Paradise Lost? John Riva, Jason Laity and Chris Lowe 30 November 2017
All hell broke loose Paradise Lost, Book IV Corporate Criminal Paradise Papers EU Tax Haven List UK Trust Register Requirement To Correct Offence What will it all mean? CRS update 2
Impact of Paradise Papers? Focus on anti-tax avoidance EU List on noncooperative jurisdictions for Tax Matters Public beneficial ownership register Substance? 3
Jersey s response Jersey does not want abusive tax avoidance schemes operating in the island and expects financial services providers to abide by a voluntary code to say they will not take on this kind of business. If there proves to be such business, we will consider how to strengthen our arrangements, if necessary by amending our legislation to introduce a substance test. It is not satisfactory for a foreign registered company to claim tax residence in Jersey without demonstrating a substance here. 4
Voluntary Code Guidance Notes Abusive Tax Scheme 1. Foreword 1.1 Whilst Jersey Finance Limited ( JFL or we ) believe in tax competition, and view tax planning as an appropriate response to operating cross-boarder, we do not support the use of abusive tax schemes designed to frustrate the will of national parliaments. 1.2 On 31 July 2014, Jersey s Chief Minister, Senator Ian Gorst, issues a statement on abusive tax schemes reiterating that there is no wish or need to accommodate, or give encouragement, to those who seek to involve Jersey in such schemes. 1.3 We fully support the position advanced by the Government of Jersey and as the representative body for the finance industry on the Island encourage our membership to do the same. To assist our members in their ability to align with these principles we have prepared supplementary guidance. 1.4 Whilst recognising that most members will already have internal policies on the topic JFL expect that, as part of the terms of each member s subscription to JFL, each member agrees to read and commit to comply with this guidance. 5
Voluntary Code (continued) 2. Business relationships and practice 2.1 Members should act lawfully and with integrity, expecting the same from their own employees and clients, and other parties with whom they interact. 2.2 JFL expects that members should: Be fully compliant with legal and applicable regulatory requirements and, in their behaviour, comply with the professional and ethical standards set by their professional oversight / supervisory body if applicable. Not entertain arrangements that evade tax. Not knowingly engage in any business activity that reflects adversely on the good reputation of Jersey in the context of the government of Jersey s statement. [My emphasis] 6
Voluntary Code (continued) 3. Provision of tax advice 3.1 Whilst recognising that there is limited tax advice given from this jurisdiction members that do provide tax advice should inform clients of the appropriate options available to them under the law. However there are certain types of abusing arrangements which are regarded as controversial and contrived, designed with the intention of frustrating the will of national parliaments. JFL consider members should not propose or advocate implementing such schemes nor recommend them to clients. 3.2 JFL expects that members providing tax advice should: Not advise clients to enter into transactions with the main purpose of securing a tax advantage clearly contrary to the intention of the respective jurisdiction s parliament in enacting the relevant legislation. Take into account prevailing public interest considerations and of any potential reputational risk to themselves, their clients and Jersey. Not exploit social policy legislation (for example, tax reliefs for charities). 7
Voluntary Code (continued) 4. Transparency and disclosure 4.1 Members should support a relationship with tax authorities where all parties behave with mutual trust and respect, which will enable constructive dialogue and responsiveness by all parties. 4.2 As part of JFL s international promotional activities, JFL seeks to demonstrate Jersey s quality proposition as a jurisdiction of substance and transparency. Members acting on this guidance will underpin and support the Jersey quality message. 8
Voluntary Code Supporting notes 1 Definition of Abusive Whilst we have not sought to define abusive within this guidance the UK definition is set out below and may serve as a useful point of reference. Tax arrangements are abusive if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including: a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions; b) whether the means of achieving those results involves one or more contrived or abnormal steps, and c) whether the arrangements are intended to exploit any shortcomings in those provisions. 2 Scope It is expected that members will apply these guidance notes to income tax, corporation tax, capital gains tax and inheritance tax where applicable in the jurisdiction. 9
Previous data leaks and consequences Leaks Consequences HMRC access to banking data 2008 - Liechtenstein bank Offshore disclosure facilities UBS whistle-blower 2008-2009 FATCA 2014 - Lux Leaks TAXE Committee on Tax Rulings 2015 - Panama Papers Beneficial ownership register for companies incorporated in CDs and OTs 2017 - Paradise Papers Substance and? 10
TAXE Press Release: Economic and Financial Affairs, Taxation and Customs Commissioner The EU is the real changer "We are in a crucial phase that calls for swift action that goes beyond the tax transparency package. We need tax fairness in the EU and we need a true single market for taxation. Taxation should serve the interest of the EU. Member States have a major responsibility in getting the rules into place, as it requires unanimity in the Council." [Regarding the work of the OECD] the Commission wants to go further 11
