Offshore Taxation Demystfied

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					                THE CARIBBEAN, THE OECD
                AND THE EMPTY BLACK LIST
After all the hype about tax havens          In 2000, an OECD report named and
and offshore banking secrecy, the            shamed 47 “preferential tax regimes“
black list is no more. Gone forever or       and 35 tax havens. These listed coun-
just the calm before the Caribbean           tries have been threatened by the
storm?                                       OECD with “defensive measures" if
                                             they fail to “eliminate harmful features
The infamous black list of un-               of their regimes." In the following
cooperative tax havens, maintained by        years, most of the listed countries did
the Organisation for Economic Co-            make commitments to transparency
operation and Development (OECD)             and exchange of information. Among
and dominated by Caribbean jurisdic-         these are Barbados and the US Virgin
tions, is empty now. In an increasingly      Islands.
borderless world, there seems to be no
rogue tax regimes any more. But this is      Seven jurisdictions (Andorra, Liech-
just a temporary silence and definitely       tenstein, Liberia, Monaco, Marshall
not forever.                                 Islands, Nauru and Vanuatu) resisted
                                             all requests and threats - this did not
Therefore, it is interesting to know         include any Caribbean jurisdiction. In
which Caribbean countries will find           April 2002, these Seven Samurai were
themselves on this list shortly and          formally identified by the OECD as
what effect it has if you live and invest     uncooperative, and as a result, the list
in a blacklisted country. Practical as-      of seven went black.
pects of the past, the present, and the
future are discussed in the following.       This was called the high-water mark
                                             of the anti-offshore initiative. How-
                                             ever, things were going to get worse
A Short History of the Black                 before they got better, if they even get
List                                         better at all.

Founded in the post-second world war         All of these jurisdictions have subse-
era, it took the OECD more than 50           quently been involved in negotiations
years before it listed 15 jurisdictions as   to make some or full commitments.
tax havens according to criteria it had      Costa Rica has been one of the last
established by itself. This first list,       jurisdictions that escaped the list.
dated from the year 2000, covered            Based on these statements, the OECD
countries from Bermudas over to the          decided in May 2009 to remove all
Cayman Islands, and on to Saint Vin-         seven from the black list.
cent and the Grenadines. OECD said
it had investigated 31 countries before
drawing up the list.
Offshore Taxation Demystified, 2009/2010

  <THE BLACKLIST OF UN-                   Who Wi$ Qualify for the Black
  COOPERATIVE TAX HA-                     List
                                          Low tax or no tax countries will qual-
   EMPTY. YOU MAY NOW                     ify as uncooperative from the OECD
   CALL IT THE WORLD’S                    point of view if they do not meet spe-
  SHORTEST BLACK LIST.>                   cific standards of transparency and ef-
                                          fective exchange of information.
As a result, the black list of uncoop-    The OECD regularly updates which
erative tax havens is currently empty.    tax havens and other jurisdictions im-
You may now call it the world‘s short-    plemented the standards and which
est black list. All 84 jurisdictions on   are in delay, although they agreed to
the radar screen of the OECD agreed       the standards. The latter ones will be
to implement the standard.                good candidates for a new black list.
A grey list (countries that supposedly    Therefore, it is of great interest how
lack fiscal transparency but have         these so-called “internationally agreed
committed to change) includes An-         tax standards” are defined. Based on
guilla, Antigua and Barbuda, Aruba,       the publications of the OECD a very
Bahamas, Bermuda, British Virgin Is-      broad and aggressive definition is
lands, Cayman Islands, Dominica,          used. It is the “full exchange of infor-
Montserrat, Netherlands Antilles, St.     mation on request in all tax matters
Kitts and Nevis St. Lucia, Saint Vin-     without regard to a domestic tax in-
cent and the Grenadines, as well as the   terest requirement or bank secrecy for
Turks and Caicos Islands.                 tax purposes.“ 
Not officially dis-
closed by the
OECD, there is
even a white list.
Te r r i t o r i e s l i ke
Delaware             and
Hong Kong, with
an overpowering
empire in the
background, can
disregard             the
OECD principles
without the threat
of being added to
the black list. The
OECD will not
quarrel with the big boys. Any Carib-     The interpretation of this definition
bean location, even the Cayman Isles,     will definitely leave a gray area. As a
will not benefit from this privilege.      rule of thumb, the OECD expects
                                          each country to sign at least twelve
                                          information exchange agreements

Offshore Taxation Demystified, 2009/2010

with non-tax-havens and its willing-       ber of bilateral agreements have been
ness to sign even more in the future.      based on this draft.

