Monday, 26 August 2013

How to Open a New Franchise in Dubai

DubaiFranchising is a legitimate business method that involves the licensing of trademarks and methods of doing business, or an exclusive right, for example to sell branded merchandise. Franchising (from the French for honesty or freedom) is a method of doing business wherein a "franchisor" authorizes proven methods of doing business to a "franchisee" for a fee and a percentage of sales or profits. In the future the Dubai economy will more likely be filled by innovative and creative franchises which seek to capitalize on their market lead and intellectual property advantage. Franchises fill a market need and therefore, are the fastest growing way of doing business.
Dubai franchise market has witnessed supremacy of few big retail conglomerates having multi brands in their portfolio and pre-dominantly the Master Franchisee arrangements but now the trend for small franchisees and sub-franchising is picking up. Dubai has a pro-business environment , whose investor-friendly policies attest to if one considers its infrastructure, corporate taxes, transfer of profits to home countries, entity ownership and availability of large pool of human resources. Businesses located in the multiple free zones enjoy tax exemption. The franchise sector in Dubai gets generous support from the government. The state is promoting the franchise sector to induce growth and development of the small and medium size businesses. Government backed Mohammed Bin Rashid Establishment for Young Business Leaders provides business training to entrepreneurs and also encourages women entrepreneurs. Further, the government established the UAE Franchise Association in 2004.

The Dubai Islamic Bank (DIB) has a program for aid of young UAE citizens under which it extends to them for buying franchise business. Setting up this project need the following; • Business plan business, plan that includes your business overview, competitor review, market trend in the particular service, your core competency, your financial projections, marketing and distribution plans and your funding alternatives. • Franchise Arrangement, an arrangement whereby as a franchisor you license the franchisee, in exchange for a fee, to exploit the system developed by you if acting in the capacity of a franchisor. Generally a package including the intellectual property rights, trade mark logos, patents or designs, trade-secrets and Copy-righted protect your IP assets by Offshore Company and register in UAE Ministry of economic. Register your franchise agreement before a UAE court. You need a reputable Firm to complete this project. Dubai remains the preferred base for franchised operations in the region, given its tax status, the comparative stability of its legal and regulatory systems and it openness to foreign investment, though Most countries in the Middle East region do not have franchise- specific legislation The franchisee market is dominated by a small number of players who take multiple Brands franchise known as Franchise Conglomerates ,with some having as many as 50-55 brands in their portfolio.

Middle East's strategic location has a key role in expanding any business around the world. Franchisors seeking new markets favor the Middle East as a franchising destination as it assures easy accessibility and communication with the surrounding areas. The most moderate estimate of the franchise industry in the Middle East and North Africa put it at $ 30 billion today. It also puts the annual growth of Middle East franchising sector at 27 per cent. This frantic pace provides huge opportunities for franchisors to bring their brands to the region, as this trend is set to continue for years to come, powered by massive consumption appetite, economic growth and record oil prices. In the last decade many Middle Eastern businesses proved to be very successful in the rest of the world with their efficient style, cost management and competitive distinguished products, especially in the retail, food and catering sectors. Successful franchises in Dubai. There are many successful franchises in Dubai of which prominent examples include:

Heritage for Henna - Beauty Franchise Heritage for Henna started in Jumeirah Beach Hotel, Dubai. It was a huge success with foreign visitors and confirmed its owner’s belief that henna decoration has a massive market outside of this region. To maintain quality, Heritage for Henna sets up its own farms in carefully selected regions, where top quality henna shrubs are cultivated. In addition, considerable investment is made to select and train the most talented henna artists. Heritage for Henna provides a wide variety of drawings with traditional, classical, contemporary and modern designs. Unlike other projects that required large space and high rent, setting up a henna salon required only the minimum of 4 square meters. Heritage for Henna provides its franchise partners with a full range of support services that will enable them to manage their projects with a high level of efficiency and profitability.

Furthermore, it offers assistance with the location selection, rental negotiations and installation of decor. At the same time, staff will be selected and trained to ensure that they meet "Heritage for Henna's" high creative and professional standards.

Foot Solutions Health & Wellness Franchise - This franchise provides foot care solutions and use high-tech computer foot scanning equipment to produce a complete line of custom shoe inserts and orthotics. Malridge Master Distributor - Photographic Engraving Franchise - Malridge has developed a unique process for the customized engraving of photographs and graphics on glass surface, while, producing the highest finish and definition. They do photo engraving and personalized engraving on all types of glassware, from crystal awards and trophies to tableware. Apart from the regulars like McDonalds, Burger King and KFC, the 3 biggest growing franchise brands internationally, there are many new casual dining, fast food franchising ventures which seem to be showing interest in the Dubai market.
Egypt's Integrated Food Franchising is promoting its Pizza Conez product, a revolutionary new take on take away. The product is a pizza cone similar to an ice cream cone and it takes five minutes to prepare. The unique selling proposition of this product is that it is portable and has mobility. The fast food products from the US, for example, Pizza Hut and Dominoes have entered the Dubai market but Pizza Conez brand is about authentic Italian ingredients.

London Dairy - Is another food brand looking to increase its presence in the market. London Dairy is a complete Dessert Destination that offers the entire exclusive range of London Dairy Premium Ice Creams, dessert sundaes, pastries, cakes and single origin coffee

Subway franchise business is pushing the fast food market to continue the globalization of its company, and there are no plans on stopping in Dubai, with multiple stores opening in Kuwait, Saudi Arabia, and Qatar. There are 60 franchises already present throughout Dubai, and this means tough competition for prospective franchisees in Dubai. Emerging markets are increasingly more important as opportunities for retail franchising in the West diminish because of market saturation and increased competition. Industries in which franchising is mature, offer fewer profits.

For example, fast food, retailing, hotels and other service based industries. Emerging markets are unsaturated, poised for growth and there is increased demand for products and services that embody international standards and quality. There are thousands of different business franchises, and there will be more than one and perhaps many in your chosen business area. Once you have made the decision to buy a franchise business it is difficult to turn back.

A wrong decision takes a few seconds to make, and for some, a lifetime to put right. So do your research. Look at the alternatives. Ask existing franchisees. Ask customers. Ask bank managers. Read the franchise trade magazines, newspapers, websites. Attend franchising exhibitions. Seek the advice and opinions of friends or Business Consultant. Do some local market research to gauge demand for the products and services, to test the reputation of the franchising companies, and to test their claims about pricing and any other relevant business claims or information you've been given. Become an expert before you sign the papers - don't wait to learn about the 'unknowns' after signing the contract and parting with your cash.

These days information is easy to find - don't be shy - look for it - ask and satisfy all of your concerns before you make your decision.

Winston Wambua

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Why Dubai is still unique for Business

Dubai has emerged as a leading regional commercial hub with state-of-the-art infrastructure and a world class business environment. It has now become the logical place to position your business in the Middle East, providing you with a unique and comprehensive value-added platform.

With its strategic location, 0% corporate and personal income tax and a consistently strong economic outlook, Dubai is the ideal base for multinationals, SMEs and start ups targeting markets in Central Asia, Middle East, Africa, Asian Subcontinent and Eastern Mediterranean with a population of over 2 billion people and a combined GDP of US$ 6.7 trillion. With a friendly beach front international and multi cultural environment and tax-free living and working it’s hard to find a more perfect setting to start a new business or set up a branch office.

Dubai is still unique in many respects: a major cosmopolitan city located in a country that does not levy direct taxes of any kind, has no VAT, and only a 5% customs duty. It is an offshore jurisdiction without the offshore stigma.

Operating a business in the UAE

Under UAE federal law foreign businesses have three main forms to choose from to conduct business in the UAE:

¨ As a local limited liability company;

¨ As a branch of a foreign company;

¨ As a representative office of a foreign company.

Alternatively, six out of seven Emirates (the exception being Abu Dhabi) offer the possibility to conduct business out of a freezone and two Emirates – Dubai and Ras al Khaimah – offer an International Business Company regime.

Free zones

If there is no need to sell goods directly to the local market then setting up in a freezone is often more attractive than setting up as a local company, which requires 51 per cent local ownership. The practice is to allow the provision of services through a freezone entity to the local market as long as a significant proportion of the turnover is realised abroad.

