spring 2017 newsletter - nedbank€¦ · oil price rose sharply, boosting inflationary expectations...

In time, 2016 will be viewed as a momentous year in terms of change to the world order. As well as Brexit and the US election result, we have now moved into a global tax transparency era and governments have been amending tax rules, especially for two of our main markets, the UK and South Africa. The low/zero/negative interest rate environment has prevailed since the financial crisis in 2008/9 and currency markets remain volatile, significantly affecting performance in what has been a positive equity performance year.

We hope you find the articles in this communication enlightening and that they help to demystify what can be complex subject matters. They should also demonstrate that, in most instances, trust structures are still very relevant and continue to add value to your financial planning arrangements.

We look forward to meeting with clients during 2017 and have published our anticipated international travel plans, to assist you in taking advantage of our service trips this year, should you not be able to meet us in our islands where you are always welcome.

2017 SPRING EDITION

OFFSHORENEDGROUP TRUST LIMITED

INSIDE THIS ISSUE

OVERVIEW OF CURRENT POSITION 1

2016 GLOBAL MARKET REVIEW 2

2017 GLOBAL OUTLOOK 3

MEET YOUR TRUSTEE 4

AN UPDATE ON THE FORTHCOMING CHANGES IN UK TAX LEGISLATION 5

COMMON REPORTING STANDARD (CRS) UPDATE 7

CUSTOMER DUE DILIGENCE 8

LOANS BY SOUTH AFRICAN RESIDENTS TO FOREIGN TRUSTS 10

FEES 2017 12

TRIPS 13

CONTACT US 14

2017 SPRING EDITION PAGE 2

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2016 GLOBAL MARKET REVIEW

2016 was certainly not dull! Markets started the year horribly, due to concerns about a falling Chinese yuan, a sharply declining oil price, and weak economic data releases in the United States. All this led investors to factor in a rather unappealing combination of slowing global growth (from already sluggish levels) and deflation. Subsequently, the US Federal Reserve backed away from expected interest rate rises, allowing a recovery in risk appetite. However, we then had the surprising Brexit vote in the United Kingdom, followed by the equally if not more surprising Trump victory. Ironically, even if you were smart (or lucky) enough to predict these events, it was still hard to profit from them, as investors that had reduced risk ahead of these events would have no doubt missed out some of the subsequent strong rally in equities.

This was especially true after Donald Trump’s unexpected victory in the 45th US presidential election. This regime change at the top of US politics sparked a significant shift in performance trends across most asset classes. Ahead of the result, many thought a Trump victory would trigger a bout of risk aversion, which would hurt equities and benefit safe havens, such as government bonds and gold. However, once Trump’s victory was realised, markets promptly did precisely the opposite of those predictions. Investors chose to gloss over worries regarding potential trade and immigration tensions, and instead focussed on the likelihood that tax cuts, infrastructure spending and deregulation would boost US and global growth in 2017. Against this background, interest rate expectations quickly adjusted to reflect the increased likelihood that the Federal Reserve would raise interest rates at its December meeting. Janet Yellen duly obliged on the 14th of December with the announcement of a quarter point increase.

Aside from the US election and Brexit, another noteworthy event of 2016 was the late November OPEC-led accord to cut global oil production in an effort to boost its price. This was the first agreement of its kind in over eight years, and the successful outcome came as something of a surprise to the market since many were sceptical that the major players, such as Saudi Arabia and Iran, could find enough common ground to reach a deal. In response, the oil price rose sharply, boosting inflationary expectations and adding to the growing pressures within the bond markets.

In aggregate, equities rose by +7.9% in 2016, according to the MSCI All Country World Index measured in US dollars. Amongst the majors, Emerging Markets (+11.2%) and the US (+10.9%) led the way, while Japan (+2.4%), UK (-0.1%) and Europe ex UK (-0.6%) were the most significant laggards. At the sector level, cyclical sectors continued to outpace stable earners. Rising commodity prices boosted Energy (+28.6%) and Materials (+24.0%), while Financials (+12.9%) were helped by a margin enhancing rise in longer term interest rates. In terms of style, Value (+13.4%) clearly outpaced Growth (+3.6%), while Smaller companies (+12.0%) outperformed Larger Companies (+7.9%).

It was definitely a year of two halves for bond markets. While government bond markets rallied strongly in the first half of the year, supported by concerns regarding deflation, weak growth and central bank easing, the exact opposite was true in the second half of 2016. A steepening of yield curves saw sizable price declines in both government and investment grade corporate bonds, especially amongst longer dated / more interest rate sensitive issues. Over the year, the JP Morgan Government Bond Index rose +3.7%, while the Merrill Lynch Global Investment Grade Corporate Bond Index rose +6.1%. However, improving global economic momentum in the second part of the year, the recovery in the oil price, and hopes that Trump’s policies would provide a reflationary boost to growth, all proved beneficial to emerging market and lower quality corporate bonds; as witnessed by the strong gains in the JP Morgan Emerging Market Bond Index (+10.2%) and Merrill Lynch Global High Yield Bond Index (+16.2%).

