Offshore Tax Havens: A Guide for Australian Investors
Offshore tax havens are the jurisdictions of choice for building corporate structures to protect assets from creditors and hide the identity of ultimate beneficiaries. This article should be of interest to any professional advisor interested in understanding the nuts and bolts of setting up an offshore corporate structure.
- What is an offshore tax haven?
- Who is using tax havens?
- Where are the tax havens?
- Setting up a tax haven
- Challenges relating to offshore accounts
- Tax haven terminology
- In context: Panama Papers
- How do offshore tax havens compare to Australia? Case Study: British Virgin Islands
- Tax information sharing
- What is the Common Reporting Standard (CRS)?
- Who governs the CRS?
- Information captured under the CRS
- The CRS in context
- What is an asset protection trust?
- Is there still interest in the tax haven model?
- Incentives for Australian companies to keep operating in Australia
What is an offshore tax haven?
There is no single accepted definition of ‘offshore haven’ but any general definition would include the following elements:
- Foreign jurisdiction: Grant of incorporation under local law without any requirement to hold assets within the jurisdiction or have a locally resident director (A person is given the right to incorporate there and hold assets there without any requirement to be personally present in the jurisdiction itself)
- Secrecy protections: No publicly available register of shareholders or directors and the right to use bearer shares, layering and nominee directorships to maintain secrecy of ultimate ownership (beneficiaries)
- Tax free status: Tax free status for any business that is conducted out of the jurisdiction and no requirements to file tax returns (e.g. no company tax, no income tax, no CGT or sales tax, no requirements to file tax returns)
Not all offshore tax companies are set up for illegitimate purposes. Offshore companies can be set up and used for legitimate purposes, such as where a company’s headquarters are set up in the no-tax jurisdiction. However offshore companies are also set up with the intention to hide money and assets and evade tax obligations.
In Australia, there is only one type of proprietary company that can be set up under the Corporations Act to conduct business. This is not the case internationally. In the offshore world, there are a number of types of companies that can be incorporated. These companies can be set up with minimal cost and minimal compliance requirements.
The most widely created offshore tax haven company is an international business company. It is a company that can be set up in a jurisdiction with the business of the company being operated outside of the jurisdiction. These companies have a prohibition on economic activity in the offshore tax haven itself. This means that the international business company is prohibited from trading in the jurisdiction despite it being the company’s jurisdiction of incorporation.
Interview on offshore tax havens – Mark Davis and Ben Sewell
Five-time Walkley Award winner, journalist and lawyer, Mark Davis interviews Ben Sewell of Sewell & Kettle Lawyers about Offshore Tax Haven Law. Their discussion includes:
- Common Reporting Standard (CRS)
- Who is using tax havens?
- Challenges relating to offshore accounts
- Is there still interest in the tax haven model?
- Incentives for Australian companies to keep operating in Australia
- Using offshore structures
- Potential impact of cryptocurrency
Podcast on offshore tax havens (Tax Talks)
- Offshore tax havens are seen as the ‘bogeyman’ by Australian tax authorities and the media because of the way that they are used by the richest among us to reduce their taxable income
- This podcast demystifies the legal techniques used in offshore corporate structures and explains the terminology of offshore jurisdictions
- Ben Sewell of Sewell & Kettle Lawyers gives an introductory podcast for Tax Talks about offshore tax haven corporate structures.
Article on offshore tax havens (Law Society Journal)
- ‘A Peek into the Workings of Offshore Tax Havens’ LSJ May 2017 (NSW)
- This article by Ben Sewell of Sewell & Kettle Lawyers describes offshore tax havens and their features, how to set them up, what the relevant terminology is, and how they compare to the Australian taxation system.
Who is using tax havens?
The Paradise Papers released in 2017 were focused on large corporates and showed that large corporates often use low tax zones or low tax jurisdictions to divert income.
The democratisation of this space is changing. Previously you would have had to fly and meet your Swiss banker to set up your arrangements directly. Now with the online world, you are able to set up an offshore structure from Australia without any tax advice or advice from a lawyer.
The analysis from the Panama Papers and the Paradise Papers is that there are two major players in setting up offshore tax haven accounts.