The main advantages of setting up in one of the freezones in the UAE are as follows:

• 100 per cent foreign ownership is allowed;

• A guarantee for 15-50 years against the  future imposition of corporation tax.

• The import of goods duty free provided the goods are not supplied to the local market;
• Streamlined procedures: all formalities are typically dealt with through the freezone  authorities instead of the various government departments;

• No restrictions on hiring expatriates.

The freezones each have their own freezone authority. These are profit-making entities. Their main source of income is derived from renting office space, collecting license fees, and providing services to the companies operating in the freezone. In all freezones financial statements need to be submitted to the freezone authorities annually.

The UAE is particularly well positioned to cope with the increasing pressure from onshore tax authorities to provide real economic substance. The UAE freezones offer a very easy and inexpensive way to obtain office space, locate a server, and hire staff:

International Business Companies (IBCs)

Dubai, through its Jebel Ali Freezone, and Ras al Khaimah, through the RAKIA freezone and the RAK Free Trade Zone, both offer an IBC regime. These companies are ideal for holding investments such as shares in local or freezone companies, UAE real estate, or for trading activities outside the UAE. IBCs cannot rent office space or apply for staff visas, and they are not allowed to trade with parties inside the UAE.

All in all, Dubai offers something that to many will sound too good to be true: an unrivalled lifestyle in a business-friendly, no-tax environment, with a strategic location and access to all the services that you would expect to be available in a world-class business Centre.

Winston Wambua

International Offshore Specialist

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Perfect Opportunity on franchising McDonald's

Perfect Opportunity on franchising McDonald's
mcdonaldsWhat are the requirements to open a McDonald's franchise? If you qualify to open a McDonald's franchise and
are willing to invest your time and money it can be a very financially rewarding and life-changing experience.
Facts  about the McDonald's Franchise System
McDonald's has been a franchising company since 1955 and has relied on its franchisees to play a major role in the system's success. McDonald's remains committed to franchising as a predominant way of doing business. Today, the McDonald's franchise is the leading global foodservice retailer with more than 30,000 restaurants, located in more than 100 countries.

If you are considering buying a McDonald's franchise you will most likely buy an existing franchise restaurant. Most franchisees enter the system by purchasing an existing restaurant, either from McDonald's or from a McDonald's franchisee. A very small number of new operators enter the system by purchasing a new restaurant.

Financial Requirements and Start-Up Costs to Open a McDonald's

An initial down payment is required when you purchase a new restaurant (40% of the total cost) or an existing restaurant (25% of the total cost). The down payment must come from non-borrowed personal resources, which include cash on hand; securities, bonds, and debentures; vested profit sharing (net of taxes); and business or real estate equity, exclusive of your personal residence.
Since the total cost varies from restaurant to restaurant, the minimum amount for a down payment will vary. Generally, you need a minimum of $300,000 of non-borrowed personal resources to be considered to open a McDonald's franchise. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities which McDonald's encourages.
Other Requirements to Open a McDonald's

•Significant business experience - Individuals who have demonstrated successful ownership or management of multiple business units or have managed multiple departments.

•Rapid growth - Individuals who possess the capability to grow rapidly with McDonald's.

•Business plan - The ability to develop and execute a business plan.

•Manage finances well - Ability to manage finances including a thorough understanding
of business financial statements.

•Good management skills - Commitment to personally manage the day-to-day operations of the restaurant business.

•Training - Willingness to complete a comprehensive world class training program and   become proficient in all aspects of operating a McDonald's restaurant business.

•Exceptional customer experience - The capability to effectively manage an organization that recruits, trains, and motivates restaurant employees who deliver an exceptional customer experience.

•Good credit history - An acceptable credit history

Ongoing Fees to McDonald's
During the term of the franchise, you pay McDonald’s the following fees:

•Service fee- A monthly fee based upon the restaurant’s sales performance (currently a service fee of 4.0% of monthly sales).

•Rent - A monthly base rent or percentage rent that is a percentage of monthly sales. McDonald's usually owns the property and also acts as the landlord.

(Source: McDonald' Acquiring a McDonalds Franchise

Once you get through the initial process of being approved for a restaurant franchise and secure your financing, you will sign a lengthy contract with the franchisor. Review the contract with a fine tooth comb before signing on the dotted line. Most importantly, know what can happen if the franchise fails. Are you locked into paying the franchisor a set amount of money each month or year, regardless of success? Who owns the equipment? Will you get any of your investment money back? Don’t assume that because it is a chain it will be an instant success. It still takes hard work and patience.

Winston Wambua

International Offshore Specialist
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Super rich hold $32 trillion in offshore tax havens:new study

Rich individuals and their families have as much as $32 trillion of hidden financial assets in offshore tax havens, representing up to $280 billion in lost income tax revenues, according to research published on Sunday.
rich_taxesThe study estimating the extent of global private financial wealth held in offshore accounts – excluding non-financial assets such as real estate, gold, yachts and racehorses – puts the sum at between $21 and $32 trillion.
The research was carried out for pressure group Tax Justice Network, which campaigns against tax havens, by James Henry, former chief economist at consultants McKinsey & Co.
He used data from the World Bank, International Monetary Fund, United Nations and central banks.
The report also highlights the impact on the balance sheets of 139 developing countries of money held in tax havens by private elites, putting wealth beyond the reach of local tax authorities.

The research estimates that since the 1970s, the richest citizens of these 139 countries had amassed $7.3 to $9.3 trillion of “unrecorded offshore wealth” by 2010.
Private wealth held offshore represents “a huge black hole in the world economy,” Henry said in a

Winston Wambua

International Offshore Specialist
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The inbound guide summary to US corporate tax

The inbound guide summary to US corporate tax
The inbound guide summary to US corporate tax
Foreign investment plays an important role in the US economy. According to the latest data from United Nations Conference on Trade and Development, the United States had more foreign direct investment from 2006 through 2009 than any other country in the world. Majority owned US affiliates of foreign parents produced $670 billion in goods and services, accounting for nearly 6% of total US private output in 2008. In addition, foreign investors in the US invested $188 billion in capital expenditures and $40.5 billion in research and development. Despite the economic downturn, which resulted in a 50% drop in foreign investment in the United States between 2007 and 2009, foreign investment activity in the United States remains strong and has increased by 49% from the economic crisis level it reached in 2009.1 Indeed President Obama affirmed the value of investments by foreign-domiciled companies to the US economy and made a commitment to treat all investors in a fair and equitable manner so that the United States remains the “destination of choice for investors around the world.” 2
As the world’s largest economy, the United States provides abundant opportunities in which to operate, an innovative and productive workforce, excellent infrastructure and lucrative consumer and business-to-business markets. It also delivers a tax code that covers more than 17,000 pages — not to mention common law precedent. Although not all provisions necessarily apply to inbound investors, you must navigate your way through sometimes vague (and often confusing) tax regimes at the national, state and local levels to maximize the possibilities and manage the risks. Missteps and missing information can create undue risk and affect the ultimate success of your cross-border operations. I am here to help.

We know that every business has a unique set of circumstances and attributes that trigger specific tax obligations. That said, there are certain overarching regulations, policies and approaches that can help make the process of doing business in the US smoother. This is designed to provide you with a ready guide to some of that information. However, we urge you to consult with a qualified and trusted advisor before you make any significant business or tax-related decisions to more fully understand what impact the US tax code and financial landscape may have on your corporate entity. Structuring your US business entity and activities;

There are number of ways in which your inbound company can structure business activities in the US, depending upon your business model. What is important is choosing a structure that is compatible with the way the group anticipates operating in the US. Just remember not to do anything purely for tax reasons. That said, there will be tax consequences to your choices, so be sure to consider those in advance as well.

US tax authorities assume that a business purpose exists for so-called “greenfield” opportunities — opportunities that are largely unexplored and undefined. Based on that premise, investors are allowed to arrange their operations as they see fit. Initial transactions in a Greenfield investment are presumed to be for some business purpose and not solely for the purpose of tax avoidance.

Forms of enterprise and their tax implications

How you structure your long-term operations in the US effectively defines how you will be taxed, so the choice can have a potentially significant impact on profitability. US Treasury regulations generally allow many business entities to choose classification as a corporation, partnership or entity disregarded from its parent. There are flow-through entities, unincorporated branches and Limited Liability Companies (LLCs). There are distributor and manufacturer representatives, joint ventures and partnerships. Where will the head office be located and what activities will go on in the US? Each choice has its own implications, complications and criteria. The various ownership structures also have financing, legal liability and growth flexibility issues. So given several viable structures that could work for your business, how do you decide which one to choose? Typical business models include a representative office, branch office or wholly owned subsidiary

Representative office.

