PLANNING IMPLICATIONS OF GLOBAL TRANSPARENCY AND TAX POLICY TRENDS. Philip Munro, Withers LLP

Transcription

1 PLANNING IMPLICATIONS OF GLOBAL TRANSPARENCY AND TAX POLICY TRENDS Philip Munro, Withers LLP

2 Philip Munro Partner Withers LLP, London (previously Withers Hong Kong and Withers Khattarwong, Singapore) Contact: Tel: +44 (0)

3 Planning solutions for clients that may have been previously considered will often no longer be appropriate in light of Governmental policies that impact on 'tax planning'. Further, transparency initiatives may mean that planning will need to be undertaken with an understanding that aspects will be disclosable. Solutions need to be developed in light of the new environment in which practitioners are operating. 1. Changes that specifically impact on the tax planning environment 2. Wider changes that are relevant in this context: specifically, (A) (B) international mobility (our clients move faster and further) technology and social media. Social and cultural developments how arrangements are seen, and what clients are looking for.

4 WHERE ARE WE ON TRANSPARENCY? FATCA (gave us the concepts of, and terminology for ) CRS Beneficial ownership - registers

5 FATCA (FOREIGN TAX COMPLIANCE ACT) US legislation which was enacted as a component of the Hiring Incentives to Restore Employment Act of FFIs to register during 2014; withholding tax provisions now in effect. FATCA is designed to identify to the US Government US persons' ownership in US persons' control over, non-us passive assets ('inbound disclosure'). Inbound disclosure is accomplished through classifying non-us entities as either foreign financial institutions ('FFIs') or non-financial foreign entities ('NFFEs'), and requiring FFIs and certain NFFEs to disclose US persons who have beneficial ownership interest in or control over such entities. To encourage global compliance, the US has entered into a number of bilateral information exchange agreements pursuant to which it would accept certain obligations. These agreements are known as 'inter-governmental agreements' or 'IGAs'. With certain so-called reciprocal IGA jurisdictions, FATCA also seeks to identify such IGA jurisdiction's taxpayers' financial assets in the US's possession ('outbound disclosure') to transfer such information to the relevant non-us IGA jurisdictions.

6 COMMON REPORTING STANDARD The Standard for Automatic Exchange of Financial Account Information, developed by the OECD and applicable to clients and Account Holders of banks and other financial institutions Disclosed information includes; Name Place/date of birth Tax identification number Bank account details Account income/withdrawals/balance Trusts/foundations holding Passive NFEs - details of Controlling Persons RFI trusts and foundations to report anyone with a Equity Interest in the structure Early adopters to make their first exchange in September 2017

7 BENEFICIAL OWNERSHIP (1) The European Union s Fourth Anti-Money Laundering Directive requires EU members states to adapt and update their anti-money laundering laws by 26 June 2017: Corporate and legal entities required to maintain accurate information on their beneficial ownership The information must be provided to the applicable government Each member state to hold information in a central register accessible to any person or organisation that can demonstrate a legitimate interest Definition of Beneficial Owner almost identical to Controlling Person and Equity Interest under CRS

8 BENEFICIAL OWNERSHIP (2) UK to implement regulations in June 2017, establishing a private register for beneficiaries of trusts which pay tax in the UK PSC ( persons with significant control ) regime already in existence through the Small Business, Enterprise and Employment Act 2015: Details of individuals who own/control more than 25% of UK company are shared on a PSC register Proposal for a beneficial ownership regime for foreign entities owning UK residential property Introduction of similar register Cayman Islands; private, but still an obligation to disclose

9 WHAT ARE THE POLICY TRENDS? Transparency: tax authorities want full visibility through automatic exchange of information Privacy Perception Substance

10 PRIVACY (1) CRS relies on the assumption that tax authorities will use data in a benign fashion many jurisdictions lack the mechanisms to adequately protect data Data in the Panama Papers was used by the media with little regard for exposing the private information of those named Dawson-Damer v Taylor Wessing

11 PRIVACY (2) Does the offshore label automatically denote tax non-compliance? 'Prime Minister's dirty secret: Leaked Panama Papers say David Cameron's dad paid no tax for three decades DAILY RECORD 'Panama fund run by David Cameron's dad 'used bishop middle-man to avoid UK tax for 30 years DAILY MIRROR 'Cameron family fortune made in tax havens THE GUARDIAN

12 CRIMINALITY AND THE CORPORATE What was considered individual, is increasingly treated as corporate In the UK, there has been an obligation to disclose tax avoidance schemes since 2004 Soon to be a new offence of failing to prevent tax avoidance contained in the Criminal Finances Bill It will be an offence to prevent a person from acting on behalf of a corporation to facilitate criminal tax evasion; a measure targeted at both banks and professional advisors

13 SUBSTANCE The OECD s movement against BEPs has not happened in a vacuum: Developed countries moving away from artificial strategies to obtain double tax treaty advantages Jurisdictions introducing new tax regimes to phase out double tax treaty benefits

14 THE IMPACT OF TECHNOLOGY Mass leaks: Portcullis sells companies like Victorinox sells knives, it would be ridiculous to blame Victorinox because one of their knives is used to commit a crime Individual leaks Media publication Mistakes

15 THE RESPONSE What can we take away from these trends and how do we conduct ourselves in the information age? A flight to quality; good advisers working with good fiduciaries to produce tailored structures

16 TECHNOLOGY Information security: Consider fiduciaries data protection capability where are servers based? Encryption of laptops and mobile devices Use of flash drives Connecting to public Wi-Fi for client work Care of documents handling: not always secure; consider encryption technology Where are documents and KYC sent and processed in practice? Trust deeds: Should these be stored/shared electronically? Risk of Courts giving preference to disclosure (Dawson-Damer) Should documents be kept offshore?

