Tax Evasion and Avoidance

TAX EVASION AND AVOIDANCE Tax Evasion is the IILEGAL practice of not paying taxes, such as not reporting income, reporting expenses not legally allowed or by not paying taxes owed.  TAX AVOIDANCE Tax Avoidance is the legitimate (LEGAL) minimizing of taxes, using approved methods....

TAX EVASION AND AVOIDANCE Tax Evasion is the IILEGAL practice of not paying taxes, such as not reporting income, reporting expenses not legally allowed or by not paying taxes owed.  TAX AVOIDANCE Tax Avoidance is the legitimate (LEGAL) minimizing of taxes, using approved methods. Example, businesses may avoid taxes by taking all legitimate deductions and by sheltering income from taxes by setting up employee retirement plans and other means. “the situation which the taxpayer brings about is one in which he is legally in the right, except in so far as some special rule may be introduced that puts him in the wrong”. GAAR and SAAR.  TAX AVOIDANCE Contd Dating back to the 1930’s, the Courts have recognized tax avoidance as not being illegal. This position was given in the case of IRC v Duke of Westminister AC1, where the judged stated that “Everyman is entitled if he arranges his affairs so as that the tax attaching under the appropriate Act TAX AVOIDANCE Contd is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.” TAX AVOIDANCE Contd. The facts of the case had to do with an arrangement where the Duke of Westminister agreed by executing a series of deeds to pay some of his employees weekly sums for the period of seven (7) years or for the life of the parties. TAX AVOIDANCE Contd. The employees continued in their employment and received the covenanted amounts as well as their pre-covenant wages.  TAX AVOIDANCE Contd. The Crown contended that these covenanted sums were remunerations for services and could not be deducted from the Duke’s total income for income tax purposes. The Duke contended that they were deductible as annual payments. TAX AVOIDANCE Contd. The Court was of the view that the documents were bona fide, the sums could not be regarded as wages and should be deductible.  TAX EVASION AND AVOIDANCE Ficticious, Artificial or Sham Transactions as per Lord Diplock “Ficticious transactions are generally regarded as sham which in effect, means the appearance of creating legal rights or obligations between the parties different from the actual rights and obligations if any”.  TAX EVASION AND AVOIDANCE Contd. Sham: The word sham was defined in case of Snook v Louden and West Riding Investments Limited as: “Acts done or documents executed by the parties to be “sham” which are intended by them to give their parties or to the court the appearance of creating between the parties legal rights or obligations different from the actual legal rights and obligations (if any) which the parties intended to create.”  TAX EVASION AND AVOIDANCE Contd. Artificial-transaction is described as being unreal and devoid of any commercial sense. Such as non-arm’s length transaction.  General Anti-abuse Rule (GAAR) A Scheme/arrangement which results directly or indirectly in a tax benefit unless the person obtaining the tax benefit proves that obtaining the tax benefit was not the main purpose of the arrangement.  Specific anti-abuse rule (SAAR)  Is utilized with the aim to address specific tax avoidance methods.  The purpose is to stop tax payers from reducing their tax liability by taking advantage of tax law loopholes.  What do you think may be an example of specific tax avoidance.  Substance over form and Form over substance Substance over form refers to transactions that reflect economic substance rather than their legal form. What do you think would be form over substance.  TAX EVASION AND AVOIDANCE Provisions in the Income Sham or Fictitious Tax Act Section 16 of the Income Tax provides for both specific and general provisions. The general provision is found at section 16(1) and states thus:  TAX EVASION AND AVOIDANCE Section “where 16(1) the Commissioner is of contd. the opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that full effect has not in fact been given to any disposition, the Commissioner may disregard any such transaction or disposition and the persons concerned shall be assessable accordingly.”  TAX EVASION AND AVOIDANCE Section Note 16(1) that the words artificial contd. or fictitious in the section.  TAX EVASION AND AVOIDANCE Section 16 Contd. Sections 16(2) and (3) speak to the cases where transfers of property are made by parents to children for the purpose of avoiding tax, the CG may, during the child’s minority, tax the income of such property as income of the parent. The parent is entitled to refund of tax, if he can satisfy the Commissioner that the scheme is not designed to evade tax.  TAX EVASION AND AVOIDANCE Section Section 16tocontd. 16(4) speaks cases where the reversion of trust property vests in the donor or may be disposed of by him, the donor may be taxed on any income from the trust property. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases Seramco Limited Superannuation Fund Trustees v Income Tax Commissioner The facts of the case was that a company by the name of Seaforth whose shares were held almost wholly by members of the E family (the family) had accumulated undistributed profits of £200,000. