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SOVEREIGN
issue 5 july/sept 2000
CONTENTS
2
T
the directors themselves. We suspect that many
anticipated list of tax havens – see page 6.
owners of offshore companies will have to restruc-
Those on the black list which fail to make the
ture and should do this quickly. As always, we
necessary commitments to the OECD before July
advise that short cuts may prove to be a temporary
AUSTRIA: To abolish anonymous
next year will go on a second list and be labelled
saving in costs and convenience but long term may
‘passbook’ accounts.
as ‘uncooperative’. Sanctions would then follow.
prove to be the most costly mistake ever made.
MONACO: Report on banking.
Already six tax havens have made an advance
LIECHTENSTEIN: To set up
commitment to revise their legislation and stan-
Financial Intelligence Unit.
dards in line with OECD requirements. Other
CHANNEL ISLANDS: To extend
jurisdictions such as the BVI and the Bahamas
S
are already preparing amendments to their leg-
Masters Degrees in International and Offshore
EUROPEAN NEWS
GIBRALTAR: Secures EU financial
regulation to fiduciaries.
US & CARIBBEAN NEWS
BVI: To increase transparency.
Tax Planning. Sovereign has been appointed as
commitment to the OECD.
the exclusive marketing organisation for the
Byrnes has been appointed as course director
USA: Anti-money laundering law.
shareholders to be
and the faculty includes
registered on public
“In particular, it seems likely
most, if not all, respected
FAR EAST NEWS
file. It does seem
that most jurisdictions
authors and experts in off-
MAURITIUS: Date for uniform tax rate.
as though there
will require details of
shore tax planning. We do
HONG KONG: To update company law.
are many persons
directors and shareholders
not believe that there has
SINGAPORE: To introduce PCCs.
resident in onshore
to be registered on public file.”
ever been such a body of
high tax jurisdictions
who have set up offshore companies and are act-
expertise assembled in
association with an academic course.
ing as directors of those companies. For many
Whilst the courses are similar to those offered
years we have been pointing out the inadvisability
by Regent University, with whom we were previ-
ENGLAND/WALES: Breach of trust.
of these arrangements as this will almost certainly
ously associated, the material has been updated
JERSEY: Variation of trusts.
make the offshore company legally tax resident in
and new modules have been added. In short, the
Guernsey: Interim injunction.
the country of residence of the director because
product has been refined and improved. The aca-
the company is managed and controlled from that
demic year commences in October with a gather-
FISCAL NEWS
jurisdiction. Many may have been aware of this
ing of the faculty and first intake of students at the
OECD: Publishes ‘tax haven’ list.
potential tax liability but have ignored it and relied
University campus in Miami. William Byrnes and
EU: Information exchange.
upon the fact that it is difficult, if not impossible, for
myself, as professors of the university, will be trav-
their home tax authority to establish their connec-
elling to Miami for this week, which will include
tion with the company. With the requirement to
lectures and tutorials as well as social functions.
publicly file details of directors, those arrange-
If anybody is interested in learning more about
ments should rightly come to an end and onshore
these courses, then please see our website
clients will have to employ professional third party
www.SovereignGroup.com or contact Michael
directors who would naturally be located offshore
Foggo in Hong Kong, Simon Denton in London or
or in a fiscally neutral jurisdiction. Responsible
Coleman Foster at St Thomas University.
LEGAL NEWS
BVI: Imperfect transfer of shares.
UK: Tax rules for multinationals.
PROFILE F.A.T.F.
Report on non-cooperative
countries or territories.
8
islation in preparation for making the necessary
USA: To replace FSC regime.
ISLE OF MAN: To restructure taxation.
7
the St Thomas University online LL.M.
courses outside the USA. Professor William
SEYCHELLES: Amends IBC Act.
6
overeign is pleased to be associated with
In particular, it seems likely that most juris-
HONG KONG: Internet banks.
5
ST THOMAS UNIVERSITY, MIAMI, USA
dictions will require details of directors and
UN: Sets out minimum standards.
4
OECD REPORT PUBLISHED
he OECD have now published the much
services passporting.
3
REPORT
www.SovereignGroup.com
INFORMATION, CONTACT
& SUBSCRIPTION
directors will not give control back to clients
through a Power of Attorney or other methods –
The material set out herein is for information purposes
only and does not constitute legal or professional
advice. No responsibility will be accepted for loss
occassioned directly or indirectly as a result of acting,
or refraining from acting, wholly or partially in reliance
upon information contained herein.
