Overview of Tax Compliance on British Virgin Island
British Virgin Islands (BVI) is located in the northeastern Caribbean and consists of 50 islands. It is one of the best tax havens providing several tax benefits to non-residents or foreigners who invest in BVI. As BVI is a tax-neutral jurisdiction, it is a go-to destination for offshore companies. BVI is a tax haven country and does not impose taxes on income, capital gains, or withholding taxes on companies and individuals. No income tax return is filed, or taxes are paid on income. However, BVI companies are required to maintain financial records and file underlying documentation to show their transactions and pay annual fees to the government based on the authorized capital of the company. A stamp duty at the rate of 0.15% is also paid on mortgage, charge, and debentures over BVI land and property.
An important aspect of BVI tax compliance is that BVI has implemented the economic substance requirement. Business entities such as companies and limited partnerships have to comply with the economic substance requirement to meet international standards of tax transparency and combat tax evasion. The Economic substance requirement requires certain companies such as banking, insurance, intellectual property, shipping, and holding company activities to demonstrate adequate economic substance of their business in BVI. Failure to meet these requirements attracts penalties and fines. Another important aspect is that even though no income tax applies to a BVI company, any income generated by the company is subject to taxes in the jurisdiction where the income arises. Further, the beneficial owner of the company is subject to taxes in the country of residence. Tax Implications of operating a company in a country should be understood clearly with the help of tax professionals.
Taxation in the British Virgin Islands
- BVI is referred to as a tax haven because it promotes the avoidance of all kinds of taxes. The tax system of BVI encourages payment of the least possible tax. BVI is often called the grandfather of all International Business Companies (IBC) as the concept of IBC emerged from BVI itself and since then it has been adopted by various jurisdictions across the globe. IBCs are exempt from profits and capital gains taxes.
- The BVI Companies Act of 2004 governs offshore companies incorporated in BVI. This Act provides that the dividends, interests, rents, compensation, royalties, and any other amount paid by the company are exempt. It also covers capital gains realized from the company's shares, debt obligations, and other securities which are completely exempt from income tax provisions.
- BVI has a very advantageous taxation system and it does not levy corporate tax, corporate gains tax, or tax on investment income. This makes BVI effectively a tax-free jurisdiction. All business companies are statutorily exempt from taxes however, an annual license fee is applicable.
- No withholding tax is applicable on dividend, interest, and royalty payments to non-residents.
- No direct personal taxes are levied in BVI. Personal income, capital gains, net worth, and inheritances are also exempt from taxes.
- Regardless of the source of income, the business companies in BVI are tax-free. The only applicable tax is the BVI payroll taxes applicable at the rate of 10%. It applies to businesses that employ local workers. In payroll taxes, the first USD 10,000 is tax-free.
- Stamp duty at the rate of 12% is levied on real estate transactions for non-BVI citizens. For citizens of BVI, the rate of tax applicable on stamp duty is 4%.
- The BVI has no double taxation agreements with any country. It implies that no information regarding income, profits, or other transactions of any BVI business company will be disclosed or shared.
- BVI in its fight against tax evasion and to improve its tax compliance has signed a Model 1B Inter-Governmental Agreement with the Government of the United States. This agreement is known as the US FATCA Agreement which stands for the United States Foreign Account Tax Compliance Act Agreement. This agreement facilitates reporting of financial accounts held by US Taxpayers or foreign entities in which those taxpayers have substantial ownership interest, This reporting is to be done by the BVI Financial Institutions.
Annual Reporting Requirement
The BVI International Tax Authority does not impose strict Annual Reporting Requirements. Unless a company has been incorporated locally, no financial statements or company accounts are required to be prepared. Nonetheless, companies should maintain records and accounts in the local registered office. Even though financial reporting is not necessary, the companies are required to submit information pertaining to the business activities to the registered agents on an annual basis. The annual return should be filed not later than the completion of 9 months from the end of the fiscal year.
The BVI Business Companies Act requires all BVI companies to file an Annual Financial Return to their Registered Agent. It is a one-page report consisting of an Income Statement and a Balance Sheet. All companies are also required to retain accounting records. The register of directors and the register of shareholders should be updated frequently. According to the recent amendments, these are applicable from 1st January 2023 and onwards.
Payroll Taxes and Social Security
Employers and self-employed persons conducting business in BVI are required to pay payroll taxes and social contributions. Payroll Taxes and Social Contributions are levied at the rate of 10% for small businesses and 14% for large enterprises. Payroll taxes are exempt for the first USD 10,000. Payroll taxes at the rate of 8% can be refunded at the expense of the employees. In addition to the payroll taxes, social security is contributed by both employers and employees at the rate of 4.5%.
FATCA Reporting Requirement
FATCA is a tool to fight tax evasion and ensure adherence to tax rules. The objective of FATCA is to identify and prevent offshore tax avoidance by U.S. citizens or residents. As per FATCA, all financial institutions must notify the US Tax Department of any attempt made by a US person to evade tax. FATCA permits financial institutions to withhold taxes if the US person refuses to meet the documentation requirement. In this regard, the BVI tax authority notified the financial institutions that obtaining the U.S. Taxpayer Identification Number (TIN) is mandatory for all reportable accounts with FATCA reporting requirements. The TIN information has been made applicable from the 2020 reporting period and onwards. In addition to this, the BVI tax authority is also conducting an internal review of filings to ensure financial institutions are following the TIN requirement. The information required to be reported under FATCA is as follows:
- Account Information
Details of every financial account held by the taxpayer along with the name of the financial institution where the account is held, the account number, and the maximum amount held in the account in that financial year.
- Taxpayer Identification Number
The details of the US taxpayer's TIN which could be the social security number or the TIN should be provided.
- Country of Residence
The details regarding the taxpayer's country of residence and the countries in which the foreign financial accounts are located.
- Signature Authority
Information on whether the taxpayer has signature authority over foreign financial accounts should be provided.
Details regarding foreign assets, foreign pensions, stock holdings, partnership interests, financial accounts, mutual funds, hedge funds, issued life insurance, and real estate held via a foreign entity should be reported to IRS.
All the above information is provided under FATCA which must be filed annually with the IRS under Form 8938.
What are the steps to ensure compliance with FATCA?
Steps to ensure compliance with FATCA are as follows:
Step 1: Determine the status of FATCA
The first step for the companies is to determine the status of foreign financial institutions or non-financial foreign entities under FATCA.
Step 2: Register with Internal Revenue Service (IRS)
The second step for the companies is to register with the IRS and obtain a Global Intermediary Identification Number (GIIN).
Step 3: Due Diligence
Due Diligence is conducted by companies on existing and potential clients to identify the U.S. Clients and their reportable accounts. It involves reviewing client documentation and records like passport or tax identification numbers.
Step 4: Report Information
Information regarding U.S. clients and their reportable accounts is required to be reported by the companies to the IRS on an annual basis.
Step 5: Withholding Tax
Companies are required to withhold 30% of payments made to non-compliant foreign financial institutions.
Step 6: Stay updated
Companies must stay up-to-date with the FACTA regulations and reporting requirements as it is dynamic and subject to change.