1
Treaties: A New Balance? Have
Governments Become More Focused
on Preventing Fiscal Evasion than
Avoiding Double Taxation?
U.S.-Latin America Tax Planning Strategies
June 6, 2014
Sonia Velasco Menal, Co-Chair, Cuatrecasas, Gonçalves Pereira (Spain)
Emin Toro, Co-Chair, Covington & Burling LLP (USA)
Juan Carlos Garantón, Torres Plaz & Araujo (Venezuela)
Gianni Gutierrez, Ferrere (Uruguay)
Adrián Rodríguez, Lewin & Wills (Colombia)
Guillermo O. Teijeiro, Teijeiro & Ballone, Abogados (Argentina)
Richard Winston, Richard L. Winston P.A. (USA)
2
Overview
 Recent OECD Comments on Treaty Abuse
 Exchange of Information Developments
 GAARs – Case Law Developments on Treaty
Limitations
 Resolving Conflicts Between Domestic Laws
and Treaties
3
Recent OECD Comments on
Treaty Abuse
4
Recent OECD Comments on Treaty Abuse
 July 2013 – at request of G20, OECD publishes
Action Plan on Base Erosion and Profit Shifting
 Action 6 (Prevent Treaty Abuse)
“Develop model treaty provisions and recommendations
regarding the design of domestic rules to prevent the granting
of treaty benefits in inappropriate circumstances. Work will also
be done to clarify that tax treaties are not intended to be used
to generate double non-taxation and to identify the tax policy
considerations that, in general, countries should consider
before deciding to enter into a tax treaty with another country.
The work will be co-ordinated with the work on hybrids.”
5
Recent OECD Comments on Treaty Abuse
 March 2014 – OECD publishes Public
Discussion Draft – “BEPS Action 6: Preventing
the Granting of Treaty Benefits in Inappropriate
Circumstances”
 Proposes adoption of Limitation on Benefits
provisions similar to those found in US (and some
Japan and India) treaties
 Proposes general anti-abuse provision (discussed
below)
 Proposes change to preamble to clarify intent not to
result in double non-taxation
6
Recent OECD Comments on Treaty Abuse
 Proposed general anti-abuse provision
 “Notwithstanding the other provisions of this Convention, a
benefit under this Convention shall not be granted in respect
of an item of income if it is reasonable to conclude, having
regard to all relevant facts and circumstances, that obtaining that
benefit was one of the main purposes of any arrangement or
transaction that resulted directly or indirectly in that benefit,
unless it is established that granting that benefit in these
circumstances would be in accordance with the object and
purpose of the relevant provisions of this Convention.”
(Emphasis added)
 Illustrations included in discussion draft
7
Recent OECD Comments on Treaty Abuse
 Proposed change in preamble
“(State A) and (State B),
Desiring to further develop their economic relationship and to
enhance their cooperation in tax matters,
Intending to conclude a Convention for the elimination of
double taxation with respect to taxes on income and on
capital without creating opportunities for non-taxation or
reduced taxation through tax evasion or avoidance
(including through treaty shopping arrangements aimed
at obtaining reliefs provided in this Convention for the
indirect benefit of residents of third States)
Have agreed as follows:” (Emphasis added)
8
Exchange of Information
Developments
9
INFORMATION EXCHANGE
Council Directive 77/799/EEC of 19 December concerning mutual assistance by the
competent authorities of the Member States in the field of direct taxation.

Council Directive 2003/48/EC of 3 June 2003 (“Savings Directive”) on savings income.

Bilateral tax treaties.
All treaties signed by Spain include an exchange of information clause based on the
wording of Article 26 of the OECD Model Convention on Income and on Capital.
Spain has signed over 100 treaties.

Tax information exchange agreements
Once a tax information exchange agreements enters into force, the country or territory
is automatically excluded from the “black list” of tax havens.
#6722232
Countries like Panama, Barbados, Bahamas have ceased to be treated as tax haven
jurisdictions for Spanish tax purposes.
10
INFORMATION EXCHANGE
FATCA
 On May 14, 2013, Spain and the United States signed an agreement to
improve tax cooperation and to implement FATCA (IGA MODEL 1).
AUTOMATIC INFORMATION EXCHANGE
 Spain have reached a compromise with other 44 countries to implement
an automatic exchange of information.
Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greek, Hungary, India, Iceland, Irland, Letonia, Liechtenstein,
Lithuania, Malta, Mexico, The Netherlands, Norway, Poland, Portugal, Romania, Slovack
Republic, Slovenia, Sudafrica, Spain, Sweden, UK, Isle of Man, Guernsey, Jersey, Unido de
Anguila, Islas Bermudas, BVI, Cayman, Gibraltar, Montserrat and Turcks and Caicos.
#6722232
11
RECENT EXPERIENCES
TAX INFORMATION REQUIREMENTS
TREATYCO
Loan
CAYMAN
DUTCHCO
Ints. 0% WHT
Loan
Ints. 0% WHT
SPAINCO
#6722232

Interest expenses were tax deductible in Spain.

The Dutch tax authorities were asked if the interest paid by SPAINCO was taxed in the
Netherlands.

