2010/04/19
1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.
Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.
Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.
An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.
NEUTERED TRUSTS
Asset Protection Trusts Neutered
by 2005 Bankruptcy Reform Act
The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.
Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.
Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.
FOREIGN ASSET PROTECTION TRUST CASES
The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.
*
In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
*
Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”
Friday, April 30, 2010
Wednesday, April 28, 2010
SA - Dave King's House of Lords Judgment
Judgments - King (Respondent) v Director of the Serious Fraud Office (Appellant) (On Appeal from the Court of Appeal Criminal Division)
HOUSE OF LORDS
SESSION 2008-09
[2009] UKHL 17
on appeal from:[2008] EWCA Crim 530
OPINIONS
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)
Appellate Committee
Lord Phillips of Worth Matravers
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Brown of Eaton-under-Heywood
Lord Mance
Counsel
Appellant:
Andrew Mitchell QC
Fiona Jackson
(Instructed by The Restraint and Confiscation Unit, Serious Fraud Office )
Respondent:
David Perry QC
Louis Mably
(Instructed by Kingsley Napley )
Hearing date:
9 FEBRUARY 2009
ON
WEDNESDAY 18 MARCH 2009
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)
[2009] UKHL 17
LORD PHILLIPS OF WORTH MATRAVERS
My Lords,
1. Mr King, the respondent to this appeal, is a British subject who has for 30 years been resident in South Africa. He has been charged by the Office of the National Prosecuting Authority of the Republic of South Africa (“the NPA”) with fraud on a very large scale. He was originally arrested in South Africa on 13 June 2002. He was served with an indictment on 29 April 2005, which was amended on 17 March 2006. He now faces 51 counts of fraud, 34 counts of contravening income tax legislation, 234 counts of contravening exchange control regulations, 2 counts of money laundering and 1 count of racketeering. His trial has been adjourned on a number of occasions. He has been granted bail and the return of his passport and has been permitted, on occasion, to travel outside South Africa.
2. This appeal arises out of a Letter of Request sent by the NPA to the United Kingdom Central Authority in London and to the Lord Advocate in Edinburgh dated 9 May 2006 seeking assistance in obtaining restraint orders over property of the respondent. The Letter of Request was referred to the appellant and, on 26 May 2006, the NPA wrote to the appellant varying the terms of the orders sought so as to make it clear that they covered property of a number of companies that were alleged to be “Alter Ego Entities” of the respondent.
3. The introduction to the Letter of Request requested assistance in seeking:
“(a) orders restraining Mr King from dealing with realisable property in (i) England and Wales, and (ii) Scotland, in order to make such property available to be recovered by means of an external confiscation order which will be sought, and (it is anticipated) on conviction granted, in criminal proceedings pending against Mr King in South Africa; and
(b) an order that Mr King swear an Affidavit setting out full details of all assets belonging to him and/or which he has the power, directly or indirectly to dispose of or deal with as his own, wherever located; and
(c) such other investigative assistance as may be appropriate in order to establish up to date factual information in relation to the assets, belonging to Mr King and/or which he has the power, directly or indirectly, to dispose of or deal with as his own, located in the UK.”
4. Paragraph 16 of the Letter of Request requested, inter alia, application for an order which
“(a) restrains Mr King from dealing with such realisable property (as defined in the relevant legislation, and including all property owned by Mr King or which he has the power, directly or indirectly, to deal with as if it were his own, including all assets held by the Alter Ego Entities) as is within the jurisdiction of the Court; and
(b) requires Mr King to swear an affidavit disclosing the full extent of his assets and those of the Alter Ego Entities, wherever situated, and…”
5. The Letter of Request set out in detail the basis on which the NPA contended that the property of the Alter Ego Entities represented property of the respondent. It set out a schedule of bank accounts of these companies which it stated were believed to be “held in England and Wales".
6. The Letter of Request explained that the purpose of the order sought was to make the restrained property available to be recovered by means of a confiscation order which would be sought in South Africa if and when the respondent was convicted.
7. The Letter of Request exhibited a draft order. This was in a standard form in common use in the Crown Court in proceedings arising out of prosecutions within this jurisdiction. This had been supplied to the NPA by the appellant.
8. On 31 May 2006 Judge Wadsworth QC, sitting in the Crown Court at Southwark, made an order pursuant to the Letter of Request. This order was in the terms of the draft order that had been exhibited to the Letter of Request. Its provisions included the following:
“DISPOSAL OF OR DEALING WITH ASSETS
5. The Defendants must not until further order of the court:
(1) remove from England and Wales any of their assets which are in England and Wales; or
(2) in any way dispose of, deal with or diminish the value of any of their assets whether they are in or outside England and Wales.
6. The prohibition against disposing or dealing with assets or diminishing their value includes the following assets in particular:
(a) the property within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if it has been sold;
(b) the property and assets of the businesses within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if any of them have been sold; and
(c) any money in the accounts within the jurisdiction as set out in the Schedule annexed hereto marked ‘D'.”
This has been described as “the Restraint Order".
9. The provisions of the order further included the following:
“PROVISION OF INFORMATION
Each Defendant shall serve a witness statement of all his assets wherever located certified by a statement of truth on the Serious Fraud Office within 31 days of the service of this Order as required by the Disclosure Order set out in Schedule C annexed to this Order.”
This has been described as “the Disclosure Order".
10. The order was made on an application without notice. The respondent applied unsuccessfully to Judge Wadsworth on 23 April 2007 to have it discharged. He then appealed to the Court of Appeal which, on 18 March 2008, allowed his appeal to the extent of substituting an order that related only to property in England and Wales: [2008] 1 WLR 2634. The appellant seeks to reverse the decision of the Court of Appeal.
11. The issue raised by this appeal is whether the Crown Court had jurisdiction to include within the ambit of the Restraint Order and the Disclosure Order property outside England and Wales.
12. Restraint orders, pursuant to requests from the NPA have also been made against the respondent in Guernsey on 9 June 2006 and in Scotland on 29 June 2006.
The statutory scheme
13. The power of the Crown Court to make a restraint order is derived from the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 (SI 2005/3181) (“the Order”), which was made under sections 444 and 459(2) of the Proceeds of Crime Act 2002 (“POCA”). POCA has replaced restraint and confiscatory regimes under the Criminal Justice Act 1988 (“the CJA 1988”) and the Drug Trafficking Act 1994 (“the DTA 1994”). A separate regime exists in relation to certain terrorist offences under the Terrorism Act 2000.
14. POCA deals primarily, as did the antecedent legislation, with orders arising out of criminal proceedings within the jurisdiction. Section 444 of POCA provides, however, that Her Majesty may, by Order in Council,
“(a) make provision for a prohibition on dealing with property which is the subject of an external request;
(b) make provision for the realisation of property for the purpose of giving effect to an external order.”
15. Section 447 of POCA deals with “interpretation” and provides:
“(1) An external request is a request by an overseas authority to prohibit dealing with relevant property which is identified in the request.
(2) An external order is an order which -
(a) is made by an overseas court where property is found or believed to have been obtained as a result of or in connection with criminal conduct, and
(b) is for the recovery of specified property or a specified sum of money…
(4) Property is all property wherever situated…
(7) Property is relevant property if there are reasonable grounds to believe that it may be needed to satisfy an external order which has been or which may be made.”
16. Part 2 of the Order is headed “Giving Effect in England and Wales to External Requests in Connection with Criminal Investigations or Proceedings and to External Orders Arising from such Proceedings". Relevant provisions in Chapter 1, which is headed “External Requests", are as follows.
17. Article 6 provides that the Secretary of State may refer an external request in connection with criminal proceedings or investigations in the country from which the request is made, and which concerns relevant property in England or Wales, to the Director of Public Prosecutions, the Director of Revenue and Customs Prosecutions or, where the request relates to an offence involving serious or complex fraud, to the appellant. Article 6(7) provides that where a request also concerns relevant property which is in Scotland or Northern Ireland, so much of the request as concerns such property shall be dealt with under Part 3 (Scotland) or, as the case may be, Part 4 (Northern Ireland). Article 8 provides that the Crown Court may make a restraint order if either of the two conditions in article 7 is satisfied.
18. The two conditions in article 7 are as follows:
“(2) The first condition is that -
(a) relevant property in England and Wales is identified in the external request;
(b) a criminal investigation has been started in the country from which the external request was made with regard to an offence, and
(c) there is reasonable cause to believe that the alleged offender named in the request has benefited from his criminal conduct.
(3) The second condition is that -
(a) relevant property in England and Wales is identified in the external request;
(b) proceedings for an offence have been started in the country from which the external request was made and not concluded, and
(c) there is reasonable cause to believe that the defendant named in the request has benefited from his criminal conduct.”
19. Article 7(4) provides that in determining whether the conditions are satisfied and whether the request is an external request within the meaning of the Act, the court must have regard to the definition in subsections (1), (4) to (8) and (11) of section 447 of POCA.
20. Article 8(1) provides that if either condition set out in article 7 is satisfied, “the Crown Court may make an order (‘a restraint order’) prohibiting any specified person from dealing with relevant property which is identified in the external request and specified in the order.”
21. Article 8(4) provides that if a restraint order is made, the court, “may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective.”
22. Article 8(6) provides: “Dealing with property includes removing it from England and Wales.”
23. Article 12 confers a power of seizure of any property which is specified in a restraint order to prevent its removal from England and Wales. Article 15 provides for the appointment of management receivers in respect of any property which is specified in the restraint order.
24. Chapter 2 of Part 2 of the Order confers on the Crown Court the power to give effect to external orders as defined in section 447(2) of the Act. Article 18 echoes article 6 in that it is a precondition to the exercise of the relevant powers that the external order “concerns relevant property in England or Wales". Chapters 2 and 3 provide for the order to be registered and then enforced. Enforcement is carried out by appointment of enforcement receivers, who are given powers to take possession of, to manage and to realise the property. These powers have to be exercised with a view to satisfying an external order that has been made against a defendant.
The decisions below.
25. Judge Wadsworth held, because the draft order exhibited to the Letter of Request had requested an order that “The Defendants must not…in any way dispose of, deal with or diminish the value of their assets whether they are in or outside England and Wales“ (emphasis added), that it was the intention of the NPA to seek a worldwide order. He held that he had jurisdiction to make the order because the condition imposed by article 7 of the Order, that relevant property in England and Wales should be identified in the request, was merely a “gateway” to the exercise of his jurisdiction. Once through the gateway, article 8 gave him the power to make an order prohibiting the respondent from dealing with relevant property identified in the external request. That was the respondent’s assets whether in or outside England and Wales, as specified in the draft order. The definition of property in section 447 as “all property wherever situated” confirmed that the request sufficiently identified the property to be covered by the order.
26. The Court of Appeal founded the relevant part of its decision on the natural meaning of articles 6, 7 and 8. It held that, read as a whole, the effect of these provisions was to provide a scheme for the making of an external order that was restricted to property in England and Wales.
Suggested aids to interpretation
27. Before turning to consider the words of the Order itself I propose to deal briefly with a number of extrinsic matters that the parties submitted were of assistance in interpreting it.
28. Mr Andrew Mitchell QC for the appellant drew attention to the aims of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which the United Kingdom became a signatory in 1988. These include depriving persons engaged in illicit traffic of the proceeds of their criminal activities. He emphasised that in ratifying the European Convention on Mutual Assistance in Criminal Matters in 1991 the United Kingdom had undertaken to afford the widest measure of mutual assistance in proceedings in respect of offences. Furthermore, the United Kingdom had, a year later, ratified the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the proceeds from Crime, which required co-operation with the other Parties to the widest extent possible for the purposes of investigations and proceedings aimed at the confiscation of instrumentalities and proceeds.
29. Mr Mitchell submitted that these obligations had been recognised by Orders in Council made under the CJA 1988 and the DTA 1994. These enabled external restraint orders to be made on a world wide basis. It would, he submitted, be extraordinary to conclude that Parliament, when enacting POCA, intended to narrow the scope of the legislative powers to investigate and recover criminal assets.
30. The Orders made under those two Acts simply extended the scope of each Act to embrace the making of orders pursuant to external requests. Mr David Perry QC for the respondent challenged the submission that these Orders had extra-territorial effect. Your Lordships did not encourage the pursuit of a lengthy satellite argument on this issue for the Order made pursuant to POCA is very different from the earlier Orders. The Order does not simply apply the provisions of POCA to external requests. It sets out its own provisions. These in many respects mirror those of POCA but in some significant respects do not.
31. Mr Perry submitted that there was good reason why the scope of the Order should be restricted to property within the jurisdiction. If a country wishes assistance from other countries in preserving or recovering property that is related to criminal activity, it makes sense for its request to each of those other countries to be restricted to the provision of assistance in relation to property located within its own jurisdiction. If each country were requested to take steps to procure the preservation or recovery of property on a world wide basis, this would lead to a confusing, and possibly conflicting, overlap of international requests for assistance. Not only would such multiplication of activity be confusing, it would involve significant and unnecessary multiplication of effort and expense.
32. There is obvious force in these submissions. Mr Perry buttressed them by reliance upon the well-established canon of construction that requires clear language if an Act is to be given extra-territorial effect.
33. Mr Perry drew the attention of the House to a clear Home Office statement in the Explanatory Memorandum to the Order to the effect that the Order relates to property within the United Kingdom. While this is not a legitimate aid to the interpretation of the language that Parliament has used it does counter Mr Mitchell’s submission that it would be extraordinary to conclude that Parliament had intended to restrict the scope of the Order in this way.
The natural meaning of the Order
34. The peripheral matters that I have been considering lend support to what I find to be the clear meaning of the relevant provisions of the Order. The object of a restraint order is to preserve relevant property that may be needed to satisfy an order for the recovery of specified property or a specified sum of money - see the definitions in section 447 of POCA. Jurisdiction to make an external restraint order only arises where the external request “concerns relevant property in England or Wales” - article 6. The relevant property must be “identified in the external request” - article 7. The Crown Court may then make a restraint order which prohibits “dealing with relevant property which is identified in the external request” - article 8. The Order then makes provision for the seizure of any property which is specified in the Order to prevent its removal from England and Wales - article 12, and for a receiver to take possession of such property - article 16.
35. These provisions are echoed by those which relate to enforcing an external order. The order must concern relevant property in England or Wales - article 18. Enforcement takes place by appointment of a receiver in respect of realisable property where the external order is for the recovery of a specified sum of money and in respect of the property in question where the external order is for the recovery of specified property - article 27. The powers that article 28 permits the court to confer on the receiver include powers that are expressly to be exercised within the jurisdiction.
36. These provisions amount to a clear and coherent scheme. From first to last, the powers conferred by that part of the Order that relates to England and Wales can only be exercised in relation to property in England and Wales. Furthermore, no machinery is provided for exercise of those powers outside England and Wales. In this respect there is a significant distinction between POCA, which deals with domestic orders, and the Order, which deals with external orders. Section 74 of POCA provides that if the prosecutor believes that there is realisable property situated in a country outside the United Kingdom he can ask the Secretary of State to forward a request for assistance in restraining dealing with the property or in realising the property. Had it been intended that external restraint orders or external orders should take effect outside the jurisdiction the Order would surely have made provision similar to that in section 74 of the Act.
37. What is there that weighs against these conclusions? Mr Mitchell submitted that the requirement that the external request should concern relevant property in England and Wales was a gateway that gave access to a worldwide jurisdiction, but I can see no logic in this proposition. I can see no reason why the existence of property of the respondent in this jurisdiction should justify a request from South Africa for this country to attempt to procure, on South Africa’s behalf, a worldwide restraint on the respondent’s property. Mr Mitchell founded much of his submission in respect of the interpretation of the Order on the definition of property in section 447 as “all property wherever situated". Whether property bears that meaning must depend, however, on the context in which the word is used. Where the Order expressly or by implication refers to property in England and Wales it necessarily refers only to property there situated.
