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UK SIGNS TIEA WITH BERMUDA & BERMUDA STOCK EXCHANGE GAINS RECOGNISED STATUS |
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On 4 December 2007, Bermuda and the United Kingdom signed a new tax information exchange arrangement (TIEA) which will allow both governments to enforce their domestic tax laws by exchanging, on request, information relevant to a tax matter covered by the arrangement.
This is the first comprehensive TIEA signed by the UK and covers both direct and indirect tax matters and follows the OECD Model Agreement on Exchange of Information on Tax Matters. Bermuda already has TIEAs in force with the United States and Australia.
The TIEA will come into force in 12 months time, provided both countries have completed their legislative procedures to give effect to the arrangement.
The UK’s HM Revenue and Customs (HMRC) also announced that with effect from 4 December 2007, it has designated the Bermuda Stock Exchange as a “recognised stock exchange” under UK tax law, and will also be regarded as a recognised stock exchange for Inheritance Tax purposes. It extends to the entire Bermuda Stock Exchange therefore; securities listed will meet the HMRC interpretation of “listed” as set out in the Income Tax Act 2007 (as amended by Schedule 26 to the Finance Act 2007). |
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INDIA & ICELAND SIGN DTAA |
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On 23 November 2007, India signed a Double Taxation Avoidance Agreement (DTAA) with the government of Iceland. The aim of the agreement is the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
The agreement provides for the taxation of dividend, interest, royalties and fees for technical services – both in the country of residence as well as the country of source. However, the rate of tax in the country of source shall not exceed 10% of the gross amount of payment in case the beneficial owner of the payments is a resident of the contracting state. It also provides that capital gains from alienation of shares of a company shall be taxable in the country where the company is resident.
It will come into force on a date to be notified. |
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NEW TAX SURVEY FINDS IMPROVED BUSINESS TAX SYSTEMS |
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According to a study by the World Bank, in association with PricewaterhouseCoopers, (Paying Taxes 2008 – The Global Picture), 31 economies made it easier to pay taxes in 2006/07 and reducing corporate income tax rates was the most popular reform implemented in 27 economies. Major revisions in tax codes were made in Moldova, Mongolia, Sierra Leone, Syria, Turkey, and Uruguay.
However, differences were apparent not only in tax rates but also in the administrative burden. In Sweden, corporate income tax, VAT, labour contributions, and property tax are filed on a single form online, whereas in the Republic of Congo, a company must make 89 payments a year, spend 106 days and pay 65.4% of its profits. It also has to fill out 50 pages of forms for corporate incomes taxes, 50 for labour taxes and contributions, and 36 for consumption taxes.
The Maldives was rated the easiest country in the world in which to pay taxes, levying only one small tax on domestic business in the manufacturing sector (the property transfer tax) and only hotels and banks are taxed on their property. The remaining top ten performers included: Singapore, Hong Kong, UAE, Oman, Ireland, Saudi Arabia, Kuwait, New Zealand, and Kiribati. The bottom five countries were: Venezuela (who increased the tax burden and introduced three new taxes), Central African Republic, Republic of Congo, Ukraine, and Belarus. |
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FSA OVERHAULS FUNDING ARRANGEMENT FOR COMPENSATION SCHEME |
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The UK Financial Services Authority (FSA) has confirmed its plans to reform the funding model for the Financial Services Compensation Scheme (FSCS) which compensates victims of financial fraud or mis-selling. It will operate from 1 April 2008 and will increase the overall financial capacity of the scheme up to a maximum of GBP4.3 billion per year.
The new model offers a “widening circle” of funding under which compensation costs emerging from a particular sub-class of firms will be met by that sub-class alone up to its annual threshold, after which higher costs are shared more widely across the industry. The scheme will be separated into five broad classes: (1) life and pensions; (2) investments; (3) general insurance; (4) deposits; and (5) home finance. Each broad class will have two sub-classes (except deposits) and above these will be a general retail pool. Initial costs will fall to the relevant sub-class until the agreed threshold is reached and then will move onto the broad class, and finally to a general retail pool. The last level is only expected to be activated in the event of a significant default or series of defaults.
However, large UK banks have objected to the cross-subsidisation mechanism arguing that they should not have to pay disproportionately for the failures of others. |
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NEW MAURITIUS INSURANCE ACT
IN FORCE |
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The Insurance Act 2005 was proclaimed and came into force on 28 September 2007 along with the Insurance (Amendment) Act 2007 which amends the Insurance Act 2005. The Insurance Act 1987 has been repealed.