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Seaforth decided to embark on a dividend stripping operation so that a major part of those profits could be received by the family in a form which would not attract liability to tax or imperil their ownership of the shares.  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd Another company called Seramco was identified as the purchaser of the shares of Seaforth. Seramco set up a superannuation fund for its employees and the trustees of that fund had wide powers of investment. The fund had no investments and only £400 standing to its credit. The trustees, in purported exercise of their powers of investment, entered into an agreement with members of the family to purchase all the  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. The purchase price was payable by eight instalments and the only way in which the trustees could pay the first instalment would be from dividends to be declared by Seaforth in favour of Seramco.. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. The members of the family therefore stood to benefit by reason of the fact, that instead of receiving the distributed profits of the company in the form of dividends on the shares upon which income tax would be payable, it received instalments of capital for the sale of their shares with an option to buy back the shares. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. It was held by the Privy Council that it was impossible to regard the transaction for which the agreement on its face provided as genuine exercise by the trustees of their powers of investment, or as a genuine sale by the family of their shares for a price payable by instalments accompanied by what was no more than an option to  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. There was an irresistible inference, that the parties had never contemplated that the shares would not be re-transferred as soon as the first instalments had been paid. Accordingly, the transaction was properly described as an “artificial” transaction within the meaning of the anti-avoidance section in the Jamaica Income Tax Act.  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Note that in arriving at its decision, the Privy Council showed the approach to be adopted in determining whether any particular transaction is artificial and as such is to be struck down by the general anti- avoidance provision.  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Such an approach requires close analysis of the terms of the transaction and the mode effecting it so as to ascertain whether what has been stipulated for and actually implemented are matters which fall within the usual course of business, or accord with commercial reality such as one would expect with regard to transactions between persons acting at arm’s length. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. In this case, the Privy Council was influenced by two unusual factors: (1) the fact that at the time of the agreement for sale of the shares, the Seramco Fund had no investments and the only money standing to its credit was £400 (2) the trustees, although purporting to TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. exercise the power of investment conferred on them by the terms of the trust deed, did not invest a single penny of the moneys standing to the credit of funding the purchase of the shares under the agreement with the members of the family. Such matters were quite clearly unusual and abnormal, thereby justifying the conclusion  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases In the case of Liner contd. Diner and ES Campbell & Co. Ltd v Commissioner of Inland Revenue, highlighted a sham transaction. In that case, the appellant company E.S. Campbell and Co. Ltd. was established in 1958 to carry on the business of restaurant keepers and refreshments room proprietors. They were also the providers of catering services for the airlines which used Montego Bay Airport. In 1961, a Mr. Delisser who had the catering concession for the Bay Roc Hotel TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. was also supplying catering service to Pan AM Airways. The appellant agreed with Delisser, that if Delisser could persuade Pan AM and Bay Roc to give the appellant their business, then Delisser would be granted 25% of issued share capital of the appellant’s company. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. In that same year, Mr. McNaught through his company Liner Diner was operating the Palisadoes Airport catering concession and his contract was up for renewal. The appellant and Mr. McNaught agreed that the appellant would not contest Liner Diner’s application for renewal. If Liner Diner was successful in its bid, there would be a  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. combination of the total operations in which Mr. McNaught would receive 20% of the equity. In view of this change in shareholdings, the authorities would require a 12 month notice. To circumvent this requirement, it was agreed that a 3rd company Airport Services Limited would be formed in which Mr. McNaught would have 20% and Campbell and Delisser the balance.  