38. In summary, there is no reason not to give the provisions of the Order their natural meaning and good reason to give them such meaning. I would uphold the decision of the Court of Appeal as to the scope of the Restraint Order. Contrary to the view of Judge Wadsworth, I do not believe that the NPA had any intention that the Letter of Request should seek assistance in relation to property outside the United Kingdom. This dispute has arisen because the appellant supplied for their use an inappropriate form.
The Disclosure Order
39. The Disclosure Order was made pursuant to article 8(4) which provides that the court may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective. It follows, as Mr Mitchell conceded before the Court of Appeal, that if the Restraint Order must be restricted to property within England and Wales there can be no justification for a worldwide Disclosure Order.
40. For these reasons I would dismiss this appeal.
LORD SCOTT OF FOSCOTE
My Lords,
41. I have had the advantage of reading in advance the opinion of my noble and learned friend Lord Phillips of Worth Matravers and am in complete agreement with the reasons he has given for dismissing this appeal. I, too, would do so.
LORD WALKER OF GESTINGTHORPE
My Lords,
42. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I would dismiss this appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD
My Lords,
43. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I too would dismiss this appeal.
LORD MANCE
My Lords,
44. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Phillips of Worth Matravers. For the reasons he gives, with which I agree, I too would dismiss this appeal.
HOUSE OF LORDS
SESSION 2008-09
[2009] UKHL 17
on appeal from:[2008] EWCA Crim 530
OPINIONS
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)
Appellate Committee
Lord Phillips of Worth Matravers
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Brown of Eaton-under-Heywood
Lord Mance
Counsel
Appellant:
Andrew Mitchell QC
Fiona Jackson
(Instructed by The Restraint and Confiscation Unit, Serious Fraud Office )
Respondent:
David Perry QC
Louis Mably
(Instructed by Kingsley Napley )
Hearing date:
9 FEBRUARY 2009
ON
WEDNESDAY 18 MARCH 2009
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)
[2009] UKHL 17
LORD PHILLIPS OF WORTH MATRAVERS
My Lords,
1. Mr King, the respondent to this appeal, is a British subject who has for 30 years been resident in South Africa. He has been charged by the Office of the National Prosecuting Authority of the Republic of South Africa (“the NPA”) with fraud on a very large scale. He was originally arrested in South Africa on 13 June 2002. He was served with an indictment on 29 April 2005, which was amended on 17 March 2006. He now faces 51 counts of fraud, 34 counts of contravening income tax legislation, 234 counts of contravening exchange control regulations, 2 counts of money laundering and 1 count of racketeering. His trial has been adjourned on a number of occasions. He has been granted bail and the return of his passport and has been permitted, on occasion, to travel outside South Africa.
2. This appeal arises out of a Letter of Request sent by the NPA to the United Kingdom Central Authority in London and to the Lord Advocate in Edinburgh dated 9 May 2006 seeking assistance in obtaining restraint orders over property of the respondent. The Letter of Request was referred to the appellant and, on 26 May 2006, the NPA wrote to the appellant varying the terms of the orders sought so as to make it clear that they covered property of a number of companies that were alleged to be “Alter Ego Entities” of the respondent.
3. The introduction to the Letter of Request requested assistance in seeking:
“(a) orders restraining Mr King from dealing with realisable property in (i) England and Wales, and (ii) Scotland, in order to make such property available to be recovered by means of an external confiscation order which will be sought, and (it is anticipated) on conviction granted, in criminal proceedings pending against Mr King in South Africa; and
(b) an order that Mr King swear an Affidavit setting out full details of all assets belonging to him and/or which he has the power, directly or indirectly to dispose of or deal with as his own, wherever located; and
(c) such other investigative assistance as may be appropriate in order to establish up to date factual information in relation to the assets, belonging to Mr King and/or which he has the power, directly or indirectly, to dispose of or deal with as his own, located in the UK.”
4. Paragraph 16 of the Letter of Request requested, inter alia, application for an order which
“(a) restrains Mr King from dealing with such realisable property (as defined in the relevant legislation, and including all property owned by Mr King or which he has the power, directly or indirectly, to deal with as if it were his own, including all assets held by the Alter Ego Entities) as is within the jurisdiction of the Court; and
(b) requires Mr King to swear an affidavit disclosing the full extent of his assets and those of the Alter Ego Entities, wherever situated, and…”
5. The Letter of Request set out in detail the basis on which the NPA contended that the property of the Alter Ego Entities represented property of the respondent. It set out a schedule of bank accounts of these companies which it stated were believed to be “held in England and Wales".
6. The Letter of Request explained that the purpose of the order sought was to make the restrained property available to be recovered by means of a confiscation order which would be sought in South Africa if and when the respondent was convicted.
7. The Letter of Request exhibited a draft order. This was in a standard form in common use in the Crown Court in proceedings arising out of prosecutions within this jurisdiction. This had been supplied to the NPA by the appellant.
8. On 31 May 2006 Judge Wadsworth QC, sitting in the Crown Court at Southwark, made an order pursuant to the Letter of Request. This order was in the terms of the draft order that had been exhibited to the Letter of Request. Its provisions included the following:
“DISPOSAL OF OR DEALING WITH ASSETS
5. The Defendants must not until further order of the court:
(1) remove from England and Wales any of their assets which are in England and Wales; or
(2) in any way dispose of, deal with or diminish the value of any of their assets whether they are in or outside England and Wales.
6. The prohibition against disposing or dealing with assets or diminishing their value includes the following assets in particular:
(a) the property within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if it has been sold;
(b) the property and assets of the businesses within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if any of them have been sold; and
(c) any money in the accounts within the jurisdiction as set out in the Schedule annexed hereto marked ‘D'.”
This has been described as “the Restraint Order".
9. The provisions of the order further included the following:
“PROVISION OF INFORMATION
Each Defendant shall serve a witness statement of all his assets wherever located certified by a statement of truth on the Serious Fraud Office within 31 days of the service of this Order as required by the Disclosure Order set out in Schedule C annexed to this Order.”
This has been described as “the Disclosure Order".
10. The order was made on an application without notice. The respondent applied unsuccessfully to Judge Wadsworth on 23 April 2007 to have it discharged. He then appealed to the Court of Appeal which, on 18 March 2008, allowed his appeal to the extent of substituting an order that related only to property in England and Wales: [2008] 1 WLR 2634. The appellant seeks to reverse the decision of the Court of Appeal.
11. The issue raised by this appeal is whether the Crown Court had jurisdiction to include within the ambit of the Restraint Order and the Disclosure Order property outside England and Wales.
12. Restraint orders, pursuant to requests from the NPA have also been made against the respondent in Guernsey on 9 June 2006 and in Scotland on 29 June 2006.
The statutory scheme
13. The power of the Crown Court to make a restraint order is derived from the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 (SI 2005/3181) (“the Order”), which was made under sections 444 and 459(2) of the Proceeds of Crime Act 2002 (“POCA”). POCA has replaced restraint and confiscatory regimes under the Criminal Justice Act 1988 (“the CJA 1988”) and the Drug Trafficking Act 1994 (“the DTA 1994”). A separate regime exists in relation to certain terrorist offences under the Terrorism Act 2000.
14. POCA deals primarily, as did the antecedent legislation, with orders arising out of criminal proceedings within the jurisdiction. Section 444 of POCA provides, however, that Her Majesty may, by Order in Council,
“(a) make provision for a prohibition on dealing with property which is the subject of an external request;
(b) make provision for the realisation of property for the purpose of giving effect to an external order.”
15. Section 447 of POCA deals with “interpretation” and provides:
“(1) An external request is a request by an overseas authority to prohibit dealing with relevant property which is identified in the request.
(2) An external order is an order which -
(a) is made by an overseas court where property is found or believed to have been obtained as a result of or in connection with criminal conduct, and
(b) is for the recovery of specified property or a specified sum of money…
(4) Property is all property wherever situated…
(7) Property is relevant property if there are reasonable grounds to believe that it may be needed to satisfy an external order which has been or which may be made.”
16. Part 2 of the Order is headed “Giving Effect in England and Wales to External Requests in Connection with Criminal Investigations or Proceedings and to External Orders Arising from such Proceedings". Relevant provisions in Chapter 1, which is headed “External Requests", are as follows.
17. Article 6 provides that the Secretary of State may refer an external request in connection with criminal proceedings or investigations in the country from which the request is made, and which concerns relevant property in England or Wales, to the Director of Public Prosecutions, the Director of Revenue and Customs Prosecutions or, where the request relates to an offence involving serious or complex fraud, to the appellant. Article 6(7) provides that where a request also concerns relevant property which is in Scotland or Northern Ireland, so much of the request as concerns such property shall be dealt with under Part 3 (Scotland) or, as the case may be, Part 4 (Northern Ireland). Article 8 provides that the Crown Court may make a restraint order if either of the two conditions in article 7 is satisfied.
18. The two conditions in article 7 are as follows:
“(2) The first condition is that -
(a) relevant property in England and Wales is identified in the external request;
(b) a criminal investigation has been started in the country from which the external request was made with regard to an offence, and
(c) there is reasonable cause to believe that the alleged offender named in the request has benefited from his criminal conduct.
(3) The second condition is that -
(a) relevant property in England and Wales is identified in the external request;
(b) proceedings for an offence have been started in the country from which the external request was made and not concluded, and
(c) there is reasonable cause to believe that the defendant named in the request has benefited from his criminal conduct.”
19. Article 7(4) provides that in determining whether the conditions are satisfied and whether the request is an external request within the meaning of the Act, the court must have regard to the definition in subsections (1), (4) to (8) and (11) of section 447 of POCA.
20. Article 8(1) provides that if either condition set out in article 7 is satisfied, “the Crown Court may make an order (‘a restraint order’) prohibiting any specified person from dealing with relevant property which is identified in the external request and specified in the order.”
21. Article 8(4) provides that if a restraint order is made, the court, “may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective.”
22. Article 8(6) provides: “Dealing with property includes removing it from England and Wales.”
23. Article 12 confers a power of seizure of any property which is specified in a restraint order to prevent its removal from England and Wales. Article 15 provides for the appointment of management receivers in respect of any property which is specified in the restraint order.
24. Chapter 2 of Part 2 of the Order confers on the Crown Court the power to give effect to external orders as defined in section 447(2) of the Act. Article 18 echoes article 6 in that it is a precondition to the exercise of the relevant powers that the external order “concerns relevant property in England or Wales". Chapters 2 and 3 provide for the order to be registered and then enforced. Enforcement is carried out by appointment of enforcement receivers, who are given powers to take possession of, to manage and to realise the property. These powers have to be exercised with a view to satisfying an external order that has been made against a defendant.
The decisions below.
25. Judge Wadsworth held, because the draft order exhibited to the Letter of Request had requested an order that “The Defendants must not…in any way dispose of, deal with or diminish the value of their assets whether they are in or outside England and Wales“ (emphasis added), that it was the intention of the NPA to seek a worldwide order. He held that he had jurisdiction to make the order because the condition imposed by article 7 of the Order, that relevant property in England and Wales should be identified in the request, was merely a “gateway” to the exercise of his jurisdiction. Once through the gateway, article 8 gave him the power to make an order prohibiting the respondent from dealing with relevant property identified in the external request. That was the respondent’s assets whether in or outside England and Wales, as specified in the draft order. The definition of property in section 447 as “all property wherever situated” confirmed that the request sufficiently identified the property to be covered by the order.
26. The Court of Appeal founded the relevant part of its decision on the natural meaning of articles 6, 7 and 8. It held that, read as a whole, the effect of these provisions was to provide a scheme for the making of an external order that was restricted to property in England and Wales.
Suggested aids to interpretation
27. Before turning to consider the words of the Order itself I propose to deal briefly with a number of extrinsic matters that the parties submitted were of assistance in interpreting it.
28. Mr Andrew Mitchell QC for the appellant drew attention to the aims of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which the United Kingdom became a signatory in 1988. These include depriving persons engaged in illicit traffic of the proceeds of their criminal activities. He emphasised that in ratifying the European Convention on Mutual Assistance in Criminal Matters in 1991 the United Kingdom had undertaken to afford the widest measure of mutual assistance in proceedings in respect of offences. Furthermore, the United Kingdom had, a year later, ratified the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the proceeds from Crime, which required co-operation with the other Parties to the widest extent possible for the purposes of investigations and proceedings aimed at the confiscation of instrumentalities and proceeds.
29. Mr Mitchell submitted that these obligations had been recognised by Orders in Council made under the CJA 1988 and the DTA 1994. These enabled external restraint orders to be made on a world wide basis. It would, he submitted, be extraordinary to conclude that Parliament, when enacting POCA, intended to narrow the scope of the legislative powers to investigate and recover criminal assets.
30. The Orders made under those two Acts simply extended the scope of each Act to embrace the making of orders pursuant to external requests. Mr David Perry QC for the respondent challenged the submission that these Orders had extra-territorial effect. Your Lordships did not encourage the pursuit of a lengthy satellite argument on this issue for the Order made pursuant to POCA is very different from the earlier Orders. The Order does not simply apply the provisions of POCA to external requests. It sets out its own provisions. These in many respects mirror those of POCA but in some significant respects do not.
31. Mr Perry submitted that there was good reason why the scope of the Order should be restricted to property within the jurisdiction. If a country wishes assistance from other countries in preserving or recovering property that is related to criminal activity, it makes sense for its request to each of those other countries to be restricted to the provision of assistance in relation to property located within its own jurisdiction. If each country were requested to take steps to procure the preservation or recovery of property on a world wide basis, this would lead to a confusing, and possibly conflicting, overlap of international requests for assistance. Not only would such multiplication of activity be confusing, it would involve significant and unnecessary multiplication of effort and expense.
32. There is obvious force in these submissions. Mr Perry buttressed them by reliance upon the well-established canon of construction that requires clear language if an Act is to be given extra-territorial effect.
33. Mr Perry drew the attention of the House to a clear Home Office statement in the Explanatory Memorandum to the Order to the effect that the Order relates to property within the United Kingdom. While this is not a legitimate aid to the interpretation of the language that Parliament has used it does counter Mr Mitchell’s submission that it would be extraordinary to conclude that Parliament had intended to restrict the scope of the Order in this way.
The natural meaning of the Order
34. The peripheral matters that I have been considering lend support to what I find to be the clear meaning of the relevant provisions of the Order. The object of a restraint order is to preserve relevant property that may be needed to satisfy an order for the recovery of specified property or a specified sum of money - see the definitions in section 447 of POCA. Jurisdiction to make an external restraint order only arises where the external request “concerns relevant property in England or Wales” - article 6. The relevant property must be “identified in the external request” - article 7. The Crown Court may then make a restraint order which prohibits “dealing with relevant property which is identified in the external request” - article 8. The Order then makes provision for the seizure of any property which is specified in the Order to prevent its removal from England and Wales - article 12, and for a receiver to take possession of such property - article 16.
35. These provisions are echoed by those which relate to enforcing an external order. The order must concern relevant property in England or Wales - article 18. Enforcement takes place by appointment of a receiver in respect of realisable property where the external order is for the recovery of a specified sum of money and in respect of the property in question where the external order is for the recovery of specified property - article 27. The powers that article 28 permits the court to confer on the receiver include powers that are expressly to be exercised within the jurisdiction.