Photocopying this publication is illegal.
nor should they. Recent cases (particularly
Dimsey v Allen) have made it clear that if directors
dance to the tune of a third party then they are
assisting in a tax fraud which would have serious
Howard Bilton
consequences for the controlling third party and
Chairman of The Sovereign Group
BA(Hons)
Barrister-at-Law (England, Wales & Gibraltar)
EUROPEAN NEWS
GIBRALTAR SECURES EU FINANCIAL SERVICES PASSPORTING
MONACO
T
he governments of UK and Spain signed
objected to recognising the competence of
A French parliamentary report on banking in Monaco
an agreement on 19 April on the adminis-
Gibraltar’s constitutional authorities.
accused the Principality of deliberately putting in
trative status of Gibraltar which will give
In addition to proposed legislation to provide
place lax banking laws, including guarantees of
Gibraltar-based banks and insurance compa-
a legal framework for electronic commerce and
anonymity, to attract wealthy depositors. It also said
nies passporting rights into the rest of the EU.
to liberalise telecommunications, the govern-
that monetary surveillance systems were so poor
The government aims to secure passporting for
ment is also to draft legislation to provide for
that officials were unable to co-operate with interna-
investment services by the end of the year.
protected cell companies designed to boost
tional anti-money laundering efforts.
Gibraltar as a captive insurance centre.
The report found that Monaco had 340,000 bank
SOVEREIGN COMMENT: Gibraltar is a full
accounts for a population of only 30,000 and that
problems in having its
member of the EU having joined as a designated
about 60% belonged to non-residents. It said that,
regulatory regime recognised
territory at the same time as Britain in 1977.
unless changes were made, France was in danger of
by other EU members.”
Despite this, Gibraltar has experienced problems
losing its own credibility in the fight against money
“Gibraltar has experienced
in having its regulatory regime recognised by
laundering. It also recommended that France review
As a result the UK will be able to desig-
other EU members partly, at least, because of
its accords with Monaco.
nate Gibraltar’s own authorities as the com-
political problems with Spain which refuses to
SOVEREIGN COMMENT: Although Monaco is a
petent authority in Gibraltar for the purposes
recognise Gibraltar as a separate state due to its
separate sovereign state, France wields con-
of EU measures and EU-related treaties. All
territorial claim over Gibraltar. For many years
siderable influence over the territory and will be
other member states will recognise and
Gibraltar has had the most comprehensive
pressurising Monaco to clean up its act.
accept the acts and decisions of the compe-
regulation of its financial business and has
tent authorities.
implemented all the required EU directives and
LIECHTENSTEIN
these efforts have finally been recognised.
The Principality is to set up a financial intelligence
Previously Spain and other members had
unit dedicated to the management of reports of
suspicious transactions following a major investi-
AUSTRIA TO ABOLISH ANONYMOUS ‘PASSBOOK’ ACCOUNTS
T
he government tabled legislation in June
books containing US$100bn although Austria has
proceeds of organised crime. Anti-money launder-
to abolish the right to open secret 'pass-
a population of only eight million, has agreed to
ing legislation is also to be amended to require
book' bank accounts from November this year
lift its threat of suspension. It said the measures
financial services professionals to report all suspi-
and phase out existing accounts by June 2002.
met its concerns and would significantly enhance
cious transactions.
The measures require that after 31 October
Austria's anti-money laundering system.
In June police raided the offices of LGT Bank,
2000 all new passbooks holders must be identi-
SOVEREIGN COMMENT: The passbook or ‘spar-
owned by Liechtenstein’s royal family, as part of
fied, as must any holders of existing passbooks
book’ provided a method whereby an Austrian bank
an investigation into the Principality’’s alleged
that make a deposit. Withdrawals from accounts
account could be opened and operated completely
part in money laundering schemes. Documents
where the holder has been identified and which
contain over ATS200,000 can only be made by
were seized and bank accounts of several lawyers
“The sparbook could be transferred
the identified holder. Deposits exceeding
without formality like
ATS200,000, whether in one amount or several
a bearer share certificate.”
connected amounts, will require the depositor to
be identified.
were frozen.
CHANNEL ISLANDS
The Jersey States Assembly has passed a Financial
anonymously. Whoever had possession of the spar-
Services (Extension) Law, to amend the Investment
After 30 June 2002 any withdrawal will
book had access to the account and the sparbook
Business Law and extend regulation to trust compa-
require the identification of the holder, and if the
could be transferred without formality like a bearer
nies. The Guernsey States Advisory & Finance
account contains ATS200,000 or more, must be
share certificate. This system clearly facilitated
Committee has also approved a Fiduciaries &
reported to the Austrian financial intelligence
money laundering and is soon to be abolished.
