• Taxation – Tax planning purposes: Companies that do not trade within the jurisdiction they were created have to pay a minimum of taxes, like annual and license fees.
• Confidentiality: This advantage is very important, due to security purposes. Doing transactions in the name of a company instead of an individual, will keep the identity of the principal out of any documentation and unrevealed.
• Fees: some jurisdiction have lower incorporation and annual fees than others.
• Cost operation: in terms of expenses, in general it could be cheaper to incorporate a company offshore, i.e. an offshore financial center, than renting an office, hiring staff, etc.
• Legal protection: In general it is easier for an offshore company to protect itself, from lawsuits, disclosure of assets, etc. Since the laws that prevail over it are the ones of its own jurisdiction, not the place where the company carries out business.

IBC (International Business Company)

The International Business Company is a product of special legislation in many jurisdictions such as Seychelles, Belize, Panama, Bahamas and the British Virgin Islands (BVI), to name a few. IBC entities are characterized by the following:

* no taxation on foreign earned income
* limited liability of its members
* exemption from local taxes and stamp duty
* privacy and confidentiality
* simple company formation
* limited or no ongoing filing requirements
* inability to trade within the country in which it is domiciled

Whether or not actually called an IBC, this type of company is the prevailing entity used by those setting up an offshore company.

The IBC is popular for holding offshore investments, international real estate and as a personal services company for expatriates working abroad. Most of the time these companies do not qualify as a tax resident for the purpose of accessing double taxation avoidance treaties.

LLP (Limited Liability Partnership) or LLC (Limited Liability Company)

The offshore LLC is very similar to the popular offshore IBC as both are limited liability companies. This company formation is popular in Nevis and the USA where the Delaware LLC is especially popular as an offshore company. Offshore LLCs are similar in some ways to IBCs in that that are tax transparent, provide the owners and managing parties limited liability and more; however, structurally they are a bit of a hybrid between a limited company and a limited partnership.

“Onshore”/Offshore Companies

With tax competition ever increasing around the world, many traditionally “onshore” jurisdictions have enacted laws and tax codes that allow certain structures to be utilised in a similar fashion to the traditional offshore company. Many countries only tax on domestic sourced income allowing certain structures to be utilised within an overall structure to reduce or eliminated taxation. Utilising these “onshore” structures in conjunction with one or more offshore entities is an increasingly popular way of structuring for international trade and investment purposes.

The BBC has reported how HSBC used a legal tax loophole to handle profits from private finance initiative (PFI) schemes, such as the Queen Alexandra Hospital in Portsmouth.

Speaking to the news provider, tax specialist Nick Parker said that the NHS was “obviously” using offshore tax planning to minimise the amount that it has to pay, but that it was “clearly” paying UK tax.

“The accounts to September 30th 2010 indicate there was a £2.5 million tax charge. However, when you actually read the notes only £100,000 of that was paid across to the UK authorities,” he explained.

According to the BBC, this amount was charged on profits of more than £38 million from its PFI schemes, the equivalent of less than 0.5 per cent of its earnings, highlighting the benefits available through offshore tax planning.

Meanwhile, the Association of Accounting Technicians has recently lauded the advantages of running businesses through limited companies, which ultimately pay less tax than sole traders and partnerships.

“Tax havens have grown so fast in the era of globalization, since the 1970s, that they are now right at the heart of the global economy and are absolutely huge,” Shaxson says. “There are anywhere between $10 and $20 trillion sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens.” Shaxson is the author of the new book, Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

JUAN GONZALEZ: As millions of Americans are preparing to file their income taxes ahead of Monday’s deadline, we look today at how corporations and the wealthy are utilizing offshore banks and tax havens to avoid paying taxes and other governmental regulations.

Earlier this year, Democratic Senator Carl Levin introduced two bills to crack down on tax havens. Levin estimates that nearly $100 billion is lost each year by not closing tax loopholes.

Besides Levin’s bill, there has been little discussion in Washington on the issue, despite the intense debate over the budget. During President Obama’s budget speech on Wednesday, he uttered the words “tax” and “taxes” nearly 40 times. Never once did he mention tax havens.

