Seminar Panel I: Race to the bottom? The Taxation of Mobile Activities
INCOME FROM FINANCIAL SERVICES
Lucie Vorlíčková, LL.M.
Diane Ring
LeitnerLeitner, Czech Republic Boston College Law School, USA
1
I. What is a “mobile financial
service”?
• 1998 OECD Report “Harmful Tax Competition: An Emerging
Global Issue”
– Banking and insurance
– Fund management
• 1999 Report Code of Conduct Group
• OECD identified several harmful tax regimes (2000 Report
“Towards Global Tax Co-operation)
2
I. What is a “mobile financial
service”?
• (Offshore) banking services to HNWI (deposits, asset
•
•
•
•
•
management, trust services, tax driven structures)
Specific banking services (Securitization, Trading, REPO and
similar (tax driven) transactions)
Investment Funds and Fund management
Insurance services (i.e. life insurance services)
Holding activities
Group financing
3
II. Example 1: Mobile Banking Services
Asset Management
Bank
(“Booking State“)
Fee
Marketing
• Banking secrecy
Post Marketing
Services
Travelling Employees
or Freelancers
Clients
• No/or few bilateral treaties
on EoI (e.g. Singapore)
• Special tax regimes for
trusts and private
foundations
4
III. How is such income sourced
to a particular jurisdiction?
• General principles (still) apply to specific business activity
• Permanent Establishment Concept
– No tax liability as long as there is no PE
– Representative office does not create a PE (preparatory or auxiliary
activities)
• Agency PE, if,
– dependent agents
– right to conclude contracts (“factual”/HQ decision)
5
III. How is such income sourced
to a particular jurisdiction? (Cont.)
• Broadening of the PE concept – Service PE:
– Creation of a permanent establishment based on the mere
rendering of services in the other State for a certain period of time
(OECD Comm. 2008 Art. 5)
6
High Net Worth Individual
7
III. How is such income sourced
to a particular jurisdiction? (Cont.)
• HNWI uses offshore banking services
– Wealth management subject to foreign law:
– No taxation on the basis of residence in the “booking state”
– Income from capital may be subject to foreign WHT
• HNWI remains subject to tax in his Residence State
– Portfolio income (vs. financial trading)
– To avoid direct attribution of income, the assets may be held via a
foundation or trust
8
II. Example 2 : Investment Funds
Fund
management
Dividends
Fee
Interest
Capital gains
Source Country
of Income
• No or low tax rates
e.g. IRL, LUX
• Lack of
transparency
•UK Hedge Funds
Investor
Investor
Investment
Fund
Host’s Country
Investor
Investor’s Country
9
of Residence
III. How is such income sourced
to a particular jurisdiction? (Cont.)
• Investment fund profits subject to host’s country’s and
investor’s country’s national tax law
–
–
–
–
–
–
non-transparent in Host Country
special investment fund legislation (e.g. UK, Ireland)
transparent: direct allocation to the Investor’s Residence State
funds income may be also taxed in source country of income
treaty network of Fund’s Host State important
2009 OECD Report regarding Application of DTC’s to CIV’s
10
III. How is such income sourced
to a particular jurisdiction? (Cont.)
• Management fees and/or carried interest (share in the fund)
– Structure of fund decisive (trust, partnership, corp, etc.)
– Income attribution under general rules to separate legal entity
– Substance over form/TP principle
11
III. How is such income sourced in terms of
connecting it to a particular jurisdiction? (cont)
Investment
Proposals
Management
Corp.
“advisor”
Investment
Decisions
Fee
Management
Corp.
“CIV”
Profit Share
Investment Fund
12
IV. International agreement on
how such income should be taxed?
• Direct taxation depends on national tax law
• Not clear on OECD level, however, kind of agreement how
NOT to tax – low or no tax AND:
–
–
–
–
–
Negotiable tax rate or tax base
Ring fencing
Lack of transparency
Lack of exchange of information
Existence of secrecy provisions
• EU Code of Conduct Group listed criteria for the evaluation of
harmful tax measures
13
IV. International agreement on
how such income should be taxed?
• OECD recommendations to counter harmful tax practices:
–
–
–
–
–
–
–
–
CFC rules
Foreign Investment Fund Rules
Thin Capitalization Rules
Deny deductions, exemptions, tax credits and other allowances
related to transactions with tax havens
Impose withholding taxes
Restrictions on the application of participation exemption rules
General Anti Abuse Rules
Increased international cooperation between tax administrations
14
V. Summary
• No specific allocation rules: General principles apply
– PE Concept
o active income: Source State (capital import neutrality)
– Income from capital will further be shared between Source and
Residence State
o passive income: Residence State (capital export neutrality)
– Services rendered by separate legal entity are attributed to such
unless substance over form/TP rules apply
15
V. Summary (Steps already taken)
• Countering harmful tax practices at OECD level:
– All 30 member countries agreed to implement Art. 26 Standard
– Elimination of banking secrecies of several OECD-Member States
with regard to non-resident tax payers
– Most of the initially identified harmful tax regimes lost this status
• EU Savings directive:
– (Automatic) Information exchange on interest income
– Withholding tax (AUT, LUX, BEL)
– Draft directive to include trusts and foundations
• Draft EU Directive on administrative cooperation in the field of
taxation: banking secrecy is no argument for refusing
exchange of information within the EU
16
V. Summary (Recent developments)
• OECD: Tax Collectors Worldwide to Co-operate in RevenueRaising to Offset Fiscal Deficits (May 29, 2009)
– Engaging with High Net Worth Individuals on Tax Compliance
– Building Transparent Tax Compliance by Banks
• US/UK: Hole blown in Bank Secrecy
– Switzerland agreed to implement Standard Art. 26 OECD
– LIE signed Tax Information Exchange Agreement and LIE
Disclosure Facility
• EU Proposed directive on Alternative Investment Fund
Managers
17
VI. What Comes Next ?
• Introduction of the Service PE into tax treaties
– Attribution of Profits to a PE (Art. 7 OECD) – AOA
– Intensified exchange of information proceedings (Art. 26 OECD)
• Introduction of “Swiss Compensation – Tax”?
• Foreign investment funds to be deemed “transparent”:
– All income is directly allocated to the investor (regardless of a
distribution)
18
Final Thoughts
19