A representative office is the easiest option for a company starting to do business in the US. You do not have to incorporate a separate legal entity and you will not trigger a corporate income tax, 5 as long as the activities are limited in nature. That would include such ancillary and support activities as advertising and promotional activities, market research and the purchase of goods on behalf of the headquarters office. A representative office is most appropriate in the very early stages of your corporation’s business presence in the US. Then, you may want or need to transition to a branch or subsidiary structure as your business in the US grow. You and your advisor should periodically review the suitability of your structure and its activities to make sure that you are not inadvertently triggering a taxable presence in the US by exceeding the permissible activities. Branch
A branch structure is similar in nature to a representative office in that it does not require incorporating a separate legal entity. The benefit of having a branch rather than a representative office is that the range of activities that can be performed by a US branch office can be substantially increased. That will, however, constitute a taxable presence in the US, which means that you must annually account for and file US corporate income tax on the branch’s profits. Generally, the branch is subject to a corporate tax rate of up to 35%6 in the US. In addition, any remittance of post-tax profits by the branch to the head office is subject to branch remittance tax of 30%. However, US tax treaties typically reduce the branch remittance tax.

A branch structure is suitable when you anticipate incurring losses in the near future or repatriating profits on a current basis. The US branch’s trading losses can be offset against the home office’s trading profits. In a reverse situation, where the branch is profitable, the parent company may also be subject to tax in the home country on the US profits. Keep in mind that an inbound corporation considering a branch structure may expose a disproportionate share of the parent company’s profits to a higher US tax rate since attributing the profits to branch activities requires arm’s length consideration. There is also a risk that intangibles such as intellectual property and brand identity may build up in the US over time. That could give rise to larger US tax liabilities in the longer term as the group becomes more successful in the US marketplace because these intangibles would necessitate attributing more of the profits to the branch.


In a subsidiary structure the inbound company incorporates a wholly owned subsidiary in the US, making it a separate legal identity distinct from the parent company. This can be used to cap any risks that may be inherent in a branch option. The profits earned by the US subsidiary would be liable to tax in the US at up to 35%7. Further, the repatriation of profits (dividend distribution) by the US subsidiary to the parent is subject to a withholding tax of 30%. However, US tax treaties typically reduce the dividend withholding tax. The chart on the following page provides a high-level look at some of the considerations specific to each of the three typical models.

Tax treaties, the US has income tax treaties with more than 60 foreign countries, providing substantial benefits by reducing or eliminating the 30% withholding tax on US source FDAP income. In addition, US business profits can only be taxed to the extent that the foreign person’s involvement in the United States rises to the level of a permanent establishment. Generally, a PE does not include activity that is considered auxiliary and preparatory. The threshold for a PE is higher than the threshold of a US trade or business, and an entity that might otherwise be subject to US net tax on ECI can be exempted under an applicable treaty from paying federal income tax if its level of activity does not rise to the threshold of a PE. The exemption from paying tax does not exempt the foreign person from otherwise applicable filing obligations (e.g., an annual income tax return).
What may come as a surprise to treaty countries is that under the US Constitution, treaties and laws passed by Congress are the “supreme Law of the Land” and have equal authority. That means US statutory guidance requires only that “due regard” be given to treaties. In addition, US case law generally supports the idea that precedence be given to the most recently enacted authority. Thus, it is possible for Congress to enact laws overriding existing US treaty commitments. Even when the treaties are upheld, they do not govern taxation by the individual states.

To combat potential abuse of the treaty system, the US tax authorities have tried to limit the extension of treaty benefits to residents of a treaty country that satisfy three conditions:

1. Economic ownership — the resident must economically or beneficially own the income.
2. Tax ownership — the resident must be subject to tax on the income imposed by the treaty country as a resident of that  country. An example of rules limiting treaty benefits due to tax ownership are the regulations regarding hybrid entities under IRC Section 894.
3. Economic nexus — the resident must have a sufficient economic nexus with the treaty country to establish that it is not merely using the country to obtain a tax advantage. Two restrictions on nexus are the Limitation on Benefits (LOB) articles, which define additional qualifications beyond mere residence that must be met, and triangular provisions, which deny or reduce benefits for certain income earned through a third-country PE. US tax authorities limit access to preferential treaty rates to entities that have economic ownership of the income eligible for treaty benefits.

Access to treaty benefits may be limited to the extent that the entity subject to tax does not have an economic nexus with the jurisdiction that is granting treaty benefits. Most US treaties have an LOB article that prevents non-residents from obtaining treaty benefits by establishing intermediary entities in treaty countries.

Controversy, misconceptions and potential trouble spots, Transfer pricing controversy
One consequence of this expanding global marketplace is the increasing potential for double taxation – the result of two or more taxing authorities attempting to tax the same profits because they do not agree with your transfer pricing. Experience tells us that the best plan is to assume controversy will happen and be prepared with a strategy for managing. Among the options are Advance Pricing Agreements (APAs), Competent Authority relief and arbitration.

Accidental expatriates, Employees living and working outside their home country are typically referred to as expatriates. That arrangement would generally involve your human resource department and include a predetermined contract that takes into account the tax and other business ramifications for both the individual and the company, at home and abroad. But what happens when the employee or contractor is sent to the US for only a short-term assignment or immediate business requirement without following formal procedures? Depending upon some clear — and less clear — factors and circumstances, such as length of stay or amount of compensation earned while in the US, you may have created an accidental expatriate.

The activities of these individuals can carry significant risk for you and your employees, primarily:

• Non-compliance with US immigration, tax and social security laws
• Double taxation of business profits by the home country and the US
• Assessment of penalties
• Failure to properly budget and allocate costs
• Employee exposure to taxation related to short-term international business travel

Keep in mind that although our handbook is specific to inbound companies doing business in the US, accidental expatriates can arise in other countries as well. The best approach is not to take any overseas business travel lightly, and to make sure that your local and US human resource professionals are involved in any contract and placement processes.

Treaties and state tax liability foreign investors in the United States should also keep in mind that availability of treaty benefits to offset the federal taxation of income may not necessarily apply to mitigating state income tax. As a general rule, states are not a party to tax treaties between the United States and foreign nations. In fact, some states, such as California, do not recognize the PE article of the US income tax treaties and do not contain any other rules that would exempt income generated by activities in their state from state income tax. For example, assume a Foreign Corporation (FC) sells goods on an arm’s length basis to its wholly owned US subsidiary, a California corporation, (US Sub) on consignment. US Sub then sells the goods on its own behalf to independent retailers and wholesalers throughout the United States. FC has no employees in the US and conducts no other business in the US. Pursuant to the treaty, FC’s US activities may not rise to the level of a permanent establishment, so FC may not be subject to US federal income tax. However, the apportioned net California source income generated by the activities would be subject to California income tax. That means FC would need to file in California to report its worldwide income and apportion that to California based on that state’s tax laws.

Winston Wambua

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Guernsey has signed a Double Taxation Arrangement (DTA) with Hong Kong.

