to combat money laundering and terrorist financing, for a 12-month period beginning July 2007. The UK will hold the Presidency from July 2007 to June 2008.
Sassoon, a former finance ministry official and investment banker, said the FATF would look at weapons of mass destruction financing after being asked to do so by the Group of Seven industrialised nations. The G7 created the FATF in 1989.
The UK Treasury also wants to use the presidency to promote international data sharing and to draw up a global money laundering threat assessment. It has, it said, made progress in improving its own record after facing heavy criticism over the role of UK banks in cases such as USD 1.3 billion looted by he late Nigerian dictator General Sani Abacha.
Sassoon said he hoped the FATF would expand its membership, which includes many western countries along with Russia, Brazil and South Africa. China, India and Korea are going through an “outreach programme” ahead of possible membership.
He also wants to develop links with the private sector, in line with UK policy of setting broad anti-money laundering principles but leaving detailed interpretation up to companies. He acknowledged other countries favoured a legalistic approach, but played down the notion that this could cause tension between the UK and other members.
OECD financial standards criticised by OFCs
Many OECD member states have regulatory standards no better, and sometimes worse, than many offshore financial centres seen as tax havens, according to a report published by the Commonwealth Secretariat on 1 May 2007.
Their deficiencies include mechanisms for tax information exchange and for identifying beneficial owners of companies or trusts, says the report, commissioned on behalf of the International Trade & Investment Organisation (ITIO), a group of small countries with international finance centres.
Malcolm Couch, deputy chairman of the ITIO, said small countries had been unfairly stigmatised by larger, more powerful ones. “It’s time to stop treating small countries with finance centres as different. Big countries have no moral or legal edge over small ones,” he said.
Offshore financial centres have improved their regulatory standards as a result of the OECD’s harmful tax competition initiative, launched in 1996. In 2000 it published a “blacklist” of 35 tax haven countries, which obliged offshore centres to make commitments to remove harmful tax practices, improve transparency and exchange information.
This process has led to “considerable rapprochement” between OECD and non-OECD participants, says the report. Both sides have recognised the case for creating “a level playing field”, although non-OECD countries still have concerns about distortions caused by the tax treaty network and the OECD’s “organisational blindness” about the regimes of its own members.
Many US states, including Delaware and Nevada, do not require companies to provide beneficial ownership information. Many industrialised countries, including the UK, permit the use of bearer shares, which reduce transparency. Switzerland limits exchange of tax information to cases of fraud, while Hong Kong and Singapore limit information exchange to cases where they have a domestic interest.
Small countries should be involved in the creation of new international standards, rather than have these imposed on them by multilateral bodies controlled by large countries, such as the OECD, said Couch.
The report also called on large countries to open up access to the international network of double taxation treaties to small countries. It criticised OECD members for offering small countries “tax information exchange agreements” without mutual benefits. It said OECD members wanted to obtain information about taxpayers “at as low a cost and with as little disruption to their competitive positions and existing international arrangements as possible”.
Ransford Smith, deputy secretary-general of the Commonwealth Secretariat, said: “To reduce global inequality, international standard setting exercises need to promote a level playing field and fair competition.”
IMF working paper redefines Offshore Financial Centres
The UK, Latvia and Uruguay could be reclassified as offshore financial centres (OFCs) according to a working paper published by International Monetary Fund (IMF) economist Ahmed Zoromé on 20 April 2007.
The paper maintains that the current definitions of OFCs do not adequately capture the intrinsic feature of the OFC phenomenon that is its raison d’être — the provision of financial services to non-residents, namely, exports of financial services. The peculiarity of OFCs, it says, is that they have specialised in the supply of financial services on a scale far exceeding the needs and the size of their economies.
It therefore proposes a new definition of OFCs as: "An OFC is a country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy."
It also develops a statistical method to differentiate between OFCs and non-OFCs using data that distinguishes OFCs based strictly on their macroeconomic features and avoids subjective presumptions based on their activities or regulatory frameworks.