AMY GOODMAN: Our first guest today is the British journalist Nicholas Shaxson, author of the new book Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. In the book Shaxson writes, quote, “The offshore system is the secret underpinning for the political and financial power of Wall Street today. It is the fortified refuge of Big Finance.” Nicholas Shaxson joins us from Washington, D.C.

Welcome to Democracy Now! Talk about what you’re calling “Treasure Islands.”

Nicholas Shaxson? We’ll go to a music break, and we’ll come back to see if we can get the audio of Nicholas Shaxson. Looks like we got it right now. Welcome to Democracy Now!, Nicholas.

NICHOLAS SHAXSON: Thanks. Thank you very much.

AMY GOODMAN: It’s good to have you with us. OK, explain what these “Treasure Islands” are.

NICHOLAS SHAXSON: Well, my book is about tax havens, and one of the big themes of my books is—one of the big things in my book is that tax havens are much, much bigger and much more important than almost anybody realizes. Most people think of tax havens as just a bunch of shady places, perhaps out in the Caribbean, Switzerland, a couple of other places, where a few celebrity tax dodgers maybe and some mafiosi and some criminals go and put their money. And they see it as a kind of exotic sideshow to the global economy.

One of the central messages of my book—and I explore the history of this in quite a lot of detail—is that tax havens have grown so fast in the era of globalization, since kind of the 1970s, that they have now become right—they are now right at the heart of the global economy and are absolutely huge. I mean, there are 10—anywhere between 10 and 20 trillion U.S. dollars sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens. It’s all around us, and it’s absolutely huge.

Part of that—part of that message is that the biggest tax havens in the world are not so much these little islands, but big, rich countries. The United Kingdom, my country, is one of the world’s most important tax havens. And right now in Washington, D.C., I’m sitting in one of the world’s biggest tax havens, as well: the United States. So, this is something we need to really reappraise, the whole geography of the system, and understand how important it is. And when we’re hearing figures of $100-plus billion lost to the U.S. taxpayers, I would argue that is just one aspect of the problem. The problem is much, much bigger. There are many, many other aspects to consider here.

JUAN GONZALEZ: Well, when you say that United Kingdom itself is a tax haven, what do you mean? And how did that develop?

NICHOLAS SHAXSON: Well, there are two aspects to this, really. One is the U.K., the city of London, which is the financial district of the United Kingdom, is itself a tax haven. And I need to explain a little bit what I mean by “tax haven.” There’s no general agreement worldwide as to what a tax haven is. A lot of people focus on the tax element, but it’s much more than that. Tax havens do offer zero or low taxes to people elsewhere, but they also offer secrecy. They offer escape routes from financial regulation. They offer escape routes from criminal laws. The key theme here is escape. If you don’t want to do—if you are constrained by democratic rules and curbs at home, you take your money offshore, you take it elsewhere, to a place where they’ll let you do what you’re not allowed to do at home.

And looking at the history of this, Wall Street, after the Second World War, they were—after the Bretton Woods agreement, 1946, there was a cooperative international order set up where capital was tightly controlled around the world. Wall Street was very firmly put in its place. And, you know, there were very high taxes on the wealthy. And for about a quarter of a century, this system more or less worked out, and capital was quite tightly constrained. It was also an era of very high, broad-based economic growth, not just in the United States, but around the world. What happened during that period, though, was that the banks, Wall Street, in particular, didn’t—obviously didn’t like these curbs, didn’t like the Glass-Steagall Act that was separating commercial from investment banking, didn’t like interest rate caps, didn’t like these controls. And essentially, they went off to London. And in London, the Bank of England and the city of London said, basically, “You bring your money here, and you can do what you like. You don’t—we’re not going to worry about Glass-Steagall. We’re not going to worry about interest rate caps.” And so, what happened is Wall Street piled into London from about the ’60s onwards, and that really marked the unraveling of—part of the unraveling of the Bretton Woods arrangements.

And Wall Street was able to grow incredibly fast offshore, much, much faster than it had been before. And this ability to grow offshore, first in London and then in a wider network of tax havens around the world, this has been one of the great reasons why it has been able to grow so fast. And now we have “too big to fail” banks and this offshore system, the ability of banks in the United States to go elsewhere to do things that allow them to grow faster and take more risks, away from the democratic curbs. It’s one of the reasons why they’ve grown so powerful and why we have got such a difficult situation today with Wall Street having such power over the politicians in this country and my country and others.