Tax information exchange is in many        Jurisdictions that accept the numbers
cases implemented in the double tax        game of at least twelve signed tax in-
treaties (e.g., ”the competent authori-    formation exchange agreements might
ties of the contracting states shall ex-   have a good start to sign bilateral
change such information as is neces-       a g r e e m e n t s w i t h s e v e n No r d i c
sary for carrying out the provisions of    economies - Denmark, the Faroe Is-
this treaty or of the domestic laws of     lands, Finland, Greenland, Iceland,
the contracting states.“) However,         Norway and Sweden - on exchange of
they can be agreed separately or in a      information for tax purposes. Seven of
multilateral contract as well.             twelve is half the battle.

The exchange of information as re-         Living Your Life in a Black-
quested by the OECD standards will
not cover only individuals but also        listed Country
companies and trusts. As a result, its
shareholders and beneficial owners          There is no doubt that the OECD will
will have to be disclosed as well.         not rest or settle before getting the
                                           full commitments of the gray listed
Everything anticipated to be relevant      jurisdictions. Instead, they will moni-
has to be disclosed. Although the          tor to achieve a rapid and effective
OECD stresses its respect for taxpay-      implementation of the standard. This
ers‘ rights, this concept is weakly im-    will include requests for legislative
plemented. There will be no effective       changes and the negotiation of specific
protection and defense against fishing      bilateral agreements.
expeditions of high-tax jurisdictions
abroad in the Caribbean.                   The Bahamas, the Cayman Islands, St.
                                           Kitts and Nevis, and some Pacific is-
                                           lands like Samoa, may be the hottest
What the Future Wi$ Bring                  candidates for a new black list. They
                                           are already in the public focus of the
The OECD published in April 2002 a         European Union and may be im-
model agreement on exchange of in-         peached first for not meeting their
formation on tax matters. 116 clauses -    pledge to fight tax evasion. On the
included in 16 articles - cover, above     other side, Aruba, Bermuda and Neth-
all, the exchange of information upon      erlands Antilles are praised for making
request, the possibility of declining a    progress in negotiating exchange of
request, confidentiality and costs, as      information agreements.
well as procedural questions. A num-

Offshore Taxation Demystified, 2009/2010


This column tries to bridge the gap          the direction. A tax information ex-
between the hardship of tax informa-         change clause without the double
tion exchanges and the chances of an         taxation avoidance clause does not
adjusted legal environment. The aim is       meet the economic interests of both
to preserve the traditional benefits          parties. 
from Caribbean financial centers, even
in an era in which banking secrecy is        An unbalanced information-only tax
equalized with tax banditry.                 a greement results in a win-lose-
                                             situation. It provides tax information
The Rationale for Tax Informa-               which is beneficial only for high tax
                                             countries and denies the benefits
tion Exchange                                which would result in benefits for the

Agreements for the avoidance
of double taxation have ad-
vantages, but also downsides.
The positive effect is that
they assure that profits are
taxed only once and not in
both countries involved. This
avoids a subsequent taxation
of offshore profits in high tax
countries and, therefore, is
b e n e f i c i a l f o r Ca r i b b e a n
countries with tax rates down
to 0%. 