ECOFIN adopts ATAP on 12 July 2016 Europe s Anti-Tax Avoidance Package 1. Anti-BEPS Directive 2. CbyCR (revised Administrative Co-operation Directive) 3. Tax Treaties 4. External Strategy (Tax good governance towards third countries) Legislative proposal Legislative proposal Recommendation Recommendation 12
External Strategy for Effective Taxation Proposal: Mechanism to evaluate Third Countries to determine whether they should be black listed" Should replace the Tax haven EU list Criteria based on whether third country abides by the concept of Tax Good Governance standards on tax transparency, fair taxation and anti-beps measures 13
External Strategy for Effective Taxation Three stage approach to listing: 1. Pre-assessment of all Third Country jurisdictions to determine their risk of facilitating tax avoidance, on the basis of a scoreboard of "indicators ; 2. Member States agree on a short list of Third Country jurisdictions, and launch the screening process and dialogue with these jurisdictions. Third Countries should be screened against clear and intentional recognised good governance "criteria". Other factors (including the level of development of the Third Country) will also be taken into account; 3. Following screening/dialogue process, the Commission will recommend Third Countries to be backlisted, and explain why. Member States endorse the final list in ECOFIN 14
Stage 2 Screening criteria 1) Tax transparency criteria Must have committed, and started the legislative process, to implement effectively the CRS, with first exchange in 2018 Must have in place effective exchange of information arrangements with all Member States by 2017 As from 2018, must have at least a largely compliant rating by the Global Forum with respect to CRS Must have at least a largely compliant rating by the GF with respect to OECD exchange of information on request Must have ratified the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters Future criterion: in line with international initiative on future global exchanges of beneficial ownership information Jersey s assessment??? 15
Screening criteria 3) Implementation of anti-beps measures Initial criterion: jurisdiction should commit by the end of 2017, to the agreed OECD anti-beps minimum standards and their consistent implementation - Addressing harmful tax practices - Tax treaty abuse - Country-by-Country reporting - Improvement in cross-border tax dispute resolution Future criterion: the jurisdiction should receive a positive assessment for the effective implementation of the agreed OECD anti-beps minimum standards. All members of the Inclusive Framework commit to implementing the minimum standards and participating in peer reviews. Jersey s assessment?? 16
Screening criteria 2) Fair taxation 2.1 The jurisdiction should have no preferential tax measures that could be regarded as harmful according to the criteria as per the Code of Conduct on Business Taxation 2.2 The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction Jersey s assessment?? 17
Concerns with Criterion 2.2 Jersey EU Member State Substance Profits 18
What constitutes real economic activity? In order to define criterion 2.2 Code principles are used to determine if the 0% rate is granted even without real economic activity and substantial economic presence: Real economic activity relates to the nature of the non-taxed activities Substantial economic presence relates to the factual manifestations of the activity that benefits from the non-taxation at issue By way of example, the following elements, taking into account the features of the industry/sector in question, will be considered: adequate level of employees, adequate level of annual expenditure to be incurred; physical offices and premises, investments or relevant types of activities to be undertaken. Whether there is an adequate link between real economic activity carried on in the jurisdiction and the profits which are not subject to tax Whether tax authority are capable (and are actually doing) investigations on carrying on real economic activity and exchange relevant information with other tax authorities 19
Example of a Substance Test Netherlands At least half of the total number of directors reside or are actually established in the Netherlands The directors have the required knowledge to perform their duties properly The entity has qualified staff for proper performance and recording of transactions entered into by the entity Board decisions are taken in the Netherlands The entity s main bank accounts are held in the Netherlands The bookkeeping takes place in the Netherlands The entity has properly complied with all tax reporting obligations The entity s registered office is in the Netherlands The entity has sufficient equity for the functions it performs, taking into account the assets used and risks run 20
Will a notification regime be necessary? The Code provides for rules of profit determination in respect of activities within MNE Groups to comply with internationally accepted principles, notably those agreed by OECD Do we need to include Transfer Pricing rules? With a notification and exchange regime for when thee rules depart from international norms/ Apply only to MNE Groups? Or a more enhanced CbC reporting regime for all companies? 21
