Lowtax International Tax Planning/IOFC Analysis - Offshore Budget Review
By Lowtax Editorial
09 December, 2011
With the seemingly endless conveyor belt of budgets, supplementary budgets, crisis budgets and solidarity budgets being announced in various parts of Europe as governments in the European Union, and indeed, worldwide, struggle to come to terms with the eurozone crisis, it is understandable that several budget announcements in key offshore jurisdictions which have been announced over the past few weeks have rather blipped off the radar undetected.
In many ways this is reasonable given the gravity of the situation in the eurozone at the moment. What's more, many people might think that offshore territories don't actually need budgets, given the strong governmental links with their old colonial masters, especially in the case of the numerous British Crown Dependencies and Overseas Territories. However, the administrations of these territories still have to find money to pay for public services, like schools and roads, and, just like any other country, they ultimately have to try and balance their books.
Given the importance of some IOFCs to both corporate and individual investors looking to invest into and out of high-tax countries, these budgetary decisions are just as relevant as those being made in Paris, Rome, London and Athens at the moment. The current fiscal state of these jurisdictions is also a useful indicator as to whether new or higher taxes will be needed in the future. Furthermore, the world of offshore has not been immune to the events which have disrupted the financial system and brought about economic turmoil over the past three years, with many jurisdictions having faced some tough choices in terms of fiscal policy. This was especially so in the smaller Caribbean territories which relied heavily on company formations, financial services and tourism to generate income, and many of them have been forced into making some painful fiscal adjustments as result, for example by increasing taxes on their citizens, successively hiking company registry fees, introducing or raising existing sales and property taxes, and levying additional taxes on all manner of other activities. On the other hand, more resilient economies, many of which are to be found in resurgent economies in Asia, have had much more leeway, having built up substantial fiscal reserves in the good times, like Hong Kong. So, if they haven't exactly been slashing taxes, the already low rates of income tax in these places have been maintained, or notched down a touch.
The following is a round-up of budget decisions taken in some of the key offshore territories and international financial centres over the past few weeks:
While Ireland is not 'offshore' in the strict sense of the word, it is widely regarded as a 'low-tax' jurisdiction due to its flagship 12.5% corporate tax rate, which has established the country as one of the main gateways for entry into the EU marketplace, especially for American multinationals.
So, it must have come as a relief then, that when Finance Minister Michael Noonan announced his tax proposals in the 2012 Budget on December 6, retaining the 12.5% corporate tax rate was a top priority of the Fine Gael/Labour coalition government.
"The government have successfully protected this rate even under international pressure and given our fiscal state," Noonan pronounced. "I want to say to our friends in the multinational sector who continue to invest so strongly in Ireland and Europe, there will be no change in Ireland's 12.5% corporate tax rate. We promised this in the Programme for Government and we will fulfil this commitment."
Also pledged in the coalition's Programme for Government was that there would be no increase in personal income tax. As such, income tax rates, bands and credits remain unchanged. On this commitment, Noonan declared: "I want to make clear that there will be no increase in income taxes in this Budget - no increases in rates, no narrowing of bands and no reductions in personal tax credits. Wages and salaries in January will be no less than wages and salaries in December, so people will continue to have discretion on how they spend their income."
Nonetheless, the government is aiming, in line with its commitments to the European Union and the International Monetary Fund, to slash public spending in 2012 by EUR2.2bn and secure EUR1.6bn in extra tax receipts. Consequently, the bulk of the Budget's tax related measures relate to value-added tax (VAT) and capital taxes.
The headline measure, which had been known about for some time anyway after a copy of the budget plan was leaked by the German government, was that the previously-proposed phased 2% increase in VAT would be brought forward to January 2012, taking the rate to 23%. However, the government has pledged that the rate will not be increased beyond 23% during its tenure. The 9% reduced rate introduced in the 'Jobs Initiative' earlier in the year for certain tourism-related services, along with the 13.5% rate applicable to home heating oil, residential housing, general repairs and maintenance, will remain the same.
