Different taxes and their implications
Tax rules change every year and offshore service providers should be conscious that while a structure may have been appropriate at the time it was created, it may not be efficient years later
Taxation consequences of services provided should be considered and reviewed on an ongoing basis
It is not the role of offshore trust and company professionals to give tax advice and they are entitled to trust that their clients are honest individuals who have declared all relevant income and gains to their tax authorities
Types of taxes
Taxes are charges levied by the government in order to raise revenue to pay for public services to meet the needs of communities, to ensure that people are healthy and secure and to assist those in need
Direct taxes: taxes on income
Natural persons, legal persons and legal arrangements are all subject to tax. The basis of taxation varies depending on the type of person and the jurisdiction that they deemed to be resident or domiciled in
Capital gains tax
Corporation tax
Income taxes
Inheritance tax
Stamp duty land tax
Stamp duty reserve tax
Indirect taxes: taxes on expenditure
Customs duties
Excise duties
Insurance premium tax
VAT
Types of tax systems
Progressive
Those with a rate of tax that increases as the individuals earnings increase. There is usually a level of income that is exempt from tax, followed by tax rates that increase when certain income thresholds are met .
UK has a progressive tax system
Proportional
Tax systems where there is a flax tax regime, There is usually an exemption for a certain amount of earned income and then a single rate is charged on the remainder
Guernsey and Jersey have proportional tax systems
Regressive
Those where the rate of tax falls as the level of income that is subject to tax rises
Intergovernmental agreements
Aim to improve international tax compliance
The agreements establish the legal frameworks for the exchange of information and tax authorities in other jurisdictions
Based on domestic reporting and the automatic exchange of information
There is a growing global intolerance of tax evasion that is resulting in a general trend towards the exchange of information
Following the introduction of FATCA and the singing of intergovernmental agreements with the US, the UK indicated to the Crown Dependancies and to the UK Overseas Territories that it also wished to exchange information on an automatic basis
Agreements that closely follow those signed under FATCA have already been negotiated by Jersey, Guernsey and the Isle of Man
There are some differences between the FATCA agreements and the UK agreements to address the type of business that is undertaken from within offshore centres
Alternative reporting arrangement agreed for business with UK resident, non domiciled individuals
Some offshore centres have also negotiated a disclosure facility which allows investors with assets in their jurisdiction to come forward and regularise past tax affairs
Tax Planning Concepts
Tax laws differ between jurisdictions, however many countries usually consider factors such as residence, domicile or citizenship when decided whether ornate an individual is fiscally connected to a jurisdiction and subject to taxation
The employment of the location of assets may decide where an individual is fiscally connected
A client may be fiscally connected to more than one jurisdiction
Different tax rues apply to an individual depending on their residence and their domicile
Rues of residence and domicile differ for jurisdictions
Residence
An individual's residence has a significant bearing on an individuals UK tax liability and determines the basis of taxation to which an individual is subject
UK resident individuals are normally taxed on an arising basis. UK resident non domiciled individuals have the choice of whether to use the arising basis or remittance basis
Prior to Finance Act 2013, the terms residence and ordinarily resident were not defined in tax legislation. The understanding of these terms had evolved based on legal cases decided by courts over a long period of time
Individuals were treated as UK resident for tax purposes in the following circumstances
Where they were physically preset in the UK for 183 days or more during any tax year
Where they came to the UK with the intention of living there permanently
Where they came to the UK temporarily, and spent 91 days or more each year in the UK on average for 3 complete tax years, they would be treated as UK resident from the start of the fourth year
Where they came to the UK for a purpose which mean they remained in the UK for at least two years, whether or not they spent 183 days or more in a particular year in the UK (eg due to employment)
Where they usually live in the UK and go abroad for short periods (business trips / holidays)
In addition to the number of days spent in the UK, factors such as ownership of UK assets, family, social and business ties
Only days where the individual was present in the UK at midnight are counted
Losing residence
In order to provide an individual was no longer resident in the UK, they needed to demonstrate that they had severed most ongoing links with the UK
Statutory residence test
Introduced in the Finance Act 2013 to provide certainty about the rules and encourage individuals and business looking to invest in the UK
Came into effect for the 2013-14 tax year and supersedes all previous legislation, case law and guidance
Applies for the purposes of establishing a person's residence status for income tax and CGT, and corporation tax and IHT where relevant
Each tax year is considered separately
Automatic Overseas Tests
If a person has not spent 183 days in the UK in a tax year
Asks whether the person was resident in the UK for one or more of the 3 years preceding the tax year, and spent less than 16 days in the UK in the tax year
