The cross-border issues making a difference

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International Tax Review Asia Tax Forum 2012
International Tax Developments:
The Cross-Border Issues Making a Difference
Steve Towers /David Weisner/Kristy Ton
May 9 – 10, 2012
1
Agenda
What hope for tax reform in the US?
OECD developments: beneficial ownership, PE, intangibles
2011 Update to the UN Model Treaty and Commentary
FATCA – It’s getter closer. What taxpayers need to know
Recent international tax cases: the global top 10
Q&A
2
©2012 Deloitte Global Services Limited
2012 Elections
Economy is driving election outcomes
% of Adults Surveyed
60
Top Five Issues of Concern to Voters
50
45%
40
30
20%
20
10
10%
Fe
b'1
1
Ma
r'1
1
Ap
r'1
1
Ma
y'1
1
Ju
n'1
1
Ju
l'1
1
Au
g'1
1
Se
p'1
1
Oc
t '1
1
No
v '1
1
De
c'1
1
Ja
n' 1
2
Fe
b'1
2
Ma
r'1
2
0
Source: NBC/WSJ Survey, March 3, 2012
• Economic issues driving 2012 elections
 Only Roosevelt re-elected (1936) with unemployment rate >8.3%
 Only Eisenhower re-elected (1956) with GDP growth <2%
3
©2012 Deloitte Global Services Limited
2012 Elections
Obama’s performance on the economy is up
Obama Performance on the Economy
% of Adults Surveyed
80
70
60
57%
60%
52%
50
45%
40
30 26%
20
39%
Approve
Disapprove
10
Source: NBC/WSJ Survey, April 2012
Fe
b '0
9
Ap
r'0
9
Ju
n '0
9
Au
g'0
Oc 9
t'0
9
De
c'0
9
Fe
b '1
0
Ap
r'1
0
Ju
n '1
Au 0
g'1
Oc 0
t'1
0
De
c'1
0
Fe
b '1
Ap 1
r'1
1
Ju
n '1
Au 1
g'1
Oc 1
t'1
1
De
c'1
1
Fe
b '1
2
Ap
r'1
2
0
• Obama approval rating on the economy has improved
 Obama had a negative 18 point rating in the fall
 It’s currently a negative 7 point rating
4
©2012 Deloitte Global Services Limited
2012 Elections
Obama’s approval ratings have improved significantly
Obama Approval/Disapproval Average Ratings
53.2
48.3
43.0
47.1
• Politicians usually in trouble with disapprovals > approvals
• Last August, Obama was looking like a “dead duck” (-10.2%)
• Today, he has a positive 1.2% rating
5
©2012 Deloitte Global Services Limited
2012 Elections
Obama’s re-election looks likely today, but it’s a 50/50 race
Obama vs. Romney, Average Polling Data
46.1
47.5
45.6
44.4
• Romney out-polled Obama slightly last October (+0.5%)
• Now Obama is out-polling Romney (+3.1%)
• Charlie Cook’s assessment: Obama wins…50/50 race
6
©2012 Deloitte Global Services Limited
2012 Elections
Election dynamics in Congress
Party Alignment in the 112th Congress
House *
Senate
Democrats
190
51
Republicans
242
47
0
2
Republicans +24
Democrats +2
Independents (caucus with Ds)
Margin of Majority Control
* 3 vacancies
• Leadership in both Houses suffer with weak majorities
• Huge ideological struggle for elections
‒ Republican strategy: cut spending, no tax increases, rollback regulation
‒ Democratic strategy: grow jobs, protect entitlements, tax the wealthy
• Conventional wisdom/political analysts projections:
‒ House: Republican majority shrinks by 15 to 20 seats, but remains under GOP
control
‒ Senate: Democrats lose 3 to 5 seats, but Republican majority 50/50 competitive
chance
7
©2012 Deloitte Global Services Limited
2012 Elections
Election dynamics in Congress
Scenario
Probability
(if election held today)
Obama wins and GOP wins both Houses of Congress
26%
Obama wins and Congress remain under divided control
(current situation)
34%
Romney wins and Congress remains split or shifts to
Democratic control
25%
GOP or Democrats sweep control of Presidency and
Congress
15%
• 51.8% likely Obama wins (average of last eight polls)
• 60% likely GOP maintains majority in the House
• 50% likely that GOP takes majority in the Senate
8
©2012 Deloitte Global Services Limited
2012 Elections
Impact on US Tax Legislative Reforms
• GOP supports a territorial system with a low corporate tax rate,
which Democrats oppose
• Other issues which may impact tax reform, i.e. long-term budget
deficits, unemployment, environmental.
• If Obama wins and Congress is split or under GOP control
 Obama will propose Tier 3 and protect it against a Republican attack
 Congressional GOP will press Obama for a territorial system with a
low corporate rate
• If Romney wins and Congress is split or under Democratic
control
 Romney will drive for a territorial tax system with a low corporate rate
that Senate Democrats and GOP House Members will support
 But, Romney will kill Tier 3
• Unified control by one party, is unlikely
Note: LEV III reduces emissions from LD vehicles for MY17-25 by 70%. Tier 3 will nationalize LEV III and cut
sulfur content in gasoline from an average of 30ppm to 10ppm
9
©2012 Deloitte Global Services Limited
Deficits and Debt
Impact of alternative scenarios on deficits as percent of GDP
Percent of GDP
Deficit Projections Under Alternative Scenarios
-1.2%
-3.0%
Deficit Averaged -2.8% Annually
FY 1971-2011
-5.9%
-8.7%
Source: CBO
• Budget Control Act set a course to reduce the deficits,
assuming expiring provisions are not extended
• If all the expiring provisions are extended, the deficits
explode by factor of 4
10
©2012 Deloitte Global Services Limited
Deficits and Debt
Impact of alternative scenarios on debt as percent of GDP
Debt Projections Under Alternative Scenarios
Percent of GDP
Debt Averaged 37% Annually
FY 1971-2011
93.2%
76.3.%
73.3%
61.3%
Source: CBO
• Budget Control Act reduces debt/GDP ratio by 16%,
assuming expiring provisions are not extended
 Assumption is flawed
 Debt/GDP ratio explodes from 73% to 93% if provisions are extended
• Impact: enormous pressure to increase taxes
11
©2012 Deloitte Global Services Limited
Tax Reform
•
Tax reform will be discussed in context of deficit reduction and will
be controversial
•
•
•
•
12
 Obama/Democrats see it as a revenue raiser
 Republicans see it as a way to cut tax rates and make the code more tax
efficient
Ways & Means Chairman Camp pushing his tax reform package
‒ Cuts the corporate rate to 25%
‒ Converts the global system to a territorial system
‒ Deems past foreign income subject to deferral repatriated and taxed at 5.25%
‒ Subjects intangibles to a 15% tax
Business groups undecided on Camp proposal
Tax reform likely will not be enacted before the November 2012 elections (more
likely will not be settled until 2013 or later). However, Congress will need to
address high-profile tax issues by year-end, including scheduled expiration of
Bush 2001/2003 individual tax cuts and status of tax extenders such as CFC
look-through.
DANGER: deficit reduction in context of tax reform needs to raise revenue
©2012 Deloitte Global Services Limited
Tax Reform
Deficit reduction will require increased revenue
Revenues and Spending Under Budget Control Act, 2011-2021
Percentage of GDP
20.9%
15.3%
12.0%
12.2%
10.4%
7.7%
Source: CBO
13
©2012 Deloitte Global Services Limited
President Obama Business Tax Reform Framework
•
President Obama’s Framework issued in February 2012 contained five
key elements of business tax reform:
1. Broaden the base and reduce corporate tax rate from 35% to 28%.
2. Strengthen American manufacturing & innovation
‒
‒
‒
Increase domestic manufacturing income deduction to 10.7%,
effectively reducing corporate tax rate on manufacturing income to 25%
Expand, simplify and make permanent R&E tax credit
Extend, consolidate, and enhance clean energy tax incentives
3. Strengthen international tax system – limit deferral of foreign
earnings by imposing minimum tax on foreign earnings, tax excess
IP returns and limit interest deduction on overseas investment.