Administration Business Law to provide for the
unit (FIU) for investigation. The transfer or
Austrian banks remain a bastion of confidentiality
licensing and supervision of fiduciaries within the
acquisition of a passbook will be prohibited and
but, as with all other jurisdictions, Austria will
Bailiwick of Guernsey, including Alderney and Sark.
made subject to an administrative fine.
now require clear identification of the beneficial
The principal element of both proposed regulatory
owner of the account and notification of any
structures is that providers of fiduciary services
change in that owner.
should be 'fit and proper' persons.
The Financial Action Task Force (FATF)
which estimated that there are 27 million pass-
2
gation into the alleged money laundering of the
USA & CARIBBEAN NEWS
UNITED STATES OF AMERICA
BRITISH VIRGIN ISLANDS TAKE STEPS ON TRANSPARENCY
The European Commission rejected proposals by
the US to amend the tax regime for Foreign Sales
T
Corporations (FSCs) which was ruled illegal by the
include access to information relating to criminal
SOVEREIGN COMMENT: As with Mauritius, BVI is
World Trade Organisation (WTO) in February. The
tax investigations and eliminate the requirement
taking steps to ensure that certain additional infor-
WTO ruled that tax breaks granted to US compa-
for dual criminality. It is also to introduce com-
mation is now available on the public file.
nies on income from exports channelled through
pulsory investigative powers legislation to pro-
Additionally BVI has identified a need to reform its
FSCs constituted illegal export subsidies and gave
vide for access to information within the BVI
the US until 1 October to brings its FSC regime
on a regulator to regulator basis.
he government is to amend the Mutual
to recognition in any other signatory country
Legal Assistance Treaty with the US to
without further authentication.
“It is difficult to see how the BVI
The IBC legislation is to be amended to
could instigate a unitary tax system…
The proposed replacement scheme would allow
require particulars of directors to be record-
as this would necessitate removing all
US companies either exporting goods or manufac-
ed at the Company Registry and restrict the
taxation on residents or imposing some
turing and selling them overseas to benefit from a
mobility and anonymity of bearer shares by
taxation on IBCs.”
tax reduction, provided they gave up their existing
requiring them to be deposited with
right to defer US income tax on overseas earnings.
licensed financial institutions who would be
tax system. Residents of the BVI are subject to tax
‘into conformity’ with international trade rules.
But EU trade commissioner Pascal Lamy said
made aware of beneficial ownership of such
at 20% but non-residents forming an IBC in BVI are
the proposed US solution changed nothing
shares. It believes these measures will
not subject to tax. The comments made earlier in
because it still applied to to sales outside the
address OECD concerns in relation to harm-
relation to the Isle of Man and Gibraltar apply. It is
US and therefore did not remove the obligation
ful tax competition and FATF concerns in rela-
difficult to see how the BVI could instigate a unitary
to export.
tion to money laundering.
tax system applicable to all. As this would necessi-
SOVEREIGN COMMENT: The US has been one
The BVI has also incorporated the Hague
tate removing all taxation on residents or imposing
of the prime movers in the OECD ‘harmful tax’
Convention into law by the Registration &
some taxation on IBC companies which would likely
initiative. It seems somewhat hypocritical that
Records (Amendment) Act. This will remove
result in those companies immediately redomiciling
while damning the tax regimes of other coun-
the need for diplomatic and consular legalisa-
to zero tax jurisdiction such as the Bahamas,
tries it is still trying to maintain the advanta-
tion of foreign public documents in the BVI.
Cayman or Turks and Caicos Islands. Those juris-
geous tax regime of its own.
Documents issued in a country which is a sig-
dictions have a distinct advantage in that they have
natory to the Convention are certified by an
no taxation whatsoever either for residents or non-
UNITED STATES OF AMERICA
apostille which must be affixed to the docu-
residents. We do envisage that many companies
An International Counter-Money Laundering Act to
ment by a competent authority and are entitled
may choose to leave the BVI in the near future.
curtail the use of 'international money laundering
havens which are used to funnel profits of illegal or
corrupt activities into the legitimate international
UN INVITES COMMITMENT TO MINIMUM STANDARDS
T
and consultative process of evaluation and
The Act is intended to provide a national mandate
should be invited to enter into a formal govern-
to make good any deficiencies identified;
for subjecting to special scrutiny those foreign jurisdic-
mental commitment to its proposed minimum
•
tions, financial institutions operating outside the US and
standards by 30 September. At a meeting in the
sion of cross-border financial services between
classes of international transactions that pose particular
Cayman Islands co-hosted by the UN Office for
onshore and offshore jurisdictions, but between
opportunities for money laundering.
