As this is the last newsletter of 2009, I would like to take this opportunity of thanking all our readers for taking the time to review our articles and to send us your valuable comments. I would also like to thank our clients for making 2009 the happiest and, bizarrely, in the worst recession we have had for decades, the most successful year we have enjoyed for a long time. And I would also like to thank our colleagues around the world for their help in contributing to this success, and I look forward to working with them even more closely in 2010 with the new Association that I am setting up. I will explain this more in the January 2010 Newsletter, but it is a professional association of contributors to my “big red book” International Tax Systems and Planning Techniques, which will provide networking opportunities for all members and assist further in providing quick and comprehensive advice to our clients. 

I have just returned from Mumbai where I was invited to speak at the 15th Annual Conference on International Taxation established by Professor Roy Rohatgi. There were several academic professors from Norway, Austria, Australia, Denmark the US, Canada and Switzerland as well as the Indian specialists who presented to a 450 strong and very successful conference. My presentation was “International Tax Issues related to Investing in the European Union”, but I thought I would highlight in this Newsletter two topics discussed by other speakers and the Panel as a whole, which are so relevant in the current environment. 

The first relates to the concept of permanent establishments, i.e. whether a person can be taxed in another country as a result of limited trading in that country; the second relates to beneficial ownership of income and whether double tax treaty provisions are respected by tax administrations. 

Stripping away all technical jargon, suppose I fill a van with home grown brussels sprouts from my garden and take the next Eurostar to Belgium. I park my van in the Grande Place and sell my brussels sprouts in Brussels, making a profit. Clearly, this is a trade carried on in Belgium, and I should be subject to Belgian taxation. However, the double tax treaty between the UK and Belgium, as with all double tax treaties, is intended to facilitate international trade without putting obstacles in its way, and being subject to Belgian taxation would certainly be an obstacle which would encourage me to cancel my Eurostar ticket. It is for this reason countries concluding double tax treaties with each other accept that there has to be a permanent establishment in place before a country is able to tax trading profits arising therein. The article below centres on two very current issues: 

Does property development constitute a permanent establishment? 

Do servers create a permanent establishment in e-commerce? 

The second article reviews the application of double tax treaties where the recipient of income may not be considered to be the beneficial owner of such income. Several court cases have established in recent years the criteria which should be considered, and my article also discusses whether countries can simply override the provisions of double tax treaties where it suits them. 

Finally, to all of our readers, Lara and I (and of course Giselle) wish you a very happy Christmas and sincerely hope that a healthy and prosperous 2010 awaits you. 


Permanent Establishments 

The OECD definition of the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Thus there must be physical presence at a specific location, which is fixed in terms of place and duration, and the physical place must be where the business is wholly or partly carried on. And then of course it is only the profits that can be attributed to that place of business that should be taxed in the relevant jurisdiction. 

Clearly, a temporary place of business (such as my van in the Grande Place in Brussels) is not a fixed place of business, and generally it is considered that anywhere which has a duration of less than six months could not be considered a fixed place of business. And the most important point is whether I have a right to use premises, even if they are indeed fixed and exist for more than six months. Thus I must either own, rent or otherwise have premises available to me as a result of a legal right. So if I had signed up with the Belgian authorities to occupy a stall for 12 months, even if I am only physically in Belgium for one or two months, I would have the legal right to use fixed premises at a specific location for a certain duration, and this is where my business is carried on. Ergo, a permanent establishment (taxable presence) would exist. 

Property developments 
Turning first to the issue of whether a property development is in itself a permanent establishment. In fact, the UK tax authorities have taken this line in specific cases where double tax treaty permanent establishment provisions are relevant. These cases relate to non-resident owners of real estate that have entered into contracts with local builders to develop land with the intention ultimately either to rent the completed development or to sell it. 

HMRC regard the non-resident companies as trading in the UK, and this in undeniable. The question is whether there is a permanent establishment in place. All the normal arguments that could be raised by HMRC are not relevant in these cases, i.e. the independent contractors are not dependent agents since they enter into contracts with many non-related owners as part of their ordinary business, and there is no other dependent agent in the UK which could create a permanent establishment. So we have to go back to the basics as above. 

The business of the property owner is to develop property, but this is carried on through its fixed place of business in its country of residence, not in the UK. Certainly part of the business will be carried on at the property itself, but not through where the property is located. Indeed, the legal right to occupy the land is contractually held by the independent contractors until completion, and the real estate owner has no right to use the land for any business purposes until the development has been completed. Thus it cannot be denied that the business is property development but it is not carried on by the non-resident company through the site in the UK, it is merely the object of the business activity. 

