Table of corporate profits in Caribbean societies.

 

 

Table
of contents

 

Ø  Introduction……………………………………………………………………………….  2

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Ø  An
Overview of Taxes and their Conditions…………………………………………….   2

Ø  Tax
Evasion Vs. Tax Avoidance………………………………………………………..…4

Ø  Residence………………………………………………………………………………….5

Ø  Trusts………………………………………………………………………………………5

Ø  Multi-jurisdictional
Issues…………………………………………………………………7

 

§  Tax
Treaties………………………………………………………………………… 7

 

§  Double
Taxation ……………………………………………………….…………. 7

 

§  International
Business………………………………………………………………8

 

 

Ø  Ethics
in Taxation…………………………………………………………………………8

Ø  References…………………………………………………………………………………9

 

 

 

 

 

Ø Introduction

Over
the last four decades, there has been an undeniable acceleration in the number
of debates surrounding the taxation of corporate profits in Caribbean societies.
Central to these debates, lies the fact that while some proponents consider
this government enforced, involuntary fee to be problematic, others acknowledge
it significance, purporting it to be the main driving force of economic growth
and development. For Small Island Developing States (SIDS) such as Antigua and
Barbuda that are constricted by limited resources, high debts, weak
administrations and relatively low levels of economic activities, taxes impose
a threat to their overall sustainability as it creates basis for double
taxation, tax evasion, tax avoidance and multi-jurisdictional issues. Contrastingly,
while this is a fact supported in a number of empirical researches encompassing
this phenomenon (Slemrod,2004; Hines, 2007 & Dharmapala, 2006), it is
important to note that devoid of taxes, it would be impossible for governments
to support their objectives which work in alignment with the interests of the general
public. This in itself reflects the disproportionate role of taxation; a role
that must be fully understood by competent financial advisors who plays a
significant role in propelling the Antiguan economy.

This
paper aims to provide justifications as to why it is necessary for the
competent financial advisor to grasp a comprehensive understanding of the basic
principles of taxation.

 

Ø Overview of Taxes and their Conditions

 Taxes are generally involuntary fees levied on
individuals or corporations that are enforced by a government entity, whether
local, regional or national in order to finance government activities. There
are several types of taxes, some of these are Income Tax (a percentage of
individual or corporation earnings filed to the federal government), Sales Tax
(taxes levied on certain goods and services), Property Tax (based on the value
of land and property assets) and Tariffs (taxes on imported goods imposed in
the aim of strengthening internal businesses).

There
are different opinions on what makes a good tax system, and notably, all vary.
There are five (5) basic conditions that should be applied and maximized to the
greatest extent. These are fairness, adequacy, simplicity, transparency and
administrative ease. Each one critically draws a way by which a tax should be
carried out.

 Fairness or equity means that everybody should
pay a fair share of taxes. This concept has been broken up into two important
concepts:  horizontal equity and vertical
equity. Horizontal equity means that tax payers in similar financial condition
should pay similar amount in taxes whereas vertical equity which is just as
important, means that taxpayers who are better off should pay at least the same
proportion of income in taxes as those who are less well off.

The
next important concept is adequacy. Adequacy in taxation means that taxes must
provide enough revenue to meet the basic needs of society. That is, to meet the
demand for public services, which alludes to the question of whether revenue
growth each year is enough to fund the growth in cost of services.

Simplicity
means that taxpayers can avoid a maze of taxes, forms and filing requirements.
This simpler system makes taxpayers better understand the system and reduces
the costs of compliance. It is important to know how tax money is being used
and who benefits from tax exemptions, deductions or credits.

Transparency
allows both tax payers and leaders to easily find information about the tax
system. It is a key component of corporate responsibility and it underpins
appropriate and prudent tax behaviour.

Finally,
it is important to make the tax system not too complicated for either taxpayers
or tax collectors. This is where administrative ease plays a part. Rules are
well known and fairly simple, forms are not too complicated, it is easy to
comply voluntarily, and the state can tell if taxes are paid on time and
correctly, and can conduct audits in a fair and efficient manner.

These
basic characteristics that makes up a good tax system will be the foundation of
the basic principles of taxation as the document seeks to highlight issues that
arises out of the tax system. These are tax avoidance and tax evasion,
residence, trusts and multi-jurisdictional issues such as tax treaty, in
particular, the CARICOM tax treaty, double taxation and international business
taxes.

 

 

Ø Tax Evasion Vs. Tax Avoidance

During
the past four decades, tax avoidance and evasion have become of paramount
importance to every tax paper in Antigua and Barbuda. As tax rates increase
time after time, tax payers sought new means of avoiding taxes. Many turned to
illegal means. In attempting to prevent tax avoidance, the government has
passed numerous acts which contains several provisions designed to prevent tax
avoidance and evasion. For example, the personal Income Tax Act of Antigua and
Barbuda, item no. 44, pp.21, 2005 states that a person who willfully, in any
manner, evades or defeats, or attempts to evade or defeat, tax, or the payment
or collection of the tax, shall be liable to a tax penalty of two hundred
percent of the tax evaded. As the government tries to close existing loop holes
in the tax laws, and subsequent acts to come, tax men will attempt to find new
means of avoid the constantly rising taxes.

