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indofood a futile search for beneficial owner


									                        indofood: a futile search
                          for ‘beneficial owner’
                       Chia-yi Chua                                                   Matthew Peters
               Fraser Milner Casgrain LLP, Toronto                             Fraser Milner Casgrain LLP, Toronto

Introduction                                                     foreign operations by geographic region. In this model,
                                                                 one central holding company will be responsible for
A variety of concerns shape the manner in which
                                                                 the coordination of activities in that particular region
multinational enterprises structure foreign
                                                                 and will in turn report to a top holding company
investments – the desire to minimise foreign
                                                                 located in a different jurisdiction.
withholding taxes on the repatriation of profits being
                                                                   Where business reasons dictate the use of a holding
but one example. In many cases, the most attractive
                                                                 company, those same reasons will also undoubtedly
alternative in managing the business risks and tax
                                                                 shape the jurisdiction in which the holding company
exposures is the interposition of a holding company
situated in a third country that has a comprehensive             will be located. For example, most multinationals
tax treaty network. Although bilateral tax treaties can          prefer doing business in jurisdictions that are
greatly reduce withholding tax rates, it is typically            conveniently located, that have established banking
only the ‘beneficial owner’ of dividends, interest               and legal infrastructures and that conduct business in a
and royalties that may avail itself of treaty benefits in        common language.
respect of these amounts. For years, enterprises have
established special purpose companies to hold and                Tax considerations
manage foreign investments, confident that these
holding companies qualify as the beneficial owners               The most effective holding company structure fuses
of their income. Then, along came the unusual and                administrative and strategic business advantages with
now infamous Indofood 1 decision, casting a somewhat             a favourable tax regime. While a comprehensive
chilling pall on the meaning of ‘beneficial owner’               discussion of all possible tax factors that may be
and the general tax-effectiveness of holding company             relevant to any particular business in determining a
structures. However, despite the shockwave that                  holding company’s jurisdiction is beyond the scope of
Indofood initially sent around the world, when the               this paper, the most common factors typically include:
dust settles the decision should cause little or no real         •	 	 low withholding tax rates on income received from
change in how most international businesses operate.                  operating companies;
                                                                 •	 	 low domestic corporate tax rates;
                                                                 •	 	 low withholding tax rates on income paid to
Holding companies                                                     shareholders;
Commercial purposes                                              •	 	 low domestic tax on the sale of shares of operating
                                                                      companies; and
Any multinational enterprise will have its own                   •	 	 low domestic tax to shareholders on the ultimate
particular business concerns driving the decision                     sale of the holding company’s shares.
to use a foreign holding company. At its most basic
                                                                 Assuming the underlying operating company is
level, a holding company takes on a separate legal
                                                                 profitable, the repatriation of business profits to the
personality insulating shareholders from liability
                                                                 holding company at some point will become a necessity.
associated with a particular business or asset.
                                                                 The first incidence of tax on such repatriation will
Where direct investment in certain jurisdictions is
                                                                 be the withholding tax levied by the country of
undesirable for business, accounting or regulatory
                                                                 residence of the operating company. A tax-efficient
purposes, a foreign holding company is typically
                                                                 holding company is typically situated in a jurisdiction
considered a necessary investment vehicle.
                                                                 having comprehensive tax treaties with the countries
  Foreign holding companies are also commonly
                                                                 in which operating companies are resident. Under
used as administrative and financial/treasury centres.
Used to coordinate foreign business operations and               these treaties, withholding tax rates should either be
investments in various markets, such companies can be            reduced to a minimal amount (ie, five per cent) or
highly attractive as a means of pooling group profits            completely eliminated. However, most treaties make
and redirecting them as needed to other business                 it a condition that withholding taxes are only reduced
operations. This administrative and financial centre             to these low or nil levels if the holding company is the
approach is often used on a micro-level to organise              ‘beneficial owner’ of dividends, interest and royalties

