May 2020: International Tax Planning Review

European Commission

Aggressive tax planning: the European Commission gives recommendations to six Member States

The European Commission has issued recommendations to the EU Member States, six of which have been advised to enhance countering ‘aggressive’ tax planning.    

The aggressive tax planning holds an intermediate position between allowable tax planning and tax evasion (and cannot be equated to the latter).   

According to the European Commission, some rules of tax systems of Hungary, Ireland, Cyprus, Luxembourg, Malta and Netherlands may facilitate aggressive tax planning practices. It should be emphasized that these rules just pose a potential risk of abuse, but do not necessarily lead thereto (as appears from the wordings used in the document).

Hungary. The absence of withholding taxes on income paid to offshore financial centers may create channels for withdrawal of profits from the EU without fair taxation. Although the volume of outgoing dividend, royalty and interest payments to tax heavens in 2013-2017 was relatively small, Hungary is recording quite large capital movement through the companies known as ‘special purpose entities’ (SPE/SPV), that suggests potential opportunities for aggressive tax planning.  

Ireland. A significant portion of royalties and dividend payments in the country’s GDP may indicate the possible use of Irish tax rules by companies in aggressive tax planning. Ireland has been advised to broaden its taxable base, as well as to strengthen supervision and enforcement of anti-money laundering laws in respect of corporate and trust service providers.    

Cyprus. The absence of withholding taxes on outgoing dividends, interest and royalties paid by Cypriot companies to residents of third countries, and the rules of corporate tax residency still may facilitate aggressive tax planning. Besides that, the mechanism of notional interest deduction, as well as schemes for obtaining residence or citizenship by investment, demand close analysis.   

Luxembourg. A significant share of dividend, interest and royalty payments in the GDP may indicate the practice of aggressive tax planning. The large volume of foreign direct investment is held by ‘special purpose entities.’ No withholding taxes on payments of interest and royalties abroad, and exemption from withholding tax on dividends subject to certain conditions, may cause a complete absence of taxation of those payments, if they are not taxable in the recipient jurisdiction. Luxembourg has developed a draft law prohibiting deduction of interest and royalties paid to non-cooperative jurisdictions from the EU blacklist as expenses. Luxembourg is recommended to ensure effective enforcement of AML legislation in relation to professional providers of trust, corporate and investment services.

Malta. The main concern of the European Commission is the regime of resident, but not domiciled companies, as well as schemes for granting citizenship and residency for investment, which carries the risk of double exemption from taxation for both companies and individuals.

Netherlands. Just like with Luxembourg, there is a large volume of passive income payments (dividends, royalties and interest) made through jurisdiction, and a significant portion of foreign investment is made in SPE/SPV companies. The absence of withholding taxes on royalties and interest payments by EU residents to third countries may result in double non-taxation situations. From 1 January 2021 it is planned to enact a reform that involves (under certain conditions) taxation of royalties and interest payments in case of abuse or in case of payments to low-tax jurisdictions, which is noted as a positive step.

Singapore companies must register their controlling persons 

Starting 1 May 2020, the requirement for Singapore companies to register all their persons with significant control (i.e. the beneficial owners of Singaporean companies) comes into force.

The Accounting and Corporate Regulatory Authority of Singapore (ACRA) has informed of the requirement to all companies and limited liability partnerships registered in Singapore, as well as foreign companies operating in Singapore, to submit registers of their controllers.

Any changes to these registers of controllers will need to be reported to ACRA within two business days.

The information contained in the registry will not be publicly available, but may be provided to the competent authorities of Singapore (without notifying the company in respect of which the information is provided).

Hong Kong: can the unrest lead to loss of autonomy?

Hong Kong (Special Administrative Region of China) is known as one of the most prosperous business hubs of Asia-Pacific region with favorable business climate, legal environment and tax regime. Over the past few years, Hong Kong has been number one in the global ranking of economic freedom. However, recent political events can have consequences that for now are difficult to predict. 

Currently, Hong Kong is under pressure from the central authorities of China, whose actions can lead to a sharp decrease in Hong Kong’s independence in the political and legal spheres and undermine the “one country, two systems” principle (which was a condition for formal transfer of Hong Kong to the sovereignty of China in 1997) .

A new draft law on national security developed by the PRC in relation to Hong Kong is aimed at counteracting “secessionist and subversive activities,” as well as “external interference” in Hong Kong’s affairs. This bill did not raise objections from the local government, but became a cause for protests within Hong Kong and the object of international criticism.

According to Hong Kong Chief Executive, the new Chinese law will not limit rights and freedoms of Hong Kong residents, including the principles of rule of law and judicial independence, but will only strengthen Hong Kong’s position as a sustainable international financial center.

It is not clear for the moment whether China’s actions can result in real restrictions of economic freedoms in Hong Kong or change of foreign investors’ regime. However, the fact of political confrontation definitely is bringing harm to Hong Kong’s reputation as a high stability jurisdiction in the longer term.

Colombia officially joined OECD  

The Organization for Economic Co-operation and Development (OECD) has informed of official admission of Colombia (South America), that becomes its new, 37th member state.  

The OECD reports that Colombia has undertaken major reforms to bring its legislation, policies and practices in line with OECD standards. These reforms affected, in particular, labor law, the judiciary, corporate governance, trade and combatting corruption.

The OECD is an international organization of developed countries, mainly engaged in economic policies including matters of international taxation. Within the framework or under the auspices of the OECD, the largest international tax transparency initiatives have been implemented in the last decade: Base Erosion and Profit Shifting (BEPS) Action Plan, automatic exchange of financial account information (CRS) and country-by-country reporting (CbCR), mass ratification of Convention of Mutual Administrative Assistance in Tax Matters and others.

Colombia has become the third Latin American country joined OECD after Mexico and Chile. Moreover, in May 2020 the OECD decided to invite Costa Rica to the membership of the Organization.

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