Although the Bloomberg Commodities Index rose a healthy +11.8%, the headline number masked significant differences across the sub-sectors. Energy (+16.3%) and Industrial Metals (+19.9%) were boosted by the talk of accelerating growth and an improving supply / demand balance. Gold managed to post a gain of +7.7% despite falling sharply in the second half of the year, as increasing bond yields effectively raises the opportunity cost of holding an asset class devoid of any cash flow. Agriculture (+2.1%) was the laggard, as favourable growing conditions raised supply which weighed on grain prices such as Wheat (-24.1%) and Corn (-9.8%).

OFFSHORE 2017 SPRING EDITION NEDGROUP TRUST LIMITED


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The US dollar rose over the period, boosted by the further divergence of the monetary policies being pursued by the different central banks. Although relatively broad-based, dollar strength was particularly marked against the British pound (+19.4%) and the euro (+3.0%), as the rise in US interest rates contrasted most starkly with the quantitative easing policies being pursued by the Bank of England (post Brexit) and the European Central Bank. Finally, improved sentiment towards emerging markets allowed a number of their currencies to recover more ground, with the South African rand (+11.3%) and the Brazilian real (+17.8%) both appreciating strongly. However, this recovery was very country specific as highlighted by the sharp decline in the Mexican peso (-19.8%).

Notes: All monthly data is quoted in US dollar terms unless otherwise stated.

2017 GLOBAL OUTLOOKIncreasingly we are seeing signs of a shift in emphasis between monetary and fiscal policies. Central banks have arguably done most of what they can do to boost economic growth through their interest rate and bond-buying initiatives. Now many are looking to governments to provide further impetus by relaxing their tax and spending policies. The underlying message of voter dissatisfaction delivered through the Brexit referendum and US presidential election has not been lost, with politicians in both countries talking about relaxing fiscal policy with the aim of boosting growth and productivity. Whilst the UK and the US may be the first, others will probably follow. In aggregate, we expect global real GDP growth to rise towards 3% in 2017, driven largely by strong US momentum, better than expected UK growth, and further improvement across the emerging markets.

We also expect core inflation to rise as employment increases and wage growth accelerates, most notably in the US. Higher oil and commodity prices, along with some material currency shifts, are likely to add to this inflationary pulse. In response, some central banks (most notably the Federal Reserve, but perhaps also the Bank of England) will look to raise interest rates modestly as the year progresses.

With growth accelerating, and deflationary pressures waning, we expect corporate earnings to be stronger in 2017 than the paltry offerings seen in 2016. This shift ought to be supportive for equities, but will also probably be a headwind for government bonds. While we can no longer describe equities as absolutely cheap, the “equity-bond yield gap” (a standard measure of their relative valuation) continues to suggest that shares offer the best value. Therefore, in our view, it is most likely that equities will outperform bonds in the coming year.

Within equities, the cheaper markets continue to be Europe, the UK, emerging markets and Japan, with the US commanding a premium due to its better corporate profitability and stronger macro-economic backdrop. While we have maintained a global approach to our strategy, our portfolios currently favour the better value non-US markets, which is mostly derived from the positioning of our underlying equity managers.

Within the fixed income portion of our strategies, we continue to have a strong focus on higher yielding, shorter dated corporate bonds. These are most positively impacted by better corporate earnings, but relatively insulated from the risk of rising interest rates. By the same token, exposure to expensive and potentially quite vulnerable longer dated government bonds has been minimised.

In other areas, we have a number of investments that offer high and reliable cash yield, but also have earnings that are either fully, or partially, linked to inflation. Amongst these holdings, commercial property (eg, FCPT and Standard Life) and infrastructure (eg, 3i Infrastructure) both have these characteristics, which should allow their value to grow even as they pay out above average dividends.

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Some reading this might not know that our Nedgroup Trust Limited offices are located in Guernsey and Jersey, which are the two largest of the Channel Islands, located in the English Channel and closer to France than to England. Each island is independent politically, we have our own governments and coinage and both have earned world-renowned reputations as financial jurisdictions of excellence.

The size of our islands will probably come as a surprise to most. Guernsey is just 24 square miles or 62 square kilometres, but is home to around 63,000 people. Jersey is the largest of the Channel Islands at 45.5 square miles or 120 square kilometres and has a population of 102,700. Though it does not seem possible, the populations of both increases still further in summer when the islands look at their most beautiful and the tourists arrive.