The new Act provides for the implementation of the International Association of Insurance Supervisors’ (IAIS) Standards and Core Principles and concentrates on specific regulatory issues connected to capital adequacy, solvency, corporate governance, early warning systems and the protection of policyholders and the financial system at large. The Insurance (Amendment) Act removes certain administrative responsibilities on branches of foreign insurers operating in Mauritius and offers greater flexibility in exceptional circumstances. |
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DFSA ANNOUNCES LANDMARK HEDGE FUND CODE OF CONDUCT |
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After several months of consultation with industry professionals and international regulators, the Dubai Financial Services Authority (DFSA) has issued its new Hedge Fund Code of Practice (Code) and is the first of its kind to be issued by a regulator. The Code, issued on 11 December 2007, sets out best practice standards for operators of hedge funds in the Dubai International Finance Centre (DIFC) and addresses some specific risks that are associated with hedge funds.
There are nine high-level principles in the Code:
Principle 1 - An Operator of a Hedge Fund should have, or have access to, appropriate skills and resources to conduct the operations of the Fund.
Principle 2 - An Operator of a Hedge Fund should develop and implement a robust and flexible investment process to suit the objectives and risk profile of its investment strategies.
Principle 3 - An Operator of a Hedge Fund should have systems and controls to mitigate trading related risks such as price overrides and failed trades.
Principle 4 - An Operator of a Hedge Fund should have adequate back-office systems and controls to avoid backlogs in trade confirmations.
Principle 5 - An Operator of a Hedge Fund should have appropriate measures to identify and manage portfolio risks.
Principle 6 - An Operator of a Hedge Fund should have adequate valuation policies and procedures to ensure integrity, accuracy and timeliness of the valuation process.
Principle 7 - An Operator of a Hedge Fund should not have arrangements under which any material benefits or concessions are provided to some investors where it would be unfair to any other investors in the Fund.
Principle 8 - An Operator of a Hedge Fund should have adequate systems and controls to deal with market sensitive information.
Principle 9 - An Operator of a Hedge Fund should not invest in an underlying Hedge Fund without appropriate due diligence.
To view the Code online, visit the DFSA website: http://www.dfsa.ae. |
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LIBYAN MINING COULD CHALLENGE OIL ON NET INCOME |
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While most income is gained from the petroleum industry in Libya, much more wealth may lie buried in this sandy country. Analysts speculate that some day mining sales may outstrip oil receipts. Increased interest in the sector surrounds the fact that many of the Libyan mining fields have not been thoroughly prospected, meaning that investors could quite easily witness their initial stakes skyrocketing, as the key areas become better explored and the infrastructure developed. The regime of Col. Muammar Abu Minyar al-Qadhafi has only recently become accepted internationally and Washington recently ended the trade embargo that lasted almost two decades. The result was that many Libyan industries were not capitalised in the manner they should have been, and so many markets lacked development that can now take place.
Vast mineral resources found in the Alaska-sized country include iron ore, gypsum, salt and limestone. With a per capita average income of USD12,000, the 7 million residents could be worse off. However, considering a third of the people are unemployed, it is clear that the Libyan economy is not operating at maximum efficiency. Yet, the country has developed a very modern foreign ownership law featuring open bidding on mineral rights, and allowing investors to directly enter, or in partnerships. The National Mining Corporation is still in the midst of the first country-wide study of the sector. While state revenues of 90% are derived from oil extraction, the fact that Libya has the world’s largest gypsum deposits, vast quantities of limestone, and other important minerals makes this a propitious time for it to re-enter the legal global economy, and for business people to consider further investigating its many investment opportunities. |
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HMRC REVEALS PLANS TO INTRODUCE SECOND OFFSHORE AMNESTY |
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Her Majesty’s Revenue and Customs (HMRC) is currently receiving the final payments from its Offshore Disclosure Facility (ODF) which ended on 22 June 2007, with full payment of any tax due to be made on 26 November 2007. HMRC made requests from five UK high street banks to hand over details of approximately 400,000 offshore accounts in its campaign against offshore tax evasion. A total of GBP400 million was paid into the government coffers by the 26 November deadline as taxpayers sought to take advantage of the 10% penalty cap on all unpaid taxes over GBP2,000, considerably less than the usual 30%. However, this amount is well below the estimated GBP1.75 billion. The remaining individuals who did not respond (30,000) are now under investigation and may face prosecution on the basis that HMRC believe they should have made a disclosure, with 1,000 of those cases thought to involve large sums. Prosecutions are set to begin as soon as April 2008.
HMRC is now planning to launch a second offshore amnesty targeting a further 170 banks and other financial institutions in order to cast its net wider but no details have been released on when or how this ODF will operate. Some experts have criticised this move as a weakening of the message that errant taxpayers only get one chance to put their affairs in order. |
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KUWAIT CUTS TAXES FOR FOREIGN COMPANIES |
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Kuwait’s Parliament adopted a long-awaited law on 26 December 2007 that will cut tax on net profits of foreign companies to 15%. This legislation which was passed by a 37-17 vote, and which has been under consideration for several years, replaces a 1955 law under which foreign companies were required to pay up to 55% tax. The law will apply to foreign companies operating in the emirate and to Kuwaiti firms which represent foreign firms exclusively.