36. These provisions amount to a clear and coherent scheme. From first to last, the powers conferred by that part of the Order that relates to England and Wales can only be exercised in relation to property in England and Wales. Furthermore, no machinery is provided for exercise of those powers outside England and Wales. In this respect there is a significant distinction between POCA, which deals with domestic orders, and the Order, which deals with external orders. Section 74 of POCA provides that if the prosecutor believes that there is realisable property situated in a country outside the United Kingdom he can ask the Secretary of State to forward a request for assistance in restraining dealing with the property or in realising the property. Had it been intended that external restraint orders or external orders should take effect outside the jurisdiction the Order would surely have made provision similar to that in section 74 of the Act.
37. What is there that weighs against these conclusions? Mr Mitchell submitted that the requirement that the external request should concern relevant property in England and Wales was a gateway that gave access to a worldwide jurisdiction, but I can see no logic in this proposition. I can see no reason why the existence of property of the respondent in this jurisdiction should justify a request from South Africa for this country to attempt to procure, on South Africa’s behalf, a worldwide restraint on the respondent’s property. Mr Mitchell founded much of his submission in respect of the interpretation of the Order on the definition of property in section 447 as “all property wherever situated". Whether property bears that meaning must depend, however, on the context in which the word is used. Where the Order expressly or by implication refers to property in England and Wales it necessarily refers only to property there situated.
38. In summary, there is no reason not to give the provisions of the Order their natural meaning and good reason to give them such meaning. I would uphold the decision of the Court of Appeal as to the scope of the Restraint Order. Contrary to the view of Judge Wadsworth, I do not believe that the NPA had any intention that the Letter of Request should seek assistance in relation to property outside the United Kingdom. This dispute has arisen because the appellant supplied for their use an inappropriate form.
The Disclosure Order
39. The Disclosure Order was made pursuant to article 8(4) which provides that the court may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective. It follows, as Mr Mitchell conceded before the Court of Appeal, that if the Restraint Order must be restricted to property within England and Wales there can be no justification for a worldwide Disclosure Order.
40. For these reasons I would dismiss this appeal.
LORD SCOTT OF FOSCOTE
My Lords,
41. I have had the advantage of reading in advance the opinion of my noble and learned friend Lord Phillips of Worth Matravers and am in complete agreement with the reasons he has given for dismissing this appeal. I, too, would do so.
LORD WALKER OF GESTINGTHORPE
My Lords,
42. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I would dismiss this appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD
My Lords,
43. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I too would dismiss this appeal.
LORD MANCE
My Lords,
44. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Phillips of Worth Matravers. For the reasons he gives, with which I agree, I too would dismiss this appeal.
Tuesday, April 27, 2010
More Info - Denmark Beneficial Ownership tax decision
Thorbjørn Henriksen Tax adviser at Copenhagen
Denmark's National Tax Tribunal on April 16 published its decision (SKM2010.268.LSR) in the first of a series of cases dealing with the beneficial ownership of dividends, interest, and royalties paid by Danish companies to nonresident holding companies.
Although this case was decided in favor of the taxpayer, the tribunal's reasoning suggests that the tax authorities could prevail in other cases with more typical fact patterns when a nonresident holding company has, as a practical matter, very narrow powers regarding the disposition of income received from a Danish company.
Background
Under Danish domestic tax law, nonresident companies are subject to withholding tax on dividends, interest, and royalties unless certain conditions are satisfied. The rate of withholding tax is 28 percent on dividends and 25 percent on interest and royalties. If the taxpayer is entitled to invoke the benefits of a tax treaty or the EU parent-subsidiary or interest and royalties directives, the withholding tax may be reduced or eliminated. To qualify for tax treaty protection, the taxpayer normally must be the beneficial owner of the relevant income.
The acquisition of many Danish companies by corporate investors and private equity funds in recent years has prompted the Danish tax authorities to examine the structuring and income flows resulting from such acquisitions and to significantly increase their focus on the issue of beneficial ownership. This has given rise to a number of cases involving substantial amounts in which the tax authorities have asserted that nonresident holding companies located within the EU or in treaty countries are not the beneficial owners of dividends, interest, and royalties paid to them by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and required the Danish companies to pay the withholding tax.
Facts
The case involved a consortium of private equity funds and other investors that had acquired a Danish company through a Luxembourg holding company. The legal structure may be summarized as follows:
The following transaction steps were scrutinized by the tax authorities:
• (1) HoldCo 1 distributed a dividend to LuxCo 2;
• (2) LuxCo 2 granted two loans to HoldCo 1;
• (3) HoldCo 1 subscribed for share capital in HoldCo 2; and
• (4) HoldCo 2 acquired shares in Target from third parties.
Steps 1 to 3 were executed on the same day and involved the same amount of money. Step 4, however, involved a higher amount because the purchase price for the shares was financed in part by third-party debt.
The tax authorities asserted that the dividends paid in Step 1 were subject to Danish withholding tax because LuxCo 2 was not the beneficial owner of the dividends under article 10 of the 1980 Denmark-Luxembourg tax treaty. The tax authorities relied on paragraphs 12, 12.1, and 12.2 of the commentary on article 10 of the 2003 OECD model treaty. According to the tax authorities, LuxCo 2 was not the beneficial owner because it did not carry out an active business and had no real power to act regarding the disposition of the dividends in question. On this basis, the tax authorities further argued that neither EU law nor the parent-subsidiary directive prevented Denmark from levying withholding tax on the dividends.
The taxpayer claimed that LuxCo 2 was the beneficial owner of the dividends. The taxpayer argued that a static interpretation should be made regarding the beneficial ownership concept; the applicable treaty was signed in 1980, and between 1977 and 2003 the OECD commentary significantly broadened the scope of circumstances in which a recipient of income can be regarded as not being the beneficial owner. However, the taxpayer claimed that LuxCo 2 should be considered the beneficial owner even under the 2003 commentary. The taxpayer's principal argument was that the dividends had not been redistributed but were used to finance the loans granted to HoldCo 1. Thus, it was immaterial whether LuxCo 2 had real power to act regarding the disposition of the dividends.
The taxpayer also referred to the prevailing opinion in Denmark that the Danish Supreme Court is expected to interpret the concept of beneficial owner in accordance with domestic law rather than to apply an autonomous tax treaty interpretation. The concept of beneficial owner is not used in domestic Danish tax law, so it was argued that a domestic law interpretation would mean that the "formal" owner of income normally should be recognized for tax purposes. That LuxCo 2 did not carry out an active business should be irrelevant because this was attributable to the nature of the company.
Article 1(2) of the EU parent-subsidiary directive, which authorizes member states to apply antiavoidance measures, requires that such measures be set forth in domestic tax law. Denmark does not have any specific antiavoidance rules on beneficial ownership, so Denmark would have to rely on the substance-over-form or assignment of income doctrines under Danish tax law. The taxpayer argued that the requirements for invoking these doctrines were not met in the case.
Tribunal's Decision
The majority of the National Tax Tribunal began by referring to paragraphs 12, 12.1, and 22 of the 2003 commentary on article 10. In particular, the tribunal emphasized that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, narrow powers to act were not in themselves sufficient for a conduit company to be disregarded as a beneficial owner.
Since LuxCo 2 had not redistributed the dividends to its parent company, it could not be characterized as a conduit company regarding the dividends. Thus, LuxCo 2 was held to be the beneficial owner of the dividends under the Denmark-Luxembourg treaty. Moreover, the tax authorities were not entitled to deny the taxpayer access to the EU parent-subsidiary directive because the conditions for applying the substance-over-form and the assignment of income doctrines under Danish law were not met. The majority thus concluded that the taxpayer had not infringed on its withholding tax obligation. The minority of the tribunal, however, found in favor of the tax authorities on the grounds that it was immaterial whether the dividends were channeled to the parent company.
Conclusion
It should be emphasized that this case is not typical of the majority of cases, in which the income paid by a Danish company to a nonresident holding company is channeled to the ultimate shareholders. Based on the reasoning of the tribunal, it is not certain how such other cases will be decided. However, the emphasis placed on the 2003 OECD commentary suggests that new cases will be decided in the spirit of that commentary. Hence, a crucial issue will likely be the evaluation of the practical powers entrusted to a holding company in relation to income received from the Danish company. However, the decision does not give any indication of the National Tax Tribunal's position on the level of such powers that will be required to satisfy the beneficial ownership test.
Denmark's National Tax Tribunal on April 16 published its decision (SKM2010.268.LSR) in the first of a series of cases dealing with the beneficial ownership of dividends, interest, and royalties paid by Danish companies to nonresident holding companies.
Although this case was decided in favor of the taxpayer, the tribunal's reasoning suggests that the tax authorities could prevail in other cases with more typical fact patterns when a nonresident holding company has, as a practical matter, very narrow powers regarding the disposition of income received from a Danish company.
Background
Under Danish domestic tax law, nonresident companies are subject to withholding tax on dividends, interest, and royalties unless certain conditions are satisfied. The rate of withholding tax is 28 percent on dividends and 25 percent on interest and royalties. If the taxpayer is entitled to invoke the benefits of a tax treaty or the EU parent-subsidiary or interest and royalties directives, the withholding tax may be reduced or eliminated. To qualify for tax treaty protection, the taxpayer normally must be the beneficial owner of the relevant income.
The acquisition of many Danish companies by corporate investors and private equity funds in recent years has prompted the Danish tax authorities to examine the structuring and income flows resulting from such acquisitions and to significantly increase their focus on the issue of beneficial ownership. This has given rise to a number of cases involving substantial amounts in which the tax authorities have asserted that nonresident holding companies located within the EU or in treaty countries are not the beneficial owners of dividends, interest, and royalties paid to them by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and required the Danish companies to pay the withholding tax.
Facts
The case involved a consortium of private equity funds and other investors that had acquired a Danish company through a Luxembourg holding company. The legal structure may be summarized as follows:
The following transaction steps were scrutinized by the tax authorities:
• (1) HoldCo 1 distributed a dividend to LuxCo 2;
• (2) LuxCo 2 granted two loans to HoldCo 1;
• (3) HoldCo 1 subscribed for share capital in HoldCo 2; and
• (4) HoldCo 2 acquired shares in Target from third parties.
Steps 1 to 3 were executed on the same day and involved the same amount of money. Step 4, however, involved a higher amount because the purchase price for the shares was financed in part by third-party debt.
The tax authorities asserted that the dividends paid in Step 1 were subject to Danish withholding tax because LuxCo 2 was not the beneficial owner of the dividends under article 10 of the 1980 Denmark-Luxembourg tax treaty. The tax authorities relied on paragraphs 12, 12.1, and 12.2 of the commentary on article 10 of the 2003 OECD model treaty. According to the tax authorities, LuxCo 2 was not the beneficial owner because it did not carry out an active business and had no real power to act regarding the disposition of the dividends in question. On this basis, the tax authorities further argued that neither EU law nor the parent-subsidiary directive prevented Denmark from levying withholding tax on the dividends.
The taxpayer claimed that LuxCo 2 was the beneficial owner of the dividends. The taxpayer argued that a static interpretation should be made regarding the beneficial ownership concept; the applicable treaty was signed in 1980, and between 1977 and 2003 the OECD commentary significantly broadened the scope of circumstances in which a recipient of income can be regarded as not being the beneficial owner. However, the taxpayer claimed that LuxCo 2 should be considered the beneficial owner even under the 2003 commentary. The taxpayer's principal argument was that the dividends had not been redistributed but were used to finance the loans granted to HoldCo 1. Thus, it was immaterial whether LuxCo 2 had real power to act regarding the disposition of the dividends.
The taxpayer also referred to the prevailing opinion in Denmark that the Danish Supreme Court is expected to interpret the concept of beneficial owner in accordance with domestic law rather than to apply an autonomous tax treaty interpretation. The concept of beneficial owner is not used in domestic Danish tax law, so it was argued that a domestic law interpretation would mean that the "formal" owner of income normally should be recognized for tax purposes. That LuxCo 2 did not carry out an active business should be irrelevant because this was attributable to the nature of the company.
Article 1(2) of the EU parent-subsidiary directive, which authorizes member states to apply antiavoidance measures, requires that such measures be set forth in domestic tax law. Denmark does not have any specific antiavoidance rules on beneficial ownership, so Denmark would have to rely on the substance-over-form or assignment of income doctrines under Danish tax law. The taxpayer argued that the requirements for invoking these doctrines were not met in the case.
Tribunal's Decision
The majority of the National Tax Tribunal began by referring to paragraphs 12, 12.1, and 22 of the 2003 commentary on article 10. In particular, the tribunal emphasized that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, narrow powers to act were not in themselves sufficient for a conduit company to be disregarded as a beneficial owner.
Since LuxCo 2 had not redistributed the dividends to its parent company, it could not be characterized as a conduit company regarding the dividends. Thus, LuxCo 2 was held to be the beneficial owner of the dividends under the Denmark-Luxembourg treaty. Moreover, the tax authorities were not entitled to deny the taxpayer access to the EU parent-subsidiary directive because the conditions for applying the substance-over-form and the assignment of income doctrines under Danish law were not met. The majority thus concluded that the taxpayer had not infringed on its withholding tax obligation. The minority of the tribunal, however, found in favor of the tax authorities on the grounds that it was immaterial whether the dividends were channeled to the parent company.
Conclusion
It should be emphasized that this case is not typical of the majority of cases, in which the income paid by a Danish company to a nonresident holding company is channeled to the ultimate shareholders. Based on the reasoning of the tribunal, it is not certain how such other cases will be decided. However, the emphasis placed on the 2003 OECD commentary suggests that new cases will be decided in the spirit of that commentary. Hence, a crucial issue will likely be the evaluation of the practical powers entrusted to a holding company in relation to income received from the Danish company. However, the decision does not give any indication of the National Tax Tribunal's position on the level of such powers that will be required to satisfy the beneficial ownership test.
More Info - Denmark Beneficial Ownership tax decision
Thorbjørn Henriksen Tax adviser at Copenhagen
Denmark's National Tax Tribunal on April 16 published its decision (SKM2010.268.LSR) in the first of a series of cases dealing with the beneficial ownership of dividends, interest, and royalties paid by Danish companies to nonresident holding companies.
Although this case was decided in favor of the taxpayer, the tribunal's reasoning suggests that the tax authorities could prevail in other cases with more typical fact patterns when a nonresident holding company has, as a practical matter, very narrow powers regarding the disposition of income received from a Danish company.
Background
Under Danish domestic tax law, nonresident companies are subject to withholding tax on dividends, interest, and royalties unless certain conditions are satisfied. The rate of withholding tax is 28 percent on dividends and 25 percent on interest and royalties. If the taxpayer is entitled to invoke the benefits of a tax treaty or the EU parent-subsidiary or interest and royalties directives, the withholding tax may be reduced or eliminated. To qualify for tax treaty protection, the taxpayer normally must be the beneficial owner of the relevant income.
The acquisition of many Danish companies by corporate investors and private equity funds in recent years has prompted the Danish tax authorities to examine the structuring and income flows resulting from such acquisitions and to significantly increase their focus on the issue of beneficial ownership. This has given rise to a number of cases involving substantial amounts in which the tax authorities have asserted that nonresident holding companies located within the EU or in treaty countries are not the beneficial owners of dividends, interest, and royalties paid to them by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and required the Danish companies to pay the withholding tax.
Facts
The case involved a consortium of private equity funds and other investors that had acquired a Danish company through a Luxembourg holding company. The legal structure may be summarized as follows:
The following transaction steps were scrutinized by the tax authorities:
• (1) HoldCo 1 distributed a dividend to LuxCo 2;
• (2) LuxCo 2 granted two loans to HoldCo 1;
• (3) HoldCo 1 subscribed for share capital in HoldCo 2; and
• (4) HoldCo 2 acquired shares in Target from third parties.