JUAN GONZALEZ: You talk in your book also about Britain recreating a new empire. You mention all of the Caribbean islands, that most Americans have heard about as vacation spots but really don’t pay much attention to: Anguilla, Bermuda, the British Virgin Islands, Turks and Caicos. What role do they play in this exploding situation with tax havens?

NICHOLAS SHAXSON: It’s a very curious story. I and my researchers, my co-researchers, went into the archives in the United Kingdom and looked at what they were saying at the time. What we had was a—we have a series of partly British territories spread around the world, notably the overseas—the British Overseas Territories, which include the Cayman Islands, Bermuda, the Turks and Caicos, Gibraltar, Anguilla, and the so-called Crown Dependencies, which are closer to the U.K. That’s Jersey, Guernsey and the Isle of Man. And all of these centers were allowed—they’re partly controlled by Britain; they do have independent politics, as well. It’s a sort of half-in, half-out kind of offshore system. So Britain has this kind of network around the world.

But what this network does is that these places serve as conduits; they serve as channels for business to be passed to the city of London. So there’s this kind of network of havens around the world, capturing business. And in the Caribbean, a lot of business captured from the United States, Latin American. And this is licit and illicit business; it’s a mixture of the two. And the Crown Dependencies—Jersey, Guernsey and the Isle of Man—capturing business focusing more on Europe, perhaps in Africa and the Middle East. And all this—so they’re serving as feeders for the city of London.

And I was talking about how the offshore system has been used to—used by Wall Street to become so big and powerful. Well, the U.K. has its own special version of that, and that’s this network, which has really—as well as the U.K. itself being a tax haven, this network feeding business into the city of London is an absolutely colossal reason why the city of London is now, by some measure, the world’s biggest financial center. So, it’s something that has—you know it is at the period of decolonization, this is when the system really started getting together and started working. And one can make an argument that this is a new kind of financial empire that Britain—you know, a kind of hidden empire that nobody really has really paid much attention to now, but it is of absolutely tremendous importance. And we in the United Kingdom—I just as—we have the banks holding our politicians by the throat, I think, just as much as you do here in the United States.

AMY GOODMAN: I wanted to go to U.S. presidential politics. One of the leading Republican presidential contenders, Mitt Romney, has a history profiting from offshore tax havens. In 2008, the Los Angeles Times exposed how Romney, as head of Bain Capital, utilized shell companies and two offshore tax havens in Bermuda and the Cayman Islands to help eligible investors avoid paying U.S. taxes. The tax-friendly jurisdictions helped attract billions of investment dollars to Bain Capital. Los Angeles Times reporter Bob Drogin spoke to us about this in 2008.

BOB DROGIN: A side light of that was Bain Capital, which today has assets of about $60 billion—that’s their—the number that they officially say—and about a third of that comes from these offshore operations that Romney set up when he was still there, in particular, companies that are set up—really, they’re just mail drops, they’re mailboxes; they don’t have any staff, they don’t have any operations. The one on Grand Cayman Island is a Post Office Box 60D, I think, on Grand Cayman Island, and the ones in Bermuda are also at a lawyer’s office. But they’ve got them in other places as well. And they bring in somewhere above $25 billion a year.

And again, it’s—these are companies—these are operations set up through various systems. They’re blocker corporations. They are investment—or rather, equity groups that are set up to attract, for the large part, foreign capital. And the reason these are set up overseas is so that foreign investors in these private companies can avoid paying U.S. taxes. Mitt Romney and his colleagues don’t get that advantage. So it’s not like they’re avoiding taxes through this. It’s simply—what happens is, they’re helping other people avoid paying U.S. taxes, and as a result they make enormous profits.

AMY GOODMAN: That’s Los Angeles Times reporter Bob Drogin speaking to us in 2008. Nicholas Shaxson, your response?

NICHOLAS SHAXSON: Yeah, this is—I mean, there are two things I would respond to this. First of all, there is—a lot of this business is legal. It is. There are two terms: tax avoidance and tax evasion. Avoidance is, by definition, not doing anything illegal, but also, by definition, getting around the spirit of the law; this is not what legislators intended when they set up the legislation. Tax evasion, on the other hand, is, by definition, criminal. It is—you’re breaking the law. But in between these two poles of evasion and avoidance is a huge gray area, and often you don’t find out which side of the law a company is until there’s been, you know, a challenge by the IRS or a court case or something like that. A British—former British Chancellor Denis Healey once said, “The difference between avoidance and evasion is the thickness of a prison wall.”