Drug Control & Crime Prevention (ODCCP) and
those that are compliant and those that are
financial system' was approved by the House
Banking & Financial Services Committee.
he UN Offshore Forum agreed that all
international financial services centres
unless sufficient opportunity has been provided
no distinction should be drawn in the provi-
It is also to provide the Treasury Secretary with
the Cayman government and attended by 100
non-compliant in the application of interna-
discretionary authority to take measures tailored to
participants from 37 jurisdictions, delegates
tional standards.
the particular money laundering problems presented
agreed to a series of principles which included:
by specific foreign jurisdictions, financial institu-
•
recognition of the positive action already
seek to prevent financial services providers
tions operating outside the US and classes of
taken or being taken by the many individual
from promoting lower regulatory standards in
international transactions, and to strengthen his
jurisdictions participating in the Forum;
any jurisdiction and that there should be no bar-
authority to issue and administer geographic
•
no sanctions imposed on individual jurisdic-
riers to the exchange of information necessary
targeting orders and to clarify that violations may
tions for non-compliance with international
for effective financial regulation and anti-money
result in criminal and civil penalties.
standards in advance of a full, fair, transparent
laundering measures.
It was also agreed that jurisdictions should
3
FAR EAST NEWS
MAURITIUS SETS DATE FOR UNIFORM CORPORATE TAX RATE
SINGAPORE
U
nder the Finance Act 2000 all Mauritius
and officers of any International Company must
Proposals to introduce new legislation for rent-a-
offshore companies are to be subject to a
now be filed with the Registrar of Offshore
captives and protected cell companies were
15% profits tax commencing 1 July 2002.
Companies, although the register is not open
announced by the Monetary Authority of Singapore
Previously only companies incorporated after 1
to public inspection. Offshore companies will
(MAS) as part of a drive to position itself as a
July 1998 were subject to this tax.
also be subject to stricter guidelines with
regional centre for alternative risk transfer products.
Further, the unilateral foreign tax credit will
“Mauritius has made an advance
respect to filing audited accounts – a limit of 6
Hauw Soon Hoon, executive director of the
months has been imposed where previously
Insurance Department of MAS, said Singapore wanted
no time frame existed.
to attract activities such as captive business,
commitment to the OECD to
A double tax treaty between Mauritius and
financial reinsurance and was also keen to see the
‘eliminate harmful taxation’”.
Cyprus has been ratified. It entered into force in
structuring and issuance of insurance-linked
Mauritius from July 2000 and will become effec-
securities being carried out from Singapore.
be reduced from 90% to 80% from the same
tive in Cyprus from 1 January 2001. There is no
date so that all offshore companies will be taxed
withholding tax on dividends, interests or royal-
HONG KONG
at an effective rate of 3%, doubling the tax expo-
ties where the recipient is the beneficial owner
The Hong Kong Monetary Authority has issued guide-
sure under the old regime. The changes also
of the dividends. Such income is only be taxable
lines on licensing Internet banks. They set out the
cover interest earned in a Mauritius bank which
in the country of residence of the recipient.
principles which it will take into account in deciding
will no longer be tax exempt. The maximum rate
SOVEREIGN COMMENT: Mauritius made an
of corporate tax has, however, been reduced
advance commitment to the OECD to ‘eliminate
Applicants will be expected to satisfy the same
from 35% to 25%.
whether to authorise virtual banks.
harmful tax competition’. The requirement to
criteria applying to conventional banks, including
The legislation governing international
register details of directors and recall bearer
requirements to maintain a physical presence in
companies has also been amended to provide
shares is the first step in the process designed to
Hong Kong, maintain an appropriate level of
more transparency. In particular bearer shares
bring its legislation and practice into line with
security and put in place appropriate policies and
have been abolished and any company with
OECD requirements. Other jurisdictions are likely
procedures to cover operational risks.
those instruments in circulation has until
to follow this lead so confidentiality in the
A consultation paper on a proposed practice note
December 2001 to convert them into registered
offshore financial centres will be eroded over the
on investment advice given by solicitors and profes-
shares. The details of the directors, member
coming years.
sional accountants has been issued by the Securities
& Futures Commission.
It proposes that a solicitor or an accountant can rely
HONG KONG TO REFORM AND MODERNISE COMPANY LAW
4
on the incidental advice exemption and will not be
T
mented at a later stage.
plan for the reform and modernisation of
The Companies Registry will now accept
the Hong Kong Companies Ordinance. It said it
documents or applications submitted electroni-
had identified 62 items for legislative amend-
cally under certain ordinances after sections 5 to
ments or further study following publication of
8 of the Electronic Transactions Ordinance con-
SEYCHELLES
the Standing Committee on Company Law
cerning the submission of electronic records and
The International Business Corporations Act has
Reform's (SCCLR) report in February.
digital signatures were brought into effect in April.
been amended to extend the period in which com-
he government announced a four-stage
required to be licensed if the advice given on securities
forms a normal or wholly incidental part of the overall
services provided and no discrete fee is charged.
