International and Offshore Banking: Masters Short Program
INTERNATIONAL TAXATION OFFSHORE FINANCIAL CENTERS
MASTERS PROGRAM
(NQF Level 9)
The Institute of Advanced Studies (Pty) Ltd
in association with
The Da Vinci Institute
for Technology Management(Pty) Ltd
offera
Masters Programon
INTERNATIONAL TAXATION OFFSHORE FINANCIAL CENTERS
International and Offshore Banking: Masters Short Program
EXECUTIVE SUMMARY OFINTERNATIONAL TAXATION OFFSHORE FINANCIAL CENTERS COURSE CONTENT
Course 1:Principles of International Taxation
This course introduces the various factors which must be taken into account in the tax structuring of international operations and transactions.
Topics include types of tax, tax terminology, connecting tax factors, non-tax factors, processing the data, stages in planning, tax diagnostic methods, the selection of the form of an international transaction, operation or relationship.
Course 2: Double Taxation Agreements and Withholding Taxes
This course provides an in-depth study of bilateral and multilateral tax treaties and withholding taxes.
Topics include double taxation and double taxation relief, foreign tax credits, tax sparing, treaty shopping, the rationale of tax treaty models, residence, permanent establishment, income from immovable property, business profits, shipping, inland waterways and air transport, associated enterprises, dividends, interest, royalties, capital gains, personal services, directors’ fees, artists and sportsmen, pensions, capital, exemption method, credit method, non-discrimination, mutual agreement procedure, exchange of information.
Case studies are presented on the withholding tax procedures in the case of
dividends, interest, royalties, and other periodic income, as well as the international taxation of business profits.
Course 3: Offshore Financial Centers (Part I): Introductory
This course provides an in-depth comparative analysis of the principal offshore financial centers.
Topics include general surveys of the offshore financial centers, with particular regard to the government, the legal system, the attitude of the government to offshore operations, political and economic stability, licenses to carry on business.
Course 4: Offshore Financial Centers Part II : Advanced
This course in offshore tax planning deals with the structuring of offshore operations and transactions, as well as a number of special offshore situations, with examples from various offshore financial centers.
Topics include banks and trust companies, insurance companies (including captive insurance companies), shipping and aircraft companies, foreign sales companies, trade preferences, collective investment schemes and societies with restricted liability, taxation in offshore financial centers, double tax treaties of certain offshore financial centers.
Course 5: International Taxation of Trusts, Estates, Inheritances, Gifts
This course covers a number of highly complex legal concepts involving issues of comparative law and taxation, in the areas of trusts, estates, inheritances, and gifts.
Topics include the law of trusts; trust documentation; comparative analysis of civilian and common law entities; asset protection trusts, Statute of Elizabeth, Hague Convention, estate, inheritance and gift taxes, taxation of trusts, offshore trusts.
Course 6: International Anti-Avoidance
This course deals with those domestic and treaty tax measures whereby countries seek to limit the abusive exploitation of the differences in the world’s tax systems.
Topics include the workings of the transfer pricing provisions in various domestic and international tax systems, thin capitalization, controlled foreign corporation legislation, the arm’s length principle, the abuse of law principle, general domestic legal principles, residence shifting, deeming provisions, limitation of benefits articles in tax treaties.
INTERNATIONAL TAXATION OFFSHORE FINANCIAL CENTERS PROGRAM SYNOPSIS
Tax Planning
It is both lawful and sensible to arrange business and personal affairs in such a way as to attract the lowest possible incidence of tax. The widening scope of tax laws, the complexity of their provisions, and high tax rates make it more necessary than ever for business enterprises and individuals alike to plan their taxable events with considerable care.
For a commercial or industrial enterprise, an unnecessarily increased tax burden represents a business waste that not only reduces its distributable profits but may well make it uncompetitive.