Further arguments relate to the question of who owns the physical assets that serve as the basis for the business activity. In this case, the cranes, scaffolding, materials and of course personnel, are all “owned, rented or otherwise at the disposal” of the independent contractor, not the real estate owner. The business activity is development, using all of these physical assets, and therefore it is the business of the independent contractor that is carried on at the physical location, not the business of the real estate owner that is carried on through that fixed place of business. 

E-commerce and servers 
The case of a server in e-commerce has similar fundamentals. The business of e-commerce may be conducted by an entity in a jurisdiction in which no servers are located. These may be the premises where the entity is located through which the e-commerce activity is carried on, but is there an argument that the activity is also carried on where the servers are located? I agree to this, much like the Grande Place is where the sales of my brussels sprouts take place. However, the fundamentals require us to ask the following questions: 

Is there a physical location for the servers? The answer is yes, and is this fixed? Again the answer is yes. 

Does the e-commerce trading entity own the physical assets that serve as a basis for the business activity i.e. the servers? If the answer is no, then does the entity have a legal right to enter the premises and use the physical assets? 

In the case of servers hosted by independent companies, the entity would generally sign up to a hosting contract, using servers owned by these independent companies, and certainly they would have no legal right to enter the premises of the hosting entity without permission. The key question to ask in any issue involving legal right (whether by ownership or through contracts) is whether the entity can be removed from the fixed location without its consent. In the majority of cases therefore, the servers do not dictate the existence of a permanent establishment / taxable presence for the trading entity. 

Beneficial Ownership 

I have written many articles on treaty shopping and the more recent trend of introducing Limitation of Benefits (LOB) clauses when negotiating double tax treaties. The LOB clauses essentially examine whether the recipient entity is really the beneficial owner of income and therefore entitled to benefit from the relevant treaty. Nowadays, however, there is a further worrying trend, and that is that countries are overriding the provisions of double tax treaties in contravention to the basic principles of the Vienna Convention on the Law of Treaties. 

The latest example was announced only last week on 2 December 2009 by the Russian tax administration amending Article 7 of the Russian Tax Code. This article states that the provisions in international treaties should have priority over domestic tax rules. The draft law now states that if it is determined that the factual recipient of income is not a tax resident of the State with which the Russian Federation has concluded an international tax treaty, then the provisions of the treaty will not apply to such relevant income. 

Certainly, when advising clients on the creation of international tax structures, I state that it is essential for there to be economic substance for any entity that is established for tax beneficial purposes. Thus, Controlled Foreign Company (CFC) rules will not apply where subsidiary companies have “exempt activities” which reflect economic substance in the form of premises, assets, equity at risk and the functional capacity required to carry out these activities through relevant personnel. Similarly, for either ultimate or intermediary holding companies, they also should have economic substance, although clearly their activities are limited to the holding of assets and investments rather than trading activities. Therefore such holding companies may not require premises and staff, but must nevertheless have directors who are capable of fulfilling the tasks of management of such assets. 

And the management should be effective management, which of course must be considered on a case by case basis. One of the recent cases involving beneficial ownership is the Indofoods case on which I have reported in previous Newsletters. Here, a Dutch company was interposed in order to obtain treaty benefits, but in fact was mandated to hand over its income to another entity within the Indofoods Group, and actually made no profit on the transaction in which it was involved. Clearly there could be no effective management attributed to the activities of the Dutch company, and in this case it was not considered to be the beneficial owner of the income for which treaty relief was claimed. 

One must look at the provisions of double tax treaties very closely to see what is the wording of specific provisions. The dominant language must also be understood in case of conflicts in interpretation of specific provisions. Thus for example the term ”beneficially owned” may be differently interpreted than the term “beneficially held”, since for example the registration in the share register of an entity may mean that a company is indeed beneficially held by a specific entity, although it may not be beneficially owned by that entity. 

But as explained above, the more worrying development is that tax authorities may simply disregard specific provisions where it suits them, stating that as far as they are concerned double tax treaties should not be used for the purposes of tax avoidance. In this, they are helped by the title of most double tax treaties entered into under previous OECD models, which is a Convention “For the Avoidance of Double Taxation and the Prevention of Fiscal Avoidance”. In many instances, tax structures not only avoid double taxation, but even single taxation in the source country is avoided without there being any corresponding taxation in the recipient entity. In such a case, tax authorities may justifiably claim that the treaty is not being used to avoid double taxation but it is indeed used for fiscal avoidance purposes and therefore should be disregarded. Certainly this is a line that has been taken in court cases to date and may become more prevalent in the future.