SOVEREIGN COMMENT: It has been many years
panies are permitted to pay fees before a 50%
“Hong Kong may become the
since the last major overhaul of Hong Kong compa-
penalty for late payment is imposed and a company
jurisdiction of choice for tax planning.”
nies legislation. The present legislation is still
becomes liable for striking off.
based on the 1926 UK act and has been little modi-
Companies set up before the end of June in any
The first phase involves urgently needed
fied since. Hong Kong is one of the few major off-
year will have until the end of that year in which to
reforms which can be taken forward quickly
shore financial centres which has not been identi-
make payment. A minimum of six months from the
and the second covers items in relation to cor-
fied as a tax haven by the OECD nor has any element
date of incorporation. Companies set up on or after
porate governance. The third and the fourth
of the tax regime been identified by the OECD as
1 July will have until the end of the following year to
phases will embrace technical items which will
being harmful. Hong Kong may become the juris-
make payment. A maximum of 18 months from the
involve substantial restructuring and rewriting
diction of choice for tax planning purposes in the
date of incorporation. This amendment will have
of the existing Ordinance. These will be imple-
near future.
retrospective effect as from 1 September 1999.
LEGAL NEWS
JERSEY: VARIATION OF TRUSTS
BRITISH VIRGIN ISLANDS: IMPERFECT TRANSFER OF SHARES
In Re the Richard Colin Douglas 1990 Settlement, an
n Laura Saus de Villalba v Adex International Ltd
I
•
application was made under Article 43 of the Trusts
& Juris Magister (Bahamas) Ltd, the plaintiff was
effect the transfer to the second defendant in
(Jersey) Law 1984 to approve on behalf of unborn
the widow of Enric Villalba who died in March 1999.
compliance with s31 of the IBC Act. Pleadings,
beneficiaries a proposed variation of a trust.
Adex was an IBC incorporated in the BVI whose
which had revealed nothing beyond the alleged
entire issued share capital was issued in the form
oral instructions, had failed to satisfy the Court.
The settlor, Richard Colin Douglas, established
a settlement in 1990 with Jersey-resident trustees
the deceased must do all in his power to
SOVEREIGN COMMENT: Bearer shares carry in-
of 50,000 bearer shares in Certificate No 1.
and governed by Jersey law. The settlor, his wife
Juris Magister (JM), a Bahamas company,
herent problems. The issue of bearer shares are,
and children were domiciled and ordinarily resi-
was sole trustee of the Mercury Trust, a BVI trust.
essentially, incompatible with “know your client”
dent in England. As a result of the changes to the
It claimed that in 1998, on oral instructions from the
principles and good due diligence. For this reason
UK Finance Act 1998, a potential capital gains tax
deceased, Adex cancelled Certificate No 1 and
many banks and other financial institutions dislike
liability of £500,000 fell on the settlor.
issued a Certificate No 2 in the name of Mercury
doing business with companies which issue bearer
Trust. It claimed ownership of Adex and its assets.
shares. For some time we have been encouraging
of the assets of the 1990 settlement to a new set-
The plaintiff, who was in possession of
clients not to issue bearer shares and most offshore
tlement created by the settlor with UK-resident
Certificate No 1, sought an order that the
jurisdictions are moving towards their abolition. In
trustees and governed by UK law. The trustees
purported issue of Certificate No 2 be declared
this case the defendants purported to have effected
would revoke the settlor’s life interest in the 1990
void and that she be declared the absolute
a transfer without taking, and passing on, physical
settlement, appoint his brother in his place and
owner of the issued share capital of Adex. The
possession of the share certificate. This is in con-
exclude all persons from benefit under the 1990
defendants filed a defence and counterclaim.
travention of s31 of the BVI IBC Act which states that
It was proposed that the trustees appoint most
The High Court of Justice British Virgin
bearer shares are ‘transferable by delivery’. This
Islands, ordering the defence and counterclaim
would not have been a problem if registered shares
settlement who were defined persons under s86 of
the Taxation of Chargeable Gains Act 1992.
to be struck out, held that:
had been issued because they can be transferred,
that even if the avoidance, minimisation or deferral
•
the defendants could not rely solely on Article 14 to
subject to the Articles of Association, by any method
of tax is the principal object, that is not a reason for
the exclusion of Article 12 and s31 of the IBC Act so
approved by the directors and physical possession
the Court to refuse to give its consent to a variation
that the word ‘cancel’ in Article 14 must involve the
of the share certificate does not constitute owner-
if it is satisfied that the arrangement is for the
delivery of the bearer share certificate for cancellation.
ship of the shares. It is only evidence of the same.
