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The IBA’s response to the situation in Ukraine
Joshua Mangeot
Harneys, Tortola
Edward Lacey
Harneys, Tortola
Alongside all other major zero- and low-tax international financial centres, the British Virgin Islands (BVI) introduced an economic substance (ES) regime in 2019 following European Union and Organisation for Economic Cooperation and Development (OECD) requirements.
The ES regime is set out in various pieces of legislation and official guidance. Broadly:
The ES requirements were outlined in Harneys’ previous article for the IBA of 22 April 2022[1].
All companies and limited partnerships (including foreign entities) registered in the BVI (Entities) are subject to certain ongoing obligations in connection with the ES regime. However, the extent and nature of those obligations varies widely depending on the activities and tax status of the relevant Entity.
Broadly, every Entity must do the following:
If an Entity carries on a ‘relevant activity’ and is not exempt due to its tax status, it will need to ensure compliance with the applicable ES requirements on a continuing basis. While this may be fairly straightforward in the case of an entirely passive ‘pure equity holding entity’, this may well require specialist advice in other cases – particularly in the case of any ‘intellectual property business’. Ultimately, responsibility for ensuring compliance falls on the Entity – and therefore its director(s) or general partner(s), as applicable.
We recommend that an Entity maintains robust written evidence (for example board minutes) supporting its classification under the ES Act and demonstrating how it has complied with applicable compliance and reporting requirements.
Following amendments in June 2022, the ITA Act requires an Entity to establish and maintain adequate systems and controls to ensure compliance with applicable requirements and obligations under the ES Act and the BOSS Act (as well as under a third act, the Mutual Legal Assistance (Tax Matters) Act, which is beyond the scope of this article).
As currently drafted, the ITA Act also introduces a requirement for Entities to establish and maintain a compliance procedures manual. The ITA has indicated that this is only expected to be implemented by the end of 2023, and that it will publish advance guidelines on compliance with this requirement. As of the date of this article, such guidance has not yet been published.
The ITA generally has six years from the end of a financial period to determine that an Entity has not complied with the ES requirements, subject to some limited exceptions.
We do not expect that every Entity will be investigated by the ITA. We understand the ITA will take a risk-weighted approach based on various factors – this may include ‘spot checks’ to examine the basis on which Entities have classified themselves for the purposes of the ES Act as well as investigating potential ‘red flags’ in reports.
Following an initial review, the ITA may determine either that:
Where the ITA requires further information, it may serve notice on any person, requiring the person to provide, within the period specified in the notice and at such place as is specified in the notice, such documents and information as the ITA may reasonably require for the purpose of facilitating the ITA’s exercise of its functions under the ES Act. The ITA cannot request information that is subject to legal professional privilege.
In practice, we would generally expect the ITA to request information from an Entity, its director(s) or general partner(s) (as applicable) or its registered agent, in the first instance.
The ITA also has broad physical investigatory powers under the ITA Act, such as the power to undertake physical compliance inspections, to examine persons under oath and to obtain search warrants, if required.
Failure by an Entity to identify whether it is carrying on relevant activity or to report the prescribed ES information without reasonable excuse, or the intentional provision of false information, is an offence carrying significant penalties. In limited circumstances, such offences may be committed by a director, officer or senior manager of the Entity, if they connive in or consent to the offence or fail to exercise all reasonable diligence.
Provided an Entity properly identifies and reports the prescribed ES information, there are broadly three ‘tiers’ of enforcement:
The ITA may take a wide range of other enforcement action (including issuing a warning letter or imposing an administrative penalty under the Regulations) in various circumstances under the ITA Act. Broadly, these are:
The ITA may also require a person to bear its costs and expenses incurred in conducting an investigation or taking enforcement action.
There is a procedure to appeal to court under the ES Act and the ITA Act. Broadly, the appeal must be filed with the court within 30 days of the penalty notice stating the ground(s) for appeal and notice of the appeal must be served on the ITA, which is entitled to appear and be heard at the appeal hearing.
The Court has the power to confirm, vary or revoke an administrative penalty or decision. However, filing an appeal will not operate as a stay on the obligation to pay any penalty imposed by the ITA.
[1] British Virgin Islands: economic substance requirements, Joshua Mangeot, Harney Westwood & Riegels, Tortola, accessible at www.ibanet.org/British-Virgin-Island-%20economic-substance-requirements