4. Simplify and cut taxes for small businesses.
5. Eliminate or making permanent temporary tax provisions.
14
©2012 Deloitte Global Services Limited
House Ways & Means Chairman Dave Camp
International Tax Reform Discussion Draft
• Reduce corporate tax rate to 25% (base broadening provisions to be
determined).
• Shift to territorial based system
‒95% dividend received deduction (DRD)
‒Subpart F inclusions on all accumulated E&P with 85% DRD.
‒Previously untaxed earnings are taxed twice:
• As deemed repatriation of all accumulated E&P (85% DRD)
• Again when actually repatriated (95% DRD)
‒Subpart F provisions maintained for FBCSI and FBCSvI (954(d)&
954(e); three alternatives for new subpart F categories to address
base erosion – excess returns, low-tax foreign income (ETR <
10%), carrot & stick option
‒Previously tax income rules repealed.
‒FTCs repealed except for passive income (but not on exempted
income).
15
©2012 Deloitte Global Services Limited
Territorial Tax System – Enzi vs. Camp
• On February 9, 2012, Senator Michael Enzi introduced an
international tax reform bill (“U.S. Job Creation &
International Tax Reform Act of 2012”) that adopts a
territorial tax system and makes significant changes to the
subpart F and foreign tax credit (“FTC”) regime.
• The bill has some similarities to the October 26, 2011,
Discussion Draft release by House Ways and Means
Committee Chairman Dave Camp (although it does not
include a provision to lower the top corporate tax rate).
16
©2012 Deloitte Global Services Limited
Territorial Tax System – Enzi vs. Camp
Comparison of key provisions of the participation exemption system
DRD
ETR on qualified
dividends
17
Enzi
Camp
95%
95%
1.75%
1.25%
Foreign taxes paid or
accrued
on qualified dividends
No FTC or deduction
No FTC or deduction
Section 78 gross-up
Not required
Not required
One-year holding
period requirement
Required
Required
10/50 company
Each 10/50 company may elect to
be treated as CFC
All or none 10/50 company may
elect to be treated as CFC
Tiered CFC structures
No specific guidance except in the
context of hybrid dividends but
permanent extension of CFC lookthrough should produce similar effect
as under Camp
CFC to CFC dividends exempt
from US tax to the extent 95%
DRD is applicable if paid directly to
10% US shareholder
©2012 Deloitte Global Services Limited
Territorial Tax System – Enzi vs. Camp (Cont’d)
Comparison of key provisions of the participation exemption system
Enzi
18
Camp
Hybrid dividends
Not eligible for 95% DRD
Hybrid dividends of tiered CFCs are
treated as subpart F income
No FTC or deduction for any tax
paid or accrued
Treated as US-source income
N/A
First-tier foreign
branch
Not treated as CFC
Treated as CFC
Deduction for foreign
income derived from
US-developed IP
50% deduction
40% deduction provided under
anti-base erosion Option C
Undistributed pre2013 earnings
Taxed under present law upon
repatriation
Distributions on a first-in, first out
basis
Taxed at 1.25% upon repatriation
©2012 Deloitte Global Services Limited
Territorial Tax System – Enzi vs. Camp (Cont’d)
Comparison of key provisions of the participation exemption system
Gain or loss on sales
of foreign corporation
stock
19
Enzi
Camp
Section 1248 amount eligible for
95% DRD
Capital gain in excess of section
1248 amount taxed under current
law
No deduction allowed for loss if the
foreign corporation was a CFC
during the 5 years preceding the
sale
Sales of stock by upper-tier CFC in
lower-tier CFC and electing 10/50
company – Gain: subpart F, eligible
for DRD to the extent of dividend /
Loss: E&P deduction disallowed
95% DRD applies to all gain
recognized by US shareholder
DRD is available only if 30% or
less of foreign corporation’s
assets give rise to FPHCI during a
3-year testing period
Deduction for loss denied
Sales of stock by upper-tier CFC
in lower-tier CFC and electing
10/50 company –Gain: subpart F /
Loss: E&P deduction (as under
current law)
©2012 Deloitte Global Services Limited
Territorial Tax System – Enzi vs. Camp (Cont’d)
Comparison of key transitional provisions
DRD
20
Enzi
Camp
70%
85%
ETR on deferred
foreign earnings
10.5% if elect under section 965
5.25% (before FTC) + 1.25% (upon
repatriation)
Foreign taxes paid or
accrued
FTC or deduction disallowed if elect
under section 965
FTC or deduction disallowed on
exempted dividends but allowed on
taxable dividends
Section 78 gross-up
Not required
Applicable to taxable dividends
10/50 company
Not eligible for DRD
Eligible for DRD
Undistributed pre-2013
earnings
Section 965 election made at each
CFC
If no 965 election, taxed under
present law upon distribution
Distributions on a first-in, first out
basis
Deemed inclusion of all
accumulated deferred foreign
income
PTI taxed at 1.25% upon
repatriation
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of key modifications to Subpart F
Enzi
Camp
Obama 2013
Budget Proposals
Section 956 (investment
in US property)
No change
Repeal
No change
Section 959 (PTI)
No change
Repeal
No change
Section 954(d) (FBCSI)
Repeal
No change
No change
Section 954(e) (FBCSvI)
Repeal
No change
No change
Section 954(h) (active
financing)
Permanently extend
Silent
Extend for an additional year
(to 12/31/2013 for calendaryear taxpayers)
Section 954(c)(6) (lookthrough)
Permanently extend
Silent
Extend for an additional year
(to 12/31/2013 for calendaryear taxpayers)
New subpart F categories
21
 Low-tax foreign income
(ETR <17.5%)
Qualified business
income exception
 Three alternatives
“excess returns”
proposal w/o separate
FTC basket
Low-tax foreign
income (ETR<10%)
Carrot & stick option
Excess returns proposal w/
separate FTC basket
excess return = 50%
mark-up over the CFC’s
directly allocable costs,
excl. interest and taxes
Low foreign ETR (10%
floor, 15% ceiling)
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of key modifications to Foreign Tax Credits
Enzi
Camp
Obama 2013
Budget Proposal
Section 902
Repeal 902 credits on
dividends out of post2012 E&P or pre-2013
E&P w/ section 965
election
Still relevant on
dividends out of pre-2013
E&P w/o section 965
election
Repeal
No change
Section 960
Preserve w/ modification
Preserve w/ modification
No change
Section 901
Allowed except w/h tax
on exempted dividend
Allowed except w/h tax on
exempted dividend
No change
Eliminate
No change
Section 909
Section 78 gross-up
Separate FTC baskets
New FTC basket
22
Preserve
Apply to pre-2013 E&P
w/o section 965 election
& section 960
Apply to section 960 only
No change
Preserve
Eliminate
No change
Foreign intangible
income
N/A
Foreign base company
excess intangible income
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of key modifications to Foreign Tax Credits (Cont’d)
Enzi
Camp
Cumulative tax pools
Maintain pools
attributable to pre-2013
earnings w/o section
965 election
Eliminate
Blending section 902
foreign tax pools
N/A
N/A
Limit 902 credits to the
average rate of total
foreign tax actually paid
on the combined earnings
of all of a group’s CFCs
Preserve
Eliminate
No change
WW interest expense
allocation
Accelerate the effective
date to taxable years
beginning 12/31/12
N/A
Legislation enacted in
2009 and 2010 postpones
the effective date to 2021
5% taxable dividends
US-source
Foreign-source
N/A
Allocation and
apportionment of
indirect expenses
23
Obama 2013
Budget Proposal
Remove foreign taxes
from tax pools when the
associated E&Ps are
eliminated
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of key modifications to Foreign Tax Credits (Cont’d)
Enzi
Camp
Obama 2013 Budget
Proposal
Section 862(a)(6)
(inventory purchased
within US sold
outside US)
US- source
Foreign-source
No change
(Foreign-source)
Section 863(b)(2)
(inventory produced
in US sold outside
US or produced
outside US sold in
US)
US-source
Partly US-source
Partly foreign-source
No change
(Partly US-source
Partly foreign-source)
Extend section
338(h)(16) to certain
asset acquisitions
N/A
24
N/A
Extend the application of
section 338(h)(16) to any
covered asset
acquisitions (“CCA”),
within the meaning of
section 901(m), to
prevent a seller from
increasing allowable
FTCs as a result of
CCAs.