Steps 1 to 3 were executed on the same day and involved the same amount of money. Step 4, however, involved a higher amount because the purchase price for the shares was financed in part by third-party debt.
The tax authorities asserted that the dividends paid in Step 1 were subject to Danish withholding tax because LuxCo 2 was not the beneficial owner of the dividends under article 10 of the 1980 Denmark-Luxembourg tax treaty. The tax authorities relied on paragraphs 12, 12.1, and 12.2 of the commentary on article 10 of the 2003 OECD model treaty. According to the tax authorities, LuxCo 2 was not the beneficial owner because it did not carry out an active business and had no real power to act regarding the disposition of the dividends in question. On this basis, the tax authorities further argued that neither EU law nor the parent-subsidiary directive prevented Denmark from levying withholding tax on the dividends.
The taxpayer claimed that LuxCo 2 was the beneficial owner of the dividends. The taxpayer argued that a static interpretation should be made regarding the beneficial ownership concept; the applicable treaty was signed in 1980, and between 1977 and 2003 the OECD commentary significantly broadened the scope of circumstances in which a recipient of income can be regarded as not being the beneficial owner. However, the taxpayer claimed that LuxCo 2 should be considered the beneficial owner even under the 2003 commentary. The taxpayer's principal argument was that the dividends had not been redistributed but were used to finance the loans granted to HoldCo 1. Thus, it was immaterial whether LuxCo 2 had real power to act regarding the disposition of the dividends.
The taxpayer also referred to the prevailing opinion in Denmark that the Danish Supreme Court is expected to interpret the concept of beneficial owner in accordance with domestic law rather than to apply an autonomous tax treaty interpretation. The concept of beneficial owner is not used in domestic Danish tax law, so it was argued that a domestic law interpretation would mean that the "formal" owner of income normally should be recognized for tax purposes. That LuxCo 2 did not carry out an active business should be irrelevant because this was attributable to the nature of the company.
Article 1(2) of the EU parent-subsidiary directive, which authorizes member states to apply antiavoidance measures, requires that such measures be set forth in domestic tax law. Denmark does not have any specific antiavoidance rules on beneficial ownership, so Denmark would have to rely on the substance-over-form or assignment of income doctrines under Danish tax law. The taxpayer argued that the requirements for invoking these doctrines were not met in the case.
Tribunal's Decision
The majority of the National Tax Tribunal began by referring to paragraphs 12, 12.1, and 22 of the 2003 commentary on article 10. In particular, the tribunal emphasized that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, narrow powers to act were not in themselves sufficient for a conduit company to be disregarded as a beneficial owner.
Since LuxCo 2 had not redistributed the dividends to its parent company, it could not be characterized as a conduit company regarding the dividends. Thus, LuxCo 2 was held to be the beneficial owner of the dividends under the Denmark-Luxembourg treaty. Moreover, the tax authorities were not entitled to deny the taxpayer access to the EU parent-subsidiary directive because the conditions for applying the substance-over-form and the assignment of income doctrines under Danish law were not met. The majority thus concluded that the taxpayer had not infringed on its withholding tax obligation. The minority of the tribunal, however, found in favor of the tax authorities on the grounds that it was immaterial whether the dividends were channeled to the parent company.
Conclusion
It should be emphasized that this case is not typical of the majority of cases, in which the income paid by a Danish company to a nonresident holding company is channeled to the ultimate shareholders. Based on the reasoning of the tribunal, it is not certain how such other cases will be decided. However, the emphasis placed on the 2003 OECD commentary suggests that new cases will be decided in the spirit of that commentary. Hence, a crucial issue will likely be the evaluation of the practical powers entrusted to a holding company in relation to income received from the Danish company. However, the decision does not give any indication of the National Tax Tribunal's position on the level of such powers that will be required to satisfy the beneficial ownership test.
Denmark's National Tax Tribunal on April 16 published its decision (SKM2010.268.LSR) in the first of a series of cases dealing with the beneficial ownership of dividends, interest, and royalties paid by Danish companies to nonresident holding companies.
Although this case was decided in favor of the taxpayer, the tribunal's reasoning suggests that the tax authorities could prevail in other cases with more typical fact patterns when a nonresident holding company has, as a practical matter, very narrow powers regarding the disposition of income received from a Danish company.
Background
Under Danish domestic tax law, nonresident companies are subject to withholding tax on dividends, interest, and royalties unless certain conditions are satisfied. The rate of withholding tax is 28 percent on dividends and 25 percent on interest and royalties. If the taxpayer is entitled to invoke the benefits of a tax treaty or the EU parent-subsidiary or interest and royalties directives, the withholding tax may be reduced or eliminated. To qualify for tax treaty protection, the taxpayer normally must be the beneficial owner of the relevant income.
The acquisition of many Danish companies by corporate investors and private equity funds in recent years has prompted the Danish tax authorities to examine the structuring and income flows resulting from such acquisitions and to significantly increase their focus on the issue of beneficial ownership. This has given rise to a number of cases involving substantial amounts in which the tax authorities have asserted that nonresident holding companies located within the EU or in treaty countries are not the beneficial owners of dividends, interest, and royalties paid to them by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and required the Danish companies to pay the withholding tax.
Facts
The case involved a consortium of private equity funds and other investors that had acquired a Danish company through a Luxembourg holding company. The legal structure may be summarized as follows:
The following transaction steps were scrutinized by the tax authorities:
• (1) HoldCo 1 distributed a dividend to LuxCo 2;
• (2) LuxCo 2 granted two loans to HoldCo 1;
• (3) HoldCo 1 subscribed for share capital in HoldCo 2; and
• (4) HoldCo 2 acquired shares in Target from third parties.
Steps 1 to 3 were executed on the same day and involved the same amount of money. Step 4, however, involved a higher amount because the purchase price for the shares was financed in part by third-party debt.
The tax authorities asserted that the dividends paid in Step 1 were subject to Danish withholding tax because LuxCo 2 was not the beneficial owner of the dividends under article 10 of the 1980 Denmark-Luxembourg tax treaty. The tax authorities relied on paragraphs 12, 12.1, and 12.2 of the commentary on article 10 of the 2003 OECD model treaty. According to the tax authorities, LuxCo 2 was not the beneficial owner because it did not carry out an active business and had no real power to act regarding the disposition of the dividends in question. On this basis, the tax authorities further argued that neither EU law nor the parent-subsidiary directive prevented Denmark from levying withholding tax on the dividends.
The taxpayer claimed that LuxCo 2 was the beneficial owner of the dividends. The taxpayer argued that a static interpretation should be made regarding the beneficial ownership concept; the applicable treaty was signed in 1980, and between 1977 and 2003 the OECD commentary significantly broadened the scope of circumstances in which a recipient of income can be regarded as not being the beneficial owner. However, the taxpayer claimed that LuxCo 2 should be considered the beneficial owner even under the 2003 commentary. The taxpayer's principal argument was that the dividends had not been redistributed but were used to finance the loans granted to HoldCo 1. Thus, it was immaterial whether LuxCo 2 had real power to act regarding the disposition of the dividends.
The taxpayer also referred to the prevailing opinion in Denmark that the Danish Supreme Court is expected to interpret the concept of beneficial owner in accordance with domestic law rather than to apply an autonomous tax treaty interpretation. The concept of beneficial owner is not used in domestic Danish tax law, so it was argued that a domestic law interpretation would mean that the "formal" owner of income normally should be recognized for tax purposes. That LuxCo 2 did not carry out an active business should be irrelevant because this was attributable to the nature of the company.
Article 1(2) of the EU parent-subsidiary directive, which authorizes member states to apply antiavoidance measures, requires that such measures be set forth in domestic tax law. Denmark does not have any specific antiavoidance rules on beneficial ownership, so Denmark would have to rely on the substance-over-form or assignment of income doctrines under Danish tax law. The taxpayer argued that the requirements for invoking these doctrines were not met in the case.
Tribunal's Decision
The majority of the National Tax Tribunal began by referring to paragraphs 12, 12.1, and 22 of the 2003 commentary on article 10. In particular, the tribunal emphasized that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, narrow powers to act were not in themselves sufficient for a conduit company to be disregarded as a beneficial owner.
Since LuxCo 2 had not redistributed the dividends to its parent company, it could not be characterized as a conduit company regarding the dividends. Thus, LuxCo 2 was held to be the beneficial owner of the dividends under the Denmark-Luxembourg treaty. Moreover, the tax authorities were not entitled to deny the taxpayer access to the EU parent-subsidiary directive because the conditions for applying the substance-over-form and the assignment of income doctrines under Danish law were not met. The majority thus concluded that the taxpayer had not infringed on its withholding tax obligation. The minority of the tribunal, however, found in favor of the tax authorities on the grounds that it was immaterial whether the dividends were channeled to the parent company.
Conclusion
It should be emphasized that this case is not typical of the majority of cases, in which the income paid by a Danish company to a nonresident holding company is channeled to the ultimate shareholders. Based on the reasoning of the tribunal, it is not certain how such other cases will be decided. However, the emphasis placed on the 2003 OECD commentary suggests that new cases will be decided in the spirit of that commentary. Hence, a crucial issue will likely be the evaluation of the practical powers entrusted to a holding company in relation to income received from the Danish company. However, the decision does not give any indication of the National Tax Tribunal's position on the level of such powers that will be required to satisfy the beneficial ownership test.
Monday, April 26, 2010
Danish National Tax Tribunal - Decision on Beneficial Ownership
John Abrahamson Director International Tax at Sheltons. International Tax Lawyer in Structured Finance, Mergers and Acquisitions
Danish National Tax Tribunal - Decision on Beneficial Ownership
The Danish National Tax Tribunal issued a decision on 16 April 2010 on the beneficial ownership of dividends paid by a Danish company to its Luxembourg holding company.
Denmark can apply 28% withholding tax on dividends paid to non residents. This is eliminated if paid to a foreign parent company (at least 10% ownership of the Danish company), and a Double Tax Agreement (DTA) would require Denmark to reduce or eliminate withholding tax. DTAs generally require the foreign company to be the beneficial owner of dividends for treaty benefits to apply.
The authorities argued that the Luxembourg company was not the beneficial owner, as it did not carry out an active business, and had no real power over disposition of the dividends.
The Tribunal held that the Luxembourg company was the beneficial owner, principally because the dividends were not paid on to the foreign funds, but were loaned back to the Danish subsidiary.
The Tribunal advised that a conduit company may be disregarded as the beneficial owner if it has very narrow powers to act in respect of the disposition of the dividends. This would, however, not be the sole factor in a decision to disregard.
A future decision on the powers required to satisfy the beneficial ownership test is awaited.
Danish National Tax Tribunal - Decision on Beneficial Ownership
The Danish National Tax Tribunal issued a decision on 16 April 2010 on the beneficial ownership of dividends paid by a Danish company to its Luxembourg holding company.
Denmark can apply 28% withholding tax on dividends paid to non residents. This is eliminated if paid to a foreign parent company (at least 10% ownership of the Danish company), and a Double Tax Agreement (DTA) would require Denmark to reduce or eliminate withholding tax. DTAs generally require the foreign company to be the beneficial owner of dividends for treaty benefits to apply.
The authorities argued that the Luxembourg company was not the beneficial owner, as it did not carry out an active business, and had no real power over disposition of the dividends.
The Tribunal held that the Luxembourg company was the beneficial owner, principally because the dividends were not paid on to the foreign funds, but were loaned back to the Danish subsidiary.
The Tribunal advised that a conduit company may be disregarded as the beneficial owner if it has very narrow powers to act in respect of the disposition of the dividends. This would, however, not be the sole factor in a decision to disregard.
A future decision on the powers required to satisfy the beneficial ownership test is awaited.
Wednesday, April 21, 2010
USA - Vermont Captive Insurance
Why Vermont?
No other state even comes close for captives -- and only Bermuda and the Cayman Islands have more captives than we do. Vermont is the undisputed on-shore leader with over twenty-five years of experience working with the captive insurance industry. Vermont is home to 44 of the Fortune 100 and 19 of the companies that make up the Dow 30 have Vermont captives.
What this means to you is that we're experienced in working with companies like yours.
We know how to do it -- and our record stands for itself.
Vermont Responds to Your Needs
Our laws and regulations keep pace with industry needs. Our legislature listens and is responsive. We keep our captive environment up to date and friendly. And in Vermont getting a meeting with a key state official only takes a phone call. Vermont has a team of regulatory and promotional professionals ready to respond to your needs.
What this means to you is a customized and personal approach to making sure Vermont meets all of your captive insurance needs.
Vermont's Infrastructure is Second to None Vermont's professional support services are the best in the world. As a leader in the industry, Vermont is home to the nation's top captive insurance providers. When you're looking for world leading management companies, highly specialized banking and investment services, accountants or expert law firms -- we've got them. When you're looking for a supportive and influential trade association -- we've got it.
What this means to you is Vermont has the complete package to maximize the benefits of your company's captive insurance needs with a team of experienced and proven professionals.
For more information go to www.vermontcaptive.com and contact www.TaxRiskManagement.com for assistance.
No other state even comes close for captives -- and only Bermuda and the Cayman Islands have more captives than we do. Vermont is the undisputed on-shore leader with over twenty-five years of experience working with the captive insurance industry. Vermont is home to 44 of the Fortune 100 and 19 of the companies that make up the Dow 30 have Vermont captives.
What this means to you is that we're experienced in working with companies like yours.
We know how to do it -- and our record stands for itself.
Vermont Responds to Your Needs
Our laws and regulations keep pace with industry needs. Our legislature listens and is responsive. We keep our captive environment up to date and friendly. And in Vermont getting a meeting with a key state official only takes a phone call. Vermont has a team of regulatory and promotional professionals ready to respond to your needs.
What this means to you is a customized and personal approach to making sure Vermont meets all of your captive insurance needs.
Vermont's Infrastructure is Second to None Vermont's professional support services are the best in the world. As a leader in the industry, Vermont is home to the nation's top captive insurance providers. When you're looking for world leading management companies, highly specialized banking and investment services, accountants or expert law firms -- we've got them. When you're looking for a supportive and influential trade association -- we've got it.
What this means to you is Vermont has the complete package to maximize the benefits of your company's captive insurance needs with a team of experienced and proven professionals.
For more information go to www.vermontcaptive.com and contact www.TaxRiskManagement.com for assistance.
Monday, April 19, 2010
USA - Notes on offshore trusts
2010/04/19
1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.
Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.
Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.
An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.
NEUTERED TRUSTS
Asset Protection Trusts Neutered
by 2005 Bankruptcy Reform Act
The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.
Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.
Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.
FOREIGN ASSET PROTECTION TRUST CASES
The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.
* In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
* Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”
1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.
Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.
Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.
An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.
NEUTERED TRUSTS
Asset Protection Trusts Neutered
by 2005 Bankruptcy Reform Act
The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.
Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.
Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.
FOREIGN ASSET PROTECTION TRUST CASES
The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.
* In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
* Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”
Why Malta?
Prof D N Erasmus
2010/04/19
Apart from the basic information below, one of our associate Professors have done quite a bit of research into Malta. If you would like to participate in the Malta Tax Benefits lecture, please contact Professor D N Erasmus daniel@dnerasmus.com to book a seat. The lecture is in the process of being arranged.
Why MALTA?
Why register a company in Malta?
The benefits of registering a company in Malta are:
• the tax advantages (5% for non-resident shareholders).
• membership of the European Union.
• excellent telecommunications.
• legislative framework in line with EU directives.
• Malta has a robust yet flexible legal and regulatory framework, with all company law and regulations published in English.
• Operational costs are low, including regulatory, registrar, listing fees, cost of lease or rent, staff costs etc.
