Everald Dewar | Taxing offshore benefits
One of the highlights of the last year's general election was when then Opposition Leader Andrew Holness was pressured by the People's National Party and corruption watchdog group National Integrity Action to release details about the construction of a house in Beverly Hills.
Prime Minister Holness eventually provided an explanation and in the mix, under advisement from his lawyers, he stated that the house is owned by a St Lucia-based company.
His lawyer later explained that the St Lucian company was set up as 'a trust' for the PM's children 'to ensure that it passes to them in the future'.
Lawyers normally set up these kind of structures for the purpose of estate planning without necessarily taking into account the resulting tax implications and, sometimes, the confusing accounting and economic reality which flows therefrom.
One tax issue that readily comes to mind involves a case where a taxpayer - let's call him Mr Biggs - lives in a house that is not his. He is not, however, a squatter as he has permission to reside there. The house was bought by an offshore company set up for that purpose.
The reason for this generosity to Mr Biggs was unexplained, and during a tax audit by Tax Administration Jamaica, the agent noticing this odd arrangement concluded that Mr Biggs was really pulling strings and the directors of this offshore company were his puppets.
The TAJ agent argued that as the directors are accustomed to acting in accordance with Mr Biggs' wishes, this made him a shadow director of the offshore company and as such, he could be taxed for receiving a benefit or a distribution under the Income Tax Act.
The term 'offshore company' tends to suggests dealings of 'big wigs' - both business and political figures - across the globe. It conjures up thoughts of aggressive tax avoidance schemes and imagines of Panama Papers-type scandal.
It is an open secret that the strategic deployment of interrelated group offshore entities, through international business companies, or IBCs, are used to hold profits and transfer properties to mitigate against local taxes. Hence, using the veil of incorporation, it shields assets and cloak finances, making them immune from local taxation.
IBCs are legal entities incorporated usually in a tax haven such as Cayman Islands or Panama.
Under our tax laws, a resident in Jamaica is taxable on 'world income' that is to say, on income earned anywhere in the world. Therefore, IBCs, which are common features of Caricom offshore tax structures, have beneficial values, including exemption from double taxation of local corporate taxation and stamp duty, provided that the company engages in no local business.
Under tax treaty rules, these include tax-free dividend, reduced income tax rates on income from investments, intellectual property, and technical fees received in its jurisdiction.
Taxpayers will use these companies to take advantage of certain loopholes such as using transfer pricing to shift profits between entities. The recent legislative amendments that tax 'captive insurance premiums' and expand transfer-pricing rules were done to combat such practices.
In addition, as most offshore structures rely on accumulating profits in a related entity based in a low-tax jurisdiction, pressure was put on this region to participate in the information exchange programmes one of the reasons for the 2013 amendments to the Revenue Administration Act.
To prevent tax avoidance, government's strategy is to impose a withholding tax. Withholding tax is an amount withheld from payments to be made to a company or individual and transferred directly to the government.
In our case, where a person is required to withhold tax but fails so to do, they are liable to a fine or imprisonment in default of payment.
Getting back to the case of Mr Biggs, a director who occupies premises owned by a company, rent-free, is deemed to have received a distribution - that is, a dividend - or a taxable housing benefit valued at the rent that could have been obtained.
We were able to prove that the TAJ agent's suggestion that Mr Biggs was a shadow director was not so, and the agent went away empty-handed. Notwithstanding, with the current transfer-pricing rules, once the occupier is connected to the offshore company, just being in a low-tax jurisdiction would create tax considerations.
- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston - firstname.lastname@example.org