case studies in tax treaty interpretation post final

Case Studies in Tax Treaty Interpretation

May 23rd 2012, The Fullerton Hotel, Singapore

2May 23rd 2012

Southeast Asia’s first full service international law firm with a major specialization in taxation.

Our VisionWe sell results, not time.

We believe that you don’t want our time. We believe you want results.That’s our value. That’s how we bill.

Our Commitment

3May 23rd 2012

At a GlanceLaos

Cambodia

Singapore

Vietnam

4 countries

40+ staff: 4 partners 5 directors 32 professional advisors

Specializing in: Tax Advisory Legal Advisory Government Relations Compliance and Accounting

Partners

Edwin Van der Bruggen was formerly with Loyens & Loeff and a partner at DFDL, and is an academic, author, and government/World Bank adviser.

Jean Loi is a CPA and was a tax partner with PricewaterhouseCoopers in Southeast Asia, RSM Chio Lim in Singapore and DFDL.

Christopher Muessel was with Baker & McKenzie Vietnam, a partner at Duane Morris LLP, Watson Farley & Williams and Rajah & Tann and advised the Cambodian Council of Ministers.

Potim Yun was formerly a partner with Gordon & Associates and Deputy Head of the Corporate & Commercial Practice Group at DFDL.

4May 23rd 2012

Our Practice Areas

Tax Advisory

Corporate tax planning strategies Tax efficient market entry advisory services Real estate tax structuring Oil, gas and mining tax services Customs and excise advisory Mergers & acquisitions and tax due diligence International and regional tax optimization Transfer pricing advisory and benchmarking Taxation of banks, insurance & financial services Controversy and litigation in tax matters

Legal Advisory

Cross-border mergers and business acquisitions Legal structuring of real estate projects Corporate & commercial law Investment licensing and market entry Project finance Compliance (including FCPA) Trade (treaty analysis and anti-dumping)

Government Relations

In a region where regulations and legal precedents are not always clear, local knowledge and relationships are the key to getting results. Our advisers’ excellent and long-standing working relationships with government authorities throughout the region enable us to advise you on relationships with government agencies and provide strategic guidance on maneuvering the intricacies of a country’s regulatory and legislative framework.

Compliance & Accounting

Expatriate employee tax services Payroll administration Corporate tax compliance Accounting services

5May 23rd 2012

Our advisers have extensive experience with taxation, M&A, corporate finance and real estate.

Collectively our advisers have extensive experience across Southeast Asia, including in Cambodia, Vietnam, Singapore, Laos, Indonesia, Thailand and the Philippines. Some of our major projects include:

Representing a US$20M listed property fund with the structuring, acquisition, and divesting of properties in Vietnam, Cambodia and Singapore.

Tax structuring of a new supply chain covering Thailand, Singapore, Vietnam, China and the Philippines.

Regional tax structuring advice for a large petrochemical joint venture project in Vietnam, including foreign contractor taxes, transfer pricing issues and the optimal method for profit repatriation.

Structuring of a US$2B complex government-leased island resort in Cambodia, including airport, marinas, hotels and infrastructure.

Advising on customs duty valuation and defense of a manufacturer of tobacco products.

Representing a multinational telecom operator with an asset transfer/merger in Cambodia and Singapore.

Representing an international enterprise in the acquisition of a majority stake in a Cambodian telecom operator.

Conducting transfer pricing analysis, risk assessment, documentation and defense for a multinational telecommunications operator in Indonesia.

Providing tax structuring advice on infrastructure and villa leases for a US$1.2B resort project in Vietnam by a private equity fund.

Providing advice on bond issues for Asian companies under a US$12B Government bond program.

Our Advisers’ Experience with Major Projects

6May 23rd 2012

Partner

Edwin Van Der Bruggen

Formerly with Loyens & Loeff and a partner at DFDL, Edwin has 20 years of experience as a tax lawyer, academic, author and government adviser. He has worked 15 years in Southeast Asia. Edwin has assisted with structuring some of the largest acquisitions, investments and property deals in the region, including the US$4.2B petrochemical plant of SCG Chemical in Vietnam, the US$425M Mobitel acquisition in Singapore and Cambodia, and the US$275M listed property fund JSM Indochina.

