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OFII Tax Conference La Quinta CA

VIEWS: 14 PAGES: 43

  • pg 1
									           U.S. Inbound Treaty
        Developments: Traps for the
                  Unwary
                                    May 3, 2008

              Rafic H. Barrage                    Stephen A. Nauheim
              Mayer Brown LLP                 PricewaterhouseCoopers
              Washington, D.C.                     Washington, D.C.


This document was not intended or written to be used, and it cannot be used, for the
          purpose of avoiding U.S. federal, state or local tax penalties.

  2008 OFII Tax Conference                                         La Quinta, CA
                                                                              1
         Introduction and Overview
•   Recent More Restrictive LOB Provisions
•   Key Provisions in the Pending Canada/U.S. Protocol
•   Other U.S. Tax Treaty Developments
•   Audit Activity Update on Form 1120-F
•   Form W-8BEN – Common Validation Issues and Proposed
    Changes




2008 OFII Tax Conference                         La Quinta, CA
                                                           2
       Recent More Restrictive LOB
               Provisions
•   Based on recent U.S. treaties, there is a trend toward more restrictive
    limitation on benefits provisions, including those with respect to:
      – The Publicly Traded Test,
      – The Ownership-Base Erosion Test,
      – The Derivative Benefits Test,
      – The Active Trade or Business Test,
      – The Headquarters Company Test, and
      – The Triangular Rule.
•   These restrictions take on increased importance in light of the increasing
    takeover of publicly traded companies by private investment funds and
    companies inverting from their home jurisdiction.


2008 OFII Tax Conference                                          La Quinta, CA
                                                                                 3
       Recent More Restrictive LOB
          Provisions, continued
The Publicly Traded Test
• The company’s principal class of shares (and any disproportionate class of
   shares) must be regularly traded on one or more recognized stock
   exchanges and one of the following requirements must be met:
    – The company's principal class of shares is primarily traded on one or
      more recognized stock exchanges located in the Contracting State of
      which the company is a resident, or
    – The company's primary place of management and control is in its State
      of residence.
• Under the subsidiary of a publicly traded company test, each intermediate
   owner must be a resident of one of the Contracting States.



2008 OFII Tax Conference                                      La Quinta, CA
                                                                          4
       Recent More Restrictive LOB
          Provisions, continued
The Ownership-Base Erosion Test
• The test generally requires consideration of direct and indirect owners of the
   recipient of the income, and that at least 50 percent of these persons qualify
   for benefits of the treaty as individuals, government units, qualified pension
   plans or charities, or publicly traded companies.
• However, recent treaties (e.g., U.S.-Belgium) also require the shares of the
   income recipient to be owned by residents of the Contracting State of which
   such income recipient is a resident.
• For the base erosion part of the test, gross income must be determined
   based on the tax laws of the resident country.




2008 OFII Tax Conference                                          La Quinta, CA
                                                                             5
       Recent More Restrictive LOB
          Provisions, continued
The Derivative Benefits Test
• An equivalent beneficiary includes a person who would be entitled to the
   same benefits under another treaty with a comprehensive LOB provision for
   the same item of income, but only if it would be treated as a qualified person
   under similar LOB treaty provisions applicable to individuals, governmental
   units, qualified pension plans or charities, or publicly-traded companies.
• Ambiguity exists as to whether residents of the source country are good
   owners.
• Although the test may be applied by looking at direct or indirect ownership,
   for purposes of determining whether a person is an equivalent beneficiary,
   only the status of the “person” in question is analyzed.