The post Issue 97 – 11 December 2009 appeared first on IFS Consultants Ltd.

This month’s newsletter contains a technical examination by Lara of how the UK is introducing legislation or practices which override existing double tax treaty arrangements, and has prompted me to comment on the uncertainty this creates for the taxpayer, and how this trend is manifesting itself in other countries. Indeed, we have been involved with negotiations with tax authorities not only in the UK, but also Denmark, France, Italy, Spain and Switzerland, and the examples we have seen show a disturbing trend. Our advice has generally been to withstand sometimes intimidatory allegations and threatened assessments which are based neither on law nor indeed the relevant facts. In some cases, neither the source of income nor the residence of the taxpayer had any connection with the country claiming their desired share of the global tax bite.

I believe tax payable on earnings is an essential ingredient to a successful and caring society, but I do believe in the basic freedoms to have certainty when planning one’s affairs. Double tax treaties are supposed to provide this certainty, yet they seem to be capable of being unilaterally overwritten by subsequent domestic legislation bought in by a particular country. The first example I can remember is as far back as 1981 when the US introduced its Foreign Investment in Real Property Taxes Act (FIRPTA), and included a provision that shares in companies owning US real estate would also be considered as real estate for the purposes of FIRPTA. Thus even though double tax treaties may have stated that the sale of shares in companies (representing movable property) would only be taxable where the alienator is resident (which may have been outside of the US for non US investors), FIRPTA had the effect of overriding such a provision.  Since then, there have been innumerable instances of similar treaty overrides, and one is left to wonder how sacrosanct the terms of a freely negotiated double tax treaty are for the unsuspecting taxpayer.  And indeed, what are the remedies if the tax administration of a particular country refuses to accept the taxpayer’s reasonable interpretation of any of its provisions.

And then there is the Freedom of Establishment clause in the Treaty of Rome, with which all EU countries should comply. This means that a structure can be created with the certain knowledge that, for example, the profits of an entity created in one jurisdiction will only be taxed in that jurisdiction, and not in the country of residence of the parent, whether this be a corporation or an individual. Yet the number of cases that are brought before the European Court of Justice shows how little attention tax authorities are paying to EU legislation. Clearly, tax payers are frightened at the cost of challenging tax authorities by bringing actions before the ECJ, since in many cases the prospective costs far outweigh the tax liabilities with which they are being penalised. 

I thought you may be interested to read the “Your Charter” section of HMRC’s own website.  The rights of the taxpayer are very nobly stated, but some of our experiences do not seem to correspond with the following:

Your rights

What you can expect from us

• Respect you
• Help and support you to get things right
• Treat you as honest
• Treat you even-handedly
• Be professional and act with integrity
• Tackle people who deliberately break the rules and challenge those who bend the rules
• Protect your information and respect your privacy
• Accept that someone else can represent you
• Do all we can to keep the cost of dealing with us as low as possible

What is not covered is:

• Ensure our legislation and practices provide you with certainty to enable you to compute your tax liabilities

Surely this is not too much to ask in a world where complex international transactions require definitive knowledge of the costs of effecting these transactions.

Tax – a reality or merely a figment of HMRC’s imagination?

The interaction of the UK’s domestic anti-avoidance provisions with its double tax treaties has been the subject of cases such as Bricom, Strathalmond and Willoughby, all discussed below.  Until recently, the question of whether the terms of a treaty will override such provisions has rested on complex legal deliberations on the interpretation of the legislative drafting in question.  However, the UK has, since these cases, made some moves to clarify matters in relation to both income tax and capital gains tax, with the effect of imposing the dominance of domestic law over international law.

The case of Bricom Holdings Ltd v IRC 1997 STC 1179 concerned whether the provisions of the UK/Dutch double tax treaty could override UK domestic controlled foreign company legislation.  In short, the question was, could the interest article in this treaty, which exempted from UK tax interest payments made by a UK company to its Dutch subsidiary, so exempt the income received by the Dutch company (a CFC of the UK company) as a result of these interest payments from being taken into account in assessing chargeable profits for the purposes of the CFC rules?  It was decided in this case that the interest in question was merely an element in a calculation and that what was apportioned to the UK company under the CFC rules was not the actual profits of the Dutch company but notional profits of an equal amount.  The argument, therefore, was that as it was not the actual income which was apportioned but only notional income, the provisions of the treaty (which applied to actual income in the form of the interest payments) could not apply.
 