Technology these days means that size, and for that matter location, doesn’t matter. Representatives from both offices regularly travel to the UK and South Africa to meet with clients and advisors, helping to find flexible wealth planning solutions that meet our clients’ needs, not only now, but as they evolve in this ever-changing world.

This is all well and good when life is going according to plan, but so often it does not, and it is particularly in those times that we need to rely on long-term, strong relationships with people that we know and trust. That is why at Nedgroup Trust we consider it important

to meet with our clients regularly and, where appropriate, also with their families.

Usually wealth management involves long-term planning for future generations and, while some clients wish to keep their arrangements confidential between themselves and Nedgroup Trust, often the wider family is aware that something is in place, even if they do not know the detail. It is in these cases that it can be beneficial for our representatives to meet with the wider family, because they may need to contact the Trustees in a situation when disaster strikes and emotions are high. In such circumstances it is always easier to speak with someone you have met, rather than a stranger in an office somewhere you have never heard of.

Our business is to assist our clients with their wealth management needs and in our experience the very best way of doing this is to sit down together and discuss them face-to-face. If you would like to arrange a meeting when one of our representatives is in your area, please let your usual contact at Nedgroup Trust know and they will make the necessary arrangements for you. Alternatively, if you find yourself in the Channel Islands, you are of course very welcome to come in and meet the team.

Julie BrownSenior Trust Manager

MEET YOUR TRUSTEE

Renewable Energy is also an area that offers high cash yields and some inflation protection, which we think should serve them well in a changing environment.

With the Federal Reserve on course to raise interest rates again in 2017, we expect the US dollar to remain well supported, especially if Brexit negotiations get messy and further undermine the pound, and perhaps also the euro. As a result, where appropriate, our strategies continue to have a healthy exposure to the US dollar, held both directly, and also through the underlying asset class preferences.

Volatility, which has been remarkably low and stable in 2016, looks set to rise. There are a number of identifiable factors that could cause this change. Firstly, it may be that increased monetary divergence exacerbates the shifts already seen in relative interest rates and currencies. While markets have largely coped with what has already occurred, any more significant shifts could unsettle

investors. Secondly, we have yet to see what will remain of Trump’s more worrying campaign promises now he is actually in office and reliant on the support and favour of Congress and the Senate. Thirdly, there are a number of elections coming up in Europe (most notably in France, Holland and Germany) that could extend the political shifts towards populism and protectionism already seen in the UK and the US. While the shocks and surprises of 2016 remind us to be humble when making our predictions, any one of these events could cause a degree of disruption to financial markets.

When talking to our clients, we are emphasising that, whilst we see some opportunities, we do not expect 2017 to be a bumper year for returns. Asset allocation will be key to successfully navigating our way through what we expect to be a challenging year of modest and potentially lumpy returns.

Andrew YeadonHead of Investments, Nedgroup Investments, London



INTRODUCTION

In early December, the UK government published its responses to the consultation on the reforms to the taxation of non-domiciles which was issued last August. December and January also saw the issue of draft clauses for the Finance Bill 2017 both in respect of domicile related matters and inheritance tax on UK residential property, with further comments being invited from the tax profession up until the end of February. The income tax changes which have been proposed in relation to non-dom settlors of offshore trusts have yet to be legislated, leaving a very short period of time before the implementation date of 6 April 2017.

DEEMED DOMICILE AND RELATED MATTERS To re-cap, from April 2017 two new forms of deemed domicile will be introduced in the UK, one aimed at longer term UK residents, catching those who have been UK resident for 15 out of the previous 20 tax years, and one aimed at those born in the UK with a UK domicile who later became domiciled elsewhere but have now returned to the UK.

In relation to settlor interested offshore trust structures, the outcome of these changes is generally positive where the settlor is caught by the 15 year deemed domicile rule. It will remain possible to avoid the immediate taxation of foreign income and capital gains arising in such trust structures by retaining funds within the trust. Going forward non-dom settlors will be taxed in much the same way as other beneficiaries, by reference to stored up income and gains in the structure as and when they receive benefits. However, care does need to be taken to avoid “tainting” these protected trusts as any additions (other than for certain permitted purposes such as to cover a shortfall in relation to trust expenses) will cause the income and gains to become taxable on the settlor on an arising basis.

The position is considerably less beneficial for trusts where the settlor is of UK origin and is returning to the UK after a period (in many cases lengthy) spent abroad. In such cases, all the trust’s income and gains, and potentially the income and gains of any underlying companies, will be taxed on an arising basis on the settlor with effect from 6 April 2017.

