Tax law change impacts offshore sector

Friday 30 April 2021 | Written by Emmanuel Samoglou | Published in Economy, National

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Tax law change impacts offshore sector
TOKERAU JIM IMAGES/ 20112904.

A law that is beginning to take effect aims to preserve the country’s reputation in the offshore financial services sector, however it remains to be seen if it will stall efforts to grow the industry.

Sweeping changes to the way international companies are taxed in the Cook Islands are slowly beginning to take effect.

In response to an international effort aimed towards tax fairness and transparency, the Cook Islands government revised legislation in late 2019 that brings roughly 800 companies under the umbrella of the nation’s tax system.

Previously, the companies were not required to pay any tax in the Cook Islands.

Little is known of the companies, some of which have been described as holding companies or shell companies that hold ownership of other companies within their structures.

And government has yet to assess the effect the changes will have on the country’s tax revenues.

Earlier this month, government released a statement outlining the changes and the new tax obligations for affected companies.

The law, formally called the International Companies (Removal of Tax Exemption) Amendment Act 2019, was prompted by the European Union and criteria the bloc developed to promote tax fairness and transparency, said Xavier Mitchell, the director of the Ministry of Finance and Economic Management’s revenue management division.

“The legislation was changed to prevent the Cook Islands being listed by the EU as a non-cooperative tax jurisdiction,” Mitchell said.

“It is highly undesirable for the Cook Islands to be listed by the EU due to possible implications for the banking industry and the Cook Islands’ international relationships, arrangements and reputation.”

Mitchell said the EU’s list is influential and can be relied upon by international financial institutions and foreign governments.

As a result of the legislation, international companies registered in the Cook Islands will now be subjected to a tax rate of 20 per cent. The change came into effect immediately for companies registered after December 17, 2019.

International companies registered before that date are subject to a “grandfathering period” and must comply beginning in 2022.

Mitchell said prior to the change, international companies were not required to provide any information to government, thus little is known about them and how much additional revenue the government expects to collect by having them incorporated into the tax system.

Local accountant Mike Carr said he hoped the EU’s criteria were being applied to other notable offshore finance jurisdictions, particularly ones within the European continent such as Lichtenstein and Andorra.

Carr said he didn’t expect to see a substantial increase in tax revenue from the international companies, and predicted the change in law could result in some of the companies fleeing the Cook Islands.

“I would be surprised if there was a significant increase in tax,” he said. “There will probably be a migration of international companies.”

Carr’s prediction has already been realised for at least one such company. Yesterday, shareholders for a publicly traded investment company named Aberdeen Asia-Pacific Income Investment Company Limited voted to re-domicile the company from the Cook Islands to Singapore.

The company said in a media release that earlier this month its board was considering the move in response to the new tax law and “… to mitigate the tax effect on shareholders”.

Marie Francis, chief executive officer of Cook Islands Finance – formerly known as the Financial Services Development Authority – said a positive reputation for the financial services sector and following international standards were vital in making the changes to legislation.

“International companies may choose to re-domicile, however the EU ‘good governance’ changes are being implemented by all international financial jurisdictions,” Francis said.

“There is a move internationally to changing what are considered to be harmful tax practices and ensuring that there is a fair taxation system. The changes to our tax legislation are consistent with international developments.”

Francis said a working group including herself, trust company representatives, the banking sector, and government officials, has been put together to assess how the law will affect the financial services sector.

Government has recently developed a strategic plan to further develop the sector.

In the next five years, government is aiming for a 50 per cent increase in the industry’s contribution to Gross Domestic Product (GDP) with a 30 per cent increase in employment.

According to the government’s 2020-2021 Budget documents, the sector’s contribution to GDP fell from $34.8 million in fiscal 2016-2017 to $27.1 million in 2018-2019.