He has taught international tax law at six different universities in Europe and Asia, including delivering a number of lectures at the prestigious International Tax Center in Leyden. He has published seven textbooks and over 50 scholarly articles, some winning scientific awards. He was an adviser to the Minister of Economy and Finance of Cambodia, provided training on tax issues to government officials in a number of Southeast Asian countries, and has supplied expert testimony to tax courts on tax treaty interpretation. Edwin has consulted for the World Bank and the ADB on tax policy and administration.

As a partner at regional law firm DFDL, he advised multinational enterprises, funds and governmental organizations on international taxation in Southeast Asia, and has won recognition for his outstanding practice, including “Best Tax Law Firm” and “Best Corporate Tax Law Firm”.

Edwin is accredited for Income Tax Advisory by the Singapore Institute of Accredited Tax Professionals (SIATP).

Edwin Van Der Bruggen has won recognition for his outstanding practice including “Best Tax Law Firm” and “Best Corporate Tax Law Firm.”

7May 23rd 2012

Managing Partner

Jean Loi

Jean Loi is widely recognized as one of the region’s most experienced tax specialists. She was formerly a tax partner with PricewaterhouseCoopers in Southeast Asia, RSM Chio Lim in Singapore and with leading regional law firm DFDL. Jean is a highly successful tax adviser with a CPA background. She has assisted on a large number of projects and market entries in Cambodia, Vietnam and Thailand, such as hydro and coal power plant projects, oil exploration blocks, and the market entry of international banks into Vietnam, and of multinationals into Indonesia. She has particular expertise in projects related to the infrastructure, energy, telecommunications and financial services industries in the region, as well as having extensive experience with supply chains. Jean has assisted investment funds and other clients with their international tax structures, addressing their tax risks and formulating their transfer pricing strategies in Southeast Asia. She oversaw the growth of PricewaterhouseCoopers in Cambodia and was recognized for her outstanding practice with a number of awards, including “Best Tax Law Firm” and “Best Corporate Tax Firm” in Vietnam. She speaks Mandarin, Bahasa Malay, Cantonese and English.

Jean is accredited for Income Tax and GST Advisory by the Singapore Institute of Accredited Tax Professionals (SIATP). Jean is also a member of the Institute of Chartered Accountants of New Zealand. She graduated with a Bachelor’s of Commerce and has obtained a Master’s of Taxation from the University of Auckland, New Zealand.

Jean Loi is widely recognized as one of the region’s most experienced tax specialists, and was formerly a tax partner with PwC in Southeast Asia.

8May 23rd 2012

Partner

Christopher Muessel

Chris Muessel is one of Southeast Asia’s most experienced foreign lawyers. He has in-country experience in Cambodia (1998-1999), where as a World Bank Counsel, he advised the Council of Ministers on new commercial laws, and in Vietnam (2001-2007), where as a Baker & McKenzie lawyer, he advised MNCs on a broad range of legal matters. As a partner with the US firm Duane Morris LLP, Chris headed the firm’s Ho Chi Minh City office, and later undertook equally high-profile partnership roles with Watson Farley & Williams and Rajah & Tann, where he focused principally on Vietnam, Cambodia, Laos and Thailand. In his 20-year career, Chris has developed an expertise in cross-border M&A (incl. PE funds), real estate, project finance (energy and mining), compliance (incl. FCPA) and trade (treaties and anti-dumping claims).

Examples of matters that Chris has advised on are: bond issues for Asian companies under a US$12B US Government bond program; a real estate transaction for a US$2B Vietnam investment fund with an Omani sovereign fund; a US$300M loan by a major French bank for an oil refinery in Vietnam; and a US$170M financing of an FPSO vessel to be operated in Vietnam by a Japanese consortium. He has also assisted a multinational with a large real estate investment in Cambodia, represented multiple US defense contractors on sales of military goods and services in Southeast Asia, advised global financial players (e.g., JP Morgan, Lehman Brothers, BNP, IFC, etc.) on SEA projects, and structured high-profile LNG deals in Indonesia, India, Japan and Qatar.