The answer was affirmative. However, the Dutch authorities did not indicate that the interest
income paid by SPAINCO was “eroded” through the interest expense derived from the loan
with a Cayman company.
12
EXCHANGE OF TAX INFORMATION
EXCHANGE OF TAX INFORMATION
In the last 5 years Uruguay has signed 13 TIEAs
and 12 DTCs.
Why?
Uruguay had been in the black, in the grey and
finally in white list.
Because the OCDE pressures and…
Argentina
Was looking for taxpayers with:
• Real estate in Punta del Este
• Agribusiness
• Trading activities
• Banks deposit
The blame and shame policy had a great
success
Are there any advantages related to the DTCs for a
country like Uruguay?
Just a few.
• Did it foster investments?
No.
• Did it eliminate double taxation situations?
For a developing country - with source income principle - there are
not so many advantages in signing DTCs.
Same situation in Paraguay and Bolivia…
The main target of DTCs was to reach the OECD standard and
avoid being in the “bad boys’ list”. Section 26 of the MODEL and
TIEAs Global Forum report made several observation to Uruguay.
To reach the OECD standards great changes had
to be done to Uruguayan tax and legal system:
Until 2010, this were the main facts regarding exchange of
information:
o Uruguay did not exchange information even regarding international
criminal prosecution.
o Bank secrecy could only be lifted for local criminal prosecution.
o Uruguay only taxes income generated in Uruguay.
o The signature of TIEAs with Argentina depended on Argentina’s
fulfillment of MERCOSUR agreements.
To accomplish the OECD standards a series of changes had to be
done:
o Lifting of bank secrecy.
o Identification of shareholder of corporations with bearer shares.
o Signature of TIEAs with Argentina and Brazil.
Challenges for Uruguay
In the last 5 years Uruguay has signed 13
TIEAS and 12 DTC.
Main requirements for information exchange:
 It requires a petition, it does not work automatically.
 Prior to any information exchange, the taxpayer has an
opportunity to oppose.
 To lift bank secrecy a judicial process, where the taxpayer is
heard, is necessary.
 All the agreements protects lawyers secrecy. But Uruguay’s
concept of “professional secrecy” includes CPAs.
 Argentina is being requiring some information; however, in
some cases the requirement has involved situations that were
not included in the agreement’s scope.
Challenges for Uruguay
• Overcome phase II of the Peers review: difficult task
• The exchange of information standards are still changing:
 Automatic exchange of information.
 Constitutional obstacles.
• Treaties are under constitutional level and have the same
level as the laws.
• There is a constitutional principle which establishes that
before taking any administrative resolution the citizen
should be heard; this would be violated if the agreements
operated automatically.
Exchange of Information – Colombia
 TIEA COL – US (Reviewed Constitutional
Court)
 IGA.
 OECD
Multilateral Convention on Mutual
Administrative Assistance in Tax Matters
(Reviewed by the Constitutional Court).
Exchange of Information – Colombia
 Tax Haven List was finally issued (September
2013 / Applicable 2014).
 33% withholding.
 Deductibility limitation.
 Transfer-pricing.
 Certain countries were gray listed (Subject to a
TIEA) (e.g. Panamá).
Exchange of Information – Venezuela
 Covered in all Tax Treaties in place (29)
Untested / No intent from the Tax Authorities to
advance on the same
 Just 5 treaties cover Assistance in Collection
NL, Norway, Belgium, Denmark and Indonesia
 Under domestic law (Master Tax Code) both
EI and AC are allowed / solve et repete
21
Exchange of Information – Venezuela
 Currently there are no TIEAs in place (none
are under negotiation)
 Not a party to the Global Forum on Tax
Transparency and Exchange of Information
for Tax Purposes
 FATCA / Little chance of negotiation of an
IGA
22
GAARs – Case Law
Developments on Treaty
Limitations
23
APPLICATION OF GAARs IN A TREATY SETTING –
OECD MC
 A Copernican twist from 1977 to 2003 version of the
OECD MC text of commentaries
 1977 Model: GAARs may not be applied in a treaty
setting unless the DTC expressly allows so, i.e., to resort
to domestic GAARs for recharacterization or
reassignment of income (redetermination of the taxpayer)
 2003 Model: GAARs apply unless the DTC text expressly
prohibits it (commentaries on article 1, par. 22, subpar.
22,1-2)
 Current Model (2010): same position
24
GAARs IN SELECTED LATAM COUNTRIES
ARGENTINA
BRAZIL
CHILE
COLOMBIA
MEXICO
PROVIDED IN DOMESTIC
LEGISLATION
APPLICATION IN TREATY
SETTING
YES
YES
YES
(No yet implemented)
Only SAAR (i.e., thin cap.)
NO
(GAAR included in tax
reform under congressional
consideration
NO
YES
NO CASES YET
Technically no, but income tax
law authorizes recharacterization of sham
transactions by MNEs
SCJN also applies fraud legis
principle
Procedural rule requires
taxpayers claiming treaty
benefits to confirm that income
is taxable in home country
GAAR specially allowed in
certain treaties e.g., Bahrain,
Ukraine.
There are no application
precedents
25
GAARs IN SELECTED LATAM COUNTRIES
PARAGUAY
PERU
URUGUAY
PROVIDED IN
DOMESTIC LEGISLATION
APPLICATION IN TREATY
SETTING
NO
NO
YES (2012)
NO
NO
NO
26
ARGENTINA
 LOBs and GAARs
 Argentine DTTs lack limitation of benefits (LOB) rules,
but in recent years the tax authorities have resorted
aggressively to domestic GAARs to recharacterize
income or redetermine the beneficiary in a treaty setting,
particularly in case of outbound (round trip) investment
 GAARs are applied regardless of express treaty
authorization
27
ARGENTINA
 Best scenario (inbound or outbound) would be a holding
jurisdiction that combines a DTT in force with Argentina with
a suitable holding regime in the treaty-partner jurisdiction.
For this purpose Dutch BVs, UK LLPs, and Spanish ETVs
are worth considering.
 Foreign treaty-partner holding must have legal as well as
economic substance
 The Netherlands recently issued substance regulations
particularly addressed to the sublicensing of IP rights,
including to residents in tax treaty foreign countries
28
GAARs APPLICATION ABSENT EXPRESS TREATY
AUTHORIZATION / DEBATED ISSUE
 Fully applicable if Argentina is country of residence of a
taxpayer whose abusive behavior is to be challenged. That
means that income might be recharacterized or beneficiary
redefined
 If Argentina is source country (1) unrestricted income
recharacterization (accord. Art. 3,2), but (2) limited power to
redefine beneficiary is benefit recipient is recognized as
resident by treaty-partner country
Query whether outcome is different is express: treaty authorization is
provided for GAARs application (e.g., MOU new Spanish treaty)
29
PRECEDENTS ON INBOUND STRUCTURES
 Ruling AFIP 57/94 (January 30, 1996) recharacterization
of insurance premium paid to foreign insurers under loan
agreement as additional interest (higher borrowing cost);
DTTs Spain and Italy
30
PRECEDENTS ON INBOUND STRUCTURES
PARTICIPATED LOANS (DNI MEMORANDUM 3/06)
DEG exemption/DTT with Germany
Participant
Participant
DEG
Participant
- Although interest paid to DEG,
DEG acts as collecting agent of
principal and interest corresponding
to participated financial entities so
that exemption does not apply on
said interest; DEG is not the
beneficial owner of the interest
income
Argentine
borrower
31
PRECEDENTS ON OUTBOUND STRUCTURES
 Memorandum DNI 64/09: Facts and Findings
Argentina
Resident
99%
Austrian
Holding
100%
B.V.I.
Corp.
 According to the Austrian DTT (no longer in force), the Argentine
resident´s holding in AH and dividends received from AH were no
taxable in Argentina by personal assets tax and income tax. Only
15% WHT on dividends applied on actual distribution in Austria
 FIF (domestic fiscal transparency rules) were avoided by
interposition of AH
 Fact findings showed that AH was a phantom (shell) company
without any economic substance
32
PRECEDENTS ON OUTBOUND STRUCTURES
 Memorandum DNI 64/09: Decision
 The decision qualified the situation as an abuse of the
treaty and made reference to the possibility of applying
GAARs in that context, in accordance with
Opinion of U.N. Expert Committee on International Tax
Cooperation, Subcommittee on Improper Use of Treaties,
and
(ii) Commentaries to Article 1, OECD MC, 2008 (reproduced
in OECD MC, 2010)
(i)
33
 By applying GAARs, the Argentine competent
authority disregarded the interposed company in
the treaty country jurisdiction and treated the
holding of the shares in and income obtained by
B.V.I. Corp. as if the interposed company did not
exist
34
 Memorandum DNI 799/10: Fact Pattern
 Operating Subs (third countries) were domiciled in LATAM
jurisdictions having no DTT with Argentina. Participation in operating
subs help trough Chilean holding which enjoyed a special (no-tax)
holding regime in Chile. The Chilean DTT did not expressly exclude
privileged holding companies from the concept of residents.
 By interposing the Chilean Holding the Argentine taxpayer avoided
taxation on dividends in Argentina; dividends that were made up
with profits coming from the second-tier operating subs, otherwise
fully taxable in Argentina (i.e., if paid directly by operating subs to
Parent Co)
35
 Memorandum DNI 799/10: Opinion