In this case, Millett LJ disagreed with the argument that the interest lost its character as interest by being deemed to be another person’s income on the basis that this was not an accurate description of the statutory process.  He cited the case of Lord Strathalmond v IRC [1972] 1 WLR 1511.  In this case, Lord Strathalmond was assessed to income tax on his wife’s income under a particular UK anti-avoidance provision which no longer exists.  It was held in this case that Lord Strathalmond was entitled to treaty relief just as his wife was (she was tax resident in the United States and under the UK/US treaty the income in question was exempt from tax in the UK), because it was the same income that was deemed to be his and not just an amount equal to this income.

However, the case of IRC v Willoughby 1995 STC 143 again took the view approved in Bricom – that the income of one person which is deemed to be that of another under UK anti-avoidance rules cannot benefit from a treaty.  In this case, it was discussed whether UK/Isle of Man treaty prevented the profits of a Manx enterprise from being deemed to be income of the taxpayer under Section 739 TA 1988 (now Section 720 et seq. ITA 2007), which attributes income earned offshore as a result of a transfer of assets by a UK resident individual to that individual.  The Special Commissioner in this case said no, on the basis that there is a distinction between actual income of an individual and actual income of another person which is deemed to be income of the individual.

It seems, therefore, that there is some difference of opinion in the judiciary as regards whether a double tax treaty can protect against anti-avoidance provisions attributing offshore income to UK residents. But what about equivalent capital gains tax provisions? Section 13 TCGA 1992 attributes gains of a non-resident close company to its UK resident participators. The capital gains tax article in the OECD Model Treaty (Article 13) provides that gains are taxable only in the contracting state of which the alienator is resident (except in the case of gains from immovable property and permanent establishment assets in the other contracting state).  Following the argument of Millett LJ in Bricom, the gains should not lose treaty protection because they are deemed domestically to be the gains of another person.  Indeed, because Section 13 taxes actual gains rather than a notional amount, the argument run in Bricom and Willoughby that the treaty should not apply because the gains somehow lose their initial character, should not apply.  The UK tax authorities do seem to accept this in their Capital Gains Tax Manual, para 57380.  However, this view is not formalised in legislation, therefore leading to some scope for uncertainty.

For income tax purposes, Section 59 Finance Act 2008 goes some way to protecting the enforceability of UK domestic anti-avoidance provisions, irrespective of contradictory terms in a double tax treaty.  This section states that the permanent establishment article in a double tax treaty is not to be read as preventing the income of a UK resident from being chargeable to tax – precisely how we thought it should be read!  This is one of three sections on double tax relief in FA 2008 (sections 57 – 59) aimed at combating tax avoidance schemes, such as the use of trusts to exempt partners in a foreign partnership from UK income tax.  However, it is not clear whether Section 59 is aimed at a particular scheme or whether it was introduced to allow HMRC to impose the UK anti-avoidance rules in any and all cases, irrespective of the existence and wording of a double tax treaty.

For capital gains tax purposes, the UK has introduced in some of its recent treaties, a specific saving provision in Article 13 (or its equivalent) which has the effect of overriding this Article where UK domestic anti-avoidance provisions apply.  Treaties containing this override are the ones with Mauritius, Australia, Canada, the US and New Zealand.  On a reading of the drafting of these overrides (they are almost identical), they do not appear to apply to Section 13, but instead to the provision of UK law which counters avoidance of capital gains tax by temporary non-residents (Section 10A TCGA 1992).  Indeed, the 2003 Technical Explanation to the US/UK Treaty states that the intention of this override is to allow the UK to apply Section 10A (and does not mention Section 13).  However, the Exchange of Notes to the 2003 Protocol to the New Zealand/UK Treaty states that this provision also applies to Section 13.  As the wording of the override in the New Zealand Treaty is almost identical to that in the other treaties noted above, are we to assume that the overrides in these treaties also specifically apply to Section 13, and how does this fit with Bricom and the view expressed by HMRC itself in its Capital Gains Tax Manual?

We must also ask how these new moves to reinforce the dominance of UK domestic law fits with EU law.  After all, if we are to have freedom of movement and establishment within the EU, how can the UK justify charging to tax UK residents in respect of offshore income and gains where these arise within the EU?  Clearly, the capital gains tax override mentioned above has not been concluded in a treaty where the corresponding country is an EU Member State, but Section 59 FA 2008 does seem contrary to EU law, as well as international law.

