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In the nineties and noughties companies increasingly adopted international business structures that minimised bricks, mortar and personnel located “onshore”. This was not just “offshoring” in the sense of locating manufacturing in countries with low wage costs; it meant a minimisation of structure in those countries, with high local costs, tax rates and social benefit costs, where the end-user for the service was located.

Whether the structure was a commissionaire sales structure with subsidiaries being small and acting as sales facilitator but not biller, or a re-invoicing centre, or using shared service centre in a low-cost location, the principle was to detach the cost base of delivery from the revenue potential of the end-user market.

Put another way, it involved billing into a country as a non-resident, maintaining a low in-country tax base, but nevertheless enjoying a sharing of the wealth of that country.

Now, via various means, the principle is under attack, under the banner “if you want to share in the wealth of this country, you need to share in the costs as well”. These various means are barriers erected in the way of running a “lite” business structure.

On a very public level, countries such as the US, Germany and France (which have relatively high public costs, public debt and tax rates) have sifted other countries into lists of black, grey and white countries as a crude measure of tax rate disparity. As an example of this process in action, the current discussions about anew fiscal discipline treaty for the Eurozone put the Irish Republic’s 12.5% mainstream corporation tax rate firmly in the crosshairs.

The UK is considering awarding itself wide anti-avoidance powers to look through a company’s tax returns and reconstrue intercompany pricing and the structuring of transactions, so as to increase onshore taxable profits without reducing what is paid offshore. The presence of ‘blacklist’ or ‘greylist’ countries in the company’s invoicing chain is, in such circumstances, taken as prima facie evidence of failure to observe arm’s-length treatment, over-pricing deductible costs onto the onshore subsidiary so as to maximise offshore profit. One could see a wider introduction of a practice known in Argentina, where every two weeks there is a new list of “criteria values”, i.e. a list of maximum import/export prices.

But the attacks are also more subtle. Italy recently introduced a requirement that a non-resident wanting an Italian bank account has to obtain an Italian Non-Resident Tax ID, in other words a surveillance mechanism to record whether local trading takes on a scope where the company is benefitting from Italian wealth by making sales, without making a contribution to Italian costs.

In a country like Argentina it is not possible to do business as a non-resident at all. At most there is a 90-day transitory period during which a non-resident bank account can exist, before a local legal entity must be founded, with a locally-based legal representative, and the account is converted into resident status.

In Brazil non-resident bank accounts are permitted in theory, but every transaction across the account that is over R10,000 carries with a reporting requirement to the Banco do Brasil with supporting documentation: for a bank wishing to offer the service the IT and operational obstacles are considerable. And in reality this measure is meant to deter foreign companies from taking a slice of the local market as revenue without establishing a tax base through which they contribute to costs.

The other aspect in the banking world is the rising information requirements to get a bank account open, both generally and then specifically raising the bar for non-residents. On the general level it is the disclosure on subjects such as Beneficial Ownership and Politically Exposed Persons, and for non-residents it is the lengthy new forms that banks are introducing, which in turn call for documents that may have to be translated and notarised, and have the apostille attached. Lastly it is banks desiring to know the main suppliers and customers of each legal entity, which exposes the invoicing chain and where profits are being concentrated.

Whilst all banks are having to comply with global guidelines on Customer Acceptance and Customer Identification, it is noticeable that the requirements in ‘blacklist’ and ‘greylist’ countries, far from being soft, are becoming more stringent than in ‘whitelist’ countries – and this is precisely a reaction of the authorities there to having being placed on those lists, betokening a desire to prove themselves Persil-white.

That makes the banking side more difficult to establish in those countries that would have been used as concentration points for profit.

There has also been an attitude shift in the banks regarding their degree of effort to support a customer’s structure where it involves such countries. The attitude is characterised by a heightened concern about the institutional reputation risks of being associated with a customer that is revealed and portrayed by the media as “not paying their fair share of taxes”. This translates on a personal level to a reluctance on the part of bank employees to have their own names associated with proposals to do business that go against the prevailing trend. The upshot institutionally reveals itself in various forms:

  • Not having a department that deals with this form of international banking at all, since it becomes classified as a Non-Core activity;
  • Only willing to insert credit facilities into the companies with real substance, and not into offshore subsidiaries which may be where the credit is needed if the company’s structure is to be optimised for P&L and tax;
  • Adopting a policy that puts the onus on the professional advisers to the customer to set up the banking needed to underpin the business structure they propose.

Since companies seek advice about such structures, and particularly where it is the adviser that “drives the bus” on the design of the structure, banks may take a hands-off attitude. In simple terms this translates as “well, if the adviser thinks it is such a great idea, get them to open the bank account in each country, and sort out electronic account reporting back to your head office, and access for payment initiation etc”.

To sum up, then, three trends are in evidence:

  • Governments taking ever greater interest in companies that sell into their country but pay very little tax, which is a move away from a stance that could be characterised as “we prefer 30% of something than 100% of nothing” and in the direction of “no representation without taxation”;
  • Bank KYC/KYB tests on non-residents becoming more stringent, and not being so flexible as to which company in the corporate tree to lend to;
  • Banks exiting what they are classifying as non-core businesses, into which bucket would be placed businesses that have a flavour of “offshore”.

The upshot is pressure on companies to locate more staff, activity and profits “onshore” in the major industrial companies, as the price of market access, a reversal of the trends of the last 20 years.

Bob Lyddon, Managing Director, IBOS Association:

PDF of Cititrust EDGE Q1 2012 article

Link to Cititrust EDGE Q1 2012 article online