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of miscellaneous proposals
Thin capitalization
25
Enzi
Camp
Silent
Disallow US net interest
deduction if (1) the US
corporation is
overleveraged compared
to the worldwide affiliated
group (the “relative
leverage test”), and (2)
the US corporation’s net
interest expense exceeds
an unspecified percentage
of adjusted taxable
income (the “ATI test”),
using section 163(j) rules.
The lesser of the amounts
determined under these
tests is the amount
disallowed. Interest
disallowed could be
carried forward.
Obama 2013 Budget
Proposal
Limit earnings stripping by
inverted companies
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of miscellaneous proposals (Cont’d)
Treatment of
partnership
Deferral of
deduction
allocable to
unremitted
foreign earnings
26
Enzi
Camp
Obama 2013 Budget Proposal
Silent
Grant Treasury broad
authority to issue
regulations providing
95% DRD treatment to
partnership of which US
corporation own more
than 10% interest.
Tax gain from the sale of a partnership
interest on a look-through basis by treating
the sale or exchange of partnership
interest as ECI to the extent the gain or
loss attributable to ECI property
N/A
N/A
Defer foreign-related interest deductions
until the foreign earnings are subjected to
US taxation.
Deductible interest =
(CY dividends + subpart F inclusions)
Post-86 E&Ps
x (CY + deferred foreign-related interests)
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of miscellaneous proposals (Cont’d)
Prevent the use of
leveraged
distributions from
related foreign
corporations to avoid
dividend treatment
27
Enzi
Camp
Obama 2013 Budget
Proposal
N/A
N/A
To the extent a foreign
corporation (funding
corporation) funds a
second, related foreign
corporation (distributing
corporation) with the
principal purpose of
avoiding dividend treatment
on distributions to a US
shareholder, the US
shareholder’s basis in the
stock of the distributing
corporation will not be
taken into account for the
purpose of determining the
treatment of the distribution
under section 301.
©2012 Deloitte Global Services Limited
Territorial Tax System vs. Obama’s Int’l Tax Reform
Comparison of miscellaneous proposals (Cont’d)
Enzi
Camp
Limit income-shifting
through outbound
transfer of intangibles
Remove the incentive
for moving IP offshore
by providing 50%
deduction for foreign
income derived from
US-developed IP
under the territorial
system
Remove the incentive for
moving IP offshore by
providing 40% deduction
for foreign-source
intangible income under
anti-base erosion Option C
under the territorial system
Amend section 367, 936 &
482
-Add workforce-in-place,
goodwill & going concern
value to the list of IP
-Provide IRS with authority
to value transfer of IP to
achieve a more reliable
result or a realistic
alternative
Provide tax incentives
for locating jobs and
business activity in
the US and remove
tax deductions for
shifting jobs overseas
N/A
N/A
Create a new general
business credit equal to
20% of the eligible
expenses paid or incurred
in connection with
insourcing a US trade or
business while disallow
deductions for expenses
paid or incurred in
connection with outsourcing
a US trade or business.
28
Obama 2013 Budget
Proposal
©2012 Deloitte Global Services Limited
Tax Reform
Comparison of Tax Reform Proposals
Proposals
House Republican
(Camp)
Senate
Republican
(Enzi)
Governor
Romney (R)
President
Obama (D)
Corporate tax rate
25%
35%
25%
28%
AMT
TBD
TBD
Repealed
Repealed
International
Territorial
Territorial
Territorial
Minimum ETR on
foreign earnings
Base Erosion Principle
3 options:
“excess returns”
proposal
Low-tax foreign
income (ETR
<17.5%)
TBD
CFC income not
subject to min tax
Low-tax foreign
income (ETR<10%)
Qualified
business income
exception
TBD
Immediately
under Subpart F
Carrot & stick option
Timing of taxation
29
Immediately under
Subpart F
Immediately
under Subpart F
©2012 Deloitte Global Services Limited
Agenda
What hope for tax reform in the US?
OECD developments: beneficial ownership, PE, intangibles
2011 Update to the UN Model Treaty and Commentary
FATCA – It’s getter closer. What taxpayers need to know
Recent international tax cases: the global top 10
Q&A
30
©2012 Deloitte Global Services Limited
OECD developments : permanent establishment
• 12 October 2011 : proposed changes to Commentary on Art. 5 issued for public
comment (by 10 February 2012)
• Sub-group of Working Party 1
• Final changes to be included in next update of the Model Convention &
Commentary (scheduled 2014)
Included
Not Included
̵
“At the disposal” : principles & factors
̵
Logistics company’s warehouse
̵
Contract manufacturing (but no reference
to toll manufacturing)
̵
Cloud computing
̵
Situations in which subsidiary’s employees
could be deemed to be employees of
parent (Rolls Royce)
̵
Express rejection of “Sidney Robert’s view”
re agency PE1
Home office
̵
Secondment : cross-reference to
Commentary on Art. 15(2) (but no
reference to Art. 5(3)(b), UN model treaty)
̵
̵
Examples elaborating on existing
Commentary
¹ Sidney I. Roberts, “The Agency Element of Permanent Establishment : The OECD Commentaries from the Civil Law View”,
1993/ 9&10 Intertax.
31
©2012 Deloitte Global Services Limited
OECD developments : beneficial ownership
• Current OECD Commentary on Arts. 10 (dividends), 11 (interest),
and 12 (royalties) explains the meaning of “beneficial owner” in
terms of two alternative disqualifying conditions
– Agency or nominee
– Conduit company acting like mere fiduciary or administrator
• First disqualifying condition (agency or nominee): introduced into
Commentary in 1977
• 1986: OECD Report: “Double Taxation Conventions and the Use of Conduit
Companies”
• Second disqualifying condition (conduit company acting like a mere fiduciary
or administrator): introduced into Commentary in 2003
• 29 April 2011: proposed changes to Commentary issued for public comment
(by 15 July 2011)
32
©2012 Deloitte Global Services Limited
Proposed changes
In summary
Existing Commentary
4 key notions
33
New Commentary (after proposed changes)
8 key notions
1
Not narrow technical sense
1A
Not narrow technical sense (amended)
2
First disqualifying condition
1B
3
Second disqualifying condition
Domestic law meaning relevant
(if consistent)
4
Look through
2
First disqualifying condition
3
Second disqualifying condition
4
Look through
5
Full right to use and enjoy the income
unconstrained by a contractual or legal
obligation
6
Cross-reference to anti-avoidance rules
7
Contextual meaning
©2012 Deloitte Global Services Limited
Proposed changes (cont’d)
5 Full right to use and enjoy the income unconstrained by a contractual
or legal obligation
Sentence
#1
Sentence
#2
Sentence
#3
34
“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
the 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
dividends; 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.” (proposed new paragraph 12.4 to
Commentary on Art. 10, all new text; bolding added)
©2012 Deloitte Global Services Limited
OECD developments : intangibles
• Working Party 6 : Transfer Pricing Aspects of Intangibles
– Leading to a revision of Chapters VI and VIII of the OECD Transfer
Pricing Guidelines
• Meeting with Business representatives, 7-9 November 2011:
– Definitional approach
– Goodwill and going concern
– Brands and brand value
– Ownership issues
– Synergies
• Future
35
©2012 Deloitte Global Services Limited
What is the relevance of the OECD Commentary
in Asia Pacific?
