The European Commission has released new proposals on limiting ‘aggressive tax planning’, by increasing scrutiny on intermediaries who design and promote cross-border schemes. If implemented, the rules could hasten the shift away from setting up offshore structures via low-tax environments, such as Singapore.
‘Perhaps the knee-jerk reaction is that professionals may refrain from providing tax advice to any HNWI who is considering investment or having business arrangement in Europe,’ Ivy Ng, tax partner at Ernst & Young Solutions LLP said in an interview. ‘The location of trusts and underlying holding companies will be looked at more closely. For this reason, [Asian] HNWIs are beginning to accept onshore holding companies as opposed to offshore holding companies for investment and business needs.’
The rules, slated to enter into force on January 1, 2019, interlock with the Common Reporting Standards (CRS) regulations that apply to wealthy individuals in Hong Kong and Singapore, which were both in the top 10 list for the most active intermediaries in the Panama Papers exposé one year ago.
The CRS is an OECD-backed scheme for the sharing of tax and financial information between jurisdictions.
‘This is consistent with the global trend driving towards transparency. This transparency trend, to me, makes the clients and intermediaries more aware of one thing… that there must be more commercial substance to what they are doing,’ Valerie Wu, partner at Pinsent Masons told Citywire Asia.
Trust structures allow for ambiguity over the powers of control and ultimate beneficial owners and can be misused to evade taxes.
Since 2012, there has also been an increase in the number of European ultra-high net worth families coming to low-tax countries in Asia, such as Singapore -- to establish family offices to manage offshore trusts and funds as well as manage offshore companies.
For example, foreign investors in an offshore fund handled by a Singapore-based fund manager are exempt from the city-state’s income tax based on certain criteria. The same applies to trustees of offshore funds based in Singapore as well.
However, under the new framework, EU companies and individuals will be required to report cross-border tax planning schemes even if the intermediary is not based in the EU. EU member states will be required to automatically exchange the information they receive from intermediaries through a centralised database.
This will result in many Europeans simplifying their business and investment structures by setting up the trusts and family offices within the low-tax jurisdictions in Asia itself, such as Singapore, according to Wu.
‘In the past, they would have picked offshore jurisdictions like British Virgin Islands or Cayman Islands, but now, they literally set up a Singapore company or a Singapore fund management company to house their investments and hire professionals onshore,’ said Wu.
For Asian HNWIs, going onshore ‘allows them to explain their structures and also show that income is booked where activities and operations are happening,’ added Ng.