2008 OFII Tax Conference                                          La Quinta, CA
                                                                             6
       Recent More Restrictive LOB
          Provisions, continued
The Active Trade or Business Test
• Recent treaties (e.g., U.S.-Belgium treaty) explicitly provide that whether a
   trade or business activity is substantial will be determined based on all the
   facts and circumstances (i.e., no safe harbor test is provided, as in the U.S.-
   Dutch treaty).
• Activities conducted by persons "connected" to such person shall be
   deemed to be conducted by such person.
     – Persons are "connected" to one another if:
         • One possesses at least 50 percent of the beneficial interest (or, in
           the case of a company, 50 percent of the aggregate voting power
           and 50 percent of the aggregate value) in the other, or



2008 OFII Tax Conference                                           La Quinta, CA
                                                                              7
       Recent More Restrictive LOB
          Provisions, continued
The Active Trade or Business Test, continued
         • Another person possesses, directly or indirectly, at least 50 percent
           of the beneficial interest (or, in the case of a company, 50 percent of
           the aggregate voting power and 50 percent of the aggregate value
           in the company) in each person.
    – A person also is considered to be connected to another if, based on all
      the relevant facts and circumstances, one has control of the other or
      both are under the control of the same person or persons.
    – Substantiality requirement for related party payments.
    – Qualification is analyzed for each item of income in respect of which
      treaty benefits are claimed.



2008 OFII Tax Conference                                           La Quinta, CA
                                                                              8
       Recent More Restrictive LOB
          Provisions, continued
The Headquarters Company Test
• Often a difficult test to meet because the test generally requires that a treaty
   benefit claimant meet a number of requirements regarding active business
   operations and gross income.




2008 OFII Tax Conference                                           La Quinta, CA
                                                                               9
       Recent More Restrictive LOB
          Provisions, continued
The Triangular Rule
• The Triangular Rule addresses fact patterns in which the income of a
   company resident in one of the Contracting States is attributable to a
   Permanent Establishment located in a third jurisdiction and, by virtue of its
   attribution to that PE is subject to reduced or no taxation in the home
   country.
• Found in U.S. treaties with in Germany, Iceland, Luxembourg, Sweden,
   Denmark, Finland, and Belgium.
• Generally denies treaty benefits where, for example, U.S. source income
   derived by a German resident in respect of which treaty benefits are
   claimed is attributable to a PE of the German resident in a third country, but
   only if:


2008 OFII Tax Conference                                          La Quinta, CA
                                                                             10
       Recent More Restrictive LOB
          Provisions, continued
… continued
   – The combined rate of tax imposed on such income in Germany and the
      country in which the PE is located is less than 60% of the tax that would
      be imposed on such income in Germany if it were derived directly by the
      German resident (i.e., not through the third country PE).
   – For dividends, interest, and royalties, a 15% U.S. withholding tax
      applies.
   – Exceptions exist for:
        • Royalty income attributable to intangible property produced or
          developed by the PE itself; and
        • Other income, where the PE is engaged in the active conduct of a
          trade or business in the third country.

2008 OFII Tax Conference                                        La Quinta, CA
                                                                           11
          Treaty with Brother-Sister
            Company (Example)
                                    Limitation on Benefits (e.g., Belgium/U.S.
                                    Treaty)
               Public               •   Publicly Traded Test (Article 21(2)(c)).
                                          – Not met since US Sub is not publicly
                                              traded, and its publicly traded parent is
                                              not a resident of the United States or
               Dutch                          Belgium.
               Parent               •   Active Trade or Business (Article 21(4)).
                                          – The Trade or Business must be
                                              conducted in the United States, and the
                Interest
    Belgian                                   income from Belgian Sub must be
                           US Sub             “connected.”
     Sub
                                    •   Derivative benefits/equivalent beneficiaries
                                        (Article 21(3)).
    Business                              – Might be met with respect to an item of
     Profits                                  income derived from Belgian Sub. The
                                              base erosion test must be met.
2008 OFII Tax Conference                                           La Quinta, CA
                                                                                 12
       Key Provisions in the Pending
          Canada/U.S. Protocol
•   The Canadian government finalized legislation to implement the protocol to
    the Canada-U.S. income tax convention on December 14, 2007.
•   The next steps are for the U.S. Congress to approve it, and then for each of
    the two countries to formally notify each other that their approval processes
    are complete.
•   The Protocol makes major changes, both positive and negative, including:
     – Zero withholding on interest (for both related and unrelated party
        interest).
          • Phase-in period for exemption from withholding tax on interest.
     – Binding mandatory arbitration (similar to Germany and Belgium).




