Issue 59 - 24 Jan 2006
Sentiment
To say it has been an eventful start to the year is a huge understatement. The major news from IFS HQ is that Roy and Sonia have become grandparents for the first time. Nick and his wife Shirley, who live in China, are the proud parents of Lauren who was born last week, and who came into this world with a healthy fighting weight of 6 pounds. Our congratulations go out to all the family, and we wish them all luck in their new roles (especially the grandparents!). Closer to home, our very own boy-wonder Richard Williams has done us very proud. Firstly, he has passed his CTA exams and is now a fully-fledged Chartered Tax Advisor (in case you were wondering what the CTA stood for), which is a fantastic achievement (no doubt he will be asking for a pay rise, shares and a company car in due course...). And secondly, he was married to Emma on Saturday afternoon on the bonnie banks of Loch Lomond. We are really proud of Richard and wish him and Emma many years of happiness together. OK, OK, enough already – let’s get down to business.
On the work front, Roy has been discovered as a media star of the future. For those of you who missed him on Bloomberg’s Financial Goals, you will be able to see the interview on the media section of the new IFS website. Roy will also be appearing on the BBC’s Money Programme, again talking about the tax consequences of football transfers. If this wasn’t enough, we have had coverage in a number of dailies and the tax press. Becoming a grandfather seems to have put a spring in his step!
Happy reading!
Tax tip of the day
UK investment companies with assets, such as real estate which have a low base cost, may be able to restructure in advance of a sale to a third party, so as to revalue the assets to market value, thus mitigating the tax liability. The solution requires the formation of a European subsidiary and unlike most solutions is relatively simple (famous last words!). For companies which need to sell, this is an attractive structure. For more information please contact Roy, Richard or Miles.
Australia
Avoidance under scrutiny
The Australian Tax Office has recently announced that it will focus its attention on invoicing arrangements involving offshore entities to inflate deductions or defer income and transfer of assets abroad to avoid capital gains tax. Where taxpayers make a full disclosure of such arrangements, including details of the promoter who designed the structure, penalty discounts may apply. Our Australian cousins are following the trend of advance disclosure, which is certainly proving successful in the UK, at least for the Revenue. However, what might be good for the Revenue is not necessarily good for business, ergo the economy. Is this not getting out of hand? Businesses are accountable to their shareholders to deliver results. Central to this is tax, because this hits the bottom line. Businesses will thrive in a competitive environment, and will always look at ways to reduce their tax liability if that environment is not competitive. Without getting into economic and academic theories about tax, it seems to me that too much regulation is a bad thing: it stifles productivity, creates an unhealthy relationship between the state and the taxpayer and is not a good advert for attracting foreign business to our shores. I wonder when the present Government will wake up and see the light. Perhaps not until it is too late...
Denmark
Thin capitalisation and withholding tax rules amended**
Bill L 116 was announced by the Danish Minister of Taxation, which is aimed at extending the thin capitalisation rules and withholding tax on interest to include debt financing transactions by equity funds.
The current thin capitalisation rules apply to Danish debtors if the debtors have borrowed an amount from a related legal entity, the debt exceeds DKK 10 million, the debtor’s debt to equity ratio exceeds 4:1 and a loan, under similar terms, could not have been obtained from a third party. Under the provisions of the Bill, transparent entities such as partnerships will also be subject to the rules.
Generally no withholding tax is payable on interest; however, interest payable to a foreign related entity is subject to a 30% withholding tax, unless, of course, the requirements of the EU Interest and Royalties Directive have been met or if a tax treaty applies. Under existing rules, withholding tax is not payable on interest to transparent entities; however under the proposals, withholding tax will be levied on interest sourced by transparent equity funds that are related to a debtor company in Denmark.
** Contribution prepared with assistance from Jørn Qviste of Rønne & Lundgren Law Firm, Copenhagen, Denmark.
Amendment in tax rules relating to gains on sale of shares
Bill L 78 was adopted at the end of last year, amending the rules in respect of the tax treatment of capital gains realised upon the sale of shares by individuals. Previously, where unquoted shares that have been held for more than three years were sold at a gain, the gain was taxed as income. Gains on the sale of quoted shares were generally not taxed, provided that certain requirements were met. Under the new rules, gains from the sale of all shares are taxed at graduated income tax rates, the maximum being 43%.
Gibraltar/United Kingdom
Tax Information Exchange Agreement (TIEA) signed At the end of 2005, Gibraltar and the UK entered into a TIEA, the terms of which are based on the proposed agreements with EU member states, providing for automatic exchange of information if no tax on interest is being withheld. Under the terms of the TIEA, the competent authorities of the UK and Gibraltar will exchange information automatically. Additionally, Gibraltar will pay to the UK 75% of the withholding tax levied. The UK will provide a taxpayer with a tax credit for tax paid in Gibraltar and will refund any excess of tax paid in Gibraltar. The TIEA is scheduled to enter into force in April 2006, provided that other EU member states and certain other countries adopt similar measures.