The country with the higher
tax rate grants this benefit not for          low tax country. In other words, in a
free. In return it expects the exchange      fair negotiation no one would expect a
of tax related information to assure         jurisdiction in the Caribbean to sign
that the tax payer does not act fraudu-      such a stripped tax treaty. It would be
lently and hides income which is tax-        similar to turkeys voting for Christ-
able in the high tax jurisdiction. It is     mas.
obvious that the low tax country has
no economic interest to obtain tax in-       The motivation for signing can be ex-
formation from the high tax country.         plained very easily. The rich OECD
It accepts such clauses to get the           countries announced to the world’s tax
benefit from the avoidance of double          havens that they will be treated as tax
taxation only.                               pariahs if they are not willing to sign.
                                             This made an offer the Caribbean
Needless to say that such an explana-        countries can’t refuse. 
tion is highly simplified and makes no
claim to describe the peculiarities of       Convinced by strong economic pres-
double taxation. However, it shows           sure of the high tax countries and a

Offshore Taxation Demystified, 2009/2010

clever exploitation of the recent finan-      Experience will show that even under
cial, political and religious disruptions,   a TIEA, black sheep cannot be
the low tax countries could not resist       avoided by any Caribbean country. Be-
to "be committed to international            sides legitimate and lawfully cross-
standards of anti-money laundering           border tax planning, there will remain
legislation and practice, counter ter-       a wide scope of unlawful tax evasion
rorist financing legislation and finan-        schemes involving the Caribbean and
cial regulation and international ef-        other low tax jurisdictions. Those "in
forts to combat financial crimes.” Ag-        the know" will easily get around any
gressive propaganda like “the war on         legislation. The latter is not subject to
tax piracy“ shows the lack of good           the following explanations.
                                             The bad and the worse TIEAs
These stripped tax treaties are mar-
keted under the term Tax Information         Information exchange agreements be-
Exchange Agreement ("TIEA"). Surely          tween independent countries are not
they do not provide a balanced "ex-          identical. They follow more or less the
change" in both directions but are           model convention of the OECD.
definitely a one-way street.                  These small differences can be of great
The rush of TIEAs
                                             Some of the new information-sharing
The Cayman Islands signed in August          agreements are weak. Well-advised
2009 its 12th TIEA with New Zealand,         countries benefit from tailor-made
and moved onto the “white list” of           agreements instead of copying the
countries that have substantially im-        saucy proposals made by the Paris
plemented the OECD’s defined tax              based bureaucracy. Therefore, it is
standard. Other "good boys" are Brit-        worth noting the differences and gaps
ish Virgin Islands, Anguilla, Turks &        which are left open for tax planning
Caicos and Bermuda. The press cele-          considerations. To distinguish between
brates the triumph of the OECD's ef-         a hard and a soft, a strong and a weak
forts to end international tax competi-      TIEA, it is helpful to concentrate on
tion. In fact, it might end the era of       the following five criteria:
banking secrecy as a shield for tax
evaders.                                     1. For which purpose is information
                                             exchanged? A double tax treaty is usu-
However, it will not at all be the end       ally restricted to income taxes. Infor-
of the tax-haven era. Instead, it will be    mation may be requested to enforce
decisive whether the coming TIEAs            the tax treaty only or, in addition, any
are negotiated in a clever way and that      tax law of the contractual country.
the offshore jurisdiction does its           Typically aged tax treaties have chosen
homework in establishing a beneficial         the restricted exchange clause, while
legal environment. In that case it will      newly agreed tax treaties implement
remain a favorable spot for invest-          an extended, but not unlimited infor-
ments by honest tax payers to make           mation exchange.
use of lawful tax avoidance schemes
and tax optimized wealth manage-             TIEAs are broader than double tax
ment. Maybe we will see a new off-            treaties and typically comprehend the
shore model whose time has come.             determination, assessment, enforce-