2008 OFII Tax Conference                                          La Quinta, CA
                                                                             13
   Key Provisions in the Pending
  Canada/U.S. Protocol, continued
    – Entirely new Limitation on Benefits Article:
       • Conversion to bi-lateral (now it only applies to Canadian companies
          claiming U.S. benefits);
       • Scope of competent authority power under Article XXIX A(7)
          (discretionary right to deny treaty benefits if it would result in an
          abuse of the treaty).
    – Controversial, precedent setting, denial of treaty benefits to certain
      hybrid and reverse hybrid structures.
    – Controversial deemed PE rule for companies performing services if
      employees are present in host country for 183 days.




2008 OFII Tax Conference                                         La Quinta, CA
                                                                           14
     Key Provisions in the Pending
    Canada/U.S. Protocol, continued
•   Deemed PE where either:
     – Services are performed in the other State by an individual who is
       present there for a period or periods aggregating at least 183 days in
       any 12-month period and, during that period, more than 50% of the
       gross active business revenues of the enterprise are attributable to
       services performed by that individual in that other State; OR
     – Services are provided in that other State for an aggregate of at least
       183 days in any 12-month period with respect to the same or
       connected project for customers who are either residents of that other
       State or who maintain a PE there and the services are provided in
       respect of that PE.




2008 OFII Tax Conference                                       La Quinta, CA
                                                                         15
     Key Provisions in the Pending
    Canada/U.S. Protocol, continued
•   New provision inserted at Canada’s request because of the CRA’s loss in
    Dudney.
     – U.S. Treasury Department strongly opposed to such provisions, but
       conceded because of the elimination of withholding tax on interest.
•   Delayed 3-year effective date. Art. 27(3)(c) of Protocol.
•   Meaning of “connected project”?
     – Exchange of Notes provides that projects will be considered to be
       “connected” if “they constitute a coherent whole, commercially and
       geographically.”
         • 2008 OECD Draft Model Tax Convention and existing commentary
           under Article 5 (¶¶ 5.3 - 5.4) may provide some guidance.


2008 OFII Tax Conference                                      La Quinta, CA
                                                                        16
       Provision of Services – U.S.
          Investing into Canada
                                    •   Does USCo have a PE in Canada?
                                    •   USCo’s employee is deemed to be
            USCo
                                        a PE of USCo in Canada if:
                                         – The individual is present in
                     One employee           Canada for at least 183 days in
                     of USCo                any 12-month period, and
                     performs
                     services for        – During that period of time, more
                     Canco in               than 50% of USCo’s gross
                     Canada                 “active business revenues”
                                            relates to income derived from
                                            the services performed by the
            Canco                           individual.



2008 OFII Tax Conference                                    La Quinta, CA
                                                                       17
       Provision of Services – U.S.
          Investing into Canada
                                    •   Does USCo have a PE in Canada?
                                    •   USCo’s employees will be deemed
            USCo
                                        to be a PE of USCo in Canada if:
                                         – Services are being provided in
                     Employees              Canada for at least 183 days in
                     of USCo                any 12-month period in respect
                     perform
                                            of the “same or connected
                     services for
                                            project,” and
                     Canco in
                     Canada              – The services are provided to
                                            customers who are residents of
                                            Canada or who have a PE in
            Canco                           Canada.



2008 OFII Tax Conference                                    La Quinta, CA
                                                                       18
    Key Provisions in the Pending
   Canada/U.S. Protocol, continued
Fiscally Transparent Entities
• Benefits Granted – New Article IV (6):
    – Intended to address the CRA’s long-standing position of denying treaty
        benefits for U.S. investors investing into Canada through a U.S. LLC.
    – Example: Income Is Derived by Resident of U.S. and Therefore Is
        Eligible for Treaty Benefits if Derived Through Non-Canadian Entity That
        U.S. Considers Fiscally Transparent.
    – Result: Canada Gives Treaty Benefits for Canadian Source Income
        Paid to Disregarded U.S. LLC Owned By U.S. Residents.
    – Effective Date: As to Withholding Taxes, 1st Day of Second Month
        Beginning After Date Treaty Enters into Force.