• Only substantive, multi-lateral double tax treaty guidance available
̶ UN Commentary? 90% the same as OECD Commentary
• Views of non-members are included in OECD Commentary,
including : China, Hong Kong, India, Indonesia, Malaysia,
Philippines, Thailand & Vietnam. With the exception of India,
areas of disagreement are relatively few
• OECD members disagree with, or don’t apply, OECD
Commentary, at times
̶ Disagreements vs. interpretation issues
̶ Substance over form / GAAR
̶ Consider : Zimmer, Dell, Roche
36
©2012 Deloitte Global Services Limited
Relevance of OECD Commentary in Asia Pacific
OECD Commentary to Art. 5
Paragraph
Topic
Disagreements² with OECD Commentary
India
18
Twelve months test not applicable to short term
sites or projects
1.1
Introduction to elimination of Art. 14
5.3 & 5.4
Example of painter and consultant
8
Leasing of tangible or intangible properties may
not constitute PE
10
Leasing of ICS equipment may not constitute PE
12 & 42.25
Malaysia
Vietnam
9 other AP
jurisdictions1
Examples constituting a priori PE
23
Scientific research exclusion in the list of
examples indicating preparatory or auxiliary
25
Substantial negotiations of an enterprise through
office and employees constitute PE
Disagreements
1 Note:
Other Asia Pacific jurisdictions are : Australia, China, Hong Kong, Indonesia, Japan, Korea, New Zealand, Philippines,
Thailand. (OECD members & non-members)
² Or position reserved
37
©2012 Deloitte Global Services Limited
Relevance of OECD Commentary in Asia Pacific
OECD Commentary to Art. 5 (cont’d)
Paragraph
Topic
Disagreements² with OECD Commentary
India
33
Mere participation or attending negotiations of
contracts should not constitute contractconcluding agency PE
42
Member of an MNC group engaged in
manufacturing / providing services on behalf of
another group company may constitute a PE
42.2
Website may not constitute a PE
42.3
Hosting of website on a server should not
constitute a PE
42.14 & 42.15
Furnishing of services only in source state
42.18 & 42.46
Tax rights when services are furnished by nonresidents outside state
42.19
Fees paid for services : net vs. gross taxation
Malaysia
Vietnam
9 other AP
jurisdictions1
Disagreements
1 Note:
Other Asia Pacific jurisdictions are : Australia, China, Hong Kong, Indonesia, Japan, Korea, New Zealand, Philippines,
Thailand. (OECD members & non-members)
² Or position reserved
38
©2012 Deloitte Global Services Limited
Relevance of OECD Commentary in Asia Pacific
OECD Commentary to Art. 5 (cont’d)
Paragraph
Topic
Disagreements² with OECD Commentary
India
42.22
Minimum level of presence not necessary for
taxing services
42.31
Physical presence of individual not essential for
taxation of furnishing of services
42.40 & 42.43
No PE for services on two different projects for a
single customer. Provision of services through
employees of separate enterprise
42.44
Example of services for the same or connected
projects
5.5
Satellite footprint in the space of source country
may not constitute a PE
9.1
Foreign network not at the disposal of the home
network operator
26.1
Undersea cables and pipelines lying in source
country may not constitute a PE
Malaysia
Vietnam
9 other AP
jurisdictions1
Disagreements
1 Note:
Other Asia Pacific jurisdictions are : Australia, China, Hong Kong, Indonesia, Japan, Korea, New Zealand, Philippines,
Thailand. (OECD members & non-members)
² Or position reserved
39
©2012 Deloitte Global Services Limited
Relevance of OECD Commentary in Asia Pacific
OECD Commentary to Art. 12
Paragraph
Topic
Disagreements² with OECD Commentary
China
10.1
Payments for distribution rights
11.2
Provision of services will generally fall under Art. 7
14.2
Payments for computer software for own use
8.2, 9.1, 9.2,
9.3, 10.1,
10.2, 14, 14.1,
14.2, 14.4, 15,
16, 17.3
India
Malaysia
9 other AP
jurisdictions1
Payments for property transfers; transponder
leasing; telecom roaming agreements; spectrum
licences; distribution rights; computer software;
digital products
Disagreements
1 Note:
Other Asia Pacific jurisdictions are : Australia, Hong Kong, Indonesia, Japan, Korea, New Zealand, Philippines, Thailand,
Vietnam (OECD members & non-members)
² Or position reserved
40
©2012 Deloitte Global Services Limited
Agenda
What hope for tax reform in the US?
OECD developments: beneficial ownership, PE, intangibles
2011 Update to the UN Model Treaty and Commentary
FATCA – It’s getter closer. What taxpayers need to know
Recent international tax cases: the global top 10
Q&A
41
©2012 Deloitte Global Services Limited
2011 Update to the UN Model Treaty &
Commentary
• 2011 Update to UN Model double tax treaty & Commentary launched on
15 March 2012 (first update for 10 years)
• Significant changes to the Commentary on Art.1
• Although the OECD Commentary to Art. 1 does discuss (and generally
endorses) the use of domestic law or treaty-based anti-avoidance rules
to combat treaty “abuse”, the 2011 Update adds significant original
content to the UN Commentary on this issue
42
©2012 Deloitte Global Services Limited
UN Commentary to Art. 1 : Examples of improper
use of tax treaties
Number
Examples
Number
Hiring of labor
Dual residence and transfer of residence
1
Movement of individual’s residence
2
Movement of company’s residence
3
Movement of shareholder’s residence
12
* Direct conduit
5
* “Stepping-stone” conduit
Triangular cases
6
Third country permanent establishment (“PE”)
13
Thin capitalization
8
Base company
9
Directors’ fees
10
Attribution of interest to a tax-exempt or
government entity
11
* Non arm's length transfer prices
* Straightforward idea
43
* Star companies
Transactions that modify the treaty
classification of income
14
Conversion of dividends into interest
15
Allocation of price under a mixed contract
16
Conversion of royalties into capital gains
17
Use of derivative transactions
Attributing profits or income to a specific
person or entity
7
* Short-term hiring
Artistes and sportspersons
Treaty shopping
4
Examples
Transactions that seek to circumvent
thresholds found in treaty provisions
18
Ownership threshold
Time limit for certain PEs
19
Art. 5(3) planning
Thresholds for the source taxation of capital
gains on shares
20
Land-rich company
©2012 Deloitte Global Services Limited
Agenda
What hope for tax reform in the US?
OECD developments: beneficial ownership, PE, intangibles
2011 Update to the UN Model Treaty and Commentary
FATCA – It’s getter closer. What taxpayers need to know
Recent international tax cases: the global top 10
Q&A
44
©2012 Deloitte Global Services Limited
FATCA Background
• “Foreign Account Tax Compliance Act” or “FATCA” was signed into law on
March 18, 2010 as a revenue raiser for the “Hiring Incentives to Restore
Employment Act” or “HIRE”
• Various effective dates. FATCA withholding on U.S. source income begins on
January 1, 2014.
• Objective is to combat offshore tax evasion by U.S. persons who invest
‒ Directly through financial accounts maintained offshore
‒ Indirectly through ownership of foreign entities
• FATCA works by requiring foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) to provide this information
• FATCA’s lever is a NEW 30% withholding tax levied on “withholdable payments” to nonparticipating FFIs and NFFEs
45
©2012 Deloitte Global Services Limited
FATCA Background:
Withholding as an Enforcement Tool
30 Percent FATCA withholding
• Imposed on “withholdable payments”, including
‒ U.S. source income from securities
‒ Interest on bank deposit accounts maintained in the United States or in a
foreign branch of a U.S. bank
‒ Gross proceeds from the sale/redemption of U.S. securities
• When made to foreign financial institutions (FFIs) or non-financial foreign entities
(NFFEs)
‒ Does not apply to payments made to individuals
• Unless
‒ the FFI enters into an agreement with the IRS (a participating FFI)
‒ the NFFE discloses the identity of its U.S. owners or certifies to non-US
ownership to the withholding agent
46
©2012 Deloitte Global Services Limited
The Role of Withholding Under Present US Tax Law
30 Percent U.S. Non-resident tax
• Is a flat rate tax that imposed on foreign persons
• Applies to U.S. source dividends, interest, royalties and other “income”, unless
a reduced rate or an exemption applies
• Does not apply to gross proceeds or gains from the sale of securities
• Does not apply if FATCA withholding applies
28 Percent backup withholding
• Applies to noncompliant U.S. non-exempt recipients
• Can apply to any payments that are reportable on Forms 1099
‒ U.S. source and foreign source income
‒ Gross proceeds from the sale/redemption of securities
• Is a credit against the federal tax liability of U.S. taxpayers
47
©2012 Deloitte Global Services Limited
Illustration of Application of Passthru Payment Rule
Foreign
Bank
Income from FFI of US$ 10M
US Withholding Tax of US$ 1.8M
(US$ 10M x 60% x 30%)
Participating
FFI
US
Portfolio
Investments
Non-US
Portfolio
Investments
Passthru Payment Percentage = 60%
• FATCA may apply for US indirect investments.