The Argentine DNI sustained that:
DTTs should not be utilized by taxpayers to
ameliorate or eliminate the tax burden through legal
forms that would not be adopted but for the tax
advantages deriving therefrom
 Domestic GAARs (economic reality principle as
contemplated in Section 2, law 11,683) may and
should be applied to avoid abusive schemes even in
a treaty setting

36
 Memorandum DNI 799/10: Opinion
 Considering the Chilean Platform company regime and
the DTT rules attributing tax jurisdiction to the parties
thereto, the reason to interpose the holding was to
deviate dividend income coming from Uruguay and Peru
(where the operating subs were domiciled), that would
otherwise have been taxed in Argentina, with the end
result of benefiting from a double non-taxation
 Double non-taxation, obtained by interposing a Chilean
Platform company between the Peruvian and Uruguayan
subs, on one hand, and the Argentine Parent on the
other, contradicts the DTT and implied an abusive
conduct which might be challenged under domestic
GAARs
37
 Memorandum DNI 799/10: Opinion
 From a different perspective, DTT are aimed at
avoiding double taxation and to that end, treaty-partners
should maintain an income tax of general application.
The Chilean Platform company regime was strange to
the income system of general application in Chile
 The Platform company was beyond the scope of the
Chilean DTT. It does not qualify under Article 1 of the
DTT (taxes covered) as that article refers to subsequent
amendments and replacing taxes using an analogous
tax basis and not to promotional regimes resulting in
double non-taxation
38
MOLINOS RIO DE LA PLATA
TAX COURT (TFN) August 14, 2013
ARGENTINA
MOLINOS RIO DE LA PLATA
S.A.
CHILE
Dividends
Dividends
URUGUAYAN SUB.
PLATFORM CO (HOLDING)
Dividends
PERUVIAN SUBS.
39
LEGAL HOMEWORK AND FACT PATTERN
 DTT Argentine / Chile patterned after Andean Pact:
income solely taxed at source; dividends paid by Chilean
company taxed in Chile exclusively
 Platform Co. only taxed on Chilean source income.
Foreign source income (profit distributions from operating
foreign) non taxable
 Dividends received by Platform Co. from op. subs. were
immediately distributed to Molinos
 Dividends were received by Molinos free of tax; if
distributed directly by Peruvian and Uruguayan subs would
have been taxed in Argentina
40
DISCUSSION AND HOLDING
 There was an abuse of the treaty; AFIP’s tax assessment
taxing dividends in Argentina affirmed
 To find the existence of an abuse, tax court applied
domestic GAARs and considered that Platform Co was not
the effective beneficiary of the dividend paid out by the
operating subs
 Deemed “effective beneficiary” concept built in GAARs
(DTT did not contemplate that concept)
 A DTT may be used to mitigate or reduce the tax burden
but not to eliminate the tax burden in its entirety
(double non-taxation)
41
 Critical Assessment of Molinos Rio de la Plata – Findings
and Conclusions
Application of Argentine GAARs should not have resulted in a
successful challenge of the Platform Company under the fact
and circumstances of the case

Argentine GAARs/economic reality principle) consist of a sham-type
provision according to which whenever a manifest discrepancy exists
between the legal forms used and the economic substance of the
transaction, the latter prevails to recharacterize the transaction or redefine
the parties thereto for tax purposes
 If that discrepancy exists, the legal forms are to be discarded regardless
of the intention of the taxpayer, i.e., regardless of whether the intention
was to avoid taxes or to pursue a legitimate business purpose. On the
contrary, if such discrepancy does not exist, the legal transaction may not
be challenged, whatever its purpose, unless it is evidenced that the
taxpayer acted in fraud legis

42
 Pursuing a tax advantage or benefit under the DTT (e.g.,
double non-taxation) is not, per se, enough to ignore the
intermediate holding, as argued in connection with the
Chilean Platform company
 To legitimately challenge the structure under GAARs, the
Tax Court should have either evidence that the Chilean
holding was not the actual owner of the dividends received
from the Peruvian and Uruguayan subs, and/or lacked
economic substance (i.e., it was a paper company which
exercises no effective management or administration of the
holdings). None of that was undoubtedly evidenced in the
case
43
 Moreover, if the preceding conditions are met (the Chilean
Platform company used and enjoyed the dividend income,
and managed the equity participations held) the Chilean
holding might not be deemed to be interposed in fraud legis
nor would fail meeting the substance test. It was not
evidenced that dividends received by Chilean Platform were
not its own (i.e., that holding was constrained to pass the
dividends on to parent)
 In that context, Argentine GAARs could not be resorted to
legitimately ignore the Chilean company as a treaty
beneficiary, even if, as it appears to be the case, the structure
was designed to save taxes (it was a tax-geared structure)
44
Developments on GAARs - Colombia
 Colombia adopted a GAAR in 2012:
 Tax abuse: Entering into transactions or using entities
with the sole purpose of obtaining tax advantages.
 Tax Ruling: “treaty shopping,” dividends paid to non-
residents in the Andean Community / Context
(Andean Community Decision 578).
 Constitutional Court: C-51977 /2005.
 Application of Domestic GAAR in a tax treaty context /
OECD MC commentaries – BEPS (active role).
Venezuela / GAAR and Treaties
 GAAR rule covered in domestic tax law (MTC and ITL
inter alia)
 Intent is critical / main purpose of transaction is to reduce
tax burden and instrument used is openly inadequate to
the economic reality pursued.
 Piercing Corporate/contractual veil recognized by Tax
Courts (when substance is clearly inconsistent with form)
46
Venezuela / GAAR and Treaties
 Tax treaties rank higher than tax laws
 Economic substance should be followed when reviewing
and characterizing a transaction for tax treaty purposes.
 Should it be followed to justify countering treaty
shopping?
 Treaty shopping does not necessarily entail lack of
substance.
47
Venezuela / GAAR and Treaties
 Choice of jurisdiction (holding vehicle inter alia), even
when the same is accompanied by an intent to reduce or
defer taxation, would not meet the test.
 So far no authority with regards to application of GAAR
to disallow tax treaty benefits
 OECD CFA Commentaries may be a guide, not
authoritative. Which Commentaries?
48
Venezuela / GAAR and Treaties
 Certainty and predictability should be chief.
 The use of tax treaty SAARs such as Beneficial
Owner and L.O.B. provisions seems a more
reasonable approach even when much harder to
implement.
49
Resolving Conflicts Between
Domestic Laws and Treaties
50
TAX TREATIES: ANTI ABUSE PROVISIONS
SPANISH POLICY IN THE NEGOTIATION OF TAX TREATIES
MC OCDE
1977
MC OCDE
1990
NO beneficial ownership
clause
YES beneficial
ownership clause
51
TAX TREATIES: ANTI ABUSE PROVISIONS
SPANISH POLICY IN THE NEGOTIATION OF TAX TREATIES

EEUU (1990 Tax Treaty (revised in 2013 –pending to be approved).

