¶ 2601
Overview
Scope of the chapter. This chapter examines how the Cook Islands taxes, and declines to tax, the international trusts, limited liability companies, foundations and international companies formed under its legislation. It sets out the domestic tax system on which every exemption is measured: the Income Tax Act 1997, its residence and source rules, its rates and its withholding tax, and the Value Added Tax Act 1997. It then examines the statutory provisions that keep the international entities outside that system, explains which of those provisions survive and which were removed under pressure from the European Union and the Organisation for Economic Co-operation and Development (OECD), and considers the rule, confirmed by the Privy Council in 2020, that the courts of the Cook Islands will not enforce the revenue laws of another country. Exchange of tax information, the Common Reporting Standard and the United States Foreign Account Tax Compliance Act are treated in chapter 27, and United States tax and reporting for Cook Islands structures in chapter 29. See infra chs. 27, 29.
The two halves of the system. For forty years the international sector of the Cook Islands has rested on a simple division. Persons and companies that belong to the Cook Islands pay its taxes: a resident company pays income tax at 20 cents in the dollar on its worldwide income, a resident individual pays progressive rates up to 30 cents, and supplies made in the Cook Islands bear value added tax at 15 per cent. Income Tax Act 1997, sched. 1, cls. 2–3 (Cook Is.); Value Added Tax Act 1997, § 11(1) (Cook Is.) (as amended by Value Added Tax Amendment Act 2014, § 12). Entities formed under the international statutes stand outside that system by force of a provision in each statute declaring that no other enactment, apart from a short list, may impose a tax on them. The provision first appeared in the International Trusts Act 1984 as section 21 and now sits in section 27B. Matching provisions appear in the Limited Liability Companies Act 2008 (section 76) and the Foundations Act 2012 (section 87), and until 2019 in the International Companies Act 1981-82 (section 249).
What changed in 2019 and after. The international company was the vehicle that drew the attention of the European Union's Code of Conduct Group for business taxation, which assessed its tax exemption in 2017 as a harmful preferential regime. The Parliament of the Cook Islands responded with the International Companies (Removal of Tax Exemption) Amendment Act 2019, which replaced section 249 with a version that no longer excludes the Income Tax Act 1997 and repealed section 250, the exemption for non-resident recipients of income. International Companies (Removal of Tax Exemption) Amendment Act 2019, §§ 5–6 (Cook Is.). Existing companies kept the old exemption until the close of 31 December 2021. Id. § 7(2). A second Act, the Income Tax (Company Residence) Amendment Act 2021, then changed the test of company residence so that a company incorporated in the Cook Islands is no longer resident there merely because of its incorporation. Income Tax Act 1997, § 82(2)–(3) (Cook Is.) (as amended by Income Tax (Company Residence) Amendment Act 2021). The combined effect is that an international company is now within the Income Tax Act, but is taxed on its foreign income only if it is managed or controlled from the Cook Islands.
What did not change. The 2019 reforms did not touch the International Trusts Act, the Limited Liability Companies Act or the Foundations Act. Each still contains its own exclusion of other enactments, and none of those exclusions names the Income Tax Act 1997 except for the Common Reporting Standard part added in 2016. Income Tax (Automatic Exchange of Financial Account Information and Other Matters) Amendment Act 2016, sched. (Cook Is.). An international trust, a Cook Islands limited liability company and a Cook Islands foundation therefore remain outside the charge to Cook Islands income tax by the terms of their own statutes. The European Union documents examined for this chapter identify the international company regime, the overseas insurance regime and the captive insurance regime as the Cook Islands regimes assessed by the Code of Conduct Group; none of them deals with trusts, limited liability companies or foundations. Council of the European Union, Doc. 7418/20, Cook Islands' International Companies Regime (CK001): Final Description and Assessment (Apr. 30, 2020).
Plan of the chapter. Paragraph 2610 describes the Income Tax Act 1997: who is taxed, on what, at what rates; and the Revenue Management Division's administration of it. Paragraph 2620 sets out the exclusion provisions in the four international statutes and traces their history. Paragraph 2630 examines the international trust: section 27B, the 2017 foreign trust rules in the Income Tax Act, and the position of the Cook Islands trustee company. Paragraph 2640 examines the international company and the 2019 and 2021 reforms. Paragraph 2650 examines the limited liability company and the foundation. Paragraph 2660 examines value added tax and the other taxes a structure may meet. Paragraph 2670 records the international reviews: the European Union list, the Code of Conduct Group, the Global Forum and the 2016 adoption of the Common Reporting Standard. Paragraph 2680 examines the foreign tax principle and Webb v. Webb. Paragraph 2690 compares the Cook Islands with Nevis and Belize and closes with a checklist.