The favourable “excluded property” inheritance tax status afforded to trusts settled by a “non-dom” will be retained if the settlor becomes

deemed domiciled under the 15 year rule, providing no further funds are added while the settlor is deemed domiciled.

However, trusts that were settled by an individual of UK origin and birth while non-UK domiciled will lose all inheritance tax protections for any period that the settlor is UK resident, potentially exposing the value of the trust fund to trustee IHT charges as well as bringing the settlor into charge under the Gift with Reservation of Benefit rules in the event of his death. However, once the settlor is deceased (or leaves the UK), the trust should once again benefit from excluded property status.

A few additional measures have been introduced alongside the new domicile rules which will affect offshore trust structures from 6 April 2017 onwards. Of particular relevance is the removal of the ability to “match” trust gains to capital payments received by non-UK resident beneficiaries. As currently drafted, this measure has considerable retrospective effect and may result in a higher level of potentially taxable gains being comprised in trust structures post April 2017. Those structures likely to be affected should be reviewed to fully establish the impact of this measure.

AN UPDATE ON THE FORTHCOMING CHANGES IN UK TAX LEGISLATION

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Specific legislative changes will also target the indirect provision of trust benefits to individuals who are resident in the UK through distributions to non-UK resident beneficiaries and onward gifts.

In view of these changes, it would be prudent to consider funding requirements ahead of April 2017 as, in some cases, advance payments could be beneficial.

INHERITANCE TAX ON UK RESIDENTIAL PROPERTY

With effect from 6 April 2017, the inheritance tax benefit of an excluded property trust owning UK residential property through an offshore company will be removed. Going forward the value of the company shares which are attributable to the residential property (after a deduction for any debts, pro-rated across all assets held in the company) will be potentially subject to inheritance tax both on the trustees (eg, in respect of ten year anniversary charges) and on the settlor under the Reservation of Benefit rules.

A further category of chargeable property has also been introduced in the form of “relevant loans” whereby loans which have been applied in relation to UK residential property become potentially subject to inheritance tax in the hands of the lender.

In practice this means that if a loan has been made by a trust to an underlying company to acquire UK residential property, there will be

no relief for the debt as the full value of the property will effectively come into charge through the combined value of the company shares and the loan asset.

The draft legislation could still be subject to amendment as it currently contains some anomalies, particularly in respect of the application of the relevant debt rules.

In view of these forthcoming changes, it is important to consider whether any inheritance tax efficiencies could be achieved through the restructuring of assets or possibly other measures (eg, by excluding the settlor from benefit). It is also important to establish when the first potential occasion of inheritance tax charge will arise, which is not always straightforward, depending on the history of the structure.

CONCLUSION

In the countdown to 6 April 2017, there are many factors to consider in relation to offshore trust structures but advance review and attention to detail should enable structures to achieve their optimum tax position, which in many cases will remain relatively favourable.

Mandy ConnollyLTS Tax Limited



COMMON REPORTING STANDARD (CRS) UPDATE CRS came into effect on 1 January 2016 for early adopter jurisdictions and on 1 January 2017 for other participating jurisdictions, meaning that all new relationships must now be fully CRS compliant at commencement and existing relationships must be brought in line with CRS. This means we have and will continually be asking for confirmation of individual’s country(ies) of tax residence and their unique tax identification number (TIN).

Guernsey, Jersey, United Kingdom and South Africa are examples of the 54 fully signed early adopter jurisdictions. Financial Institutions (FI) in these jurisdictions will be required, prior to June 2017, to file their first CRS reports for the year ended 31 December 2016. For other participating jurisdictions, the first reports must be made by June 2018. The reports will be submitted by the FIs to their local tax authorities who will send the information on to the relevant authorities in each of the early adopter jurisdictions.

CRS has similarities to US FATCA (Foreign Account Tax Compliance Act) but involves many more jurisdictions and is concerned only with an individual’s tax residence NOT their citizenship. As an individual can, due to jurisdictional differences, be considered a tax resident of more than one jurisdiction at any one time it is possible that a CRS report for an individual will be forwarded to more than one jurisdiction.

The CRS reports filed by FIs must contain the information listed below if any of the following persons connected to the structure are tax resident in a CRS participating jurisdiction:

Settlor, Grantor, Donor, Member, Mandatory Beneficiary, Vested Beneficiary (in that reporting period), Debtor (someone the entity owes money to), Beneficial Owner, Trustee, Protector or other Controlling Person.

Individual’s name, residential address, country(ies) of tax residence, date and place of birth, Taxpayer Identification Number (TIN) or equivalent, the Entity name and/or other identifier, Entity address, value of the Entity/value of the loan/value of payments made to or due to the beneficiary during the reporting period, reporting entity name, address and tax identification number. In addition reports have to include the gross value of any additional assets received on the accounts of the persons identified above.