- Intermediaries – these are the people that set up the structure and do the thinking.
- Registered agents – someone who is an accountant or lawyer in the jurisdiction to actually be the registered office, and to set up the documents and put the structures and accounts into play.
If you are an Australian professional adviser, you may engage agents in the offshore world to do the work. In terms of international tax structuring, there is some work in Australia but there is not anyone that puts themselves forward publicly as an intermediary. If you were an intermediary in Australia and you were setting up a structure, you would have to be very careful that you knew the counterparty involved.
One element of the Common Reporting Standard (read later in the article for an explanation of this and the ‘Know Your Customer’ process (defined in our terminology section below) is the identification of the beneficial owner. This is a requirement that the party that sets up bank accounts or companies identifies the beneficial owner/the ultimate owner.
Linking beneficial ownership to a foundation or a trust, or trust-like structure is an obvious way to evade disclosure of who is the ultimate owner, or you could have someone who is a trusted associate to actually be the beneficial owner and director of the entity, and the holder of your account.
Where are the tax havens?
These offshore jurisdictions prefer to call themselves Offshore Financial Centres (OFCs) and they may be broken up subcategories of Sink OFCs and Conduit OFCs. OFCs include Switzerland, the British Virgin Islands, Luxembourg, Bermuda and the Cayman Islands.
A Sink OFC is a jurisdiction where a disproportionate amount of value disappears from the economy, while a Conduit OFC is a jurisdiction through which a disproportionate amount of value moves into Sink OFCs.
What are the common features of offshore trusts that depart from Australian trust law?
- Rules against perpetuities do not apply
- Beneficiaries may also be objects
- Beneficiaries have no rights to enforce trusts
- Beneficiaries have no rights to information about the trusts
- Special roles of appointor including “protector” or “enforcer” of the trust
- Appointor has wider powers to amend terms of trust, apply income or capital, issue directions to the trustee and appoint and remove a trustee
- Low or no tax rates for income generated
Setting up a tax haven
Setting up an International Business Company in an offshore tax haven is straightforward and relatively inexpensive. If you use the search terms, “set up bvi ibc” in Google you will find a large number of online incorporation services with direct links to registered agents in the British Virgin Islands.
An offshore tax company can be set up through online incorporation service companies. These incorporation service companies have links with registered agents who can incorporate international business companies in offshore tax jurisdictions.
In an offshore tax haven, the registered agent of a company is the local custodian that holds the register of directors and who has the authority of the jurisdiction to make the grant of incorporation.
An intermediary, on the other hand, is the gateway between the registered agents and the company. The intermediaries of offshore companies are the lawyers, accountants and other providers around the world who set up the company structures, hire the agents and set up the bank accounts of the company.
There are two sets of documents required:
- A completed application form. This will include the preferred company name and details of the beneficial directors and shareholders. This includes nationality, country of residence, address and occupation.
- Due diligence documents. Such as a scanned certified copy of each director and shareholder’s passport (or ID card), an original proof of residence (a telephone bill or utility bill) and a reference letter.
Registered agents offer to incorporate an International Business Company for a flat fee (around $1,000 USD plus disbursements) and they also offer related services such as nominee directors, bearer shares, powers of attorney and assistance to set up offshore bank accounts. The objective of the service provider is to assist with low-cost incorporation whilst meeting the secrecy requirements of their clients. The alternative to online incorporation is to contact intermediaries who engage the registered agents in the local jurisdictions and set up the arrangements for incorporation including nominee directorships.
The writer predicts this will lead to the “democratisation” of the use of offshore havens by Australians who are becoming wealthier and more internationally mobile. The temptation to leave assets in offshore havens with tax-free status is a significant risk for the Australian Tax Office and also onshore creditors.
Challenges relating to offshore accounts
There is no publicly available register of directors or the owners of shares in the offshore world. This is usually the first point to consider, but unless that information as to who the directors and shareholders of the company are is disclosed, or you get a subpoena in the relevant jurisdiction, you are not going to know.
Attempting to get subpoenas in foreign jurisdictions can be a very expensive process where you need to have a timely action. In attempting to help your clients you could approach ASIC or the police and attempt to get the authorities involved. Alternatively, you could commence injunction proceedings and related subpoenas around the world at the same time, otherwise, you may miss the money and the trail may go cold.
