Taxing Times Tax Advice and Schemes by sofiaie

VIEWS: 15 PAGES: 26

									Double Taxation Conventions
             and
Beneficial Ownership Clauses
    Congresso Internacional de Direito
       Tributario – Rio de Janeiro

            Philip Baker QC
        Grays Inn Tax Chambers
                 Outline
 Background    - the “beneficial ownership
  limitation” provision and its meaning
 The Indofood case
 The Bank of Scotland case
 Indofood and Bank of Scotland compared
 Some conclusions and implications
            1) Background
 E.g. Article 10 (2)
 “… such dividends may also be taxed in
  the Contracting State of which the
  company paying the dividends is a
  resident and according to the laws of that
  State, but if the beneficial owner of the
  dividends is a resident of the other
  Contracting State, the tax so charged shall
  not exceed: ….”
            1) Background
 Found  in the Dividends, Interest,
  [Royalties] and “Other Income” Articles
 Very important for reduced withholding tax
  claims
 Originated in 1977 OECD Model
 Used previously in e.g. US and UK DTCs
           1) Background
 Note: has a technical meaning in common
  law systems – “beneficial ownership”
  contrasted with “legal ownership”
 The need for an “international fiscal
  meaning”
 French: “bénéficiaire effectif”
           1) Background
 What   is the meaning of “beneficial
  ownership”
 The original OECD Commentary: mere
  nominees or agents
 The Conduit Companies Report (1986):
  mere fiduciary or administrator
 Commentary amended 1995 and 2002
 A limited anti-shopping provision
       2) The Indofood case
 English High Court – 7th October 2005
 English Court of Appeal – 2nd March 2006
 Why was the case brought in the English
  courts?
            The Indofood case
Indofood TBK
(Indonesia)
“Parent Guarantor”   $280 m.
                     10.375%

                                Indofood International
                                Finance Ltd (Mauritius)
                                “Issuer”


                      $280 m.
JP Morgan Chase       10.375%
Bank NA
“Trustee”
            The Indofood case
Indofood TBK                    Indofood International
(Indonesia)                        Netherlands
                                Finance Ltd (Mauritius)
                     $280 m.       NewCo
                                “Issuer”
“Parent Guarantor”
                     10.375%



                                Indofood International
                                Finance Ltd (Mauritius)
                      $280 m.   “Issuer”

JP Morgan Chase       10.375%
Bank NA
“Trustee”
            The Indofood case
 Background:   termination of the Indonesia-
  Mauritius DTC
 Proposal to insert a Dutch SPV
 Was this a “reasonable measure”
 The knock-out blows:
     A) the Dutch SPV would not be the “beneficial
      owner” of the interest
     B) The Dutch SPV would not be a resident of
      the Netherlands
         The Indofood case
 The   meaning of “beneficial ownership”
 CA: An “international fiscal meaning”
 Beneficial ownership meant: “the full
  privilege to directly benefit from the
  income” – taken from the Indonesian Dir-
  Gen of Income Tax
            The Indofood case
 TheDutch SPV would not be the
 beneficial owner as:
     A) It was obliged to pay on the interest in 1
      day
     B) Precluded (by the note conditions) from
      finding the money from any other source
 Regard is to be had to the “substance of
 the matter”
           The Indofood case
 Conclusion:
     The Dutch SPV would not be the beneficial
      owner
     The interposition was not a reasonable
      measure
       What Indofood decided
 UK  law or Indonesian law?
 “International fiscal meaning” vs. Art. 3(2)
 OECD Commentary
         What Indofood decided
 Isthe decision really that surprising?
 The egregious facts:
      Same loan in and out
      Same interest in and out
      Fixed timetable
      Issuer was omitted from cash flows
      The Note Conditions precluded funds from
       any other source
      Implications of the case
 Limited  confirmation of meaning of
  beneficial ownership
 Question remains: how far does it extend?
 Initial HMRC reaction – Draft Guidance
 Group finance subs (multiple loans in and
  out)
 CDOs – waterfall arrangements
 3) The Bank of Scotland case
 French   Conseil d’Etat, 29th December
  2006
 UK-France Double Taxation Convention of
  1968
3) The Bank of Scotland case

      Merrell Dow Inc
      US                3-year usufruct for Frs.
                        267m
                               Bank of
                               Scotland - UK




     Marion Merrell         Dividends of Frs. 270m.
     Marion Merrell
     Dow - Fr               Plus
     Dow – Fr
                            Repayment of tax credits
                            and withholding tax of Frs.
                            74.25m
  3) The Bank of Scotland case
 Legal  background
 25% non-treaty withholding tax – reduced
  to 15% by Art. 9(6) of the UK-France DTC
  (with a bo limitation)
 Right to repayment of dividend tax credit –
  under Art. 9(7) – (no bo limitation)
 No right to repayment of the dividend tax
  credit under the France-US double
  taxation convention
  3) The Bank of Scotland case
 The  Conseil d’Etat decided:
 The transaction was not a usufruct: there
  was an abuse of legal form; it was in
  reality a loan to the US parent from the
  Bank, repaid by the French subsidiary
 The beneficial ownership limitation applied
  also to the repayment of the dividend tax
  credit – it was a general requirement in tax
  treaties
 3) The Bank of Scotland case
 Note:  the Bank was not nominee or mere
  fiduciary
 However, the Conseil d’Etat confirmed that
  the beneficial ownership limitation
  reflected a general, abuse of law doctrine
  to deny treaty shopping
 The repayment of the excess withholding
  tax and dividend tax credit was denied
 4) Indofood and Bank of Scotland
             compared
 Both  cases suggest a wider use of the
  “beneficial ownership” limitation to counter
  treaty shopping – not a narrow anti-
  avoidance measure
 The exact meaning of “beneficial
  ownership” left unclear by the English
  Court of Appeal, especially the role of the
  OECD Commentary
 4) Indofood and Bank of Scotland
             compared
 The Conseil d’Etat suggest a very wide
  use of the beneficial ownership limitation
 Note: the Bank was clearly not a nominee
  or agent or mere fiduciary / conduit
  (except in a broad factual sense)
 5) Consequences of the Indofood
    and Bank of Scotland cases
 HMRC     draft Guidance on finance
  structures – more challenges to claims for
  reduced / zero withholding taxes likely
 France – possibly more challenges on
  treaty shopping (a change from the
  traditional approach in France)
 Background of protecting source country
  taxation
 5) Consequences of the Indofood
    and Bank of Scotland cases
 Possibilitythat other countries will follow
 E.g. Indonesian Supreme Court case –
  17th October 2006
 Changes to OECD Commentary?
 Do we need more clarification of the
  meaning of the beneficial ownership
  limitation
 Are detailed anti-abuse measures needed
  in DTCs?
Double Taxation Conventions
             and
Beneficial Ownership Clauses
    Congresso Internacional de Direito
       Tributario – Rio de Janeiro

            Philip Baker QC
        Grays Inn Tax Chambers

								
To top