Under other revenue raising measures:
- Capital gains tax will rise from 25% to 30% from December 7;
- The current rate of capital acquisitions tax is to increase from 25% to 30% from December 7;
- Deposit Interest Retention Tax (the withholding tax rate on domestic interest payments) will be increased from 27% to 30%;
- The Pay Related Social Insurance (PRSI) base will be broadened through the removal of the remaining 50% employer PRSI relief on employee pensions, and the base further broadened to cover rental, investment and other forms of income from 2013;
- The "citizenship" condition for payment of the Domicile Levy will be abolished, so as to ensure that "tax exiles" cannot avoid it by renouncing their citizenship, while the tax treatment of tax exiles will be kept under constant review;
- The Carbon Tax on fossil fuels introduced in Budget 2010 will be increased from the equivalent of EUR15 per tonne to EUR20 from December 7 (although farmers will be allowed a double income tax deduction for increased costs arising from the change in carbon tax); and
- In early 2012, the government will consult with the motor industry and other interested parties to review options for the improvement in vehicle registration tax and motor tax revenues in future years. In the meantime, effective January 1, 2012, the motor tax will rise, generating additional income of EUR47m in 2012.
Noonan also managed to sweeten the budget with a sprinkling of tax incentive measures, even if these haven't met with quite the enthusiastic welcome from the business community he was hoping for. Under these measures:
- The corporate tax exemption for new start-up companies will be extended for the next three years, and will be available for companies that commence trading in 2012, 2013 and 2014.
- The stamp duty rate for commercial property transfers will be reduced from the current top rate of 6% to a flat rate of 2% on all amounts in respect of all non-residential property, including farmland, commercial and industrial buildings. The change took immediate effect from December 7.
- A capital gains tax incentive was introduced for property purchased between December 7, 2011 and the end of 2013. Properties bought during this period and held for at least seven years will see the gain attributable to that holding period relieved from capital gains tax.
- From January 1, 2012, the exemption level of the universal social charge (USC) - introduced in Budget 2011 - will be raised from EUR4,004 to EUR10,036. This should benefit nearly 330,000 people and is designed to assist people in moving into the labour market. From next year, the Revenue Commissioners will collect the USC on a cumulative basis, reducing the risk of over- or under-payment of the USC.
- Improvements to the research and development tax credit regime will allow a larger portion of the total spend on R&D to be written off, by including without restriction the first EUR100,000 spent for the purposes of availing of the credit. Companies will have the option to use a portion of the R&D tax credit to assist in the employment of key employees in order to drive the development of R&D.
Guernsey's 2012 Budget Report, announced by Treasury and Resources Department last month, was a relatively minor affair, with perhaps the most interesting measure related to property tax, under which tax rates applicable to real property will rise by 20% on domestic property (GBP20-25 per annum for a typical property) and 3% for commercial property and land. The Department also recommended a small increase in the personal income tax allowance by 1.7% (GBP150 on the Single Persons Allowance).
Other tax hikes centred mainly on the usual annual 'sin tax' increases on alcohol and tobacco (by 3% and 6.5% respectively), as well as an increase in the rate of duty on fuel by 9.8%.
The future complexion of the tax regime in Guernsey is, however, heavily contingent on whether it is allowed to keep its 'zero-ten' system of corporate taxation, under which businesses and corporate entities have been subject to income tax at 0% from the 2008 tax year, with firms regulated by the Financial Services Commission charged income tax at 10%.
The zero-ten corporate tax regime has been under a near-constant state of review since the EU Code of Conduct Group on Business Taxation took issue with similar regimes in Jersey and the Isle of Man. For Guernsey, however, the omens are good, after the two other Crown Dependencies apparently received the all clear from the Code Group in September subject to certain amendments, leaving their systems basically intact.
The Department's Minister, Charles Parkinson stated: "This Budget proposes modest increases in indirect taxes, coupled with tough constraints on spending, to further reduce the States' deficit. More fundamental tax reform will have to await the conclusion of Guernsey's review of its corporate tax regime. It is now highly unlikely that the review will be completed during this parliamentary term, but we hope to be able to give the States and the island an indication of our preferred direction of travel early in 2012."
As a small EU member state within the eurozone, Malta, so far at least, seems not to have been sucked into the crisis currently raging in its near neighbours, Italy and Greece. This has gave Minister of Finance, Economy and Investment Tonio Fenech cause to announce numerous tax measures in the territory's budget for 2012, which aim to reduce the tax burden on islanders and enhance the island's appeal to international investors.
Among the latest changes, royalty income derived from copyright-protected books, film scripts, music and art will now be tax exempt in Malta. The announcement follows the decision in the 2010 Budget that royalties on patents would receive an exemption.