2008 OFII Tax Conference                                         La Quinta, CA
                                                                           19
    Treaty Benefits Granted to U.S.
       LLCs – New Article IV (6)
                                 Current treaty
            U.S.
         residents
                                 • Even if U.S. LLC transparent for
                                    U.S. tax purposes, 25% Canadian
                                    WHT on dividends.
                                 Protocol
           LLC                   • If U.S. LLC members are U.S.
                                    residents
                                      – 15% on dividends (possibly 5%
                     Dividends          if owner is a company and
                                        indirect ownership >=10%).
          Canco                         See Art. X(2)(a) (as amended
                                        by the Protocol).


2008 OFII Tax Conference                               La Quinta, CA
                                                                  20
     Pending Canada/U.S. Protocol:
      Residence Article, continued
Fiscally Transparent Entities
• Benefits Denied – New Article IV (7)(a):
    – Adopts principles similar to I.R.C. § 894(c) into the Treaty.
         • Possible application to U.S. trade or business income?
    – Example: Income Not Derived by Resident of U.S. and Not Eligible for
      Treaty Benefits if Derived Through Non-U.S. Entity That U.S. Considers
      non-Fiscally Transparent
    – Result: Canada Denies Treaty Benefits for Canadian Source Income
      Paid to Non-U.S. Entity Owned By U.S. Resident That Is Not Subject to
      Current U.S. Tax When Paid
    – Effective Date: Prospective - First Day of Third Calendar Year Ending
      After Date Treaty Enters into Force. Example: Effective January 1,
      2010 If Treaty Enters into Force in 2008.

2008 OFII Tax Conference                                            La Quinta, CA
                                                                             21
            Treaty Benefits Denied – New
             Article IV (7)(a) – Example
Synthetic NRO (historically used to finance   Current Rules
Canadian operations)
                                              • Interest subject to 10% WHT.
                                              • Not currently taxable in U.S. as
                                                 CanLP treated as Canadian
                           USCo
                                                 corporation for U.S. tax law.
                                              Treaty Protocol
                                              • USCo derives interest through
                                                 CanLP, which is not U.S. resident.
                                              • CanLP not fiscally transparent in
                 Canco               CanLP
                                                 U.S., so interest not taxed as if
                                                 received by USCo directly (i.e., no
                          Interest               current U.S. tax on interest).
                                              • Result  25% WHT on interest.

     2008 OFII Tax Conference                                         La Quinta, CA
                                                                                 22
     Pending Canada/U.S. Protocol:
      Residence Article, continued
Fiscally Transparent Entities
• Benefits Denied – New Article IV (7)(b)
    – Example: Income Not Derived by Resident of U.S. and Not Eligible for
        Treaty Benefits if Derived Through Canadian Resident That U.S. Considers
        Fiscally Transparent
    – Result: Canada Denies Treaty Benefits for Canadian Source Income Paid to
        U.S. Resident By Canadian Corporation That Is Disregarded for U.S.
        Purposes Because Not Subject to Current U.S. Tax When Paid
    – Effective Date: Prospective - First Day of Third Calendar Year Ending After
        Date Treaty Enters into Force. Example: Effective January 1, 2010 If Treaty
        Enters into Force in 2008.




2008 OFII Tax Conference                                           La Quinta, CA
                                                                              23
      Treaty Benefits Denied – New
       Article IV (7)(b) – Example 1
Synthetic NRO II                         Current Rules
                                         • Interest paid by NSULC subject to 10%
                   USCo                      WHT.
                                         • Disregarded in U.S. as NSULC
                              Interest       considered branch of USCo.
                                         Treaty Protocol
                                         • Under Canadian law, USCo considered
                                             to receive interest from a Canadian
                         NSULC               resident (NSULC).
                                         • U.S. treatment of interest different than if
                                             NSULC were not treated as fiscally
       Canco              CanLP              transparent (in which case interest
                                             taxable to USCo).
                                         •   Result  25% WHT on interest.
                   Interest
2008 OFII Tax Conference                                             La Quinta, CA
                                                                                  24
      Treaty Benefits Denied? – New
       Article IV (7)(b) – Example 2
NSULC Holding Company
                                   Current Rules
                USCo               • Dividends paid by NSULC subject to
                                      5% WHT.
                                   Treaty Protocol
                       Dividends
                                   • Under Canadian law, USCo
                                      considered to receive the dividends
               NSULC                  from a Canadian resident (NSULC).
                                   • Treatment of dividends for U.S. tax
                                      purposes different than if NSULC were
                                      not treated as fiscally transparent (in
                CanLP                 which case dividends would be taxable
                                      to USCo instead of disregarded).
                                   • Result  25% WHT on dividends?
               Operating
                assets
  2008 OFII Tax Conference                                  La Quinta, CA
                                                                        25
             Treaty Benefits Denied? – New
              Article IV (7)(b) – Example 3
Tower
Financing       Canco                     •   Partnership distribution by US LP (treated
Structure                                     as dividend for U.S. tax purposes) subject
                                              to 30% U.S. withholding tax.
                                                – Interest payment by US LP should not
 U.S.: Corp.              Loan                     result in a 30% U.S. withholding tax.
 Can.: P/S      US LP


