The MO

Transparency Special  

To honour the World Cup, this month the MTN is about a subject close to FIFA’s heart, transparency.

We start with a favourite of several tabloids and politicians, that of entities registered in the last echoes of the British Empire in the Caribbean. We then cover the latest announcements from the Finance Ministers of the EU, one of which we are very interested in! Our third article discusses how funds interact with BEPS Action 6 on preventing inappropriate access to treaty benefits.

Next we have a reminder that UK tax legislation can strike with the faintest of links and with the new requirement to correct penalties commencing in October, now is the last chance to ensure nothing has been forgotten. We finish with some perhaps unsurprising news about the Common Corporate Tax Base.

  1. Public registers of ownership in the British Caribbean – you will do as I say!
  2. Announcements from our leaders – three all at once.
  3. Funds and accessing treating benefits – The effects of Action 6
  4. The requirement to correct – the long arm of UK tax law
  5. The common corporate tax base – the EU’s Holy Grail moves a step closer.

The Empire Strikes Back

The BOTs…

The UK government has accepted an amendment to the Sanctions and Anti-Money Laundering Bill that requires the British Overseas Territories (BOTS) to establish public registers showing the beneficial ownership of companies incorporated in their jurisdiction.

The amendment was introduced by Labour’s Margaret Hodge and backed by MPs from all major parties and commits the government to forcing the Overseas Territories to set up registers by 31 December 2020.

Under the new legislation, the BOTs will be required to disclose company ownership information broadly equivalent to that available on the People with Significant Control (PSC) Register of UK Companies. This means that anyone who ultimately owns or controls more than 25% of an entity registered in one of the BOTs, or its assets (i.e. if it’s an LLP or partnership), or more than 25% of the voting rights, will be disclosed in the public register. Whether such a generous de minimis test will be applied in The BOTS remains to be seen – being the untrusting types, we wouldn’t be surprised if the likes of Hodge and Mitchell call for the reporting threshold to be significantly lowered.

One of the BOTs, the Cayman Islands, achieved great notoriety in 2008 when ex-Senator Obama called it the biggest tax scam on record because a building on the Islands, Ugland House, housed thousands of corporations. That said, for every Ugland House in Cayman, there’s one in Delaware, Wyoming, Nevada etc etc. Anyway, while it’s debateable whether it’s a tax scam, it’s true that billions of dollars in global financial transactions flow through the Islands, a large proportion of which is from U.S. hedge funds that are structured using Cayman companies as a master fund to aggregate their U.S. investors’ cash. For U.S. federal income tax purposes, the master fund is typically treated as a flow-through entity.

Under the new public registry rules, U.S. limited partners in U.S. hedge funds, structured through the Caymans, would have to disclose their personal details where they own more than 25% of the fund’s assets/shares. This could be an administrative nightmare, with ultimate ownership having to be traced through several layers of intermediate holding vehicles, a difficult and time consuming exercise in a fund-of-fund context.

As the Americans would say, it’s “dollars to doughnuts” that by simply holding less than 25% of a Cayman fund, a US limited partner could easily side step the disclosure regime. The reality is that most U.S. LPs’ holdings will be south of 10% allowing very significant amounts of wealth to remain outside the scope of the registry – probably not the result that the Hodge/Mitchell cabal were seeking.

If you would like further information about the BOTs, please contact Geoff on or +44(0) 20 7534 7188.

EU Finance Ministers Get busy – Sort of

At their meeting on the 25th May the Council of EU Finance Ministers (ECOFIN) made three announcements in the field of direct taxation:

  • transparency rules adopted for tax intermediaries;
  • two more territories were removed from the EU list of non-cooperative tax jurisdictions; and
  • adopting a revised provision on good governance in tax matters for agreements between the EU or its Member States and third countries.

We cover all three announcements below, but as you can probably guess we are a little more interested in the first announcement!

Transparency Rules for Tax Intermediaries

As might have been expected, ECOFIN has now decided to extend the EU Directive on Co-operation in Tax Administration (DAC) to include cross-border arrangements marketed or implemented by Tax Advisers.

The new rules also cover the OECD’s proposals to require Tax Advisers to report schemes designed to either circumvent the Common Reporting Standard, or to conceal the real beneficial ownership of offshore entities, with both proposals framed as if they are aimed at stopping tax evasion – although, as ever, they may have the effect of eroding people’s right to privacy. But, this being the EU, the proposals go somewhat further.

The rules are to be applied from 1 July 2020. This is after Brexit, but HMRC/the UK is likely to want to stay within the exchange of information provisions of the DAC if at all possible. Whether Mr Barnier agrees to this is one thing – whether Brexit actually ever happens is another.