4                                                           IBA Legal Practice Division ASIA PACIFIC FORUM NEWS   December 2008
                                iNDofooD – A fuTile seArcH for ‘beNeficiAl oWNer’

received from the operating company. Accordingly, tax           Interaction with limitation on benefits provisions
planners must make every reasonable effort to ensure
                                                                Since 1977, the OECD has expressly encouraged
that holding companies satisfy the ‘beneficial owner’
                                                                countries to clarify the ‘beneficial owner’ requirement
                                                                in their bilateral tax treaties in order to combat any
                                                                perceived abuses not falling within the description
Holding companies as ‘beneficial owner’                         provided by the Commentary (ie the ‘agent’ and
                                                                ‘nominee’ concept).9 The Commentary has been
Genesis of ‘beneficial owner’ concept
                                                                consistently revised over the years to heighten the
The term ‘beneficial owner’ generally did not appear            warning that countries should address perceived
in any bilateral income tax treaty before 1966, at which        treaty abuses in bilateral treaty negotiations. In
time the United Kingdom and the United States agreed            this respect, several paragraphs were added to the
to enter into a Protocol amending their 1945 Income             Commentary describing various anti-abuse provisions
Tax Treaty (the ‘1966 US/UK Protocol’).2 The 1966               and limitation on benefit (LOB) clauses that member
US/UK Protocol allowed a reduction in the US/UK                 states could consider including in their bilateral
dividend withholding rate if the shareholder was the            treaties to combat such abuses.10 Notably, these sample
‘beneficial owner’ of the dividend.                             provisions include special ‘look through’ rules and
  The stated intention of the drafters of the 1966              business purpose tests aimed at giving contracting
US/UK Protocol in using this term was to ensure that            states the ability to deny treaty benefits where
the benefits of the reduced withholding rate did not            considered appropriate. The clear implication is that
inure to persons not entitled thereto, specifically agents      such rules and tests are not embedded within the
and nominees. An example of an agent or nominee for             ‘beneficial owner’ concept.
this purpose would be a financial institution resident            There is a growing acceptance that the inclusion
in the US that agreed to receive dividends from a UK            of detailed and comprehensive LOB provisions in
company on behalf of a person not resident in the US.3          bilateral treaties is necessary to combat perceived
  Since 1961 a number of countries around the world             treaty abuses.11 International courts have recently
have been members of the Organisation for Economic Co-          reiterated the importance of including such LOB
operation and Development (the ‘OECD’).4 Since 1963 the         provisions if a contracting state seeks to deny a treaty
OECD has published a number of model income tax                 benefit that is not considered appropriate in certain
treaties and explanatory commentaries on those model            circumstances.12
treaties. These models and their commentaries have                Other commonly used tools in the arsenal of many
served as the basis for countless bilateral income treaties     international tax authorities in combating perceived
between numerous common law and civil law countries.            treaty abuses are domestic anti-abuse rules, such as
  The use of the term ‘beneficial owner’ in respect of          substance over form, step transaction, and anti-conduit
withholding tax was first proposed by the OECD in draft         doctrines. These doctrines may be well-developed in
form in 19745 and was thereafter formally adopted by            the particular jurisdiction and have an established
the OECD in its 1977 model income tax convention                manner of application. By using domestic anti-abuse
(the ‘OECD Model’).6 The OECD’s stated purpose in               rules, a contracting state may obviate the need to rely
using this term was to explicitly exclude intermediaries        on the ‘beneficial owner’ concept or specific LOB
in third States, such as agents and nominees, from treaty       provisions to combat perceived abuses.
benefits.7 This is strikingly similar to the reasons put
forward by the United States and the United Kingdom
                                                                Presumption that a holding company is the ‘beneficial owner’
in respect of the 1966 US/UK Protocol.
  The OECD clearly did not intend ‘beneficial owner’            Tax treaties work on the starting premise that a
to be applied solely to deny treaty benefits; in practice,      resident of a contracting state is entitled to claim treaty
this term also provides relief where the availability of        benefits in respect of income derived from the other
treaty benefits would otherwise have been in doubt.             contracting state. This principle is plainly evident in
For example, a shareholder resident in a country (the           the wording of the various withholding tax provisions
‘Residence Country’) that has a tax treaty with the             of any treaty. This principle is further illustrated by the
country where a dividend payer is situated (the ‘Source         inclusion of LOB provisions in tax treaties, which deny
Country’) should be entitled to the benefits of that            otherwise available treaty benefits to a resident of a
treaty on dividends paid from the Source Country even           contracting state in particular circumstances where the
though shares of the dividend payer may be legally held         contracting states have agreed that benefits should not
by an agent or nominee (ie, a stockbroker) resident             be available.
in a third country. It would simply be unfair to deny             In adopting the phrase ‘beneficial owner’, there was
treaty benefits in such circumstances. Canada and the           no expectation by the OECD that a holding company
United States have recently echoed the importance of            was to be considered a mere agent or nominee
‘beneficial owner’ in this tax-relieving context.8              for its shareholders in all instances, that is, that its

