TAX HAVEN LEGISLATION

1
TAX HAVEN LEGISLATION
Whatever the difficulties facing those who
instructed the draftsmen, they did not include
lack of choice. Somehow, we obviously had to say
what tax havens we were interested in. One way
would have been to name the tax havens, and that
is what the Japanese do. However we are all tax
havens in one way or another, and some countries
are very sensitive over the point. They do not
like being called tax havens, and indeed we do
not like it ourselves. The truth of the matter is
that it is sometimes a subjective judgement
depending on the viewpoint of the observer,
though there might be general agreement in
labelling Bermuda, for example, as a tax haven,
because it has no income tax at all. That said,
what is a tax haven today may not be a tax haven
tomorrow. So the legislation goes about it in a
more neutral and objective way, and says that a
company cannot be a CFC unless it is subject to a
lower level of taxation' in the territory in
which it is resident.
HMRC Manual
2
CONTROLLED FOREIGN COMPANIES

• Introduced 1984 (TA 1988 s747)
• Work began on it following removal of Exchange
  Control in 1979
• Applies to corporate shareholders only
• Attributes profits of overseas company back to
  those shareholders
• relief given for CFC tax against tax on dividends
  subsequently paid to UK
• INTM200000 ST D4.3

3
CHARACTERISTICS OF A CFC

• Not resident in UK
• Controlled by UK residents
• Liable to a lower level of tax
• Lower means less than 3/4 of the corresponding UK
  tax (s750)
• Designer companies

4
DESIGNER COMPANIESs750A

• some countries have devised schemes to allow
  companies to achieve a local tax rate just above
  the 75 level
• special CFC rules will set aside the 75 for
  certain named designer rate schemes
• applies only to territories designated by
  Treasury
• intended to combat harmful tax competition

5
CFC EXEMPTIONS

• Exempt activities test
• Acceptable distributions (90 within 18 months) -
  link with mixer company regime
• Motive test (Cadbury Schweppes case)
• De minimis (50,000)
• Excluded countries list (2 parts - one absolute
  and the conditional on local tax status)

6
Cadbury Schweppes plc v CIR

• CS had set up IFSC subsidiary in Dublin
• Benefited from 10 tax
• UK HMRC raised CFC assessment
• CS argued that CFC legislation contrary to EC
  Treaty
• HMRC argued that by establishing in Dublin purely
  for tax reasons CS is abusing the freedoms given
  by the Treaty therefore cannot rely on it
• Special Commissioner referred case to European
  Court

7
Articles 43 EC and 48 EC do not preclude
national tax legislation which provides for
inclusion in the tax base of a resident parent
company profits of a controlled foreign company
established in another member state where those
profits are subject in that state to a much lower
level of taxation than that in effect in the
state of residence of the parent company, if that
legislation applies only to wholly artificial
arrangements intended to circumvent national law.
Such legislation must therefore enable the
taxpayer to be exempted by providing proof that
the controlled subsidiary is genuinely
established in the state of establishment and
that the transactions which have resulted in a
reduction in the taxation of the parent company
reflect services which were actually carried out
in that state and were not devoid of economic
purpose with regard to that company's
activities. Cadbury Schweppes plc and another v
Inland Revenue Commissioners (Case C-196/04)
COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES
(GRAND CHAMBER)
8
Judgment in Case C-196/04

• CS were fully entitled to establish company in
  IFSC and were not precluded from relying on EC
  Treaty
• Whether or not the CFC legislation was in breach
  of the EC Treaty depended on the interpretation
  by the UK Courts of the motive exemption
• If courts allow exemption in anything other than
  wholly artificial arrangements then no breach
• But if courts deny exemption because tax saving
  was central to use of CFC, even if arrangements
  not necessarily wholly artificial, then rules are
  in breach of Treaty

9
Vodafone 2 v HMRC ST ND.208

• Subsidiary company in Luxembourg
• HMRC view that it was caught under CFC
• Special Commissioners initially decided to remit
  case to ECJ
• Changed their minds following Cadbury case
• Held that legislation was compliant with EU law
  if you added a second test re freedom of
  establishment
• Company appealed to High Court - held that courts
  couldnt rewrite law
• CFC motive test was therefore contrary to EU law

10
TA 1988 s 751A

• Introduced by FA 2007 following the Vodafone
  decision
• Allows companies to apply for the chargeable
  profits of a CFC located in an EEA territory to
  be reduced to nil
• Must have a business establishment and employees
  in the EEA
• EEA territory means the EU member states, and
  those EEA states with which the UK has
  international tax enforcement arrangements which
  currently includes Iceland and Norway, but not
  Liechtenstein.

11
EXEMPT ACTIVITIES

• must be resident somewhere
• must have business establishment there and be
  effectively managed there
• must not carry on any of the precluded activities
  (being broadly investment activities or
  transactions with associated parties)

12
ASSESSMENT

• chargeable profits apportioned to all persons
  having an interest in the CFC
• but only UK resident companies can be assessed
• only assessable if the apportioned profits
  (including those of any associate) are 25 or
  more of the chargeable profits (s747(5))
• limit increased from 10 to reduce compliance
  costs - warning of changes (possibly
  retrospective) if this is exploited

13
However, the CFC legislation was introduced in
1984 and largely reflects the world before
e-commerce. Whether the legislation is adequate
to deal with these new developments needs careful
consideration. The increasing possibility for
goods and services to be offered direct to the
general public from a haven company contrasts
with the use of havens for intra-group
arrangements for which the CFC rules were largely
written. It is possible therefore that the CFC
exemptions may need to be changed at some point
in order to ensure that the UK tax base continues
to be adequately protected and the Government is
monitoring developments. Revenue Manual