It means that Guernsey has now signed 'full' DTAs with seven jurisdictions. In addition to this DTA with Hong Kong, Guernsey has had a DTA with the UK for many years and has signed
Guernsey and Hong-KongDTAs with Malta, in 2012, and earlier this year with the Isle of Man, Jersey, Qatar and Singapore.
The DTA with Hong Kong was signed for Guernsey by the Chief Minister, Peter Harwood, who commented that this was a further important step in growing the business links between Guernsey and the Far East.
The Chief Minister said: "I am delighted to further strengthen our relationship with Hong Kong. The signing of this DTA, combined with the visit of the Chinese Ambassador to the UK to Guernsey this week, recognises the importance attached to Guernsey's business relationship with the Far East. The agreement is expected to bring significant commercial benefits to our finance sector, resolving issues relating to potential double taxation, and leading to greater opportunities for new business."
Guernsey's finance industry has worked closely with its counterparts in China and Hong Kong since 2006, particularly since the establishment of a Guernsey Finance office in Shanghai at the end of 2007. Guernsey signed a Tax Information Exchange Agreement (TIEA) with China in 2010.
In 2011, Guernsey businesses were approved to list on the Hong Kong Stock Exchange (HKEx) and Guernsey's then Commerce & Employment Minister was part of a delegation that visited Hong Kong. Last year Guernsey's finance industry was heavily represented in Hong Kong at conferences such as Super Return Asia and STEP Asia. Today, a number of Guernsey-based firms have offices in Hong Kong, including law firms Mourant Ozannes and Ogier, fund administrator International Administration Group (IAG) and fiduciary services providers Louvre, Nerine and Newhaven.
Fiona Le Poidevin, Chief Executive of Guernsey Finance - the promotional agency for the Island's finance industry, said: "The DTA between Guernsey and Hong Kong further deepens the relationship and offers significant potential for expanding financial services business between the two jurisdictions. The DTA means that individuals or companies with 'home' as one jurisdiction but with interests in the other jurisdiction will have mechanisms in place to prevent them from being taxed by both sets of authorities on the same income. This clarity and certainty on matters of taxation makes it more attractive to conduct business between the two jurisdictions, especially in terms of investment funds, fiduciary services and intellectual property.
"In addition, the DTA will provide increased possibilities for the expansion of Guernsey's financial services business, not just with Hong Kong but also other jurisdictions. Hong Kong is continuing to develop as a major financial services hub in Asia, which is fuelled by the fact that its network of DTAs with other jurisdictions enables it to act as a gateway for business coming into and out of the wider region. As such, the DTA offers the potential to tap into the other parts of Hong Kong's DTA network and therefore attract flows from a broader field of jurisdictions. The DTA with Hong Kong comes less than two weeks after the publication of a successful OECD Global Forum Peer Review report on Guernsey's tax regime in relation to transparency and exchange of information.
The Chief Minister added: "The conclusion of this DTA reflects Guernsey's commitment to meeting international standards of tax transparency and co-operation - underlining the fact that the OECD's Peer Review report earlier this month said that Guernsey had in place all of the elements which it assessed."  The signing of the Hong Kong DTA is Guernsey's sixth since the beginning of 2012, all of which meet the international standards on international taxation.
Rob Gray, Guernsey's Director of Income Tax, said: "As well as creating a mechanism for exchanging requested tax information with Hong Kong, the agreement will assist in resolving issues relating to potential double taxation of both corporate and personal incomes, such as business profits, dividends, interest, royalties, income from employment and pensions." In addition, Guernsey has now signed 41 Tax Information Exchange Agreements (TIEAs), the most recent being with the British Virgin Islands (BVI), signed by the Chief Minister last week. This network of agreements covers the majority of G20 countries and EU Member States.
Guernsey has signed 18 DTAs: Full - Hong Kong, the Isle of Man, Jersey, Malta, Qatar, Singapore and the UK; Partial - Australia, Denmark, the Faroes, Finland, Greenland, Iceland, Ireland, Japan, New Zealand, Norway and Sweden.Guernsey has signed 41 TIEAs: Argentina, Australia, Bahamas, Brazil, British Virgin Islands (BVI), Canada, Cayman Islands, Chile, China, Czech Republic, Denmark, the Faroes, Finland, France, Germany, Greece, Greenland, Iceland, India, Indonesia, Ireland, Italy, Japan, Latvia, Mauritius, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovenia, South Africa, St Kitts & Nevis, Sweden, Turkey, the UK and the US.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Winston Wambua

International Offshore Specialist
For more information please contact me on
Mobile +971553350517

Skype: Winston.Wambua

Swiss Bank Accounts and the Law Regulations

Swiss Bank Accounts and the Law

In the United States, law enforcement agencies, the judicial system, and even private citizens can gain access to financial information of all sorts. In Switzerland, however, neither a bank's officers, nor employees are allowed to reveal any account or account holder information to anyone, including the Swiss government.
CurrencyThe Swiss banker's requirement of client confidentiality is found in Article 47 of the Federal Law on Banks and Savings Banks, which came into effect on November 8, 1934. The article stipulates that "anyone acting in his/her capacity as member of a banking body, as a bank employee, agent, liquidator or auditor, as an observer of the Swiss Federal Banking Commission (SFBC), or as a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/her or of which he/she has been apprised because of his/her position."
In order to sidestep this law, there must be a substantial criminal allegation before a governmental agency, especially a foreign one, can gain access to account information. Tax evasion, for example, is considered a misdemeanor in Switzerland rather than a crime.
According to the Swiss Bankers' Association Web site, however, there is also a duty for bankers to provide information under the following circumstances:

•     Civil proceedings (such as inheritance or divorce)
•    Debt recovery and bankruptcies
•    Criminal proceedings (money laundering, association with a criminal organization, theft, tax    fraud, blackmail, etc.)
•    International mutual legal assistance proceedings (explained below)

International mutual assistance in criminal matters

Switzerland is required to assist the authorities of foreign states in criminal matters as a result of the 1983 federal law relating to International Mutual Assistance in Criminal Matters. Assets can be frozen and handed over to the foreign authorities concerned. Assistance in criminal matters follows the principles of dual criminality, specialty and proportionality.
Dual criminality means that Swiss courts don't lift the requirement of bank/client confidentiality unless the act being investigated by the court is punishable under the law in both Switzerland and the country requesting the information. The specialty rule means that information obtained through the arrangement can only be used for the criminal proceedings for which the assistance is provided. The proportionality rule means the measures taken in conducting the request for assistance must be proportionate to the crime.

International mutual assistance in administrative matters

Under these proceedings, the Swiss Federal Banking Commission (SFBC) may communicate information only to the supervisory authorities in foreign countries subject to three statutory conditions:

•   The information given can't be used for anything other than the direct supervision of the banks or financial intermediaries who are officially authorized and can't be passed on to tax  authorities.

•    The requesting foreign authority must itself be bound by official or professional confidentiality and be the intended recipient of the information.

•    The requesting authority may not give information to other authorities or to other public supervisory bodies without the prior agreement of the SFBC or without the general authorization of an international treaty. Information can't be given to criminal authorities in foreign countries if there are no arrangements regarding mutual legal assistance in criminal matters between the states involved.


Swiss residents pay 35 percent tax on the interest or dividends their Swiss bank accounts and investments earn. This money is namelessly turned in to the Swiss tax authorities.
For nonresidents of Switzerland there are no taxes levied on those earnings, unless:

Swiss Withholding Tax

There is a 35 percent Swiss withholding tax on interest and dividends paid out by Swiss companies. So, if you invest in a Swiss company such as Nestlé or Novartis, then 35 percent of any dividends will be withheld as a tax regardless of where you live. The same is true if you buy bonds issued by a Swiss company. If you're a Swiss taxpayer (or if your country has a double taxation agreement with Switzerland) then you can claim the tax back. Double taxation is when income is taxed both in your home country, as well as the country in which the income is earned.

EU Withholding Tax

On July 1, 2005, the European Union Withholding Tax came into effect to prevent residents of EU member countries from avoiding paying tax on interest earned on money deposited in foreign banks with very strong banking secrecy laws. The EU goal had been for all countries to disclose interest earnings to the home countries of their bank clients so that that money could be taxed. Several non-EU countries, Switzerland included, didn't agree because it went against their banking privacy/secrecy laws. Now, bank clients who live in the European Union pay a withholding tax on the interest made by certain investments. This tax started at 15 percent and is gradually increasing to 35 percent by 2011. No exchange of information or taxes on capital or capital gains is levied.

Inheritance Tax

If you want to pass on your account to your family (and you're not a Swiss resident) you're in luck because there is no inheritance tax in Switzerland for nonresidents. Your heirs are responsible for declaring the holdings to their country's tax authorities, however. Swiss banks offer the same range of services of other banks: checking accounts, savings accounts, custodial accounts, etc. They also will hold other valuables like stock certificates, gold, silver, and other property for a fee. Like other Swiss accounts, they are protected under Swiss law from any snooping unless you're engaged in criminal activity.

When it's time to make a withdrawal, it can be paid in the currency of your choice. Swiss francs, American dollars, whatever you would like. Unlike American law where law enforcement agencies, the judicial system, and private citizens can gain access to all kinds of financial information under Swiss law, except for extraordinary circumstances neither the bank's officers or the bank's employees are allowed to reveal any information, relative to any account to anyone, including the Swiss government.