• Foreign Bank makes investment in Participating FFI, which in turn invests in
various US and non-US portfolio investments that generate US and non-US
source investment income, respectively, and eventually proceeds from the
exit.
• If Foreign Bank does not enter in an agreement with the IRS, 30% tax would
be withheld on payments from Participating FFI to Foreign Bank “related” to
US investments of the Participating FFI determined as a function of US/total
assets ratio of the Participating FFI.
48
©2012 Deloitte Global Services Limited
Initial Guidance on Passthru Payments
• Why?
– The primary purpose behind the passthru payment concept is to prevent
an FFI to be used as a blocker for US persons trying to avoid US tax by
making indirect investments in US assets.
– The IRS also noted that the passthru payment rule is to encourage FFIs to
enter into FFI agreements (i.e., a passthru payment paid to a PFFI is not
subject to FATCA’s withholding requirement, whereas a passthru payment
paid to a non-participating FFI would be subject to FATCA withholding).
• What is it?
– A passthru payment is defined in the statute and it includes withholdable
payments from direct US investment and other payments from an indirect
US investment through a PFFI.
Direct US Investment
Withholdable
Payment
49
Indirect US Investment
Nonwithholdable
Payment
Passthru
Payment
Percentage
©2012 Deloitte Global Services Limited
Foreign Financial Institution (FFI) Defined
Under FATCA, the term FFI is quite broad
Includes any foreign entity that
• Accepts deposits in the ordinary course of a banking or similar business
• Is in the business of holding financial assets for the account of others
• Is engaged primarily in the business of investing, reinvesting, or trading
in securities, partnership interests, commodities, or any interest in such
securities.
FFI Examples: non-U.S. banks, custodian banks, securities brokers and
dealers, hedge funds, collective and family investment vehicles.
• Includes personal investment corporation (“PIC”) holding solely passive
assets – the PIC is an FFI.
50
©2012 Deloitte Global Services Limited
Non-Financial Foreign Entity (NFFE) Defined
An NFFE that has one or more “substantial” U.S. owners (other than
exempt U.S. owners) is considered a U.S. owned NFFE
Substantial ownership means more than 10 percent of:
•
•
•
•
Vote or value of a corporation’s stock
Profit or capital interest in a partnership
Beneficial interest in a trust if any grantor is a non-exempt US person
Example: A closely-held manufacturing company
Exempt U.S. owners include
• A corporation the stock of which is regularly traded on an established
securities market and any of its affiliates
• Any tax-exempt organization under IRC section 501(a) or an individual
retirement plan
• Any bank, any REIT or any RIC
• Any common trust fund, charitable lead or remainder trust
51
©2012 Deloitte Global Services Limited
New Way to Categorize Client Accounts
Need to determine whether to treat
• An individual account holder as a U.S. person or a foreign person
• An entity account holder as
‒
‒
‒
‒
a U.S. person
A foreign financial institution (FFI)
An excepted foreign organization (e.g., a foreign government)
A non-financial foreign entity (NFFE)
• An FFI as
‒ A participating FFI
‒ A deemed-compliant FFI or
‒ Non-participating FFI
• An NFFE as
‒ A U.S. owned NFFE (having a substantial US owner)
‒ An excluded NFFE
‒ A recalcitrant account
Observation: Presents a new and completely different way to
categorize client accounts and service providers
52
©2012 Deloitte Global Services Limited
Indicia of Potential U.S. Status
Searches for U.S. indicia are used to identify U.S. persons that own accounts
An account holder has indicia of U.S. status if he:
1. Is a U.S. citizen or resident
2. Was born in the U.S.
3. Has a U.S. residence or mailing address;
4. Has a U.S. telephone number
5. Has provided standing instructions to transfer funds to a U.S. based account
6. Has granted power of attorney over the account to a person with a U.S. address
7. Has a “care of” or hold mail address that is the sole address of account holder
53
©2012 Deloitte Global Services Limited
Account due diligence rules for FFIs
54
Account Type
Individuals:
Entities:
Pre-existing
Pre-existing individual
accounts
Pre-existing entity
accounts
New
New individual accounts
New entity
accounts
Balance
Individual
Entity
De-minimus
$50,000
$250,000
High Value
$1,000,000
$1,000,000
©2012 Deloitte Global Services Limited
Account due diligence rules to identify U.S. account
holders
Individual Accounts (only applies to FFIs, not USFIs)
New individual accounts
• Review all of the information provided at the opening of the account,
including identifying information collected under AML/KYC rules
If an indicator of U.S. ownership is found, obtain additional documentation
or treat the account as held by a recalcitrant account holder
55
©2012 Deloitte Global Services Limited
Account due diligence rules to identify U.S. account
holders
Entity Accounts
Pre-existing entity accounts
• $250,000 or less – Excluded from review, until account balance exceeds $1,000,000.
Must collect documentation sufficient to establish account holder’s FATCA status (e.g.,
U.S. entity, Participating FFI, Active non-financial foreign entity (NFFE), Passive NFFE)
• Passive NFFEs – Must identify substantial U.S. owners
‒ Balance more than $1,000,000 – Must obtain information regarding substantial U.S.
owners
‒ Balance not more than $1,000,000 – May rely on information collected for AML
New individual accounts
• Must collect documentation sufficient to establish account holder’s FATCA status (e.g.,
U.S. entity, Participating FFI, Active non-financial foreign entity (NFFE), Passive NFFE)
• Review all of the information provided at the opening of the account, including
identifying information collected under AML/KYC rules
56
©2012 Deloitte Global Services Limited
Client Management Issues for FATCA Compliance
• Certain products and services may no longer be available to certain
clients
• New clients must provide extensive personal information beyond
current requirements (Relationship Manager’s role expanded)
• Clients must waive privacy rights and grant permission for personal and
account information to be reported to the IRS
• Recalcitrant accounts may require closure against client wishes
57
©2012 Deloitte Global Services Limited
Reporting requirements – a phased approach
Calendar Year
Reporting Due
Reporting Requirement
to U.S. Accounts1
2013
September 30, 2014
Required to report only name, address,
TIN, account number, and account balance
with respect to U.S. accounts identified as
of June 30, 2014
2014
March 31, 2015
Required to report only name, address,
TIN, account number, and account balance
2015
March 31, 2016
Required to report only name, address,
TIN, account number, account balance,
and income paid
2016
March 31, 2017
Required to report name, address, TIN,
account number, account balance, income
paid, and gross proceeds
2017
March 31, 2018
All of the reporting for calendar-year 2016
as well as foreign passthru payments
1 In
the case of a U.S.-owned foreign entity, the information must be reported for the entity as well as the name, address, and TIN for each
substantial U.S. owner.
58
©2012 Deloitte Global Services Limited
Timelines – phased implementation
FFIs and USFIs each have their own timeline
Phased implementation starting in 2013, and ending no earlier than 2017
Some systems and procedures need to be ready on Jan 1, 2013
Major key dates:
• January 1, 2013 – USFIs need new account procedures in place
• July 1, 2013 – Participating FFIs should have signed agreement in place with
the IRS
• January 1, 2014 – FATCA withholding commences on withholdable payments
• July 1, 2014 – Need to certify due diligence is complete on high value
accounts
• September 30, 2014 – First FATCA account reporting is due
• January 1, 2017 – FATCA withholding scheduled to commence on foreign
passthru payments
59
©2012 Deloitte Global Services Limited
Legal Issues for Implementation
• FFI is required to seek a waiver of applicable bank secrecy,
confidentiality, data collection or other information disclosure prohibitions
from the U.S. account holder that might otherwise prohibit or limit FATCA
reporting, and close accounts in certain circumstances.