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. It was also agreed that the profits of the appellant and Liner Diner would be transferred to the new company in order that the total profits might be divided between the parties in the manner agreed. There were written agreements stating that Airport  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Services would manage and supervise the operations of the concession, and that the appellant would pay Airport Services 100 pounds in the first year and an amount equal to 95% of its net profit in the second and subsequent years. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. The respondent assessed both named Appellants for the years 1996 and 1997 under the 1954 income tax law. In respect of the appellants, the respondent allowed the management fee paid to be categorized as expense, wholly and exclusively incurred in acquiring the income in both 1966 and 1967. In 1969, they discovered that the deduction had already been allowed to Airport Services  TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Limited which was under the control of the appellant. The respondent concluded that the management fee was paid to Airport Services in order to reduce the tax payable by the appellants. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. Additional assessments were raised and the appellants notified. It is in respect of those additional assessments that the appellant objected. The respondents met with the directors. The appellant’s auditors also supplied copies of the management agreements. At first, the books of accounts of Airport Services could not be located. Eventually, a reconstructed general ledger was produced. After examining the documents, the respondent TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. concluded that the agreements were not normal commercial agreements and confirmed the additional assessments. The appellants took the matter to court. The court looked inter alia at the following: (a) Airport Services had only one employee in the person of Mr. Campbell. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. b) there was no evidence that Airport Services had any cash transactions despite the fact that some of the accounts showed that quite large sums were due to it by the appellants. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. (c )Even when Airport Services went into liquidation, payments for management fees were still made to it by the appellants. (d) Insufficiency of evidence as to what management services were performed by Airport Services. TAX AVAOIDANCE AND EVASION Fictitious or Sham Cases contd. The court held that the transfer of profits to Airport Services, together with the liquidation were for the purpose of obtaining a tax advantage. It was not a genuine commercial transaction. The court regarded the transaction as fictitious and artificial.  TAX EVASION AND AVOIDANCE Section 18 ITA Section 18 of the Income Tax Act also speaks to Anti-avoidance Provisions, specifically transaction in securities. It speaks to transactions in which taxpayers (individuals/companies) who hold shares in companies having accumulated profits, obtain or seek to obtain those profits in a form which does not make the taxpayer liable to income tax.  TAX EVASION AND AVOIDANCE Section 18 ITA contd. Sections 18(2),18(6),18(I(b),18(9)deals with the instances where a person would be caught by the section; and sections 18(I)(b) and 18(4) deals with the circumstances under which a person who is caught by the section can prove that the section does not apply to him.  TAX EVASION AND AVOIDANCE Section 18 ITA contd. Section 18 (3) states the methods by which the Commissioner can counteract or neutralize the tax advantage gained by the person. Section 18(4)(a), proviso to 18(5), 18(7)(b) looks at the powers of the Commissioner in carrying out the counteraction measures. Sections 18(2),(6),(10) define some of the terms. TAX EVASION AND AVOIDANCE How to detect tax-avoidance in transaction in securities In examining cases brought before the courts, the courts have asked the following questions: a) Is there a security involved; b)Was there a transaction in securities as defined in section 18(10);  avoidance in transaction in securities contd. (d) Is there a tax advantage as defined in section 18(10? (e)Does the tax advantage arise from the transaction in securities? (f)What was the motive of the taxpayer in entering into the transaction?  avoidance in transaction in securities contd. What is a security? The definition of security is found in section 18(10) and includes “shares and stock”. It extends to debentures, debenture stock and bonds, whether secured or unsecured. How to detect tax-avoidance in transaction in securities The section states thus: “transactions in securities” include transactions, of whatever description, relating to securities, and in particular – (i) The purchase, sale or exchange of securities; (ii) The issuing or securing the issue of, or applying or subscribing for, new securities; (iii)The altering or securing the alteration of, the rights attached to securities.  