Entities that close during the year are still required to be included in the subsequent report, as are liability loans which are paid off.

In some jurisdictions an individual’s TIN is their tax number ie, South Africa (this is issued by SARS and is not the same as an income tax number) however, in some jurisdictions, an individual’s TIN will be their national insurance number as in some countries couples can share a tax number (ie, United Kingdom).

If you are in any doubt as to your tax compliance, we would recommend that you seek professional advice. Many individuals and firms have very good relationships with their local tax offices and can offer prospective clients a ‘no names’ advice service to help individuals establish if all their personal tax reporting obligations have been met. Nedgroup Trust Limited is happy to refer you to contacts with whom we have worked in the past, should this be required.

FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) US

The United States have decided not to be a party to CRS and therefore US FATCA remains in existence and we will be making our third report under this legislation during 2017. As the UK is now a party to CRS, the UK FATCA reporting has been amalgamated into the CRS reporting and no separate UK FATCA reporting is required during 2017 for 2016, or going forward.

Beth MahyProject Officer



It is well known that Guernsey has robust regulations and rules to combat money-laundering and financing of terrorism. Indeed, this has been frequently recognised by international bodies, such as the International Monetary Fund and MONEYVAL (the European body implementing the Financial Action Task Force’s standards), who regularly assess the Island’s compliance with international standards, just as they do other nation states.

Due diligence is a concept that has been around for many decades involving the collection and assessment of documents of substance which, in turn, enable informed decisions to be made. Customer due diligence is no different. The process includes the identification and verification of relevant parties; an understanding of their backgrounds, sources of wealth and circumstances; a knowledge of the purposes and objectives of the trusts and companies managed; and an awareness of expected transactions. The rules are rigorous and strictly enforced.

Aside from the mandatory application of customer due diligence in combatting money laundering and financing of terrorism, the process is also very appropriate in the fiduciary field. It allows us to provide a service better suited to settlors’ and beneficiaries’ needs and gives us a markedly better opportunity of recognising unauthorised requests to defraud trusts and companies.

IDENTIFICATION AND VERIFICATION

Customer due diligence comprises the identification and verification of relevant parties. The regulations require that we verify certain information including full legal name, nationality or citizenship, date of birth, place of birth (place and country) and primary residential address.

A passport is the ideal document to verify the first four of these items, however, we are happy to accept an alternative form of government issued photo-ID (such as a national identity card or driving licence). But if that does not contain all the required information, please additionally provide us with other officially issued documents which contain the missing information.

We must also verify your primary residential address. Post office boxes, “care of” addresses and business premises are insufficient. Ideal documents include recent bills, statements or correspondence issued by a utility company; national or local government authority; or by a bank, insurance company

or investment house licensed and supervised in a prescribed country*. Other suitable options include property title documents; an unexpired property lease agreement; or an introduction/reference addressed directly to Nedgroup Trust from a lawyer, accountant or financial business licensed and supervised in a prescribed country*. In any case the document must state both your name and primary residential street address. We are unable to accept internet derived documents at the present time. If none of these documents apply to your circumstances, please contact us to discuss a suitable alternative.

We are happy to accept photocopies of documents so long as the copy is taken directly from the original document and certified by a suitable person with the correct wording (eg, “certified a true copy of the original”). In the case of photo-ID documents, the certifier must additionally attest to his having met the bearer (eg, “…and the photo bears a true likeness to the bearer, whom I have met.”).

Suitable certifiers include: qualified practising lawyers, accountants, notaries, commissioners of oaths; officers of financial services businesses regulated and supervised in a prescribed country*; or embassy/consular officials of the country of issue of the document. They should date and authenticate their certification using their usual signature and provide their name, qualification or firm and position, together with their contact details. Please note that we cannot accept client documents that have been certified by a member of their own family.

In line with other prudent and diligent providers, we do not accept self-certification. Although affidavits may be sworn in front of a notary, if the notary does not attest to the independent means by which he has verified the information, it is a form of self-certification and, unfortunately, we are unable to accept it.

CUSTOMER DUE DILIGENCE

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SOURCES OF WEALTH AND FUNDS

The customer due diligence process also involves a good understanding of principals, their backgrounds and their sources of wealth, even those aspects of wealth that are outside our trusteeship. A good knowledge in these respects will also allow us to understand the settlor’s wishes and beneficiaries’ circumstances thereby enabling us to discharge our duties and exercise our discretions, as trustees, more appropriately. Source of wealth refers to all the activities by which someone has generated his total net worth: funds, assets and property. Source of funds, by contrast, refers to the recent activity which directly generated the specific funds/assets transferred to an entity under our management (it is not simply the bank account from which the funds were remitted). The regulations require that we have a full understanding and, on occasion, corroboration, of the nature, volumes and duration of the activities which generated the wealth or funds and applies to any additional funds.