Chris has previously served on several boards of the American Chamber of Commerce (AmCham), including AmCham Vietnam (Chairman 2007) and AmCham Singapore (Governor 2008-2011). He has been a recommended lawyer by Chambers Asia (Leading Overseas Counsel; Vietnam), Chambers Global (Global Leading Lawyer – Corporate; Vietnam) and the Legal 500 (Leading Lawyer – Corporate; Vietnam).

Chris Muessel is one of Southeast Asia’s most experienced foreign lawyers and a former partner at Duane Morris LLP, Watson Farley & Williams and Rajah & Tann.

9May 23rd 2012

Which Rules Apply to the Interpretation of DTAs?

Moving or Instant PEs

Who is the Real Employer?

The Case of the Thai Singer

Beneficial Ownership

Contents

10May 23rd 2012

Which Rules Apply to the Interpretation of DTAs?

11May 23rd 2012

Article 31 General rule of interpretation:

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: a) any agreement relating to the treaty which was made between all the

parties in connection with the conclusion of the treaty; b) any instrument which was made by one or more parties in connection with

the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

Vienna Convention on the Law of Treaties

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Article 31 General rule of interpretation:

3. There shall be taken into account, together with the context:a) any subsequent agreement between the parties regarding the

interpretation of the treaty or the application of its provisions; b) any subsequent practice in the application of the treaty which establishes

the agreement of the parties regarding its interpretation;c) any relevant rules of international law applicable in the relations between

the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.


13May 23rd 2012

Article 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation,

including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: a) leaves the meaning ambiguous or obscure; or b) leads to a result which is manifestly absurd or unreasonable.


14May 23rd 2012

Article 33Interpretation of treaties authenticated in two or more languages 1. When a treaty has been authenticated in two or more languages, the text is

equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail.

2. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree.

3. The terms of the treaty are presumed to have the same meaning in each authentic text.

4. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.

DTAs in Other Language Versions

15May 23rd 2012

Article 3(2) DTA

Pre-1995 OECD Model“As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.”

Current OECD Model“As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.”

“general rule of interpretation” OECD Commentary on art. 3, par. 11

16May 23rd 2012

Role of the UN and OECD Commentary

OECD Commentary as a recommendation

OECD Model and its Commentary are “recommendations” under art. 5 (b) of the OECD Convention. Contrary to “decisions”, they are not binding upon the members.

But they are not legally irrelevant either. When a member state denies any effect at all to each and every recommendation issued by the international organization under a treaty to which the state is a party, it violates the legitimate expectations of the treaty partner, which may at least expect that the state shall give the recommendations some serious consideration.

A recommendation can be influential without being binding. “correspondence of behavior is not the same as compliance”.

OECD Commentary binding under 31-32 Vienna Convention?

Tacit agreement between the contracting states when using the Model text, depending on the circumstances (reservations, other expressions that there is no consent). (Engelen)

17May 23rd 2012

Difference between UN and OECD Commentary

Reproduction Not created by state representatives but by state-nominated experts Does it matter? (ICJ Mazilu case) No reservations possible

Possibilities:

OECD member with OECD member OECD member with non-member Non-member with non-member

Difference in legal status of

the Commentary?

18May 23rd 2012

32.7 This situation may be illustrated by reference to a variation of the example described above. A business is carried on through a fixed place of business in State E by a partnership established in that t State and a partner, resident in State R, alienates his interest in that partnership. Changing the facts of the example, however, it is now assumed that State E treats the partnership as a taxable entity whereas State R treats it as fiscally transparent; it is further assumed that State R is a State that applies the exemption method. State E, as its treats the partnership as a corporate entity, considers that the alienation of the interest in the partnership is akin to the alienation of a share in a company, which it cannot tax by reason of par 5 of Article 13. State R, on the other hand, considers that the alienation of the interest in the partnership should have been taxable by State E as an alienation by the partner of the underlying assets of the business carried on by the partnership to which par 1 or 2 of Article 13 would have been applicable. In determining whether it has the obligation to exempt the income under par 1 of Art 23, State R should nonetheless consider that, given the way that the provisions of the convention apply in conjunction with the domestic law of State E, that State may not tax the income in accordance with the provisions of the convention. State R is thus under no obligation to exempt the income.(OECD Commentary on Art. 23)

Qualification of the Source State?