IBA Legal Practice Division ASIA PACIFIC FORUM NEWS December 2008                                                              5
                              iNDofooD – A fuTile seArcH for ‘beNeficiAl oWNer’

shareholders were to be considered the beneficial                Curious shadow cast by Indofood
owners of the holding company’s income.13 In this
                                                                 Indofood appears on its face to provide the first
respect, a holding company by its very definition
                                                                 meaningful judicial discussion of the term ‘beneficial
generally has limited functions and responsibilities;
                                                                 owner’ in the context of bilateral tax treaties. However,
however, this does not mean that it should be
                                                                 as discussed further below, Indofood’s prominence
considered to act in a capacity similar to a nominee on
                                                                 in the international tax treaty vernacular, and its
behalf of its shareholders.14
                                                                 reputation for having significantly altered the tax treaty
   The presumption therefore must be that a holding
                                                                 landscape, is likely undeserved.
company resident in a contracting state is the beneficial
                                                                    Indofood was a Mauritian subsidiary of an Indonesian
owner of its income for treaty purposes. Only if it can
                                                                 parent company, PTISM, which wanted to raise debt in
be established that the holding company fails the
                                                                 the international bond market. As Indonesia had a 20 per
beneficial owner test (ie, if it is acting in a capacity such
                                                                 cent withholding tax in general, but only a ten per cent
as an agent or nominee) may it possibly be stripped of
                                                                 withholding tax on interest paid to Mauritius, Indofood
its entitlement to treaty benefits.
                                                                 was established in Mauritius and issued US$280 million
                                                                 of five year bonds, guaranteed by PTISM, with a fixed
Conduit holding companies as ‘beneficial owner’                  interest rate of 10.375 per cent, and lent the money so
                                                                 raised to PTISM on substantially the same terms.
As early as 1986, the OECD began to identify certain
                                                                    PTISM was required to pay interest on its loan
holding companies (referred to as ‘conduits’) that
                                                                 from Indofood two days before Indofood was due to
should not be entitled to treaty benefits in certain
                                                                 pay interest on its bonds. Within one day after that,
circumstances even though they may not technically
                                                                 Indofood was obliged to transfer the cash received to JP
act as an agent or nominee. At its core, a conduit is a
                                                                 Morgan as paying agent, to pay the bondholders.
corporation whose sole purpose is to receive income
                                                                    Two years later, Indonesia gave notice that it
and pass it along to its shareholders. Undoubtedly,
                                                                 was revoking its tax treaty with Mauritius, which
there are thousands of foreign holding companies
                                                                 would cause 20 per cent withholding to apply on
in existence that can be considered ‘conduits’ based
                                                                 the Indofood/PTISM loan instead of ten per cent.
on this general definition. However, the OECD did
                                                                 Pursuant to the terms of the debt obligations, this
not suggest that all conduits should be stripped
                                                                 material tax change permitted Indofood to repay its
of their status as beneficial owners. Rather, the