avoidance in transaction in securities However, contd. a more comprehensive definition was provided for in the case of Commissioner of Inland Revenue v Parker at p. 408, the lower Court stated that, these cases indicate, to my mind, (1) prima facie “security” is limited to security for the payment of a debt as contrasted with shares in the capital of a company; How to detect tax-avoidance in transaction in securities contd. (2) that the context may extend its meaning to include shares; (3) that security by a document establishing personal liability and without charge on property is recognized as a form of security; (4) that it is questionable whether security in that sense would be within its prima facie meaning; but (5) even if it is not within the prima facie meaning of security, yet such security is a less extended meaning of the word than are shares.” avoidance in transaction in securities contd. There are several circumstances specified in section 18(2) of the ITA which must be present for there to be a tax advantage obtained from the transaction in securities. Anyone or more of the following must exist: avoidance in transaction in securities contd. a) Where in connection with the distribution of the profits of a company, a person who is entitled to an exemption from tax or who by the setting off of losses against profits/income is entitled to recover tax in respect of dividends received by him, in fact receives an abnormal amount of dividends; How to detect tax-avoidance in transaction in securities contd. As per 18 (6), an abnormal amount of dividends exists if, in the case of a fixed-rate dividend, he receives an amount which substantially exceeds that which he would have received had the dividend accrued from day to day and he had been entitled only to so much of the dividend as accrued while he still held the securities; or dividends in an amount which substantially exceeds a normal return on the amount paid avoidance in transaction in securities contd. Where in connection with the sale or purchase of securities, which is later followed by the purchase or sale of the same or other securities, a person who is entitled to an exemption from tax or who by the setting off of losses against profits/income is entitled to recover tax in respect of dividends received by him, in fact receives an abnormal amount of dividends;  avoidance in transaction in securities contd. b)Where in connection with the distribution of the profits of a company a person becomes entitled to a deduction in computing profits or gains of the company due to fall in the value of the securities resulting from the payment of dividends or from some other dealing with the company’s assets;  avoidance in transaction in securities OR contd. Where in connection with the sale or purchase of securities which is later followed by the purchase or sale of the same or other securities, a person becomes entitled to a deduction in computing profits or gains of the company, due to a fall in the value of the securities resulting from the payment of dividends or from some other dealing with the company’s assets;  avoidance in transaction in Section securities 18(2)(b) contd. Dividend-stripping cases are covered by this as well. Dividend-stripping is defined in The International Tax Glossary (4th Edition) as, “a transaction whereby corporate profits are extracted to shareholders in a tax beneficial form, generally by converting taxable dividend income into tax-free or low taxed capital gain. How to detect tax-avoidance in transaction in securities contd. The most common for of dividend- stripping involves the sale of shares to an intermediary party shortly before a dividend is paid on the shares, follows by a resale to the original shareholder once the dividend has been paid. The difference in purchase price and sale price (less the service fee for the intermediary) representing the How to detect tax-avoidance in transaction in securities contd. dividend amount. The original shareholder typically realizes a tax-free capital gain (instead of taxable income) while the intermediary can generally shelter the dividend income by claiming a tax credit and/or loss on resale.” How to detect tax-avoidance in transaction in securities contd. Is there a tax advantage as per section 18(9) and 18(10) The definition contained in section 18(10) can be divided into two parts, that is, what and how. It means the avoidance or reduction of an assessment, the avoidance or reduction of a possible assessment, relief from tax or increased relief from tax, repayment of tax or increased repayment of tax. The advantage or avoidance is achieved when receipts accrue to a taxpayer in such a way that no tax is paid or borne on those receipts or when the taxpayer is allowed a deduction in computing profits or gains.  avoidance in transaction in securities contd. Section 18(9) extends the definition of tax advantage. It states that not only may there be a tax advantage as a result of one transaction in securities, but a tax advantage may be the result of a combination of two or more transaction in securities. Also, a tax advantage may be the result of the combined effect of a transaction or transactions in securities and the liquidation of a company.  