To further promote Malta as a hub for innovation and product development, the 15% personal income tax scheme - aimed at attracting skilled persons engaged in certain fields to Malta - is to be extended to include international professionals specializing in the development of digital games. In addition, Maltese companies which commission educational digital games will be given a tax credit up to a maximum of EUR15,000 (USD20,000).
The government has also announced significant tax cuts for parents with the introduction of a new 'parent computation' and tax allowances for parents sending their children to private, fee-paying schools will be significantly increased. Other measures include the introduction of a new car scrappage scheme, worth 15.25% of the value of the new car when trading in an older model, with the benefit capped at EUR2,000. Registration taxes for older vehicles will, however, be hiked from January 1, 2012.
Tax concessions are also to be introduced for property owners for the restoration of certain buildings.
The government also intends in the New Year to merge the Inland Revenue Department and value-added tax department, and to hold a VAT amnesty to allow taxpayers to regularize their tax affairs.
While Malta appears to be weathering the eurozone storm for the moment, the same unfortunately cannot be said of Cyprus, whose banks are dangerously exposed to Greek debt, and with a rising budget deficit, Cypriot lawmakers approved the first of two sets of austerity measures in late August to avoid the prospect of an EU-funded bailout.
As previously proposed, parliament agreed upon the creation of a new income band with a rate of 35% on income above EUR60,000 (USD87,000), a hike to the withholding tax on savings interest derived by Cypriot residents from 10% to 15%, increases to the tax on real estate, and a EUR350 annual fee on companies.
Earlier this month, the Cypriot government secured a cross-party agreement on additional tax hikes and spending cuts, which are needed to ensure that the government meets its sub-3% of GDP deficit target by 2012.
The second set of austerity measures included a 2% rise in VAT to 17% - a measure rejected by parliament in the first austerity budget - and an increase in the tax on dividends to 20% from 17%.
If implemented, it is anticipated that the plan will slash the deficit from 7% of GDP recorded at the start of the year to 2.8% by 2012, down from the 4.9% 2012 deficit forecast in the absence of such measures.
It remains to be seen whether these measures, which were accompanies by cuts in public sector wages, will ultimately succeed without damaging Cyprus's reputation as a stable, low-tax jurisdiction with foreign investors. Foreign banking institutions in Cyprus have already warned, however, that any increase in their tax bills may drive their business abroad.
Urging the government to maintain current tax rates, the Association of International Banks stated last month: "The favorable tax environment of Cyprus has been stable for many years and this has attracted a large number of international banks and other investors; this stability is now under considerable attack."
The statement came as the Cypriot government mulled proposals for banks to contribute to a fund that would stabilize the country's banking sector in time of need. The Association said it saw such a proposal as a tax increase that could heavily impact their operations' profitability, which could potentially prompt them to consider more tax-effective locations.
Jersey has emerged from the financial crisis largely unscathed and its financial centre continues to go from strength to strength. However, the territory is expected to run a budget deficit of GBP100m this year - a not insubstantial sum given the relatively small size of the economy - and the government has had to consider making a number of savings.
Some taxes have also had to rise; for example, on June 1, 2011, the 3% goods and services tax introduced in 2008 was increased to 5%.
The main point of interest in Jersey's 2012 Budget, approved by the States in November, for financial services firms operating in the island was that the International Services Entity Fee paid by banks would rise from GBP30,000 to GBP50,000. A cap of GBP50,000 on tax-free termination payments, reducing the tax-free amount of payments received on termination of employment, affecting primarily high earners, is also contained in the budget, although the government has decided to extend the tax allowances for those taxable under Jersey's '20 means 20' personal income tax regime (under which allowances are being phased out for high income individuals).
The Budget also grants additional support to islanders through higher tax relief for child care costs, and by increasing the personal tax exemption thresholds in line with inflation. First-time home-buyers' tax relief is also to rise. Some of this revenue will be recouped via increases in tobacco and alcohol excise duty rates, and the Vehicle Emissions Duty.
Explaining the reasoning behind the 2011 budget proposals, the island's Treasury and Resources Minister, Phillip Ozouf stated: "Now that we have taken the difficult decisions to tackle the impact of the global downturn, we can maintain our prudent approach to managing the island's budget, while also delivering additional support to those who need it most."
Mauritian Finance Minister Xavier-Luc Duval unveiled details of the government's 2012 finance bill in November, which he said is designed to promote export and market development, and to open up the country's economy, with tax measures intended to boost growth and investment and to promote social justice.