Allowing the application, the Royal Court held
benefit of the persons concerned.
GUERNSEY: INTERIM INJUNCTION
ENGLAND & WALES: BREACH OF TRUST
In Novo Nordisk & Others v Banco Santander &
I
n Wight & Another v Olswang, the defen-
failed to satisfy the test in Lenroyd v Whitely that
Richard Adler, an application was made to contin-
dant was co-trustee of a fund consisting pri-
‘the law required of a trustee no higher degree of
ue an interim injunction requiring the disclosure of
marily of a holding in Aegis Group plc. The set-
diligence in the execution of his office than a
documents by Banco Santander (Guernsey) in
tlement conferred on the trustees an absolute
man of ordinary prudence would exercise in the
relation to an action commenced in the US District
discretion in relation to the continued retention
management of his own private affairs’.
Court of Alabama. This was stayed by a further
of the holdings. In April 1991 the trustees sold
The High Court held that, irrespective of
breaches of trust during the decision-making
consent order. The defendant Adler intervened to
apply for the discharge of the second order. Exam-
“The law requires of a trustee no
process, beneficiaries of a trust did not have a
ination of the disclosure orders under the principle
higher degree of diligence… than a
claim against a trustee who made an invest-
of Norwich Pharmaceutical Co v Commissioner of
man of ordinary prudence… ”
ment decision unless they could establish that
the decision was one that no reasonable
Customs & Excise and tracing orders under
Bankers Trust Co v Shapira.
The Royal Court, dismissing the application,
50,000 of the shares. Most of the remainder
were sold in 1992 and 1993.
trustee could have made.
SOVEREIGN COMMENT: This case confirms the
held that a Norwich Pharmaceutical order required a
The claimants submitted that the trustees
principle that trustees will only be liable for losses
tangible link between the alleged wrongdoer and the
lost, by reason of alleged breaches of duty,
resulting from investment decisions if it can be
person against whom disclosure is sought. This was
opportunities to sell the remaining shares at
shown that those decisions could, and would, not
not the case. The Court should not go outside the
higher prices in May and September 1991.
have been made by a reasonable man. Trustees
ambit of the English authorities in granting equitable
remedies against third parties.
The defendant argued that the claim could
only succeed if the decision not to sell the shares
are not expected to be expert investment advisers
but they may be expected to hire same.
5
FISCAL NEWS
OECD IDENTIFIES 35 JURISDICTIONS ON ‘TAX HAVEN’ LIST
ISLE OF MAN
T
he OECD Forum on Harmful Tax Practices
meet its tax haven criteria and which did not
The government announced a radical restructuring
published a list of 35 jurisdictions which
make a commitment were: Andorra; Anguilla;
of its tax system to meet new international stan-
meet its criteria for tax havens based on its
Antigua & Barbuda; Aruba; Bahamas; Bahrain;
dards promoted by the G7 and OECD countries and
report on Progress in Identifying and Eliminating
Barbados; Belize; British Virgin Islands; Cook
to attract entrepreneurs and internet companies.
Harmful Tax Practices. Listed jurisdictions have
Islands; Dominica; Gibraltar; Grenada; Guernsey/
The tax proposals are based on a reduction in the
been given one year to agree to eliminate harmful
Sark/Alderney; Isle of Man; Jersey; Liberia;
corporate tax rate from 20% to 10% for trading
features by the end of 2005 or they will be includ-
Liechtenstein; Maldives; Marshall Islands;
companies over a three to five-year period, with a
ed on an OECD list of Unco-operative Tax Havens
Monaco; Montserrat; Nauru; Netherlands Antilles;
deadline of 2005, and removal of the ring-fence
(UTHs), to be completed by 31 July 2001, against
Niue; Panama; Samoa; Seychelles; St Lucia; St
regime around exempt insurance companies and
which economic sanctions may be imposed.
Kitts & Nevis; St Vincent & the Grenadines; Tonga;
ship management companies which will be brought
Turks & Caicos; US Virgin Islands; and Vanuatu.
within the domestic tax system, but at a zero rate.
