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News Last month, a panel at the World Economic Forum in Davos, Switzerland
said that companies who pay little or no tax in large, developing economies
are keeping tax rates high. The
panel on business regulation and taxation entitled "How Red is Your Tape?"
examined the so-called informal sector or black economy, which includes
companies that evade their taxes. It encouraged legitimate businesses
to lobby governments to move faster in bringing the black economy into
the legitimate economy. Such a move could result in lower corporate tax
rates overall as the tax burden is more equally distributed across all
businesses. The panel suggested incentives such as phasing in full tax
payments while informal companies adjust. High levels of tax evasion put
more pressure on legitimate corporate taxpayers to make up the shortfall.
Panel members included the Brazilian finance minister, Guido Mantega,
the secretary-general of UNCTAD, Supachai Panitchpakdi, who was director
general of the WTO from 2002 to 2005 as well as Domenico Siniscalco, vice-chairman
and managing director of Morgan Stanley in the UK. Figures
from one panellist indicated that 70% of workers in the BRIC countries
of Brazil, Russia, India and China fell outside government control and
do not pay any taxes at all. The
panel revealed that, in 2003, the informal economy accounted for 42% of
Brazil's GDP. This is a significant increase from 1990 when it stood at
32%. In Russia, the total was 49%, against 38% in 1990. It accounted for
26% in India, up from 21% in 1990, and for 16% in China, against 11% in
1990. In India, according to another participant, 43% of the workforce is in
the informal sector, which accounts for 47% of the country's exports. The
panel did concede that gathering precise data in many countries is difficult,
if not impossible. It identified tax as a key driver in the growth of
the informal economy. One panellist claimed that, in a BRIC country, a
company conforming to all tax regulations can expect to pay around 80%
of its annual profits in tax. Other
panellists said that countries are hampered in development plans and in
creating education and health programmes, because large parts of their
economies are outside the taxation system and provide no revenue to government
coffers. A
debate running alongside the panels, entitled "Make Green Pay", looked
at the connection between growing environmental concern and taxes. It
discussed whether a global carbon tax would do more harm than good. Nicholas
Stern, head of the UK's Government Economic Service within Treasury, argued
against the motion while Jose Goldemberg of the Institute of Electronics
and Energy in Brazil supported the idea. The audience voted on the debate
with 36% saying that a carbon tax would do more harm than good. The
UK will be the first western country to introduce legislation to permit
banks to sell sukuk or "Islamic bonds". The Finance Bill 2007,
to be published alongside the Budget in March or April, will include legislation
to enable companies to issue bonds that do not pay overt interest. The
reform will allow issuers of sukuk to offset the payments they make on
these bonds against their corporate tax bills, making it more attractive
to use these instruments. At
present, companies can offset interest payments against profits for regular
bonds. However, they cannot presently do this with sukuk because payments
relating to these vehicles are not defined as "interest" but
rather as "profit" to respect Islamic sensibilities. The
provisions could be decisive in encouraging Islamic investors to move
some of their vast wealth to the City from other centres such as the Dubai
Stock Exchange, which is now the world's largest for Islamic bonds.
