Offshore Taxation. Smart Move or Faux Paus ?

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Since when was tax avoidance illegal?

Commentary by Paul Hymers, Financial Director at Atlas Corporate Services in Dubai.

Tax avoidance is always an easy target for politicians, but tax planning is essential, not just for huge multinationals, but also much smaller entities. Companies such as Amazon, with its Luxembourg HQ, are not applauded for doing what they do better than anyone else; rather they are attacked by their less successful competitors who claim, “It isn’t fair!” To me, that’s like a lazy student complaining when someone who works harder and revises more gets a better grade in an exam.

A common structure for corporations is to have a holding company which is the ultimate parent and is from where the company is controlled. Separate to that it is also common to have a treasury company as a subsidiary to work as an in-house bank for payments and receipts between all of the other various subsidiaries as this reduces bank charges, risk and time delays. Holding company (A) owns Treasury company (B) and other subsidiaries (C & D). C & D both owe money to B. If C wants to pay D, B can increase the amount C owes them and reduces the amount they are due from D.

In recent years many high-profile firms, such as advertising giant WPP and biopharmaceutical company Shire, migrated their headquarters away from the UK into countries with a similar talent pool but more favourable tax system, such as Ireland or Switzerland. In 2011 George Osborne declared his desire to win them back with “the best place in Europe to start, finance and grow a business.” The changes he announced in last months’ budget back this up, specifically with reform of controlled foreign companies (CFCs), which offer an incentive for UK-based companies to set up a UK-controlled treasury company (company B above) in an offshore jurisdiction, such as a UAE Free Zone or UAE Offshore company. Profits generated by this treasury company would liable to local tax (i.e. nil in UAE), but instead of also being subject to full corporation tax (CT) in the UK, the chargeable UK CT rate for these profits is reduced by 75% from 2013, meaning that the effective tax rate on these profits is 6% in 2013 and 5.75% in 2014.

In the Amazon case, their company A has been in Luxembourg since 2006, but it employs only 134 staff. However they have a subsidiary (like C above) in the UK which employs 2,265 staff. The key question is who controls the company, Amazon EU Sarl in Luxembourg (company A) or Amazon.co.uk (company C) in the UK? If HMRC can argue that the company is controlled in the UK, they’ll be liable to UK corporation tax on their profits. With UK sales of well over £2bn in 2010 it’s no wonder HMRC are investigating the possibility of getting their piece of the action. The Amazon justification is that Amazon.co.uk (company C) is only a delivery company, with all payments from the UK to the business transferred to Amazon EU Sarl.

The budget changes certainly offer UK-based businesses an incentive to reconsider their current structure, including smaller groups who have not fully examined their tax planning options. For the UAE and other low-tax jurisdictions this means more jobs, since the provisions state that the CFC must have premises in the jurisdiction.

George Osborne can tell the Daily Telegraph that he’s ‘shocked’ as much as he wants. I’m not buying it. I’m shocked that person who runs the UK economy doesn’t seem to understand the difference between avoidance and evasion.

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About Atlas Corporate Services

Atlas Corporate Services Group is a global corporate and trust service provider, with corporate and private clients. The Group manages onshore and offshore companies, trusts and other business structures to meet the individual demands of its clients, such as corporate re-structuring, wealth and asset protection, tax reduction, international expansion and the provision of professional officers and secretarial services.

www.atlas-corp.com

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