THIRD PARTY PAYMENTS A third party payment is one that would be rightfully paid to one person but, at his request, is paid on his behalf to another person. The concern is that such payments break the natural audit trail and so may be abused for the purposes of laundering the proceeds of crimes or the financing of terrorism. It is also commonplace for fraudsters to use them as part of their deception. While it is our policy not to make third party payments, in our capacity as trustee, we are aware that, depending on the circumstances, it may be appropriate to pay a third party. However, we only do so when we are fully aware of the nature of the relationship and of the transaction between the rightful and actual payees as well as the good reason for making the payment directly. To this end we will seek copies of relevant documents concerning the transaction as well as the third party (which will include verification of his identity and address). The payment will however be accounted for as a distribution to the appropriate beneficiary which has implication with regard to FATCA and forthcoming CRS reporting.

CONCLUSION While good customer due diligence is a major tool in the fight against money laundering and the financing of terrorism, it also has significant benefits in preventing fraud and better places us to discharge our powers and duties effectively. Accordingly, as prudent trustees, we make no excuses for ensuring we are dealing with the right people and understand their circumstances. So, please do not be offended by requests for certified verification and to be fullyinformed: your security and the appropriate application of the assets under our management is at the forefront of our minds. Requests or changes will be verified to ensure that they originate from legitimate sources. * Prescribed countries comprise Austria, Australia, Belgium, Bulgaria, Canada, Cayman Islands, Cyprus, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, the UK, and the USA.

David DykeSenior Compliance Officer



LOANS BY SOUTH AFRICAN RESIDENTS TO FOREIGN TRUSTS

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South African resident individuals require exchange control approval from an authorised dealer of the South African Reserve Bank ("SARB") to remit funds offshore. Provided the South African individual is not seeking to transfer more than ZAR11m offshore per annum, this is a simple procedure requiring that the individual's tax affairs are up-to-date with the South African Revenue Service ("SARS") so that SARS may issue the requisite tax clearance certificate to the individual. From an exchange control perspective, the South African resident individual is then at liberty to do as he/she pleases with the expatriated funds, including loaning them to a foreign trust.

However, from a tax perspective, whenever inter-jurisdictional transactions take place between connected persons, the issue of transfer pricing arises.

Transfer pricing refers to the process by which connected persons establish the prices at which they transfer goods and services between one another. For our purposes, the service is financial assistance (ie, any loan, advance, debt, security or guarantee) and the price thereof is the interest, if any, charged by the lender, the South African resident, to the borrower, the foreign trust, for such financial assistance.

Transfer pricing between connected persons in different tax jurisdictions has become a major issue for tax authorities concerned with price manipulation and the potential consequence of base erosion and profit shifting that such manipulation may precipitate.

Should a South African resident wish to loan funds to a foreign trust, the first question one must ask is whether the South African resident and the foreign trust are "connected persons" in relation to one another.

The "connected person" definition was introduced into section 1 of the South African Income Tax Act 58 of 1962 ("Act") in 1993 and is pivotal to several specific anti-tax avoidance provisions of the Act which seek to regulate the tax consequences of transactions concluded between connected persons. This is due to SARS's general suspicion of transactions concluded between connected persons as being more susceptible to tax advantageous manipulation than transactions entered into between unconnected persons.

A "connected person" in relation to a natural person, is any relative of the natural person and any trust of which such natural person or such relative is a beneficiary. A "connected person" in relation to a trust, is any beneficiary of such trust and any connected person in relation to such beneficiary.

A "relative" is defined in section 1 of the Act as the spouse of any person and anybody related to that person or that person's spouse within the third degree of consanguinity (blood relation), and any spouse of anybody so related.

As if the "connected person" web weren't extensive enough, SARS employs an exceedingly wide interpretation of the term 'beneficiary' to extend its range still further. A beneficiary includes capital and income beneficiaries with vested rights; discretionary beneficiaries, provided that the discretionary beneficiaries have been designated as such, irrespective of whether or not they have ever received any trust distributions or have formally accepted trust benefits. Indeed, SARS holds that a beneficiary includes the member (named or unnamed) of a designated group of persons from whom trustees may select beneficiaries, even where such selection has not been made in respect of a particular person. In addition, SARS considers a contingent beneficiary whose entitlement to benefit from the trust is contingent upon the occurrence of a future uncertain event; to be a beneficiary for purposes of establishing whether he/she is connected vis-á-vis a trust, even before the happening of such future event.