In places like the Cayman Islands that pride themselves on its secrecy, there is not just institutional resistance but there is also a structure of law, in terms of insolvency, that is structurally obtuse. For example, there is no administration, there is often only one court you can go to, the courts are often closed, and there is no urgency or law of shadow directorship. Therefore, if you did try to implement action you would be looking at a process that could be delayed a long time.
Tax haven terminology
The terminology of offshore havens is in stark contrast to Australian corporate law. Here, we define some of the key terms.
- Bearer shares: A share in a company that is owned by the person who holds the physical certificate. This maintains the secrecy of the true owner of the share as there is no share register held by the registered agent.
- In Australia, if you own a share your name will be listed on the share certificate, on ASIC’s share register or the ASX listing of the company (for a public company). However, with a bearer share the owner is the person who literally ‘holds’ the bearer share and therefore the owner’s name is not listed on any share register.
- Interestingly, INXS frontman Michael Hutchence’s estate dispute included bearer shares and offshore incorporated entities as subjects. Hutchence’s assets and intellectual property rights (including his music rights) were held in an offshore tax haven company called Chardonnay Investments, incorporated in the British Virgin Islands. The Hutchence estate matter is interesting to consider and provides an insight into the estate issues that can arise where offshore tax havens are incorporated to hold assets.
- Layering: Ultimate ownership is made more opaque by adding multiple layers of corporate ownership and corporate directorships. In an asset tracing exercise multiple Court applications in different jurisdictions may be required to identify the ultimate owner of an offshore corporate structure. See the diagram below for an example of layering.
- The layering of a corporate structure starts with an individual. The individual who has decided to utilise an offshore tax haven will engage the intermediary who will then form the corporate structure by incorporating companies in multiple offshore tax haven jurisdictions. The individual may be the director of the first company, or a nominee director may be appointed to the company.
- The purpose of a corporate structure is to keep the identity of the individual corporate holder secret.
- In Australia, under the Corporations Act 2001 (Cth) only an individual over the age of 18 years old can be a director of a company. In offshore tax jurisdictions, however, entities can have director companies which allow the corporate structure to be layered for secrecy.
- In a layered corporate structure, the first company is the owner of the second company and the second company is then the owner of the third. The title to the assets of the companies are then put in the name of the third company, and if required in the future, the assets can be moved between the companies. This ‘layering’ makes it difficult to pierce the corporate veil and determine the true owner of the assets.
- The layering of a corporate structure makes it very difficult for a claim to be pursued against a company, as the person may be required to go through a number of layers to identify who the beneficial owner.
- Corporate directorship: Unlike Australia, where all directors are required to be natural persons, companies can hold directorships in offshore haven companies.
- CRS: Means Common Reporting Standard, a new single global standard for collection, reporting and exchange of financial information on foreign tax residents. CRS was agreed by G20 leaders in 2013 to create a mechanism for automatic exchange of tax information between multiple countries. An Australian law that provides for the exchange of foreign resident account information with participating CRS nations is coming into effect on 1 July 2017.
- FATCA compliance: Means complying with a Federal United States statute, the Foreign Account Tax Compliance Act (FATCA). To avoid prohibitive withholdings (30% of payments to foreign payees) all foreign financial institutions are required to report to the United States Internal Revenue Service information about their bank accounts held by or linked to United States citizens or corporations. Australia and the United States entered into a bilateral agreement regarding FATCA compliance in 2014.
- Intermediaries: The lawyers, accountants and ‘fixers’ who set up offshore corporate structures with layering, nominee directorships and bearer shares to ensure secrecy whilst keeping their client in control of the assets held. The intermediaries may not necessarily be the registered agents in the offshore haven.
- International Business Company: An offshore company formed under the laws of a jurisdiction where the company’s activities are limited to international business. Also known as an international business corporation.
- KYC: ‘Know Your Customer’ is the process of verifying the identity of a customer by a banker or registered agent. Pursuant to CRS from 1 July 2017 Australian financial institutions will be required to disclose the foreign taxpayer identification number or an equivalent when opening accounts for foreign residents in Australia.