avoidance in transaction in Is the securities tax advantage ascontd. a result of the transaction (securities). There needs to be a release of assets from one person to another for there to be a distribution, which is taxable. For example, there must be a release of assets by a company and a consequential receipt of assets by a shareholder or connected person. The transaction in securities must cause receipts to accrue to the taxpayer in a way that he pays or bears no tax or is allowed a deduction in computing his profits or gains. How to detect tax-avoidance in transaction in securities contd. If that release is the distribution of capital, then there is nothing to tax. One can only step in where it is clear that a part or all the profits of a company is transferred/distributed/released to the shareholder, in the sense that the company no longer has it and as a consequence, the shareholder does.  avoidance in transaction in So if securities contd. a transaction goes no further than capitalization of profits, nothing passes to the shareholder in the form of dividends. All that happens is that assets held by the company in one form are transferred to the company in another form, and it may increase the capital input of the shareholder, not his income. How to detect tax-avoidance in transaction in securities contd. What was the taxpayer’s motive for entering into the transaction Was the transaction one that the taxpayer would have entered into in the ordinary course of his business? Was there a genuine commercial purpose for the transaction? Was it the intention of the taxpayer to obtain a tax advantage by entering into the transaction, or any of the transactions where there is more than one transaction How to detect tax-avoidance in transaction in securities contd. How to deal with tax advantages as per the Income Tax Act Section 18(3) outlines measures open to the Commissioner General where it is discovered that transactions resulted or may result in tax advantages to the persons involved. The provision speaks to the fact that the Commissioner General may make adjustments on such bases as the Commissioner General may specify in written notification to the persons concerned. These adjustments are stated as being: How to detect tax-avoidance in transaction in securities contd. (a) an assessment or additional assessment; (b( the nullification of the right to repayment to refunds; ( c) a requirement that a repayment or refund already made be returned; (d) the computation or re-computation of profit and gains (5) the computation or re-computation of tax liability. How to detect tax-avoidance in transaction in securities contd. Section 18 (7) also speaks to the powers that the Commissioner General has in treating with tax advantages. 1) Where the Commissioner is of the opinion that as a result of a transaction(s) a person is liable to pay income tax by virtue of the provisions of section 18, the Commissioner may serve a written notice on that person requiring him to furnish all the information specified in the notice which is in his possession and which relates to the transaction(s), within the time specified in the notice (not less than twenty eight (28) days).  TAX EVASION AND AVOIDANCE The questionSecurities of what is a transaction in securities with particular reference to liquidation of a company is considered a transaction in securities. The answer to this question was provided for in the case of IRC v. Joiner the facts are as follows: The taxpayer owned 75% of the family business called The Joiner Company:  TAX EVASION AND AVOIDANCE Securities 25% was Contd. owned by trustees of a settlement made by his father. A liquidation agreement was entered into between shareholders and an accountant who should act as the liquidator.  TAX EVASION AND AVOIDANCE The Securities agreement provided Contd. that the company should go into a members voluntary liquidation and the liquidator would transfer the trading assets and liabilities to another company called the Auto Company in return for an unsecured loan. The Auto Company was owned by the taxpayer.  TAX EVASION AND AVOIDANCE Securities Contd. The liquidator then distributed the assets of Joiner. The trustees would receive Auto’s loan note and the taxpayer would receive certain marketable stocks and shares. The agreement was implemented with Auto taking over Joiner’s business and also its name.  TAX EVASION AND AVOIDANCE Securities Contd. The result was that the taxpayer received some £150,000 in accumulated profits without paying tax because he received it as capital (the stocks and shares) while his company’s trade continued unaffected. It was held that the taxpayer had received a tax advantage in consequence of a transaction in Securities.  TAX EVASION AND AVOIDANCE The Securities distribution Contd. of surplus assets to shareholders in the course of a liquidation was a transaction resulting to their shares and so a transaction relating to securities. The word transaction included a unilateral act and a distribution by liquidation to shareholders gave effect to the rights attaching to their shares. It followed that the tax advantage obtained by the taxpayer had been obtained in consequence of a  TAX EVASION AND AVOIDANCE The Securities taxpayer is requiredContd. to provide the Commissioner with documents during a specified time period in order to convince the Commissioner why he should not be taxed. The taxpayer is required to make full disclosure in providing the information. Where the Commissioner acts to counteract the tax advantage, the taxpayer will not be required to pay more tax than he ought to.  