International Fiscal Association
International Tax – The Emerging Landscape
Recent Tax decisions - Foreign
courts
- Pinakin Desai
7th July 2012
Agenda
►
Velcro Canada Inc. v The Queen (Supreme Court of
Canada)
►
Tradehold Ltd (SA Supreme Court of Appeal)
►
St. Michael Trust Corp. v. Canada (Supreme Court of
Canada)
►
Dell Products (NUF) v Tax East (Supreme Court of Norway)
►
Revenue Commissioners V. Anson (UK Upper Tribunal)
►
Television de Cataluna SA (Spanish Supreme Court)
Velcro Canada Inc. v The Queen
2012 TCC 57,
Facts
NL Antillies
NL Antillies Co
Netherland
NL Antillies
Co
90% of
Royalties
NL resident in
view of EM
EM in NL
Antillies
Netherland
Royalties
NL Co
Canada
Royalties
Canada
Canadian
Co
Canadian Co
Royalty WHT
July 2012
Page 4
CA NL Antilles
No treaty (25%
domestic WHT rate)
CA – NL Treaty
NIL
Recent Tax decisions - Foreign courts
Facts
►
NL Antillies Co assigned license in favour of its newly formed NL
WOS
►
Canadian Co pays royalty to NL Co
►
90% of royalties paybale by NL Co to NL Antillies Co
►
Canadian Co assessed on basis that NL Co was not beneficial owner
of royalties, but, was a conduit
July 2012
Page 5
Recent Tax decisions - Foreign courts
Ruling – Beneficial ownership criterion
Criteria
adopted
Factors of relevance
Possession of ►NL Co had right to receive royalties
royalty
►NL Co deposited royalties in own bank account and earned
income
interest
Use and
control of
royalty
income
►No restriction on use of funds
►Funds co-mingled with other funds and used to meet
expenses, invest in new enterprises
Risk profile of
parties
►Currency risk associated with upstream royalty payment
borne by NL Co
►Funds of NL Co available to creditors without any priority
given to NL Antillies Co
►Risk of NL CO not insulated by NL Antillies Co by way of
indemnification
July 2012
Page 6
Recent Tax decisions - Foreign courts
Tradehold Ltd
14 ITLR 967
Facts
South Africa
Luxembourg
►
Migration of
Tradehold
shift EM to Luxembourg (Lux)
Trade hold
Residence
2 July 2002 : Board resolution to
►
26 February 2003: Amendment in
SA Law:
Tradegro
Holdings
Company resident as per DTAA
fictionally ceased to be SA
company under local IT Law
Guernsey
►
Tradegro
On cessation of residence,
company subject to deemed
capital gain on FMV of assets (exit
UK
tax)
UKCo
July 2012
Page 8
Recent Tax decisions - Foreign courts
The issue for determination
►
Relevant provision:
Art. 13(4) of SA – Lux DTAA reads :
“‘Gains from the alienation of any property other than that referred to in
paragraphs 1, 2 and 3, shall be taxable only in the Contracting State of
which the alienator is a resident’”
►
Issue :
Whether deemed alienation under SA domestic law qualifies as “an
alienation” within Art.13(4) of SA – Lux DTAA?