But also, the example of Mitt Romney—I imagine what he was doing was on the avoidance, not on the evasion side—is this issue of intermediaries, people who help others. And we’re talking here particularly about accountancy firms, law firms and banks, and also company formation agents. These intermediaries have, for such a long time, seen a very simple calculus. They get—I saw a statistic yesterday that, for the big four accountancy firms on certain kinds of business, the average profit for a client was something like $360. The maximum fine for infringement for assisting a client to do things that have gone wrong is $10,000. So it’s a very simple calculation. You know, if you get caught, well, you pay a bit of money, but it will only be a fraction of your profits. And as a result of these kinds of incentives, you’ve had the complete corruption of the culture of these industries, saying, “We’re just going to, you know, help these people. We don’t care if they’re breaking the law or avoiding taxes or whatever. We’ll just help them do what they want to do.” And it’s a terrible—this corruption of the culture is one of the biggest problems of the whole—the whole issue.

JUAN GONZALEZ: Nicholas Shaxson, I want to ask you about the portion of your book that deals with the impact of these tax havens on the poor countries of the world. You say, at one point in the book, “Nearly every effort to generate large flows of capital to developing countries since the 1980s has ended in crisis because the money has escaped offshore. Towering inequalities in Europe and the United States, not to mention in underdeveloped countries, cannot be understood properly without exploring the role of secrecy jurisdictions. The systematic looting of the former Soviet Union, and the merging of the nuclear-armed country’s intelligence apparatus with organized crime, is substantially a story that unfolds in London and its offshore satellites.” You also talk about Saddam Hussein’s billions and the power of North Korea’s Kim Jong-il. Could you explain?

NICHOLAS SHAXSON: Yeah, offshore—if you look at these crises, offshore is always a part of the story. It’s never the whole story; you can always point to other factors in, you know, the corruption of a country or economic crisis. But offshore is always a huge part of the story.

And you’ve had—in these debt crises, you have had huge lending to developing countries. And the rulers in these countries, and the ruling elites, are able to appropriate this money, the money that comes in from borrowing, and they just—they take it offshore. And you have countries left saddled with debts. Recent studies have indicated—in Africa, at least—that the private assets, the assets held by Africans, far outsee the debts of African countries. The difference is that the assets are held in private hands. These are assets offshore in banks overseas. They could easily pay off the debts. The income on those assets could easily pay off, you know, all the debt repayments. But we have this mismatch, and the burden is that the debts are borne by the African people in the form of either higher taxes for themselves or degraded public services and an elite that benefits from complete impunity for what they’re doing. The money is offshore. There’s nothing that anybody can do about it. And this leads to the corruption of countries and a wholesale subversion of democracy. So it’s an absolute scourge on developing countries.

Global Financial Integrity, which is a Washington think tank, in January estimated that illicit financial flows out of developing countries in 2008 added up to $1.2 trillion U.S. dollars into tax havens and rich world economies. A lot of that came here into the United States. A lot of Latin American money comes here. And so, the United States itself is a tax haven. United States has a kind of two-faced problem. One is that it’s losing money to foreign tax havens, but also it is itself offering secrecy facilities, offering tax-free treatment to foreigners who bring their money here, and helping foreigners evade taxes and commit crimes. And one of the arguments, great arguments, in my book is that this money that’s coming in does not make up for the money being lost. Instead, it causes harm. It further puffs up wasteful property bubbles, further puffs up Wall Street, and has contributed even more to this, you know, “too big to fail” problem and the problem the financial capture of the political process. So we have a double—the inflow problem and the outflow problem both being harmful for the United States, but also for the developing countries.

AMY GOODMAN: So what do you think—how should this change? I mean, you have this enormous emphasis on the deficit in this country. You say that offshore tax evasion has cost the United States $100 billion a year. How can we turn this around?