Offshore Taxation Demystified, 2009/2010

ment and collection of all taxes. In ad-    3. An important issue is whether the
dition, it may cover the investigation      information exchange is effectively
or prosecution of criminal tax matters.     limited to a case-by-case basis. Other-
It might even go beyond this and open       wise "fishing expeditions" would be
the door to each type of law enforce-       possible, similar to a dragnet investiga-
ment and the application of civil and       tion.
public laws, regulations and decrees. 
                                            Equal relevance has the minimum ap-
2. Tax information can be submitted         plication requirements. The request
on request or exchanged automatically.      must be specific; the nature of infor-
Automatically would mean, for exam-         mation being sought and a description
ple, that any opening of a bank ac-         of the specific evidence being sought
count, any bank transfer of a certain       must be outlined in the request. A
scope, any registration as an agent, or     good standard would require that the
any identification as a trustee or          tax authorities have to name names
beneficiary would result in an informa-      and details, which might not be easily
tion transfer. Typically the TIEA guar-     ascertainable.
antees that a jurisdiction is not obliged
to provide information that has not         In addition, no request for informa-
been explicitly asked for by the other      tion should be allowed that is unlikely
jurisdiction.                               to be relevant to the tax affairs of a
                                            given taxpayer. Such limitation is con-
                                                          tained in either the text
                                                           of the TIEA itself or in
                                                           a formal letter that is
                                                           exchanged upon the
                                                           signing of the TIEA.

                                                            4. If would not be un-
                                                            fair to restrict informa-
                                                            tion requests to cases
                                                            of proved tax offenders
                                                            on the basis of suffi-
                                                            cient case-by-case
                                                            specification. However,
                                                            the OECD model con-
                                                           vention goes far below.
In a briefing paper published by the         Information has to be foreseeable
government of the British Virgin Is-        relevant tax-wise only. It has to be ex-
lands (International Affairs Secretar-       changed without regard to whether
iat) dated June 2009, it is stated: "The    the conduct being investigated would
BVI signed a TIEA with the United           constitute a crime under the law of the
States of America seven years ago in        requested country. There is neither a
2002 and to date the USA has made           single nor a dual criminality and even
only one request for information to         not a probable cause requirement.
the BVI. The BVI has made none."
This clearly illustrates the advantage      5. For the tax payer, confronted with
of an "on request only" limitation in       an agreed TIEA or even the vague
the TIEA.                                   chance that a TIEA will be concluded

Offshore Taxation Demystified, 2009/2010

in the future, it is of utmost impor-       in any instance to hand over names of
tance at which point in time such           the customers to the United Kingdom.
agreement will enter into force. Typi-
cally, it will enter into force concern-    A Broken Business Model or a
ing criminal tax matters much earlier
than regarding all other matters cov-       Big Chance?
ered by the TIEA.
                                            Dishonest tax players might lose the
                                            ability to easily hide assets and income
The Scope of Flexibility                    in Caribbean bank accounts. Honest
                                            tax players will be disgusted to see
It is not surprising if the OECD will       their privacy freely disclosed to an in-
look of the quality of the agreements       definite scope of persons and entities.
rather than just counting the quantity.     In the worst case, the game is already
Twelve TIEAs is the magic number in         up for offshore financial centers.
determining whether a jurisdiction is
removed from the gray list. This list       However, from the point of view of
contains those countries that have an-      the Caribbean location, passive in-
nounced to follow the OECD re-              come from banking activities, highly
quests, but are not performing yet in       automated and computerized, has
the implementation of such state-           never made a substantial contribution
ments.                                      to the development of the economy.
                                            Therefore, even if the banking busi-
However, a broad scope of flexibility        ness model is broken, this does not
remains possible, including alternative     mean the end of the offshore benefits.
approaches. One of the recent and
famous examples is the tax agreement        It is no secret that bank accounts are
between Liechtenstein and Great             not the only place to put wealth out of
Britain, concluded on August 11, 2009,      reach and out of sight from the tax
which has the appearance but not the        man. A TIEA is restricted to banks
outcome of a TIEA.                          and other financial institutions on the
                                            one side, and the ownership of com-
Under this agreement, financial insti-       panies, trusts and other legal entities
tutions of Liechtenstein are required       on the other side. There is no informa-
to ask British customers for proof and      tion exchange regarding the ownership
evidence that they are in communica-        in other movable and immovable
tion with the British tax authorities. If   property. Therefore, land owners in
the customer can provide the docu-          the Caribbean are not directly affected
mentation to prove that the British         by the TIEA.
government is aware of his tax status,
then the bank can continue with its         Why shouldn't we use this great op-
customer’s relationship.                    portunity? Investments in commercial
                                            and private property are discreet and
If the customer can't or doesn't want       close-lipped. They are a smart and
to, he has to find another offshore lo-       sound investment. If the switch from a
cation to put his money. Otherwise,         financial investment at a bank to an
the Liechtenstein bank will close his       investment in Caribbean land and in-
account in 2015. The bottom line is         frastructure succeeds, a bright future
that Liechtenstein will not be required     can be expected.

