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New rules make ‘brass plate’ companies extremely risky

Non-compliant firms face fines of £100k and EU blacklisting.

A new layer of compliance designed to clamp down on the use of ‘international finance centres’ by multinational companies as low or no tax jurisdictions has been added to the already increasingly complex offshore world. 

These jurisdictions have traditionally competed for business by offering attractive tax rates to corporates without any specific requirement for the companies to have adequate business operations there.

However, this world has changed with the introduction of economic substance legislation in these jurisdictions, says Hanneke Farrand, director at ENSafrica’s private client and tax practice. She was speaking at the annual Tax Indaba hosted by the South African Institute of Tax Professionals.

Farrand says the new legislation focuses mainly on globally mobile businesses with activities in, among others, banking, insurance, intellectual property, fund management, distribution or service centres and shipping.

Read: Glencore to cut down on tax-haven subsidiaries as scrutiny grows

The requirements have been in place since the start of the year. Companies were given six months to become compliant or face fines starting at £3 000 for the first year, moving up to £100 000.

Reputational risk

Jurisdictions that do not comply face being “blacklisted” by the European Union (EU), which creates reputational risk. They also risk forced exchange of the financial information of the companies in their jurisdiction to other revenue authorities where the companies or their directors could be tax resident.

Non-compliant companies also face being struck off the companies register in the jurisdiction in which they have set up business if they do not adhere to the new requirements set out in the legislation.

Farrand says the main thrust is to ensure that the income generated in a country correlates with the activities and operations conducted in these jurisdictions.

‘Letter box’ or ‘brass plate’ companies – where directors and board members fly in to conduct board meetings, but where no substantial activities take place in the jurisdiction – will not be considered compliant under the new rules.

Money laundering in the crosshairs

Farrand says the offshore tax world has changed considerably over the past five to 10 years in order to ensure greater transparency and prevent money laundering activities.

The EU and the Organisation for Economic Cooperation and Development (OECD) have been introducing measures such as country-by-country reporting and the automatic exchange of information between tax authorities to curb base erosion and profit shifting.

The Forum on Harmful Tax Practices agreed to level the playing field and introduced the substance requirement in order to allow countries to become OECD framework members and to stay off the EU’s tax haven black list.

According to Cynthia Fox, KPMG’s associate director in international tax, nine jurisdictions introduced the economic substance legislation at the start of this year in order to avoid reputational damage and to meet their commitment to the EU.

These jurisdictions include Mauritius, the Cayman Islands, Bermuda, Jersey, Guernsey, the Seychelles and the British Virgin Islands.

Fundamantals and variances

Farrand says the fundamental scope and principles of the different pieces of legislation will be the same in all jurisdictions. However, there will be different applications depending on the sector and how mobile the business is.

On the Isle of Man, for example, adequate economic substance requires that a company be directed and managed on the island and that it have a number of qualified employees proportionate to the level of activities.

“There must be a correlation between your employees and your activities and there must be a correlation between your expenses and your operations,” says Farrand.

On top of that there must be an adequate physical presence, and the company must conduct “core income generating activities” on the isle.

It is not uncommon to see non-compliant companies having their bank accounts closed, she adds.

“The risk of non-compliance is no longer just a tax audit,” Farrand warns. Companies risk having their accounts closed and the business will be struck off the company register.

“The economic substance rules are a continuation of the wave of increased governance and compliance.”

The following jurisdictions areecurrently blacklisted by the EU: American Samoa, Belize, Domenica, Fiji, Guam, the Marshall Islands, Oman, Samoa, Trinidad and Tobago, the United Arab Emirates, the US Virgin Islands and Vanuatu.

Being on a blacklist means the jurisdiction is considered to be an uncooperative tax haven. Landing on the grey list means there is some commitment to introducing legislation that will meet EU requirements.

According to Fox, Aruba was removed from the blacklist in May, and Barbados and Bermuda were moved to the grey list.

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Thanks, always enjoyed your tax articles Amanda.

Another country I stumbled upon Georgia (Eurasia)…their banks adhere to the US’ FATCA rules, but do not belong to the OECD group…so a potential place for Saffas to hide funds in Tbilisi.

(To open a bank account is fairly easy in Tbilisi, either you appoint a Georgia lawyer with a PoA and do it online, or you physically visit Tbilisi on a holiday…takes 30minutes at bank to open acc. Next day you have your Visa/Master card. Service! Good interest % rates on US dollar or EU accounts.)