• English and Maltese are the official languages but Italian and French are widely spoken.
• Professional Investor Funds are exempt from Maltese capital gains and income taxes, so non-resident investors do not have to pay income tax in Malta.
• Malta has double taxation treaties with 60 countries including most EU and OECD member states.
• Malta can boast of a high standard of education and there are highly qualified specialist professionals from all fields.
By exploiting the tax advantages and other facilities in Malta, companies and individuals who are involved in international trade, could derive great benefits by relocating their trading activities to originate from Malta.
2010/04/19
Apart from the basic information below, one of our associate Professors have done quite a bit of research into Malta. If you would like to participate in the Malta Tax Benefits lecture, please contact Professor D N Erasmus daniel@dnerasmus.com to book a seat. The lecture is in the process of being arranged.
Why MALTA?
Why register a company in Malta?
The benefits of registering a company in Malta are:
• the tax advantages (5% for non-resident shareholders).
• membership of the European Union.
• excellent telecommunications.
• legislative framework in line with EU directives.
• Malta has a robust yet flexible legal and regulatory framework, with all company law and regulations published in English.
• Operational costs are low, including regulatory, registrar, listing fees, cost of lease or rent, staff costs etc.
• English and Maltese are the official languages but Italian and French are widely spoken.
• Professional Investor Funds are exempt from Maltese capital gains and income taxes, so non-resident investors do not have to pay income tax in Malta.
• Malta has double taxation treaties with 60 countries including most EU and OECD member states.
• Malta can boast of a high standard of education and there are highly qualified specialist professionals from all fields.
By exploiting the tax advantages and other facilities in Malta, companies and individuals who are involved in international trade, could derive great benefits by relocating their trading activities to originate from Malta.
Tuesday, April 13, 2010
USA - Shulman acknowledges IRS has "changed the game" on compliance
Erin Kelechava in Washington, DC
2010/04/13
"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."
Doug Shulman, Commissioner of the US Internal Revenue Service (IRS), spent much of his speech at Tax Executive Institute's mid-year meeting yesterday time reassuring the audience that he appreciated their concerns over new IRS compliance proposals.
Shulman referred to announcement 2010-9, released in January, as a big step towards fostering transparency in the tax system. The announcement describes changes to how corporate taxpayers will be required to report uncertain tax positions. These new reporting requirements are causing serious concern among large corporate taxpayers about the amount of information the IRS will now have about potential tax liabilities.
"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."
The commissioner stressed that in developing the programme, the IRS tried to craft a proposal that provides the Service with the information it needs, without forcing taxpayers to divulge its opinions about the strengths and weaknesses of their uncertain tax positions.
He acknowledged that although "some friction in the system in healthy" , he also believes that the new proposals will allow both parties to assure that time is efficiently spent discussing the law rather than searching for facts, and would allow the examiners to prioritise issues, resulting in a more timely and less fraught resolution process.
The IRS chief also tried to provide some reassurance about litigation that is of serious concern to taxpayers. He said that the Service is maintaining its policy of restraint about tax accrual workpapers. This has been the subject of a recent case in the US Court of Appeals for the First Circuit, US v Textron.
Shulman also addressed concerns about the redundancy of information taxpayers file with the IRS. He announced that the IRS is planning to consider the reporting of uncertain tax positions as adequate disclosure for purposes of penalty provisions in other tax statutes.
In response to a question from the audience as to how the IRS would train its examiners to use the information contained in the new schedule of uncertain positions properly, Shulman was candid.
"This proposal has laid bare the distrust on both sides of the audit table," he said.
For the IRS' part, Shulman noted that "with more information comes more responsibility".
Changes to CAP and increased published guidance
Shulman also announced the expansion of the Compliance Assurance Program (CAP) initiative, which he referred to as "the most successful foray to date into enhancing transparency". The IRS is now trying to make the CAP pilot programme permanent, and is working on developing a pre-CAP process to allow taxpayers an easier path to enrolment in the programme.
The Service is also developing a CAP maintenance programme so that when issues arise between tax seasons, taxpayers that are involved in the program will be able to gain more benefit from the greater certainty that the program affords.
The commissioner said that the use of published guidance will be front and centre in the government's efforts to eliminate uncertainty. "We won't hesitate to go to Congress with issues that are ambiguous and require clarification," he said.
2010/04/13
"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."
Doug Shulman, Commissioner of the US Internal Revenue Service (IRS), spent much of his speech at Tax Executive Institute's mid-year meeting yesterday time reassuring the audience that he appreciated their concerns over new IRS compliance proposals.
Shulman referred to announcement 2010-9, released in January, as a big step towards fostering transparency in the tax system. The announcement describes changes to how corporate taxpayers will be required to report uncertain tax positions. These new reporting requirements are causing serious concern among large corporate taxpayers about the amount of information the IRS will now have about potential tax liabilities.
"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."
The commissioner stressed that in developing the programme, the IRS tried to craft a proposal that provides the Service with the information it needs, without forcing taxpayers to divulge its opinions about the strengths and weaknesses of their uncertain tax positions.
He acknowledged that although "some friction in the system in healthy" , he also believes that the new proposals will allow both parties to assure that time is efficiently spent discussing the law rather than searching for facts, and would allow the examiners to prioritise issues, resulting in a more timely and less fraught resolution process.
The IRS chief also tried to provide some reassurance about litigation that is of serious concern to taxpayers. He said that the Service is maintaining its policy of restraint about tax accrual workpapers. This has been the subject of a recent case in the US Court of Appeals for the First Circuit, US v Textron.
Shulman also addressed concerns about the redundancy of information taxpayers file with the IRS. He announced that the IRS is planning to consider the reporting of uncertain tax positions as adequate disclosure for purposes of penalty provisions in other tax statutes.
In response to a question from the audience as to how the IRS would train its examiners to use the information contained in the new schedule of uncertain positions properly, Shulman was candid.
"This proposal has laid bare the distrust on both sides of the audit table," he said.
For the IRS' part, Shulman noted that "with more information comes more responsibility".
Changes to CAP and increased published guidance
Shulman also announced the expansion of the Compliance Assurance Program (CAP) initiative, which he referred to as "the most successful foray to date into enhancing transparency". The IRS is now trying to make the CAP pilot programme permanent, and is working on developing a pre-CAP process to allow taxpayers an easier path to enrolment in the programme.
The Service is also developing a CAP maintenance programme so that when issues arise between tax seasons, taxpayers that are involved in the program will be able to gain more benefit from the greater certainty that the program affords.
The commissioner said that the use of published guidance will be front and centre in the government's efforts to eliminate uncertainty. "We won't hesitate to go to Congress with issues that are ambiguous and require clarification," he said.
Tuesday, April 6, 2010
10 MOST FAMOUS TAX EVADERS OF ALL TIME
As soon as you receive your first real paycheck, you experience the bittersweet moment when you understand income tax withdrawals. The more you make, the more the government takes out in taxes, but there’s nothing you can do about it, at least not legally. If you’re ever tempted to stiff the government on taxes, though, check out the stories of these 10 famous tax evaders. Let’s hope they convince you to keep it legal.
1. Judy Garland: Movie star Judy Garland played dreamy, optimistic characters in some of her best films, but she famously struggled with drugs, self image problems and depression. She was divorced four times, and after a failed suicide attempt, died of a drug overdose when she was only 47 years old. In addition to her prescription drug problem, the Wizard of Oz star and Golden Globe, Grammy and Special Tony Award-winning actress did not pay taxes between 1951 and 1952. She was audited by the IRS and had to pay hundreds of thousands of dollars in back taxes, during a time in which she was already struggling financially.
2. William Bud Abbott and Lou Costello: The iconic comedy stars Abbott and Costello were immensely popular in the 1940s and 50s and developed the now infamous act "Who’s on First?" They were featured on the radio, on TV and in movies, but due to overexposure in the 1950s, the public began to lose interest and their act suffered. Both men were ordered by the IRS to pay such a large amount of back taxes that they had to sell their homes and declare bankruptcy.
3. Tom Coughlin: The Wal-Mart family and their partners are known for being extremely wealthy, but the former vice chairman of Wal-Mart Stores Inc., Thomas Coughlin nearly went to prison for tax evasion and fraud. Coughlin, who had worked for Wal-Mart for 28 years, was sentenced to home detention and probation in 2008, plus fines and restitutions in 2006.
4. Annie Liebovitz: Photographer Annie Leibovitz has photographed celebrities, presidents and other public figures for distinguished magazines and publications, as well as for private clients, but in 2009, she went public with her surprising financial troubles. She apparently had a damaging spending problem, was sued for $15 million by a neighbor, and had to put up as collateral several of her houses and rights to photographs. Luxist.com reports that Leibovitz "was also late in paying $1.8 million in federal taxes in 2007 and 2008."
5. Pete Rose: Former baseball star and manager Pete Rose is also one of the most famous tax evaders of all time. He actually had to plead guilty to filing two false income returns. Rose neglected to tell the IRS of any income he received selling memorabilia and autographs or from horse racing. He spent July, 1990 – January 1991 in jail, and paid $366,041 in back taxes.
6. Wesley Snipes: Hollywood actor and producer Wesley Snipes is famous for starring in movies like Blade and U.S. Marshals, but he was slapped with a serious fraud charge in 2006. Along with Eddie Ray Kahn and Douglas P. Rosile, Snipes was charged with conspiring to defraud the United States, and Snipes alone was charged with six counts of willingly failing to file federal income tax returns. The charges involved claims going back 10 years. In 2008, he was sentenced to three years in prison, but he is still appealing the sentence and works freely around the world, though he is only out on bail.
7. Richard Hatch: Survivor star Richard Hatch won the first season of the reality TV show, earning him $1 million, plus another $10,000 for appearing on the reunion show. Hatch never reported the extra income to the IRS, or the $321,000 he received from appearing on a Boston radio show. In 2005, he was found guilty on 10 counts, and in 2006, he was found guilty of tax evasion. Hatch began serving his 51-month sentence in May 2006, but he was released three years later to home confinement.
8. Nicholas Cage: Movie star Nicholas Cage has an Academy Award and was once in the top blockbusters in the 1990s, but his career has been dwindling lately. The City of Angels, Con Air and It Could Happen to You star was the subject of an IRS investigation involving the sale of a home in Louisiana, as well as failed federal income taxes amounting to over $6.5 million. In October 2009, he sued his business manager for $20 million.
9. Sophia Loren: Italian movie star Sophia Loren is still considered one of the most beautiful actresses of all time. Loren appeared in movies like Houseboat, The Fall of the Roman Empire and Man of La Mancha, and is the second most awarded actress in movie history. In 1982, however, Loren was imprisoned for tax evasion, and she spent 18 days in jail. Remarkably, her time in prison never seemed to hurt her reputation, and she continues to be one of the most celebrated women in Hollywood.
10. Al Capone: Infamous gangster Al Capone was a successful bootlegger and liquor smuggler in the 1920s and 1930s. The Brooklyn-born, Chicago-based criminal used the cover of a used furniture salesman, but he ran one of the biggest crime rings in history and was wanted by the FBI for a number of crimes, including the 1929 St. Valentine’s Day Massacre. That same year, the Bureau of Prohibition began to shut down some of Capone’s breweries, and two years later, he was indicted for income tax evasion and was sentenced to eleven years in jail.
Provided by: http://www.careeroverview.com/blog/2010/10-most-famous-tax-evaders-of-all-time/
1. Judy Garland: Movie star Judy Garland played dreamy, optimistic characters in some of her best films, but she famously struggled with drugs, self image problems and depression. She was divorced four times, and after a failed suicide attempt, died of a drug overdose when she was only 47 years old. In addition to her prescription drug problem, the Wizard of Oz star and Golden Globe, Grammy and Special Tony Award-winning actress did not pay taxes between 1951 and 1952. She was audited by the IRS and had to pay hundreds of thousands of dollars in back taxes, during a time in which she was already struggling financially.
2. William Bud Abbott and Lou Costello: The iconic comedy stars Abbott and Costello were immensely popular in the 1940s and 50s and developed the now infamous act "Who’s on First?" They were featured on the radio, on TV and in movies, but due to overexposure in the 1950s, the public began to lose interest and their act suffered. Both men were ordered by the IRS to pay such a large amount of back taxes that they had to sell their homes and declare bankruptcy.
3. Tom Coughlin: The Wal-Mart family and their partners are known for being extremely wealthy, but the former vice chairman of Wal-Mart Stores Inc., Thomas Coughlin nearly went to prison for tax evasion and fraud. Coughlin, who had worked for Wal-Mart for 28 years, was sentenced to home detention and probation in 2008, plus fines and restitutions in 2006.
4. Annie Liebovitz: Photographer Annie Leibovitz has photographed celebrities, presidents and other public figures for distinguished magazines and publications, as well as for private clients, but in 2009, she went public with her surprising financial troubles. She apparently had a damaging spending problem, was sued for $15 million by a neighbor, and had to put up as collateral several of her houses and rights to photographs. Luxist.com reports that Leibovitz "was also late in paying $1.8 million in federal taxes in 2007 and 2008."
5. Pete Rose: Former baseball star and manager Pete Rose is also one of the most famous tax evaders of all time. He actually had to plead guilty to filing two false income returns. Rose neglected to tell the IRS of any income he received selling memorabilia and autographs or from horse racing. He spent July, 1990 – January 1991 in jail, and paid $366,041 in back taxes.
6. Wesley Snipes: Hollywood actor and producer Wesley Snipes is famous for starring in movies like Blade and U.S. Marshals, but he was slapped with a serious fraud charge in 2006. Along with Eddie Ray Kahn and Douglas P. Rosile, Snipes was charged with conspiring to defraud the United States, and Snipes alone was charged with six counts of willingly failing to file federal income tax returns. The charges involved claims going back 10 years. In 2008, he was sentenced to three years in prison, but he is still appealing the sentence and works freely around the world, though he is only out on bail.
7. Richard Hatch: Survivor star Richard Hatch won the first season of the reality TV show, earning him $1 million, plus another $10,000 for appearing on the reunion show. Hatch never reported the extra income to the IRS, or the $321,000 he received from appearing on a Boston radio show. In 2005, he was found guilty on 10 counts, and in 2006, he was found guilty of tax evasion. Hatch began serving his 51-month sentence in May 2006, but he was released three years later to home confinement.
8. Nicholas Cage: Movie star Nicholas Cage has an Academy Award and was once in the top blockbusters in the 1990s, but his career has been dwindling lately. The City of Angels, Con Air and It Could Happen to You star was the subject of an IRS investigation involving the sale of a home in Louisiana, as well as failed federal income taxes amounting to over $6.5 million. In October 2009, he sued his business manager for $20 million.
9. Sophia Loren: Italian movie star Sophia Loren is still considered one of the most beautiful actresses of all time. Loren appeared in movies like Houseboat, The Fall of the Roman Empire and Man of La Mancha, and is the second most awarded actress in movie history. In 1982, however, Loren was imprisoned for tax evasion, and she spent 18 days in jail. Remarkably, her time in prison never seemed to hurt her reputation, and she continues to be one of the most celebrated women in Hollywood.
10. Al Capone: Infamous gangster Al Capone was a successful bootlegger and liquor smuggler in the 1920s and 1930s. The Brooklyn-born, Chicago-based criminal used the cover of a used furniture salesman, but he ran one of the biggest crime rings in history and was wanted by the FBI for a number of crimes, including the 1929 St. Valentine’s Day Massacre. That same year, the Bureau of Prohibition began to shut down some of Capone’s breweries, and two years later, he was indicted for income tax evasion and was sentenced to eleven years in jail.