19May 23rd 2012

Anti-avoidance dictating interpretation

“To the extent that anti-avoidance rules are part of the basic domestic rules set by domestic tax laws for determining which facts give rise to a tax liability, they are not addressed in tax treaties and are therefore not affected by them. Thus, as a general rule, there will be no conflict between such rules and the provisions of tax conventions.” OECD Commentary 1/9.2).

The DTA can be interpreted in such a manner that states would not have to grant benefits in abusive transactions, notably “those entered into with the view to obtaining unintended benefits under the provisions of these conventions”. “It is agreed that States do not have to grant the benefits of a double taxation convention where arrangements that constitute an abuse of the provisions of the convention have been entered into” (OECD Commentary 1/9.4).

The OECD agrees that the DTA does not restrict substance-over-form and general abuse rules of the states (OECD Commentary 1/22.1).

20May 23rd 2012

International Case Law (“parallel treaties”)

“Common international tax language” advocated by international scholars

Possible legal basis?- Through OECD Commentary - “Good faith”, ut regis valeat quam pereat- DTAs are meant to be applied internationally, income from third

states, standardization is a must

Citing decisions of courts in other countries can be very authoritative IF these are high courts and IF the decisions are consistent

Problems: - Influence of domestic issues in each case - Transparency of information , language barriers - IBFD database of court decisions

21May 23rd 2012

DTA Interpretation Crucible

1 2

Text Context

Agreements

Subsequent

Rules of Interna-tional Law

Special Meaning

Supplementary Means

Circumstances

DTA Meaning

Meaning in the other language

Meaning in other treaty

Domestic Meaning (possibly including Anti-Avoidance)

OECD &

UN Commentary

Other Sources (parallel treaties)

WEAK

STRONGGood Faith - Object & Purpose

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23May 23rd 2012


Oilfield Service Provider

IndiaThailand

Indonesia

Thailand: PE: 30% on net profit WHT: 15% on gross fees (subject

to DTA)

Indonesia: PE: deemed profit taxed at 10-

30% plus branch profit tax WHT: 20% (non-residents)

India: PE: Readily assumed. See Fugro

Engineers case (40%) WHT: as a rule, services at 10%

24May 23rd 2012

Article 5 of UN ModelPERMANENT ESTABLISHMENT1. For the purposes of this Convention, the term “permanent establishment”

means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:a) A place of management;b) A branch;c) An office;d) A factory;e) A workshop;f) A mine, an oil or gas well, a quarry or any other place of extraction of natural

resources.


25May 23rd 2012

Article 5 of UN ModelPERMANENT ESTABLISHMENT3. The term “permanent establishment” also encompasses:

a) A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months;

b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.


26May 23rd 2012

Specific rules, e..g:

Specific provision for Technical Fees: Source taxation for all “services of a management, consulting or technical

nature” (within or outside scope of royalties)

DTA between Vietnam and Hong Kong (Article 5(2)) The term “permanent establishment” includes especially:

h) an installation structure, or equipment used for the exploration of natural resources.


27May 23rd 2012

Key approaches:1. Physical PE – how long is long enough? 2. Furnishing of Services PE

“The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than six months[1] within any twelve-month period”.

3. Art. 3 (2) a. “Fixed”b. “Place of business”c. “Permanent”

4. OECD and UN Commentary a. A PE may not be purely temporaryb. Special type of activity?

“A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is sometimes difficult to determine whether this is the case” (OECD Commentary 5/6).


28May 23rd 2012

Crucible on Instant PEs assume OECD Model

DTA Meaning

Domestic Meaning

OECD & UN Comment (including Qualification)

Source State

Other Sources

WEAK

STRONG

Text Context

Agreements

Subsequent

Rules of International Law

Special Meaning

“Permanent” and “Fixed” refers to a situation that is not purely temporary

Domestic meaning of “fixed” can frustrate this, but context is strong.

Commentaries allow for shorter periods, but not 1 day, it seems.

International case law is divided but mostly supports longer periods

Supplementary Means

Circumstances

DTA Meaning


Domestic Meaning

OECD & UN Commentaries

Other Sources

Good Faith - Object & Purpose

29May 23rd 2012

Who is the real employer?