Netherlands/Netherlands Antilles/Aruba**
Dividend withholding tax rate disappointingly high The rumours at the time of writing ITN 45 proved to be untrue: we expected that the withholding tax rate between the Netherlands and the Netherlands Antilles would be reduced to 0% as from the beginning of this year. This, however, turned out to not be the case, and the withholding tax on dividends will be 5%. On the positive side, the minimum holding required to enjoy this reduction will be reduced to 10% from 25%. Additionally, dividends paid to banks, insurance companies, quoted companies and pension-funds will be exempt. This is an interesting development viz, for quoted companies. Listing on exchanges such as CISX (Channel Islands) is relatively straightforward and inexpensive (which may come as a surprise to many). It is very attractive for private equity funds and private unit trusts for a variety of reasons, as it will be for Antilles companies in the future no doubt. If you would like further information, please do not hesitate to contact us.
** Contribution prepared with assistance from Hans van Leeuwen, Baker Tilly Netherlands Antilles BV, Curacao, Netherlands Antilles.
South Africa
Discussion Paper on GAAR issued
A Discussion Paper was issued by the South African Revenue Service (SARS) proposing certain amendments to the general anti-avoidance rules (GAAR) contained in the Income Tax Act No. 58 of 1962. It seems that the current GAAR provisions are not sufficiently wide in their application in terms of the requirements of ‘abnormality’ of a transaction (i.e. a transaction was entered into not for a normal business purpose) and ‘purpose’ (i.e. that the purpose of a transaction was not to avoid tax). The Discussion Paper proposes certain factors be taken into account to determine the normality of a transaction, which includes the following:
- the form and substance of the transaction and its constituting steps;
- the tax result of the transaction, without the application of GAAR;
- the existence of a circular flow of cash or assets;
- the failure of parties to deal at arm’s length.
The Discussion Paper outlines that where some of the listed factors are present, a rebuttable presumption of ‘abnormality’ of a transaction will arise. This is certainly an interesting development, and one imagines it will be closely monitored by other countries. Should the UK, for example, consider a GAAR of this nature? Would it make UK tax legislation ‘cleaner’ and more definitive? At the moment we have a statute book that is growing year on year, with ever more complex anti-avoidance rules, which often create uncertainty due to poor drafting and thus fail to hit the spot. Is it time for GAAR?
United Kingdom
Real Estate Investment Trusts (REITs)
The UK property industry was taken by surprise with the Chancellor’s about turn on pensions being able to invest in residential property. Not all is lost though with the long-awaited introduction of REITs. Draft regulations have been published by HMRC, comments to which are invited by the end of January. The main characteristics of the proposed REIT legislation are as follows:
- UK resident companies listed on a stock exchange and carrying on rental business in real estate in the UK or overseas;
- the real estate letting business will be ring-fenced from the REIT’s non-qualifying activities;
- no less than 75% of the REIT’s activities must relate to the ring-fenced business;
- ring-fenced activities will not be subject to corporation tax and capital gains tax;
- no less than 95% of the profits derived from the ring-fenced activities has to be distributed.
Open-ended investment companies, amongst others, will not be allowed to join the scheme. Distributions from qualifying profits of a REIT will be taxed as Schedule A income for corporate tax purposes, or as profits from a UK property business as far as individuals are concerned. It seems that Finance Bill 2006 will include the relevant legislation, and we will bring you updates between now and then.
United States
Reporting requirements on inversion transactions
Final regulations relating to ‘inversion’ transactions and reporting thereof were announced in December 2005 and accompanied by guidance notes in IRS Notice 2005-7. An ‘inversion’ transaction is one in which the US parent company of a multinational group is transferred offshore. The final regulations differ from the 2003 temporary regulations in various respects, most significantly in that the requirement to report is limited to those transactions in which the corporation, or any of the shareholders, has to recognise a gain under Section 367(a) IRC. The final regulations are applicable to acquisitions of control and substantial changes in the capital structure of a corporation where this occurs after 5 December 2005. When reporting such transactions, Form 8806 and 1096 should be used for corporations and Form 1099-CAP is to be used for reporting of shareholders.
Check-the-box regulations – Societas Europaea
The US Treasury Department and the Internal Revenue Service have announced final check-the-box regulations, as announced in IRS Notice 2004-68 in October 2004. The Societas Europaea will in future be added to the list of per se corporations in Treasury Regulations §301.7701-2(b)(8). Other entities that will automatically be accepted as corporations for US tax purposes include the Estonian Aktsiaselts, the Latvian Akciju Sabiedriba and the Liechtenstein Aktiengesellschaft.