For full details of the rules you can do no better than read Geoff’s well received article in Tax Journal.

Non-Cooperative Jurisdictions – The World Becomes Slightly Smaller

Since publishing its list of 17 non-cooperative jurisdictions for tax purposes on 5 December 2017, the EU has been working with the territories on the list to “persuade” them to become co-operative. These discussions are bearing fruit as two more territories, the Bahamas and Saint Kitts and Nevis, were removed from the list as of 25 May 2018 bringing the number on the naughty step to seven.

The Recalcitrant Seven (which has to be a better film than the woeful remake of the Magnificent Seven) are American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago and the U.S. Virgin Islands. We are not sure we will get odds on the three U.S. territories coming off the list any time soon.

Good Governance – Be a Good Partner

ECOFIN has agreed a revised provision that is to be entered into agreements between the EU or its Member States and third countries. The provision commits both parties to the global standard on tax transparency and the minimum standard for BEPS. It also seems to commit the parties to helping each other collect taxes as well. We may well see more assistance in the collection of taxes articles in tax treaties now.

If you have any queries concerning these new EU provisions please contact Andrew P on or +44(0) 20 7534 7184 or Geoff on or +44(0) 20 7534 7188.

Funds and Action 6

Accessing Treaty Benefits in a BEPS World

Typically, a hedge fund is constituted as a tax transparent limited partnership. Such an entity cannot generally access treaty benefits itself because, as a fiscally transparent entity, it’s not liable to tax on the income it receives – a key requirement to establish treaty eligibility.  It is therefore common for hedge funds to establish a master holding company in a jurisdiction such as Luxembourg or Ireland that acquires and holds the fund’s investments and that can access treaty benefits in its own right provided it has sufficient substance.

In many cases, it is possible for the limited partners / investors to rely on their own treaty status to claim treaty benefits on their share of the fund’s returns. Of course, the administrative burden of requiring each limited partner / investor to apply for treaty relief makes this difficult in practice and in some cases investors may not want to bring their investments to the attention of foreign tax authorities.

Recently, a question came up in our practice on how robust a fund structure has to be in a BEPS world, especially in light of Action 6 that combats treaty shopping. There has been a lot of disagreement among OECD members as to which set of rules would best combat treaty shopping:

  1. either a formulaic ‘limitation on benefits’ (LOB) rule that sets out a series of criteria that must be satisfied by a person to demonstrate that it has sufficient connection with its home jurisdiction; or
  2. a more subjective ‘principal purpose test’ (PPT) that denies treaty benefits if one of the main purposes of the transaction or arrangement is to obtain a tax benefit.

The U.S. has traditionally favoured LOB provisions, while major Western European economies seem to be more inclined to the PPT.

The OECD recognizes that LOB rules don’t work well in a fund context, especially in respect of fund-of-funds where it is administratively difficult to drill down through the layers of ownership to establish whether the ultimate investor is sufficiently connected with its home jurisdiction – a key LOB criterion that must be satisfied. At one point, an argument was put forward for the inclusion of an “equivalent beneficiary” provision that would allow an entity to benefit from treaty entitlements if a particular proportion of its ultimate investors were resident in jurisdictions that would have enabled them to access the same (or better) treaty benefits had they invested directly. However, this would require the sponsor to track the status of the investors in the fund in order to determine whether a sufficient number would have qualified for equivalent benefits in each investee jurisdiction, or, less palatable to the tax authorities, allow treaty access to investors that would not have directly qualified.

The inclusion of PPT, rather than LOB provisions, may be less challenging for fund structures, although even that will depend on the manner in which each jurisdiction interprets the test. Some jurisdictions may be more pragmatic than others when applying the PPT and recognize that it may make commercial sense for a fund to set up a treaty platform in a jurisdiction that has a good treaty network, political stability, a business-friendly environment, a reliable legal system and a skilled labour force.

The OECD did try to resolve this uncertainty in early 2016, when it issued a report on how BEPS Action 6 would apply to hedge funds (the OECD refers to them as non-CIV funds). The report contains examples of hedge funds accessing treaty benefits through master holding companies. It seems to recognize that investment funds have to pool their investors’ cash somewhere and all other things being equal it makes commercial sense for them to do so in a jurisdiction that provides access to a wide treaty network.

In short, a master holding company that invests into several jurisdictions and that has adequate substance and resources to carry out its activities is unlikely to be adversely impacted by BEPS. As a footnote, we think the EU’s Anti-Tax Avoidance Directives I & II may impact fund arrangements. Look out next month for our views on this!

If you have any queries about HMRC’s international tax anti-avoidance rules then please contact Andy M on or +44(0) 20 7534 7182 or Geoff on or +44(0) 20 7534 7188.