NICHOLAS SHAXSON: Well, as I said, the $100 billion, I see, is just one part of the picture. I think that there are—there is some legislation that is coming in to try and crack down on this stuff. There was a bill originally co-sponsored by Barack Obama before he was president, and now it has not—it has not yet passed through, but Senator Levin, I believe, is—it’s called the Stop Tax Haven Abuse Act—Senator Levin is, I believe, trying to reintroduce this.

There is no magic bullet that is going to solve this problem, but there are a series of different measures that can be and need to be taken. And the first thing that really has to be done is for people to start to see how big and bad this system has become. While people think it’s just a few islands out in the Caribbean doing a little bit of tax evasion—I’m not saying $100 billion is just a little bit of tax evasion, but while people still see it as a problem just on that scale, there won’t be the political momentum for reform. One of my central arguments is this is so much bigger and so much badder than almost anybody knows. We need to—as a first step for reform, we need to understand that and spread the message.

AMY GOODMAN: Well, I mean, you say it was President Obama who was pushing this as senator, but it’s the same President Obama who is trying to raise a billion dollars in 2012. What would you say is the single most powerful force that is stopping any kind of crackdown on this?

NICHOLAS SHAXSON: Well, I think, of course, Wall Street banks and financial institutions, which are huge fans of the offshore system. Multinational corporations are able to use the offshore system through—particularly through tax avoidance, sending their money offshore, not getting taxed on it until they bring the money back home, so they are huge, huge proponents of this system. So, corporate lobbying power is also a huge part of the problem.

Another part of the problem is that there is this kind of self-reinforcing dynamic of the offshore system. When one country cuts its tax rates, its corporation taxes, or it creates a new loophole, others in the game which are tax havens, which have a business model of being tax havens, then feel they have to keep up, and they think, “OK, we’ve got to create an even better loophole.” When one country creates a nicely—a very strong form of secrecy, the other countries will say, “Ah, we’ve got to create an even stronger form.” So you have this kind of race to the bottom.

And one of the big effects from a tax point of view—and this also happens with financial regulation—but from a tax point of view, what you will get is the tax charge on mobile capital, which is very often the form of how wealthy people and corporations receive their income and how they’re taxed, the tax charge on mobile capital falls. That means somebody else has to pay for those taxes that aren’t being paid by the wealthy people and corporations, so other people have to pick up the slack. So you get a kind of compression of the tax system because of this dynamic. So you get ordinary people having to pay more in order to pay the taxes that the wealthier people are not paying. And this is a kind of impersonal dynamic that is inherent to the offshore system. And one thing that is especially required to deal with that is international cooperation, and I think the United States can take a lead, a global lead, and should take a global lead, on getting cooperation on this kind of problem that is a part of the offshore system.

JUAN GONZALEZ: And isn’t part of the problem that any talk of reform has to run up against the fact that the international banking system, to one degree or another, benefits from the entire situation of these tax havens? Because I would assume that the money is always held in banks, whether it’s in the United States or in England or in these other countries, and I would assume that the banks that help facilitate this kind of avoidance or evasion end up with bigger fees as a result of their extra assistance to the holders of these accounts, so that, in essence, the banking system doesn’t want to see this changed.

NICHOLAS SHAXSON: No, I think that’s probably fairly true to say. We should not underestimate also the lobbying power of the accounting firms. They are—that’s something that people don’t really consider. Of course the banks are huge. The accounting firms, the legal firms that are involved in this are absolutely enormous.

I think one of the things that could be done is to look at ways of having much more severe penalties on people who assist particularly criminal tax evasion and other aspects of it. But we also mustn’t lose sight of the financial regulation aspect of this. And when countries like the United Kingdom, but other tax havens like Luxembourg, Ireland, the Netherlands, which are not traditionally regarded as tax havens, but they’re huge, huge players in this business, we must increasingly recognize them as engaging in what is nothing short of economic warfare against the United States and other countries. We really need to start recognizing that this is—you know, this is conflict. This is economic conflict. When one country tries to suck tax revenue or illicit flows or whatever out of another country, that is an aggressive act. And we need to start taking much more robust action to defend all of our countries against what’s going on in the offshore system.