- Nominee directorship: Where a person who is the validly appointed director is acting on behalf of another person and following their instructions. This is further complicated by corporate directorships in offshore havens.
- Registered agent: International business companies are required to have an address within the jurisdiction through a certified professional agent (usually a lawyer or accountant). The registered agent holds the register of shareholders and directors. When the International Business Company is incorporated the registered agent attends to KYC on behalf of the offshore haven’s regulators.
|Offshore haven characteristic||Comparison with Australia||Takeway for solicitors|
|No income tax or other direct taxes||Corporate tax on profits and capital gains tax||It may be tempting for some clients to send assets to be held by international business companies to avoid tax|
|No requirements to file tax returns||Annual income tax returns, Superannuation returns, BAS returns||Use of offshore vehicles may be undertaken without any ongoing professional advice in Australia|
|Secrecy of share ownership||Information on share ownership of proprietary companies and substantial holders of public companies is publicly available||A Court application in the offshore haven’s jurisdiction to obtain this information may be required|
|Nominee directorships and corporate directorships||In Australia, companies cannot be directors of other companies and shadow directors have fiduciary responsibilities||Frustration in asset tracing is a risk with layered corporate structures and nominee and company directorships|
|No shadow directorship law||Where there is a nominee directorship their controller may be liable for director’s duties||A shadow director of an International Business Company is not liable under the local law for breach of director’s duties|
In context: Panama Papers
Offshore havens captured our imagination through the Panama Papers leak. A trove of client data (2.6 terabytes of data containing 11.5 million records) from a Panamanian Law firm Mossack Fonesca was leaked to the International Consortium of Investigative Journalists (ICIJ). The ICIJ’s website provides a search engine with offshore haven company ownership information from the leaked documents as well as educational videos and articles. The offshore leaks database only gives you relationship information and not substantive legal documents. Both founders have since been arrested for money laundering.
The ICIJ reports the two most popular offshore havens are the British Virgin Islands and Panama. Those jurisdictions prefer the title “offshore financial centre” to offshore haven or tax haven. The British Virgin Islands (Norman Island) was reputedly the inspiration behind Robert Louis Stevenson’s pirate novel Treasure Island. Today, according to the ICIJ, there is still treasure hidden in the same islands, metaphorically at least.
Podcast on the Panama Papers
Ben Sewell of Sewell & Kettle Lawyers gives an introductory podcast for Tax Talks about the Panama Papers and its significance for Australian professional advisers.
The discussion includes:
- Case studies
- An exploration of bearer shares
- An explanation of layering
- Different jurisdictions such as the British Virgin Islands and the Cayman Islands.
How do offshore tax havens compare to Australia? Case Study: British Virgin Islands
What can you get in the British Virgin Islands that you can’t get in Australia? The material benefits for incorporating an International Business Company in the British Virgin Islands (as an example) compared to leaving assets in an Australian domiciled company are:
- Incorporation within two business days provided KYC is completed
- No tax generally, including income tax, corporate tax, capital gains tax, inheritance tax, gift tax wealth tax or another form of direct taxation
- Corporate directors permitted
- No nationality or residency restriction on directors or shareholders
- Appointment of nominee directors permitted and no law of shadow directorship
- Identity of shareholders and directors not publicly available unless volunteered or subject to Court order
- Bearer shares permitted
- No requirements to lodge annual corporate returns or tax returns
- The country is a British overseas territory and its highest Court is the Judicial Committee of the Privy Council in London
- No law of ultra vires so there is no limit on usage of the company
In 2013 Vanity Fair magazine published an article about the London Apartment Complex ‘One Hyde Park’ and suggested that it was the most expensive address in the world (A Tale of Two Londons, April 2013 Shaxson, N., Vanity Fair). It reported (after a search of the land registry) that 32 of the 86 apartments were owned by British Virgin Islands international business companies. Further, the article reported that 59 of the apartments were owned by companies from offshore havens and, staggeringly, the purchase price of the first 76 apartments sold to that date was USD$2.7 billion. The most expensive apartment in the complex had sold for $214 million at the time of the article.
The article concluded about the British Virgin Islands link:
“From this we can conclude at least two things with certainty about the tenants of One Hyde Park: they are extremely wealthy, and most of them don’t want you to know who they are and how they got their money.”
