Sentiment
The dominance of hope over reality is entering its four year cyclical phase as England marches off to Germany for the World Cup. Yet again we see red and white flags adorning motor cars throughout streets in the UK, and we can but hope that this time they won’t litter the ground before the final itself. There is however one certain reality, and that is that the financial moguls will have the final say as to who is ultimately victorious. No good winning the battle if you lose the war, and the war for most footballers is to try and preserve wealth long enough to be able to enjoy a reasonable standard of living when their playing career is over. Our sister company Opus Sports and Entertainments AG in St Gallen, Switzerland has been created specifically to win such wars on an individual basis, particularly with regard to maximising income from image rights which is now such a substantial proportion of the earning capacity of international footballers, wherever they are resident. We comment below on the anomalies created in last week’s House of Lords ruling in Agassi.
Happy reading!
Tax tip of the day
Transfer pricing is continuing to keep tax directors at large multinational and smaller companies busy. It is one of those administrative obligations people sometimes wonder what is it all for. Unfortunately, tax administrations around the world are increasingly using it as a significant tool to raise more revenue. Tax authorities are becoming increasingly sophisticated with respect to transfer pricing and failing to comply with the administrative obligations could result in penalties, but particularly the transfer of the burden of proof to the tax payer. In that situation it is the tax payer who has to demonstrate that the prices charged are reasonable. This is not a postion I believe anyone would like to be in. It is therefore important that where you have inter company transactions or transactions between the company and its shareholders, to ensure that your transfer pricing documention is up to date. This means that you document and specify the transactions that take place between related parties and that you establish a price that would have been charged in an unrelated situation. Let the burden of proof remain with the tax authorities!
Canada
Federal Budget -Business income tax
Dividends that are paid to individuals are presently grossed-up by 25% and the individual receives a tax credit of 13.33% of the grossed-up dividend. The Budget has increased the dividend gross-up to 45% with a tax credit of 19%. Dividends that are paid to individuals out of income by a corporation are taxed at a higher rate than if the individual earnt the income directly through an entity such as an income trust, the effect of the amendment is to eliminate this discrimination in tax treatment.
General corporation income tax rate
Presently the general corporation tax rate is 21% this will be reduced to:
- 20.5% by 1 January 2008
- 20% by 1 January 2009
- 19% 1 January 2010
Corporate surtax
The corporate surtax is to be abolished for all corporations with tax years ending after 31 December 2007. The removal of the corporate surtax has the effect of a 1.12% decrease in corporation income tax rates.
Business losses and investment tax credits
The carry forward period for business losses and investment tax credits is to be extended from 10 to 20 years for tax years that end after 2005.
Federal capital tax
Effective from 1 January 2006 is the removal of the federal corporation tax on corporations. Although this does not apply to financial establishments, where only minimal changes have been made. Capital tax on financial institutions is charged on taxable capital in Canada, presently at:
- 1% between $200m and $300m
- 1.25% in excess of $300m
The Budget purports to increase the threshold to $1billion.
EU/Ireland
Opinion delivered by ECJ re: Cadbury Schweppes Tax Appeal
With the intention of securing favourable tax treatment, Cadbury Schweppes formed indirect subsidiaries within the International Financial Services Centre in Dublin taxable at the rate of 10%. Under the controlled foreign company (CFC) rules the UK tax authorities attempted to tax Cadbury Schweppes on the Irish subsidiary’s profits. The case was referred to the ECJ. The opinion given by the Attorney General of the ECJ ascertained that UK CFC legislation is only applicable to arrangements that are entirely “artificial” and with the clear intention to evade tax. The Attorney General suggested that in determining the scope of “artificial” three factors should be considered.
- The degree of physical presence of the subsidiary in the host state
- The genuine nature of the activity provided by the subsidiary
- The economic activity of the parent company to the rest of the group
The decision should be received in several months.
EU/Netherlands
Significant opinion concerning dividend withholding tax by the ECJ
The Advocate General has provided a significant opinion regarding the Denkavit case, no. C-170/05. This case involves, prior to the EU parent subsidiary directive, a holding company based in the Netherlands and two French operating companies who distributed dividends upwards. A 5% withholding tax was applied following the provisions of the double tax treaty between France and The Netherlands. The issue arising being that if the holding company had been resident in France the dividends would have been exempt from withholding tax. The Netherlands holding company could not take advantage of this exemption and subsequently they claimed that this was an infringement on the EU freedom of establishment. It appears that France, through the dividend withholding tax exemption, in fact eliminates the economic double taxation when profit is distributed to a French holding company. However the profits distributed to a Netherlands holding company are effectively double taxed.Thus accordingly the Advocate General announced that France had contravened the freedom of establishment principle. The ECJ’s judgement is thought to be delivered later in 2006.