The study claims that consistent with the proposed definition, an indicator of the OFC status of a country or jurisdiction would relate the level of its net exports of financial services to a measure of its national income or domestic financing needs. More specifically, it could be considered that the ratio of net financial services exports to GDP could be an indicator of the OFC status of a country or jurisdiction.
"In theory," said Zoromé, "and as confirmed by the study's empirical results, a positive correlation exists between the exports of financial services and the accumulation of assets in offshore jurisdictions." But he believed the study could be further refined, saying that "it would be interesting to see if sectoral proxies could also be constructed to examine OFC activity from the perspective of one sector at a time (banking, insurance, securities, etc.)."
The suggested methodology identified more than 80% of the OFCs in the study sample that also appear in the a priori list used by the IMF to conduct its OFC assessment programme. The study also identifies three new countries as meeting OFC criteria - Latvia, the UK and Uruguay.
The issue of an objective definition was of crucial importance to the work of the IMF, said Zoromé. Since the OFC assessment programme was voluntary and relied on a co-operative effort to enhance the supervisory capacity of the assessed jurisdictions, enshrining the eligibility in the programme through objective and mutually acceptable criteria would go a long way toward promoting participation in, and ownership of, the assessment programmes and any ensuing reforms.
Zoromé is an economist in the IMF’s Monetary & Capital Markets Department of the IMF, but the views expressed in “Concept of Offshore Financial Centres: In Search of an Operational Definition”, do not necessarily represent those of the IMF. IMF Working Papers describe research in progress and are published to elicit comments and to further debate.
Bahrain to upgrade investment fund regulatory framework
The Central Bank of Bahrain (CBB) is drafting new regulations to provide for higher risk and volatile instruments, such as hedge funds, derivatives and other alternative investment instruments, said Deputy Governor Anwar Khalifa Al Sadah on 22 May 2006.
“The CBB has long supported the investment funds industry in Bahrain, and we are currently working to ensure that the regulatory framework is suited to today's environment,” he said.
Bahrain was the first regional jurisdiction to establish a regulatory framework for the regulation and supervision of collective investment schemes in the 1990s. As of end-April 2007, nearly 2,300 funds were authorised by the CBB, of which 102 were locally domiciled funds – the largest concentration of locally domiciled funds in the GCC.
The CBB is in the process of updating the regulations governing collective investment schemes. A key objective of the new regulations is to widen the range of schemes permitted. Besides retail schemes, the new regulations will also authorise expert schemes, which will be subject to less restrictive investment guidelines but will be subject to some limitations as to their investor base.
Luxembourg introduces SPF to replace 1929 company
Luxembourg passed a law on 11 May 2007 to introduce the new Société de gestion de Patrimoine Familial (SPF), a new private wealth management vehicle to replace the 1929 holding company regime. Existing 1929 entities are to benefit from a grandfathering clause until the end of 2010.
The 1929 holding company regime, which was terminated on 1 January 2007, had been found by the European Commission to be in violation of state aid rules for providing "unjustified tax advantages" to providers of certain financial services that set up holding structures in Luxembourg. The SPF, or "Family Wealth Company", has been approved by the European Commission.
Shareholders will be restricted to a small group of individual shareholders and SPFs will not be available to listed corporations or large groups of unconnected shareholders. They will be prohibited from commercial activity and limited to private wealth management, such as the holding of financial instruments such as shares, bonds and other debt instruments, in addition to cash and other types of bankable asset.
The main characteristics of the SPF are as follows:
· an SPF will not be subject to corporate income tax, municipal business tax or net wealth tax, provided it does not receive more than 5% of its dividends from companies that are not subject to a tax comparable to the Luxembourg corporate income tax (in other words, the payer must be subject to at least an 11% corporate income tax);
· no withholding tax will be imposed on dividend distributions by an SPF to its investors;
· an SPF will be subject to a subscription tax of 0.25% (with a minimum amount of €100 and up to a maximum of €125,000);
· an SPF will be subject to capital duty (1% or 0.5%);
· an SPF will not be deemed to be a taxable person for VAT purposes;
· an SPF will not be entitled to benefit from the EC parent-subsidiary, interest and royalties, or merger directives, nor will it have access to Luxembourg's tax treaty network.