Tax information sharing
Australia, like the United States, taxes its residents on their ‘worldwide income’ and we are required to declare ‘foreign income’ in income tax returns. Therefore, there is a strong incentive for Australian residents to generate income in offshore havens and evade Australian income tax through secrecy. This is likely to be an increasingly risky venture because of the tax information-sharing agreements between Australia and offshore havens.
The United States leads the charge against offshore havens and its most important action was passing the Foreign Account Tax Compliance Act in 2010. It basically forces all banks that want to receive money from the United States financial system to disclose information about accounts held by United States citizens or corporations to the Internal Revenue Service.
The CRS is a multilateral exchange system and both Australia and a number of offshore havens (including the British Virgin Islands) are parties to it. The British Virgin Islands has agreed to begin complying with the CRS from September 2017 and therefore Australians who expect secrecy in that offshore haven may need to reconsider the risk they face.
Suing international companies under the Australian Corporations Act
It may be useful to know that the corporate veil around an International Business Company can be pierced by Australian law.
A company, including an International Business Company, irrespective of where it is incorporated is subject to Australian corporate law if it carries on business in Australia. The source of the law is somewhat convoluted but if you read the definitions under section 9 of the Corporations Act 2001 (Cth) of ‘company’, ‘Part 5.7 body’ and ‘foreign company’ you will find that even though an International Business Company is not registered in Australia it will be subject to the Corporations Act if it ‘carries on business in Australia’.
This is important when acting for a creditor of an International Business Company because Australian corporate law provides significantly more protections for creditors than the corporate law of offshore havens.
On the other hand, the CRS may be useful for the Australian Taxation Office but it doesn’t offer any benefits to Australians who are creditors of international business companies. To pierce the shroud of secrecy a Court application in the offshore haven may be required to obtain information about the directors and shareholders of the company. This is likely to be expensive and potentially a slow task.
What is the Common Reporting Standard (CRS)?
The Common Reporting Standard (CRS) is a single global standard for financial institutions to deliver financial data to tax authorities worldwide about foreign tax residents. It means that if you open a bank account on the Cayman Islands, the Australian Taxation Office (ATO) will know about it.
The CRS took effect from 1 July 2017, and the first report under the CRS was due to be filed on 31 July 2018. Therefore, any assets held by Australians in that financial year in offshore accounts (in countries that have adopted the CRS) will now have been reported to the ATO for the first time under the CRS.
The CRS was implemented by the enactment of the Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016 and requires Australian Reportable Financial Institutions to complete due diligence and report information to the ATO regarding accounts held by foreign tax residents. This information is then provided to foreign tax authorities and in exchange for the information, the ATO is provided with the international financial account information of Australian residents from other countries’ tax authorities.
The CRS gives the ATO expanded powers to capture financial information from financial institutions in 95 jurisdictions including offshore tax havens such as Luxembourg, Switzerland, the British Virgin Islands, the Cayman Islands, Guernsey and Jersey.
The CRS regime incorporates not only banks and other authorised deposit-taking institutions as Reporting Financial Institutions, but also requires cooperation from brokers, custodial institutions investment entities and specified insurance companies.
Who governs the CRS?
The CRS is governed by Schedule 1 of the Income Tax Assessment Act 1997 (Cth) and is required to be applied consistently with the “Standard for Automatic Exchange of Financial Account Information in Tax Matters” (the Standard) approved by the OECD.
The Income Tax Assessment Act legislates with regards to the general reporting requirements of the Reporting Financial Institutions, record keeping and anti-avoidance provisions amongst other requirements. However, the Standard contains the text of the Common Reporting Standard implemented and additional Commentaries on the CRS.
The purpose of the CRS is to ensure that Australian residents with financial accounts in other countries comply with Australian tax laws, making it more difficult for Australians abroad to engage in tax evasion.
The implementation of the CRS now provides the ATO with financial data of Australians living abroad, regardless of whether the individual elects to provide that data to the ATO. The global implementation of the CRS regime means that the noose is tightening on tax evasion globally.
