Reported by Nicholas Kuria

In this review of taxation and the British Virgin Islands, Conyers Corporate Counsel Nicholas Kuria discusses some of the most commonly misunderstood notions relating to the use of offshore jurisdictions, with a focus on the BVI.

We will begin with an overview of the tax position. The British Virgin Islands has no corporate tax, capital gains tax, wealth tax, or any other tax applicable to a British Virgin Islands company. These companies remain exempted from income taxes and stamp duties regarding all instruments or deeds relating to company business, including the transfer of all property to or by the company and its securities transactions.

The designation “tax-neutral jurisdiction”, however, in no way corresponds to a jurisdiction nefariously used by individuals and companies to conceal income and assets from tax authorities in other jurisdictions. The British Virgin Islands has implemented measures to comply with global standards in the sharing of tax information. Its International Tax Authority was established by the International Tax Authority Act 2018. The functions of the tax authority include monitoring British Virgin Islands compliance with international obligations in cross-border tax matters and administering and monitoring compliance with mutual legal assistance legislation.

Almost ten years ago, on 30 June 2014, the British Virgin Islands and the United States signed an agreement to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA), introduced by the United States in 2010 as part of the Hiring Incentives to Restore Employment Act (U.S. IGA), based on the Model 1B (nonreciprocal) intergovernmental agreement. FATCA is a federal law of the United States, but it does have extraterritorial effect that extends to the British Virgin Islands.

To comply with FATCA, a British Virgin Islands foreign financial institution is required to report information on U.S. taxpayers’ accounts to the IRS. The U.S. IGA facilitates FATCA reporting for the British Virgin Islands by allowing reporting to be made directly to the International Tax Authority, which then passes the information to the IRS.

On 28 November 2013, the British Virgin Islands and the United Kingdom effected an agreement to improve international tax compliance (U.K. IGA) that facilitates similar reporting to the United Kingdom. The shared objective of the U.K. IGA and the U.S. IGA is the automatic exchange of information between the British Virgin Islands and the United Kingdom and United States, respectively.

The British Virgin Islands was also one of the first countries to adopt the common reporting standard (CRS) developed by the OECD and approved by the G20 as the global standard for the automatic exchange of information. Under the CRS, jurisdictions are required to obtain financial account information from their financial institutions and automatically exchange this information annually with partner jurisdictions. The British Virgin Islands implemented the CRS within local legislation through the Mutual Legal Assistance (Tax Matters) Act 2003 (as amended, the CRS Act), enforced by the International Tax Authority.

Under the Mutual Administrative Assistance in Tax Matters Convention, extended to the British Virgin Islands on 4 September 2013, and effective 1 March 2014, all British Virgin Islands financial institutions are required to identify account holders’ tax residencies and other financial information and submit reports to the International Tax Authority via the British Virgin Islands Financial Account Reporting System. This information is exchanged automatically by the International Tax Authority with relevant tax authorities in CRS jurisdictions. As evidence that the International Tax Authority is enforcing CRS Act compliance, the International Tax Authority in May 2020 issued notices to financial institutions, requiring them to produce copies of their CRS compliance policies and procedures for inspection.

Transparency in tax matters is part of the British Virgin Islands’ international financial centre model. The jurisdiction is party to various tax information exchange agreements. TIEAs are bilateral agreements negotiated and signed between two jurisdictions to establish a formal regime for the exchange of information relating to civil and criminal tax matters. For example, on 29 October 2008, the British Virgin Islands and the United Kingdom entered into a TIEA that authorizes the automatic exchange of information for tax purposes. The British Virgin Islands has over 100 TIEAs in place with other jurisdictions, with over 1,000 information requests (and counting) having been filled.

The British Virgin Islands has also implemented country-by-country (CbC) reporting as part of action 13 of the OECD’s base erosion and profit-shifting project. CbC reporting was adopted under the Mutual Legal Assistance (Tax Matters) (Amendment) Act 2018, which amended the Mutual Legal Assistance (Tax Matters) Act 2003. The 2003 Act, as amended, imposes reporting and registration requirements on multinational enterprise groups with consolidated group revenues of at least €750 million in the preceding fiscal year. Any business unit or permanent establishment of a Multinational enterprise (MNE) group that is tax resident in the British Virgin Islands will be subject to reporting and registration requirements.

In particular, British Virgin Islands constituents must file a CbC report to the International Tax Authority by no later than 12 months after the last day of the MNE group’s reporting fiscal year. The CbC report must contain a breakdown of revenue, profits, taxes, and other indicators of economic activity for each tax jurisdiction in which the MNE group does business. The International Tax Authority will automatically exchange CbC reports with tax authorities of TIEA partners.

Contrary to popular belief, British Virgin Islands entities are not used for tax avoidance through tax treaties, and company and individual tax liabilities to onshore tax authorities are not unlawfully reduced. This is because, unlike some other jurisdictions, the British Virgin Islands is not a party to any tax treaties. The shareholders of a British Virgin Islands company are liable for the appropriate taxes in the relevant jurisdictions in which such persons are tax residents. No additional tax is levied by British Virgin Islands tax authorities.

Read full report: https://www.conyers.com/publications/view/tax-and-the-british-virgin-islands-separating-myth-from-reality/