Asks whether the person was resident in the UK for none of the 3 tax years preceding the tax year and spent fewer than 46 days in the UK in the tax year
Asks whether the person worked full-time overseas over the tax year, without any significant breaks, and spent fewer than 91 days in the UK in the tax year AND if the number of days in the tax year in which they worked for more than three hours in the UK is less than 31
If any of the criteria are met, the person is automatically non-resident for that year and there is no need to consider any of the other parts of the statutory resident test
Automatic UK Test
If the person does not meet any of the automatic overseas tests, they are UK resident if they meet of the automatic UK tests
183 days or more were spent in the UK in the tax year
The person had a home in the UK during all or part of the tax year and spent at least 91 consecutive days there (30 of which fall in the tax year in consideration)
The person had no overseas home, or if they have one, not more than a permitted amount of time was spent there
Sufficient Ties Test
If none of the automatic overseas tests or any of the UK tests are met, sufficient ties test is used to determine a person's UK resident status for a given tax year
If a person was not UK resident for any of the 3 year before the tax year, their sufficient ties are considered
A 90 day tie
A country tie (if the person was resident for one or more of the 3 tax years before the one in question)
Accommodation ties
Family ties
Work ties
Of particular relevance is whether the person was tax resident for any of the three years before the tax year in question. The number of days is also important as this decided the number of UK ties that are needed for a person to be UK resident
If a person has spent less time in the UK in a tax year, more ties are required for them to be deemed UK resident
Ordinary residence
The new statutory residence test has abolished the concept of ordinary residence
A separate concept from tax residence but which had a bearing on an individual's tax liability
Applied to people who were deemed resident in the UK for a particular tax year but who were not typically resident there
Dual residence
It is possible to be resident in the UK and at the same time be resident for tax purposes in another country
Individuals with dual residence would be taxed in accordance with any double taxation agreement that exists between the individual and the other country
Double taxation agreement
Different countries have different tax rules
Possible a person could become liable to tax in two countries on the same income
In order to avoid double taxation the could arise, countries have negotiated double taxation agreements with other countries
Individuals who find themselves subject to double taxation need to make a claim under the relevant agreement
Domicile
Distinct from a person's nationality and place of residence
Typically where they have their permanent home
Only affects a person's position for income tax and CGT purpose if they have foreign income and gains. Also relevant for IHT purposes
Three types of domicile:
Deemed domicile: Only relevant for IHT purposes. An individual will be deemed domiciled in the Uk for a tax year if they have been resident in the UK for any part of the last 17 out of 20 years, including the tax year in question
Domicile of origin:
A person acquires a domicile or origin when they are born. This is acquired from their father, unless their parents were not married, in which case the domicile is acquired form the mother. If parents are unknown, then it is the place where the person was found.
This domicile is retained until a person acquires a domicile of choice
Domicile of choice:
To acquire this a person must leave their current country of domicile and settle in another country
Not sufficient to comply to be present in the jurisdiction of the domicile of choice
Would need to provide strong evidence that they intend to leave the UK permanently
Following factors may be relevant when acquiring a new domicile of choice:
Individuals business interests
Individuals intentions
Individuals permanent residence
Individuals permanent residence
An individuals permanent residence
Individuals social and family interests
Property owned by an individual
Domicile of dependance:
Until a person has the legal capacity to change their domicile, their domicile follows that of the person on whom they are legally dependant
Before 1974 , a married woman automatically acquired her husband's domicile, this is no longer the case
Basis of taxation
Arising basis of taxation
A person who is resident in the UK is normally taxed on the arising basis of taxation
They will pay UK tax on all of they income as it arises and on the gains as they accrue, wherever that income and those gains are in the world
Remittance basis of taxation:
Alternative tax treatment to the arising basis
Available to people who are resident in the UK and who are either non-UK domiciled or not UK-resident
Non-Domiciled individuals (or those who are not UK resident) pay UK tax only on the amount of their foreign income and gains that they bring or remit to the UK
Tax is still paid on income and gains that accrued the UK
Individuals who are not UK-resident but are domiciled in the UK can use the remittance basis in respect of foreign income, but cannot use it in respect of foreign gains
If a long term UK-resident (one who has been in the UK for seven out of nine of the previous tax years) decides o claim the remittance basis, they may have to pay the remittance basis charge (RBC)
RBC is an annual tax charge for non-domciicled individuals who have been U resident for at least 7 years. It is higher for those have been UK-resident for 12 years or more