No private citizen, or their legal representative can ever receive any type of information about any one's Swiss bank account under any set of conditions. That includes all types of legal proceedings that the Swiss classify as "non-criminal behavior." The Swiss consider tax evasion and many other "crimes" under US law as "political offences." Things like divorce, inheritance disputes and bankruptcy cases are examples of "private matters," and as such the secrecy of the account is protected from any legal action to verify the presence of, or attempts to seize any assets. There are some notable exceptions. Three types of activity which the Swiss consider illegal, and are bound by treaty with the United States to "open" the account for possible legal proceedings are: organized crime activities, drug trafficking, and "insider trading" of securities. In instances of this kind, the Swiss authorities have the final say on whether or not to reveal any information.

The Swiss currently charge a hefty 35% tax on interest earned in Swiss accounts but Americans get 30% of that tax refunded by showing that they're not Swiss residents. To claim the refund there is a catch 22. You must identify yourself, which of course give up your secrecy. If you maintain the account in Swiss francs, and the franc increases in value relative to the American dollar, you may also be liable for a capital gains tax when you withdraw the money and convert it back to United States dollars. If you sustain losses from any decrease in value they are usually not deductible. There are no US restrictions on having Swiss bank accounts, but current IRS regulations require you tell them what foreign accounts you have when you file your annual income tax return. If you answer yes, the Internal Revenue Service requires more paperwork.

Interest earned in a foreign account is still taxable under present US Tax laws, but you usually get to offset foreign taxes that you may be required to pay. Consult with a tax expert to learn what present regulations are since they change frequently and are beyond the scope of this report.

With its long-standing association with the world’s finances, the perception of a Swiss Bank could be one of a series of dated institution, set in their ways and which don’t move with the times and, therefore, could become obsolete in time. This could not be further from the truth. Some older banking institutions do, in fact, get left behind when technology advances at a pace and so cease to exist. Switzerland has long understood the maxim ‘evolve or die’ and, as an offshore jurisdiction, has adapted rapidly to address the changes in modern life and modern banking. In the last few years

Swiss Banks have made huge strides to develop the ultimate in technological offshore banking:
encryption security technologies, electronic funds transfers, internet banking etc. Swiss Banking, if not leading the way, is certainly at the forefront of the modern technological age. Wire transfer of assets and electronic signatures are now the order of business.

Winston Wambua

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Tax new agreements for British overseas territories and crown dependencies

New tax scrutiny agreements for British overseas territories and crown dependencies
New tax scrutiny agreements for British overseas territories and crown dependenciesBritish expats with bank accounts in overseas territories and crown dependencies will be subject to greater tax scrutiny after UK Chancellor George Osborne announced new commitments to tackle tax evasion and enhance transparency. He said that all British Overseas Territories with significant financial centers have signed up to the government’s strategy on global tax transparency, marking a turning point in the fight against tax evasion and illicit finance.
Following the recent leadership shown by the Cayman Islands, the other Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands, have agreed to much greater levels of transparency of accounts held in those jurisdictions. They have agreed to pilot the automatic exchange of information bilaterally with the UK and multilaterally with the G5, comprising of the UK, France, Germany, Italy and Spain.
Under this agreement much greater levels of information about bank accounts will be exchanged on a multilateral basis as part of a move to a new global standard. The agreement will mean that the UK, along with other countries involved in the pilot, will be automatically provided with much greater levels of information about bank accounts held by their taxpayers in these jurisdictions. This includes names, addresses, dates of birth, account numbers, account balances and details of payments made into those accounts and well as information on certain accounts held by entities, such as trusts.
The Isle of Man, the first non US jurisdiction to agree to greater exchange of information with the UK, has also agreed to join the multilateral initiative and Gibraltar, which already operates the relevant transparency directives as part of the European Union, has also made the same commitments. These jurisdictions have also committed to taking action to ensure they are at the forefront of transparency on company ownership. The government is working closely with them ahead of the UK’s presidency of the G8. Earlier this year Prime Minister David Cameron identified tax transparency as a key priority for the summit. This represents a step change in the level of international transparency and will make it much harder for people to escape paying taxes by hiding their money overseas. Osborne has urged others to join this growing initiative.
‘This represents a significant step forward in tackling illicit finance and sets the global standard in the fight against tax evasion. I now hope others follow these governments’ lead and enter into similar commitments to this new level of transparency, removing the hiding places for those who seek to evade tax and hide their assets,’ he said. The agreements build on those the UK reached with the Isle of Man, Guernsey and Jersey to exchange tax information automatically based on a ground breaking automatic information exchange agreement with the US to implement the US FATCA law to tackle tax evasion. The UK government sees this as setting a new standard in international tax transparency.

Winston Wambua

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Apple’s Move Keeps Profit Out of Reach of Taxes

Why a company with billions of dollars in the bank and no would plans for a large investment — decide to borrow billions more?  (Floyd Norris Report) A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.

apple4It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated. Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever. The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend. The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible. Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all. Anger at such tax avoidance we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain. Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States relative to the profits it makes, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.

Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult. “It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States.The company makes no secret of the fact it has not paid taxes on a large part of its profits. “We are continuing to generate significant cash offshore and repatriating this cash will result in significant tax consequences under current U.S. tax law,” the company’s chief financial officer, Peter Oppenheimer, said last week.
A company spokesman says the company paid $6 billion in federal income taxes last year, and “several billion dollars in income taxes within the U.S. in 2011.” It is a testament to how profitable the company is that it would still face “significant tax consequences” if it used the cash it has to buy back stock.There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.

“The fundamental problem we have in trying to tax corporations is that corporations are global,” says Eric Toder, co-director of the Tax Policy Center in Washington. “It is very, very hard for national entities to tax entities that are global, particularly when it is hard to know where their income originates.” In principle, there are two ways the United States could get out of the current mess. The first, proposed by President John F. Kennedy more than 50 years ago, is to end the deferral. Companies would owe taxes on profits when they made them. There would be, of course, credits for taxes paid overseas, but if a company made money and did not otherwise pay taxes on it, it would owe them to the United States. After it paid the taxes, it could move the money wherever it wished without tax consequences. President Obama has not gone that far, but he has suggested immediate taxation of foreign profits earned in tax havens, defined as countries with very low tax rates. Some international companies hate that idea, of course. They warn that we would risk making American multinational corporations uncompetitive with other multinationals, and perhaps encourage some of them to change nationality.

The other way is to move to what is called a territorial system, one in which countries tax only profits earned in those countries. Apple would then be free to bring the money home whenever it wanted, tax-free. But without doing something about the ease with which companies manage to claim profits are made wherever it is most convenient, that would simply be a recipe for giving up on collecting tax revenue. Companies around the world have done a good job of persuading countries to lower tax rates. Back in the 1980s, the American corporate tax rate of 34 percent was among the lowest in the world. Now the 35 percent United States tax rate on corporate income is among the highest. In this country, notwithstanding the high rate, the corporate income tax now brings in about 18 percent of all income tax revenue, with individuals paying the rest. That is half the share corporations paid when Dwight Eisenhower was president. There seems to be something of a consensus developing around the idea that the United States rate should be lowered. Both President Obama and Representative Dave Camp, the chairman of the House Ways and Means Committee, say they want to do that without reducing government revenue, but they disagree on most details. Mr. Camp likes the territorial idea, but he concedes that we would have to do something about the ease with which companies move income from country to country.

In fact, the need for such a rate reduction is not as clear as it might be. Reuven Avi-Yonah, a tax law professor at the University of Michigan, studied the taxes paid by the 100 largest American and European multinationals and found that, on average, the Americans paid lower rates. Professor Avi-Yonah says he thinks that the developed countries should cooperate and enact similar rules. He compares that to the American Foreign Corrupt Practices Act, which makes it illegal for American companies to bribe foreign governments. American companies used to say that was unfair, but now most developed countries have similar laws. Something like that may be growing a little more likely. At the request of the Group of 20 governments, the Organization for Economic Cooperation and Development is doing a study called BEPS, for Base Erosion and Profit Shifting.