Information captured under the CRS
Under the CRS each Reporting Financial Institution must report the following information with respect to each individual’s reportable account:
- The tax payer’s name, address, tax file number and date and place of birth;
- The account number of the overseas account and name of the overseas financial institution; and
- The balance of the account at the date of closing or the end of the reporting period.
However, the specific reporting requirements (i.e. what must be reported) depends on the basis of the reportable account. For example, in the case of a Depository Account, the total gross interest paid or credited account during the calendar year must be reported.
Further, in the case of any Custodial Account (held for the benefit of another), the information that is required to be reported includes the total gross amount of dividends and the total gross amount of other income generated with respect to the assets held in the account.
The CRS in context
In 2017, G20 countries including Australia, but excluding the United States, implemented the Common Reporting Standard (CRS). This requires offshore tax havens to disclose information about bank accounts and assets that are held on behalf of taxpayers from across the G20, including Australia. These tax havens have voluntarily agreed to take on compliance requirements for assets and for bank accounts.
A few years ago, there was a voluntary compliance code introduced called ‘KYC – Know Your Customer’. This was implemented by the offshore world that required anyone that set up a company or bank account to disclose their name, address and any other relevant information about themselves.
The CRS provides tax authorities around the G20 an avenue of information from the offshore world and from banks around the world. It is more of a compliance process where the financial institution itself needs to comply with a specific set of disclosure requirements.
This may not be the end of tax havens because there is a continuous change in the methodology and the instruments that they use to maintain the secrecy and the business that they have. For example, different types of structures have been created over the years such as trust structures, quasi trust structures and various instruments that have been invented.
Tax rulings on worldwide income can be found on the ATO website. If you are an Australian with a permanent place of abode in Australia, and the Tax Office finds that you are an Australian taxpayer for the purposes of worldwide income, then you would be required to disclose any foreign income. Failure to disclose may mean you are going into an area of fraud.
An Australian professional adviser could probably not with any confidence advise on historical accounts. In the circumstance where the overseas bank account was set up years ago before the KYC and CRS requirements were implemented, it would be difficult for the overseas institution or agent to trace the account back given the lack of requirement for details to be given.
Podcast on the CRS
Ben Sewell of Sewell & Kettle Lawyers gives an introductory podcast for Tax Talks about the CRS and what it means for Australian taxpayers that hold assets in offshore tax havens.
What is an asset protection trust?
Any form of trust that provides for assets to be held on a discretionary basis under the control of a trustee for the benefit of the beneficiaries.
What are the benefits of an asset protection trust?
- Flexibility of taxation planning
- Avoiding family breakdown issues affecting control of assets
- Avoiding claims by creditors of bankrupt beneficiaries affecting assets
What are the benefits of setting up your asset protection trust in a tax haven?
- Limitation of potential legal actions against the trust in the offshore jurisdiction
- Difficulties obtaining information about the trust by potential claimants
- Tax advantages
What risks do Australians face in setting up an asset protection trust offshore?
The main risk is that they will receive an Australian tax bill. A non-resident company controlled directly or indirectly by Australian residents will be deemed to be a “controlled foreign company” under Australian tax law. The secondary risk is that by entrusting assets to a foreign jurisdiction the appointor will have more limited rights of recourse if they suffer civil or criminal misfeasance in the foreign jurisdiction.
What are the different types of asset protection trusts available in the offshore jurisdictions?
- British Virgin Islands: VISTA protected trust (pursuant to the Virgin Island Special Trusts Act 2003)
- Cayman Islands: STAR trusts (pursuant to the Special Trusts (Alternative Regime) Law 1997)
- Lubuan, Malaysian: Labuan special trust (pursuant to the Labuan Trust Act)
What is interesting about Labuan special trusts for Australians (both asset holders and creditors)?
This is a matter of interest for both asset holders and also claimants to interests in trusts settled in Labuan, Malaysia.
This jurisdiction is a special zone for the purposes of tax and corporate law and is the subject of different law to the rest of Malaysia. The tax haven has crafted law to foster the investment of monies through trust structures. There are special tax rates so trust income is taxed at 3% of profit or at a relatively low flat rate.
Pertinent laws to protect Labuan trusts
- No foreign law or judgment in relation to marriage, succession or insolvency is enforceable against a Labuan trust.