30May 23rd 2012


2 Problems:1. Resident of Vietnam or Singapore?2. Taxed as an employee or as a consultant?

Technical Consultant

Assigned to work 5 months

Vietnam Singapore

Individual home

31May 23rd 2012

Singapore

Stay or work in Singapore at least 183 days

Residence DTATIE-BREAK

ARTICLE 4: RESIDENT1. For the purposes of this Agreement, the term "resident of a

Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:a. he shall be deemed to be a resident of the State in which he

has a permanent home available to him;b. if he has a permanent home available to him in both States,

he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

c. if the State in which he has his centre of vital interests cannot be determined, or of he has no permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

d. if the status of resident cannot be determined according to sub-paragraphs (a) to (c), the competent authorities of the Contracting States shall settle the question by mutual agreement.

Residence Question

Vietnam

Presence 183 days or more

Having a residence (including lease for 90 days)

Note: Vietnam non-member country position on “center of vital interests” in favor of place of work.

32May 23rd 2012

Crucible on Centre of Vital Interests

DTA Meaning

Domestic Meaning


Source State

Other Sources

WEAK

STRONG

Text Context

Agreements

Subsequent


Special Meaning

“Ordinary meaning” indicates that all facts are to be considered. No definitive interpretation whether work has more weight.

Domestic meaning does not refer to place of work.

Commentaries: no support either way.

NMCP! International case law points to

include all circumstances, a global evaluation, without more weight for one factor or another.

Supplementary Means

Circumstances

DTA Meaning


Domestic Meaning


Other Sources


33May 23rd 2012

Singapore

Trading income vs. salary

Contract of Service vs. contract for service

Risk, payment, level of control


Vietnam

Income from trading, business = business incomeIncome from research, brokerage, teaching, … “other services”= salary (Art 3(2) a) PIT Law)

Doctrine of true employer Circular 133/2004

Employee?

OR

Independent?

34May 23rd 2012

ARTICLE 14: INDEPENDENT PERSONAL SERVICES1. Income derived by an individual who is a resident of a

Contracting State in respect of professional services of other activities of an independent character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other Contracting State but only so much of it as is attributable to that fixed base.

2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.


ARTICLE 15: DEPENDENT PERSONAL SERVICES1. Subject to the provisions of Articles 16, 18 and 19, salaries,

wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:a. the recipient is present in the other State for a period or

periods not exceeding in the aggregate 183 days in the calendar year concerned, and

b. the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and

c. the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State shall be taxable only in that State.

35May 23rd 2012

Crucible on Centre of Vital Interests

DTA Meaning

Domestic Meaning


Source State

Other Sources

WEAK

STRONG

Text Context

Agreements

Subsequent


Special Meaning

Ordinary meaning of “employment”, context (Art. 14, Art. 7) indicate that service is not included.

ILO ?

Domestic meaning eliminated by context. Anti-avoidance?

Commentaries: clear difference in terms of authority and control (OECD Comm 15/8)

International case law: authority

Supplementary Means

Circumstances

DTA Meaning


Domestic Meaning


Other Sources


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37May 23rd 2012

“(a) 5 per cent of the gross amount of the royalties received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, excluding cinematograph films and films, tapes or discs for radio or television broadcasting; (b) 15 per cent of the gross amount of the royalties in any other case”. “Royalties" = means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films and films, tapes or discs for radio or television broadcasting), any patent, trade mark, design or model, computer programme, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (Art. 12, Thai-Mauritius DTA)


Mauritius

Music Publisher

Copyright Owner

Music

PaymentVoice Performance

Owner

38May 23rd 2012

Thai Copyright Act B.E. 2537 does not include related rights such as performance

Berne Convention for the Protection of Literary and Artistic Works, 1886

Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations 26 October 1961: protection for performers

Both Thailand and Mauritius are parties to the Berne Convention

TRIPS, again both Thailand and Mauritius acceded.


Mauritius

Music Publisher

Copyright Owner

Music

PaymentVoice Performance

Owner

39May 23rd 2012

Crucible on “Artistic Work”

DTA Meaning

Domestic Meaning


Source State

Other Sources

WEAK

STRONG

Text Context

Agreements

Subsequent


Special Meaning

“ordinary meaning” of “artistic”, context imply inclusion

Berne Convention, Trips -> include

Thai law would exclude it.