From 2004, Spain starts introducing LOB provisions in our tax treaties following the OECD Model.
Not all new treaties have such clause.
52
EXAMPLES
IFF CASE (T.S. 22-03-2012)
US
5% WHT NL-US Tax treaty
100%
NL2
100%
NL1
100%
0% WHT Parent
Subsidiary Directive

SP
Anti Abuse Clause (art. 13.1 g) LIRNR): The Parent Subsidiary Directive does not apply even if NL1 had personal,
rendered services to its affiliates, was engaged in a business activity.

The Spanish-Dutch Tax Treaty applies (5% WHT). No penalties were applied.
53
EXAMPLES
EMIRATES CASE (TEAC 28-09-2009)
Emirates
100%
UKCo
100%
0% WHT Parent
Subsidiary Directive
SpainCo

Anti abuse (art. 13.1 g) LIRNR): no applicable since the UK Co lacks substance.

Beneficial owner clause in the UK-Spanish tax treaty: tax rate of 10% is denied by the TEAC but in the High
Court based on the “reformatio in peius” doctrine the 10% tax rate is accepted.

Penalties were imposed.
54
Interaction between domestic law and tax treaties –
Colombia
 2012 Tax Reform (Act 1607 /2012)
 Tax residency criteria: incorporation, domicile
and place of effective management.
Tie-breaker rule (DTA).
Anti-Avoidance rule (treaty context and non-
treaty context).
Dual residency conflicts (If no treaty applies).
Interaction between domestic law and tax treaties –
Colombia
 2012 Tax Reform (Act 1607 /2012)
 Thin capitalization rule or deductibility limitation.
 Applies on foreign and national indebtedness.
 Applies on related and unrelated party indebtedness.
 Applies on debts with banks.
 Interaction with transfer-pricing rules.
 Interaction with DTAs.
 Not Covered by Article 24 (Non-discrimination clause).
 Not Covered by Article 9 (Associated Enterprises).
Interaction between domestic law and tax treaties –
Colombia
 Colombian source income (technical services, technical
assistance and consultancy supplied in Colombia or
“from abroad”) / 10% withholding.
 DTAs: Technical services, technical assistance and
consultancy included in the royalties definition:
 Domestic definition (expanded definition).
 Royalties:
 Commentaries: Software (acquisition of a software
copy for a limited used Article 7 / DIAN Royalties
(article 12) Ruling: 081572/2011.
Why Do the Local Tax Authorities Sometimes Disregard Treaty
Principles (Mexican Example)?

Sale of Goods: Why should a local Latin American government believe that it has the right to fully tax a
nonresident company selling goods to its own resident?
 Example: An American company sells a mobile phone to a customer located in Mexico on “DDP”
(delivered duty paid) incoterms.
 The actual place of “sale” takes place within the borders of Mexico, but the product was
located in Mexico for only 48 hours before the sale.
 The mobile phone manufacturer developed its intellectual property in the United States, and most
of its employees will be located in the United States.
 The mobile phone manufacture incurred billions of dollars of expense within the United States
for its development activities.
 Common sense suggests that the American government (not the Mexican government) should
retain the right to tax the company on most of its worldwide profits.
 Why should Mexico be entitled to tax the proceeds from the mobile phone sale merely because the
actual sale takes place in Mexico (the product was located in Mexico for “one day”)?
 Should the U.S.-Mexican Tax Treaty provide some relief because the U.S. company does not
maintain the typical attributes of a “permanent establishment” in Mexico (no physical presence and
no dependent agents)? Article 7 relief (limited profits “attributable to” Mexico)?
 The Mexican position is that Article 5 of the treaty (Permanent Establishment) does not protect a
nonresident company from taxation from an actual “sale” of goods taking place in Mexico (the
treaty protects against the maintenance of goods in Mexico for storage, processing, display,
delivery, and advertising, but not an actual sale).
 What are the policy considerations? The Mexican tax authorities cannot accept the nonresident
exploitation of the Mexican customer base.
 Should the imposition of VAT (imposed on the local customer for the “use” of the product)
solve this problem?
58
Why Do the Local Tax Authorities Disregard Treaty Principles?
(Cont’d)

Sale of Services (Brazil Example)
 A nonresident rendering services from abroad to customers located in Brazil,
Uruguay, Argentina (partially), Colombia (partially), and Chile may be subject to local
withholding tax when the payment is made abroad.
 When a tax treaty applies, most jurisdictions will accept that the “source country”
of the services (i.e., the place where the services are rendered) retains jurisdiction
to tax the “business profits” earned by the source company rendering the
services.
 Brazil disagrees (for now)
 The main problem with Brazil’s position is that most “source country”
governments will refuse to subsidize the Brazilian withholding tax by granting a
foreign tax credit to the non-Brazilian company rendering the services.
 Those source country governments will “double tax” the income that they deemed
properly allocated to their home jurisdiction (i.e., the place where the services were
rendered).
 Treaties were intended to mitigate double taxation between taxpayers doing business
in two high-tax jurisdictions.
 Even though many of Brazil’s tax treaties were concluded before Brazil created its
newest domestic rules on withholding taxes, the policy of those tax treaties has
always been evident.
 The Brazilian tax authorities lack the experience to understand the basic principles of
double taxation conventions.
59
Brazilian Taxation of Nonresident Services (New Developments)





The Brazilian Federal Revenue Attorney General’s Office (PGFN) recently published a
formal Opinion (No. 2.363/13) ratifying a Superior Court of Justice (STJ) decision (Copesul)
that provides that certain Brazilian payments for technical services without the transfer of
know-how made by Brazilian residents to residents of jurisdictions with which Brazil has
entered into a tax treaty should not be subject to withholding tax (WHT).
For many years, Brazilian taxpayers have tried to classify such service payments rendered
from abroad (in a treaty jurisdiction) as (Article 7) “business profits” taxable only in the
country where the services are rendered.
Based on Normative Act 01 of 5 January 2000 (Declaratory Act COSIT 1/2000), the tax
authorities have asserted that service payments remitted abroad should be classified as
“other income” (subject to Brazilian tax).
 The tax authorities claim that the “business profits” section applies only to income
earned on a “net” basis (“revenue minus expenses”).
 Services payments are made on a “gross payment” basis (without a reduction for
“expenses”).
The PGFN Opinion was issued in response to a potential threat by the Finnish government
to terminate the existing Brazil-Finland tax treaty if Brazil were to seek to withholding tax
for payments made by a Brazilian resident taxpayer for technical services rendered in
Finland by a Finnish company.
The new PGFN Opinion, which is not binding on the tax authorities, would not apply in
cases where Brazil has tax treaties that recharacterize the transfer of technical services as
“royalties” (which would be subject to a different level of withholding taxes and/or CIDE).
60
Brazilian Taxation of CFC Income (New Developments)