France/Luxembourg
Under the existing double tax treaty between Luxembourg and France, profits generated by a Luxembourg company from French real estate is not subject to French tax if the Luxembourg company does not have a permanent establishment in France. Neither is the profit subject to Luxembourg tax. The French administration wishes to amend the double tax treaty and allow the profits to be subject to French tax. Negotiations are under way and a new protocol in this respect is expected to be released within 1-2 years.
Ireland
Finance Act 2006
Following the implementation of the Irish holding company regime such as the introduction of the capital gains tax participation exemption for disposals of "qualifying shareholdings" and amendments to the Irish taxation treatment with regard to repatriated foreign dividends received by Irish resident companies, Ireland has become increasingly appealing as a holding company location. However the Finance Act 2006 in effect takes a step backwards by restricting certain tax reliefs. Where a loan is acquired by an investment company from a related company and the purpose of the loan is to buy shares in another related company then relief for the interest will no longer be available according to the revised provisions of the Finance Act 2006. The reasoning is that this provision will only apply to situations where the transaction is totally artificial in an attempt to claim tax relief.
The Netherlands
Banking secrecy
The State Secretary of Finance has announced that they intend to press the Luxembourg authorities to release information about so-called code accounts. These bank accounts are not registered in the name of the holder. The State Secretary of Finance claiming that banking secrecy is an "obsolete concept". This announcement is surprising as all EU Member States agreed to the EU Savings Directive effective per 1 July 2005. The Dutch Authorities nevertheless attempt to collect information about foreign bank accounts and transactions from these accounts prior to that date, proving to be unsuccessful after the KB-Lux project. With unlawfully obtained information about Dutch holders of bank accounts at KB-Lux and doubtful statistics, the Dutch Revenue commenced a witch hunt against Dutch taxpayers whom they believed were identified from the KB-Lux information. The outcome of this project is disastrous, as most Courts have denied the KB-Lux information and the statistics as convincing evidence.
Investment institutions
On 25 April, a Bill was sent to Parliament concerning a new tax regime for investment institutions. After abolishing the 0.55% capital tax per 1 January 2006 the new regime for investment institutions should further encourage setting up investment schemes in the Netherlands. The Bill includes an exemption for Dutch corporation tax as well as an exemption for dividend withholding tax as the investment institution will not be a withholding agent for dividend withholding tax. This regime will be available for any type of vehicle set up for collective investment in stocks, including a transparent fund, investment institution with distribution obligation or exempt investment institution.
Contributions received with thanks from our good friend Lex van der Zande at Strik Law Firm in Amsterdam.
Holland
Corporate tax white paper
- Dividend withholding tax is suggested to be reduced from 25% to 15%
- Corporate tax is suggested to be reduced from 29.6% to 25%. In addition the corporate tax rate for profits up to € 20,000 is to be reduced from 25.5% to 20%
Intercompany interest box
It is proposed to introduce an optional intercompany interest box whereby the balance of interest paid and received on intercompany loans is taxed at a favourable rate of 5%.
Patent box
Similar to the interest box, a royalty box is anticipated to be introduced for intercompany royalty income. The rate projected for the royalty box would be 15%.
Losses
Presently losses can be carried forward for an indefinite period. It is planned to limit the loss carry forward period to 9 years.
The proposed changes show that Holland is at last waking up to reinvent the pre-eminent role it had in tax planning in the 70s and 80s.
United Kingdom
Barclays case
Following the introduction of an EU directive which allows European states and offshore territories to exchange details about bank holdings, HMRC won a momentous legal battle, forcing Barclays to surrender details of its customers’ offshore accounts. It is clearly legal to hold money offshore however it is illegal not to declare the interest received. The records will be examined to determine the UK domiciled individuals who have not declared income on money kept offshore. The Revenue intends to obtain further rulings in respect of other banks.
House of Lords Ruling in Agassi Case
The House of Lords ruled on the 17th May 2006 that Andre Agassi indeed had a tax liability in the UK in respect of his earnings from sponsorship contracts where payments had been made by two non-resident companies, Nike and Head. Previously, the Court of Appeal had ruled that these payments were extra territorial since Agassi, like the paying companies, was non-resident of the UK. However, the House of Lords ruled that certain of his activities for which the payments were made were UK source and covered by relevant legislation affecting sportsmen and entertainers. The problem is that Agassi earned these fees not only for work done in the UK but throughout the world, but nowhere in the legislation is there specific provision for apportioning the amount of the payments that should be subject to UK tax.
Strangely, a resident but non-domiciled sports star earning fees from a foreign company could be exempt from UK tax in respect of his foreign activities under proper structuring arrangements, provided that the amount is not remitted to the UK. So a resident sportsman or entertainer may be better off than a foreign non-resident individual, an anomaly which their Lordships do not appear to have considered or advised upon.
United States/Bangladesh
Tax agreement to be approved
The US and Bangladesh have established a double taxation avoidance agreement all that remains is the signing of documents. It is believed that such an agreement will make it easier for US investors to invest in Bangladesh in a wide range of areas, especially relevant in view of the great interest in the country’s energy sector.