Companies participating in the new scheme must have a minimum capital level of €12,500, one associate and one director in order to participate in the new regime. SPF shares can be nominative or bearer, but may not be quoted. If it is used to hold voting rights in other companies, it must ensure that it does not involve itself in the running of those companies, and it is prohibited from providing any kind of service.
There are about 14,000 existing 1929 Holdings in Luxembourg and those formed before 20 July 2006 will be able to keep their present status until 2010. Certain restrictions on transfer of ownership of the shares of those companies still need to be clarified. The new law is expected to apply to around 80% of 1929 Holdings and Luxembourg is apparently drawing up a further draft law to replace the remainder.
UK Appeal Court upholds GBP 48 million-divorce award
The UK Court of Appeal upheld a GBP 48 million-divorce award to the former wife of insurance tycoon John Charman, on 24 may 2007. It was the largest contested settlement in English legal history. The three senior judges refused Charman leave to take the case to the House of Lords, but he could still petition the Law Lords directly.
Sir Mark Potter, sitting with Lord Justice Thorpe and Lord Justice Wilson at the Court of Appeal, also suggested that pre-nuptial agreements should become legally enforceable so that couples could avoid bringing acrimonious legal claims to London - the "divorce capital of the world''.
Charman had challenged the sum, which was originally awarded by a High Court judge, arguing that his ex-wife should receive only GBP 20 million from the couple's joint assets of GBP 131 million.
The judges rejected Charman's appeal but called for an inquiry by the Law Commission to consider whether divorce payments are out of step with those in other parts of Europe. There are now expensive legal battles between international couples over whether a divorce claim should be heard in England.
Sir Mark said the result of recent emphasis by the courts on the principle of equality in settlements was "to raise the aspirations of the claimant hugely''. The first of these settlements was White v White, where the wife achieved parity with her former husband because she had made an equal contribution to their farming business. Until then awards for wives had been limited to their "reasonable requirements''.
The Court of Appeal accepted yesterday that a "special contribution'' by one party to the marriage would justify departure from equality. Where one spouse had made a special financial contribution, the judges added, the other spouse should receive no less than one third of the assets.
Mrs Charman had conceded that her husband's "extraordinary'' success in business meant she could claim not more than 45% of his assets. But she challenged his argument that she was entitled to little more than 15%.
The judges also rejected Charman's claim that GBP 68 million he had put in a family trust should be excluded from the assets available for distribution on divorce.
"In the circumstances of the present case, it would have been a shameful emasculation of the court's duty to be fair if the assets which the husband built up in Dragon (the trust) during the marriage had not been attributed to him," the judges said.
UK signs OECD’s Mutual Tax Assistance Convention
The UK became the fifteenth country to sign the joint OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters at a signing ceremony hosted by Angel Gurría, Secretary-General of the OECD, on 24 May 2007 at the OECD’s Paris headquarters.
The Convention strengthens the ability of tax administrations to work together to enforce their national tax laws, and provides for a variety of forms of multilateral administrative co-operation between parties in the assessment and collection of taxes, including VAT. Drafted jointly by the Council of Europe and the OECD, it was first opened for signature by the EU and OECD member states on 25 January 1988.
Gurría said: “I am pleased to see the growing interest in this Convention, which in many ways was ahead of its time. Increasingly, tax administrations are finding that bilateral tax co-operation is insufficient to tackle the tax administration issues of today’s open and more integrated economy."
UK Chancellor Gordon Brown first announced the UK’s move in November 2005 as part of his Pre-Budget Report. Introducing the enabling legislation in Parliament, UK Paymaster General, Dawn Primarolo said: “While the UK has an extensive network of bilateral treaties, extending mutual assistance arrangements with countries outside the European Union will support our efforts to ensure compliance and help to tackle tax fraud, an issue about which we have been very concerned."