In Europe, where budget problems have grown drastically, there seems to be a growing understanding that governments must raise a certain amount of revenue and a belief that if one sector manages to avoid paying taxes, that means other sectors must pay more. That led to the anti-Starbucks demonstrations in Britain. In this country, there is little sign of similar attitudes, let alone a belief that those who find ways to twist the laws to avoid paying taxes are being unpatriotic. If that belief were to become widespread, Apple and similar companies might find that their success in avoiding taxes was making them unpopular with other taxpayers — people whom Apple wants to be its customers.

Winston Wambua

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Transfer Pricing Arm's Length

Transfer Pricing Arm's LengthTransfer pricing is one of the most important issues in international tax. Transfer pricing happens whenever two related companies – that is, a parent company and a subsidiary, or two subsidiaries controlled by a common parent – trade with each other, as when a US-based subsidiary of Coca-Cola, for example, buys something from a French-based subsidiary of Coca-Cola. When the parties establish a price for the transaction, they are engaging in transfer pricing.
Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing. (Transfer mispricing is a form of a more general phenomenon known as trade mispricing, which includes trade between unrelated or apparently unrelated parties - an example is rein voicing.)
It is estimated  that about 60 percent of international trade happens within, rather than between, multinationals: that is, across national boundaries but within the same corporate group. Suggestions have been made that this figure may be closer to 70 percent. A March 2009 Christian Aid report estimated $1.1 trillion in bilateral trade mispricing into the EU and the US alone from non-EU countries from 2005 to 2007. The “Magnitudes ” section of our website contains a range of estimates and data. Accurate movie exploring this issue, watch the US film "We're Not Broke."

 Mispricing and the "Arm’s Length" principle

 If two unrelated companies trade with each other, a market price for the transaction will generally result. This is known as “arms-length” trading, because it is the product of genuine negotiation in a market.  This arm’s length price is usually considered to be acceptable for tax purposes.

 But when two related companies trade with each other, they may wish to artificially distort the price at which the trade is recorded, to minimise the overall tax bill. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes. For example, take a company called World Inc., which produces a type of food in Africa, then processes it and sells the finished product in the United States. World Inc. does this via three subsidiaries: Africa Inc. (in Africa), Haven Inc. (in a tax haven, with zero taxes) and America Inc. (in the United States).

 Now Africa Inc. sells the produce to Haven Inc. at an artificially low price, resulting in Africa Inc. having artificially low profits – and consequently an artificially low tax bill in Africa. Then Haven Inc. sells the product to America Inc. at a very high price – almost as high as the final retail price at which America Inc. sells the processed product. As a result, America Inc. also has artificially low profitability, and an artificially low tax bill in America. By contrast, however, Haven Inc. has bought at a very low price, and sold at a very high price, artificially creating very high profits.

However, it is located in a tax haven – so it pays no taxes on those profits. What has happened here? This has not resulted in more efficient or cost-effective production, transport, distribution or retail processes in the real world. The end result is, instead, that World Inc. has shifted its profits artificially out of both Africa and the United States, and into a tax haven. As a result, tax dollars have been shifted artificially away from both African and U.S. tax authorities, and have been converted into higher profits for the multinational. This is a core issue of tax justice – and unlike many issues which are considered to be either “developing country” issues or “developed country” issues – in this case the citizens of both rich and poor nations alike share a common set of concerns.  Even so, developing countries are the most vulnerable to transfer mispricing by multinational corporations.

Winston Wambua

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Tax havens a modest proposal

A modest proposal
A modest proposalTHE rampant use of tax havens by large companies to reduce their tax bills has been moving up political agendas. The G8 and G20 have called for action to curb the practice. They worry that the    international network of treaties and rules designed to avoid the double taxation of multinationals has instead allowed them to enjoy widespread double non-taxation. The Organisation for Economic Co-operation and Development, which crafts international tax rules and guidelines, recently produced a report on profit-shifting and has promised to unveil firm proposals by the summer. It is unclear precisely what the OECD will recommend, but it appears to be leaning towards patching up the existing framework rather than embracing an entirely new approach. Many independent tax experts—those who don’t work for multinationals—argue that this would be a missed opportunity, given how easy it has become to game the system.One of the most intriguing (and refreshingly straightforward) comes from Jeffery Kadet, a former tax partner with Arthur Andersen, who now teaches at the University of Washington School of Law. Mr Kadet believes the answer lies in adopting a “worldwide full-inclusion” system of corporate taxation, an approach that has received surprisingly little attention, given its merits. Here’s his proposal:

“We see in the media almost daily items about the detrimental effects of tax havens in general and corporate profit-shifting in particular. Profit-shifting is the structuring by multinationals of their cross-  border operations to minimise taxes imposed in both their home countries and the countries where they actually operate, and the movement of those profits through legal planning into subsidiaries in low-tax jurisdictions. The goal is to achieve “double non-taxation”: no tax in countries where operations and revenues occur and no tax in the company’s home country. So successful has big business been at achieving this goal—and thus eroding the tax bases of both leading economic powers and developing countries—that the issue has shot up the agendas of the OECD, the G8 and the G20. All are looking for solutions.

Some solutions look like mere band-aids. Countries are urged, for instance, to tighten rules on “transfer pricing” of transactions between subsidiaries in different countries; or to strengthen their “general anti-avoidance rules”. Such rules might make profit-shifting a bit more difficult, but they won’t solve the problem. The same goes for country-by-country financial reporting, which would make profit-shifting easier to identify but wouldn’t eliminate the motivation to seek double non-taxation. That motivation will only disappear if management knows that the group’s worldwide income will always be taxed, and that no amount of planning or developing complex schemes can avoid it. That is why the only real solution is to force current (ie, non-deferred) taxation on 100% of a multinational’s worldwide income, with no exceptions. What mechanisms could accomplish this? One that’s sometimes discussed is “unitary” taxation, under which all countries agree to a formula that would allocate the worldwide profits of each company among the countries in which it has operations, employees, assets and revenues. Each country would then tax its allocated share at its domestic tax rate.

This approach has merit. However, it is hard to imagine countries around the world agreeing on an allocation formula, including rules covering details like where to locate valuable intangible property. Then there’s the Herculean effort of implementing the system through domestic legislation in each country. And unless all countries signed up, the system would likely result in some double taxation and some double non-taxation.Fortunately there is another way forward, and it is one that could work even if adopted by less than all countries and in varying forms that reflect individual countries’ needs. It would require the countries that embraced it to abandon the “territorial” and “deferral” systems that have become popular and instead adopt a worldwide “full-inclusion” system. It is time to digress briefly, to explain why the territorial and deferral systems have led to a frenzy of profit-shifting. Under the territorial approach, which has been widely adopted, countries exempt their resident corporate taxpayers from home-country tax on some or all income earned through business activities overseas. Under the deferral system, the home country taxes worldwide income, but for foreign subsidiaries the levy is delayed until the year dividends are declared or paid to the parent. And that declaration or payment may never come, meaning that the deferral can be permanent. A multinational based in a country that uses the territorial or deferral system will find it hard to resist the temptation to employ cross-border tax planning and structuring to achieve two objectives: minimise or avoid tax in the countries where operations occur and/or revenues arise; and maximise income outside the home country (while ducking any measures the country may have adopted to counter erosion of the tax base, such as transfer-pricing or controlled foreign corporation rules). Where successful—and this is very often—the results are double non-taxation, a low effective tax rate, higher reported earnings, a higher share price and nice bonuses for executives with equity-based compensation.
 The incentive to engage in aggressive tax planning is clear.

So what is a worldwide full-inclusion system?

And how would it significantly dampen a company's enthusiasm for profit-shifting?