The Forum reviewed 47 jurisdictions which it
initially identified as potential tax havens on the
The OECD Forum also reviewed harmful
Personal allowances will be available for non-resi-
tax practices in its own member countries. It
dents as for residents and a new tax credit system for
“Most of the jurisdictions … will be
identified 47 tax practices in countries, including
distributions will ensure that tax neutrality is preserved
keen … to secure exclusion from the
Switzerland and Luxembourg which abstained
for the investor, whether resident or non-resident.
list of unco-operative havens.”
from the 1998 Report, as ‘potentially harmful’
An important element of the proposed tax
SOVEREIGN COMMENT: For the moment hold-
system will be an updated double tax treaty with the
grounds of: no or only nominal taxes; tax breaks
ing company regimes such as the Dutch partici-
UK which can be applied equally to any other juris-
for non-residents; lack of effective exchange of
pation exemption, UK International headquarters
diction wishing to enter into a treaty. Talks with the
information; lack of transparency; and attracting
companies and the new Danish regime have not
UK Inland Revenue are ongoing.
business with no substantial activities.
been identified as harmful tax regimes by the
SOVEREIGN COMMENT: The OECD regards one
Six of the jurisdictions under review –
OECD but they have indicated that they will be
of the criteria which identifies a tax haven to be a
Bermuda, Cayman Islands, Cyprus, Malta,
examining these in the near future. Most of the
dual system of taxation. In the Isle of Man local
Mauritius and San Marino – were found not to
jurisdictions which have been identified as tax
residents pay tax at 20% but non-residents are not
be in compliance but were not listed after mak-
havens will be keen to ensure that they make
subject to tax. The new measures are designed to
ing ‘advance’ commitments to adopt internation-
the necessary commitments and changes in
implement one system of taxation which will apply
al standards on exchange of information on tax
legislation to secure exclusion from the list of
to both residents and non-residents. In effect the
matters, transparency and fair tax competition.
unco-operative havens which the OECD will
Isle of Man will become a low tax jurisdiction
publish next year.
rather than a no tax jurisdiction. Other jurisdictions
The jurisdictions found by the OECD to
with similar tax systems such as Gibraltar are also
likely to introduce a unitary system. In the case of
EUROPEAN UNION TO PURSUE EXCHANGE OF INFORMATION
T
he EU ended the three-year deadlock on
to impose a similar system. EU ministers set a
the proposed taxation of non-resident sav-
target of 31 December 2002 to persuade third
ings after Austria and Luxembourg dropped
countries to adopt similar measures.
based system of taxation similar to Hong Kong.
UNITED KINGDOM
objections to information exchange at the EU
SOVEREIGN COMMENT: The requirement for
The Treasury has agreed to defer implementation of
summit in Portugal. EU states have agreed to
exchange of information is to apply to EU members
Budget measures to tighten tax rules for multina-
draw up a directive by the end of this year.
and territories under their control so, in particular,
tional companies by preventing the use of mixer
Under the deal, five countries – Luxembourg,
these requirements are likely to apply to the British
companies, or overseas subsidiaries through which
Austria, Belgium, Greece and Portugal – are to
offshore financial centres such as Bermuda, BVI,
profits are repatriated to the UK as dividends, from
be allowed to operate a withholding tax system
Cayman etc. The EU has made it clear that they do
1 July this year to 31 March 2001, although the pro-
but would be required to shift to information
not wish to see a flight of capital to offshore centres
posals remained in the Finance Bill.
exchange after a seven-year transition period.
but this is the likely result of this legislation as
The new rules will cap the rate of underlying tax
This would require those countries with bank
people do have a legitimate desire for privacy.
attributable to a dividend paid from one company to
secrecy rules to repeal them.
The likely outcome is a flight of capital to inde-
another at the UK corporation tax rate and end a
pendent territories such as Bahamas, Hong Kong
company’s ability to specify out of which profits a
and Mauritius.
dividend is paid.
Implementation is contingent on third countries, primarily the US and Switzerland, agreeing
6
Gibraltar they are examining switching to a source-
PROFILE F.A.T.F.
THE FINANCIAL ACTION TASK FORCE REVIEW TO INDENTIFY NON-COOPERATIVE COUNTRIES OR TERRITORIES
I
n June, the Financial Action Task Force
against money laundering. The BVI allows cer-
the obligation to report is a direct one. Where the
(FATF) issued a list of 15 ‘non-cooperative’
tain intermediaries, and individuals, which are
underlying criminal conduct is another predicate
financial centres,which it said, must step up
subject to the same anti-money laundering stan-
offence, the reporting is an "indirect obligation":
efforts to combat money laundering or face the
dards and supervision as financial institutions, to
failure to make a report potentially leaves one
threat of unspecified international counter-meas-
introduce business to banks and financial institu-
open to a charge of money laundering; making a
ures. The 15 countries in which the FATF identi-
tions on the basis that the introducers them-
report is a defence against such a charge. FATF
fied ‘serious systemic problems’ are: Bahamas,
selves verify the identify of the customer. BVI
will need to discuss further the adequacy of the
Cayman Islands, Cook Islands, Dominica, Israel,
also allows certain institutions based in certain
suspicious transaction reporting system in the
Lebanon, Liechtenstein, Marshall Islands,
overseas countries, subject to equivalent stan-
jurisdictions with the authorities.