Tax
evasion is the illegal nonpayment or underpayment of tax by not reporting
income, reporting expenses that are illegal, or by not paying taxes owed to the
government. Individuals involved in illegal enterprises often engage in tax
evasion because reporting their true personal incomes would serve as an
admission of guilt and could result in criminal charges. Proof of the crime
requires first proving the attendant circumstance that an unpaid tax liability
exists. Second the prosecution must prove some affirmative act by the defendant
to evade or attempt to evade a tax. Finally, prosecutors must show that the
defendant possessed the specific intent to evade a known legal duty to pay. To
convict, the jury must find the defendant guilty of each of these elements
beyond a reasonable doubt.

On
the other hand, the term tax avoidance, according to the Government of the
United Kingdom, involves bending the rules of the tax system to gain a tax
advantage that parliament never intended. They went on to say it involves
contrived, artificial transactions that serve or no purpose other than to
produce this advantage. It involves operating within the letter, but not the
spirit, of the law. In 2013, there was a plan to tackle multinationals tax
avoidance was drawn up by the G20 in the wake of a firestorm of public anger-
over the low tax bills paid by certain companies. It was argued that existing
principles had been designed decades ago in an era before tax havens and the
digital economy. Increasingly, globalization placed a strain on the system, not
because of the ease with which multinationals have centralized their intangible
assets- the intellectual property, brands, trademarks and knowhow that make up
80% of their value in low tax countries. 
Tax avoidance can be found as early as the 1850’s and the term “tax
haven” which goes hand in hand with it, has been widely used since the 1950’s
(Palan, Murphy and Chavagneux, 2010). Tax haven, is a bit of a misnomer because
these places offer an escape not just from taxes but from many other rules and
regulations too. The common feature of tax haven that they offer secrecy.

There
are many implications if you avoid or try to evade taxes. As mentioned in the
act earlier, you could be charged up to two hundred percent for such activity.
Therefore, it is important that any one individual must be mindful and should
pay their taxes on time to avoid the repercussions if caught. In addition, it
results in the loss for the government. It generates more and more “black
market money” that is, money that is acquired through illegal means. With this
illegal money circulating, people try to offload it as quickly as possible by
purchasing real estate, automobiles, expensive jewelry etc. which distresses
the economy by artificially inflating prices and therefore the market.

 

Ø Residence

The
government of Antigua and Barbuda launched a permanent residency scheme in June
1995. Its aim was to encourage high net worth individuals to establish tax
residency in Antigua and Barbuda. All income of the residents are free of any
kind of local tax whether the income is remitted or not. Since Antigua and Barbuda
is traditionally a low tax and offshore jurisdiction, residents are normally
free from capital gains tax, inheritance tax and wealth tax. Any international
business may be management through an International Business Corporation, so
the profit will be exempt from tax. Residence is important because it offers
individuals the advantage of tax planning and asset protection. Residency is calculated
on the number of days spent in the country each year. Non-residents are those who
spend less than 6 months of each tax year in the country.

 

Ø Trusts

A
Trust is a relationship created by a settlor whereby during his lifetime he
transfers assets to a trustee for the benefit of another person or class of
persons called beneficiaries. Trusts have proliferated in Antigua and Barbuda.
Some are well managed, and some are not. Trustees do not always understand
their obligations and beneficiaries are sometimes wrongly locked out of trust
property or disadvantaged by trustee decisions. The court can intervene to stop
trust excesses or to assist trustees with directions. There are many ordinary
family Trusts in Antigua and Barbuda. Trusts are also used in commercial
transactions and among many more things, many charitable institutions are run
in the form of trusts. That means that many legal issues affecting these
entities must be resolved by taking account of trust principles. Family trusts
often create problems and sometimes those who establish them do not realize
that the property they transfer to Trust is no longer theirs, even if they are
trustees. The property becomes subject to fiduciary obligations and the
trustees have duties that they must be carried out. In another way, the trust must
be run in such a way that shows it is genuine and separate from the settlor.
Trusts sometimes outlive their usefulness and need to change which can be done
in several ways. A distribution or resettlement may occur. Alternatively, the
court may be approached in some cases to amend the trust. The latter would
trigger a disadvantages tax result. It is important to have a Trust because it
helps in the preservation of family wealth by avoidance of death duties and
inheritance tax. This is important because upon death, tax authorities will be
looking for hidden assets held by the deceased for the purposes of levying
death duties and inheritance tax in addition to making good on taxes and
penalties avoided during the life of the deceased. If the deceased has left a
will upon death his asset are disclosed to the world and hence to the tax
authority.  By parting his property
during his lifetime to trustees the settlor avoids this eventuality and so
preserves family wealth.   Secondly, it
acts as a continuity of ownership and management of business assets. A trust is
similar to a limited liability company and hence notwithstanding the death of
the settlor its management and operation continues especially where the trustee
is a well-established organization that has been specifically authorized to
manage trust. The key implications behind this is that while you do not have to
be wealthy to find that a trust can offer flexible, effective way of passing
assets onto your chosen beneficiaries- both during your lifetime, and following
your death- there may be other options, including alternative trusts, which
could be more appropriate for your individual situation. The key issues are to
seek expert advice as early as possible and make sure that any changes in your
own personal situation are reflected in your tax and estate planning.