Of course, the test for all of this is how this will be applied in practice but it does certainly seem to fit with the attitude of the UK in recent years to anti-avoidance and tax schemes in general.

The post Issue 96 – 17 November 2009 appeared first on IFS Consultants Ltd.

This is our first newsletter since the summer break, and I am delighted to welcome back my daughter Lara Saunders after her maternity leave….. and to thank her for making my granddaughter Lila the most beautiful and loveable baby that ever existed! 

Six months ago at the height of the recession, with the London stock market falling to 3500, I exhorted readers to decry the universally pessimistic attitude that was prevalent at the time.  After all, I suggested that if worldwide consumer demand was maintained, this coupled with historically low interest rates would provide a continued stimulus to economic growth.  Companies had already taken the opportunity of shedding unwanted overheads, unfortunately particularly staff, and consumer demand would lead to restocking of products for consumption.

Six months later, with the London stock market veering towards an inversion of figures to 5300, I would nevertheless caution against a too optimistic view of the current level of the economy.  Economic growth can only flourish in a market where both savings are encouraged and investment opportunities abound.  Maintaining low interest rates only encourages investments if banks will lend relevant funds, but of course they discourage savings.  What is more worrying is that governments (particularly the UK one) are taking the view that they ought to increase taxation to meet the cost of providing public services which the government can no longer afford. But raising taxes does not contribute to economic growth, it is merely a shifting of wealth from the private to the public sector.  In the absence of absolute growth in the economy, this will inevitably lead entrepreneurs to question whether it is worthwhile to make relevant investments. 

During the last six months, I have seen many clients who are indeed asking this question, some of whom are moving their personal residence and some of whom are moving their corporate residence, or at least the centre of their corporate activities.  Dis-incentivising the wealth makers historically leads to a weak economy, and at this stage of the economic cycle, this would be disastrous.  For those who remember the 98% maximum rate of income tax under the 1964/70 Harold Wilson government, this started the first of the ‘brain drains’ from the UK.  By contrast, and assuming that sterling is a measure of the strength of the UK economy, the more relaxed tax regime in the 1979/90 Margaret Thatcher years created a strength against other currencies which had not been seen for decades (sterling against the dollar was $2.80 to the £ post-war until 1965 and then retreated dramatically to $1.30 until it advanced through the 1980’s and 1990’s to $2 until 2007 since when it has fallen again, particularly this time against the euro).  The connection between currency strength and taxation seem obvious, but seems to be ignored amidst the political concerns of how to pay for our public services. 

Some more statistics to prove the point.  From a base of approximately 35% of GDP in 1980’s, tax revenue has now risen to over 40% in the UK, and even higher figures up to 50% are relevant for such socially aware countries as Denmark, Sweden, Belgium, France, Finland, Norway and Austria.  Contrast this with 33% in Canada, 30% in Australia, 28% in the US and 27% in Japan.  Is education far inferior in those countries, or medical assistance (despite the furore currently raging in the US), and are these countries defenceless when threatened?  Or is it simply that GDP is much higher per capita in these countries than in others?   Have their tax policies been instrumental in creating a stronger GDP than in other countries?

The public should be encouraged to focus on the correlation between high taxation and economic strength (which itself allows for greater social services).  The last Royal Commission on taxation was in 1957, over half a century ago.  The world is a very different place nowadays than it was then, and it is time that another Royal Commission was created.  Rather than tinkering with the existing tax system through stealth taxes and additional percentages, the entire tax system needs to be reviewed.  Specific taxes for specific public services will provide greater accountability in ‘balancing the books’, and avoid the enormous waste of public money that quangos and other government bodies spend out of the general public finance.   Wouldn’t it be great if the tax system could again be the impetus for economic growth? Perhaps UK residents would not find continental Europe such an expensive place to go for their holidays, and perhaps UK entrepreneurs would consider staying put!

ITSAPT PROFESSIONAL ASSOCIATION

I thought I would use this newsletter to introduce a new Association that I have created. The acronym ‘ITSAPT’ stands for ‘International Tax Systems & Planning Techniques’ which is a 1,000 page loose leaf work that I first wrote in 1983. Since then, it has had 57 releases, i.e. just over two a year, and it covers the tax systems of over 30 countries. It is the only international tax reference work that has been written by one individual, but I have to admit that the task of keeping the book up to date was too much for me and I relinquished sole responsibility for the book after the first 10 years. Since then, I have asked tax specialists in various countries to assist me with updating the chapters, and indeed some new ones such as Russia, India and South Africa have been added. It is these specialists that I have invited to join the ITSAPT Professional Association, along with other specialists from countries that are not currently included in ITSAPT (such as Brazil and China) which I intend to include in the new work.