The Requirement to Correct – Are There Any Issues Forgotten Down the Back of the Sofa?

We were recently retained to review a 30 year old trust arrangement to consider whether the trustees had a UK inheritance tax (IHT) exposure. The trust was established as an Accumulation and Maintenance (A&M) trust by an individual who was resident and deemed domiciled in the UK for tax purposes. A&M trusts were a popular type of discretionary trust most commonly setup by grandparents for their grandchildren. To qualify as an A&M trust, one or more of the trust’s beneficiaries (i.e. the grandchildren) had to either be entitled to an interest in possession or to a share of the trust’s capital prior to reaching the age of 25.

The tax benefits of A&Ms were two-fold:

  1. the creation of an A&M trust was considered to be a potentially exempt transfer (PET), so fell outside the scope of UK IHT provided the settlor survived for 7 years from the date the trust was settled; and
  2. assets owned by the trustees fell outside the ‘relevant property’ regime, so outside the scope of exit and 10-year period IHT charges.

You’ll note the past tense when referring to the tax benefits of an A&M trust. Time stands still for no man and tax legislation less so, and A&M trusts were effectively done away with from 6 April 2008 for tax planning purposes. There was a limited period during which trustees could restructure prior to 6 April 2008, but thereafter an A&M trust was, nearly always, treated in the same way as a discretionary trust. This means that the trust is subject to the 10-year period charge and exit charges (i.e. on certain distributions made from the trusts), as its assets now fall within the scope of the UK ‘relevant property’ regime.

The first periodic 10 year charge for our client’s trust arose in 2015. The trustees failed to report to HMRC the tax due (c6% of the trust assets arising for the period after 6 April 2008 when those assets became relevant property). As the settlor had left the UK in 2010 and become non-resident and non-domiciled, and the trustees and all beneficiaries were also non-UK tax resident, one can understand why the trustees assumed no UK tax was liable.

We are now assisting the trustees with a disclosure to HMRC of the unpaid tax. As HMRC should have been notified of the IHT liability within 12 months of the end of the month that the charge arose, penalties will apply. Provided the failure to notify was not deliberate, the maximum penalty likely to be charged is 30%.

The financial consequences of not complying with the UK’s tax code are ever more significant given the UK’s recent enactment of the ‘requirement to correct’ (RTC) regime. The RTC is an example of the UK utilising its new powers under automatic exchange of information, namely the Common Reporting Standard, to tackle tax avoidance and evasion. The RTC applies to taxpayers with undisclosed tax liabilities who fail to make a disclosure to HMRC about their affairs prior to 30 September 2018. Failure to correct will result in increased penalties of between 100% and 200% of the tax due.

Our advice to clients over the past few months has been simple – even if you think there is no UK tax risk, given the penalties that apply after 30 September 2018, it is worth having a second look to ensure there are no issues lurking at the back of the closet/down the back of the sofa.

If you would like to discuss the Requirement to Correct legislation or a tax matter with us, please contact Zoe at or +44(0) 20 7534 7183 or Rozi at or +44(0) 20 7534 7186. 

If at First You Don’t Succeed…

The Common Corporate Tax Base (CCTB) 

Tax harmonisation seems to be the Holy Grail for the EU. They have launched and relaunched their quest for all EU member states to tax companies in the same way several times over the years, always drawing a blank.

However, the EU’s quest came one step closer on 20th June when France and Germany announced a joint proposal for corporate tax harmonisation across Europe. Indeed, at least for corporation tax, the Franco/German proposal goes further than the EU’s Common Corporate Tax Base proposals as it would apply to all companies within the EU and not just large groups. Our friends on the continent also propose that in their brave new world there will be no incentives, with even R&D reliefs going the way of the dodo.

Somewhat surprisingly there is no proposal for a minimum rate or band within which member states will be required to set their corporate tax rates. Could it be that this is an attempt to obtain Ireland’s support, as we would expect them to veto any EU proposal that affected their prized 12.5% CT rate?

That said, it would be possible for a CCTB to be brought in for member states who wanted to go down a “fast track” as long as France and Germany can persuade enough countries to go with them. Spain and Italy were in favour of the EU’s proposals so it is likely they would look favourably on this new proposal. With the four big Euro economies in favour and the UK intending to turn its back on such matters following Brexit, this time the CCTB may become more than a legendary tale.

We’ll be keeping an eye on how this progresses.

If you want to know more about the CCTB and how it may affect you please contact Miles at or +44(0) 20 7534 7181 or Andrew P at andy@milestonetax.con or +44(0) 7534 7184.


Happy Reading!

The Milestone Tax Team