Concerns with Criterion 2.2 Jersey EU Member State Substance Profits 22
Fund Structure Jersey EU Member State Fund Management Agreement Manager Directors No employees Outsource agreement Transfer Pricing for IA is based on cost plus model Investment Adviser Directors Large no of employees 23
Defensive measures against blacklisted jurisdictions The EU Commission agreed last year that work on exploring defensive measures at EU level should be completed in due time Defensive measures expected to be presented to the EU Council at the same time as when they agree the list There has been much speculation including: Withholding tax on payments Denying tax relief for payments CFC rules Limitation of participation examples Switch-over rule Reversal of the burden of proof Special documentation requirements Mandatory disclosure of tax intermediaries of special tax schemes with respect to cross-boarder arrangements Reputational and operational issues of doing business in blacklisted jurisdictions 24
Where are we now? November 2017: Letter received from Code Group - further steps to be taken in relation to economic substance All CDs and OTs Response ongoing commitment to the screening process, and to resolving any issues identified Commitment to dialogue with the CCG from early 2018 Commitment by the end of 2018. To what??? Code Group report presented on 5 December 25
To summarise Most leaks generally lead to change to international tax policies The Paradise papers would have strengthened the EU s resolve concerning the list on Uncooperative Jurisdictions for Tax Matters It is my view that Jersey will NOT be blacklisted We will work with the Code Group to see whether we can resolve the issues they may have on criterion 2.2 with the view of implementing any changes, where necessary, by the end of next year Substance test? Notification requirement? But 26
What about zero tax rate, especially after Brexit? 27
Gateway criterion? Within the scope specified in Paragraph A, tax measures which provide for a significantly lower effective level of taxation, including zero taxation, than those levels which generally apply in the Member State in question are to be regarded as potentially harmful and therefore covered by this Code. The absence of a corporate tax system or a nominal or zero rate is a possible indicator of lack of real economic activity but UK ensured that it was not an absolute criterion this may change when the UK leaves! 28
Requirement to correct ( RTC ) Jason Laity
Requirement to Correct Overview Failure to Correct Reasonable Excuse Actions Needed Requires taxpayers who have outstanding offshore tax noncompliance at 5 April 2017 to correct position by 30 September 2018 Non-compliance must involve an offshore matter (income, assets or activities outside UK) or offshore transfer (income received or transferred outside UK) involve Income Tax, CGT or IHT have been committed on or before 5 April 2017 Behaviour determines periods assessable and penalties - could be 4, 6 or 20 years (not extension to 5 April 2021) Penalties 200% (can be lowered but no lower than 100%) 50% additional penalty for seeking to avoid RTC For serious cases Up to a 10% asset based penalty on relevant asset (over 25,000 tax in a year) Naming and shaming (over 25,000 tax across all years) No penalty where taxpayer has reasonable excuse for FTC Advice disqualified if given by interested person, i.e. participated in avoidance arrangements or for consideration facilitated them Also disqualified if advisor did not have appropriate expertise, failed to take account of taxpayer s individual circumstances or was addressed to, or was given to, person other than the taxpayer Correct/Notify HMRC Take one of the prescribed actions to correct the position with HMRC (e.g. disclose and pay, or enhance disclosure if position uncertain) Take further advice Seek advice from a non-interested advisor re original advice this could provide a reasonable excuse If clients choose neither they risk being exposed to FTC penalties if tax liability is established post 30 September 2018 30
Corporate Criminal Offence ( CCO )
Overview of Corporate Criminal Offence Criminal tax evasion by a taxpayer (not simply noncompliance falling short of fraud) Criminal facilitation of that criminal tax evasion by an associated person of relevant body acting in that capacity Failure to prevent from committing the criminal facilitation act Effective now, but HMRC recognise may be 12-18 month roll out period, but should be rapid Should by now have at least considered risk assessment Associated Person is an employee, agent or other person who performs services for or on behalf of relevant body and associated person must act deliberately and dishonestly Where there is a UK tax evasion offence does not matter if relevant body or associated person is UK based or not offence will have been committed and can be tried by courts of UK. UK nexus only relevant for the foreign tax offence. (Only) defence Relevant body had put in place reasonable prevention procedures to prevent its associated person from committing tax evasion Revised HMRC guidance issued 1 September 2017 https://www.gov.uk/government/u ploads/system/uploads/attachmen t_data/file/642714/tackling-taxevasion-corporate-offences.pdf Otherwise - guilty of offence 32