The New ITSAPT

After more than 25 years, and in a very different world of international tax than in 1983, I have decided to revamp ITSAPT with a new format. My publishers, Sweet & Maxwell, have suggested that a loose leaf work is now less popular than hitherto, and the new ITSAPT is to be published as a bound book every two years, the first edition being published in 2010. In the intervening years, a small booklet will be published with major changes to tax law in the countries covered.

Lara will be primarily responsible for editing the new book, collating the various chapters and working with contributors to ensure that the original concept of ITSAPT is maintained, i.e. a comparison between countries of specific provisions which may not yet be within a particular country’s legislation, but which could be considered as possible future changes in that particular country.

For those of you who are familiar with the Polycon Lens Company (PLC), this will continue as Part A of ITSAPT, but brought up to date as an internet company which is now considering its involvement in renewable energy. Part A traces the development of PLC from an initial domestic base to the creation of a worldwide international structure through both manufacturing and sales subsidiaries, using overseas holding companies where relevant. The acquisition of further companies and the financing thereof is a feature of the development of PLC, which then uses its profits to invest in real estate internationally, set up licensing and franchise operations for its products and finally become a major worldwide name. The tax issues that are relevant throughout its entire growth over the same 26 years that ITSAPT has been in existence are then cross-referenced to relevant chapters within Part B of the book, explaining the planning techniques that are relevant for the various stages of PLC’s development.

Part B covers the tax systems of the following countries, not only from a corporate but also a personal tax position, and specifically with regard to investments by domestic residents outside of their country, and also investments by foreign entities and individuals into domestic ventures. Primarily, therefore, the book centres on cross-border transactions, although significant domestic tax information can be gleaned from specific sub-sections of each chapter.  It is these sub-sections that we have revamped for each country, as well as adding new countries which ITSAPT needs to include if it is to be useful for professional advisors in the 21st century. I hope that you will be interested in at least one of the following countries covered:

Australia, Austria, Belgium, Brazil, Canada, Channel Islands, China, Cyprus, France, Germany, Gibraltar, Hong Kong, India, Isle of Man, Israel, Italy, Luxembourg, Malta, Mauritius, Monaco, Netherlands, Netherlands Antilles, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Ukraine, United Kingdom and United States.

The ITSAPT Professional Association

So what is the Association about? There are many networks of lawyers and accountants who claim to be able to provide comprehensive international tax advice, and many do amongst their many qualified colleagues. The problem with a network is that it is only as strong as its weakest link, and my aim in creating The ITSAPT Professional Association is to avoid any weak links, and to ensure that each individual is highly qualified to provide international tax advice to IFS clients.  There will be a link on the IFS website with the co-ordinates of all Associates, and I am only too happy for readers of our newsletters to contact these individuals direct if they require specific advice about a particular country, instead of having to come through IFS and increase the professional fees their own clients have to incur.

Additionally, I plan to have an annual conference of ITSAPT professional associates, probably in London, and this conference will address current issues affecting international tax structures. If you would like to receive information concerning these forthcoming conferences, please click here. The first conference is unlikely to be until the last quarter of 2010, by which time the new ITSAPT will be published.

Finally, now that we are all back at work after the summer recess, I sincerely hope that all readers of our newsletters enjoy a more stable environment in which their businesses and practices flourish in the coming year. Lara and I really look forward to working with you and hope that we can assist you in achieving your goals.

The post Issue 95 – 6 October 2009 appeared first on IFS Consultants Ltd.

I know I said I was going to give myself (and you) a break from our newsletters over the summer months, but I thought you may like to read the transcript of a lecture I gave to the International Tax Planning Association in Zurich last month, entitled “New Developments: Recent Changes affecting International Tax Planning”. The topics covered include the following:

• Can we rely on using Double Tax Treaties for international structures and can their provisions be unilaterally over-ridden?
• The beneficial ownership concept inherent in treaty provisions.
• Expanding the concept of permanent establishments as it relates to UK real estate.
• The continued use of Luxembourg for investing in French real estate.
• Abolishing dividend withholding tax in Luxembourg and its use for investing in China.
• Using Mauritius and its IPPAs for African and Indian businesses.
• The Singaporean holding company regime.
• Italian changes in its attitude to foreign trusts with Italian beneficiaries.
• The UK participation exemption regime in the 2009 Finance Bill.
• The US exit tax and the concept of Constructive Receipt of Income.
• The ability to rely on the Dutch Co-operative to avoid Dutch withholding tax.