AMY GOODMAN: Nicholas, very quickly, as we wrap up, the two powers—corporate power and grassroots power. On the corporate side, you have people like Rupert Murdoch, who determines much of the debate in this country with his ownership of media. You call him a “master of offshore gymnastics.” And then you’ve got the grassroots movements, Uncut, both in Britain and the United States, this growing movement that’s going after tax avoiders. Talk about both. Start with Rupert Murdoch.

NICHOLAS SHAXSON: OK, Rupert Murdoch. Now he—the last investigation into his tax affairs I’m aware of is one conducted by The Economist in, I think, 1998 or 1999, so we don’t have very updated data on him, but he had cut his tax rate down to six percent, when others were paying, you know, much higher rates. A recent Government Accountability Office report in 2008 estimated that News Corporation has 152 offshore subsidiaries, according to their definition of tax havens. So he is certainly a big player in the game. And when you have—you know, he’s not the only—obviously not the only media player using offshore tax havens; it’s very widespread. But when you have big players in the game defending this, then you have a big problem from the media point of view, as well.

On the grassroots side, this is incredibly heartening, what’s been happening. There has been until, I would say, a year ago almost complete radio silence on this issue. Very few people were taking an interest in it. We saw—we have seen the Uncut movement is something that emerges, spontaneous protests against corporate tax avoidance. In my country, in the U.K., where there’s big spending cuts happening, people turning around, saying, “How come we’re giving these effective subsidies to corporations, these tax subsidies to corporations, and now we’re having to cut schools and hospitals?” And people are coming out onto the streets. And this is absolutely new, and this is thrilling to see. And it’s happening in the United States. And stories such as General Electric’s ability to get away with paying no tax in the United States is, you know, a catalyst for something. So something very new is happening now, and it’s tremendously refreshing. And this is, you know, the beginning, I believe, of something much bigger that will, as austerity and deficits continue to bite, will get more people into the streets.

AMY GOODMAN: We have video of the protesters, the Uncut folks in the United States, holding up Treasure Islands, your book. Nicholas Shaxson, we want to thank you very much for being with us—

NICHOLAS SHAXSON: Thanks very much.

AMY GOODMAN:—author of Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

Foreign companies who intend to carry on business in Australia must register as a foreign company with the Australian Securities and Investments Commission (ASIC). The key issue to determine is whether a foreign company carries on a business in Australia.

Are you carrying on business in Australia?

A foreign company that has a place of business in Australia is deemed to carry on a business in Australia. This includes circumstances where the foreign company establishes or uses a share transfer office or share registration office in Australia. It also includes, subject to specific exemptions, circumstances where the foreign company administers, manages or otherwise deals with property situated in Australia as agent, legal personal representatives or trustee.

The Corporations Act 2001 provides that a foreign company will not be considered to carry on business merely because it:

• is a party to court proceedings or a claim or a dispute in Australia; or
• holds directors or shareholders’ meetings or carries on other activities concerning its internal affairs in Australia; or
• maintains a bank account; or
• effects a sale through an independent contractor; or
• solicits or procures an order that becomes a binding contract only if the order is accepted outside Australia; or
• creates evidence of a debt or creates a charge on property; or
• secures or collects debts or enforces its rights regarding any securities relating to such a debts; or
• conducts an isolated transaction (the transaction must be completed within 31 days and must not be one of a number of similar transactions); or
• invests funds or holds any property.

The Australian courts have also considered the meaning of ‘carrying on business’. Generally, a company will be taken to be carrying on business in Australia if its activities are conducted with sufficient system, repetition and continuity. These activities may be carried on as part of or in conjunction with another business and do not necessarily need to be for profit. However, system, repetition and continuity are not essential; a one-off transaction, if substantial, could also be seen by the courts as carrying on a business in Australia.

The courts have determined that if a foreign company establishes a fixed place of business and carries on business from that place using an agent or agents, with authority to bind the foreign company, then the company will be taken to be carrying on business.

The courts will also take into account various other factors such as whether the activities are:

• regular and repetitive
• carried out in a similar manner to businesses in its industry and of the same kind
• planned, organised and carried on in a business-like manner
• more permanent than temporary; and
• carried out in a commercial manner and would therefore not be better described as hobbies.

These factors should not be considered in isolation as the courts will review all the information and the circumstances surrounding the foreign company’s operations to determine whether the foreign company is ‘carrying on business’ in Australia.

