Withholding tax option
Changes to the BVI position
On July 12 2011 the government gazetted the Mutual Legal Assistance (Tax Matters) (Automatic Exchange Information) Order 2011, which changes the way that the British Virgin Islands complies with the directive.
Under the order, the British Virgin Islands will transition, as of the tax year commencing January 1 2011, to the group of countries and territories that comply with the directive through the automatic exchange of information on savings income with tax authorities in EU member states.
The directive is designed to facilitate the exchange of information on individuals' savings income between the tax authorities of EU member states. Under the original legislation, EU member states were required to implement the directive in their offshore dependencies even though virtually all of these dependencies are not part of the European Union. Consequently, the United Kingdom arranged implementation in its overseas territories and crown dependencies, including the British Virgin Islands.
The directive and associated legislation provide that institutions, termed 'paying agents', must report certain minimum information about savings income to their local tax authorities. The local tax authority in turn discloses the information received from the paying agent to the tax authority where the individual is resident. The minimum information required for these purposes consists of the following:
- the identity and residence of the beneficial owner;
- the name and address of the paying agent;
- the account number of the beneficial owner or, where there is none, identification of the debt claim giving rise to the interest; and
- information concerning the interest payment.
Despite the information exchange policy at the heart of the legislation, until recently both the directive and the act entitled paying agents based in certain jurisdictions, including the British Virgin Islands, to impose a withholding tax as an alternative to the minimum information disclosure requirement.
Under the withholding tax option, paying agents would not be required to disclose the minimum information to the local tax authorities. They would instead withhold a percentage of the income due and deliver this via the local tax authority to the relevant foreign tax authority.
The withholding tax option was added to the directive to appease the governments of certain EU member states which did not initially favour information exchange. Consequently, the non-EU jurisdictions required to implement the directive, including the British Virgin Islands, were also given this option.
When the directive was originally introduced, the BVI government decided to implement the withholding tax option as a requirement to be imposed by all BVI-based paying agents instead of requiring or permitting information exchange, as this was seen to be in the British Virgin Island's interest at the time.
The new order provides that from January 1 2012, BVI-based paying agents will no longer be subject to, or be able to rely on, the withholding tax option as a way of complying with the directive.
As such, BVI institutions will be obliged to disclose the minimum information to the BVI Inland Revenue, which in turn will comply with the information exchange policy under the directive.
The order's changes will be most relevant to individuals who are resident in an EU member state and who maintain savings accounts with banks in the British Virgin Islands. Persons who do not meet both of these requirements are less likely to be affected by the legislation.
From August 2011 the Financial Services Commission website lists the following institutions as licensed to carry out banking business in the British Virgin Islands: Banco Popular de Puerto Rico, Firstbank Puerto Rico, First Caribbean International Bank (Cayman) Limited, London International Bank and Trust Company Ltd, National Bank of The Virgin Islands Limited, Scotiabank (BVI) Limited and VP Bank (BVI) Limited.
For further information on this topic please contact Ross Munro at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email ([email protected]).