- The onus of proof in any claim against a Labuan trust is generally “beyond reasonable doubt” (i.e. criminal not the civil burden in Australia).
- A strict limitation period for commencement of court proceedings including one year from the date of any disposition.
- Successful claims against a trust may only be met from the property held by the trust (i.e. protecting the corporate veil).
- Note that under Malaysian law an Australian judgment is not registrable under their express law of recognition.
Take-away for interested Australians for Labuan special trusts: Given the closer time zone, the fact that there is no automatic reciprocation of Australian judgments and the limitations on causes of action, advancing a claim would be a challenging task.
Is there still interest in the tax haven model?
Australia has a system of worldwide taxation so this means that if you are a company or an individual that has a permanent place abode, or a centre of control in Australia, you will be taxed in Australia.
In Hong Kong, on the other hand, they have a territorial system of taxation which means that if you are in Hong Kong and you have income that arises or income that is derived from a non-Hong Kong source, you do not have to pay tax on it. In Ras al-Khaimah of the United Arab Emirates, you can live there completely tax-free. There is no corporate tax and no income tax but you do have to be a resident there to obtain this benefit.
Where someone wishes to stay in Australia and have a corporate headquarters somewhere else, you may be battling with the ATO. If you have no territorial link to Australia, then it would be a very attractive proposition for you to have your accounts set up in an offshore structure.
Nomadic capitalists have an enormous amount of information online about how you should hand in your passport and get a few different passports from different regions, and live somewhere that will not charge you any taxation, therefore avoiding your American or Australian tax obligations.
Incentives for Australian companies to keep operating in Australia
The battle the Australian Tax Office (ATO) has is that the more internationalised we become, the more mobile our capital is. It is unclear how this battle will play out because there has been a lot of work by the ATO in terms of transfer pricing and there are always new policies that are being introduced.
As a business, the ultimate way to deal with this issue with the ATO would be to sever ties with Australia. However, if you want to maintain ties with Australia, and have Australians who work for you, Australian clients, Australian operations, and so on, then that will be the challenge.
The law firms based in the offshore world that offer these offshore accounting services provide justifications for doing their work that includes things such as protecting people from being kidnapped, protecting people’s legitimate right to not have their affairs aired, and to help people internationalise.
Historically, the ATO has not been as active as some other tax collectors around the world. For example in the UK, the tax collection system has gotten to the point of going to cafes and counting the number of coffees that are made. In the past, the ATO has relied mostly on a passive approach but now relies more so on a data matching approach. The data matching approach means that they are trying to automate the way that they analyse and collect taxes.
Vanuatu used to operate as a tax haven, but it appears this has been shut down. Australian authorities have difficulty retrieving information related to bank accounts and corporate affairs in places such as Vanuatu, However, there are a plethora of other jurisdictions in the Pacific such as the Cook Islands where you can do things such as setting up your own insurance company, highlighting the fact that if one tax haven shuts down, then it is possible that two more havens will appear in their place.
The progress of Australia through the development of ABNs, GST and so on has made the use of the offshore world by small to medium enterprises more difficult. The Panama Papers which was a leak of tax haven documents did not reveal many Australians. Recently the ATO disclosed that they had recovered $50 million from 470 Australians. In the scheme of things, this figure is not that high, but this figure relates only to one law firm in Panama.
- The world of offshore tax havens can be a dubious world where many entities are incorporated with the intention of avoiding tax and hiding assets. One legitimate purpose may include protection from illegal expropriation, privacy and funding real offshore business.
- When considering whether an offshore company has been established for a legitimate purpose the objective of its incorporation should be considered.
- With the recent introduction of the CRS the Australian Government and 95 jurisdictions worldwide are actively tackling the issue of global tax evasion head-on.
- Australian professional advisors should be aware of CRS and that their clients may have information about their offshore bank accounts disclosed to the Australian Taxation Office without their knowledge.
- It is likely that the use of International Business Companies will grow as these vehicles become more accessible and cheaper for Australians.
- The differences between the corporate law of offshore havens and Australia are irreconcilable. If acting for Australian creditors of International Business Companies you will face a difficult task in any asset recovery action.