What must a foreign company do to register in Australia?

To register a foreign company with ASIC, such a company must file appropriate documentation with ASIC, appoint a local agent and maintain a registered office and in certain instances a register of local members in Australia. Once the foreign company has been registered with ASIC, it must comply with various obligations such as reporting its financial results to ASIC.

Failure to register a foreign company in Australia is a strict liability offence and could result in fines by ASIC and the courts.

Are there alternatives to registration that a foreign company could consider?

The foreign company may choose to incorporate a local Australian subsidiary that will carry on business in Australia instead of the foreign company.

To incorporate an Australian subsidiary company (which will generally be a proprietary limited company), such a new company must have both an Australian registered office address and principal place of business (if it is not the address of the proposed registered office address), at least one shareholder (who will likely be the foreign company) and one Australian resident director. Once the Australian subsidiary company has been incorporated with ASIC it must also comply with various obligations such as carrying out an annual review, notifying ASIC of company changes and in certain instances reporting its financial results to ASIC.

If the foreign company chooses this route, there will likely be a number of other issues it will need to consider including contracts between it and the local subsidiary and employment arrangements for staff who will be on the ground in Australia.

The foreign company will also need to consider direct and indirect tax consequences of doing business in Australia regardless of which route is taken.

For more information about the registration of an Australian Company see: Register a company in Australia or contact us.

“We are concerned that individuals may enter into these arrangement to reduce tax liabilities by splitting their income with an associate, and that the arrangement may not satisfy the personal services income tests and that the anti-avoidance provisions could possibly apply,” Mr D’Ascenzo said.

“The ATO is reviewing these arrangements and will be writing to entities facilitating them about our concerns that they may risk contravening the promoter penalty laws.”

Mr D’Ascenzo also reminded firms entering into such arrangements that they may not be withholding the appropriate amount of tax and providing the correct superannuation support to the individual participants and may be liable for penalties and charges under the Taxation Administration Act 1953 and the Superannuation Guarantee (Administration) Act 1992.

The Tax Office said that anyone seeking guidance on this issue before April 30 will be entitled to a reduction in any penalties that might apply if the arrangements prove to be ineffective.

Under these arrangements a LBG company is established to receive income distributions from a trust and then lend that money to directors, members or associates of that company or related parties. Minimal or no interest or principal is paid on the loans, however the Commissioner has stated that the Tax Office is concerned that some people are utilizing these arrangements to obtain income from their trusts without having to pay the required amount of tax.

The alert applies to arrangements with features substantially equivalent to the following:

• A company limited by guarantee (the LBG company) is set up and becomes a beneficiary or an object of a trust (the Trust);
• The Trust distributes net income to beneficiaries including the LBG company. The distribution to the LBG company may have franking credits attached;
• The LBG company pays tax on the distributions at the company tax rate (30%);
• The LBG company makes loans to directors, members or associates of the LBG company or related parties to the directors, members or associates (the borrower);
• The borrower does not include the value of the loans in their assessable income in the year in which they are received;
• The borrower pays minimal or no interest to the LBG in relation to these loans; and
• Aside from the perceived beneficial tax treatment, there is little or no commercial reason for the establishment of a limited by guarantee company.

The Tax Office has indicated that anyone who has participated in such arrangements should come forward prior to April 30, 2011 before they are contacted, and that if they do so, there may be reductions in any penalties imposed by the Tax Office.

He referred to the government’s just announced decision to adopt two recommendations of the Board of Taxation to simplify the tax law for over 600,000 trusts, and so addressing two key areas of uncertainty for trusts following the High Court’s decision in the Bamford case, which related to capital gains flowing from family trusts and affected about 600,000 taxpayers.

First, the amended law will clarify the definition of the income of a trust estate. This will address situations where the tax burden falls on a beneficiary despite not receiving the economic benefit. Second, the law will be amended to enable streaming of capital gains and franked distributions to beneficiaries.

He said that before the Bamford case, trusts commonly streamed income to particular beneficiaries and that the government wants to ensure that this flexibility can continue. These changes will apply for 2010-11 and later income years. “There are no easy answers and these are interim steps to ensure greater confidence and certainty in trusts. They will not solve all the issues highlighted by the Bamford case and the Gillard Government remains committed to updating and rewriting trust laws more broadly.”