In the case of an individual, the net return from personal endeavour and the investment of capital is in most countries so severely reduced by the Revenue that the failure to take advantage of potential tax minimisation benefits may have a considerable effect on spending power and accumulated wealth. The omission to anticipate death duties and inheritance taxes will frequently cut an unnecessarily deep wedge into the estate.
International tax planning is tax planning in which factors involving more than one country are included in the original database and an offshore element is introduced as an extension of domestic tax planning.
The different ways in which two or more systems may be linked offer considerable scope for tax minimisation or deferral, particularly where at least one of the countries is offshore, since offshore does, by its very nature, generally refer to a better tax deal in a foreign country.
On the other hand, where a project crosses frontiers, there are far more tax and non-tax factors to be taken into account than in a purely domestic case. It follows that offshore tax planning may often be exceedingly complex.
The International and Offshore Database
With the expansion of international trade and private foreign investment, it has become increasingly necessary to have access to a database containing general information regarding tax and business laws and practices in foreign countries. This need is catered to by a number of publications and online services, which are of varying degrees of accuracy, completeness, and speed of updating.
However, most of the available information is far from comprehensive, and it therefore follows that one is dependent to a greater or lesser extent on second-hand information.
The difficulty of obtaining adequate information is aggravated in the case of countries where administrative rulings (and even judicial decisions) are not published fully and quickly, where the ultimate tax bill is subject to negotiation (especially where such negotiation is open to graft), and generally where there is a contrast between the printed word and actual practice.
One is thus frequently obliged to obtain advice from experts in foreign countries involved in a proposed arrangement. Depending on the available documentation, it may be desirable to seek such advice at the outset, during the course of the research, or only at a much later stage for the purpose of controlling whether a possible benefit or pitfall may not have been overlooked.
The database required for the design of an offshore tax plan consists of: (a)the facts,(b)tax factors, and(c)non-tax factors.
Planning Factors
In analyzing the tax factors of an international tax plan, it is necessary to examine:
-the domestic internal tax systems of the countries involved in the project; and
-the manner in which the general rules embodied in such systems are affected by the introduction of the offshore factor.
Non-tax factors may also have to be taken into consideration for the purposes of a proposed offshore tax plan. These can be every bit as important as the tax factors.
The Connecting Factor
The most effective offshore tax plans derive from the ability to sever the nexus or connecting factor with a taxing country in favour of an offshore country or to rearrange the connecting factors in such a way that a lower overall tax burden is suffered. Liability to tax is dependent upon the existence of a connecting factor between a taxing jurisdiction on the one hand and a taxpayer or taxable event on the other.
Even though a taxpayer may stay within the letter of the law, there is usually a limit to the tax minimization steps that may lawfully be taken. Most tax systems contain some general or specific antiavoidance provisions. The substance versus form rule enables the revenue to disregard appearances and to rewrite transactions so as to reflect the true situation.
In the case of an individual taxpayer, the principal connecting factors are residence, ordinary residence, domicile, and citizenship (nationality). In the case of a company, they are management and control, beneficial ownership, place of incorporation, and location of the registered office. In the case of a trust, they are the place of creation, the applicable law, the place of administration or trusteeship, and the residence, domicile, or citizenship of the beneficiaries or trustees.
Other important connecting factors may be the center of economic interests, the presence of a permanent establishment, and effectively connected income.
The principal connecting factor with regard to a taxable event is the real or deemed source. For example, in the case of profits deriving from the sale of goods, the source might be the place of the execution of the contract, the place where a trader or manufacturer employs his capital or where activities are exercised, while in the case of a real property tax or a capital gains tax on the sale of real property, geographic source or situs would normally constitute the connecting factor.
Tax and Non-Tax Incentives
Tax incentives may convert otherwise high tax countries into limited purpose tax havens. Tax incentives are tax concessions that are granted to attract local or foreign investment capital to particular activities or areas. Nearly all countries grant tax incentives of some kind as part of their general or regional economic development programs.
