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essentially requires each legal entity to analyse its operations and circumstances to be able to assess whether the test is met and to report accordingly. The Code provides some guidance on the practical application of the substance regime. Whilst it does not define the above terms, in practice there will need to be some degree of proportionality applied to the size of the entity’s business. The ESA is not meant to require any entity to engage more employees, have more premises or incur more expenditure than it needs, and local companies (having their staff, place of business and incurring expenses in the BVI) should be able to easily demonstrate substance. Ultimately the aim of the ESA and the Code is to ensure that BVI entities conducting relevant activities have real substance within the BVI, rather than being used to enable structures with artificial arrangements with entities in countries with higher rates of taxation (which reduces the amount of income that is subject to taxation in those countries). Penalties The penalties for a legal entity failing to meet the substance test are an initial fine of up to US$20,000 (US$50,000 for certain IP related legal entities). Ongoing failure to meet the test could lead to an additional penalty of up to US$200,000 (US$400,000 for certain IP legal entities) and may also lead to the legal entity being struck off. Failure to provide substance information could, in itself, lead to a fine of up to US$75,000 and up to 5 years in prison. Outsourcing The Code helpfully provides further guidance around outsourcing, which is likely to be of particular relevance for holding business. A legal entity may outsource CIGA to a third party (such as a BVI registered agent (RA)) and count this towards compliance with substance requirements provided that: • the third party carries on that activity in the BVI; • records are kept evidencing the work carried on for the legal entity; and • the outsourced activities are monitored and controlled. Indeed, for passively managed holding business, it is difficult to see what else it would need other than a BVI registered office and RA that can consciously allocate one of its staff to administering that entity and recording this. In such circumstances, this may be sufficient to comply with the substance requirements. Whilst the Code is still in draft and there may be some further updates, particularly around the requirements

for CIVs, it is clear that the ITA expects legal entities and their agents and advisers to rely on it. Timing for reporting Legal entities existing before 1 January 2019, have until 30 June 2019 to comply with the regime, but should ideally be assessing now whether they meet the substance test so that they can report accordingly 6 months after the end of their relevant financial period. For example, the first reporting deadline under the regime, for legal entities having a financial period ending 29 June 2020 would be 29 December 2020. Reporting via the BOSS System The Beneficial Ownership Secure Search System (BOSS System), established in 2017, to enable the automatic exchange of beneficial ownership information, is being extended for legal entities to report their substance-related information. The ITA will also use it to monitor compliance with the ESA. All legal entities are responsible for providing accurate and complete substancerelated information, including: • identifying the relevant activities (if any) carried out; • confirming their jurisdiction of tax residence (and if they are resident outside the BVI, providing supporting evidence); • if they carry out relevant activities and are not tax resident outside the BVI, providing information to evidence if they meet the economic substance in relation to each relevant activity they undertake. Legal entities will need to provide the above information to their RA for each relevant financial period. Currently, it appears that the RA will only be responsible for taking reasonable steps to request and collect the information from legal entities and to submit the information (in the same way that RAs currently submit beneficial ownership information via an RA database). At the time of writing, we understand that the ESA will be amended to make this clear. The RA database and the BOSS system are not public, but may be searched by, among others, the ITA and overseas law enforcement authorities. In addition to monitoring and determining compliance with the regime, the ITA will be required to disclose economic substance information to relevant overseas competent authorities. BVI’s Opportunity This new substance regime means that the level of substance of a number of BVI entities must increase within the BVI. In a recent speech to members of the BVI Investment Club, Lorna Smith, OBE and former CEO of BVI Finance,

said that facilitating economic substance could be “transformational for the BVI”. At a minimum, expansion of local direct services, such as managed office space, local directors, qualified and experienced employees, the ITA and related capability, will all be needed as well as all of the ancillary services associated with ensuring businesses and their people are supported. To meet this expectation will mean, maintaining a high standard of living with access to quality accommodation, both short and long term, ease of transportation, delivery of basics of life – food, electricity, general goods and services, telecoms, health, education and infrastructure generally. The opportunity here for the BVI, is the improvement and expansion of the local business environment for both immediate and longer term sustainable economic growth. Challenge The sort of action the BVI needs to take to move it to the next level of competitiveness present nothing particularly new. The 2014 McKinsey Report “Building on a thriving & sustainable Financial Services Sector in the British Virgin Islands” set out a number of priority recommendations for the BVI financial services industry, which hold true. These priorities all remain fundamental to a strong and globally competitive platform for BVI business. Bearing in mind the McKinsey recommendations, the following are key deliverables for the BVI to position itself to take advantage of the opportunity presented by the ES regime and which will also encourage yet more business to come: • enhanced customer service levels in both the public and private sectors across specialised financial services business as well as local service and supply chains, together with a co-operative approach to the facilitation and regulation of international business; • a welcoming and collaborative local business environment, that effectively and efficiently taps into global intellectual, financial and human capital, whilst ensuring that local talent is nurtured by such capital; • incentivising and prioritising business requirements for the financial services industry, as well as those relating to the supply of local goods and services and social needs (eg medical facilities, schools, quality roads, effective waste and sewerage disposal, quality rental and other accommodation); • investing in infrastructure and services: world class telecoms and efficient access to the BVI by sea and air are important to attract

global business to carry on with enhanced presence in the BVI. This in turn stimulates local economic growth and prosperity for the Islands’ residents; and • building on and improving local capability through enhanced education and targeted curricula. This is certainly a longer term ambition, but will set up generations to come to lead the way in the growth and further development of the BVI. Specifically Sustainable growth and the ability to effectively continue a world class environment for more substantive business will require: • strong and strategic Government leadership; • targeted and committed investment from both the public and private sector; • active collaboration between the Government and all stakeholders; • harmonisation of Government departments; • business-friendly policies, efficient trade/business licence processes and labour and immigration procedures - critical to attract and retain the skills needed to provide the required services and valueadded businesses • sophisticated educational opportunities to increase and support the local talent pool to ensure the future of the BVI’s growth and development is led by the next generation; and • understanding from those living in the BVI of the significant part the financial services industry plays in enhancing prosperity and quality of life. The opportunity is right now The economic substance regime is already in effect in the BVI. There is a relatively short window of opportunity for the BVI to work on the infrastructure and systems it needs to capitalise on the significant opportunities brought by this regime. The opportunity is huge. Even if just a tiny fraction of all the BVI business companies and limited partnerships each set up a substance operation in the BVI, it will be a game changer for the local economy and its residents. The BVI has always been flexible and ultra-responsive as a jurisdiction when implementing and complying with ever-changing international best practices. There is absolutely no reason, with sufficient and dedicated support from all stakeholders, why the Territory cannot build on this successful approach, and for its economy and inhabitants to continue to prosper as a result. | BB



Profile for Business BVI

Business BVI July 2019  

The theme for the July 2019 edition is ‘A View Beyond the Horizon’, which is intended to reflect where the territory is post 2017, while at...

Business BVI July 2019  

The theme for the July 2019 edition is ‘A View Beyond the Horizon’, which is intended to reflect where the territory is post 2017, while at...