“I do want to emphasize that the government has taken swift action on trusts where others haven’t. We don’t believe trusts are any form of tax avoidance. We see trusts as a legitimate feature of how Australians conduct their financial affairs. And there will be more to come in this space.

“My overall point here is that the Gillard Government’s forward-looking tax reform agenda seeks to position Australia to meet these challenges and take advantage of new opportunities for the benefit of all Australians, now and well into the future.”

The Assistant Treasurer also talked about the government’s wider commitment to simplifying the tax system, saying that it was an objective built into basically every reform planned, announced and delivered. He said that greater tax certainty and reducing the compliance burden on individuals and business is important in promoting increased participation and productivity.

He referred to the optional standard deduction in lieu of claiming work related expenses and the cost of managing tax affairs, of AUD500 in 2012-13 and rising to AUD1,000 in 2013‑14; and a AUD5,000 small business instant asset write-off that will reward small businesses when they invest to grow and make tax time simpler for them.

“Modernizing and simplifying Australia’s tax system and taking advantage of the possibilities offered by new technologies will provide substantial benefit to Australian taxpayers. For instance, the standard deduction is an important step on the way to a ‘tick and flick’ system of pre-filled tax returns. As I said in Canberra earlier this week, it will remove the hassle of keeping a shoebox full of receipts. When fully phased in about 6.4m Australians will save time and get a bigger tax return by just ticking the box”, he said.

Describing the Opposition’s tax plans as “seriously absurd or seriously non-existent” he suggested that they stood for little more than opposing all of the Gillard Government reforms.

“They talk about wanting reform, but every single action they take is in fact anti-reform. They copied word for word the government’s list of Henry Review rule outs, and then ruled out a further 13 recommendations. And they ruled out delivering any tax reform during a first term (had they been elected).”

“Their idea of tax reform seems to be nothing more sophisticated than a AUD6bn company tax increase during the election, to pay for their Paid Parental Leave scheme. And an expensive, time wasting thank you note on personal tax returns that is such bad public policy that I won’t even bother your time with it.”

“This is all the more disappointing because politics hasn’t usually been like this. I think the current petty and cynical approach is beneath the Liberal Party’s greater history. Regardless of political allegiances my belief is that the Liberals have, historically, at least been rational and thoughtful contributors to our nation’s economic story.”

“We are Australians, and it is a part of our idea of the Commonwealth that we pay taxes ungrudgingly in this fair-go country. It is our way of being civilised. It is everybody’s way of being civilised. It is not a magic potion, it is not a magic pudding. But it is a way, and the best way, I believe, of using available resources for the common good”, he said.

As part of this process Shorten also announced that he would seek advice from the Board of Taxation (Board) on whether there were any issues with the operation of the trust income tax provisions that must be addressed in this current tax year.

After examining the advice provided by the Board, a discussion paper has been released that considers ways to implement two interim reforms that will provide taxpayers with increased certainty, and reduce the scope for unfair tax outcomes and the manipulation of tax liabilities through the use of trusts.

While the update and rewrite of the trust income tax provisions in Division 6 will eventually address the current issues with the operation of the trust income tax provisions, the government is aware that there is a need for certainty in the interim. After examining advice provided by the Board of Taxation, it has decided to amend the law to better align the key concept of ‘income of the trust estate’ (which has been interpreted to mean distributable income) with the tax law concept of ‘net income of the trust estate’ (taxable income), so as to reduce anomalous outcomes and opportunities to manipulate tax liabilities; and secondly ensure that capital gains and franked distributions can be streamed to particular beneficiaries.

The paper examines the merits of the different approaches that could be adopted to amend the current tax law to achieve these outcomes, and the government is keen to point out that it is not suggesting that there should be any changes to the trust law.

The government has accepted the Board’s advice that the issues highlighted in this paper must be addressed for this current tax year. This will ensure that the current uncertainties about streaming and opportunities for manipulation are addressed by amendments applying from the 2011 income year.

Interested parties are invited to comment on the paper, and all information contained in submissions will be made available to the public on the Treasury website unless those submitting indicate that they would like all or part of their submission to remain in confidence. The closing date for submissions is Friday, March 18, 2011.