TAX EVASION AND AVOIDANCE Securities Contd. IRC v Brebner In that case, in order to defeat a take over bid of a company of which he was the director, the respondent and five other shareholders of the company in question made a counter offer which was accepted by the other shareholders. To fulfill this counter offer the sum of £108,000 had to be found by the respondent or his group. They borrowed the money from the bank on terms requiring joint and several undertakings from the group and the early repayment. The money was also to be repaid early.  TAX EVASION AND AVOIDANCE Securities contd. The Company’s auditors prepared a scheme whereby ,the Co. increased its share capital from £60,000. to £135,000 The company had £75,000 in cash, distributed £58,000 as ordinary dividend and £16500 as capital dividend to the respondent and his associates.  TAX EVASION AND AVOIDANCE Securities contd. The company embarked on a reorganization scheme and reduced its share capital to £60,000. The respondent and his associates used the sums they received to pay off the loan.  TAX EVASION AND AVOIDANCE The Securities respondent contd.on was assessed the dividends he received, he appealed the victory of the CIR and eventually the matter went to the House of Lords. The House of Lords held that the transaction was entered into for the bona fide commercial reason of a take over bid and the subsequent scheme of reorganization. The main objective was not that of obtaining a tax advantage.  Substance over Form The Ramsay Principle Decision in W.T.Ramsey v IRC Where a transaction, or composite transactions have pre- arranged artificial steps, that serve no commercial purpose other than to save tax, the proper approach is to tax the effect( substance) of the transaction as a whole This decision form the Ramsay Principle and in that Ramsay Principle Contd. The Court is to look at the purpose of the transaction as a whole. The Ramsay Principle is still good law and was applied in the Carreras case which we discuss in the  TAX EVASION AND AVOIDANCE Form Carreras over substance? Case On April, 27,1999- Carreras Group entered into a written agreement to transfer all the issued ordinary share capital and most of the preference shares in Jamaica Biscuit Co.to Caribbean Brands Ltd.  Carreras Case Contd. The consideration was expressed to be a debenture to be issued by Caribbean in the sum of US37.7 million and in terms annexed to the agreement. Carreras Case Contd. The terms were that the debenture would not be either secured or transferable. The principal debt would carry no interest and be repayable by banker’s cheque on May 1999.  Carreras Case Contd. The terms were that the debenture would not be either secured or transferable. The principal debt would carry no interest and be repayable by banker’s cheque on May 1999.  Carreras Case Contd. The Issue Whether the transfer of shares was chargeable to transfer tax, as a sale ;or Whether it was an exchange of shares for debentures in a reorganization of share capital of Carreras ,in which Caribbean issued a debenture in exchange for the shares in Jamaica Biscuit.  Carreras Case Contd. Pursuant to the Transfer Tax Act, a reorganization, is not a sale and not liable to transfer tax. Part 1 of the First Schedule is the section relevant to a scheme of reorganization. The terms of the agreement specifically referred to the transaction as “an exchange  Carreras case Contd. Carreras successfully challenged the characterization of a sale by the Stamp Office ,in the Revenue Court. The matter went to the Court of Appeal.The Ramsey Principle was introduced by the AG’s Dept representing the Stamp Office. The Stamp Office won.  Carreras Case Contd. Having lost in the Court of Appeal,Carreras appealed to the Privy Council The Judges ruled ,that they agreed with the Jamaica’s Court of Appeal, that the transaction for the purposes of the Transfer Tax Act comprised both the issue and the redemption of the debenture and that such transaction ,taken as a whole could not be appropriately characterized as an exchange of shares for a debenture  Carreras Case Contd. The Privy Council ruled that the debenture was only a formal step, having no apparent commercial purpose or significance, in a transaction by which the shares in Jamaica Biscuit were exchanged for money  Carreras Case Contd. They were of the view that it was plain from the terms of the agreement, that the debenture and timetable was intended by the parties as an integral part of the transaction separated from the exchange by” as short a time as was thought to be decent in the circumstances.The absence of security and interest reinforces this inference”  Form over Substance Applicable sections in the ITA Section 19 (1) speaks to transfers to persons abroad. The provision speaks to prevention of persons resident or ordinarily resident in Jamaica avoiding tax by transferring their assets and income to persons resident and domiciled outside of the island.  