In 2013, the Brazilian Supreme Court (“STF”) ruled by a small majority vote (broadly) that the CFC
regime was not in conflict with the constitution, but the Court did not decide the issue of whether
Brazil’s CFC regime is compatible with double tax treaties concluded by Brazil.
On April 25, 2014, the Superior Tribunal da Justiça (“STJ”) held that the previous version of the
Brazilian CFC regime is overruled by the business profits article of Brazil’s tax treaties with
Belgium, Denmark and Luxembourg.
 Under the respective treaties with Belgium, Denmark, and Luxembourg, the “business
profits” of the subsidiaries of Vale could be taxed only once in those countries (not twice in
both those respective countries and Brazil at the same time).
 The decision confirmed that the international tax treaties signed by Brazil should prevail
over domestic law provisions.
 On the other hand, the business profits of Vale, for example, in Bermuda could be taxed
immediately in Brazil under the normal CFC rules.
The STJ also analyzed how the Brazilian corporate investor should treat the income earned by a
CFC.
 Under current regulations, Brazilian corporate investor must include in its taxable profits the
positive result of the “equity method” as applied to its foreign subsidiaries and affiliates on
31 December of each year.
 Under the “equity method,” profits earned by a subsidiary are added to the investment value
recorded by the parent (dividends and other distributions reduce the value).
 The decision did not appear to change the older view of how the “equity method” should be
applied.
All of these decisions may be moot in light of the new CFC regime enacted by the Brazilian
legislature in 2014 (PM 627/2013--Lei 12.973/14)
61
 The new CFC rules do not necessarily use tax treaties as the basis of their application.
Nondiscrimination Provisions in Latin American Country
Tax Treaties


The underlying objective of the “nondiscrimination clauses” in tax treaties is to
ensure that the country where an investment is made treats both resident and
nonresident investors similarly under the income tax rules.
 Taxpayers may also try to use both bilateral investment treaties and/or
trade agreements to create nondiscriminatory treatment with respect to the
application of VAT principles.
OECD, Article 24 (Nondiscrimination)
 Article 24(1) (General Rules): Nationals of a Contracting State shall not be
subjected in the other Contracting State to any taxation or any requirement
connected therewith, which is more burdensome than the taxation and
connected requirements to which nationals of that other State are or may
be subjected.
 Article 24(5) (CFCs): 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 more burdensome than the taxation and connected
requirements to which other similar enterprises of the first-mentioned
State are or may be subjected.
62
Nondiscrimination Provisions in Latin American Country
Tax Treaties (Cont’d)

Some anti-avoidance rules (directed at nonresidents) have been successfully
challenged by taxpayers who invoke nondiscrimination clauses in tax treaties.
 Thin capitalization rules are generally established to prevent a nonresident investor
from “stripping” the earnings of a local subsidiary by overcapitalizing the
subsidiary with debt (generating high levels of deductible interest payments that are
subject to lower withholding tax rates).
 Certain treaties with Argentina, for example, have been used to neutralize the
effects of thin capitalization rules.
 Restrictions on the deductibility of related party payments are usually implemented
to prevent affiliates from “stripping” the earnings of a local entity by allowing for
deductible intercompany service payments that may not be subject to any
withholding taxes.
 For example, Colombian DIAN Ruling 77842/2012 removed the limitations on
the deductibility of foreign expenses paid to Spanish affiliates (normally
capped at 15% of net income).
 Withholding taxes on dividends paid to nonresidents.
 Such withholding taxes must be consistent with domestic law principles on the
taxation of dividends (see e.g., Volvo case in Brazil decided by the STJ in 2012
under the Brazil-Sweden Tax Treaty, considering “old” Brazilian Law
Law 8.383/1991).
63
Nondiscrimination Provisions in Latin American Country
Tax Treaties—The Brazilian Royalty Example

Under Brazilian law, nonresidents investors must register all transfers of technology
in Brazil (except software) with the Brazilian Patent and Trademark Office (INPI).
 Under these longstanding rules (dating back to 1966), Brazilian companies may
not make royalty payments to related parties that exceed 5% of the amount of the
earnings from the transfer of technology.
 In the case of unrelated parties, the Brazilian company may not deduct any
payments that exceed 5% of the amount of the earnings from the transfer of
technology.
 These rules create havoc for “high-tech” foreign multinationals doing business in
Brazil.
 The “3M Corporation” is presently facing a challenge in the United States because the
IRS wishes to use its transfer pricing rules to tax (fictional) royalty income that 3M
could not legally receive from its Brazilian subsidiary. See 3M Co. v. Commissioner,
T.C. Dkt. No. 5186-13.
 The IRS position is based on the concept that most of 3M’s IP and employees are
located in the United States.
 On the other hand, the Government of Brazil has made it nearly impossible
through its licensing rules (dating back to the 1960s) for nonresident technology
companies to properly exploit their technology in Brazil.
 Question: Could a nonresident company situated in a treaty jurisdiction with Brazil
litigate the validity of the royalty restrictions under the nondiscrimination clause of a
64
Brazilian tax treaty (e.g., Israel)?
Thank you!
Panel Co-Chairs: Emin Toro
Speakers:
Firm:
Email:
Covington & Burling LLP
etoro@cov.com
Sonia Velasco
Firm:
Email:
Cuatrecasas, Gonçalves Pereira
sonia.velasco@cuatrecasas.com
Juan Carlos Garantón
Firm:
Email:
Torres Plaz & Araujo
jgaranton@tpa.com.ve
Gianni Gutiérrez
Firm:
Email:
Ferrere, Montevideo
GGutierrez@ferrere.com
Adrián Rodríguez
Firm:
Email:
Lewin & Wills
agonzalez@lewinywills.com
Guillermo O. Teijeiro
Firm:
Email:
Teijeiro & Ballone,
guillermo.teijeiro@te-ba.com
Richard Winston
Firm:
Email:
Richard L. Winston P.A
Richard@winstonpa.com
65
Appendix
66
GAARs – Case Law
Developments on Treaty
Limitations
67
IMPROPER USE (ABUSE) OF TREATIES
“Guiding principle . . . benefits of a [tax treaty] should not
be available where the main purpose of entering into
certain transactions or arrangements was to secure a more
favorable tax position and obtaining that more favorable
treatment in these circumstances would be contrary to the
object and purpose of the relevant provisions” (OECD, MC,
Commentary on article 1, par. 9,5)
68
FIGHTING ABUSE OF TREATIES/OECD MC
3 different tools:
• Beneficial ownership concept
• LOB provisions
• Application of domestic GAARs
• Beneficial ownership and GAARs sometimes overlap
in practical application
69
WHAT DOES THE EXPRESSION “BENEFICIAL
OWNER” MEAN?
Traditionally, 3 different interpretation lines:
• It excludes agents and nominees exclusively (accord.
Commentaries, article 10, par. 2, 12,1)
• The concept coincides with the prevailing meaning in
common law countries
• Beneficial owner refers positively to the person to
whom the income is attributable for tax purposes,
either under the laws of the residence country or
under the law of the source country
70
BENEFICIAL OWNERSHIP: WHEN INTRODUCED,
WHERE AND HOW EXPRESSED
• When: As from OECD Model 1997
• Where: articles 10 (dividends), 11 (interest) and 12
(royalties)
• How: expressed “…such dividends/interest) may also be
taxed in the (source state)… according to the laws of
that state, but if the beneficial owner of the
(dividends/interest) is a resident of the other contracting
state, the tax so charged shall not exceed:…” (articles
10, 11 OECD Model, par. 2)
71
BENEFICIAL OWNERSHIP: WHEN INTRODUCED,
WHERE AND HOW EXPRESSED (cont.)
“Royalties arising in a contracting state and beneficially
owned by a resident of the other contracting State shall be
taxable only in that other State” (article 12, par. 1)
So, functionally, reduced source taxation is denied if the
recipient residing in the other contracting State is not the
beneficial owner of the dividend, interest or royalty income
72
BENEFICIAL OWNERSHIP LEADING PRECEDENTS:
ECONOMIC OR LEGAL SUBSTANCE APPROACH
 Indofood (Court of Appeals, Decision UK, 2006) –
Economic Approach
• Beneficial owner is an international tax concept
• No single and clear test available (reference is made to the
substance of the matter)
• Analysis is to be made on a case-by-case basis
considering all facts and circumstances
Indofood was an extreme interest case: (i) identical amount
of principal and interest in both segments (notes and loan);
(ii) interposed company bypassed for cash repayments of
principal and interest; (iii) interposition of company solely due
to tax reasons.
73
Notes placed with
foreign inventors
(1)
Funding
SUBSIDIARY IN
MAURITIUS
Notes guarantee
(2)
Reduced
withholding
tax DTT
Indonesia /
Mauritius
Indofood
Indonesia
Loan of funding obtained
trough placement
74
 Prevost: Dividends case (TCC 2008, confirmed FCA,
2009) – Legal Approach
• “Beneficial owner of dividends is the person who receives
the dividends for his or her own use and enjoyment and
assumes the risk and control of the dividend he or she
received … 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”
• Absence of substance: office/employees is not an issue
• Legal owner is the beneficial owner unless it is a conduit
(FCA)
 Velcro: Royalties case (TCC 2012): Similar reasoning
75
Henlys
U.K.
Volvo
 49%
Sweden
51%
DHC
The
Netherlands
49%
100%
PREVOST
Canada
DHC was beneficial owner because (i) it has tittle on the shares; (ii) dividends
Received from Prevost were its own; (iii) Volvo and Henlys might not dispose
76
Of the dividends received by DHC until actually distributed by DHC