Offshore Taxation Demystified, 2009/2010

It is obvious that such switch can be      2. The right to land ownership should
successful for a certain percentage        be opened to foreigners and foreign
only. However, this would be over-         companies. This would make interna-
compensated by the enormous posi-          tional corporate and private structures
tive side effects in comparison to a        possible.
money transfer to a bank.
                                           3. The unlimited and undisturbed land
One clear obstacle is the lower fund-      ownership should be explicitly guaran-
ability and interchangeability of land     teed by the national constitution. This
in comparison with a bank account          gives the foreign investor more com-
                                                          fort and greatl y re-
                                                          duces the fear of being
                                                          dispossessed and ex-

                                                             Needless to say, these
                                                             three points are just
                                                             the first step in creat-
                                                             ing a legal environment
                                                             which attracts bank
                                                             customers to invest the
                                                             funds in real estate
                                                             rather than transfer
                                                             them to supposed se-
                                                             cure alternative off-
                                                             shore locations. An-
that can be transferred very easily.       other gap in the TIEA, which might
This issue cannot be significantly in-      be used for a restructuring, is the per-
fluenced, but may be a problem merely       petuation of the attorney's rights of
for smaller investment amounts.            confidentiality and secrecy (legal privi-
                                           lege limitation). It should be noted as
Which legal environment is required        well that the requested country is
to give the stranded money a safe          typically not obliged to provide infor-
home? Three aspects are outlined be-       mation which is neither held by its
low, other have to be discussed later:     authorities nor in the possession or
                                           control of persons who are within its
1. As a starting point for any structur-   territorial jurisdiction.
ing, the traditional secrecy and confi-
dentiality rules for bank accounts can     The future of the Caribbean offshore
be utilized for land ownership. There      business depends on the ability to re-
is no need for a public land register.     valuation, adjustment and assimilation.
Any independent country has the            The coming years will see winners and
right to allow its land owners to skulk    losers in the Caribbean offshore arena.
in the shadows.

Offshore Taxation Demystified, 2009/2010

              - AND HOW TO ESCAPE THEM

“Basically, if fewer smart thirty-           The OECD itself has no power to im-
something’s, educated in business and        plement sanctions against any black-
law schools and fluent in five lan-          listed country. However, its member
guages, were engaged to pour over            states have already opened and shown
German tax legislation and amend-            their toolbox of countermeasures.
ments with a fine-tooth comb in order
to find ways of avoiding tax, if this did     Typically, they have three options:
not happen, then I could reduce tax          First, the tax environment for black-
rates.“ (Germany‘s Minister of Fi-           listed countries can be damaged by
nance, Peer Steinbrueck, in a speech         changes in the domestic tax laws of
on a tax conference in September             OECD member states. Second, a re-
2009).                                       view, repeal and/or refusal of bilateral
                                             tax treaties may occur. As a third
A Friendly Word                              measure, aggressive tax audits and
                                             non-tax measures like an embargo, the
Convinced by strong economic pres-           cancellation of free trade agreements
sure from the G8-countries and a             or punitive tariffs and customs might
clever exploitation of the recent finan-      frighten and discipline offshore juris-
cial, political and religious disruptions,   dictions.
the Caribbean offshore countries
could not resist to "be committed to         The future of the Caribbean offshore
international standards of anti-money        business depends on the abilities of
laundering legislation and practice,         revaluation, adjustment and assimila-
counter terrorist financing legislation       tion. The coming years will see win-
and financial regulation and interna-         ners and losers in the Caribbean off-
tional efforts to combat financial           shore arena. Therefore, it is essential
crimes.”                                     to be prepared for the next moves.