Under this approach, each company’s home country would impose its normal

l corporate-tax rate on the group’s worldwide income. Importantly, this would include income earned by foreign subsidiaries, and deferral would not be allowed. A foreign tax-credit mechanism would prevent the double taxation that would otherwise occur from the same income being taxed once in countries where operations occur or revenue is earned and then a second time by the home country. As a result, 100% of the group’s earnings would be subject to at least the home-country tax rate. Complex structures and schemes to move profits into tax havens would no longer be effective since even these offshore earnings would be swept up and taxed currently as earned by the home country. The motivation for such profit-shifting vanishes. Can it actually be implemented? I believe it can, even though the trend over the past decade or two has been to move in the opposite direction, towards territorial systems. (Britain and Japan are two recent examples, with pressure to go territorial in America too.) I'm optimistic for several reasons. First, outrage over the present system has been growing, strengthening the political will to do something to solve the problem. Second, a full-inclusion system only has to be adopted by countries that are home to the multinationals; there is no need for universal buy-in. Third, any country that adopts the system can choose the form of implementation and the tax rate; there’s no need for uniformity. Lastly, and very importantly, with the broadened tax base that such a system would create, there’s room for each adopting country to lower its general corporate tax rate. Such a reduction could help make local enactment politically acceptable. To be sure, there’s plenty of technical tax mumbo-jumbo that would need to be worked out by each enacting country. Perhaps the biggest concern is that multinationals would be encouraged to redomicile in tax havens so as to minimise or avoid the home-country levy. But is GE really likely to move to Bermuda? In any case, rules can be crafted (and in some countries already exist) to prevent such an exodus. The OECD would need to provide guidance on these and other issues.

Some developing countries that offer tax incentives may have concerns about a full-inclusion system since these incentives may become less attractive to multinationals. On the other hand, with less motivation to shift profits, the multinationals that do business in the developing world will likely be paying more tax there. Economists may have mixed feelings about a worldwide full-inclusion system. They often point out that taxation systems that focus on the “source” of income have a number of theoretical attractions. Some also argue that “residency” (ie, home-country taxation of everything) is not a great basis on which to build a tax system because place of incorporation and management and control, the most typical determinants of residency, can be easily manipulated. However, it is clear in today’s globalised world that the profit-shifting incentive created by “source”-based taxation systems is so strong that it far outweighs any theoretical benefits these systems might provide. Moreover, there are other benefits of adopting the full-inclusion system. It should create a more level competitive playing field within each country among homegrown multinationals, foreign multinationals that do business there and purely domestic businesses. The last of these are at a big disadvantage under the present system because they don't have the same opportunities to reduce taxes using offshore structures. Under a full-inclusion system, there would be a more level playing field globally for multinationals from different countries as each would be subject to a minimum level of taxation as imposed by its home country. Competition will not be played out through which multinational is more creative or aggressive in its tax planning. Another benefit is simplification. While the transition period could be messy, in the long run the new system would be more straightforward than today's tax labyrinth.
Among those attending the talks at G7 meeting, was Canada's central banker Mark Carney who takes over from Sir Mervyn King as Bank of England Governor in July. King said the meeting had been the most productive of the 25 he had attended during his term at the helm. Joking about his impending departure, King said: "In a week in which retirement came to Sir Alex Ferguson, it is pretty clear it has to come to everyone. I am looking forward to a new life." Also at the talks was IMF managing director Christine Lagarde as the body undertakes its annual health check of the UK.The IMF, which will deliver its verdict later this month, has already suggested Osborne must be more flexible with his deficit-reduction plans. Shadow treasury minister Catherine McKinnell said: "It's disappointing that this G7 meeting has failed to set out any concrete steps to promote economic growth or tackle tax avoidance.
Does the G8/G20promote trade?

Winston Wambua

International Offshore Specialist
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Why have Arab countries recovered so little of the money thought to have been nabbed by their former regimes?

ArabIN THE months after the “Arab spring”, rumours swirled in Egypt, Libya and Tunisia that every household would gain a slice of looted public funds prised from the grasp of their former leaders and the cronies who surrounded them. Hossam Issa, a prominent academic and at the time deputy head of the Nasserist Party, said the deposed President Hosni Mubarak’s ill-gotten gains had been “a daily insult for 30 years…now I have hope.” International anti-corruption campaigners looked forward to a promising new front opening in the global war on graft. Source the economist. Estimates of the loot range widely, reflecting the murkiness of offshore finance, but the talk is of tens of billions of dollars. Sani Abacha of Nigeria, often taken to epitomise venality, pilfered between $5 billion and $8 billion. But sometimes optimism overtakes reality: the upper, $70 billion, estimate of the amount siphoned off by Egypt’s Mubarak clan may just be on the high side.

What is clear is that the value of assets identified and frozen by foreign governments is disappointingly small: two years after the Arab spring, they are worth a little over $1 billion, more than three-quarters of it in Switzerland. Assets actually repatriated are even paltrier: to Egypt, nothing; to Libya, a London house linked to Muammar Qaddafi’s son, Saadi; to Tunisia, some planes and, earlier this month, $29m from a Lebanese bank account belonging to the wife of Zine el-Abidine Ben Ali, the ousted dictator (his family and cronies are thought to have plundered $3 billion). Even modest recoveries are welcome for cash-strapped governments. But amid legal blockages, investigative dead-ends and recriminations, early hopes gave way to despair. Now some signs suggest the tide is turning.

Easy to steal, easier to keep

Asset recovery is a slog. It requires hacking through thickets of international law. It cuts across criminal, civil and administrative justice. It relies on co-operation between countries (and between agencies within countries) that are often unable or unwilling to share information. The asset-recovery provisions in the UN’s Convention against Corruption form a basic framework, but the process is still littered with obstacles: in a report in 2011, the World Bank and UN counted 29 hurdles. Persuading courts to freeze and return assets is especially tricky when they have been hidden inside complex corporate structures in jurisdictions that offer secrecy to investors, and when their owners can afford the best lawyers. Forfeiture cases are almost always “complex legally, complex forensically and expensive,” says Bruce Zagaris of Berliner Corcoran, a law firm. They are also protracted. Funds pilfered by Ferdinand Marcos that were frozen in 1986 were not released to the Philippines government until 2002. Legal action over the $200m that the UN estimates Pavlo Lazarenko, a former prime minister, pinched from Ukraine in the 1990s still rumbles on, with a dozen parties chasing assets in eastern Europe, America and Antigua.
Hordes of Western lawyers, accountants and gumshoes have rushed to offer new Arab governments their help but with a mostly poor harvest. Egypt’s main legal counsel, Stephenson Harwood, has drawn fire for reportedly taking a large upfront fee but producing few tangible results. The firm, based in London, says it does not comment on specific assignments. Mohamed Shaban of MS Legal, who helped recover Libya’s London mansion, says he works on a no-win, no-fee basis: “it’s what my people [Libyans] understand.” Libya has been plagued by investigative bounty-hunters hawking “evidence” for cash—and for its part the post-Qaddafi government failed to co-ordinate its response, allowing its agencies to sign a bevy of overlapping contracts.

Foreign officials say Arab prosecutors lack knowledge of international law and the intricacies of offshore structures. In the early post-revolutionary days (things have improved a bit since) they would fire off mutual legal assistance (MLA) requests without first doing the necessary investigative work to support them. (MLA requests are made when a country needs help in another jurisdiction to support an investigation.) The countries grew irritated when they did not receive a quick, positive response. Some requests were botched: in one case, Egyptian prosecutors misunderstood the principle of “double criminality”, which means a suspect can usually be extradited for breaking the requesting country’s laws only if a similar law exists in the extraditing country. “It’s hard for me to berate the West when my client isn’t doing all it should,” says Mr Shaban. Western governments have indeed been criticised for their handling of MLA applications. Arab prosecutors complain that their requests are often held up or rejected on technicalities, fuelling suspicion that countries with large financial centres are shielding those who trade in dirty money. Mr Shaban says it is “disingenuous” for countries to respond to requests by saying, “Here’s our procedure. Follow it.” Poor record keeping, weak administration and inexperience mean countries such as Libya “need hand-holding”.

But, for all these disappointments, the mood is brightening a little. Switzerland, long a byword for obstruction on tax secrecy, has been markedly more helpful in tracking down and returning stolen public funds. It was the first country to freeze Egyptian assets, less than an hour after Mr Mubarak resigned. New Swiss laws facilitate asset recovery, most notably the “Lex Duvalier” of 2011, named after Haiti’s former strongman. This allows the federal authorities to return funds unilaterally to failed states that lack the resources to build watertight cases. (Arab spring countries do not—yet—qualify for such treatment.) Under Swiss law, corrupt former regimes can sometimes be classified as organised criminal groups, allowing the burden of proof to be reversed. A law expected to be passed in 2015 would streamline the repatriation process further. Valentin Zellweger, a Swiss foreign-ministry official who oversees asset recovery, has won plaudits for his efforts to build trust with Arab counterparts. “If there’s a problem, we talk. We have each other’s cell-phone numbers,” he says.

