Germany can use "stolen" bank details to trace tax evaders

Tax authorities in Germany can use illegally obtained bank account details to track down tax evaders, according to a ruling by the constitutional court in Karlsruhe on 30 November 2010.

A number of different German authorities have bought several CDs from informants in Liechtenstein and Switzerland, who unlawfully copied the information from bank databases.

The judges at the Karlsruhe court said investigators could use personal banking data bought off informants, irrespective of how the information was acquired. The judges ruled that the search warrant was not unconstitutional and did not violate the claimant's basic rights.

The case was brought by a claimant who objected to a search warrant after his name appeared on a CD containing information on German bank accounts held in Liechtenstein and sold to the German government.

Both Liechtenstein and Switzerland have signed declarations to begin negotiations on tax issues with Germany which will make it harder in future for Germans to avoid paying tax by placing their money in Swiss or Liechtenstein bank accounts.

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EU group considers "zero 10" tax regimes

The EU Code of Conduct Group met in Brussels, on 19 November 2010, to give further consideration to the so-called “Zero 10” tax regimes currently operating in the British Crown Dependencies of Jersey, Guernsey and Isle of Man.

The group considered a paper prepared by commission officials that was concerned solely with whether the deemed distribution provision and the combined effect of taxation at company and shareholder levels came within the scope of the code as business taxation.

The commission's view is that measures to ensure that in certain circumstances resident individuals pay tax on their company profits come within the definition of business taxation rather than personal taxation, are discriminatory and therefore in conflict with the code.

Jersey and the Isle of Man maintain that these anti-avoidance measures are personal taxation and not within the scope of the code.

It is understood that the Code Group is proposing a review by a High Level Tax Group, which will determine what the code means by business taxation and whether this definition goes beyond corporate tax to include shareholder taxation.

Guernsey has already announced its zero 10 strategy is to be scrapped, possibly in favour of a 10% corporation tax. Its policy council said it had received confirmation that the code group had ‘agreed with unanimity’ that the zero 10 corporate tax regimes have harmful effects. The expectation was now that the Crown Dependencies would be required to introduce revised corporate tax regimes, its statement added.

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Hong Kong signs tax treaty with Japan

Hong Kong Secretary for Financial Services and the Treasury Professor K C Chan, and Consul-General of Japan in Hong Kong, Yuji Kumamaru, signed, on 9 November 2010, the text of the much anticipated Hong Kong/Japan treaty on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

Under the treaty, double taxation will be avoided in that any Japanese tax paid by the companies will be allowed as a credit against the tax payable in Hong Kong in respect of the income, subject to the provisions of the tax laws of Hong Kong.

Currently Hong Kong residents receiving dividends from Japan not attributable to a permanent establishment in Japan are subject to a Japanese withholding tax, which is currently set at 20%. Under the agreement, such withholding tax is capped at 5% for a company holding (directly or indirectly) for a period of six months at least 10% of the voting shares of the company paying the dividends, and 10% for other cases.

Also, Hong Kong residents receiving royalties from Japan are subject to a current withholding tax at 20% in Japan. Under the agreement, the royalties withholding tax will be capped at 5%. The Japanese interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.

The treaty incorporates the latest OECD standards on exchange of information but unusually it does not include a limitation of benefits (LOB) clause similar to the comprehensive LOB Clauses which are based on a series of objective tests that have to be met to claim treaty benefits that have been included in Japan's most recently renegotiated tax treaties.

Rather, at article 26 the treaty includes a very brief clause headed "Limitation of Relief" that lists five specific paragraphs in the treaty and states that: " ... No relief shall be available under (the five paragraphs) if the main purpose of any person concerned with the creation or assignment of any right or property in respect of which income arises was to take advantage of the such provisions ..."

The new treaty will come into force after the completion of ratification procedures on both sides. It was the sixteenth comprehensive double tax treaty concluded by Hong Kong with its trading partners, coming after those with Belgium, Thailand, the Mainland of China, Luxembourg, Vietnam, Brunei, the Netherlands, Indonesia, Hungary, Kuwait, Austria, the UK, Ireland, Liechtenstein and France.

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US withdraws "JohnDoe" summons against UBS

The US tax authority (IRS) fully and definitively withdrew, on 15 November 2010, the “John Doe” Summons served on Swiss bank UBS. The move followed the last substantial delivery of administrative assistance cases to the US by Switzerland.

By the end of August, the Swiss Federal Tax Administration (FTA) had examined approximately 4,450 UBS client accounts under the agreement with the US. The delivery of data by Switzerland to the US was largely completed by mid-November after expiry of the appeal periods. Overall, approximately 4,000 cases have been supplied to the US to date.

The examinations conducted and information handed over by the FTA were based on an administrative assistance agreement with the US, signed on 19 August 2009, which "defined the criteria for examining the administrative assistance request concerning tax offenses."

In July 2008, the US court had given the IRS authority to issue the "John Doe Summons" to the UBS, requiring the Swiss bank to hand over information on its U.S. clients suspected of evading US taxes.

The Summons demanded information about US taxpayers who held accounts at UBS between 2002 and 2007, with an estimation of more than 50,000 US citizens on the list.

With the issuing of the Summons, the UBS was placed in to a dilemma between the US tax authority and the Swiss law on banking secrecy.

The John Doe Summons are orders issued by the IRS to a third party to provide information on an unnamed, unknown taxpayer with potential tax liability.

Subject to the outcome of pending appeals before the Swiss Administrative Court or in the case of no appeals, information on a number of additional accounts covered by the administrative assistance agreement will be delivered to the IRS over the course of the coming months.

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EC presses for automatic information exchange with third countries

European tax commissioner Algirdas Semeta criticized, in a speech at Leuven in Belgium on 16 November 2010, EU member states that have made bilateral tax information exchange agreements with third countries.

His comments followed the recent agreements made by the UK and Germany to pursue deals with Switzerland. Under these agreements, the Swiss government will not routinely disclose information about British and German taxpayers, but instead will impose a withholding tax on assets they own in Switzerland.

Commissioner Semeta insisted that the Commission will be satisfied only when "close neighbour" third countries, particularly Switzerland, agree to exchange taxpayer information automatically with all EU countries, as specified in the EU Savings Directive.

He said it was logical to expect close neighbours to cooperate more closely with the EU on the exchange of information. "It is not sufficient that individual EU member states conclude bilateral agreements with third countries which provide for the OECD standards of transparency and exchange of information," he said.

"It is much more interesting for a tax authority to receive comprehensive information about the assets owned by its residents abroad than to receive only a withholding tax on the income produced by such assets [which] does not allow Member States to assess the overall tax base of their residents."

Semeta said he expected EU Finance Ministers to reach a political agreement on the Commission's proposals for administrative cooperation "very soon".

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