17 TRANSPARENCY CRS/AML requirements will expose a criminally non-compliant client who has relied on overseas accounts to evade taxes. Adverse consequences of exposure could now affect the client s advisers, bankers and fiduciaries: Try to utilise good quality fiduciaries to ensure accurate reporting Assume the worst and plan on the basis of possible exposure Consider the narrative Structures with commercial rationale, not purely tax advantages

18 STRUCTURING (1) Concerns of negative implications by association, i.e. Mossack Fonseca (?) Trusts/foundations sold off the shelf may no longer be suitable; clients should start with a blank canvas Is a structure strictly necessary? Can planning be achieved through wills, testamentary trusts and shareholder agreements? If trusts are considered too tax negative, alternative options might include the Guernsey and Jersey Foundation The Cayman Foundation Company can exist during the founder s lifetime with or without shares and with membership rights used to create a succession planning vehicle a company/foundation fusion

19 STRUCTURING (2) CRS need not be highly invasive: 100+ CRS states; 196 countries in the world: who has not signed up? Reporting generally much better if trusts (and entities) are FIs; a sophisticated fiduciary will make companies into investment entities Consider the settlor: is the settlor living and where does the settlor reside? Beneficiaries are not always reportable; consider the beneficial class for a Passive NFE or bank in the jurisdiction the beneficiaries live in Protectors are reportable; a professional protector might be most suitable Jurisdictional arbitrage; participating states will apply the OECD s framework differently to their own jurisdictions, e.g. is the state a MCAA participant or a bilateral participant?

20 PERCEPTION CRS; the great leveller? Going forwards: (1) Offshore jurisdictions, with strong regulatory infrastructure and which are market accepted; and (2) Nearshore/midshore jurisdictions, with benign tax regime that are not associated with tax planning: Hong Kong/Singapore both with territorial tax systems The UAE the DIFC can be a platform for family offices/funds/trustees New Zealand a popular choice for trust planning Potential to combine these options; PTCs in the DIFC and Hong Kong with administration outsourced

21 FLEXIBILITY & PORTABILITY The need to be able to respond; to exit a jurisdiction or tp terminate a service provider Ensure trusts have sensible mechanisms to change trustees and/or governing laws Winding up/migrating companies comes with wider implications

22 CORPORATE PLANNING Perfectly viable but actually requires substance: Considerations for corporate planning; companies are not necessarily portable and changes to the corporate structure can carry risks Entities formed to take advantage of a treaty positions should factor in exit implications Substance is required to truly obtain tax treaty benefits

23 RESIDENCY & CITIZENSHIP Non-residency for individuals is viable: The fiscal nomad; not acknowledged in the OECD s framework but jurisdictions will need to recognise it (e.g. Singapore) Aided by increasingly objective residency tests, private air travel etc. Jurisdictions still want to attract the wealthy: UK made remittance basis available for 15 years for individuals non-uk domiciliaries In planning, take care to ensure no exit tax implications and previous fiscal residence is not broken Alternative citizenships; second passport options benefit mobility and portability (e.g. Malta, Cyprus, St. Kitts)

24 IT IS NOT ALL TAX Political/international risk to assets Avoiding private litigation Divorce risk

25 PROTECTING ASSETS INTERNATIONALLY In politically uncertain times, protecting assets is key. Increasing use of entities that can benefit from the government-togovernment protection of BITs (bilateral investment treaties) 140 countries have concluded over 1000 BITs. The UK, for example, has signed 106 treaties; 96 are in force Terms of BITs vary, but some common elements are: Protection from discriminatory expropriation of property Entitlement to compensation in event of government seizure of assets Protection for repatriation of funds with more currency flexibility Reference for disputes to an international tribunal BITs provide a restraint on governments contemplating restrictive treatment

26 PRIVATE LITIGATION Creditors claim are not always avoidable, but good planning to segregate assets can protect wider family wealth: Contain trading businesses or investments within limited liability vehicles such as a company, limited liability partnership or LLC Segregate, so no wider family investments are held within vehicles, keeping balance sheets as low as possible Give different vehicles different ultimate owners; consider favourable asset protection regimes if using a trust as ultimate owner

27 DIVORCE RISK The nuclear weapon in succession planning? Consider residency where are family members at risk of divorce habitually resident? Directly held assets are more at risk than those held in structures Divorce regimes in some jurisdictions do not consider assets held in trust English courts only have power to vary nuptial trust Trusts set up for future generations (with no spouse in the beneficial class) may not be nuptial A trust might be argued to be a resource but drafting, letters of wishes and trust administration can protect it from being 100% available for distribution Pre/post-nuptial agreements, though not always binding, can be a persuasive safeguarding tool