Spain's
new Tax Fraud Prevention Act, passed last November, will become law when
the official gazette is published. The
counter-fraud measures for foreign entities revolve around the concept
of effective exchange of information, in line with the current international
trend. Two
such measures will have a significant impact on a particular type of structure
that has been widely used by foreign investors in the Spanish real estate
market involving offshore entities investing through intermediate Spanish
companies. The
first is that the shares in the Spanish companies will be attached to
tax liability arising on the capital realised on the disposal of the shares
in the non-resident entities. The
second one is that entities, but only if resident in a "tax haven"
or in a null-tax territory, shall be treated as Spanish residents, unless
it is proved that they hold a larger amount of assets in other countries
of if they satisfy the standard business purpose test. A number of technical uncertainties can be identified such as whether
the attachment will apply when shares in the Spanish company are disposed
of, on which day or period of days the test for the second measure is
to be made, and whether entities that become resident under this new principle
will be deemed to have transferred their residence abroad if they acquire
a majority of non Spanish-based assets. Clearly,
real estate has always been a visible tax structuring object in most jurisdictions,
in particular, countries such as Spain, and too visible for the Revenue
to ignore. The
Swiss canton of Zug has voted in favour of a revision of the Cantonal
Tax Law. The
basic capital tax rate for holding companies has been reduced from 0.0075%
to 0.002% resulting in an effective tax rate of 0.0031%. In return, the
minimum capital tax was increased for holding and mixed companies from
CHF150 to CHF250. Zug
has reduced the effective double taxation of dividend income by 30%. This
reduction applies to distributed profits of companies which are tax resident
in Switzerland and is subject to meeting one of the following conditions: In
addition to the above, the following amendments came into effect on 1st
January: On
1st February, Guernsey Financial Services Commission introduced a streamlined
consent process for registered closed-ended funds and removed the need
for a principal manager in respect of regulated open-ended schemes. The
changes emanate from a root and branch review of investment funds legislation
and are part of a number of recommendations made by the working party
- chaired by leading Guernsey advocate, Peter Harwood - in its subsequent
report (see "Guernsey fund infrastructure gets root and branch review" Offshore Investment, Issue 172). The Harwood Report proposed that regulation should focus on the licensed
Guernsey administrator, reducing the number and scope of funds that will
be regulated directly. It also recommended that changes be made to facilitate
Guernsey service providers to administer non-Guernsey funds. The changes to streamline the consent process for registered closed-ended
funds and remove the requirement for regulated open-ended funds to have
a principal manager are the first of the Harwood Report's recommendations
to be implemented, with the remainder set to come on-stream during 2007. Funds
under management and administration in Guernsey reached a new high of
more than GBP120 billion at the end of September 2006 - a rise of 31%
year on year. The
Bermuda Companies Amendment Act 2006, passed at the end of last year,
is expected to come into force shortly. It incorporates a wide range of
improvements to legislation which essentially dates from 1981, in response
to a request from the minister of finance that the law should be updated
"to meet the demands of business in the twenty-first century". Key
aspects of the new legislation include: Currently,
Bermudan companies are usually formed by registration under the Companies
Act 1981, as amended, taking between two and five days depending on whether
the minister's approval is required. An application for registration is
made to the Bermuda Monetary Authority (BMA), giving details of the proposed
beneficial ownership and the proposed name is reserved with the Registrar
of Companies; some sensitive words are not permitted, including "bank".
When business requirements are unusual, a company can be formed by Act
of Parliament, which takes about two months. Local
companies must be 60% owned by a Bermudian and they can trade within the
domestic economy. Two directors are required who cannot be corporate but
need not be Bermudian; a secretary is required, does not have to be local,
and can be corporate. At least one shareholder is required and nil-value
shares are not permitted. The
minimum capital was previously USD12,000 and there is an annual fee related
to the authorised capital, which does not have to be issued. Accounts
must be kept at a locally registered office along with the share register
and minutes of shareholders' and directors' meetings although the accounts
are not open to inspection. The share register, register of directors
and officers, certificate of incorporation and memorandum and articles
of association are all publicly accessible. Shelf companies are not obtainable
but old companies are available on occasion. Following extensive consultation between Bermuda's private and public
sector, new primary legislation - the Investment Funds Act 2006, dealing
with the regulation and supervision of investment funds (formerly referred
to as collective investment schemes) and regulating fund administrators,
has also received the approval of Bermuda's legislature. Although the
new act, which will replace The Bermuda Monetary Authority (Collective
Investment Scheme Classification) Regulations 1998, received the assent
of the governor on 28th December 2006, a commencement date has yet to
be announced by the minister of finance. The act makes provision for the
BMA to make fund rules and fund prospectus rules and it is anticipated
that the commencement date of the act will coincide with these rules being
finalised by the BMA, expected to be by no later than the end of the first
quarter of this year. |
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