As a result, the black list of uncoop-       Case study: The German Anti-
erative tax havens is currently empty.       offshore Legislation
All 84 Caribbean and non-Caribbean
jurisdictions on the radar screen of the     Although the black list is empty, Ger-
OECD agreed to implement the stan-           many continues to combat offshore
dard.                                        jurisdictions by tough new legislations
                                             and new black list mechanisms. Tax
However, the OECD regularly updates          experts and oppositional politicians
which tax havens and other jurisdic-         pointed out that this new legislation is
tions implemented them and which             therefore untimely, redundant, and
are in delay, although they agreed to        unnecessary.
the standards. The later ones will be
good candidates for a new black list.        In spite of massive criticism, the gov-
The OECD‘s viewpoint is obvious: A           ernment made it clear that from their
friendly word and a gun will get you a       viewpoint, there is a need for such
lot further than a friendly word alone.      regulations until the promises of the

Offshore Taxation Demystified, 2009/2010

gray list states are kept and the respec-     from the parliament to the executive
tive information exchange agreements          bodies.
are concluded. Otherwise, the inten-
tion to prevent tax evasion resulting         Under generally accepted constitu-
from an insufficient tax information            tional principles, an ordinance made
exchange cannot be fulfilled.                  by the executive is null and void, if the
                                              underlying law does not define the
The new German legislation might              content, purpose, and scope of the or-
provide an excellent lesson in how an         dinance in detail. Tax lawyers are cur-
implementation of the OECD‘s strat-           rently in a wait-and-see mode for the
egy will work in other G8 states as           outcome of the case. However, no one
well. It is coming soon to legislation        should expect that the ordinance will
near you.                                     be rejected retroactively by the Ger-
                                              man constitutional court in later years.
The “Act for Combating Tax Evasion“
                                                           It is the basic concept of
                                                            the new legislation to
                                                            impose sanction on the
                                                            tax payer if he enters
                                                            into business relation-
                                                            ships with specific juris-
                                                            dictions and does not
                                                            comply with specific du-
                                                            ties. Both conditions
                                                            have to be met before
                                                            any negative tax effect

                                                             It is a trivialization and
                                                             belittlement to argue
(“Steuerhinterziehungsbekämpfungs-            that only some tax benefits are denied.
gesetz“) modifies the basic tax laws of        These measures, including a shoot-to-
Germany. These are, above all, the In-        kill policy, result in tough sanctions
come Tax Law, the Corporation In-             and a substantial economic downside
come Tax Law and the Fiscal Code.             for any offshore legislation affected.

In September 2009, the Federal Gov-
ernment enacted an implementing or-
                                              Area of Application
dinance (“Steuerhinterziehungs-
                                              The legislation is applicable to all
bekämpfungsverordnung“) which aims
                                              German tax payers with cross-border
to clarify how the taxpayer has to im-
                                              business relations to offshore coun-
plement the new law in his business
                                              tries. This includes individuals as well
dealings. Generally, the new legislation
                                              as corporations. The same rules apply
will be applicable for the first time in
                                              for offshore entities with a permanent
the tax year 2010.
                                              establishment in Germany and for
                                              German taxpayers maintaining a per-
From a constitutional point of view it
                                              manent establishment in the offshore
is doubtful whether the ordinance is
legally valid. It shifts accountability for
the legislative enactment procedure