Commentaries: no guidance

Supplementary Means

Circumstances

DTA Meaning


Domestic Meaning


Other Sources


40May 23rd 2012

Beneficial Ownership

41May 23rd 2012

Restructuring necessary due to cancelling of Indonesia –Mauritius DTA

Cooperation of trustee, JP Morgan, is necessary

In case the loans are restructured through BV, would BV obtain reduced WHT or problems with beneficial ownership

Court of Appeal: substance, object and purpose of the DTA → BV would not be the beneficial owner.

Indofoods (Court of Appeal England, 2006)

BV

Interest 0% - 10%

WHT

Indo Co.

Bond holders

Loan

Mauritius Co.

Loan

Bond holders

0% WHT

42May 23rd 2012

Volvo and Henlys are acting as direct shareholders, in practice

Holding BV has no employees, etc. Weeghel: BV is deemed beneficial owner

of the dividends under Dutch law Original intention of OECD was limited to

nominees, agents Luthi: conduit holding companies,

nominee s. If the conduit company has very limited powers it is not the beneficial owner. The company must have ownership, possession, use, risk, control.

Tax Court accepts this principle but decides that in this case, the company did have ownership, control.

See also Volvo Canada, Tax Court Canada 2012

Prevost (Tax Court Canada, 2008)

Volvo Sweden

Holding BV

Shareholder agreement with agreed distributions

PrevostCanada

Dividends 5% WHT (instead of 10% for UK, 15% for Sweden)

HenlysUK

43May 23rd 2012

Corporate restructure to optimize WHT on dividend distribution from Denmark Aps

Cyprus Ltd has no office or employees Danish tax authorities argument: Cyprus

Ltd is not the beneficial owner of the dividend (Art 10 of DTA). WHT of 28% should apply

Taxpayer argument: Cyprus Ltd is not a conduit company and is the beneficial owner of the dividend. Even if Cyprus Ltd were not the beneficial owner, then US Inc would be the beneficial owner, and US-Denmark DTA would exempt WHT

Tribunal: the dividends distributed by Denmark Aps are exempt from WHT because Cyprus Ltd was a legally established and properly functioning company, and by virtue of its ownership of the shares in the Danish company, was the proper recipient of the dividends

See also ISS case, Danish High Court 2011

Danish case (Danish National Tax Tribunal, 2012)

US Inc

Cyprus Ltd

Denmark ApS

Bermuda Ltd

1. Dividend

2. Repayment debt

44May 23rd 2012

OECD Draft Clarification of Beneficial Owner

“In these various examples (agent, nominee, conduit company acting as a fiduciary or administrator), the recipient of the dividend is not the “beneficial owner” because that recipient does not have the full right to use and enjoy the dividend that it receives and this dividend is not its own; the powers of that recipient over that dividend are indeed constrained in that the recipient is obliged (because of a contractual, fiduciary or other duty) to pass the payment received to another person. The recipient of a dividend is the “beneficial owner” of that dividend where he has the full right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient clearly does not have the full right to use and enjoy the dividend; also, the use and enjoyment of a dividend must be distinguished from the legal ownership, as well as the use and enjoyment, of the shares on which the dividend is paid.” (OECD Draft Clarification of the Meaning of “Beneficial Owner”, 2011)

45May 23rd 2012

Beneficial Owner

• OECD position on applying domestic anti-avoidance measures in a DTA situation, cited above

• States do not have to grant the benefits of a double taxation convention where arrangements that constitute an abuse of the provisions of the convention have been entered into. (OECD Commentary 1/9.4)

• “It is important to note, however, that it should not be lightly assumed that a taxpayer is entering into the type of abusive transactions referred to above. A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions” (OECD Commentary 1/9.5)

• “Member countries should carefully observe the specific obligations enshrined in tax treaties to relieve double taxation as long as there is no clear evidence that the treaties are being abused” (OECD Commentary 1/22.1)

46May 23rd 2012

Regional Approaches to Treaty Shopping: Vietnam

Circular 133/2004: France Co must have the loan on its balance sheet.

US Bank

Loan

France Co.

Interest can be 0%

Loan

Vietnam Borrower

Interest 0%

Interest 10% (now 5% + 5% VAT)

Interest

BVI

SIN Co.