                                                                 public bonds at par. However, by June 2004 the bonds
OECD identified a particular sub-set of conduits
                                                                 were standing in the market well above par, due to
that it considered potentially ‘abusive’ from a tax
                                                                 changes in credit conditions, and the bondholders
perspective. For example, a conduit that has been
                                                                 wanted to avoid the repayment at par taking place.
interposed between a parent corporation and a
                                                                    The debt obligations excluded repayment at par if
subsidiary may be considered ‘abusive’ and therefore
                                                                 there were ‘reasonable measures’ that PTISM could
not the ‘beneficial owner’ of income received from
                                                                 take to avoid the impact of the tax change. JP Morgan,
the subsidiary where:15
                                                                 as trustee for the public bondholders, contended
•	 	 the conduit was interposed with a view to taking
                                                                 that PTISM and Indofood could achieve this by
     advantage of the treaty benefits between the
                                                                 incorporating a new Dutch special purpose vehicle
     jurisdictions of the subsidiary and the conduit; and
                                                                 (SPV) and novating to it the bonds owed by Indofood,
•	 	 the parent corporation has transferred to the
                                                                 as well as assigning to the Dutch SPV the ownership
     conduit all of the assets and rights giving rise to the
                                                                 of the debt owed by PTISM to Indofood. There was a
     income for the purpose of taking advantage of these
                                                                 ten per cent interest withholding tax benefit under the
     treaty benefits.
                                                                 Indonesia-Netherlands tax treaty if the recipient was
This type of conduit will typically have very
                                                                 the ‘beneficial owner’ of the interest.
limited powers that render it a mere ‘fiduciary’ or
                                                                    In examining the ‘beneficial owner’ issue, the UK
‘administrator’ with respect to the income, and
                                                                 Court of Appeal took into account material that an
therefore akin to an agent or nominee.16
                                                                 Indonesian court would likely consider, including:
   In practice, the OECD has acknowledged that it
                                                                 •	 	 the absence of a meaning of ‘beneficial owner’
will usually be difficult for the source country to
                                                                      under Indonesian domestic law;
demonstrate that the conduit is not the beneficial
                                                                 •	 	 the ‘substance over form’ approach that forms part
owner. In this respect, ‘the fact that its main function is
                                                                      of Indonesian domestic law;
to hold assets or rights is not sufficient to categorise it
                                                                 •	 	 a circular on ‘beneficial ownership’ that was issued
as a mere intermediary, although this may indicate that
                                                                      by the Indonesian tax authorities in July of 2005,
further examination is necessary’.17 It should come as
                                                                      after being consulted on the use of the Dutch SPV
no surprise, then, that the OECD has been so adamant
                                                                      by Indofood in this case; and
in recommending the adoption by contracting states of
                                                                 •	 	 the evidence of experts, including a retired
specific and comprehensive LOB provisions targeted at
                                                                      Indonesian tax official.
perceived abusive situations.

