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Technical Development Round Up

Not all of the stories within this technical development round-up may impact upon you directly. However, these are a selection of stories which have made technical news headlines recently and may be of interest.

Australia replace the Foreign Investment Fund Rules

Historically, Australian residents holding non-Australian investments which deferred taxes were subject to the Foreign Investment Fund (FIF) taxation regime and assessed to tax annually (unless it qualified as a superannuation fund).

The FIF rules have been repealed from July 1, 2010 and are to be replaced by a specific, narrowly-defined anti-avoidance rules that apply to offshore accumulation or roll up funds. These rules appear to specifically target Foreign Life Assurance policies. However, they do not seem to impact on contracts where benefits are only available benefit upon death or Total Permanent Disability.

The new rules may also impact on Qualifying Recognised Overseas Pension Scheme (QROPS) transfers because, depending upon the final detail of the anti-avoidance rules (which, as yet is unavailable), it may no longer be necessary to move an existing pension pot into a scheme that was previously compliant under the FIF rules to avoid being taxed.

Gaines–Cooper wins right to appeal to the Supreme Court

Robert Gaines-Cooper, the Seychelles-based entrepreneur at the centre of a long-running battle over his residency and domicile with Her Majesty’s Revenue and Customs (HMRC), has been granted leave to appeal the High Court decision against him.

Mr Gaines-Cooper is appealing the February 2010 High Court decision on his residence in the UK’s Supreme Court. The landmark case raises important issues of clarity, consistency and fairness which are relevant to all taxpayers. When Mr Gaines-Cooper left the UK in 1976, he satisfied the precise requirements of IR20*.

However, he lost his appeal because HMRC successfully argued that there was an implied term which Mr Gaines-Cooper failed to satisfy. HMRC claimed that Mr Gaines-Cooper had not made a distinct break from the UK, which the Court interpreted as having to sever all family and social ties with the UK.

Mr Gaines-Cooper is arguing taxpayers should be able to structure their affairs and liabilities to taxes in accordance with HMRC guidance, and not subject to rules which are open to interpretation. Watch this space…

* IR20 – covers liability to tax in the UK for residents and non-residents.

Domicile and Inheritance Tax – New Guidance

HMRC have issued new guidance showing where they will consider an individual’s domicile and decide whether to make a determination of UK Inheritance Tax (UK IHT). This follows a previous Revenue and Customs Brief issued on 25 March 2009, which described changes to procedures following the changes to the remittance basis rules and the residence rules made by the Finance Act 2008.

The revised guidance applies to dispositions made after the issue of Revenue & Customs Brief 34/10 (24 August 2010) and states that HMRC will consider opening an enquiry where domicile could be an issue, or making a determination of UK IHT in such cases, only where there is a significant risk of loss of UK tax.

The significance of the risk will be assessed by HMRC using a wide range of factors. The factors will depend very much on the individual case but will include, for example:

a review of the information available to HMRC about an individual on HMRC databases

whether there is a significant amount of tax (all taxes and duties, not just UK IHT) at risk

HMRC does not consider it appropriate to state an amount of tax that would be considered significant as the amount of tax at stake is only one factor. HMRC will take into account the potential costs involved in pursuing an enquiry, including the potential costs of litigation should HMRC and the individual not agree. This contrasts with previous guidance which stated that an enquiry would take place where the tax at stake was £10,000 or more.

Where HMRC does open an enquiry on UK IHT, it intends to keep an eye on these factors and may stop the enquiry at any stage if it considers continuation is not cost-effective. There could well be situations where, although HMRC may be confident of making a determination for UK IHT, that the potential costs involved will stop them from issuing it in the first place.

Enquiries into domicile do require a detailed investigation into all of the relevant facts, and HMRC is likely to require considerable personal information and extensive documentary evidence about the taxpayer and the taxpayer’s close family. It is therefore vitally important that where UK domicile is likely to be an issue that comprehensive records are maintained.

USA Tax clampdown

Under the ‘Hiring Incentives to Restore Employment Act (HIRE) 2010’, the USA appears to have enacted legislation which imposes incredibly wide-reaching information reporting requirements on non-US entities with investments in the USA.

Essentially, this new legislation requires any entity classified as a ‘Foreign Financial Institution’ (FFI) to either enter into an agreement with the US Internal Revenue Service (IRS) disclosing details of any accounts held by US Persons (or substantially owned by US Persons) or suffer a 30% gross withholding tax on all amounts it has invested in the US. An IRS bulletin dated 13 September 2010 details which entities they think should be caught or exempt from the legislation.

With regard to insurance companies, the current definition of an FFI is certainly wide enough to encompass such institutions, although it appears that pure insurance/ reinsurance contracts without a cash value will be exempt. However, it is felt that contracts which combine an element of insurance with an investment component may present the opportunity for US tax evasion, and the IRS is seeking responses as to how they should be treated.