Form over Substance Applicable sections contd Section 19(2) states that where a Jamaican resident has the power to enjoy any income of a non-resident or non-domiciled person which if it had been received by him in the Island would have been chargeable to tax, such income will be deemed to be income of the Jamaica resident.  Form over Substance Applicable sections Contd. Section 19(3) states that where after any such transfer a Jamaican resident receives or is entitled to receive any capital sum the payment of which is connected with the transfer, any income which by virtue of such transfer has become the income of a non-resident person shall be deemed to be income of the Jamaican resident.  Form over Substance Contd. Section Sections 19(6) 20 and (7) lay out the instances in which the Jamaican resident will be deemed “to have power to enjoy” income of the non-resident person. Briefly it would be so regarded where:- a. The income is so dealt with as to ensure to the benefit of the resident whether in the form of income or not; b. Income received increases the value of assets held by the resident;  Substance over Form- Section 20 Contd. c. The resident receives or is entitled to receive any benefit provided or to be provided out of the income; d. The resident has a power of appointment or power of revocation to obtain for himself the beneficial enjoyment of the income; and  Substance over Form- Section 20 Contd. e. The resident receives or is entitled to receive any benefit provided or to be provided out of the income; f. The resident has a power of appointment or power of revocation to obtain for himself the beneficial enjoyment of the income; and Section 20: makes it unlawful without the consent of the Minister:-  Substance over Form- Section 20 Contd. a.For a resident body corporate to cease to be resident; b.For the trade and business of any part thereof of a resident body corporate to be transferred to a non-resident.  Substance over Form – Section 20 Contd. For the resident body corporate to cause or prevent a non-resident corporation over which it has control to create or issue shares, stock or securities, unless the non-resident is required to do so by the Government of the country in which he resides: d. For the principal member of a body corporate- not on the stock exchange- to do any act whereby the body corporate ceases to be controlled by residents; and Substance over Form- Section 20 Contd. e. except for enabling a person to qualify to act as a Director, to transfer to any person any shares, stocks or securities of a non- resident corporation over which it has control. Persons guilty of an offence under this section are subject to a fine not exceeding $20,000.00 or a term of imprisonment of two years or to both. What is Tax ARBITRAGE? Tax Arbitrage is the LEGAL practice that covers those transactions carried out to gain from the difference or spread made between the tax systems, tax treatments, or tax rates TAX ARBITRAGE vs Tax Avoidance How is Tax Arbitrage different from Tax Avoidance? TAX ARBITRAGE TAX AVOIDANCE Definition Tax arbitrage involves Tax avoidance refers to exploiting differences the use of legal methods in tax rates or tax to minimize tax liability. systems between This can include taking different jurisdictions advantage of deductions, or financial instruments credits, and other tax to reduce overall tax incentives provided by liability. the tax code. 104 TAX ARBITRAGE vs Tax Avoidance How is Tax Arbitrage different from Tax Avoidance? TAX ARBITRAGE TAX AVOIDANCE Mechanism It often involves It involves planning complex financial and structuring transactions, such transactions in a way as shifting income that reduces tax or assets to lower- liability, such as tax jurisdictions or investing in tax- using financial advantaged accounts instruments to take or claiming allowable advantage of tax deductions. rate discrepancies. 105 TAX ARBITRAGE vs Tax Avoidance How is Tax Arbitrage different from Tax Avoidance? TAX ARBITRAGE TAX AVOIDANCE Legalit Generally legal, but Completely legal, as long y it can be subject to as it adheres to the scrutiny if it appears letter of the law. to be purely for tax However, aggressive tax benefits without any avoidance strategies can substantial sometimes border on tax economic purpose. evasion if they are deemed to be abusive. 106  TAX ARBITRAGE vs Tax Avoidance Key differences Complexity: Tax arbitrage often involves more complex financial strategies compared to tax avoidance. Scope: Tax avoidance is typically more straightforward and involves using provisions within the tax law or regulation, while tax arbitrage exploits differences between tax systems or instruments. Perception: Both practices are legal, but tax arbitrage can sometimes be viewed more critically by tax authorities due to its complexity and potential for abuse. 107  TAX ARBITRAGE vs Tax Avoidance Example: Cross-Border Tax Arbitrage A multinational company, XYZ Corp, operates in two countries: Country A and Country B. Country A has a corporate tax rate of 30%. Country B has a corporate tax rate of 10%. 