Successive
                 ULC
capital
contributions

                         Loan
                 LLC            US Opco
                        Interest
     2008 OFII Tax Conference                                        La Quinta, CA
                                                                                 26
     Pending Canada/U.S. Protocol:
           Hybrid Provisions
•   Germany (Protocol), New Article 1(7)
     – “In the case of an item of income, profit or gain derived by or through a person
        that is fiscally transparent under the laws of either Contracting State, such item
        shall be considered to be derived by a resident of a State to the extent that the
        item is treated for the purposes of the taxation law of such State as the income,
        profit or gain of a resident.”
•   U.K. Tax Treaty, Article 1 (8)
     – “An item of income, profit or gain derived through a person that is fiscally
        transparent under the laws of either Contracting State shall be considered to be
        derived by a resident of a Contracting State to the extent that the item is treated
        for the purposes of the taxation law of such Contracting State as the income,
        profit or gain of a resident.”
•   Netherlands (Protocol), New Article 24 (4), similar to U.K. Treaty.
•   New Belgium Treaty, Article 1(6), similar to U.S. Model Treaty.

2008 OFII Tax Conference                                                   La Quinta, CA
                                                                                       27
     Pending Canada/U.S. Protocol:
      Elimination of Interest WHT
•   Canadian Protocol will eliminate          Year     Non-Arm’s    Arm’s
    withholding tax on arm’s length         Interest    Length -   Length –
    and non-arm’s length (related
                                              Paid                   All
    party) interest.
•   Major benefit for payments to         Current        10%         10%
    Canadian banks and related            First Year      7%         0%
    Canadian lenders.
                                          Second          4%         0%
•   Phase-out for non-arm’s length        Year
    (related party) interest.
                                          Third and       0%         0%
•   Contingent interest (i.e., interest
    that varies with debtor’s financial   Subsequent
    performance or distributions) will    Years
    be subject to 15% withholding tax
    (up from 10%).

2008 OFII Tax Conference                                       La Quinta, CA
                                                                        28
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   LOB article is now fully reciprocal (previously applied only to treaty benefits
    sought from the United States).
•   Entitlement to all the benefits of the treaty generally requires a person to be a
    “qualifying person”:
     – Publicly traded test – only U.S. and Canadian stock exchanges are currently
        included (Article 29A(2)(c)).
           • Exchange of Notes state that anti-inversion language could be added
             as a future amendment to the publicly traded test.
     – Subsidiary of a publicly traded company (Article 29A(2)(d)), but only if:
           • 5 or fewer persons that meet the publicly traded test own directly or
             indirectly more than 50% of the vote and value of the shares.
           • TRAP FOR THE UNWARY: In the case of indirect ownership, each
             company in the chain of ownership must be a qualifying person.

2008 OFII Tax Conference                                             La Quinta, CA
                                                                                29
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   Ownership and base erosion test (Article 29A(2)(e)):
     – 50% or more of the vote and value of the company is owned, directly or
       indirectly, by qualifying persons
         • All intermediate owners also must be qualifying persons (“not owned, directly
           or indirectly, by persons other than qualifying persons”); and
     – Less than 50% of its gross income is paid as deductible expenses
       (determined by state of residence) to non-qualifying persons.
         • No exclusion for arm’s length amounts paid for services or tangible
           personal property, as in some other U.S. tax treaties.