Provided by: http://www.careeroverview.com/blog/2010/10-most-famous-tax-evaders-of-all-time/
Thursday, December 24, 2009
The Managerial Benefits of Tax Compliance: Perception by Small Business Taxpayers
P.Lignier
2009/12/18
The results of the survey conducted by the doctoral candidate are interesting and point out why businesses are reluctant to put extra effort into being tax compliant. The results are contrary to what our experience is in focusing on a tax risk management process - there are clear benefits to taxpayer businesses.
eJournal of Tax Research (2009) vol. 7, no. 2, pp. 106-133
The Managerial Benefits of Tax Compliance:
Perception by Small Business Taxpayers
Philip Lignier ( Lecturer in Taxation, School of Accountancy, Queensland University of Technology. This paper is derived from my PhD thesis that I completed as a doctoral candidate at Atax, UNSW.
Email: philip.lignier@qut.edu.au)
Abstract
Research undertaken in 2006 – 2007 investigated the perception of managerial benefits of tax compliance by small business taxpayers. Survey data from a sample of 300 small business taxpayers and responses to semi-structured interviews of ownermanagers were examined. The study found that a majority of small business taxpayers recognised that tax compliance
activities led to better record keeping and to an improved knowledge of their financial affairs. However, there seemed to be a general reluctance by respondents to accept the idea that benefits could be derived as a result of complying with tax. The findings of this study are important as it is the first research that systematically investigated managerial benefits and their perception by small business taxpayers in Australia.
TWO QUOTES APPEAR BELOW:
“If we didn’t have tax, keeping records of our debtors would be the only thing
I would do. I would prepare accounts in-house only; […] there would be no
point in having an accountant.” TCE participant A
“If we didn’t have tax, I would probably do it all [the accounting] in house.
But I admit that I would be a bit concerned about the accuracy of the records
as nobody would check the work. At least the accountant does.” TCE
Participant E
2009/12/18
The results of the survey conducted by the doctoral candidate are interesting and point out why businesses are reluctant to put extra effort into being tax compliant. The results are contrary to what our experience is in focusing on a tax risk management process - there are clear benefits to taxpayer businesses.
eJournal of Tax Research (2009) vol. 7, no. 2, pp. 106-133
The Managerial Benefits of Tax Compliance:
Perception by Small Business Taxpayers
Philip Lignier ( Lecturer in Taxation, School of Accountancy, Queensland University of Technology. This paper is derived from my PhD thesis that I completed as a doctoral candidate at Atax, UNSW.
Email: philip.lignier@qut.edu.au)
Abstract
Research undertaken in 2006 – 2007 investigated the perception of managerial benefits of tax compliance by small business taxpayers. Survey data from a sample of 300 small business taxpayers and responses to semi-structured interviews of ownermanagers were examined. The study found that a majority of small business taxpayers recognised that tax compliance
activities led to better record keeping and to an improved knowledge of their financial affairs. However, there seemed to be a general reluctance by respondents to accept the idea that benefits could be derived as a result of complying with tax. The findings of this study are important as it is the first research that systematically investigated managerial benefits and their perception by small business taxpayers in Australia.
TWO QUOTES APPEAR BELOW:
“If we didn’t have tax, keeping records of our debtors would be the only thing
I would do. I would prepare accounts in-house only; […] there would be no
point in having an accountant.” TCE participant A
“If we didn’t have tax, I would probably do it all [the accounting] in house.
But I admit that I would be a bit concerned about the accuracy of the records
as nobody would check the work. At least the accountant does.” TCE
Participant E
Monday, November 30, 2009
SARS are sending information notices to Tannenbaum scheme participants - to commence audits
TAXtalk
2009/11/25
SARS are sending out the first information notices to commence tax audits on Tannenbaum scheme participants. Be very careful of your constitutional rights in complying with SARS'request. THe are already participating as observers at the secret FICA inquiries taking place to gather as much information about the participants - not just Tannenbaum and Rees. How you approach this investigation will go a long way towards allowing to to claim any losses. SARS have already warned they will not allow the deduction of losses. If it was an investment - they may be right. If it was a loan, they may also be right. But there is one more possibility that may give you the deduction - but what you say now, and have said in the past will become part of the evidence to support or refute the deduction of the loss opportunity.
A closed seminar for parties affected by the Tannenbaum Scheme will be held (and their advisors are invited) to explore the opportunities for claiming a tax deduction.
The seminar will be held and broadcast on-line with an opportunity for delegates to ask questions. Interested participants are invited to contact Gilbert Ferreira on gilfer@me.com to book their seat.
2009/11/25
SARS are sending out the first information notices to commence tax audits on Tannenbaum scheme participants. Be very careful of your constitutional rights in complying with SARS'request. THe are already participating as observers at the secret FICA inquiries taking place to gather as much information about the participants - not just Tannenbaum and Rees. How you approach this investigation will go a long way towards allowing to to claim any losses. SARS have already warned they will not allow the deduction of losses. If it was an investment - they may be right. If it was a loan, they may also be right. But there is one more possibility that may give you the deduction - but what you say now, and have said in the past will become part of the evidence to support or refute the deduction of the loss opportunity.
A closed seminar for parties affected by the Tannenbaum Scheme will be held (and their advisors are invited) to explore the opportunities for claiming a tax deduction.
The seminar will be held and broadcast on-line with an opportunity for delegates to ask questions. Interested participants are invited to contact Gilbert Ferreira on gilfer@me.com to book their seat.
Friday, October 30, 2009
SOUTH AFRICA: Barry Tannenbaum's Ponzi Scheme - Take care
Prof D N Erasmus
2009/10/30
Further to an earlier post, the Tannenbaum Ponzi scheme is in the news with government announcing that 800 investors from 7 countries are involved, and that the estates of Dean Rees and Barry Tannenbaum are being sequestrated to ensure some of the monies can be clawed back. A more ominous risk resides beneath all of this. SARS is actively conducting desk audits on all the big investors and apparently are finding that some of them have not kept their tax affairs up to date. With a SARS hungry for money, it can be anticipated that a number of David King styled investigations will take place. In addition many of these participants are actively co-operating with the authorities on a voluntary basis, not knowing that the information they are divulging may be used in a second onslaught against them, as opposed to getting the money back from the fraudsters. Co-operating the CORRECT way with the authorities is the clever way to do this. But what is that correct way? Many would have missed this perfectly legitimate trick...So what is the correct way? Now that would be giving away my intellectual property - so if you are interested in learning more - please contact me on daniel@dnerasmus.com As to whether or not you were an investor in the scheme? Think that through carefully as well. MY EARLIER POSTING So if you read the BUSREP.CO.ZA article by a journalist quoting hungry for money SARS, in your panic you may make the wrong classification choices on how to treat your investment (or not?) in the Ponzi-scam by Barry Tannenbaum. If you classify it as an investment, you may have participated in a broader unlawful transaction breaking every rulebook in the Banks Act. On the other hand...and wouldn't you like to know? A Special Report of the likely tax consequences on the Barry Tannenbaum Ponzi Scam is available to order - currently being researched and written. One copy for the first 5 subscribers is available for a charitable contribution of R50,00 to the SPCA. The stray dogs and cats need it! Everyone after that - the research and tax direction to help you get the taxman to pay for your mess, will cost you R950,00 per report. Cheap, considering your losses may come down by your marginal tax rate.
BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009
By Roy Cokayne
Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.
Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.
However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.
Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.
Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.
Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.
2009/10/30
Further to an earlier post, the Tannenbaum Ponzi scheme is in the news with government announcing that 800 investors from 7 countries are involved, and that the estates of Dean Rees and Barry Tannenbaum are being sequestrated to ensure some of the monies can be clawed back. A more ominous risk resides beneath all of this. SARS is actively conducting desk audits on all the big investors and apparently are finding that some of them have not kept their tax affairs up to date. With a SARS hungry for money, it can be anticipated that a number of David King styled investigations will take place. In addition many of these participants are actively co-operating with the authorities on a voluntary basis, not knowing that the information they are divulging may be used in a second onslaught against them, as opposed to getting the money back from the fraudsters. Co-operating the CORRECT way with the authorities is the clever way to do this. But what is that correct way? Many would have missed this perfectly legitimate trick...So what is the correct way? Now that would be giving away my intellectual property - so if you are interested in learning more - please contact me on daniel@dnerasmus.com As to whether or not you were an investor in the scheme? Think that through carefully as well. MY EARLIER POSTING So if you read the BUSREP.CO.ZA article by a journalist quoting hungry for money SARS, in your panic you may make the wrong classification choices on how to treat your investment (or not?) in the Ponzi-scam by Barry Tannenbaum. If you classify it as an investment, you may have participated in a broader unlawful transaction breaking every rulebook in the Banks Act. On the other hand...and wouldn't you like to know? A Special Report of the likely tax consequences on the Barry Tannenbaum Ponzi Scam is available to order - currently being researched and written. One copy for the first 5 subscribers is available for a charitable contribution of R50,00 to the SPCA. The stray dogs and cats need it! Everyone after that - the research and tax direction to help you get the taxman to pay for your mess, will cost you R950,00 per report. Cheap, considering your losses may come down by your marginal tax rate.
BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009
By Roy Cokayne
Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.
Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.
However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.
Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.
Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.
Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.
I predicted this over a year ago
Prof D N Erasmus
2009/10/29
The government is running low on money as tax collections are suffering. The former commissioner is now Minister of Finance. I predicted MAJOR cash flow problems over a year ago. The writing was on the wall of SARS Annual Report. See my prediction below:
Tuesday, July 22, 2008
THE TRUTH ABOUT SARS EFFICACY
OK. So let me get this right. SARS boasts the following results in 2007:
69 270 audits
This in practical terms means, for a two man team of auditors to conduct 4 (100hr) audits per month, they had 2886 persons dedicated to this task. These audits would earn roughly R1,03bn in salaries, excluding bonuses!
R6,6bn was raised in revised assessments from these audits.
What does this mean? What the short form table of results (in their annual report published on the SARS web site) does not tell you, is that R6,6bn was not collected. That is what was merely assessed through revised assessments. For each R1 spent, they earned R6,6. What’s wrong with that? You ask! Well, a little closer look at the following scant numbers published by SARS, prints the following picture. SARS collected 3.75% of its debt (R17,7bn collected) which we presume is mainly revised assessments (or the like), which is the same type of assessments’ as the R6,6bn – not collected yet. Except for that small 3.75%.
That tells us that 96,25% of the revised assessment debt due to them is bad, or potentially bad. Remember only 3.75% has been collected! Now applying this logic through to the boasted about R6,6bn assessments that their close to 70 000 audits have earned, means that only R247,5m is probably collectable (out of the total R6,6bn). Against a cost of just over R1bn! That’s not good business. They are spending over R1bn to collect R247,5m!
We don’t know all the reasons why 96,25% is not collected of the debt due to SARS, but guesses are out there that a lot of it is improper and hasty audits, giving rise to ‘funny’ numbers for SARS, which are simply not collectable.
Turning to their heightened criminal prosecutions. We see similar statistics emerging. 447 guilty verdicts out of 1909 prosecutions. That is a success factor of only 23,4%. The worst part of it is that 1462 individuals had to be dragged through the shameful process of criminal prosecution. Have you ever witnessed the criminal prosecution of a person? It’s not a nice experience, even if you are not convicted.
These statistics are horrendous. And show a lack of respect and application of Constitutional principles in SARS exercising their important duty of administering tax law and not merely being a monetary hitman!
When will someone start recognising the clear trend that is developing within SARS management, and demand that some of these questions be answered and prove, beyond a reasonable doubt, that my simple analysis is wrong!
Taking this to a positive conclusion for SARS. In light of the obvious bad business sense that prevails in its methodology in audits, they would be better of settling along the lines about to be proposed. Lets recap:
1. Of the R6,6bn, only R250m (rounded up) is collectable;
2. That translates to R3650 per taxpayer audited;
3. Each audit costs R15 000.
If SARS settles all its audits by simply asking for payment of an extra R18 650 from each audited taxpayer it would achieve two things:
1. It will be R15 000 better off per audit, covering its costs (which is not the case now);
2. It would be saving the taxpayer huge sums in tax advisor fees, justifying the R18 650 payment.
In fact, if Mr Gordhan really wanted to stretch the boundaries of being taxman entrepreneur of the decade, he should take his randomness technique of selecting taxpayers for audits, extract 70 000 taxpayers for audit and do the following:
1. Offer them the option of paying R18 650, no questions asked (like an insurance fee) and face no audit;
2. Save R15 000 out of the R18 650 (because he doesn’t need the SARS auditors to do anything);
3. Only audit those who justifiably should be audited after proper investigation;
The effect will be threefold:
1. An extra pot of tax guarantee money for less harassed taxpayers;
2. Less SARS auditors to pay, who are not turning out to be profitable;
3. More successful and focussed audits catching the real tax crooks – not chasing after political agenda’s and slanted random audits (like the one that will be planned against me after publishing this article!)
Watch this space!
2009/10/29
The government is running low on money as tax collections are suffering. The former commissioner is now Minister of Finance. I predicted MAJOR cash flow problems over a year ago. The writing was on the wall of SARS Annual Report. See my prediction below:
Tuesday, July 22, 2008
THE TRUTH ABOUT SARS EFFICACY
OK. So let me get this right. SARS boasts the following results in 2007:
69 270 audits
This in practical terms means, for a two man team of auditors to conduct 4 (100hr) audits per month, they had 2886 persons dedicated to this task. These audits would earn roughly R1,03bn in salaries, excluding bonuses!
R6,6bn was raised in revised assessments from these audits.
What does this mean? What the short form table of results (in their annual report published on the SARS web site) does not tell you, is that R6,6bn was not collected. That is what was merely assessed through revised assessments. For each R1 spent, they earned R6,6. What’s wrong with that? You ask! Well, a little closer look at the following scant numbers published by SARS, prints the following picture. SARS collected 3.75% of its debt (R17,7bn collected) which we presume is mainly revised assessments (or the like), which is the same type of assessments’ as the R6,6bn – not collected yet. Except for that small 3.75%.
That tells us that 96,25% of the revised assessment debt due to them is bad, or potentially bad. Remember only 3.75% has been collected! Now applying this logic through to the boasted about R6,6bn assessments that their close to 70 000 audits have earned, means that only R247,5m is probably collectable (out of the total R6,6bn). Against a cost of just over R1bn! That’s not good business. They are spending over R1bn to collect R247,5m!
We don’t know all the reasons why 96,25% is not collected of the debt due to SARS, but guesses are out there that a lot of it is improper and hasty audits, giving rise to ‘funny’ numbers for SARS, which are simply not collectable.
Turning to their heightened criminal prosecutions. We see similar statistics emerging. 447 guilty verdicts out of 1909 prosecutions. That is a success factor of only 23,4%. The worst part of it is that 1462 individuals had to be dragged through the shameful process of criminal prosecution. Have you ever witnessed the criminal prosecution of a person? It’s not a nice experience, even if you are not convicted.
These statistics are horrendous. And show a lack of respect and application of Constitutional principles in SARS exercising their important duty of administering tax law and not merely being a monetary hitman!
When will someone start recognising the clear trend that is developing within SARS management, and demand that some of these questions be answered and prove, beyond a reasonable doubt, that my simple analysis is wrong!