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  The Court concluded that, on the balance of                   of the treaty otherwise requires. Indonesia is a civil
probabilities and based on relevant Indonesian law, an          law jurisdiction that generally does not recognise the
Indonesian court would not consider the Dutch SPV               concept of ‘beneficial ownership’, which has its roots
as the beneficial owner of the interest received from           in the common law tradition. Accordingly, the Court
PTISM based on an ‘international fiscal meaning’ of             had to look elsewhere in determining a meaning
beneficial owner. This conclusion was reached primarily         for this term, ultimately landing on what it called an
on the basis that the Dutch SPV would not have ‘full            ‘international fiscal meaning’. Accordingly, the Court
privilege’ with respect to such interest income and would       concluded that it was necessary to examine whether
have the sole purpose from the outset of maintaining a          the Dutch SPV had ‘full privilege’ with respect to its
low interest withholding tax rate.                              income. The Court did not provide a comprehensive
                                                                discussion of what ‘full privilege’ means; however,
Little meaningful guidance from Indofood                        on its face it would seem to resemble the generally-
                                                                understood common law meaning as reflected by
There has been a concern among tax practitioners                the OECD (ie, meaning that excludes persons such
that Indofood imports an implicit substance over                as agents, nominees, trustees and fiduciaries who are
form requirement into the meaning of ‘beneficial                clearly not imbued with any meaningful authority or
owner’ for purposes of all tax treaties. In other words,        discretion outside the principal).
‘beneficial owner’ should not be determined based                 Fourth, even if the Court intended to adopt a
on corporate and legal form, but rather the ‘ultimate           broader meaning of beneficial owner than the
economic ownership’ of income. In this respect,                 general common law meaning, it would be difficult to
there could be a heightened risk post-Indofood that             imagine that a UK court’s view of what an Indonesian
any foreign holding company could be denied treaty              court might conclude in respect of the meaning of
benefits where the company factually distributes                ‘beneficial owner’ for purposes of the Indonesia–
onward to its shareholders all income that it receives          Netherlands tax treaty is in any way relevant in
from lower-tier operating companies. However, a                 determining the meaning of that term in any other
proper interpretation of the content of the case and            international bilateral tax treaty. In this respect, even
the reasoning of the Court suggests that this concern           certain tax authorities have suggested that the Indofood
is unwarranted and that most multinationals should              decision might have gone ‘too far’ and could lead to
be unaffected by the judgment.                                  inappropriate results in certain circumstances.18
   First, no principal of tax law was established in
Indofood. Rather, the UK Court of Appeal’s decision
merely reflects a factual conclusion on how an                  Substance over form… nothing new here
Indonesian court would likely treat a hypothetical              Consistent with prior case law
Dutch company inserted into an existing structure
in response to a treaty that has just been terminated.          It is questionable whether Indofood actually adds
In this respect, the Court relied on evidence from              anything new or meaningful to the ‘beneficial owner’
the Indonesian tax authorities as to the tax treatment          debate. At its core, it is a substance over form case in
they would afford to the transactions. As we know, the          which a court applied a domestic anti-abuse rule to
manner in which tax authorities assess a taxpayer is            deny treaty benefits. In this respect, Indofood is not
not always representative of how the taxpayer should            entirely dissimilar from other high-profile and often-
be assessed and, in any event, is not binding on local          cited international case law where reduced withholding
courts.                                                         tax rates under a treaty had been denied.
   Second, the UK Court of Appeal arrived at its                   For example, in the seminal US case of Aiken
conclusion based on the application of a domestic               Industries,19 a Bahamian corporation (Bahamasco)
Indonesian anti-avoidance principle, namely, a                  owned 99.997 per cent of the stock of a US corporation
‘substance over form’ approach. Moreover, the                   (USco) and 100 per cent of the stock of an Ecuadorean
Indonesian tax authorities referred to this substance           corporation (Ecuadorco). Bahamasco loaned money
over form approach in its circular produced at trial            to USco in return for a note (the ‘US Note’) bearing
describing the reasons why the Dutch SPV would not              interest at four per cent and having a 20-year term.
be considered the beneficial owner. Undoubtedly, the            Interest payments from USco to Bahamasco under the
fact that the Dutch SPV was interposed for no legal or          US Note were subject to full 30 per cent US domestic
commercial purpose other than to maintain the ten               withholding taxes. Ecuadorco created a 100 per
per cent interest withholding tax rate in an existing           cent-owned Honduran subsidiary (Hondurasco) and
corporate structure tainted the Court’s view of the             Bahamasco transferred the US Note to Hondurasco in
substance of the transaction.                                   exchange for nine demand notes that bore the same
   Third, as discussed above, undefined terms in a              four per cent interest rate and had the same aggregate
tax treaty are to be given the meaning that they have           principal amount as the US Note. Hondurasco
under the relevant domestic law unless the context              therefore was under a contractual obligation pursuant