July 2012
Page 9
Recent Tax decisions - Foreign courts
Counter Arguments
►
Taxpayer Argument :
►
Taxpayer protected from exit tax in view of Art.13(4) of SA-Lux DTAA
►
For DTAA to apply, it makes no difference whether alienation in SA is
actual or fictional
►
Revenue Argument :
►
DTAA does not contemplate an event which is not actual
►
Deemed disposal is not an alienation under Art.13(4) of DTAA
►
Incorrect to restrict scope of SA law to an emigration to certain select
States
►
Fiction introduced in domestic law not in contemplation on date of
notification of DTAA
July 2012
Page 10
Recent Tax decisions - Foreign courts
Ruling*
►
Art. 2 of DTAA which covers ‘normal tax’ includes tax on capital gains
►
DTAA intended to encompass not only existing taxes, but also future
taxes (see Art. 2(2))
►
Alienation, if not defined in DTAA, derives meaning from domestic law
(Art. 3(2))
►
‘Alienation’ as used in DTAA is broad neutral term not restricted to
actual alienation
►
With relocation of seat of effective management to Lux (being state of
residence under Art 4(3)) Lux acquired exclusive taxing rights
*It was not in dispute that company became tax resident of Lux with passage of resolution
in July 2002
July 2012
Page 11
Recent Tax decisions - Foreign courts
St. Michael Trust Corp. v. Canada
2012 SCC 14
Facts
Post 1998
Before 1998
Garron Family Trust
Barbados
Barbados
Canada
Canada
Garron
Family
Dunin
Famiy
HoldCo
July 2012
Page 13
● Barbados discretionary
trusts
Existing Canadian
Shareholders
B Class
Shares
(value 50M)
PMPL
(CanCo)
Dunin Family Trust
50%
CanCO
Recent Tax decisions - Foreign courts
50%
A Class growth shares (Entitled to
future surplus)
Facts
►
Reorganization of CanCo holding in 1998 by Canadian residents in respect
►
Formation of Trusts:
►
Two trusts were settled in the Caribbean island of St. Vincent (Barbados)
►
All beneficiaries were residents in Canada
►
The trustee was a Barbados resident corporation
►
Pursuant to reorganisation Trusts acquired growth shares of CanCo
►
Two years later, trusts sold shares at FMV
►
Claimed exemption on gain under Canada – Barbados Treaty
►
Assessment in Canada on the basis that trusts were residents in Canada
July 2012
Page 14
Recent Tax decisions - Foreign courts
Court Finding on role of beneficiaries
►
Beneficiaries could replace protector
►
In turn, protector could replace trustees
►
The trustees tax advisors and accountants with no expertise of managing investments
►
The trustee partner-in-charge confirmed his role as investment recorder
►
Documented investment policy respected advice of beneficiaries
►
No effective decision making power with Trustees
►
Decisions including for disposal as per directions of beneficiaries
July 2012
Page 15
Recent Tax decisions - Foreign courts
Ruling
►
Sufficient similarities between trusts and corporations for determining
residency
►
Residence is determined where “central management and control”
actually abides
“The residence of the trustee will also be the residence of the trust where
the trustee carried out the central management and control of the trust,
and these duties are performed where the trustee is resident. These,
however were not the facts in this case”
►
Court finding that trustee had limited role to provide administrative
service - beneficiaries exercised management and control of trust in
Canada
July 2012
Page 16
Recent Tax decisions - Foreign courts
Dell Products (NUF) v Tax East
14 ITLR 371
Facts
Supplies goods
USCo
Ireland Co
to Ireland Co
Outside Norway
Sales concluded on standard
terms & conditions by Norway Co
Norway
Norway Co
Issue: Does Norway
company ignite DAPE for
Irish Co in Norway?
July 2012
Page 18
Recent Tax decisions - Foreign courts
Fact pattern
►
►
►
Commissionaire agreement between Irish Co and Norway Co
regulated by Norwegian Commission Act
Under the Act, an agent who acts in own name does did not bind the
principal
Conduct of business
►
Norway Company entered into agreements with customers on standard
terms and conditions set out by Irish Co
►
Agreements entered into in the name of Norway Company
►
Sales under the brand name of Irish Co
►
Sales on terms other than standard terms required prior approval of Irish
Co
►
In practice, Irish Co did not review individual contracts
July 2012
Page 19
Recent Tax decisions - Foreign courts
Ireland – Norway DTAA : Implications
►
►
►
DAPE Article of OECD patterned DTAA ignited DAPE if there was “an
authority to conclude contracts in the name of the enterprise” with
Norway Co
As per Norwegian version of DTAA, there was requirement of
“authority to conclude contracts on behalf of the enterprise”.
Issue under consideration
Whether, in facts of the case, Norway Co had any
such authority to conclude contracts?