OECD
CFA clarification of the meaning of beneficial owner /
discussion draft: April 29, 2011 / Revised: October 19,
2012
•
Dividends: “In these various examples (agent, nominee,
working party conduit company acting as a fiduciary or
administrator) the recipient of the dividend is not the “beneficial
owner” because that recipient’s right to use and enjoy the
dividend is constrained by a contractual or legal obligation to
pass on the payment received to another person …where a
recipient of a dividend does have the right to use and enjoy the
dividend unconstrained by a contractual or legal obligation to
pass on the payment received to another person, the recipient is
the beneficial owner of that dividend…” (draft commentaries on
article 10, subpar. 12,4)
77
“The fact that the recipient of a dividend is considered to be
the beneficial owner of that dividend does not mean,
however, that the limitation of tax provided for by paragraph
2 must automatically be granted … (the concept of
beneficial owner)… does not deal with other cases of treaty
shopping and must not, therefore, be considered restricting
in any way the application of other approaches to address
such cases” (draft commentaries on article 10, subpar.
12,5)
78
“…Where the recipient of interest does have the right to use and enjoy
the interest unconstrained by a contractual or legal obligation to pass on
the payment received to another person, the recipient is the beneficial
owner of such interest…” (draft commentaries on article 11, subpar.
10,2)
“The fact that the recipient of an interest is considered to be the
beneficial owner of the interest does not mean, however, that the
limitation of tax provided for by paragraph 2 must automatically be
granted … there are many ways of addressing conduit company, and,
more generally treaty shopping situations, these include specific antiabuse provisions in treaties, general anti-abuse rules and substance
over from economic substance approaches… (the concept of beneficial
owner)… must not, therefore, be considered as restricting… the
application of other approaches to address such cases” (draft
commentaries, art. 11, par, 10,3)
79
Royalties: “…Where the recipient of royalties does have the
right to use and enjoy the royalties unconstrained by a
contractual or legal obligation to pass on the payment
received to another person the recipient is the “beneficial
owner” of these royalties” (draft commentaries on article 12,
subpar. 4,3)
Paragraph 4.4 adds that the beneficial owner concept does
not limit application of other anti-treaty shopping
approaches (text is similar to that being included in the
commentaries on articles 10 and 11)
80
APPLICATION OF GAARs IN A TREATY SETTING –
OECD MC
 A Copernican twist from 1977 to 2003 version of the
OECD MC text of commentaries
 1977 Model: GAARs may not be applied in a treaty
setting unless the DTC expressly allows so, i.e., to resort
to domestic GAARs for recharacterization or
reassignment of income (redetermination of the taxpayer)
 2003 Model: GAARs apply unless the DTC text expressly
prohibits it (commentaries on article 1, par. 22, subpar.
22,1-2)
 Current Model (2010): same position
81
APPLICATION OF GAARs IN A TREATY SETTING –
OECD MC
“Other... possible ways to deal with… (abuses), including
“substance over form”, “economic substance” and general
anti-abuse rules have also been analyzed, particularly as
concerns the question of whether these rules conflict with
tax treaties”… (commentaries on article 1, par. 22)
82
APPLICATION OF GAARs IN A TREATY SETTING –
OECD MC
“…as a general rule… there will be no conflict: for example,
to the extent that the application of these rules… results in a
recharacterization of income or in a redetermination of the
taxpayer who is considered to derive such income, the
provisions of the Convention will be applied taking into
account these changes” (commentaries on article 1, subpar.
22.1)
83
APPLICATION OF GAARs IN A TREATY SETTING –
OECD MC
“Whilst these rules do not conflicts with tax conventions,
there is agreement that member countries should carefully
observe the specific obligations enshrined in tax treaties to
relieve double taxation as long as there is no clear evidence
that the treaties are being abused” (commentaries on article
1, subpar. 22.2)
84
BEPS action 6: preventing the granting of treaty benefits in
inappropriate circumstances 14th March / 9th April, 2014
It includes entitlement of benefits clause model in line with
that contained in article 22, US MC
85
GAARS IN SELECTED LATAM COUNTRIES
ARGENTINA
BRASIL
CHILE
COLOMBIA
MEXICO
PROVIDED IN DOMESTIC
LEGISLATION
APPLICATION IN TREATY
SETTING
YES
YES
YES
(No yet implemented)
Only SAAR (i.e., thin cap.)
NO
(GAAR included in tax
reform under congressional
consideration
NO
YES
NO CASES YET
Technically no, but income tax
law authorizes recharacterization of sham
transactions by MNEs
SCJN also applies fraud legis
principle
Procedural rule requires
taxpayers claiming treaty
benefits to confirm that income
is taxable in home country
GAAR specially allowed in
certain treaties e.g., Bahrain,
Ukraine.
There are no application
precedents
86
GAARS IN SELECTED LATAM COUNTRIES
PARAGUAY
PERU
URUGUAY
PROVIDED IN
DOMESTIC LEGISLATION
APPLICATION IN TREATY
SETTING
NO
NO
YES (2012)
NO
NO
NO
87
ARGENTINA
 LOBs and GAARs
 Argentine DTTs lack limitation of benefits (LOB) rules,
but in recent years the tax authorities have resorted
aggressively to domestic GAARs to recharacterize
income or redetermine the beneficiary in a treaty setting,
particularly in case of outbound (round trip) investment
 GAARs are applied regardless of express treaty
authorization
88
ARGENTINA
 Best scenario (inbound or outbound) would be a holding
jurisdiction that combines a DTT in force with Argentina with
a suitable holding regime in the treaty-partner jurisdiction.
For this purpose Dutch BVs, UK LLPs, and Spanish ETVs
are worth considering.
 Foreign treaty-partner holding must have legal as well as
economic substance
 The Netherlands recently issued substance regulations
particularly addressed to the sublicensing of IP rights,
including to residents in tax treaty foreign countries
89
GAARS APPLICATION ABSENT EXPRESS TREATY
AUTHORIZATION / DEBATED ISSUE
 Fully
applicable if Argentina is country of
residence of a taxpayer whose abusive behavior is
to be challenged. That means that income might be
recharacterized or beneficiary redefined
 If Argentina is source country (1) unrestricted
income recharacterization (accord. Art. 3,2), but (ii)
limited power to redefine beneficiary is benefit
recipient is recognized as resident by treaty-partner
country
Query whether outcome is different is express: treaty
authorization is provided for GAARs application (e.g., MOU
90
new Spanish treaty)
PRECEDENTS ON INBOUND STRUCTURES
 Ruling
AFIP 57/94 (January 30, 1996)
recharacterization of insurance premium paid to
foreign insurers under loan agreement as
additional interest (higher borrowing cost); DTTs
Spain and Italy
91
PRECEDENTS ON INBOUND STRUCTURES
PARTICIPATED LOANS (DNI MEMORANDUM 3/06)
DEG exemption/DTT with Germany
Participant
Participant
DEG
Participant
- Altough interest paid to DEG, DEG
acts as collecting agent of principal
and interest corresponding to
participated financial entities so that
exemption does not apply on said
interest; DEG is not the beneficial
owner of the interest income
Argentine
borrower
92
PRECEDENTS ON OUTBOUND STRUCTURES
 Memorandum DNI 64/09: Facts and Findings
Argentina
Resident
99%
Austrian
Holding
100%
B.V.I.
Corp.
 According to the Austrian DTT (no longer in force), the Argentine
resident´s holding in AH and dividends received from AH were no
taxable in Argentina by personal assets tax and income tax. Only
15% WHT on dividends applied on actual distribution in Austria
 FIF (domestic fiscal transparency rules) were avoided by
interposition of AH
 Fact findings showed that AH was a phantom (shell) company
without any economic substance
93
PRECEDENTS ON OUTBOUND STRUCTURES
 Memorandum DNI 64/09: Decision
 The decision qualified the situation as an abuse of the
treaty and made reference to the possibility of applying
GAARs in that context, in accordance with
Opinion of U.N. Expert Committee on International Tax
Cooperation, Subcommittee on Improper Use of Treaties,
and
(ii) Commentaries to Article 1, OECD MC, 2008 (reproduced
in OECD MC, 2010)
(i)
94
 By applying GAARs, the Argentine competent
authority disregarded the interposed company in
the treaty country jurisdiction and treated the
holding of the shares in and income obtained by
B.V.I. Corp. as if the interposed company did not
exist
95
 Memorandum DNI 799/10: Fact Pattern
 Operating Subs (third countries) were domiciled in LATAM
jurisdictions having no DTT with Argentina. Participation in operating
subs help trough Chilean holding which enjoyed a special (no-tax)
holding regime in Chile. The Chilean DTT did not expressly exclude
privileged holding companies from the concept of residents.
 By interposing the Chilean Holding the Argentine taxpayer avoided
taxation on dividends in Argentina; dividends that were made up
with profits coming from the second-tier operating subs, otherwise
fully taxable in Argentina (i.e., if paid directly by operating subs to
Parent Co)
96
 Memorandum DNI 799/10: Opinion