Taking this to a positive conclusion for SARS. In light of the obvious bad business sense that prevails in its methodology in audits, they would be better of settling along the lines about to be proposed. Lets recap:
1. Of the R6,6bn, only R250m (rounded up) is collectable;
2. That translates to R3650 per taxpayer audited;
3. Each audit costs R15 000.
If SARS settles all its audits by simply asking for payment of an extra R18 650 from each audited taxpayer it would achieve two things:
1. It will be R15 000 better off per audit, covering its costs (which is not the case now);
2. It would be saving the taxpayer huge sums in tax advisor fees, justifying the R18 650 payment.
In fact, if Mr Gordhan really wanted to stretch the boundaries of being taxman entrepreneur of the decade, he should take his randomness technique of selecting taxpayers for audits, extract 70 000 taxpayers for audit and do the following:
1. Offer them the option of paying R18 650, no questions asked (like an insurance fee) and face no audit;
2. Save R15 000 out of the R18 650 (because he doesn’t need the SARS auditors to do anything);
3. Only audit those who justifiably should be audited after proper investigation;
The effect will be threefold:
1. An extra pot of tax guarantee money for less harassed taxpayers;
2. Less SARS auditors to pay, who are not turning out to be profitable;
3. More successful and focussed audits catching the real tax crooks – not chasing after political agenda’s and slanted random audits (like the one that will be planned against me after publishing this article!)
Watch this space!
Thursday, October 22, 2009
Daylight Robbery
Daniel N Erasmus
2009/10/22
Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.
Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.
The morning was still crisp and fresh. The beginnings of the warm morning sun flowed over the countryside stretching the shadows of the occasional coppice. The rolling green covered in a fine sparkling mist looked fresh. He admired the beautiful English landscape around him. It was a fine day.
In the distance he noticed the remnants of last night’s fireplace wisping away, twirling slowly into the fresh morning sky. A cottage in a small village. Next to a bubbling stream in the valley below him. He noticed a child running out of the door, chasing a few chickens. Next minute, what must have been his mother, clad in a large apron, charged out the door after him, wagging her finger furiously. The setting looked so beautiful, so peaceful. What a wonderful place to live.
He sighed as his thoughts drew back to the parchment rolled up in his saddlebag. A decree issued by the Governor for May. ‘Taxa omnes fenestras per quas lucem cotidianam iter facit’. A tax on every window through which daylight passed. It had been decreed that all those home dwellers who fit into the wording of the decree would pay the tax. Although it was primarily aimed at the wealthy with large dwellings containing many windows, it also affected all small home dwellers. The locals aptly referred it to as ‘daylight robbery’.
Caius was en route to execute his orders to collect the tax from the country folk. He was given charge of a small band of soldiers to assist in executing his orders as the tax collector anticipated rebellious behaviour. Quite so, he thought to himself. Most of the country dwellers would find it difficult to find the extra coinage to pay for this sudden tax. He pitied them.
Nevertheless, he had orders to execute and obey them he must.
His small party of men continued to wind their way down the hill towards the peaceful village.
On arrival at the entrance to the village he noticed that these folk must mostly be craftsmen of high standard. The village and its construction was immaculate. The dwellings were all neatly built in pristine condition. Everywhere there was evidence of superb craftsmanship, beautifully carved pillars, pole fencing, neatly trimmed awnings, stylish wagons, well kept implements. He was astonished!
Equally astonishing was the fact that there was not a soul or animal in sight. The village was dead quiet, as if everyone had disappeared. All the doors were shut closed. Then he noticed something extra-ordinary, every single cottage he passed had beautifully designed wooden shutters in front of what would previously have been the windows. All the windows had been closed up with these shutters.
He stopped for a moment and admired not only the craftsmanship, but also the ingenuity of these folk. Not one window allowed light to pass through it. They had heard of the ‘daylight robbery’ and had carefully planned a way around it, using their own brand of expertise. How clever. How ingenious. How creative. He chuckled to himself, shouted an order to his men, and continued marching through the village, on his way. At the end of the day, there was no tax to collect here.
A LESSON for us all from the past, tax planning should always result in creating something of sustainable nature, other than just saving tax. Like the shutters before the windows and the taxman should acknowledge this. Ingenuity of value is valuable. It is what helps us to advance and develop. It should always be encouraged and promoted. Sometimes the imposition of tax gives rise to such a seedbed.
2009/10/22
Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.
Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.
The morning was still crisp and fresh. The beginnings of the warm morning sun flowed over the countryside stretching the shadows of the occasional coppice. The rolling green covered in a fine sparkling mist looked fresh. He admired the beautiful English landscape around him. It was a fine day.
In the distance he noticed the remnants of last night’s fireplace wisping away, twirling slowly into the fresh morning sky. A cottage in a small village. Next to a bubbling stream in the valley below him. He noticed a child running out of the door, chasing a few chickens. Next minute, what must have been his mother, clad in a large apron, charged out the door after him, wagging her finger furiously. The setting looked so beautiful, so peaceful. What a wonderful place to live.
He sighed as his thoughts drew back to the parchment rolled up in his saddlebag. A decree issued by the Governor for May. ‘Taxa omnes fenestras per quas lucem cotidianam iter facit’. A tax on every window through which daylight passed. It had been decreed that all those home dwellers who fit into the wording of the decree would pay the tax. Although it was primarily aimed at the wealthy with large dwellings containing many windows, it also affected all small home dwellers. The locals aptly referred it to as ‘daylight robbery’.
Caius was en route to execute his orders to collect the tax from the country folk. He was given charge of a small band of soldiers to assist in executing his orders as the tax collector anticipated rebellious behaviour. Quite so, he thought to himself. Most of the country dwellers would find it difficult to find the extra coinage to pay for this sudden tax. He pitied them.
Nevertheless, he had orders to execute and obey them he must.
His small party of men continued to wind their way down the hill towards the peaceful village.
On arrival at the entrance to the village he noticed that these folk must mostly be craftsmen of high standard. The village and its construction was immaculate. The dwellings were all neatly built in pristine condition. Everywhere there was evidence of superb craftsmanship, beautifully carved pillars, pole fencing, neatly trimmed awnings, stylish wagons, well kept implements. He was astonished!
Equally astonishing was the fact that there was not a soul or animal in sight. The village was dead quiet, as if everyone had disappeared. All the doors were shut closed. Then he noticed something extra-ordinary, every single cottage he passed had beautifully designed wooden shutters in front of what would previously have been the windows. All the windows had been closed up with these shutters.
He stopped for a moment and admired not only the craftsmanship, but also the ingenuity of these folk. Not one window allowed light to pass through it. They had heard of the ‘daylight robbery’ and had carefully planned a way around it, using their own brand of expertise. How clever. How ingenious. How creative. He chuckled to himself, shouted an order to his men, and continued marching through the village, on his way. At the end of the day, there was no tax to collect here.
A LESSON for us all from the past, tax planning should always result in creating something of sustainable nature, other than just saving tax. Like the shutters before the windows and the taxman should acknowledge this. Ingenuity of value is valuable. It is what helps us to advance and develop. It should always be encouraged and promoted. Sometimes the imposition of tax gives rise to such a seedbed.
IRS Commissioner on Tax Risk Management
2009/10/21
EDITORIAL - The Commissioner of the IRS makes comments in his speech to the NACD corporate governance conference that reiterates the principles we teach through the International Tax Institute and apply at www.TaxRiskManagement.com to our corporate clients worldwide.
Prepared Remarks of IRS Commissioner Doug Shulman before the NACD Governance Conference
WASHINGTON -- Thank you for that warm introduction and welcome.
I realize that the IRS Commissioner has not customarily addressed the NACD’s corporate governance conference…but what I want to discuss with you this afternoon is the important role that boards of directors can play in overseeing tax risk and tax strategies of corporations. After all, taxes are one of the biggest expenses of a corporation, so how they are managed is very important to most corporations.
Clearly, corporate boards of directors play an incredibly important role in the vibrancy of businesses and our economy. Boards are a source of creative ideas, strategic thinking, and, importantly, governance and oversight. Boards hold management accountable, and in that role, understanding the risk posture of the company is critically important.
So today, I want to share with you some observations of what I have seen since I’ve taken the helm of the organization responsible for collecting 96% of all federal receipts – around $2.5 trillion.
To begin, I understand that many of you – actually most of you – are not tax experts and you were not installed on the board because of your tax expertise. You bring other critical skills, experiences and expertise to the boardroom.
And I also understand that even with all of your sophistication, expertise and experience in business and financial affairs, it’s difficult to understand the tax consequences of a complicated business transaction, such as a tax-free reorganization or a hedging transaction, let alone the corporation’s overall tax profile as it relates to federal, state and international taxes. That’s why you need to have strong tax departments and outside tax advisors. After all, you have finance experts to help you understand the economic value of hedging transactions, and you need tax experts to help you understand the myriad and complex tax issues facing your company.
Now, my motivation to create this dialogue with you is based in part on personal and professional experience. I moved from the business world where I interacted with boards… to FINRA, the largest independent securities regulator in the U.S. ….to the IRS, where I am focusing on major trends, such as the globalization of tax administration, and innovative ways to strengthen and improve our tax system. In all of these roles, I have seen the importance of board oversight of major areas of risk.
So, I know first hand that in the post-Sarbanes Oxley world, corporations have invested significant time and resources on compliance issues and internal controls. In the tax arena, some have instituted regular meetings between the Audit Committee and the tax director to ensure an open dialogue.
As I mentioned earlier, tax issues should remain on your radar screen – and for good reason. It’s one of the biggest expenses on your income statement. In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today’s business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games.
So, although the complexity of the tax code may make your eyes glaze over, Board members – like you –are critically important to making sure that the tax system works well and is worthy of the confidence of the American people.
But how can you increase your oversight of tax compliance given the limited amount of time you have available and the competing business issues you face?
Well, you probably know or could figure out, that the IRS conducts risk assessments of its own when determining how to use its time and resources and whom to audit. Similarly, the board of directors can assess its corporation’s tax risk profile, internal controls, and relationship with its corporate tax department, to help determine the tax matters of which it should be aware.
Now, we recognize that many businesses are trying to get it right. Positions taken in tax returns may be well-grounded and taken in good faith. Other tax positions taken may be more aggressive and use elaborately structured transactions or arrangements to push tax planning up to the edge, or beyond acceptable bounds.
Enter FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.
Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company’s maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company.
FIN 48 paints a picture of tax risk by indicating how much money a corporation has to book in tax reserves to reflect the risk should one or more of its tax positions go south.
But let’s get behind the reserve numbers for a moment. What are they telling you – the board directors – beyond the dollars in the tax reserve?
They’re saying that the audit committee needs to know and influence what tax posture the tax planners are taking. They and you need to know whether that multi-million – or in some cases multi-billon-dollar bet – you and your company are making could be too aggressive and therefore risky.
So where does that bring us? What are the next steps?
Before I get to that, I want to be clear about what I “do” intend and “don’t” intend in this dialogue.
We don’t intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don’t expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk.
I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process. For example you might want to:
- Set a threshold confidence level for taking a tax position…
- Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions …
- Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.
And diving down a little deeper, here are some questions you might ask of your tax director and your external auditors relating to FIN 48:
- What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?
- How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?
- How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director’s assessment?
- Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company’s position is regarding those issues?
There are already some IRS programs in place that help provide greater certainty and can give a board more comfort that there won’t be second guessing down the road. For example, our compliance assurance program, or CAP where we agree on issues with the taxpayer before a corporate return is filed, envisions full disclosure by the taxpayer in exchange for real time tax certainty. And the Advance Pricing Agreement program, where we agree with a taxpayer on pricing methodology before a return is filed, provides certainty in the complex and uncertain area of transfer pricing.
Now, we’re not the only government thinking about the notion that corporate taxpayers that employ sound management and governance practices on tax matters are more likely to be compliant.
One example is Australia. The Australian Tax Office publishes a Governance Guide for Board Members and Directors that suggests useful questions – similar to the ones I just posed – that a corporate director can ask of management.
Some of the Australian Tax Office’s questions include: Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes? If so, can the difference be satisfactorily explained? Is the structure and financing for your business or a major transaction complicated, perhaps more complex than necessary to achieve the commercial objectives? These questions give you a flavor of what some other countries are thinking about and doing in the corporate governance area.
On a broader scale, the Organisation for Economic Co-operation and Development has charted a worldwide trend of increased boardroom attention to issues of taxation. A recent guidance document outlines good corporate governance principals in relation to tax, based on advice from governments around the world.
In summary, my main observation to share with you is this: Taxes are an important expense, and like any important expense, management responsible will try to control it. In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses. So you need to understand how management controls this expense and how it decides how aggressive to be. You also need to be certain that reporting is effective.
Tax expense in this sense is no different from other expenses. Manage it too loosely and you give up profit. Manage it too aggressively and there are bad consequences. You, the board, have to oversee how management manages it. That means some level of understanding, a set of policy principles and then a control system of reporting that assures you that the policy is being carried out.
My goal here today was to start a discussion about the board of directors’ role in overseeing tax risk. I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks.
I see my time is up today. I hope it was a good start and that this beneficial dialogue will continue and mature in the weeks and months ahead. Thank you.
EDITORIAL - The Commissioner of the IRS makes comments in his speech to the NACD corporate governance conference that reiterates the principles we teach through the International Tax Institute and apply at www.TaxRiskManagement.com to our corporate clients worldwide.
Prepared Remarks of IRS Commissioner Doug Shulman before the NACD Governance Conference
WASHINGTON -- Thank you for that warm introduction and welcome.
I realize that the IRS Commissioner has not customarily addressed the NACD’s corporate governance conference…but what I want to discuss with you this afternoon is the important role that boards of directors can play in overseeing tax risk and tax strategies of corporations. After all, taxes are one of the biggest expenses of a corporation, so how they are managed is very important to most corporations.
Clearly, corporate boards of directors play an incredibly important role in the vibrancy of businesses and our economy. Boards are a source of creative ideas, strategic thinking, and, importantly, governance and oversight. Boards hold management accountable, and in that role, understanding the risk posture of the company is critically important.
So today, I want to share with you some observations of what I have seen since I’ve taken the helm of the organization responsible for collecting 96% of all federal receipts – around $2.5 trillion.
To begin, I understand that many of you – actually most of you – are not tax experts and you were not installed on the board because of your tax expertise. You bring other critical skills, experiences and expertise to the boardroom.
And I also understand that even with all of your sophistication, expertise and experience in business and financial affairs, it’s difficult to understand the tax consequences of a complicated business transaction, such as a tax-free reorganization or a hedging transaction, let alone the corporation’s overall tax profile as it relates to federal, state and international taxes. That’s why you need to have strong tax departments and outside tax advisors. After all, you have finance experts to help you understand the economic value of hedging transactions, and you need tax experts to help you understand the myriad and complex tax issues facing your company.
Now, my motivation to create this dialogue with you is based in part on personal and professional experience. I moved from the business world where I interacted with boards… to FINRA, the largest independent securities regulator in the U.S. ….to the IRS, where I am focusing on major trends, such as the globalization of tax administration, and innovative ways to strengthen and improve our tax system. In all of these roles, I have seen the importance of board oversight of major areas of risk.
So, I know first hand that in the post-Sarbanes Oxley world, corporations have invested significant time and resources on compliance issues and internal controls. In the tax arena, some have instituted regular meetings between the Audit Committee and the tax director to ensure an open dialogue.
As I mentioned earlier, tax issues should remain on your radar screen – and for good reason. It’s one of the biggest expenses on your income statement. In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today’s business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games.
So, although the complexity of the tax code may make your eyes glaze over, Board members – like you –are critically important to making sure that the tax system works well and is worthy of the confidence of the American people.
But how can you increase your oversight of tax compliance given the limited amount of time you have available and the competing business issues you face?
Well, you probably know or could figure out, that the IRS conducts risk assessments of its own when determining how to use its time and resources and whom to audit. Similarly, the board of directors can assess its corporation’s tax risk profile, internal controls, and relationship with its corporate tax department, to help determine the tax matters of which it should be aware.