108  TAX ARBITRAGE vs Tax Avoidance Steps Involved in Cross-Border Tax Arbitrage : Income Shifting: XYZ Corp generates significant profits in Country A, where the tax rate is higher. To reduce its overall tax liability, XYZ Corp shifts some of its income to Country B, where the tax rate is lower. 109  TAX ARBITRAGE vs Tax Avoidance Steps Involved in Cross-Border Tax Arbitrage : Interest Deductions: XYZ Corp could also arrange for its subsidiary in Country A to borrow money from its subsidiary in Country B. The interest payments made by the subsidiary in Country A are tax- deductible, reducing its taxable income. Meanwhile, the subsidiary in Country B receives the interest income, which is taxed at the lower rate. 110  TAX ARBITRAGE vs Tax Avoidance Steps Involved in Cross-Border Tax Arbitrage : Transfer Pricing: XYZ Corp might use transfer pricing strategies to sell goods or services from its subsidiary in Country A to its subsidiary in Country B at artificially high prices. This reduces the taxable income in Country A and increases it in Country B. 111  TAX ARBITRAGE vs Tax Avoidance Steps Involved in Cross-Border Tax Arbitrage : Outcome: By shifting income and using transfer pricing and interest deductions, XYZ Corp effectively reduces its overall tax burden by taking advantage of the lower tax rate in Country B. This is a form of tax arbitrage, as it exploits the differences in tax rates between the two countries. 112 TAX avoidance strategies Tax Avoidance strategies used to minimize tax liability DESCRIPTION EXAMPLE Income Distributing income among A business owner might pay Splitting family members or related a salary to a spouse or entities to take advantage children, reducing the overall of lower tax brackets. tax burden. Deductio Claiming allowable Mortgage interest ns and deductions and credits to deductions, charitable Credits reduce taxable income. contributions, and tax credits can significantly lower tax liability. 113 TAX Avoidance Strategies Tax Avoidance strategies used to minimize tax liability DESCRIPTION EXAMPLE Internatio Structuring business Establishing subsidiaries in nal Tax operations and countries with lower Planning investments to take corporate tax rates. advantage of favourable tax treaties and lower tax rates in other countries. Tax Using legal structures or Investing in a Special Shelters investments specifically Economic Zone or entering designed to reduce tax the Junior Stock Market that 114  TAX Avoidance Strategies These strategies are legal and commonly used, but it’s important to ensure they comply with tax laws and regulations. Aggressive tax avoidance can sometimes attract scrutiny from tax authorities. Governments use a variety of strategies to address and mitigate abusive tax practices. 115  address and mitigate abusive tax practices Key approaches used: 1. Legislation and Regulation General Anti-Avoidance Rules (GAAR): Rules that allow tax authorities to deny tax benefits from transactions that lack substantial economic purpose and are primarily for tax avoidance. Specific Anti-Avoidance Rules (SAAR): These target particular tax avoidance schemes, such as thin capitalization rules to prevent excessive interest deductions. 116  address and mitigate abusive tax practices 2. Enhanced Reporting Requirements Country-by-Country Reporting (CbCR): MNEs are required to provide detailed reports on their global operations, including income, taxes paid, and economic activity in each country. Disclosure of Tax Planning: Some jurisdictions require taxpayers to disclose aggressive tax planning strategies to tax authorities. 117  address and mitigate abusive tax practices 3. International Cooperation Information Exchange Agreements: Countries share tax information through treaties and agreements to track cross- border transactions and combat tax evasion. OECD Initiatives: The OECD’s Base Erosion and Profit Shifting (BEPS) project provides a framework for countries to address tax avoidance by ensuring profits are taxed where economic activities occur. 118  address and mitigate abusive tax practices 4. Audits and Investigations Targeted Audits: Tax authorities conduct audits of high-risk taxpayers and transactions to identify and address abusive practices. Specialized Units: Some tax authorities have dedicated units focused on complex tax avoidance schemes and international tax issues. 119  address and mitigate abusive tax practices 5. Penalties and Sanctions Financial Penalties: Tax authorities impose fines and penalties on taxpayers who engage in abusive tax practices. Criminal Prosecution: In severe cases, individuals and companies may face criminal charges for tax evasion and fraud. 120  address and mitigate abusive tax practices 6. Public Transparency Public Disclosure: Some countries require public disclosure of tax payments by large corporations, increasing transparency and accountability. Whistleblower Programs: Programs that encourage individuals to report tax evasion and abusive practices, often with financial rewards for whistleblowers. 121  address and mitigate abusive tax practices 7. Tax Policy Reforms Simplification of laws and regulations: Simplifying laws and regulations to reduce loopholes and opportunities for tax avoidance. Adjusting Tax Rates: Aligning tax rates across different jurisdictions to reduce incentives for tax arbitrage. 122