There’s an ongoing global battle between “under the radar’/non-cooperative tax havens (supported by wealthy global citizens who despise of their high-tax 1st world countries, theft & corruption among developed-nation polititians) versus rest of globe’s tax authorities. In short, a battle between greedy politicians (respested by govt) versus wealthy citizens (who believe their tax dollars are wasted) = tax haven will always exist.

The (non-cooperative) tax havens, that do not share information, faces pressure from other co-operative world govts, whereby such tax havens are sidelined when it comes to economic development. These tax haven countries will have to decide either earn income from foreigners’ deposits, or partake in global economic activity.

Now here’s an ethical question (I don’t expect an answer):

It is tax law in most countries (with on a ‘resident-based source’ of income) that tax-residents have to declare interest/dividends from foreign sources. Good.
If say a wealth taxpayer receives decent amount of interest/dividends from a foreign source (which they have to declare to SARS) based in a co-operative ‘tax haven’ like Mauritius being on the OECD’s ‘good books’…even if not declared, it CAN be picked up if SARS is aware of it, and Mauritius Revenue will oblige.

The investor will then ask: WHAT IS THE POINT of having assets in a so-called ‘tax haven’ which will happily share bank info with other OECD countries?

(One advantage of foreign bank account/other assets abroad, must be that of sovereignty….i.e. away from local govt…but not the returns on those funds)

However, some non-cooperative (true) tax-havens have a less favorable reputation, and could be a risky place to keep your money safe. You make your choice…

(When I’m retired and have more time, I’m planning to write a book on global tax havens)

When you write said book, post a link here (Moneyweb) or on JustOneLap (with Simon& Kristia). Would love to read it.

Hi there! Been thinking, instead of a paper book, better to have this future research on a website, as tax havens’ status are constantly in motion. Dynamics. Plan is to also focus on “low tax” jurisdictions as well, which is equally attractive as tax-havens (especially for Saffas that one day want to retire in a low-tax country. Usually it goes hand-in-hand with low cost of living as well…so it means “other than” typical destinations like US, Oz, NZ, UK, Eu, etc. Off the radar countries, but being still livable with reasonable healthcare, safety, etc. Mix with another layer of residency/citizenship requirements.

Plan is to make the info practical, by constantly being abreast of low-tax countries tax rates (and tax types)…which I also need to combine with the 3 or so major tax-bases one find globally (source based vs resident based vs territorial vs citizen-based).

Plus when one consider Double Tax Treaties between countries….if really is going to be a complex piece of work. (There’s already a lot of sites/books on this, but segmented. Aim is to practically combine it all, and let my mind go how to structure the layout of everything.

The aim is to let other (especially Saffas) benefit with such knowledge, which will hopefully be easy to reference and follow.

(My day-to-day running of my small tax practice, is keeping me from doing it as yet)

Will pop email to JustOneLap. You must be “SB”? 😉

Hi Michael, not “SB”. But I’m a fan of JustOneLap. Only recently (end of June) found out about them and have since binged on their podcasts and asked multiple questions on the Facebook group. Learned a lot.

My journey started as I got increasingly frustrated by the low (and now negative) growth of my RA. My FA just kept telling me the market is going sideways and such. So I started doing research and found JustOneLap and StealthyWealth. So currently I got my TFSA going, busy moving my RA from Old Mutual so Sygnia (Skeleton), MUCH lower fees.

My aim is to become financially more literate, so I’m consuming as much info I can find on the internet. Websites, blogs, facebook groups, podcast, newsletter, everything I can get my eyes on.

Have a great day! 😀

Hi MrG9000. Yup, you caused a bit of confusion for the real Simon Brown, as he responded to a personal email I sent him, as I thought one of JustOneLap’s staff requested it.

Nevertheless, thank you you, I also become a regular SUBSCRIBER of JustOneLap *lol* Yes, there’s plenty of useful material on their site I need to catch up with 😉

EasyEquities is also a recommended platform, not only for trading local shares, but for Tax-Free Savings accounts (where you also can select Sygnia ETFs, or iShares by BlackRock), and a boon is their USD Trading Account, where you can transfer funds directly abroad to a US cash account, with minimal fuss & fairly low forex conversion costs.

(Btw, your FA earns 99,9% commission…it’s expected he/she will say that and keep you invested)

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