• Local Privacy Laws
• Conflict with Local Laws
• Burden on FFI
• Account Opening Documentation
• Transactional Documentation
60
©2012 Deloitte Global Services Limited
Impact to MNCs (NFFEs)
• Impact on the Treasury Function
• “Stealth” Foreign Financial Institutions that might be part of
Consolidated Group
• Impact to Accounts Payable and other Departments
• Legal Documentation Changes
61
©2012 Deloitte Global Services Limited
Loans: Gross-Up
“The Borrower shall not be required to make an increased payment
to a Finance Party under paragraph (a) above for (i) a Tax
Deduction imposed by reason of such Finance Party’s failure to
comply with any certification, identification, information,
documentation or other reporting requirement if such compliance is
required by law, regulation, administrative practice or an applicable
treaty as a precondition to exemption from, or reduction in the rate
of, deduction or withholding of any Tax Deduction, (ii) a Tax
Deduction imposed by reason of such Finance Party’s failure to
comply with Clause 14.7 or (iii) any U.S. federal income
withholding tax imposed under FATCA.”
62
©2012 Deloitte Global Services Limited
ISDA
“Foreign Account Tax Compliance Act. (a) For purposes of any
Payer Tax Representation, the words “any Tax from any payment”
shall not include any tax imposed under Sections 1471 and 1472 of
the Internal Revenue Code of 1986, as amended (or the United
States Treasury regulations or other guidance issued or any
agreements entered into thereunder) (“FATCA Withholding Tax”); (b)
for the avoidance of doubt the parties agree that for purposes of
Section 2(d)(i) the deduction or withholding of FATCA Withholding
Tax is required by applicable law; and (c) the definition of
“Indemnifiable Tax” shall not include any FATCA Withholding Tax.”
63
©2012 Deloitte Global Services Limited
Offering Circular
“We intend to structure our investments so that we will not be
required to withhold 30% FATCA withholding tax earlier than 2017
although no assurances can be given in this regard. Pursuant to the
FFI Agreement we intend to enter into, beginning no earlier than
2017, we will be required to withhold 30% FATCA withholding tax on
certain dividends that we pay to foreign financial institutions that
have not entered into an FFI Agreement (including Name of
Depository) if it does not enter into an FFI Agreement) or to
Shareholders that do not verify their status under the FATCA rules,
to the extent such dividends are foreign passthru payments.”
64
©2012 Deloitte Global Services Limited
Offering Circular
“The application of FATCA to an investment in our Shares will
depend on:
• whether the foreign financial institutions through which you hold our
Shares, including (name of depository) and any broker, have entered
an FFI Agreement, which is outside of our control; and
• whether you verify your status under the FATCA rules to us or to the
foreign financial institution through which you hold our Shares.”
65
©2012 Deloitte Global Services Limited
Treasury/IRS Guidance Needed
Statutory provisions are not self-implementing
• Guidance is expected to be published in waves
• IRS must draft an agreement for foreign financial institutions
• Expect revisions to Form W-8 series
Preliminary guidance published 8/27/2010 in Notice 2010-60
Additional guidance published 04/09/2011 in Notice 2011-34
Further guidance published 07/14/2011 in Notice 2011-53
Proposed regulations published on 02/08/2012
Written or electronic comments sent by April 30, 2012.
Public hearing scheduled for May 15, 2012.
Final regulations need to be published
Any delay in Treasury/IRS guidance
• puts pressure on the effective date and
• narrows the window for building needed systems and procedures
66
©2012 Deloitte Global Services Limited
Agenda
What hope for tax reform in the US?
OECD developments: beneficial ownership, PE, intangibles
2011 Update to the UN Model Treaty and Commentary
FATCA – It’s getter closer. What taxpayers need to know
Recent international tax cases: the global top 10
Q&A
67
©2012 Deloitte Global Services Limited
#10 Ford (UK)
• Use of non-discrimination article in UK/US
treaty to achieve transfer of tax losses
between 2 UK companies, even though
they did not have a common UK holding
company (which UK tax law required at
that time).
• Art. 24(5), OECD model treaty:
US Co
US
UK
68
UK Co 1
UK Co 2
Losses
Profits
“Enterprises of a Contracting State, the
capital of which is wholly or partly owned
or controlled, directly or indirectly, by one
or more residents of the other
Contracting State, shall not be subjected
in the first-mentioned State to any
taxation or any requirement connected
therewith which is other or more
burdensome than the taxation and
connected requirements to which other
similar enterprises of the first-mentioned
State are or may be subjected.”
[Emphases added]
©2012 Deloitte Global Services Limited
#9 George Anson (UK)
George Anson
Div.
UK
US
• Delaware LLC characterised as a
company for UK tax purposes (lower
tribunal had characterised it as a
partnership)
• Property interest in LLC’s assets vs.
non-discretionary entitlement to
dividends
LLC
Profits
69
©2012 Deloitte Global Services Limited
#8 Li & Fung (Hong Kong)
HK Co
Service
contract (A)
HK
Service
contract (B)
$
Customers
70
Offshore
$
Foreign
Affiliates
• Customers contract with HK Co for the
provision of “supply chain” and “logistics”
services (eg. locating suppliers, placing
orders with suppliers (on behalf of
customers), quality control inspections,
arranging for shipment, etc.) Fee = 6%
of sales price.
• Many of the services are performed
(outside HK) by foreign affiliates of HK
Co. Fee = 4% of sales price.
• HK Co argued that its 6% fee income
was sourced outside HK and thus is taxexempt.
• Court of Appeal : HK Co wins
• Follows ING Baring case (Court of Final
Appeal, 2007): in determining the source
of profits, the focus should be on the
important profit-producing activities, and
not on any antecedent or incidental
activities.
©2012 Deloitte Global Services Limited
#7 Fabrikant / Columbia Sportswear (India)
US Co
US
India
Office
Sale
• Art. 5(3)(d), India/US treaty:
exception from PE status for “the
maintenance of a fixed place of
business solely for the purpose of
purchasing goods or merchandise
…..for the enterprise”
• Both US companies have a
purchasing office in India, Columbia
Sportswear to purchase sports
clothes and Fabrikant to purchase
diamonds
Suppliers
• Columbia Sportswear: PE.
Fabrikant : No PE.
71
©2012 Deloitte Global Services Limited
#6 Share buy-back case (India)
Mauritius
Co
US Co
49%
Share
buyback
25%
Offshore
India
India Co
[publicly listed]
72
Sing Co
2%
• India Co undertook share buy-back
with Mauritius Co.
• Share buy-back is not subject to
dividend distribution tax (DDT), but
is subject to the tax on capital gains.
• Ruling sought that Mauritius Co is
exempt under Art. 13, India /
Mauritius treaty.
• AAR : This is a “colourable device”
(ie. sham or tax avoidance
transaction). Thus, its tax treatment
should be based on substance, not
form. In substance, this is a
dividend payment, and thus India Co
would be liable for DDT.
©2012 Deloitte Global Services Limited
#5 Total Return Swap case¹ (Switzerland)
TRS
Bank
Counterparties
Third
countries
Denmark
Switzerland
Div.
Swiss
Companies
Total Return Swap (TRS)
•
Short-term (3-6 months)
•
Bank pays amount equivalent to:
̶
Appreciation in share portfolio
Dividends from share portfolio
̶
•
Counterparty pays amount equivalent to:
̶
̶
73
• Danish Bank entered into several
TRSs (involving shares in Swiss
companies) with counterparties in
the EU and the US.
• As a hedge, Danish Bank acquired
the corresponding amount of the
underlying Swiss shares.
• Swiss domestic tax law : 35% DWT
• Switzerland / Denmark treaty (at the
relevant time), Art. 10:
̶ 0% DWT
̶ No “beneficial ownership”
condition
Depreciation in share portfolio
LIBOR plus margin on principal
¹ Case A-6537 / 2010
©2012 Deloitte Global Services Limited
#5 Total Return Swap case (Switzerland) (cont’d)
TRS
Bank
Counterparties
Third
countries
Denmark
Switzerland
Div.