2008 OFII Tax Conference                                               La Quinta, CA
                                                                                   30
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   Active conduct of a trade or business test (Article 29A(3)):
     – Applies where the person claiming benefits is not a “qualifying person”
        but that person (or a related person) is engaged in the active conduct of
        a trade or business (“ACTB”) in its state of residence;
     – The income derived from the other state in respect of which treaty
        benefits are claimed (e.g., dividends from a U.S. subsidiary) must be
        derived in connection with, or be incidental to, the ACTB in the state of
        residence;
     – The trade or business in the residence state is “substantial” in relation to
        the trade or business activity carried on in the source state.




2008 OFII Tax Conference                                           La Quinta, CA
                                                                              31
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   Derivative benefits test (Article 29A(4)):
     – Applies where person claiming treaty benefits is not a “qualifying
        person”;
     – If satisfied, provides treaty benefits but only in respect of dividends,
        interest, and royalties, and not, for example, for PE protection purposes.
     – More than 90% of the Canadian (or U.S.) company’s shares must be
        owned, directly or indirectly, by persons each of whom is a “qualifying
        person” or a person who:
          • Is a resident of a country with which the United States (or Canada)
            has a comprehensive income tax treaty and is entitled to all the
            benefits under such treaty;



2008 OFII Tax Conference                                           La Quinta, CA
                                                                             32
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   Derivative benefits test, continued
         • Would qualify for benefits as a “qualifying person” or pursuant to the
            ACTB test under the U.S.-Canada treaty if such person were a
            Canadian (or a U.S.) resident;
         • Would be entitled to a rate of tax in the United States (or Canada)
            under the treaty between the United States (or Canada) and that
            person’s country of residence, with respect to the particular class of
            income for which benefits are being claimed, that is at least as low
            as the rate applicable under the U.S.-Canada treaty; and
         • A base erosion test is satisfied (less than 50% of gross income paid,
            directly or indirectly, to non-qualifying persons): No carve-out for
            arm’s length deductible payments.


2008 OFII Tax Conference                                           La Quinta, CA
                                                                             33
     Pending Canada/U.S. Protocol:
    Limitation on Benefits Provisions
•   Competent Authority relief. Art. 29(6).
•   Discretionary denial of treaty benefits. Art. 29(7).
     – Included in the 1995 protocol at Canada’s request so that Canada could
        apply its domestic anti-avoidance laws (GAAR).
         • Now applies bilaterally, apparently even if a person otherwise
            qualifies for treaty benefits under the LOB article.
     – Scope of provision is unknown.




2008 OFII Tax Conference                                       La Quinta, CA
                                                                         34
                Other U.S. Tax Treaty
                   Developments
•   Belgium, Germany, Denmark and Finland Ratification
     – Completed on December 28, 2007.
•   General entry into force date is January 1, 2008.
•   General entry into force for withholding tax is first day of second month (i.e.,
    February 1, 2008).
     – Exception for Germany, which is retroactive for withholding tax
        purposes to amounts paid or credited on or after January 1, 2007.
     – Finnish Protocol is retroactive for parent/subsidiary dividends for
        dividends derived on or after January 1, 2007.




2008 OFII Tax Conference                                             La Quinta, CA
                                                                                35
             Other U.S. Tax Treaty
            Developments, continued
•   Common Themes
     – O% tax on dividends if 80% ownership and other criteria met.
     – More Restrictive Limitation on Benefits Article:
        • Publicly traded companies must also meet substantial presence
          test, based on where stock is traded or primary place of
          management.
        • Non-public companies must be 50% locally owned (plus meet
          base erosion test).
     – German and Belgian treaties contain binding arbitration provisions
       encouraging the tax authorities to resolve disputes over double taxation.