On the assumption then that the South African resident is a connected person vis-á-vis the foreign trust to which he/she intends loaning funds, we find ourselves within the realm of transfer pricing and section 31 of the Act.

Section 31 of the Act was introduced in 1995, and is based on the transfer pricing provisions formulated by the Organisation for Economic Co-Operation and Development ("OECD"). The OECD Transfer Pricing Guidelines provide guidance on the application of the "arm's length principle" for the valuation, for tax purposes, of cross-border transactions between connected persons and associated enterprises. In a global economy, governments need to ensure that taxable profits are not artificially shifted out of their jurisdiction and that the tax base reported by taxpayers conducting inter-jurisdictional transactions in their country reflects the economic activity undertaken therein.



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SARS seeks to regulate transfer pricing through the application of section 31 of the Act. Section 31 entitles the Commissioner of SARS, when confronted with an "affected transaction", which includes any transaction, operation, scheme, agreement or understanding that has been directly or indirectly effected between or for the benefit of either or both, a South African resident and any other person who is not a South African resident, who are connected persons in relation to one another; where any term or condition of the affected transaction differs from the term or condition that would have existed had the persons to the transaction being independent persons dealing at arm's length, in consequence of which a tax benefit has arisen for a party to that transaction; to calculate the taxable income of that person as if that transaction had been concluded at arm’s length.

To illustrate by way of example; assume a South African tax resident, A, makes an interest-free loan of ZAR11m to his connected foreign trust, Trust B, established in Guernsey. Trust B converts the ZAR11m into EUR770 000, and invests the full amount into a european equity fund, which currently yields approximately 5.1% per annum.

This example places us squarely within section 31 of the Act: A, a South African resident, has granted financial assistance to Trust B, a non-South African resident connected person vis-á-vis A. The interest-free nature of the loan is not characteristic of the pricing of financial assistance granted between independent persons dealing at arm's length. The Commissioner of SARS is therefore entitled to apply an arm's length price to the provision of financial assistance by A to Trust B.

What is an arm's length price you may ask? Well, generally unsecured ZAR funding is granted at the South African prime rate, currently 10.5%, or higher, as the credit risk dictates. However, South African domestic legislation has recently been promulgated in the form of section 7C of the Act, which becomes effective 1 March 2017, and regulates loans or credit advanced to a South African resident trust by a connected South African person. In terms of section 7C of the Act, the current arm's length price to be applied to a loan granted to a trust by a connected person in relation to such trust within the domestic context, is 8%. Given the principle of non-discrimination, which dictates parity of treatment between like persons, irrespective of their jurisdiction of residence; one may reasonably conclude that the Commissioner would have to accept 8% as the arm's length price attributable to the funding granted by A to Trust B. In consequence, in terms of section 31 of the Act, ZAR880 000 (ZAR11m x 8%), will be treated as a donation by A to Trust B, subject to donations tax calculated at 20%, ie, ZAR176 000 of tax for each year that the loan remains outstanding and interest-free.

If your mind is churning at this point, concerned that section 7(8) of the Act would also apply to deem the 5.1% yield on Trust B's European Equity Fund investment to be income in A's hands by virtue of A's ZAR11m donation, settlement or other disposition to Trust B; fear not. Section 31 of the Act trumps section 7(8), and once an arm's length price has been applied to the loan granted by A to Trust B in accordance with section 31, the loan will no longer constitute a donation, settlement or other similar disposition for purposes of section 7(8), SARS having applied an arm's length price to the financial assistance, thereby eliminating any gratuitous element afforded by its interest-free nature.

Lisa BruntonCliffe Dekker Hofmeyr Inc.



FEES 2017 We aim at all times to offer high levels of service, while remaining competitively and transparently priced. Entering 2017, we believe our fees are very competitive compared with other providers from this jurisdiction and Crown Dependency equivalents, and our fees for private clients, pension and freezer trusts remain unchanged (unless communicated separately). However, some price increases are unavoidable and our net standard fees are being increased by 2% for 2017, in line with Guernsey inflation figures. We have also increased the cost of British Virgin Isles (BVI) companies, due to increased agent costs, and have also adjusted for currency exchange movements.

The revised fees for discretionary trusts and companies are as follows:

TRUST ESTABLISHMENT FEE 2017 £1,000

ANNUAL TRUSTEE FEES 2017

ASSET VALUE RESPONSIBILITY FEE£1 to £100,000 £710

£100,001 - £200,000 £932

£200,001 - £350,000 £1,167

£350,001 - £1,066,153 £1,386

£1,066,154 and above 0.13%

MAURITIUS BVI GUERNSEY ISLE OF MAN

COMPANY FORMATION FEE 2017 on request £1,555 £1,130 on request

Includes all agent and statutory fees, statutory books, first meeting and opening a bank account.