Swiss
Companies
• Argued by Swiss tax authorities : 0%
DWT rate should not apply because
̶ Danish Bank not “beneficial
owner” of dividends (and
“beneficial ownership” condition
should be “read into” Art. 10)
̶ Danish Bank is committing
“treaty abuse”
Total Return Swap (TRS)
•
Short-term (3-6 months)
•
Bank pays amount equivalent to:
̶
̶
Appreciation in share portfolio
Dividends from share portfolio
•
Counterparty pays amount equivalent to:
̶
̶
74
Depreciation in share portfolio
LIBOR plus margin on principal
©2012 Deloitte Global Services Limited
#5 Total Return Swap case (Switzerland) (cont’d)
TRS
Bank
Counterparties
Third
countries
Denmark
Switzerland
Div.
Swiss
Companies
Total Return Swap (TRS)
•
Short-term (3-6 months)
•
Bank pays amount equivalent to:
̶
̶
Appreciation in share portfolio
Dividends from share portfolio
•
Counterparty pays amount equivalent to:
̶
̶
75
Depreciation in share portfolio
LIBOR plus margin on principal
Federal Administrative Tribunal:
• “Beneficial ownership” condition might possibly
be “read into” Art. 10 – Tribunal did not have to
decide this point, as it concluded that Danish
Bank is the “beneficial owner” of the dividends
• Danish Bank satisfies the “beneficial
ownership” condition, because :
- Lack of interdependence between the
dividends paid by the Swiss companies
and the Danish Bank’s obligations under
the TRS:
1) The Danish Bank was not obligated
to acquire the shares in the Swiss
companies – it decided to do so in
order to hedge its position
2) Regardless of whether the Danish
Bank received the dividends from
the Swiss companies, it was
obligated to make the relevant
payments under the TRS
©2012 Deloitte Global Services Limited
#5 Total Return Swap case (Switzerland) (cont’d)
TRS
Bank
Counterparties
Third
countries
Denmark
Switzerland
Div.
Swiss
Companies
Federal Administrative Tribunal:
• Danish Bank does not commit “treaty
abuse”, because :
̶ If there is no explicit “treaty abuse”
provision in the treaty, then “treaty
abuse” occurs only if the company
engages in no genuine economic or
commercial activity
̶ The Danish Bank has premises,
employees and a wide commercial
activity, and thus there is no “treaty
abuse”.
Total Return Swap (TRS)
•
Short-term (3-6 months)
•
Bank pays amount equivalent to:
̶
Appreciation in share portfolio
Dividends from share portfolio
̶
•
Counterparty pays amount equivalent to:
̶
̶
76
• Thus, 0% DWT rate applies
Depreciation in share portfolio
LIBOR plus margin on principal
©2012 Deloitte Global Services Limited
#4 Rolls Royce (India)
Rolls Royce Plc., UK
Services
Sale of spares / equipment
Facts
100%
Rolls Royce India
Limited, UK
Offshore
India
Office
Customers
• Rolls Royce Plc (Rolls Royce UK) was
tax resident in the UK. It sold certain
parts and equipment to customers in
India
• Rolls Royce India Limited (Rolls Royce
India), a wholly owned subsidiary of Rolls
Royce UK, was also tax resident in the
UK. It provided various services to Rolls
Royce UK through its office in India for
cost-plus remuneration
• Services provided by office of Rolls
Royce India to Rolls Royce UK included
marketing, negotiating, and facilitating
the selling of products
Issues
• PE under Art. 5, UK/India treaty?
• Calculating profit attributable to PE
77
©2012 Deloitte Global Services Limited
Rolls Royce Plc., UK
Services
Sale of spares / equipment
#4 Rolls Royce (India) (cont’d)
100%
Rolls Royce India
Limited, UK
Offshore
India
Office
High Court judgment
• Art. 5(1)
– Individuals who are formally
employed by Rolls Royce India act
as if they are employees of Rolls
Royce UK. They should thus be
treated as employees of Rolls
Royce UK. Therefore, the office of
Rolls Royce India (which is used
every day by those individuals) is
“at the disposal” of Rolls Royce UK
– Activities conducted by those
individuals are not preparatory or
auxiliary, but a core activity
Customers
78
©2012 Deloitte Global Services Limited
#3 Velcro (Canada)
Original Situation
Restructure
Post-Restructure Situation
X Co
X Co
Lic.
X Co
Netherlands
Antilles
Netherlands
Antilles 
Lic.
Roys.
Roys.
(90% x A)

Netherlands
X Co
(Under Assignment
Agreement)
Canada
Y Co
Canada
Co
Y Co
Netherlands
Canada
Lic.
Roys.
Canada
Co


79
X Co migrates tax residence
from Netherlands to
Netherlands Antilles
X Co assigns licence
agreement to Y Co
(subsidiary of X Co)
SubLic.
(Original Licence
Agreement)
Roys. (A)
Netherlands
Canada
Canada
Co
©2012 Deloitte Global Services Limited
#3 Velcro (Canada) (cont’d)
Post-Restructure Situation
• Amaco Management Services BV, an arm’s
length corporation, conducted in large part the
management of Y Co.
X Co
Netherlands
Antilles
• Purpose of assignment was to transfer the
management of licensing royalty streams to Y Co.
• Y Co’s main activities:
Lic.
Roys.
(90% x A)
holding shares in subsidiaries
̶
providing loans to subsidiaries
̶
managing royalty streams
(Under Assignment
Agreement)
̶
Y Co
SubLic.
(Original Licence
Agreement)
Roys. (A)
̶
making of loans
Netherlands
̶
payment of operational expenses
Canada
̶
payment of professional fees
Canada
Co
80
• When Y Co receives royalties from Canada Co,
these receipts were intermingled into Y Co’s other
accounts and used for a variety of Y Co’s
purposes, at Y Co’s sole discretion – for example:
• Y Co was contractually obliged to pay X Co its
royalties (ie. 90% of the royalties received from
Canada Co) 30 days after the receipt of the
Canada Co royalties.
©2012 Deloitte Global Services Limited
#3 Velcro (Canada) (cont’d)
Court decision
Post-Restructure Situation
• Applied the rule from Prevost case:
“When corporate entities are concerned, one
does not pierce the corporate veil unless the
corporation is a conduit for another person
and has absolutely no discretion as to the use
or application of funds put through it as
conduit…” [emphasis added]
X Co
Netherlands
Antilles
Lic.
Roys.
(90% x A)
• From Prevost, there are four elements in
considering beneficial ownership:
(Under Assignment
Agreement)
possession
̶
use
̶
risk
̶
control
Y Co
̶
SubLic.
(Original Licence
Agreement)
Roys. (A)
Netherlands
Canada
Canada
Co
81
• Y Co has each of those four elements
• Although Y Co has limited discretion, it does have
some discretion. It is not the case that, per
Prevost, it has “absolutely no discretion”. Thus, Y
Co is the beneficial owner of the royalties paid by
Canada Co, for the purposes of the Canada /
Netherlands treaty.
©2012 Deloitte Global Services Limited
#2 Vodafone (India)
Supreme Court
HTIL
(Cayman)
SPA
Loans
HTI BVI
(BVI)
Transfer
of only
share
Vodafone
(Netherland
s)
CGP
Investment
s
(Holdings)
Ltd
(Cayman)
Offshore
52%
Direct &
indirect
Hutchison
Essar Ltd
(HEL) (India)
 If genuine commercial business
structure or transaction: legal form is
respected in determining tax liability
 If sham or tax avoidance scheme:
Revenue can apply “substance over
form” and /or “piercing of corporate
veil” principles to determine tax liability
Mauritius
IHCs
India
• “Look at” the structure or transaction on
an holistic basis and in context – ie. do not
apply a “dissecting approach”:
3 GSPL
(India)
Has the
Option to
acquire 15%
Key
• Holding companies, including SPVs, are a
common and acceptable structure in
regard to company law, takeover code
and income tax
• Azadi Bachao Andolan case (capital gains
exemption under Art. 13 of India /
Mauritius treaty) endorsed
• Direction of shareholding or loan. Thus, A  B
means that A owns shares in B or A has lent to B
• Interposed entities omitted
82
©2012 Deloitte Global Services Limited
#1 Roche Vitamins Europe Ltd (Spain)
Swiss Co
Spain / Switzerland treaty
Art. 5(1) :
Switzerland
CM
contract
Marketing
contract
Spain
“For the purposes of this Convention, the term
‘permanent establishment’ means a fixed place of
business in which the business of the enterprise is
wholly or partly carried on.”