Exchanges of Information
The principal formal exchange of information mechanism is the tax treaty. Most tax treaties contain an article providing for the exchange of information between the competent authorities. Frequently, too, provision is made for the contracting states to render to each other administrative and legal assistance in connection with the assessment and collection of taxes. Informal exchanges of information between the administrations are on the increase.
Structural Strategies
The structural design of an international arrangement may involve one or more of the following:
•the selection of the form of an international transaction, operation, or relationship;
•the selection of a foreign investment country or new country of residence;
•the introduction of one or more additional offshore jurisdictions; and joint ventures.
Where all the countries are determined in advance, the planning process may not go beyond the stage of selecting the most favourable form of a transaction, operation, or relationship from the tax point of view. Dividends, interest, royalty receipts, and capital gains frequently receive quite different tax treatment at the domestic level and at the treaty level.
Selection of a Foreign Investment Country or New Country of Residence
Where there is a choice between two or more possible opportunities in different countries, it is useful to examine comparative tax burdens in the light of the business considerations.
In deciding between offers to take up shares in companies in different countries, the following considerations should, inter alia, be taken into account:
•the rate of tax imposed on corporate profits in the investment countries under examination;
•whether dividend distributions are subject to withholding taxes, and if so, at what rates; and
•whether any tax credits or deductions are available in the country of residence of the shareholder in respect of taxes paid in the investment countries under examination.
Introduction of Additional Offshore Jurisdictions
It may be prudent to examine the tax savings that may be achieved by the careful selection of the form of an international transaction, operation, or relationship, and then only consider the possible benefits and pitfalls through the introduction of one or more IOFCs.
Joint Ventures
The planner should begin with a close analysis of:
•what each of the parties is required to contribute to the venture,
•how the profits (if any) are to be divided between them,
•how losses are to be borne,
•how the venture can be unscrambled.
Evaluating the International Tax Plan
It is wise to compute all variables as accurately as possible for each of the following hypotheses:
- if the plan is not adopted;
- if the plan is adopted and succeeds; and
- if the plan is adopted and fails.
Substance versus Form
The rule that the substance of a transaction, rather than its mere form, controls tax liability is one of very wide application. This rule can affect the amount of taxable income arising from practically any type of transaction.
This rule is also applied frequently to settle questions of who is taxable on certain taxable events.
Applicability of Tax Treaties
When relying on a tax treaty, care should always be taken to insure that it is in force and that it applies to the parties. It is always important to check whether there are any new treaties or amending protocols and whether there are any interpretative rulings or official statements concerning the applicability of the treaty.
International Double Taxation
International double (or multiple) taxation occurs when the tax authorities of two or more countries concurrently impose taxes having the same bases and incidence, in such a way that a person incurs a heavier tax burden than if he were subject to one tax jurisdiction only.
Tax treaties, which are intended to avoid such incidence of double taxation, may inadvertently create opportunities where global tax burdens may be reduced in a manner unintended by the treaty partners.
Reduction in Withholding Rates
Treaties normally also reduce the rate of tax a country is allowed to withhold on income being paid to a recipient in another treaty partner country.
For this type of arrangement to prove efficient, the costs of the structure plus the aggregate tax burden suffered in the third country by the conduit company should not exceed the high tax country’s tax burden.
Business Profits and Permanent Establishments
Tax treaties lay down which country will be entitled to tax business profits that an enterprise of one country makes in the other country. In most cases, this is by reference to whether there is a permanent establishment in such other state. In situations in which companies wish to take advantage of the certainty and better provisions of double tax treaties, the possibility of structuring business transactions with or in a high tax country through a third country with which it has a tax treaty should be investigated in the diagnostic.
The advantage of using a company incorporated in a country with tax treaties is the possibility offered by the treaties to reduce worldwide taxes on business profits, while structuring the operations so as to attract very little tax in the country of incorporation. This is as a function of the provisions of tax treaties that make it possible to avoid tax on business profits in a foreign treaty country.