Offshore Taxation Demystified, 2009/2010

The law excludes “cooperative” off-          (“TIEA”), or it has to be the common
shore jurisdictions from its area of ap-    practice without having the qualified
plication. It is decisive whether the       tax clause. Or as a third possibility, the
offshore business entity is resident in a    country has to be ready to follow this
foreign country with a tax treaty in        practice by implementing article 26
line with article 26 of the OECD            soon.
Model Convention.
                                            In practice it cannot be expected that
Article 26 of the OECD Model Con-           the area of application of the anti-
vention provides the most widely used       offshore legislation will be determined
legal basis for bilateral exchange of in-   on a case-by-case basis. Instead the
formation for tax purposes. It creates      German government, respectively the
an obligation to exchange information       Federal Ministry of Finance, will pub-
that is foresee-ably relevant not only      lish a list and request each local tax
to the correct application of a tax con-    office to follow this guideline. The list
vention, but also for general purposes      will contain three categories.
of the administration and enforcement
of domestic tax laws of the contract-       1. First, the countries which entered
ing states.                                 into a tax treaty in conformity with
                                            the OECD Model Convention.
Article 26 was updated in July 2005, at
which time additional paragraphs were       2. Second, a list of countries which fol-
added. These paragraphs make it clear       low the wishes of the OECD without
that a state cannot refuse a request for    having formally a clause similar to ar-
information solely because it has no        ticle 26.
domestic tax interest in the informa-
tion, or solely because it is held by a     3. Third, the list will contain the coun-
bank or other financial institution.         tries which are at least willing to co-
If no such tax treaty exists or the tax
treaty deviates from this OECD stan-        The list will be reviewed and updated
dard, it is sufficient, that the country      on an irregular basis. Germany‘s tax
typically provides information in a         lawyers are already familiar with such
type and scope comparable with the          countries’ lists, for example, with re-
OECD Model Convention.                      spect to the cross-border VAT refund
Even if it is not yet the common prac-
tice to provide information, the law        It should be noted that the regular tax
sees it as sufficient, that the country is    rate of the offshore country will have
willing to do so. Reviewing the legisla-    no impact on the applicability of the
tive history and introductory state-        new legislation. The willingness to ex-
ment shows that timely measures of          change tax information is the only cri-
the offshore legislations to introduce       terion.
this OECD standard are required.

From a practical point of view, there
are three options. Either there has to
be a qualified clause in a tax treaty or
tax information exchange agreement

Offshore Taxation Demystified, 2009/2010

What are the Documentation                 These documentation requirements
                                           are not applicable, if the total amount
Obligations?                               of sales and services to a person does
                                           not exceed Euro 10,000 in each busi-
The anti-offshore legislation provides      ness year.
for the following eight transfer pricing
documentation requirements:                All these documentations have to be
                                           prepared and delivered promptly.
1. Nature, content and scope of busi-      Promptly means prepared within six
ness relationships.                        months of the end of the relevant
                                           business year, and to be submitted
2. Contracts and agreed contractual        within 30 days of the date on which
arrangements including any later           the authority demands it be done.

3. The usage of intangible assets, dis-    Additional Obligations to be
                                                                 Business rela-
                                                                 tions with a fi-
                                                                 nancial institu-
                                                                 tion in offshore
                                                                 jurisdictions are
                                                                 a further point
                                                                 of attack by the
                                                                 new legislation.
                                                                 The ordinance
                                                                 expects that
                                                                 the tax authori-
                                                                 ties lodge a
                                                                 c l a i m f o r i n-
                                                                 formation di-
                                                                 rectly a gainst
posed by the tax payer or his business     the offshore bank. On request, the tax
partner in connection with the busi-       payer is obliged to grant a power of
ness concerned.                            attorney to the tax authorities for all
                                           such judicial and extrajudicial
4. The functions exercised and risks       measures. 
assumed by the parties, including later
modifications.                              In addition, the new legislation would
                                           request that the tax payer signs a
5. The assets involved.                    sworn declaration that the declared
                                           financial income earned through or
6. The business strategy used.             from offshore banking institutions is
                                           complete and correct. It will give the
7. The significant market situation and     tax payer cold comfort to know that
competitive relationship.                  he cannot be punished with penalty
                                           payments or prison if he rejects to give
8. The ultimate shareholders and           such affirmation in lieu of an oath. 
beneficiaries of the parties.