The Parties to the Convention are: Azerbaijan, Belgium, Denmark, Finland, France, Iceland, Italy, the Netherlands, Norway, Poland, Sweden and the US. Canada and Ukraine have signed the Convention and are still in the process of ratification.
Denmark reports on status of tax treaty negotiations
The Danish government, in response to a question by the parliament's Tax Committee, provided an update on the status of its tax treaty negotiations on 10 May 2007.
Denmark has signed protocols to its tax treaties with the US and Malaysia. The Danish parliament has adopted acts on the accession to the two tax treaty protocols, but they have yet to be ratified by the US and Malaysia.
Negotiations have been completed for new treaties with Azerbaijan, Croatia, Nigeria, and Austria, and for protocols to existing treaties with the Nordic countries and Germany. Denmark has also completed negotiations with Serbia and Montenegro following their division into two separate states.
Negotiations for tax treaties with Brazil, Cyprus, France, Georgia, Israel, Kuwait, and Poland are ongoing.
Denmark and the other Nordic countries are also negotiating Tax Information Exchange Agreements with the Isle of Man and Jersey. Once signed, the UK Crown Dependencies intend to negotiate tax treaties that are limited in scope.
Denmark will also seek negotiations with other tax havens on the OECD list of tax havens to conclude agreements on the exchange of tax information.
Sweden considers amendment to capital tax regime
The Ministry of Finance issued a memorandum on 11 May 2007 that proposes to limit a tax deferral on the transfer of property to affiliated corporations to cases in which the other party is resident in the European Economic Area.
In the European Court of Justice's judgment in X and Y (C-436/00), Sweden was told that the benefit of tax deferral on the transfer of property to affiliated corporations could not be reserved for Swedish corporations only.
The new memorandum proposes to limit the tax deferral to cases in which the other party is resident in the European Economic Area. It also says that the tax base should be secured by an exit tax arrangement.
It also proposes extending the existing rule under which a non-resident alienating Swedish shares within 10 years of relinquishing Swedish residency is taxable in Sweden on the gain at the sale of the shares. The memorandum includes foreign shares and partnership rights under that rule, provided that the taxpayer was a resident of Sweden when they were acquired.
The Swedish Tax Agency has been asked by the government to report on the possible introduction of advance pricing agreements in Sweden. A report should be completed by the end of 2007.
In a separate move, the new leader of Sweden's Social Democratic party Mona Sahlin announced that the wealth tax will be reinstated if her party wins the next election in 2010. Sweden's new government announced as part of this year’s Budget that net wealth tax would be assessed for the last time this year. Sahlin said she would also reverse the conversion of Sweden's real property tax into a municipal fee.
Sweden to defend state alcohol monopoly after EU ruling
The Swedish government said it would defend its state alcohol monopoly and tax policy after the European Court of Justice ruled on 5 June 2007 that the Swedish ban on individuals importing alcohol was an unjustified bar to the free movement of goods.
Under Swedish law, retail sales of alcoholic beverages in Sweden are carried out under a monopoly held by state-run alcohol retailer Systembolaget. Only Systembolaget and wholesalers authorised by the state may import such drinks. Sweden maintains that the monopoly and high taxes on alcohol are needed to protect public health.
In Klas Rosengren et al v Riksaklagaren (C-170/04), Rosengren and other Swedish nationals had ordered cases of Spanish wine through a Danish website. The wine was confiscated by customs and criminal proceedings were brought.
Public Health Minister Maria Larsson said in a ruling by the EU court in November stating that goods imported to Sweden are to be taxed according to Swedish regulations was of greater importance in maintaining the country's restrictive alcohol policy.
Finance Minister Anders Borg said the government would work hard to ensure that the state receives taxes for privately imported alcohol and that state tax revenues were not changed.
"We will do everything in our power to protect the alcohol policy and the tax rates," he added.