Reasonable Prevention Procedures HMRC s 6 Guiding, Principles Assess exposure to risk and document relevant body s risk assessment and tax risk appetite Monitor and revisit preventative procedures and improve where necessary Monitor, Report & Review Risk Assessment Risk-based Prevention Procedures Identify and apply proportionate measures to prevent criminal facilitation of tax evasion including common elements in HMRC guidance Policies and procedures should be communicated, embedded and understood throughout the organisation, and possibly externally Communications Top level commitment Top-level management should be committed to and involved in preventing criminal facilitation of tax evasion Due diligence Apply proportionate DD procedures in respect of persons who will perform services for on on behalf of relevant body including review of contractual terms, disciplinary action for breaches, and whistleblowing procedures etc 33
UK trusts registration service ( TRS )
UK trusts registration service ( TRS ) Background Which trusts must register? Which beneficiaries are disclosed? Timelines Non public register driven by 4MLD available to law enforcement authorities, including HMRC Regulations at http://www.legislation.gov.uk/u ksi/2017/692/pdfs/uksi_2017069 2_en.pdf Draft (not final) HMRC guidance latest version 22 November https://www.step.org/sites/default/f iles/policy/trs_guidance_faq_- _22_November_2017.pdf Penalties in regulations are civil and criminal; guidance says proportionate penalty framework will be set out in near future Relevant trusts include those where trustees are non UK resident if the trustees receive UK income or have UK assets on which it is liable to pay certain UK taxes (IT, CGT, IHT, SDLT, SDRT) Trustees of taxable relevant trust (i.e. relevant trust in year in which trustees are liable to pay above taxes in relation to UK assets or UK income of trust) must register and disclose Revised guidance states trustees must register if there is look through to assets in underlying company; still needs clarifying re new IHT charges Beneficial owners and potential beneficiaries of taxable relevant trusts Settlor, trustees, beneficiaries, class in whose interest trust set up, and individual who has control over trust Potential beneficiary in regulations Any other individual referred to as a potential beneficiary in a document from the settlor in relation to the trust such as a letter of wishes Note revised HMRC guidance Beneficiary named separate from class must be disclosed Un-named, (and named?), or contingent, and part of class, disclose only when distribution made Special rules for EBTs Under existing SA rules, trustees must register by 5 October after end of tax year after liability to income tax or CGT first arises For 2016/17 no penalty if trustees of taxable relevant trust, not already registered, register and disclose before 5 January 2018 In subsequent years, or where the trust is already registered for self-assessment, must register and disclose by 31 January after the end of the tax year Notify any changes (other than value) or confirm no changes, by 31 January after end of tax year in which change occurred, if still a taxable relevant trust 35
Information to be disclosed Information in respect of trust Full name of the trust; Date on which the trust was set up; Statement of accounts, describing the trust assets and identifying the value of each category of the trust assets at the date on which the information is first provided (including the address of any property held by the trust) note not just UK assets; Country where the trust is considered resident for tax purpose; Place where trust is administered; Contact address for trustees; and Full name of advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust (subsequently limited to those assisting with registration process only). Information in respect of each beneficial owner and potential beneficiary Full name; NI number or unique taxpayer reference; If no NI or UTR the individual s usual residential address; If that address is not in the UK, either a passport or identification card number identification; Date of birth; and Nature of individual s role in relation to the trust. 36
Information to be disclosed Information in respect of corporate trustee (i.e. as beneficial owner) Legal entity s corporate name; Legal entity s UTR; Registered or principal office; Legal form of the legal entity and the law by which it is governed; The name of the register of companies in which the legal entity is registered; and The nature of the entity s role in relation to the trust Information in respect of individual trustee (i.e. as beneficial owner) Full name; NI number or unique taxpayer reference; If no NI or UTR the individual s usual residential address; If that address is not in the UK, either a passport or identification card number identification; Date of birth; and Nature of individual s role in relation to the trust. 37
Changes to the CRS post 30 June 2017 Chris Lowe
CRS changes post 30 June 2017 On 10 th October 2017, the States of Jersey States Assembly approved the Taxation (Implementation) (International Tax Compliance) (Common Reporting Standard) (Amendment) (Jersey) Regulations 2017. 3 changes came into force from 17 th October 2017 Regulation 1 (5) shall be substituted the following paragraph A word or expression used in these Regulations which is defined in the CRS has the meaning given in the CRS.. Regulation 5(1)(b) change in length of time records must be kept. 6 years beginning with the end of the year in which the requirements applied to the reportable accounts there shall be substituted the words at least 5 years after the end of the period within which the reporting financial institution must report the information required to be reported. Regulation 12A In determining penalties, the Comptroller shall take into account a) the CRS and b) related commentaries on the CRS published on the OECD s website Updated CRS Guidance Notes issued at the end of October 39