Offshore Taxation Demystified, 2009/2010

In principle, the law requires hard evi-          the risk that the offshore payments
dence on an existing business relation            will be fully non-deductible. This
with an offshore banking institution,              means the tax authorities have the
or at least a clear indication for the            power to completely deny the deduc-
existence of a specified relationship              tion of corresponding expenses. This
with an offshore bank. However in                  is the most alarming nature of the
practice, this will be a toothless limita-        beast.
tion of the tax authority’s proceedings
as soon as the assumed name of a bank             Another part of the sanction package
is disclosed.                                     deals with withholding tax obligations.
                                                  As a general rule, any relief from with-
Another question is whether any non-              holding taxes is denied under the new
cooperation of the financial institution           legislation in the case of investments
vis-a-vis German tax authorities would            from or through offshore countries. 
result in sanctions for the tax payer. A
bank in a blacklisted country might               As a last part, the de facto 95% ex-
not be very carefully with respect to             emption of dividend revenues in a
the          k n o w- y o u r- c u s t o m e r-   German limited-liability company will
requirements. As a result, the re-                not be applicable for offshore divi-
quested information might be not                  dends. This will make offshore sub-
available for the bank. At least it               sidiaries less attractive from the tax
would be an uphill battle for the Ger-            planning point of view.
man tax authorities to convince a non-
cooperative court that the required               How to Deal with Anti-
background information is available. 
                                                  Offshore Legislation
What are the Sanctions and                        In a nutshell, what is the overall con-
Downsides?                                        clusion after reviewing the new legisla-
                                                  tion for combating tax evasion? The
As a general rule, any expenditure to             mouse that roared - or the empire
offshore countries shall be non-                  strikes back? The stopping power
deductible for tax purposes. The word-            against effective tax planning seems to
ing in the ordinance “in connection               be not very impressive. 
with activities” is broad and vague. It
would be nothing but fair to allow a              The new law, enhanced by the new or-
deduction at least in cases where it is           dinance, has three weak and three
proven or obvious that the expendi-               strong points: The weaknesses merely
ture has been subject to offshore taxa-            come from a diplomatic dance more
tion. However, the German govern-                 than from an ignorance of law and
ment implemented the new legislation              practice. 
with a shoot-to-kill intention and will
not listen to such arguments.                     1. The tax authorities will have to go a
                                                  long way to fight against constitutional
Transfer pricing documentation re-                and practical hurdles. Is it really possi-
quirements typically result in the pos-           ble to overrule the individual bilateral
sible downsize that the fair market               tax treaties? Is it constitutional to
price is in the worst case estimated by           authorize the government - and not
the tax authorities. However under                the legislator - to specify the black list
the new legislation, the tax payer faces          of offshore countries? 

Offshore Taxation Demystified, 2009/2010

2. The black list is empty and the         The second aspect is the substantially
whole legislation obsolete. The gov-       increased cooperation and retention
ernment has the power and authority        obligation of the taxpayer. It can be
to name and shame certain offshore          expected that any offshore bank ac-
jurisdictions independently from the       count number disclosed and any other
OECD and other G8 countries. How-          sensitive information leaked, will re-
ever in a common European market,          sult in a comprehensive tax audit.
this seems to be non-cooperative with
respect to the EU member states.           The third aspect, and may be most
                                           alarming one, is the fact that the new
3. The new legislation does not allow      legislation has not to be qualified as
any dragnet operations and, luckily for    the high-water mark of the anti-
the tax payer, resigns from the only       offshore initiative. It is merely the
powerful and effective weapon.              starting point for more.

Seeing these deficits, it is easy to say    Anyway, tax planning is a precise busi-
that the German legislator brought a       ness. The restrictions and require-
knife to a gunfight. However, the          ments of the OECD model conven-
other side of the coin is primarily the    tion, the European and U.S. tax legisla-
shoot-to-kill policy of the new legisla-   tion, and the increasing experience of
tion. The deductibility of expenses,       the international tax authorities have
the relief from withholding obliga-        to be integrated and implemented in
tions, and the preservation of tax ex-     the future cross-border tax structuring
emptions will either survive the battle    and the business relations with Carib-
or not. It is a black-or-white approach    bean offshore jurisdictions.
with no grey areas accepted. 

              Published in the Caribbean Property Magazine
                between August 2009 and February 2010

Copyright: PUGNATORIUS S.A., Panama City, Panama.


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