If any reader has any comments on my views expressed in the transcript, I would really like to hear them. As a member of the Executive Committee of the International Tax Planning Association, I would be happy to introduce you to the organisation if you would like to join it, and invite you to visit its website at www.itpa.org. My next scheduled presentation is next June in Venice where I will be discussing issues around changes of personal tax residence, and indeed avoiding tax residence anywhere for particular periods of time. I would be delighted to see you there if not before.

I hope you enjoy reading this month’s unexpected newsletter!

Kind regards

Roy Saunders

The post Issue 94 – 17 July 2009 appeared first on IFS Consultants Ltd.

My mind this month has quite naturally been geared to the process of creation, and I am delighted to announce the birth of baby Lila to my daughter Lara and her husband Adam Arnold. Lila is of course the most beautiful baby that has ever been born and although two weeks early at 5lbs 7ozs she is a sturdy little bundle of perfection.  I have attempted throughout my career to be as creative as possible, but I have to admit abject failure to come anywhere near Lara’s achievement!  Both mother and daughter are doing brilliantly.

The ITSAPT club

As Lara is not going to be around to help me for the next four months, I thought I might give myself (and you the reader) a break from our IFS newsletters during the summer and bring the next one to you in October, when Lara returns. Until then, and to enable her to look after Lila at the same time,, she will be working on the re-vamp of “International Tax Systems and Planning Techniques” which is being changed from the loose-leaf work that has been the leading international tax reference book since 1983, to a bienniall bound book with yearly updates. Sweet & Maxwell, its publishers, have asked IFS to continue with the work after 26 years of successful editions totalling 58 releases.

What is exciting to me is that I have asked specific tax advisors in the 30 or so jurisdictions covered by the book to join me in an informal ITSAPT Limited Partnership where each member takes responsibility for his country but also agrees to cooperate with each other to assist on client matters. In other words, a sort of informal network of specialists who I believe are able to provide the best advice to our clients as well as their own group of clients on international tax matters. I plan to hold an annual conference at which the ITSAPT LP members will join me in London in discussing international tax issues of current interest. The conference will be open to delegates from all over the world, and the first will probably be in mid 2010.

Can we rely on Double Tax Treaty provisions any more?

One of the current issues which we will be discussing is going to become of greater significance in the future than it was in the past;  that is whether we are able to rely unreservedly on the provisions of double tax treaty arrangements in force in order to create appropriate structures for our clients. The use of intermediary holding companies, finance and licensing companies rely on the ability to minimise foreign withholding taxes according to double tax treaty arrangements, whilst trading companies want to be sure that they are not going to be taxed in another country and want to rely on the permanent establishment clause of a treaty to avoid a fiscal presence in that other country; and individuals may move to a particular country in order to obtain benefits from personal income rights that are afforded by a particular treaty.

35 years ago when I started practising as an international tax consultant, one didn’t even have to think whether one could rely on a double tax treaty – simply look at the wording of the treaty and create an entity to take advantage of the relevant provisions. Picking a company off the shelf in the Netherlands or Luxembourg and interposing that between two or more business entities was a perfectly natural thing to do. Then along came the US which started to override the provisions of double tax treaties without recourse to the other country (the contracting party) – so much so that the current Swiss/US Treaty contains a provision that no treaty override will be permitted unless a mutually agreed reciprocal benefit is afforded to the contracting party.

The ability of the US to override treaty arrangements stems from the US constitution in which the provisions of international agreements and those of domestic legislation have equal status.  So when the US implemented “The Foreign Investment in Real Property Taxes Act” in 1981 (FIRPTA), it did not need to renegotiate double tax treaties in order to implement the FIRPTA provisions. No superior status is given in the US to treaty legislation over domestic provisions, unlike the case for example in France and the Netherlands where it is expressly stated that international agreements take precedence over subsequent domestic legislation.

Certain constitutions such as Luxembourg and Belgium require international agreements to be incorporated into the domestic law of the countries, but limit the ability of subsequent domestic legislation to amend the provisions of those agreements, so again treaty overrides would not be permitted. In the UK however, although international agreements also have to be incorporated into domestic law before they become effective, Court cases have confirmed that Parliament may take away anything that it has given, ie Parliamentary supremacy would permit treaty overrides. And in 2008, that is exactly what they did by providing in Section 59 of the Finance Act 2008 that UK residents could not rely on qualified double tax treaty provisions to override UK legislation.