The Argentine DNI sustained that:
DTTs should not be utilized by taxpayers to
ameliorate or eliminate the tax burden through legal
forms that would not be adopted but for the tax
advantages deriving therefrom
 Domestic GAARs (economic reality principle as
contemplated in Section 2, law 11,683) may and
should be applied to avoid abusive schemes even in
a treaty setting

97
 Memorandum DNI 799/10: Opinion
 Considering the Chilean Platform company regime and
the DTT rules attributing tax jurisdiction to the parties
thereto, the reason to interpose the holding was to
deviate dividend income coming from Uruguay and Peru
(where the operating subs were domiciled), that would
otherwise have been taxed in Argentina, with the end
result of benefiting from a double non-taxation
 Double non-taxation, obtained by interposing a Chilean
Platform company between the Peruvian and Uruguayan
subs, on one hand, and the Argentine Parent on the
other, contradicts the DTT and implied an abusive
conduct which might be challenged under domestic
GAARs
98
 Memorandum DNI 799/10: Opinion
 From a different perspective, DTT are aimed at
avoiding double taxation and to that end, treaty-partners
should maintain an income tax of general application.
The Chilean Platform company regime was strange to
the income system of general application in Chile
 The Platform company was beyond the scope of the
Chilean DTT. It does not qualify under Article 1 of the
DTT (taxes covered) as that article refers to subsequent
amendments and replacing taxes using an analogous
tax basis and not to promotional regimes resulting in
double non-taxation
99
MOLINOS RIO DE LA PLATA
TAX COURT (TFN) August 14, 2013
ARGENTINA
MOLINOS RIO DE LA PLATA
S.A.
CHILE
Dividends
Dividends
URUGUAYAN SUB.
PLATFORM CO (HOLDING)
Dividends
PERUVIAN SUBS.
100
LEGAL HOMEWORK AND FACT PATTERN
 DTT Argentine / Chile patterned after Andean
Pact: income solely taxed at source; dividends paid
by Chilean company taxed in Chile exclusively
 Platform Co. only taxed on Chilean source
income. Foreign source income (profit distributions
from operating foreign) non taxable
 Dividends received by Platform Co. from op.
subs. were immediately distributed to Molinos
 Dividends were received by Molinos free of tax; if
distributed directly by Peruvian and Uruguayan
subs would have been taxed in Argentina
101
DISCUSSION AND HOLDING
 There was an abuse of the treaty; AFIP’s tax assessment
taxing dividends in Argentina affirmed
 To find the existence of an abuse, tax court applied
domestic GAARs and considered that Platform Co was not
the effective beneficiary of the dividend paid out by the
operating subs
 Deemed “effective beneficiary” concept built in GAARs
(DTT did not contemplate that concept)
 A DTT may be used to mitigate or reduce the tax burden
but not to eliminate the tax burden in its entirety
(double non-taxation)
102
 Critical Assessment of Molinos Rio de la Plata – Findings
and Conclusions
 Application
of Argentine GAARs should not have resulted in a
successful challenge of the Platform Company under the fact
and circumstances of the case
Argentine GAARs/economic reality principle) consist of a sham-type
provision according to which whenever a manifest discrepancy exists
between the legal forms used and the economic substance of the
transaction, the latter prevails to recharacterize the transaction or redefine
the parties thereto for tax purposes
 If that discrepancy exists, the legal forms are to be discarded regardless
of the intention of the taxpayer, i.e., regardless of whether the intention
was to avoid taxes or to pursue a legitimate business purpose. On the
contrary, if such discrepancy does not exist, the legal transaction may not
be challenged, whatever its purpose, unless it is evidenced that the
taxpayer acted in fraud legis