Now, we recognize that many businesses are trying to get it right. Positions taken in tax returns may be well-grounded and taken in good faith. Other tax positions taken may be more aggressive and use elaborately structured transactions or arrangements to push tax planning up to the edge, or beyond acceptable bounds.
Enter FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.
Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company’s maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company.
FIN 48 paints a picture of tax risk by indicating how much money a corporation has to book in tax reserves to reflect the risk should one or more of its tax positions go south.
But let’s get behind the reserve numbers for a moment. What are they telling you – the board directors – beyond the dollars in the tax reserve?
They’re saying that the audit committee needs to know and influence what tax posture the tax planners are taking. They and you need to know whether that multi-million – or in some cases multi-billon-dollar bet – you and your company are making could be too aggressive and therefore risky.
So where does that bring us? What are the next steps?
Before I get to that, I want to be clear about what I “do” intend and “don’t” intend in this dialogue.
We don’t intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don’t expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk.
I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process. For example you might want to:
- Set a threshold confidence level for taking a tax position…
- Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions …
- Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.
And diving down a little deeper, here are some questions you might ask of your tax director and your external auditors relating to FIN 48:
- What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?
- How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?
- How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director’s assessment?
- Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company’s position is regarding those issues?
There are already some IRS programs in place that help provide greater certainty and can give a board more comfort that there won’t be second guessing down the road. For example, our compliance assurance program, or CAP where we agree on issues with the taxpayer before a corporate return is filed, envisions full disclosure by the taxpayer in exchange for real time tax certainty. And the Advance Pricing Agreement program, where we agree with a taxpayer on pricing methodology before a return is filed, provides certainty in the complex and uncertain area of transfer pricing.
Now, we’re not the only government thinking about the notion that corporate taxpayers that employ sound management and governance practices on tax matters are more likely to be compliant.
One example is Australia. The Australian Tax Office publishes a Governance Guide for Board Members and Directors that suggests useful questions – similar to the ones I just posed – that a corporate director can ask of management.
Some of the Australian Tax Office’s questions include: Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes? If so, can the difference be satisfactorily explained? Is the structure and financing for your business or a major transaction complicated, perhaps more complex than necessary to achieve the commercial objectives? These questions give you a flavor of what some other countries are thinking about and doing in the corporate governance area.
On a broader scale, the Organisation for Economic Co-operation and Development has charted a worldwide trend of increased boardroom attention to issues of taxation. A recent guidance document outlines good corporate governance principals in relation to tax, based on advice from governments around the world.
In summary, my main observation to share with you is this: Taxes are an important expense, and like any important expense, management responsible will try to control it. In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses. So you need to understand how management controls this expense and how it decides how aggressive to be. You also need to be certain that reporting is effective.
Tax expense in this sense is no different from other expenses. Manage it too loosely and you give up profit. Manage it too aggressively and there are bad consequences. You, the board, have to oversee how management manages it. That means some level of understanding, a set of policy principles and then a control system of reporting that assures you that the policy is being carried out.
My goal here today was to start a discussion about the board of directors’ role in overseeing tax risk. I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks.
I see my time is up today. I hope it was a good start and that this beneficial dialogue will continue and mature in the weeks and months ahead. Thank you.
Tax Snippets - Private Equity Taxation
Tax Snippets
2009/10/21
EDITORIAL - A classic case of tax planning to reduce tax exposure. If the business is sold, the funds will generate Capital Gains Tax, and the dividend in the hands of the investor will also result in taxation. By borrowing money, the interest in the USA is tax deductible, and only the dividend is subject to tax in the hands of the investor. In commonwealth tax jurisdictions the interest would not be tax deductible in line with basic common law tax principles.
By far the most significant way of realizing on a successful investment by a fund was to dispose of it (sell it or bring it public) once the company had grown to sufficient size and become sufficiently valuable. In the early years of this decade, the tax laws were changed so that dividends were taxed at the same rate as were capital gains. Once this occurred, sophisticated fund sponsors and investment bankers determined that the fund could borrow money against the increasing value of the company, take the proceeds of that loan, and distribute it as a dividend to fund investors, resulting in no greater tax to such investors than if the company had been sold. If fund documents did not deal with dividends, the general partner would often receive a larger share of proceeds than had been intended by the drafters of the partnership agreement.
2009/10/21
EDITORIAL - A classic case of tax planning to reduce tax exposure. If the business is sold, the funds will generate Capital Gains Tax, and the dividend in the hands of the investor will also result in taxation. By borrowing money, the interest in the USA is tax deductible, and only the dividend is subject to tax in the hands of the investor. In commonwealth tax jurisdictions the interest would not be tax deductible in line with basic common law tax principles.
By far the most significant way of realizing on a successful investment by a fund was to dispose of it (sell it or bring it public) once the company had grown to sufficient size and become sufficiently valuable. In the early years of this decade, the tax laws were changed so that dividends were taxed at the same rate as were capital gains. Once this occurred, sophisticated fund sponsors and investment bankers determined that the fund could borrow money against the increasing value of the company, take the proceeds of that loan, and distribute it as a dividend to fund investors, resulting in no greater tax to such investors than if the company had been sold. If fund documents did not deal with dividends, the general partner would often receive a larger share of proceeds than had been intended by the drafters of the partnership agreement.
Wednesday, October 21, 2009
China Clarifies Tax Treatment of Equity-Based Incentive Compensation Submitted
by Zsuzsanna Blau
2009/10/20
EDITORIAL - It seems that China is following other OECD country trends in the treatment of stock options - on accrual of an appreciated sum, or realization of growth in the stock.
In late August 2009, China’s State Administration of Taxation (SAT) has issued Guo Shui Han No. 461, the ‘Notice on Individual Income Tax Issues Concerning Stock Incentives’. The SAT, together with the Ministry of Finance had previously issued a number of tax circulars (such as Cai Shui [2005] No. 35, Guo Shui Han [2006] No. 902 and Cai Shui [2009] No. 5) concerning the individual income tax treatment of stock options, restricted stock and stock appreciation rights.
The new tax circular, Guo Shui Han No. 461, stipulates that an individual is taxed at the time he or she receives payment from his or her employer with respect to a stock appreciation right.
‘Stock appreciation right’ is the right to receive a cash payment based on the appreciation of stock. A company will pay the employee in cash equal to the difference between the grant price and market price of stock when employees exercise their stock appreciation right.
The taxable income of restricted stock is computed using a specific formula: taxable income equals (closing share price on share registration date plus closing share price on vesting date for current installment) divided by 2 times the number of shares vested in current installment minus total payment by employee times (number of shares vested in current installment divided by total number of shares received).
The tax treatment of restricted stock appears more favorable than that of stock options. However, the favorable computation formula is not applicable in the following situations–the stock appreciation rights, stock options, and restricted stock are awarded by a non-listed company; the incentive plan is adopted by a company before listing and employees receive incentive income after the company is listed; the company fails to file the required data with the tax authority in charge; or an individual is an employee of an affiliate of the listing company issuing stock and the listing company directly or indirectly owns less than 30 percent stock of the affiliate, or the affiliate is not a first-tier or second-tier subsidiary.
2009/10/20
EDITORIAL - It seems that China is following other OECD country trends in the treatment of stock options - on accrual of an appreciated sum, or realization of growth in the stock.
In late August 2009, China’s State Administration of Taxation (SAT) has issued Guo Shui Han No. 461, the ‘Notice on Individual Income Tax Issues Concerning Stock Incentives’. The SAT, together with the Ministry of Finance had previously issued a number of tax circulars (such as Cai Shui [2005] No. 35, Guo Shui Han [2006] No. 902 and Cai Shui [2009] No. 5) concerning the individual income tax treatment of stock options, restricted stock and stock appreciation rights.
The new tax circular, Guo Shui Han No. 461, stipulates that an individual is taxed at the time he or she receives payment from his or her employer with respect to a stock appreciation right.
‘Stock appreciation right’ is the right to receive a cash payment based on the appreciation of stock. A company will pay the employee in cash equal to the difference between the grant price and market price of stock when employees exercise their stock appreciation right.
The taxable income of restricted stock is computed using a specific formula: taxable income equals (closing share price on share registration date plus closing share price on vesting date for current installment) divided by 2 times the number of shares vested in current installment minus total payment by employee times (number of shares vested in current installment divided by total number of shares received).
The tax treatment of restricted stock appears more favorable than that of stock options. However, the favorable computation formula is not applicable in the following situations–the stock appreciation rights, stock options, and restricted stock are awarded by a non-listed company; the incentive plan is adopted by a company before listing and employees receive incentive income after the company is listed; the company fails to file the required data with the tax authority in charge; or an individual is an employee of an affiliate of the listing company issuing stock and the listing company directly or indirectly owns less than 30 percent stock of the affiliate, or the affiliate is not a first-tier or second-tier subsidiary.
US-SACU Free Trade Agreement - Trade and Investment Development Cooperation Agreement
bilateral.org
2009/10/17
What does this have to do with tax? If norms are agreed to between two states in a bilateral agreement, and these norms are transgressed by domestic tax legislation, the opportunity arises for the offended foreign investing party to approach their state to invoke diplomatic protection and hold the offending state that they are investing into responsible for any harm that they may have suffered. Even after they have exhausted normal court channels in the offending state and lost. The offending state is held responsible for its courts' actions, where the obligation transgressed by the offending state is contrary to international law norms - what is contained in the treaty. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.
The US began negotiating a free trade agreement with the Southern African Customs Union — composed of South Africa, Botswana, Namibia, Lesotho and Swaziland — in June 2003. The talks first got stalled in mid-2004, largely because of the US’ extreme and inflexbile demands regarding intellectual property rights. Around July-September 2005, officials started trying to reignite the process by chopping the FTA negotiating items into "bite size pieces". By early 2006, the process was looking like it would still go nowhere and in April that year it was suspended. From the start, the prospects of a US-SACU accord raised a lot of fears in the subregion, if past US free trade agreements are anything to go by. The demands put forward by the US — especially in terms of investment and intellectual property, including patents on drugs and seeds — would be quite radical for the SACU countries. While the talks were stalled, the US administration reportedly began looking into the possibility of negotiating bilaterals FTAs with individual sub-Saharan African countries. Washington also proposed that the US and SACU adopt a Trade and Investment Cooperation agreement — more than a TIFA, but less than an FTA — as step towards a full-fledged FTA. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.
2009/10/17
What does this have to do with tax? If norms are agreed to between two states in a bilateral agreement, and these norms are transgressed by domestic tax legislation, the opportunity arises for the offended foreign investing party to approach their state to invoke diplomatic protection and hold the offending state that they are investing into responsible for any harm that they may have suffered. Even after they have exhausted normal court channels in the offending state and lost. The offending state is held responsible for its courts' actions, where the obligation transgressed by the offending state is contrary to international law norms - what is contained in the treaty. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.
The US began negotiating a free trade agreement with the Southern African Customs Union — composed of South Africa, Botswana, Namibia, Lesotho and Swaziland — in June 2003. The talks first got stalled in mid-2004, largely because of the US’ extreme and inflexbile demands regarding intellectual property rights. Around July-September 2005, officials started trying to reignite the process by chopping the FTA negotiating items into "bite size pieces". By early 2006, the process was looking like it would still go nowhere and in April that year it was suspended. From the start, the prospects of a US-SACU accord raised a lot of fears in the subregion, if past US free trade agreements are anything to go by. The demands put forward by the US — especially in terms of investment and intellectual property, including patents on drugs and seeds — would be quite radical for the SACU countries. While the talks were stalled, the US administration reportedly began looking into the possibility of negotiating bilaterals FTAs with individual sub-Saharan African countries. Washington also proposed that the US and SACU adopt a Trade and Investment Cooperation agreement — more than a TIFA, but less than an FTA — as step towards a full-fledged FTA. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.
Monday, October 12, 2009
State Responsibility in Taxation Matters
Daniel N Erasmus, Adjunct Professor, Thomas Jefferson School of Law, USA
2009/10/11
State Responsibility in Taxation Matters
Hans Pijl in his interesting article, ‘State Responsibility in Taxation Matters’ states that international tax law is part of international law. The engagement of state responsibility in cases of breaches of tax-related treaties is an element of international tax law. The article gives an overview of the rules of state responsibility in international law.
The article takes further some of what I have taught on a 'rule of law' approach in applying international tax principles to facts in the greater international law arena.
In one interesting case, where US resident shareholders of a Barbados Co. invested into a company in South Africa, SARS (the tax authority) are refusing to refund overpaid tax, paid in error. The shareholders in the company are disinvesting, and SARS, by refusing to refund an overpayment of taxes (made by mistake by the company), will indirectly affect the US shareholders.
Once the company has exhausted its options in the court system in South Africa, assuming they do not win, the US shareholders may approach the State Department of the USA to exercise their discretion to invoke "diplomatic protection" on their behalf against the South African government and claim reparation and damages, for failure to repay the overpaid taxes (unjust enrichment) in terms on international law.
In another interesting case, APEH of Hungary are imposing harsh record keeping VAT provisions on marketing functions performed by a consumer product company to promote its product, applying old Hungarian tax rules that are contrary to EU law.
Under the international doctrine of "diplomatic protection", once this company has exhausted in Hungary its VAT dispute through the court system, and assuming it gets no positive result, its shareholders, at different levels, as there are a number of intermediate companies to the holding company, can approach the most sympathetic State to intervene on their behalf, and institute action against the State of Hungary for reparation and restitution for the VAT, penalties, interest and any other foreseeable damages caused, by virtue of the wrongful conduct of APEH enforcing the VAT provisions contrary to EU law.
Both South Africa and Hungary would be embarrassed having to face such an action, as the plaintiff would be another State.
For more information about this topic, or any international law and international tax law related issue, please do not hesitate to make contact with me at daniel@dnerasmus.com.
www.TaxRiskManagement.com
2009/10/11
State Responsibility in Taxation Matters
Hans Pijl in his interesting article, ‘State Responsibility in Taxation Matters’ states that international tax law is part of international law. The engagement of state responsibility in cases of breaches of tax-related treaties is an element of international tax law. The article gives an overview of the rules of state responsibility in international law.
The article takes further some of what I have taught on a 'rule of law' approach in applying international tax principles to facts in the greater international law arena.
In one interesting case, where US resident shareholders of a Barbados Co. invested into a company in South Africa, SARS (the tax authority) are refusing to refund overpaid tax, paid in error. The shareholders in the company are disinvesting, and SARS, by refusing to refund an overpayment of taxes (made by mistake by the company), will indirectly affect the US shareholders.
Once the company has exhausted its options in the court system in South Africa, assuming they do not win, the US shareholders may approach the State Department of the USA to exercise their discretion to invoke "diplomatic protection" on their behalf against the South African government and claim reparation and damages, for failure to repay the overpaid taxes (unjust enrichment) in terms on international law.
In another interesting case, APEH of Hungary are imposing harsh record keeping VAT provisions on marketing functions performed by a consumer product company to promote its product, applying old Hungarian tax rules that are contrary to EU law.
Under the international doctrine of "diplomatic protection", once this company has exhausted in Hungary its VAT dispute through the court system, and assuming it gets no positive result, its shareholders, at different levels, as there are a number of intermediate companies to the holding company, can approach the most sympathetic State to intervene on their behalf, and institute action against the State of Hungary for reparation and restitution for the VAT, penalties, interest and any other foreseeable damages caused, by virtue of the wrongful conduct of APEH enforcing the VAT provisions contrary to EU law.
Both South Africa and Hungary would be embarrassed having to face such an action, as the plaintiff would be another State.
For more information about this topic, or any international law and international tax law related issue, please do not hesitate to make contact with me at daniel@dnerasmus.com.
www.TaxRiskManagement.com
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