Shares: 0% cap gain

Vietnam OPCO

In case of direct sale: 25%

Capital Gains

DTA procedures must have been completed on time.

Can the gain be attributed to a PE?

47May 23rd 2012

Revenue Department

Demand COR Recharacterize into royalties Reject deductibility of the fee for CIT

Thai Revenue Code sec. 65 ter 13 and 14

Review from transfer pricing perspective

Regional Approaches to Treaty Shopping: Thailand

BVI

SIN Co.HK Co.

Manufacturing fees 0% WHT

Thai Co.

Manufacturing fees 15% WHT

Dividend0% WHT

48May 23rd 2012

Interpretation of the Term “Beneficial Owner” under Tax Treaties“The Director-General of Taxation has issued circular letter SE-04/PJ.34/2005 dated 7 July 2005 in which guidance is given on how the term “beneficial owner” should be interpreted under tax treaties entered into by Indonesia. According to the circular letter, the beneficial owner is the actual owner of the income in the form of dividend, interest and royalty.The beneficial owner must be either an individual or a corporate taxpayer that is fully entitled to directly enjoy the benefits of the dividend, interest or royalty. Special purpose vehicles like conduit companies, paper box companies, pass-through companies, etc. are not considered to be the beneficial owner.If the dividend, interest or royalty is paid to parties that are not considered beneficial owners, the payer is obliged under Art. 26 of the Income Tax Act to withhold income tax at a rate of 20% of the gross amount of the payment.” (Asia-Pacific Tax Bulletin September/October 2005)

Indonesia Tax Court, 14 March 2008: “In the absence of any proof offered by the Indonesian tax authorities that the Mauritius entity is not the beneficial owner, the certificate of residence is persuasive.”

Regional Approaches to Treaty Shopping: Indonesia

49May 23rd 2012

Notice 601 specifies the following elements that are generally regarded as adverse to an applicant’s identification as a beneficial owner:i. the applicant has the obligation to distribute or assign all or majority (e.g., more than 60

percent) of its income to a third country (jurisdiction) resident in a prescribed period (e.g., within 12 months of the receipt of the income)

ii. the applicant has no or little operational activities other than holding the property or rights based on which the income is derived

iii. the applicant, in case of being a company or entity, has relatively small or few assets, scale or staffing, which barely match the amount of income

iv. the applicant has no or little rights to control or dispose of the income or the property or rights based on which the income is derived, and bears no or little risks

v. the contracting country (jurisdiction) does not tax or exempts from tax the relevant income, or imposes tax at an effective tax rate that is extremely low

vi. in addition to the loan contract from which the interest is derived and paid, there exist between the creditor and third parties other loan or deposit contracts of which the amounts, interest rates and contract signing dates are similar

vii. in addition to the contracts on transfer of use rights on copyright, patent, technology, etc. based on which the royalties are derived and paid, there exists between the applicant and third parties other contracts on transfer of use rights or ownership of the relevant copyright, patent, technology, etc.

Regional Approaches to Treaty Shopping: PROC Notice 601

50May 23rd 2012

Crucible on Beneficial Ownership

DTA Meaning

Domestic Meaning


Source State

Other Sources

WEAK

STRONG

Text Context

Agreements

Subsequent


Special Meaning

Ordinary meaning, context of “beneficial”: hard to tell whether narrow legal approach (= original) suffices. Title and preamble do refer to combatting tax evasion (and sometimes avoidance) -> Object and purpose?

Domestic meaning might allow any re-characterization or attribution

Commentaries: Between OECD members that did not make a reservation, persuasive maybe even binding

International case law is divided Other state’s position?

Supplementary Means

Circumstances

DTA Meaning


Domestic Meaning


Other Sources


51May 23rd 2012

Will be highly fact-sensitive, so domestic appreciation of facts will often prevail.

In that case, legal principles will not be of much use

Few, if any, states now accept that just because there is a legal entity, one can apply the DTAs

The OECD interpretation in the Commentary might be interpreted by some states as a blank check to ignore DTA obligations under the guise of combatting tax avoidance (all DTAs are supposed to lead to tax savings!)

Concluding remarks on beneficial ownership

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