2008 OFII Tax Conference                                         La Quinta, CA
                                                                            36
            Other U.S. Tax Treaty
           Developments, continued
Treaties Without Limitation on Benefits Articles
• Iceland: The Protocol was signed in October 2007 and will enter into force
   after ratification by both countries and exchange of instruments of
   ratification..
• Hungary: A round of negotiations took place in February 2008 but there
   remains a long way to go, as the negotiators are working through an entirely
   new treaty.
• Poland: Treasury claims it is a priority but has yet to hold a first round of
   negotiations.
• Norway: The signing of a new agreement is expected “shortly” but additional
   change may be needed.



2008 OFII Tax Conference                                        La Quinta, CA
                                                                          37
            Other U.S. Tax Treaty
           Developments, continued
Other Updates
• Bulgaria: New treaty expected to be sent to the Senate early this year to
   begin the ratification process.
• Malta: Proposed income tax treaty has been initialed. It is awaiting
   signature.
• Brazil, Chile, Singapore, and Vietnam: Exploratory discussions being
   conducted.
• Italy: Treasury will be following up on the inaction by Italy on either
   accepting the new treaty signed in 1999 with the Senate Reservation or
   going back to the negotiation table.
• France and New Zealand: Protocols to the treaties are in negotiation.
• Spain: US-Spain AmCham is seeking to initiate changes to the current
   treaty.
2008 OFII Tax Conference                                            La Quinta, CA
                                                                             38
          Form 1120-F Audit Update
•   Two years ago the IRS initiated a project.
       – Conducted specialty training for LMSB and SB/SE international
              agents to examine “Protective forms 1120-F”.
       – 120 returns were selected for examination by SB/SE and 40 returns
              by LMSB.
•   The IRS has not given up. They anticipate more 1120 activity next year due
    to e-filing of Forms 1120F.
•   Swallows Holding case was won on appeals.




2008 OFII Tax Conference                                        La Quinta, CA
                                                                          39
     Common Validation Issues with
          Form W-8BEN
•   U.S. address permanent resident and/or mailing address on form.
     – Withholding agent must obtain documentation to prove the beneficial
        owner is foreign (e.g., articles of incorporation).
•   Failure to provide a taxpayer identification number when beneficial owner is
    claiming a tax treaty benefit.
•   “Capacity in which acting” line on form:
     – Failure to complete line.
     – Entering a title that does not demonstrate sufficient authority to act on
        behalf of the beneficial owner.
          • Examples: manager, associate, secretary, authorized agent without
             a Power of Attorney being attached to form.


2008 OFII Tax Conference                                         La Quinta, CA
                                                                            40
    When is a TIN Required on Form
               W-8BEN?
•   Generally, a TIN is not required on Form W-8BEN to:
     – Document the beneficial owner's status as foreign
     – Obtain a reduced rate of withholding on interest and dividends from
       actively traded securities.
•   Generally, a TIN is required to on Form W-8BEN to claim a reduced rate of
    withholding pursuant to an income tax treaty.




2008 OFII Tax Conference                                        La Quinta, CA
                                                                             41
         Expiration of Form W-8BEN
•   A Form W-8BEN without a TIN will be valid for the year in which the form is
    received plus 3 additional years, unless a change in circumstances occurs.
•   A Form W-8BEN with a TIN will remain valid indefinitely if a Form 1042-S is
    issued each year unless a change in circumstances occurs.
•   In practice, we recommend implementing the most stringent validation
    period because it will ensure consistent treatment and prevent errors that
    would subject the withholding agent to 30% withholding.
      – Re-solicit a new form every 3 years.




2008 OFII Tax Conference                                        La Quinta, CA
                                                                           42
    Draft Form W-8BEN (July 2007) –
           Proposed Changes
•   Foreign taxpayer identification number will be required.
     – Assists in validation of foreign status and sharing of information with
        other countries.
          • The IRS is working to provide guidance on the TIN format used by
            various countries.
          • Requires changes to systems and procedures.
•   Lines 4 and 5, the “do not abbreviate” language has been removed from the
    country section.
     – IRS has advised examiners to no longer reject forms because the
        country name has been abbreviated.
     – All forms in the Form W-8 series will be updated for this change.


2008 OFII Tax Conference                                        La Quinta, CA
                                                                          43

								
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