 

 

Ø Multi-jurisdictional Issues

§  CARICOM Tax Treaties   

CARICOM
(Caribbean Community) consist of any state or territory in the Caribbean
region, that is able and willing to exercise the rights and assume the
obligations of membership. The objectives of the community are to improve the
standard of living and work, enhance levels of international competitiveness
and to increase production and productivity among many other things. What makes
the CARICOM Tax Treaty unique is that it reserves final taxation of
non-resident investment income and business income to the source CARICOM
country, and disqualifies taxation in the recipients Caribbean of residence or
nationality. In contrast, most modern-day treaties follow the O.E.C.D model
treaty that exempts or limits taxation of investment income and business in the
source country, thereby reserving final taxation to a non-resident’s country of
residence or nationality. The most important feature of the CARICOM Tax Treaty
is that after-tax dividends pass free of withholding taxes between the CARICOM
member jurisdictions. The tax implications from such a treaty results in low
taxed investment income and business income earned in one CARICOM country can
be distributed by way of dividends to another CARICOM country completely
tax-free. Such dividends are totally exempt under the CARICOM Tax Treaty from
withholding tax in the source country and from taxation in the recipient’s
resident’s CARICOM country. For example, such dividend income received tax-free
in Antigua and Barbuda can then be passed either at a treaty-reduced dividend
withholding tax to a non-resident of Antigua and Barbuda treaty country, or
totally free of Antigua and Barbuda withholding tax depending on the type of
Antigua and Barbuda resident trust used.

 

§  Double Taxation

Double
Taxation is a taxation principle referring to income taxes paid twice on the
same source of earned income.  It can
occur when income is taxed at both the corporate level and personal level. It
also occurs in international trade when the same income is taxed in two
different countries. There is a tax treaty with the United Kingdom (UK) and a
double taxation agreement (DTA between member states of CARICOM, Antigua and
Barbuda included. It provides that persons in either the United Kingdom or
Antigua and Barbuda are entitled to relief from Corporate Income Tax (CIT) and Withholding
Tax (WHT). This is important because the treaty allows that where a UK resident
is liable to pay income tax in the United Kingdom in respect of the same income
that is taxable in Antigua and Barbuda, one will be entitled to relied at a
rate that is equal to the amount by which the tax rate in Antigua and Barbuda
exceeds one half of the UK rate. Secondly, if the tax rate in Antigua and
Barbuda exceeds the UK tax rate, then one will be entitled only to relief at a
rate equal to one half the UK tax rate.

 

§  International Business
Tax

An
International Business Corporation (IBC) is a tax-exempt company requiring only
one shareholder and one director who can be the same natural personal or legal
entity from any country. This can result to all foreigners owning all the
corporate shares in an IBC. An IBC is important because it can spur economic
growth within a country. It encourages International Investments, Global
Commercial trading, leasing worldwide assets and encourages International Trust
activities. Antigua and Barbuda have very strict banking confidentiality laws
making it criminal offense for any bank employee or IBC employee or associate
to disclose any banking information to unauthorized persons. These include
imprisonment and large fines. It is important to encourage IBCs because they
contribute significantly to an economy by creating jobs and sound economic
activity which provides greater returns to the government.

 

 

Ø Ethics
in Taxation

The
question could be asked, “Why do individuals resist tax compliance with their
tax commitments and why does this situation differ internationally?” Ethics is
the study of moral judgement and standards of ethics. It has six core values,
these are trustworthiness, respect, responsibility, fairness, caring and
lastly, citizenship. It is important for every participant, whether both the
agent, corporation or person to act honestly and with integrity. This involves
having an honest and professional business relationships. Ensure all
participants have fair dealings and there is no commitment to mislead or
deceive. Additionally, It is important to be truthful at all times.

It
is also imperative to comply the taxation laws in the conduct of both your
personal and business affairs. Therefore, report all income taxes, indirect
taxes, superannuation taxes just to name a few. It is important to avoid or
terminate clients who are determined to engage in unlawful activities and
ensure that all your taxes are up to date.

If
these conditions, not limited to these only, are not followed, could result to
being regarded as negligent or a direct disregard of rules or regulations. There
should not be any substantial understatement of income tax and any substantial
valuation misstatement. Finally, any substantial overstatement of pension
liabilities or estate or gift tax valuation 

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