Nauru, Niue, Panama, Philippines, Russia, St
dards, to introduce business, without separately
All allow certain intermediaries, and individu-
Kitts & Nevis and St Vincent & the Grenadines.
verifying the identity of the client. The banks and
als, which are subject to the same anti-money
laundering standards and supervision as finan-
The report calls on FATF members to
request their financial institutions to give
“International co-operation has been marked
cial institutions, to introduce business to banks
special attention to businesses and trans-
by long delays and restricted responses
and financial institutions on the basis that the
actions with persons, including compa-
to requests for assistance.”
introducers themselves verify the identify of the
customer. They also allow certain institutions
nies and financial institutions, in countries
or territories identified as being non-cooperative.
financial institutions are only required to know
based in certain overseas countries, subject to
The FATF examined 29 countries and territories.
the name of the client but not to verify the identi-
equivalent standards, to introduce business,
Below we set out extracts of the FATF findings in
ty separately. There is concern as to whether
without separately verifying the identity of the
relation to those jurisdictions reviewed in which
such a system provides sufficiently rigorous
client. The banks and the financial institutions in
The Sovereign Group has offices:
checks on the identity of clients of banks and
Guernsey, Isle of Man and Jersey are only
financial institutions, especially in cases where
required to know the name of the client but not to
the introducer is not a financial institution.
verify
BAHAMAS: Although the Bahamas has
comprehensive anti-money laundering legisla-
the
identity
separately.
Guernsey,
tion, there are serious deficiencies in its system.
The BVI also has a large number of Inter-
Gibraltar, and Jersey have decided to restrict to
In particular, there is a lack of information about
national Business Companies (IBCs), the forma-
those meeting FATF standards, the list of coun-
beneficial ownership as to trusts and internation-
tion of which by intermediaries is subject to fewer
tries permitted to introduce business to banks
al business companies, which are allowed to
identification requirements than applied to the
without them having to verify separately the
issue bearer shares. There is also a serious
company sector as a whole. The FATF has
client's identity. The FATF has decided to con-
breach in identification rules since certain inter-
decided to consider both issues.
sider the adequacy of introducer systems in the
mediaries can invoke their professional code of
CYPRUS: Cyprus has a comprehensive
conduct to avoid revealing the identity of their
anti-money laundering system. The review did,
jurisdictions.
The lack of a stringent scheme to apply
new rules of customer identification for pre-
clients. International co-operation has
been marked by long delays and restrict-
“The lack of a stringent scheme to apply new
existing accounts is also a source of concern.
ed responses to requests for assistance
rules of customer identification to pre-existing
The new rules for customer identification ver-
and there is no room to co-operate out-
accounts is also a source of concern.”
ification were introduced in Gibraltar in 1995,
Guernsey in 1999, Isle of Man in 1998 and
side of judicial channels.
This jurisdiction is a member of the
however, raise a specific issue of concern on
Caribbean Financial Action Task Force (CFATF),
customer identification in respect of trusts. The
Jersey in 1999.
MALTA: In an otherwise comprehensive
and has indicated, during the process of this
FATF welcomes Cyprus' intention to supervise
anti-money laundering system, the review raised
review, its commitment to follow the recommen-
lawyers and accountants when engaged in
only one major source of concern. This relates to
dations contained in the CFATF mutual evalua-
financial activities.
the Maltese system of nominee companies which
tion of 1997. At present there are several Bills
GIBRALTAR, GUERNSEY, THE ISLE
is an obstacle for the identification of the benefi-
pending in the legislative process that would
OF MAN & JERSEY: These jurisdictions
cial owners in offshore and onshore companies
address the weak points identified.
have comprehensive anti-money laundering sys-
although the nominee companies are licensed
BRITISH VIRGIN ISLANDS: The British
tems. All have in place a system for reporting
and regulated by the Malta Financial Services
Virgin Islands (BVI) is committed to implement-
suspicious transactions. Where the underlying
Centre. The FATF urges Malta to accelerate the
ing solid legislation and regulatory measures
criminal conduct is drug trafficking or terrorism,
phasing-out of the nominee company system.
7