Treaty Shopping
“Treaty shopping” is the attempt by third parties to benefit artificially from tax treaties intended to benefit the bona fide residents of residents of the two treaty countries.
Both the OECD Model Income Tax Convention on Income and Capital and the U.S. Treasury Model Income Tax Treaty contain provisions limiting the use of treaty shopping.
Measures to Combat Harmful Tax Practices
Countries that allow their treaties to be used for treaty shopping are directly in the firing line of the OECD attack on harmful tax practices. This makes it sensible to refer the international measures to combat harmful tax practices.
International Offshore Financial Centers (IOFCs)
Andorra, Anguilla, Antigua, Bahamas, Bahrain, Barbados, Bermuda, Belize, Botswana, British Virgin Islands, Brunei, Campione, Cayman Islands, Cook Islands, Costa Rica, Cyprus, Djibouti, Dominican Republic, Ecuador, French Polynesia, Gibraltar, Grenada, Guernsey, Hong Kong, Ireland, Isle of Man, Jamaica, Jersey, Kuwait, Labuan, Lebanon, Lesotho, Liberia, Liechtenstein, Luxembourg, Macau, Madeira, Malaysia, Maldives, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Namibia, Nauru, Netherlands, Netherlands Antilles, Nevis, Niue, Oman, Panama, St. Vincent, Seychelles, Singapore, Swaziland, Switzerland, Turks & Caicos Islands, United Arab Emirates, Vanuatu
What do the Offshore Centers Offer?
The principal products stocked by the offshore supermarkets are companies and trusts. Offshore companiesusually hold investments and may get involved in trading. Offshore trusts protect the ownership of assets and frequently of the companies themselves. The true beneficiaries are usually individuals residing in high tax countries.
Offshore companies and trusts may hold every imaginable kind of asset: real estate, art collections, jewellery, stocks and bonds, insurance policies, contingent claims, in fact anything at all.
Offshore Companies
No one can count the number of offshore companies, and that number is expanding exponentially. They are put there for a very good reason: An offshore company can be used for any purpose for which a company in a high tax country can be used, and it mostly does not have to pay tax in the offshore jurisdiction. The bulk of offshore companies simply collect income consisting of dividends, loan interest or patent royalties, and license fees. But many are also used for business purposes. Handled correctly, the offshore company plays a turntable role using tax-exempt income to make more tax-exempt income. Apart from tax, an offshore company can be used for other purposes such as privacy and freedom from exchange control, or protection of assets against future developments in the home country. Though companies in most offshore jurisdictions offer basic similarities, there are significant differences. For example, what information must be contained in the bylaws? Can the true promoters and beneficial owners be kept entirely out of the picture? What are the costs of incorporation? How much time is involved, and can it be accelerated? Are there limits on the powers of the company? Is there any limitation of liability? Can there be bearer shares, no par value shares, preference shares, redeemable shares, shares with special rights?
Offshore Trusts and other Offshore Products
The wonder product is the offshore trust. The trust concept is over eight hundred years old, older than company law. The trust vehicle, from the tax planning perspective, may allow a taxpayer to break the connecting factor between the trust assets, the taxpayer, and the taxing jurisdiction. A huge and increasing volume of international banking takes place offshore. Indeed it is extremely easy for an individual or a company with acceptable references to open a bank account offshore, and even numbered accounts are possible. In most countries, one of the terms of the relationship between banker and customer is that the banker will keep the customer’s affairs secret. In some tax havens this rule is now being widened and made a marketing feature. However, the whole world is moving, toward greater openness, and severe pressure is currently being brought to bear on onshore and offshore jurisdictions to fight money laundering and to furnish information to the appropriate authorities in other countries. Other products on the shelves of the offshore supermarkets are finance subsidiaries, captive banks, captive insurance companies, shipping and trans-shipment companies, licensing companies, headquarters companies, limited liability companies, foundations, management services companies, manufacturing and export bases, and tax shelters.