The Assembly had passed the Foreign Direct Investment law in 2001 which provided key incentives to foreign investors such as a ten year tax holiday; however it failed to attract foreign investments due to the high taxes under the 1955 law. This was evidenced by recent foreign investment statistics which showed that Kuwait attracted inflows of USD300 million compared to USD18.7 billion for the United Arab Emirates. It is hoped that this new law will revitalise the economy and remove many of the obstacles that have prevented foreign investment in this Gulf state.
The law will come into force once it has been approved by the emir of the state, Sheikh Sabah Al-Ahmad Al-Sabah. |
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US TREASURY ANNOUNCES THREE PROTOCOLS & ONE NEW TAX TREATY NOW IN FORCE |
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The US Treasury Department declared that three protocols and one new tax treaty and protocol have entered into force. The three protocols amending existing tax treaties with Germany (signed on 1 June 2006), Denmark (signed on 2 May 2006), and Finland (signed on 31 May 2006), and the new income tax treaty and protocol with Belgium (signed on 27 November 2007) entered into force on 28 December 2007. This followed exchanges in Washington DC of required notifications and instruments of ratification.
The protocols and tax treaty all generally apply to tax years beginning on or after 1 January 2008, however, certain provisions of the protocols with both Germany and Finland are retroactively effective on or after 1 January 2007. |
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CHINA INCREASES FOREIGN INVESTMENT CAP & EXPANDS CHANNELS FOR CHINESE TO INVEST OVERSEAS |
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China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), announced that the ceiling on foreign investment in Chinese securities by so-called qualified foreign institutional investors will be raised to USD30 billion from USD10 billion. However, it could take several months before institutional investors secure fresh quotas and the exact date for when the change will take place has not yet been revealed.
SAFE also reaffirmed its intention to allow Chinese citizens to invest more overseas under the Qualified Domestic Institutional Investor programme. Under this scheme, residents will soon be able to purchase shares in London through their local banks under an agreement between the China Banking Regulatory Commission and British regulators. A similar agreement is also being negotiated with US regulators to extend the scheme to New York markets. |
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CYPRUS BLACKLISTED BY RUSSIA |
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The Finance Ministry in Russia has placed Cyprus (and other jurisdictions) on a blacklist of uncooperative territories in order to prevent Russian companies from setting up offshore companies in Cyprus and repatriating income back to Russia tax free.
The blacklist is part of an amendment to the Russian tax code which came into effect on 1 January introducing a tax exemption on the repatriation dividends from foreign subsidiaries of Russian companies under certain circumstances. Subsidiaries based in territories and countries on the blacklist were not included in the exemption.
The draft list was first published on 18 June 2007 and included 59 jurisdictions such as the Cayman Islands, BVI, Belgium and Ireland, however, the list was amended and all the US territories, Belgium, Ireland, Luxembourg, Portugal, Barbados and others were removed leaving the count standing at 41.
Tax experts have played down the impact of this development claiming that there are many loopholes which can be employed since foreign companies investing in Russia through Cyprus subsidiaries are exempt from the rule. Nonetheless, the Cypriot government is making overtures to Moscow regarding the possibility of Cyprus’s removal from the blacklist. |
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NIGERIA’S FUTURE BETTER AS OIL AND BANKS ON FIRMER FOUNDATION |
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Rising on the cusp of record oil profits, the Nigerian economy is now a sizzling Foreign Direct Investment (FDI) destination, attracting USD6 billion in 2006. Sparking the economic renaissance was reception of USD32 billion in debt forgiveness in 2006 by the Paris Club (which is an informal group of financial officials from 19 of the world's richest countries, which provides financial services such as debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors), and now reserves top almost USD50 billion. Financial institutions also went through a season of mergers, reducing the number of banks from 89 to less than 30 in 2005, helping strengthen the sector. The outlook now appears so rosy analysts speculate Nigeria can become a top 20 economy by 2025, a claim that a few years ago would have seemed ridiculous, given the amount of problems the nation suffered. Aiding financial sector liquidity is the hefty petroleum haul, which was USD46 billion in 2006, and now bank shares are trading at 20 times expected 2008 earnings, allowing Nigerian growth to hit 8% in 2006, and forecast the same for this year.
Helping infuse stability and confidence to the markets and allowing outside creditors to take Nigeria seriously, is the new President, Umaru Yar’Adua, who after election in April 2007, is already making his reputation on toiling to subtly create a more transparent, honest government. Much work remains in a country still notorious for audacious acts of graft, such as the famed “Nigerian Letters” that were once mailed, but today are emailed globally. Now, internal bank insurance and international loans are secured through oil derived letters of credit, greatly helping attract the flow of FDI funds now pouring in. Yet, one must still be cautious while transacting business in Nigeria, which one analyst compared to “doing business in the former Soviet Union.” Despite any enticing appearance, no rush should be made to broker any deal without personal knowledge of all participants. |
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