July 2012
Page 20
Recent Tax decisions - Foreign courts
Ruling
►
►
►
Court observed
“A literal understanding of these terms strongly indicates that
it is required that legally binding contracts are entered into on
behalf of the enterprise for which the agent is acting.”
Under Norway Civil Law, contract signed by an agent in his name was
not legally binding on Irish Co
Norway Co was not regarded as having authority to conclude
contracts as required by DTAA
July 2012
Page 21
Recent Tax decisions - Foreign courts
Revenue Commissioners V. Anson
14 ITLR 371
Facts
►
►
►
►
►
►
Mr. Anson, non domicile in UK, a participant in Delaware LLC.
Anson taxed in US on profits of LLC on the basis that LLC is a
transparent entity.
Anson remitted income to UK and claimed tax credit against taxes
payable in UK
HMRC considered LLC to be an opaque entity under English law and
considered amount to be separate source or passage of income.
HMRC rejected claim for tax credit considering it to be restricted to
same source of income
HMRC rejected contention of double taxation
July 2012
Page 23
Recent Tax decisions - Foreign courts
Ruling
►
►
►
US - UK DTAA tax credit by reference to the same profits or income
on which tax levied in US
LLC considered opaque entity
►
Separate legal existence
►
LLC owned assets and business as its own
►
Profits belonged to LLC
►
Members had no proprietary interest in the assets of business or in the
profits as they arise
►
US statute merely attributed profits of LLC for tax purposes to the
members
►
Payout by LLC was from profits of LLC
Distribution from LLC constituted a different source of income for
Mr. Anson
July 2012
Page 24
Recent Tax decisions - Foreign courts
Television de Cataluna SA
14 ITLR 545
Facts
Facts
NL Co
►
Payments made to NL Co related to
activity or performance of entertainer or
sportsman
►
Spanish Co claimed refund of
withholding tax on the basis that Art. 18
of Spain-NL DTAA dealing with Artistes
and sportsmen did not have article
equivalent to Art. 17(2) of OECD Model
Convention
Spanish Co
Taxpayer contention
►
July 2012
Page 26
Amount non taxable in view of Article 18
which does not contain anti-avoidance
clause mentioned in Article 17(2) of MC
Recent Tax decisions - Foreign courts
Ruling
►
►
►
►
Introduction of Article 17(2) in 1992 Model Convention expresses the
wish of signatories to interpret DTAA in the spirit of commentaries,
even in absence of more precise wording in DTAA.
Neither Spain nor NL expressed any reservation or opposition to the
introduction or to the commentary.
States were bound to express reservation or opposition if their
position was different from that implied in the commentaries.
Article 17(2) aims to prevent intermediary companies as a “look
through” mechanics to impute the income to the artist or sportsman
July 2012
Page 27
Recent Tax decisions - Foreign courts
Ruling
►
►
►
►
Article 17(2) provides for permitting source state to tax income in
name of company if the source State has no statutory right to look
through the company
Source state which “looks through” arrangement under domestic law
is enabled under Article 17(1) to tax income from activities in source
state
Question is not one of application of the signed text, but of
incorporation by Spain of a clause that is not explicit in DTAA
Spain is not prevented by its domestic regulation to tax income
obtained through and intermediary company and obtained the same
consequences as follow introduction of Article 17(2) in DTAA
July 2012
Page 28
Recent Tax decisions - Foreign courts
Thank You
“This Presentation provides certain general information existing as at the time of
production. This Presentation does not purport to identify all the issues or developments
pursuant to the transaction. Accordingly, this presentation should neither be regarded as
comprehensive nor sufficient for the purposes of decision-making. Ernst & Young does not
undertake any legal liability for any of the contents in this presentation. The information
provided is not, nor is it intended to be an advice on any matter and should not be relied on
as such. Professional advice should be sought before taking action on any of the
information contained in it. Without prior permission of Ernst & Young, this document may
not be quoted in whole or in part or otherwise referred to in any documents.”