The scourge of Treaty Shopping

As an advanced warning to the world that the US would not accept “treaty shopping” arrangements, the 1992 US/Netherlands double tax treaty brought in a two page “Limitation of Benefits” provision which effectively prevented Dutch companies not owned by Dutch residents from benefiting from any of the treaty provisions.  Even those entities owned by Dutch residents would not be able to benefit if 50% or more of the income received under the treaty benefited from lower withholding taxes and was paid to non-residents who would not be so entitled to such tax mitigation on a direct receipt of such income (the base erosion test). These Limitation of Benefits provisions are now common in all US treaties that have been renegotiated since 1992.

Case law developed by various countries has also succeeded in limiting the benefits of treaties to those who are actually beneficially entitled to the income. For example, the dividend and interest articles of double tax treaties have a requirement that the recipient must be the beneficial owner of the income in order to obtain treaty benefits. There have been many cases which have reviewed whether a recipient entity is indeed the beneficial owner of the income, particularly where that entity has no real substance and is only, in effect, a virtual entity established in a particular jurisdiction for the purposes of taking advantage of the treaty.  Cases such as Indofoods v J P Morgan in the UK and the Prevost and MIL Investments cases in Canada can explain the way Courts are thinking in this regard.

Is the objective of the Treaty being fulfilled?

However, there have been few cases which have looked at whether a treaty should apply at all if the object and purpose of the treaty is not being fulfilled appropriately. Regard could be had to Article 31 of the Vienna Convention on the Law of Treaties which states “the treaty should 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”. It is not a great leap from considering whether specific provisions apply, to looking at whether the treaty as a whole should be disregarded.   After all, the heading of any double tax treaty will generally read “Agreement between X country and Y country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income”. If an off the shelf entity without any substance is interposed in a particular structure with the object of avoiding taxation in the source State, and it has no other commercial purpose in life and no substance, then tax authorities should quite properly question whether the object and purpose of the treaty are being fulfilled. Is double taxation being avoided, or are the taxes of just one country being avoided, and is the interposition of the virtual company assisting with fiscal evasion rather than preventing it?

The UK authorities seem reluctant to pursue this argument in Court cases, such as the Smallwood case, but the French have taken issue with a particular structure using this argument successfully. The Yanko-Weiss case in Israel in December 2007 held that a general anti-avoidance concept is implicit when applying double tax treaties.  It cites Article 26 of the Vienna Convention which states that the treaties must be performed in good faith, and the case stated that treaties must not be used to abet tax evasion.

There is, however, a contrary argument that is in fact the basis of the Vienna Convention which suggests that the text of double tax treaties must be presumed to be the definitive intentions of the contracting parties.  Therefore, although unwritten intentions of the parties should be considered, the meaning of the text itself coupled with the customary interpretation already exercised by the contracting parties should be of paramount importance. In summary, generally Continental civil law jurisdictions might suggest that literal interpretations may be at variance with the purposes of the treaty as a whole, while Anglo-Saxon countries may be reluctant to deny the actual text of a particular treaty (although the US seem quite happy to do this).

Uncertainty for the future

What is certain is that automatic treaty shopping as we all practised it 35 years ago is no longer on the agenda and we must all ensure that any corporate entity within a structure has to have commercial validity.  It needs to have sufficient substance to ensure that it is indeed resident in the jurisdiction where is it claiming treaty benefits, and that it is not undermining the intention behind the treaty as a whole if it is included within a relevant structure.  In today’s economic climate requiring investment opportunities to rekindle global growth, one would have thought that impediments to making investments (such as the uncertainty outlined above) would be counter-productive.  Unfortunately, Revenue authorities often fail to see the wider picture so that preservation of a 5% withholding tax differential becomes more important than whether the investment actually takes place.  And after all, the principal purpose of a double tax treaty, as highlighted in paragraph 7 of the Commentary to Article 1 of the OECD Model Treaty is “to promote … exchange of goods and services, and the movement of capital and persons”.

Clearly, we at IFS need to maintain our creativity in order to help with the impetus required for new global growth, but at the same time we need to be aware of trends in the attitude of Revenue authorities and Courts as regards the reliance we can place on double tax treaty arrangements.

The post Issue 93 – 9 June 2009 appeared first on IFS Consultants Ltd.