103
 Pursuing a tax advantage or benefit under the DTT
(e.g., double non-taxation) is not, per se, enough to
ignore the intermediate holding, as argued in connection
with the Chilean Platform company
 To legitimately challenge the structure under GAARs,
the Tax Court should have either evidence that the
Chilean holding was not the actual owner of the
dividends received from the Peruvian and Uruguayan
subs, and/or lacked economic substance (i.e., it was a
paper company which exercises no effective
management or administration of the holdings). None of
that was undoubtedly evidenced in the case
104
 Moreover, if the preceding conditions are met (the
Chilean Platform company used and enjoyed the
dividend income, and managed the equity participations
held) the Chilean holding might not be deemed to be
interposed in fraud legis nor would fail meeting the
substance test. It was not evidenced that dividends
received by Chilean Platform were not its own (i.e., that
holding was constrained to pass the dividends on to
parent)
 In that context, Argentine GAARs could not be resorted
to legitimately ignore the Chilean company as a treaty
beneficiary, even if, as it appears to be the case, the
structure was designed to save taxes (it was a taxgeared structure)
105
Richard L. Winston
Primary Goals of Double Tax Conventions (“Tax
Treaties”)
 The primary goals of double tax conventions are to:
 Prevent double taxation
 The same taxpayer should not be subject to taxation on the
same income in two countries.
 The rules found in tax treaties are intended to provide for the
proper allocation of income to each treaty partner.
 Provide clear and predictable results to taxpayers engaging in
cross-border transactions
 Tax treaties generally set forth clear rules to define whether
(and how much) a treaty country may tax a particular type of
income.
 Tax treaty provisions are intended to override the “domestic
tax laws” of each of the treaty partners.
 Prevent tax evasion by requiring the sharing of tax information
between the treaty partners (e.g., to ensure that a taxpayer is
claiming consistent positions in each country).
107
Who Enters Into Double Tax Conventions?
 High-tax countries generally enter into comprehensive tax treaties only
with other high-tax jurisdictions.
 The intent of a tax treaty is to reduce double taxation, not to allow
for low taxation or zero taxation.
 In theory, taxpayers are less likely to engage in tax avoidance
transactions when shifting of income between two high-tax
countries.
 High-tax countries have no reason to enter into comprehensive tax
treaties with low-tax jurisdictions (although high-tax countries may
enter into limited “exchange of information” agreements with lowtax jurisdictions).
 Tax treaties between high-tax and low-tax countries tend to be
highly restricted in scope (e.g., transportation or social security
treaties).
108
When Do Tax Treaties Provide for Less Than
Single Taxation (or “Zero Taxation”)?
 Planning opportunities are often presented for taxpayers when the
government officials of one high-tax country miscalculate the tax
system of their so-called “high-tax” treaty partner.
 Tax treaties work best when income is allocated between two high-tax
jurisdictions, but when one high-tax jurisdiction offers its tax
residents a low-tax (or zero tax) option, the income earned by a
taxpayer in a cross-border transaction may escape all taxation.
 For example, a Barbados IBC qualifies for tax benefits under the
Barbados-Venezuela tax treaty even though the Barbados IBC
pays no more than 2.5% corporate income tax in Barbados (the
regular corporate tax rate in Barbados is 25%).
 If taxpayers move income from Venezuela to Barbados
(through deductible payments from Venezuela), they will be
subject to tax at a 2.5% Barbados tax rate rather than a 34%
Venezuelan tax rate.
 Brazil once terminated its tax treaty with Portugal when it
discovered that taxpayers were exploiting a loophole by
establishing tax planning vehicles in the Portuguese territory of
109
Madeira.
Withholding Taxes Under Tax Treaties –
Policy Considerations



Tax treaty rates on dividends, royalties, and interest represent another form of “allocation”
of taxes between two high-tax countries.
The jurisdiction in which the payor (of dividends, royalties, and interest) is located will
withhold and remit the proper amount of taxes as agreed by the parties to the treaty.
 For example, when Argentina agrees with the Netherlands that it will withhold 12% on
interest payments made to a Dutch company (rather than the normal 35% Argentine
domestic tax), Argentina is reserving the right to keep 12% of the payment.
 The assumption, however, made by the Argentine government is that the interest will be
paid to the Dutch company, and the Dutch government will impose 25.5% Dutch
corporate income taxation on the interest (offset by a foreign tax credit for the
Argentine taxes paid).
 Final allocation of taxes = 12% to Argentina and 13.5% to the Netherlands = 25.5%
taxes.
 In reality, good tax planning will often change the result.
Mexico has recently paid close attention to “earnings stripping” schemes that rely on the
movement of Mexican-source income to low-tax regimes (often using a tax treaty).
 Under 2014 Mexican Tax Reform rules, Mexican payments of interest, royalties or
technical assistance will not be deductible when (1) paid to a controlling foreign entity
that is fiscally transparent, unless the shareholders or partners are subject to tax on the
foreign entity’s income, and the payments are made at arm’s length, (2) the payments
are not deemed to exist for tax purposes in the country or territory in which the entity is
resident; or (3) the foreign entity does not properly accrue the taxable income under the
applicable local tax rules.
110
Interest-Stripping Structure
U.S. Corp
or Tax Haven
Equity
99.9%
Dutch
CV
Loan (0% Dutch interest WHT)
99.9%
Dutch BV
or
Cooperative
“Disregarded”
Loan
Argentine WHT
--Interest 12% (gives rise
to a tax deduction against
35% income tax).
--Treaty nondiscrimination
clause may defeat “thin
cap” rules.
99.9%
U.S.
LLC
Back-to-Back Loan
Small “spread” earned
by Dutch BV (small
Dutch tax rather than
25.5% tax, plus credit for
Argentine taxes
withheld)
0.1%
Argentine
S.A.
111
THE END
COMMENTS OR QUESTIONS?
RICHARD L. WINSTON
112