MAURITIUS BVI GUERNSEY ISLE OF MAN

NET ANNUAL DOMICILIARY FEE 2017 £2,710 £2,212 £2,210 £2,800

Includes provision of Directors*, Secretary, Nominee Shareholders, all agents and statutory fees.

Clients with bespoke fee arrangements will have received direct contact concerning any proposed changes.

Charges will be levied quarterly in relation to time spent in respect of all administration services provided by Nedgroup Trust, and will be billed to the trust or company. This

is calculated using six minute units, with chargeout rates varying depending upon seniority from £98 to £360 per hour. A review will be conducted periodically to assess the

documentation, for which a fee of £90 will be levied for a trust and £110 for a company. Fees will be deducted at Nedgroup Trust's discretion unless other arrangements

are made. Charges levied by custodians, bankers and other agents will be charged to the trust or company. Nedgroup Trust will conduct annual reviews of investment

performance, for which time charges shall be charged at the above rates. Should we or our clients consider more frequent investment reviews would be appropriate (such

consideration to be expressed between the parties in writing), any additional time spent shall also be charged at the above rates. Any third-party expense (if applicable

and by prior arrangement) shall be levied at cost. Trusts and companies will be required to maintain a minimum liquid balance of £2,000 at all times to cover fees and

disbursements. Termination fees are levied per the published fee tariffs found at www.nedgrouptrust.com.

*Additional responsibility fees may be chargeable where company activities are of substantial value or complexity. These will be agreed in advance.



TRIPS FOR 2017

MONTH WHO DESTINATIONMARCH Alex Le Prevost South Africa

MARCH Katie Penny Asia

APRIL Bernie Quant South Africa

MAY Jill Osmond Durban and Port Elizabeth

MAY Katie Penny Middle East

JULY Bernie Quant South Africa

AUGUST Jill Osmond South Africa

SEP/OCT Katie Penny Middle East and Far East

SEP/OCT Nathan Lihou South Africa

OCTOBER Karl Pedersen South Africa

NOVEMBER Marcus Prevel / Rob Titterington South Africa

DISCLAIMERNo legal or tax advice will be given or deemed to be given by Nedgroup in respect of any Managed Entity or otherwise. It is the responsibility of the Client, an Authorised Person and any other Person associated with a Managed Entity to take their own independent legal, tax, financial and other such advice in relation to the Services and the Managed Entity and to deal with the management of their legal and tax affairs including any applicable filings and payments and complying with any applicable laws and regulations.



NEDGROUP TRUST LIMITED PO Box 192 Fairbairn House Rohais St Peter Port Guernsey Channel Islands GY1 3LT Tel +44 (0) 1481 710895 Fax +44 (0) 1481 710789 [email protected] www.nedgrouptrust.com www.nedbankprivatewealth.com

Nedgroup Trust Limited is licensed by the Guernsey Financial Services Commission under the Regulation of Fiduciaries Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 to carry out Fiduciary Duties and Company Administration. Company Registration No. 23460.

Nedbank Private Wealth is a registered trade name of Nedbank Private Wealth Limited. Nedbank Private Wealth Limited is not licensed to take deposits under the Banking Supervision (Bailiwick of Guernsey) Law, 1994 and it is not a member of the Guernsey Banking Deposit Compensation Scheme.

CONTACT US

KARL PEDERSEN Senior Trust Manager

Tel: + 44 (0) 1481 706150

Email: [email protected]

JILL OSMOND Client Relationship Manager

Tel: +44 (0) 1481 706194


ALEX LE PREVOST Senior Trust Officer

Tel: + 44 (0) 1481 706139


ROB TITTERINGTON Senior Trust Officer

Tel: + 44 (0) 1481 706199


LINDA RODGERS Trust Officer

Tel: + 44 (0) 1481 706190


BERNARD QUANT Managing Director


NATHAN LIHOU Chief Operating Officer

Tel: + 44 (0) 1481 706174


MARCUS PREVEL Director

Tel: + 44 (0) 1481 706107


KATIE PENNY Director

Tel: + 44 (0) 1534 823201


SHARON CLEAL Associate Director

Tel: + 44 (0) 1481 706178


NEDGROUP TRUST LIMITED

PO Box 192 Fairbairn House Rohais St Peter Port Guernsey GY1 3LT

Tel: +44 (0) 1481 710895 Fax: +44 (0) 1481 710789

Web: www.nedgrouptrust.com


spring 2017 newsletter - nedbank€¦ · oil price rose sharply, boosting inflationary expectations...

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