Implications of the change
CRS changes post 30 June 2017 Prior to this amendment, it was possible to use a definition as applied for FATCA or the IGA for CRS purposes as long as it does not frustrate the purposes of the CRS. The CRS Guidance Notes identify the following areas that can no longer be used except in so far as they match the CRS: Section 3.2 - resident for tax purposes Section 3.9 investment entity Section 3.12 nominee companies Sections 7.1, 7.2, 7.3 on the treatment of Jersey trusts Section 7.8 which among other things refers to the position of a settlor who is specifically excluded from the trust Section 7.13 Employee Benefit Trusts Section 19.4 Multiple Financial Institutions Duplicate Reporting. 41
Investment Entity managed-by definition CRS definition The gross income of which is primarily attributable to investing, reinvesting, or trading in Financial Assets, if the entity is managed by another entity that is a depository institution, a custodial institution, a specified insurance company, or an Investment Entity described in subparagraph A(6)(a). An entity is treated as primarily conducting as a business one or more of the activities described in subparagraph A(6)(a), or an entity s gross income is primarily attributable to investing, reinvesting, or trading in financial assets for purposes of subparagraph A(6)(b), if the entity s gross income attributable to the relevant activities equals or exceeds 50% of the entity s gross income during the shorter of: (i) the three-year period ending on 31 December of the year preceding the year in which the determination is made; or (ii) the period during which the entity has been in existence. IGA definition Means any entity that. is a managed by an entity that is regarded as an Investment Entity 42
Implications if previously used the IGA definition The term Financial Asset does not include a non-debt, direct interest in real property. If the previous approach was to use the managed by definition under the IGAs to include all entities under management as a Financial Institution. It is necessary to: Review all entities classified under the managed by classification to determine if they pass the Gross Income Test. Strategy to complete this review? Distinction of Financial Assets v Non Financial Assets what about cash? What if no income? What about mixed income? The review will need to be completed on an annual basis If the classification changes to an NFE, it will be necessary to contact all counterparties with an updated self certification to inform them of the change. Issues with different status for FATCA and CRS 43
Other items covered in the CRS Guidance Notes Nil returns will be called for in 2018 in relation to the 2017 Reports Assistance can be obtained from the UK HMRC International Exchange of Information Manual and documents prepared by STEP based on the HMRC manual. Date of Birth is mandatory EBTs 44
Penalty regime
Penalty Regime Amendment to the regulations: 12A Matters to be taken into account in determining liability to penalties In determining whether a person is liable to a penalty under these Regulations, the Comptroller shall take into account (a) the CRS; and (b) related commentaries on the CRS published on the OECD s website.. What is the Penalty regime Penalty of 300 for failure to comply with any obligation under the regulation If failure continues after the person has been notified of penalty, subsequent penalty may be imposed on up to 60 per day Reasonable excuse clause Daily penalty may be increased up to 1,000 per day subject to approval of Commission of Appeal where failure of obligation continues for more than 30 days after daily penalty imposed 46
Penalty Regime cont A penalty of up to 3,000 may be imposed where an inaccurate return has been submitted and The inaccuracy is as a result of the DD process or is deliberate; or person is aware of inaccuracy but does not inform Comptroller Comptroller or authorized person has power to enter business premises and examine business documents Unlimited fine and six months imprisonment for obstructing an authorised person in seeking to enter business or examine business documents Unlimited fine and two years imprisonment for intentionally altering, suppressing or destroying business documents that have been requested by the Comptroller or authorised person Why the emphasis? Comptroller needs to demonstrate they are enforcing the penalty regime. Undocumented accounts 47
Concluding comments
Concluding comments Updated Regulations and CRS Guidance Notes were issued in October 2017 The updates will have an impact on a number of areas including Investments Entities utilising the managed by approach Nil Returns Penalties the Comptroller needs to be seen applying them Reporting for non reciprocal jurisdictions Potentially a large number of errors in the 2016 xml reports Ensure all DD is reviewed by 31 December 2017 Thank you! 49
Contacts John Riva Head of Tax +44 (0)1534 608401 jriva@kpmg.com Jason Laity Senior Partner +44 (0)1534 608427 jlaity@kpmg.com Chris Lowe Senior Manager, Tax +44 (0)1534 632518 chrislowe@kpmg.com 50
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2017 KPMG Channel Islands Limited, a Jersey company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative The KPMG name and logo are registered trademarks or trademarks of KPMG International. Document Classification: KPMG Confidential