A cynic might say that the Swiss have been busy only because they accepted so much dirty money in the first place. Swiss bankers have long viewed politically exposed persons (PEPs in the jargon of anti-money-laundering efforts) as “strategic clients”. Bank accounts may not be the most important target: the dodgiest clients favour harder-to-trace gold or bearer securities. And Swiss co-operation only goes so far. In January a federal court in effect put asset repatriation on hold when it blocked Egyptian officials’ access to Swiss case files, citing political turmoil and the potential misuse of confidential data.
Fruit of Office

Turning the tables

Egypt has been the most forceful at pushing back against unhelpful foreign governments. Last year it sued the British government in an English court, seeking a judicial review of its efforts. Britain, a popular haunt for Arab elites, has frozen Egyptian property

and bank accounts worth just £85m ($130m). It waited more than a month after the revolution before moving against assets linked to Mr Mubarak and 18 associates: ample time to move money elsewhere. British officials argue they had to wait for a European Union sanctions order to take effect. Egypt says that as of February, Britain had refused 15 of 25 requests for assistance. British officials say they merely asked for more information. A BBC investigation last year found that two companies and a £10m property in Knightsbridge, a prime bit of central London, appeared not to have been frozen despite compelling links to the Mubarak clan, some of it easily garnered through public-records searches. One firm had been set up by a former minister’s wife seven months after she was put on the sanctions list.

But Britain has now formed a “task

-force” to speed up its work with Egypt and has put a prosecutor in the region to provide technical assistance. “We recognise the moral imperative to return assets as quickly as possible,” says Jeremy Browne, the minister in charge. America and Switzerland, too, have experts in the field to help with evidence-gathering and the drafting of MLA requests. America’s Department of Justice even has a “kleptocracy” unit. Public and private international bodies run training workshops for Arab lawyers and sleuths. Experienced former prosecutors from the Basel-based International Centre for Asset Recovery run courses that draw on real cases and groom the best students to train others when they return home. The Stolen Asset Recovery Initiative (StAR), a UN-World Bank project, also provides training and technical assistance. But its most important role is to foster ties between the countries seeking looted money and those sitting on it. That may simply be fixing meetings between their police, prosecutors and financial-intelligence experts. Informal communication means that “by the time you formally request assistance you know it will be accepted,” says Jean Pesme, StAR’s coordinator.

The Gulf state of Qatar is acting as a different sort of intermediary. Its attorney-general, Ali bin Fetais al-Marri, helped the return of $29m from Lebanon to Tunisia and is trying to broker similar deals for Egypt. But this has fostered suspicion: that the Qataris are helping mainly in order to learn more about stolen assets and be better positioned to buy them on the cheap. Such insinuations may be cynical, but bargains are likely. Some of the construction and industrial projects used by the Mubarak regime to siphon off public funds are likely to collapse. The banks that backed them are now distressed sellers. An early look at the books could help a prospective buyer. Qatari officials deny all such notions. But the country makes no secret of its interest in the Egyptian economy. It has invested in several large firms, though it recently failed in its bid to buy the largest investment bank, EFG Hermes.

Whatever the Qataris’ motives, they could prove useful in efforts to recover looted funds concealed in the Arab world. Large sums are thought to be in Saudi Arabia and Dubai, probably in property and other assets with murky ownership. French police hint that more than €70m ($93m) in gold was moved to Dubai and Istanbul via French airports by Mr Ben Ali’s staff during Tunisia’s revolution. (French customs officials apparently reported the transfers to superiors but no action was taken.) Arab financial centres have a poor record in money-laundering cases. But impatient governments are now cutting deals. Under Egypt’s new reconciliation law, sentences may be overturned or prosecutions dropped if former regime cronies hand back a wad of money. In March Rachid Mohamed Rachid, a former trade and industry minister convicted in absentia of squandering public funds, was taken off the to-be-arrested list after he paid back 15m Egyptian pounds (about $2.2m). Prosecutors are negotiating through intermediaries with Hussein Salem, a longtime Mubarak confidant who grew rich buying industrial assets at derisory prices. Mr Salem is in Spain, which has so far refused to extradite him. He is believed to have offered to give up half of his wealth. Next in line to cut a deal could be the former ruling family: for instance, Suzanne Mubarak, the ex-president’s wife, is believed to be open to negotiations over the return of an unknown sum parked in a Swiss foundation that she controls.

What to tell the voters

The new government of Muhammad Morsi is trying to find a way to make such deals acceptable to the Egyptian public. They could be seen as cop-outs if they allow the ex-cronies to avoid prison in exchange for handing over a small portion of their loot. Their disclosed or discovered wealth is likely to fall far short of their total holdings. Osama Diab of the Egyptian Initiative for Personal Rights, an NGO, worries that the settlements could undermine efforts in Switzerland and Britain to link frozen assets to crimes so that courts can sanction their return. However, economic necessity means that securing something now may look better than waiting years in the hope of recovering more. Cherif Bassiouni, a world-renowned expert in international criminal law (and an Egyptian), thinks the government may try to make the settlements more palatable to the public by presenting them as a revenue-generating requirement of any loan deal struck with the IMF.

In the meantime, prosecutors will continue to pursue illicit gains through the courts. Criminal cases will continue to be hard to build, but other options include civil cases known as non-conviction forfeitures. American prosecutors have used them over the years to chase the assets of various bigwigs, including most recently Teodorin Obiang,   the Lamborghini-loving son of Equatorial Guinea’s president. In some jurisdictions, the burden is on the asset’s owner to show he had sufficient legitimate funds to acquire it. This can be tricky for someone who has spent his entire career ostensibly in the public sector. With such tools available, and with co-operation now improving slightly, asset-recovery specialists are hopeful that something meaningful can be achieved before October, when officials from Arab countries, the G8 and Switzerland will gather to review progress. NGOs are doing their bit to identify suspicious assets. In March, for instance, the Corner House, a British anti-corruption organisation, dug up evidence of the involvement of the former Egyptian leader’s son, Gamal Mubarak, in a private-equity affiliate of EFG-Hermes. The bank later said that to the best of its knowledge he still owns an 18% stake in the firm.

Law lessons

To have a fighting chance, asset recovery needs strong political support. This is in short supply, woefully so in Egypt. To be fair, ministers there have other worries too. But they could have done more. Responsibility for asset recovery is splintered between justice ministries, prosecutors-general and special committees. Mutual suspicion abounds. Staff turnover is high, mirroring the coming and going of ministers in the post-revolution tumult. Asset-recovery officials are sometimes oddly reluctant to move cases forward. One reason may be fear of retribution from people linked to the former regimes who retain influence even when out of power. Egypt has also been slow to appreciate the time due process takes in advanced legal systems. Cases must take human-rights laws into account. Linking assets to specific crimes is not easy. Gamal Mubarak worked for years as a financier in London. How to prove that his property there was bought with the proceeds of corruption rather than legitimate earnings? Many of his investments are owned jointly with third parties, complicating asset seizure further.

The absence of convictions at home slows things, too. Thanks to a pliant legislature, the Mubarak regime was able to make dodgy transactions look legal. Mr Mubarak and his sons were acquitted of corruption last year, though they are being retried. Not all convictions will count abroad. Mr Bassiouni doubts that the numerous Egyptian judgments rendered in absentia against fugitive Mubarakites would pass muster if challenged in the European Court of Human Rights. Late last year he was asked by Mr Morsi to draft a national asset-recovery strategy. the president followed his recommendation to set up an inter-agency committee to co-ordinate government efforts. But the president could not resist establishing a separate committee, headed by the vice-president; other suggestions were rejected for unclear reasons. Helping Egypt in this area can feel like “an almost impossible mission,” says Mr Bassiouni.

Mr Shaban expects to bring more claims this year. He says cases are being bolstered by information supplied by former regime figures under interrogation. Meanwhile, the Qaddafi mansion in London that he helped recover for Libya remains a fitting symbol of the ups and downs of asset-recovery efforts. Nestled in a quiet cul-de-sac in the lush suburb of Hampstead, the property is “a bit dilapidated” and hasn’t been put up for sale because “no one can make a decision about what to do with it,” says Mr Shaban. “But at least the Libyan people have it back. It’s going nowhere.”

Winston Wambua

International Offshore Specialist
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