Art. 5(4) :
Spain Co
CM contract:
•
Spain Co manufactures & sells goods to Swiss
Co
•
Cost plus 3.3%
Marketing contract:
•
Spain Co designated as Swiss Co’s agent to
promote the sale of particular products and to
“represent, protect and promote” the interests
of Swiss Co. No authority to conclude
contracts.
•
Fee = 2% of sales
83
“A person acting in a Contracting State on behalf of an
enterprise of the other Contracting State – other than
an agent of an independent status to whom paragraph
5 applies – shall be deemed to be a permanent
establishment in the first-mentioned State if he has,
and habitually exercises in that State, an authority to
conclude contracts in the name of the enterprise,
unless his activities are limited to the purchase of
goods or merchandise for the enterprise.”
Art. 5(5):
“An enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the
other Contracting State merely because it carries on
business in that other State through a broker, general
commission agent or any other agent of an
independent status, where such persons are acting in
the ordinary course of their business.”
©2012 Deloitte Global Services Limited
#1 Roche Vitamins Europe Ltd (Spain) (cont’d)
Swiss Co
Supreme Court
Switzerland
CM
contract
•
Swiss Co has a PE in Spain, under both Art. 5(1)
(fixed place of business : Spain Co’s premises) and
Art. 5(4) (agency of Spain Co) of Spain /
Switzerland treaty
•
Key aspect of facts : All the activity of Spain Co
was directed, organised and managed by Swiss Co
Marketing
contract
Spain
Spain Co
CM contract:
•
Spain Co manufactures & sells goods to Swiss
Co
•
Cost plus 3.3%
Marketing contract:
•
Spain Co designated as Swiss Co’s agent to
promote the sale of particular products and to
“represent, protect and promote” the interests
of Swiss Co. No authority to conclude
contracts.
•
Fee = 2% of sales
84
¹ Cited on earlier slide
©2012 Deloitte Global Services Limited
#1 Roche Vitamins Europe Ltd (Spain) (cont’d)
Swiss Co
How can this decision be rationalised?
Switzerland
CM
contract
Marketing
contract
Spain
Spain Co
CM contract:
•
Spain Co manufactures & sells goods to Swiss
Co
•
Cost plus 3.3%
Marketing contract:
•
Spain Co designated as Swiss Co’s agent to
promote the sale of particular products and to
“represent, protect and promote” the interests
of Swiss Co. No authority to conclude
contracts.
•
Fee = 2% of sales
85
•
Art. 5(1) : employees of Spain Co are de facto
employees of Swiss Co?
•
Art. 5(4) : “Sidney Roberts” view of agency PE¹?
•
Application of “substance over form”?
•
OECD Commentary on Art. 5, para 10:
“The business of an enterprise is carried on by
the entrepreneur or persons who are in a
paid-employment relationship with the
enterprise (personnel). This personnel
includes employees and other persons
receiving instructions from the enterprise (eg.
dependent agents). The powers of such
personnel in its relationship with third parties
are irrelevant. It makes no difference
whether or not the dependent agent is
authorised to conclude contracts if he works
at the fixed place of business….”
¹ Cited on earlier slide
©2012 Deloitte Global Services Limited
Global top 10
#1
Roche Vitamins Europe Ltd (Spain) : PE
#2
Vodafone (India) : Anti-avoidance
#3
Velcro (Canada) : Beneficial ownership
#4
Rolls Royce (India) : PE
#5
Total Return Swap case (Switzerland) : Beneficial ownership
#6
Share buy-back case (India) : Anti-avoidance
#7
Fabrikant / Columbia Sportswear (India) : PE
#8
Li & Fung (Hong Kong) : Source
#9
George Anson (UK) : Entity characterisation
#10
Ford (UK) : Non-discrimination article
86
©2012 Deloitte Global Services Limited
Questions & Answers
87
Biographies
Kristy P. Ton, CPA, JD, LLM
Director of Tax – Asia Region
Corning Inc.
Email : [email protected]
Kristy P. Ton is Director of Tax, Asia for Corning with whom she has worked since August 2006.
As Director of
Tax, she is responsible for all tax matters relating to Corning’s businesses in Asia. Kristy began her career at
PricewaterhouseCoopers and prior to joining Corning, she was tax counsel at ConocoPhillips. Her primary area of
practice is US international and local country tax planning with a focus on cross-border structuring for financing,
reorganizations, mergers and acquisitions, and derivative transactions. Kristy has extensive experience and
knowledge of local country tax and tax audits in areas relating to withholding taxes, determination of permanent
establishment and benefits under income tax treaties. Geographic areas in which she has had responsibility include
North Asia (Japan, Korea, Taiwan, China), Southeast Asia (Singapore, Indonesia, Malaysia, Thailand), Australia,
India, Western Europe (UK, Ireland, Finland, Denmark, Sweden, Norway, Germany, Switzerland, Netherlands,
Belgium, Luxembourg), and Central Eastern Europe(Czech Republic, Slovakia, Hungary).
Kristy received a B.A. (cum laude) and a M.B.A. (cum laude) from the University of Dallas, a J.D. from Loyola
University School of Law and a L.L.M. in Taxation from the University of Houston. She is a member of the Texas
State Board of Public Accountancy and the Louisiana State Bar and a Board member of TEI – Asia Chapter.
88
©2012 Deloitte Global Services Limited
Biographies
David Weisner
US Tax Counsel for Asia Pacific
Citigroup
Email : [email protected]
David Weisner is based in Hong Kong and is US Tax Counsel for Asia Pacific for Citigroup. He
handles the tax issues for variety of businesses throughout Asia Pacific. Prior to joining Citigroup in 2003,
David worked at Fidelity Investments in Boston as international tax counsel. Prior to Fidelity Investments,
David worked for White & Case, a New York based law firm, and Deloitte & Touche, a big 4 accounting firm.
David is a member of the Illinois Bar.
David is President of the Asia Chapter of the Tax Executive Institute (TEI), on the executive committee of
the Capital Market Tax Committee (CMTC), on the tax committee for the Hong Kong chapter of Alternative
Investment Management Association (AIMA) and leads the FATCA subcommittee for the Hong Kong
Association of Banks (HKAB).
89
©2012 Deloitte Global Services Limited
Biographies
Steve Towers
Asia Pacific Leader – International Tax
Tel: +65 6216 3227
Email: [email protected]
Deloitte Singapore
Steve Towers is the Asia Pacific leader of Deloitte’s international tax practice.
He is a senior international
tax partner with over 30 years of experience in international tax planning for multinational corporation (MNCs).
Steve has worked in the Deloitte Touche Tohmatsu offices in Sydney, Melbourne, London, New York, and
Singapore. He has substantial experience in advising MNCs on corporate structuring and restructuring, real
estate investment structuring, mergers and acquisitions, hybrid instruments, transfer pricing, use of double tax
treaties, permanent establishment issues, and tax aspects of supply chain planning. A large part of his current
practice involves the leadership of Asia Pacific regional tax projects.
Steve is a frequent public speaker on international tax issues affecting investment within Asia-Pacific. He has
been listed (since 1998) in the current edition of “The World’s Leading Tax Advisors” (Euromoney).
Steve is a member of the Institute of Chartered Accountants in Australia. He is a former Chairman of the
International Fiscal Association (Singapore Branch). He is a member of the board of directors of the Tax
Academy of Singapore.
Steve has Bachelor of Economics and Bachelor of Laws degrees from the Australian National University, and a
Master of Laws (first class honors) degree from the University of Sydney.
90
©2012 Deloitte Global Services Limited
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche
Tohmatsu Limited and its member firms.
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©2012 Deloitte Global Services Limited
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©2012 Deloitte Global Services Limited
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