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Response to the Panama papers

In the wake of the leaked "Panama papers" and the apparent misuse of BVI companies, press and television journalism is representing a distorted view of the international finance centres, and the BVI.

This distortion is evident to those working in the trust and corporate services industry and it is clear that recent journalistic criticism of the BVI does not mention any of the following developments:

  • The BVI has entered into tax information exchange agreements (TIEAs) with many countries including the USA, Germany, France, Denmark, the UK, Australia and New Zealand. These agreements require the BVI authorities to obtain and provide, on request, information held by banks, trustees and other financial institutions as well as information regarding the ownership of companies.
  • The BVI has entered into systematic automatic exchange of information procedures under various agreements including the EU Council Directive, the Convention on Mutual Administrative Assistance in Tax Matters, UK FATCA and US FATCA. These agreements include but extend beyond tax information, and network the BVI with all EU and OECD countries. The BVI has also recently enacted domestic legislation implementing the OECD "common reporting standards" or CRS. The CRS is similar in concept to the BVI, US and UK FATCA legislation and is the OECD's initiative for the global automatic exchange of information for tax purposes. The BVI government is fully committed to this.
  • The BVI has recently (8 April 2016) entered into a new exchange of information Protocol with the UK aimed at deterring money laundering.
  • By 31 December 2016 details of the beneficial owners of all BVI companies incorporated for professional introducers (e.g. lawyers and accountants) must be held by licensed corporate service providers in the BVI. It will no longer be sufficient for the beneficial owner information to be already held and retained by the introducing lawyer or accountant.
  • The BVI has been rated "largely compliant" for its approach to tax transparency and exchange of information in the Peer Review report published by the Global Forum, a taskforce set up by the OECD in Paris to assess transparency and exchange of information for tax purposes of nation states and territories. This puts the BVI on a par with OECD countries such as the UK and Germany.

Clearly some of the papers leaked to the press are disturbing and will lead to official investigation - but what the news broadcasters do not reveal is what proportion of the files they have obtained disclose prima facie evidence of wrongdoing.

Those working in the international financial community know that the criminal abuse of BVI companies is relatively rare, although reputable service providers remain very vigilant, and continue to be dismayed on the occasions that press revelations reveal apparently poor "KYC" procedures.

It is also important to consider the typical uses of offshore companies in the context of taxation. Typical uses include:

  • international joint venture vehicles
  • international holding companies
  • personal asset holding vehicles

In all cases, it is accepted and acceptable that a significant benefit is tax neutrality. This is not a euphemism for tax avoidance. Today, most people would agree that tax must be paid somewhere on trading profit, capital gain or other income streams. International tax planning in the BEPs era recognises that tax must be paid on income generation, but such planning aims to ensure, as far as possible, that in cross-border business transactions, tax is paid only once on the income concerned (such single level taxation being paid either in the country of residence of the recipient, or at source), or with maximum possible relief from double taxation. Any double or multiple taxation of the same income without relief discourages international business and therefore economic growth in national economies. The OECDs global network of double taxation treaties (of which the UK has the largest number) strives to mitigate such multiple taxation in order to drive economic growth from international business. The positive impact of international tax planning and double taxation treaties should not be underestimated. The OECD itself has stated that millions of people have been lifted out of poverty by the use of taxation treaties, and this has contributed to social and human betterment. BVI companies cannot and do not interfere with the taxation of profits at source, and neither can they prevent multiple taxation. But BVI companies do not add another layer of taxation and so can be used to receive and hold post tax income and capital in a tax neutral and politically and financially stable environment. This is a welcome facility for the global economy, particularly in the context of international transaction, involving parties from different countries who want a neutral legal and fiscal forum.

In the wake of the most recent leaks there has also been much adverse publicity concerning the use of BVI companies to own UK residential property of high value. When assessing the rightness or otherwise of such ownership, it should not be forgotten that all offshore companies acquiring residential property must pay Stamp Duty Land Tax (SDLT) on acquisition. There is no question of tax avoidance in terms of SDLT. In fact, since March 2012, the rate of SDLT paid by offshore companies acquiring UK residential property has been at the higher rate of 15%. This rate now also applies to residential properties of modest value (those worth more than £500,000). This alone is a very welcome bonus to the UK Exchequer. Furthermore, BVI companies (and all other offshore companies) now also pay an annual ownership tax in the UK, and a capital gains tax on disposal of the UK properties they own. The detail of these taxes is of course under-reported in the press, because it does not provide the headlines they seek.

Jordans conducts "KYC" checks on its clients and introducers as required by applicable anti-money laundering laws and regulations referred to in this note. Such legislation has been driven by powerful supra-national bodies such as the EU and the OECD, as well as the USA. This "KYC" certainly adds to the costs of offshore company formation and management, but it is a cost that well-informed clients and introducers are happy to pay and is today a real safeguard against the criminal misuse of professional corporate and trust services.

 Martin Palmer

Martin Palmer
T: +44 (0)117 918 1321

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