IBA Legal Practice Division ASIA PACIFIC FORUM NEWS December 2008                                                           7
                              iNDofooD – A fuTile seArcH for ‘beNeficiAl oWNer’

to the relevant notes to pass all amounts received from         levied on this payment. Danishco, in turn, paid the
USCo to Barbadosco. However, relying on the US-                 dividend on to its Guernsey parent. Danishco applied
Honduras treaty then in force, USco did not withhold            for a refund of the Swiss withholding tax on the basis
on interest paid to Hondurasco. The interposition               that Article 10 of the Switzerland-Denmark tax treaty
of Hondurasco effectively eliminated all US interest            provided that dividends paid by Swissco to Danishco
withholding taxes and resulted in a greater net amount          were taxable only in Denmark. The Swiss tax authorities
being repatriated to Barbadosco.                                accepted that Danishco was the ‘beneficial owner’ of
   The US Tax Court denied the reduction of                     the dividend but denied the refund on the application
withholding tax. The fundamental basis for this                 of an inherent anti-abuse rule embedded within the
conclusion was the application of the domestic US               treaty itself. The Court concluded that the doctrine
substance over form doctrine.20 The Tax Court did not           of ‘abuse of rights’ (inherent anti-abuse) applied
consider the meaning of ‘beneficial owner’; in fact, the        since Danishco had no real economic activity or
relevant treaty did not even use the term ‘beneficial           active business activity. But for the inherent anti-abuse
owner’. The Tax Court found that the interposition of           principle adopted by the court, Danishco likely would
Hondurasco did not have                                         have qualified for treaty benefits as the ‘beneficial
   ‘any valid economic or business purpose. Its only            owner’ of the dividends.
   purpose was to obtain the benefits of the exemption
   established by the treaty for interest paid by a United
                                                                Nothing the OECD has not previously identified
   States corporation to a Honduran corporation. While
   such a tax-avoidance motive is not inherently fatal to       The Court’s reasoning and conclusion in Indofood may
   a transaction…such a motive standing by itself is not        not significantly stretch the OECD’s prior guidelines
   a business purpose which is sufficient to support a          on conduit companies. The sole purpose of the
   transaction for tax purposes.’21                             Dutch SPV was to access Indonesian treaty benefits
The Tax Court further stated that ‘[Hondurasco] had             that would have been lost when the Mauritius treaty
no actual beneficial interest in the interest payments          was cancelled. Moreover, the Dutch SPV would have
it received, and in substance, [USco] was paying the            received its rights, obligations and interest in its assets
interest to [Barbadosco].’22                                    for the sole stated purpose of allowing it to access
   Similarly, in the more recent case of Bank of Scotland,23    these treaty benefits. These facts resonate with the
the French Supreme Tax Court denied benefits under              OECD’s general observations on potentially abusive
the France-UK tax treaty (the refund of the French              conduits, discussed above.
avoir fiscal and reduced withholding tax rate on                  By referring to its adopted approach as the
dividends) to Bank of Scotland, a resident of the UK,           ‘international fiscal meaning’ of beneficial owner,
on the receipt of dividends paid by a French company.           the Court may have simply articulated another way of
The basis for this conclusion was not that Bank of              describing the OECD’s prior observations on potentially
Scotland failed to satisfy the conditions for ‘beneficial       abusive conduit companies. Combined with Indonesia’s
owner’ per se, but rather that Bank of Scotland could           domestic substance over form doctrine, the Court’s
not satisfy these conditions after the application of a         conclusion in this case, that the Dutch SPV should not
French substance over form doctrine that changed the            be entitled to treaty benefits, is not entirely surprising.
characterisation of the facts and relationships between
the parties. In that case, the US parent of a French            Corporate structures in light of Indofood
subsidiary sold preferred shares of a French subsidiary
to Bank of Scotland for an amount that generally                While the outcome in Indofood may not be surprising,
represented the dividend entitlement on the shares,             the widespread fear to which it has given rise is
adjusted for certain amounts. The sale was carried out          somewhat astonishing. At its core, Indofood is one
primarily for the purpose of allowing Bank of Scotland          more case in a growing line where treaty benefits have
to receive a refund of the French avoir fiscal under the        been denied based on the application of a domestic
France-UK tax treaty, which was not available under             anti-abuse rule, such as substance over form or step
the tax treaty between the United States and France.            transaction. As with all of these cases, treaty benefits
The French Supreme Tax Court had no hesitation in               are typically only denied if there is an absence of any
recharacterising the transactions under domestic anti-          business purpose for the holding company.
abuse rules as a loan from Bank of Scotland to the US             Moreover, based on the OECD’s prior guidance on
parent company and applying the ‘beneficial owner’              conduit companies, it should not come as a surprise
test to these recharacterised facts.                            that certain countries may be more apt to apply these
   Inherent treaty abuse rules have also been judicially        domestic anti-abuse rules in a treaty context where
employed to deny withholding tax benefits in lieu               a conduit has been established primarily to avail of
of the ‘beneficial owner’ requirement. In the Swiss             treaty benefits.
case of ApS,24 a Danish company (Danishco) received               For the most part, Indofood is a reiteration of what
a dividend from its wholly-owned Swiss subsidiary               other cases have already highlighted. Specifically, that tax
(Swissco). A 35 per cent Swiss withholding tax was              practitioners should carefully review the domestic laws
                                                                of the countries in which they have business operations

8                                                          IBA Legal Practice Division ASIA PACIFIC FORUM NEWS   December 2008
                                         iNDofooD – A fuTile seArcH for ‘beNeficiAl oWNer’