In his address, Duval explained that the 2012 budget is based on a conservative growth rate of 4%, in view of uncertainties surrounding the global economy, and noted that the budget is expected to increase tax revenues by around MUR76.9bn (USD2.7bn), of which MUR16.4bn would be derived from income taxes, MUR44.4bn from indirect taxes and a further MUR3.4bn derived from grants and other budget support.
The budget deficit for 2012 is forecast to stand at 3.8% of gross domestic product (GDP), the minister revealed, while emphasizing that this figure is significantly lower than the 5.1% deficit inherited from the previous government.
According to Duval, Mauritius's 2012 budget bill provides crucially for a MUR15,000 increase in the income tax exemption threshold for each of the six categories of income tax payers in Mauritius, as well as for the abolition of the solidarity tax imposed on dividends and interest from January 1, 2012.
Other measures contained in the government's bill, outlined by the minister, include plans to abolish capital gains tax levied on immovable property with immediate effect, and to remove the municipal tenants' tax from January 1, 2012. The Mauritian finance minister also highlighted government plans to remove land transfer tax on the sale of immovable property by financial institutions relating to debt recovery, and to ensure that hoteliers and tourist residences only pay the environment protection fee in 2012 provided that they are profitable. The tax holiday of Freeport operators, due to end in 2013, is to be extended indefinitely.
In his address, the minister outlined government plans to strengthen and to simplify the existing tax administration and regulatory framework for financial services, and plans to employ an additional 50 tax inspectors within the Mauritius Revenue Authority as part of increased efforts to strengthen enforcement and to clamp down on tax evasion.
'Uncertain economic times' led the Barbadian Finance Minister Chris Sinckler to introduce a Budget full of new tax measures last August, as part of a plan to drive down the deficit and stimulate economic growth.
As a jurisdiction which relies fairly heavily on tourism and international financial services, the Barbadian economy contracted by 4.7% in 2009 and in 2010's the budget deficit grew to 8.8% of GDP, up from 8.5% the previous year, as corporate tax receipts fell.
In March, Barbados's Senate passed a bill officially raising the country's VAT from 15% to 17.5%, as part of a series of Budget 2010 measures designed to tackle the country's record deficit. However, in July, Central Bank figures revealed that tax receipts were still falling, with lower tourist spending and a lack of business profitability making it hard for the government to meet its fiscal targets.
In spite of Barbados's deteriorating fiscal health, and a warning from ratings agency Standard & Poor's that it could downgrade its credit rating to junk status unless the government gets a grip on the problem, Sinckler announced a series of modest tax cuts in the Budget in an attempt to stimulate the economy. Under these measures:
- Land tax assessment bands will be adjusted and the tax-free threshold will be increased;
- A land tax rebate of up to 50% will be available from next year for properties where it can be proven that the owner has engaged in the manufacturing of solar energy equipment;
- All rebates will be granted within the year in which the tax is due, and will be applied only at the time of payment;
- Those in the hotel sector and stand-alone restaurants will be permitted to pay land tax bills during the last quarter of the fiscal year without losing access to discounted rates;
- From the current tax year, the energy conservation and renewable energy allowance will be increased for individuals and small businesses;
- There will be a separation of business and employment income for the computation of tax payable with effect from tax year 2011;
- The government will finalize changes to the Income Tax Act to reduce the effective rate non-doms are charged on their foreign income;
- 150% of costs associated with conversion to alternate energy will be written off over five years for those businesses with up to date filings and arrangements in place for settling arrears;
- There will be a 100% waiver of interest and penalty charges on outstanding tax due if a payment of 80% is made in full by a one-off cash payment; and
- Taxes paid by businesses on remittances to insurers based outside Barbados who provide global insurance cover will be reduced, applicable from the 2012 financial year.
The government believes its plans will reduce the fiscal deficit, facilitate business operations and development, and lay the groundwork for sustainable growth.
Offshore financial centres are not immune to the negative economic trends which have swept the world in the last three years, and are attempting to balance the need to raise revenue against the desire to stay competitive and attract investors, just like any other country. Some are managing this better than others. However, while most of the major countries in the West are saddled with huge debt burdens, and will face years of higher taxes to pay these down, low-tax and offshore jurisdictions are likely to retain their edge and continue to play an important role in global finance for many years to come.
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