and assess the potential application of domestic anti-                             8 Ibid.
                                                                                   9 See eg, paras 7 and 10 of the 1977 Commentary to Article 1 of the
abuse rules to their holding company structures. In
                                                                                      1977 OECD Model; para 12 of the 1977 Commentary to Article 10 of
jurisdictions where no such domestic anti-abuse rules                                 the 1977 OECD Model.
apply and there are no explicit or implicit LOB rules at                           10 See eg, paras 11-21 of the Commentary to Article 1 of the OECD Model.
play in the relevant treaties, Indofood generally provides                         11 For example, the tax treaty policy of the United States is to include
little meaningful guidance on the circumstances in which                              a comprehensive LOB provision in every treaty under negotiation.
                                                                                      Moreover, Canada recently agreed to be bound by a comprehensive
treaty benefits should be available.                                                  LOB provision in its treaty with the United States.
                                                                                   12 Union of India et al v Azadi Bachao Andolan et al [2003] INSC 494 (India
Notes                                                                                 Sup Ct); MIL, ibid., at para 84.
1 Indofood International Finance Ltd v JPMorgan Chase Bank NA, London              13 See eg, the OECD’s comments on ‘conduit companies’, discussed
   Branch [2006] EWCA Civ 158 (Court of Appeal, Civil Division)                       further below, in ‘Double Taxation Conventions and the Use of Conduit
   [Indofood].                                                                        Companies’, adopted by the OECD Council on 27 November 1986 (the
2 1945 Income Tax Convention (United States/United Kingdom), 93                       OECD Conduit Report).
   TNI 251-115; Doc 94–30292. 1966 Protocol to the 1945 Convention                 14 See eg, Wood and Another v Holden (Inspector of Taxes) [2006] EWCA Civ
   (United States/United Kingdom), 93 TNI 20–27; Doc 93–30131.                        26 (CA).
3 United States Senate Foreign Relations Committee Report, No 3, 89–2, June        15 This is referred to by the OECD as a ‘direct conduit’, as described at
   17, 1966, 87 TNI 53–97.                                                            page R(6)-2 of the OECD Conduit Report, above.
4 The OECD was formed in 1961 as an international body to assist in,               16 Ibid. See also para 12.1 of the Commentary to Article 10 of the OECD
   among other things, developing strategies to support sustainable                   Model.
   international economic growth and financial stability. One of the               17 OECD Conduit Report, above at page R(6)-8.
   OECD’s continuing projects has been to develop and refine a model               18 See eg, 2006 TNT 56–5, UK Treaty Shopping Ruling ‘Disturbing’, Treasury
   tax convention intended to be used by Member States in negotiating                 Official Says.
   bilateral tax conventions. See eg,                                19 Aiken Industries, Inc v Commissioner, 56 TC 925 (1971) (Aiken).
5 Organisation for Economic Co-operation and Development, Double                   20 See also Del Commercial Properties, Inc v CIR, 251 F.3d 210; 2001 US App
   taxation of income and capital: revised texts of certain articles of the 1963      Lexis 11849 (DC Cir 2001), affirming. 78 TCM 1183 (1999).
   OECD Draft convention and of the commentary thereon (Paris: OECD,               21 Aiken, above at 934.
   1974), at Article 10, para 2.                                                   22 Ibid.
6 Organisation for Economic Co-operation and Development, Model                    23 Conseil d’Etat, dated 29 December 2006, Ministre de l’Economie, des
   Double Taxation Convention on Income and on Capital (Paris: OECD, 1977).           Finances et de l’Industrie c/ Société Bank of Scotland, no 283314; Revue de
7 See eg, para 12 of the Commentary to Article 10 of the OECD Model.                  Droit Fiscal no 4/2007, p 34, section 87 (Bank of Scotland).
   See also the Technical Explanation to the Fifth Protocol amending               24 A Holding ApS v Federal Tax Administration, 8 ITLR 536 (Swiss FC – 28
   the income tax treaty between Canada and the United States (the                    November, 2005) (ApS).
   ‘Technical Interpretation’), where it is suggested at page 9 that this
   interpretation conforms to the meaning of ‘beneficial owner’ under
   the domestic laws of both Canada and the United States.

 Developments affecting the choice of
 arbitral seat and institution in china-
  related contracts: mainland china,
       Hong Kong or elsewhere?
                                                                         Richard Hill
                                                            Fulbright & Jaworski LLP, Hong Kong

P   arties drafting international arbitration clauses in
    contracts involving mainland Chinese parties
should be aware of a number of interesting
                                                                                   The growing role of international arbitration in Hong
                                                                                   Kong and mainland China
                                                                                   The best known international arbitral institutions in
developments and issues involving arbitration practice
                                                                                   Hong Kong and mainland China are experiencing an
in Hong Kong, mainland China and elsewhere in Asia
                                                                                   ever-increasing case load, reflecting both the region’s
when they come to consider the governing law, place of
                                                                                   continuing economic success and also a growing trend
arbitration and arbitration institution (if any) in their
                                                                                   towards the use of arbitration clauses in international
contracts. This article considers the choices that are
                                                                                   commercial contracts in the region.
available to parties in the light of these developments.
                                                                                   For example, the China International Economic and

IBA Legal Practice Division ASIA PACIFIC FORUM NEWS December 2008                                                                                              9

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