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INTERNATIONAL TAXATION
Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena
Offshore Financial Centres
2
Alderney Gibraltar Nauru
Andorra Grenada NetherlandsAntilles
Anguilla Guatemala Niue
Antigua ...
Offshore Financial Centres
3
Tax havens
4
Small Sovereigns Big Sovereigns Non Sovereigns
Andorra
Bahamas
Cyprus
Liechtenstein
Luxembourg
Monaco
Panama
...
Tax havens
5
Invoking Anti Avoidance Rule
6
 Arrangement to avoid tax
 Not practiced for bonafide business purposes
 Rights & obliga...
Specific Anti Abusive Rules
7
 Payment to associated persons as expenditures (royalty,
management fee, material supply, i...
MCMAATM (OECD)
8
 International movement of persons, capital, goods & services,
beneficial in itself, has increased tax a...
MCMAATM (OECD)
9
 Assistance Covered (on request, spontaneous & automatic)
 exchange of information, tax examinations ab...
MCMAATM (OECD)
10
 Confidentiality
 standards of confidentiality and protection of personal data
 Co-ordinating Body
 ...
UN Model of Double Taxation
11
 DTAA between developed and developing nations-
special attention to developing countries
...
DTAA Conventions
12
 Protect multinational industry from double taxation
 Promote flow of investment, technology and
kno...
New Features of UN Model 2011
13
 Modification of Art 13 (Capital Gains) Para 5
 Optional version of Art 25 (MAP)
 New ...
Anti Abusive Provisions in UN Model
14
 Agent- Art 5 Para 5
 Beneficial Owner- Art 10,11,12
 Special Relationship-inter...
Anti Abusive Decree
15
 Swis Federal Court-if the requirements specified in the tax
treaty (such as residence, beneficial...
“look-through” provision
16
 A company that is a resident of a Contracting State
shall not be entitled to relief from tax...
Subject-to-Tax Provisions
17
 Where income arising in a Contracting State is received
by a company resident of the other ...
Subject to Tax Provisions (Alternative)
18
 Where income arising in a Contracting State is received
by a company that is ...
General bona fide provision
19
 The foregoing provisions shall not apply where the
company establishes that the principal...
Activity provision
20
 The foregoing provisions shall not apply where the
company is engaged in substantive business
oper...
Amount of tax provision
21
 The foregoing provisions shall not apply where the
reduction of tax claimed is not greater th...
Stock exchange provision
22
 The foregoing provisions shall not apply to a
company that is a resident of a Contracting St...
Alternative relief provision
23
 In cases where an anti-abuse clause refers to non-
residents of a Contracting State, it ...
Triangular Cases
24
 dividends, interest or royalties are derived from State S
by a resident of State R, which is an exem...
Thin capitalization
25
 interest is a deductible expense whereas dividends,
being a distribution of profits, are not dedu...
Use of Base Companies
26
 Mere shell-insignificant employees/ economic activity
 Effective management of base company fr...
Directors’ fees and remuneration of top-level
managers27
 salary split arrangement could be used in order to reduce
the t...
Star Companies
28
 allows the State in which the activities of an entertainer
or sportsman are exercised to tax the incom...
Transactions modify classification of Income
29
 Convert dividend to interest
 Allocation of price under mixed contract-...
30
 Use of derivative transactions
 company X, a resident of State A, wants to make a large portfolio
investment in the ...
31
 Circumvent Thresholds
 Lower limit of source tax on dividends to non resident / resident
company by a resident compa...
32
 Time Limit for PE
 Splitting same project among associated non-resident
entities to avoid PE
 Splitting one project...
Fiscally Double Residence within a Year
33
 Permanent home
 Apportionment of period between two resident
state
 Determi...
Permanent Establishment
34
 Fixed Base Test for individual services-UN Model days of physical presence- not in
OECD
 6 m...
Permanent Establishment
35
 Electronic Commerce-
 Presence of employee not required to be a PE
 Internet web site, comb...
Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena
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International taxation un oced model _ Jena

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International taxation un oced model _ Jena

  1. 1. INTERNATIONAL TAXATION Chidananda Jena Email: chidananda.jena@gmail.com Skype/ YM: chidanandajena
  2. 2. Offshore Financial Centres 2 Alderney Gibraltar Nauru Andorra Grenada NetherlandsAntilles Anguilla Guatemala Niue Antigua and Barbuda Guernesey Norfolk Aruba Hong Kong Oman Antillas Holandesas Ireland Panama Aruba Israel Philippines Bahamas Jersey St. Kitts and Nevis Bahrain Jordan St. Vincent Barbados Labuan St. Lucia Belize Lebanon Samoa Bermuda Liberia San Marino Botswana Liechtenstein Sark British Virgin Islands Luxembourg Seychelles Brunei Darussalam Macau Singapore Cayman Islands Madeira Switzerland Campione D'Italia Malta Turks and Caicos Cook Islands Isle of Man UAE Costa Rica Marshall Islands United Kingdom Cyprus Mauritius Uruguay Dominica Monaco USA Ghana Montserrat Vanuatu
  3. 3. Offshore Financial Centres 3
  4. 4. Tax havens 4 Small Sovereigns Big Sovereigns Non Sovereigns Andorra Bahamas Cyprus Liechtenstein Luxembourg Monaco Panama Samoa San Marino Seychelles Ireland Netherlands Switzerland British Crown Dependency-Guernsey,Jersey, Isle of Man British Overseas Territory-Bermuda,British Virgin Islands,Cayman Islands, Turks and Caicos Islands Italy-Campione d'Italia Iraq-Kurdistan Netherlands-Curaçao Malaysia-Labuan United Arab Emirates-Jebel Ali Free Zone United States- Alaska, Delaware,Florida, Nevada,Texas,South Dakota,Virgin Islands, Washington,Wyoming
  5. 5. Tax havens 5
  6. 6. Invoking Anti Avoidance Rule 6  Arrangement to avoid tax  Not practiced for bonafide business purposes  Rights & obligation not created under Arm’s length  Substance differs from form given to interposition of entity or transaction  Lacks commercial substance  Tax benefit, but no business risk or cash flow  Round trip financing & accommodating party  Disguises location, source, ownership & control  Pre tax profit insignificant wrt tax benefit  Invoke Special Anti Avoidance Rule  DTAA will be superseded  Commissioner can invoke OECD commentary mentions anti abusive law is not conflicting with tax treaties
  7. 7. Specific Anti Abusive Rules 7  Payment to associated persons as expenditures (royalty, management fee, material supply, interest payment in debt financing)  Misuse of Most Favored Nation agreements to avoid customs duty  Arm’s Length Principle  Transfer Pricing Rules to prevent shifting income  Controlled Foreign Corporations Rule-conduit companies  Foreign Investment Fund Rule-avoidance of tax on investment income  Thin Capitalization Rule  Exit/ Departure Tax Rules- change of residence before realization of treaty exempt capital gains  Dividend Stripping Rules-transfer dividends to treaty exempt capital gains  Transaction in securities leading to indirect transfer of assets-look through provision - Vodafone-hutch case led to retrospective amendment
  8. 8. MCMAATM (OECD) 8  International movement of persons, capital, goods & services, beneficial in itself, has increased tax avoidance & evasion  Key Benefits  Multilateral-single legal document for multi nation cooperation  Wide scope- most taxes except Customs  Flexible- Each nation can record reservation on a clause/tax  Uniform-Coordinating body of signatory nations for uniform application  Covers more taxes than DTAA bilateral treaties  Certain cooperation with all signatories even if DTAA absent  Measures of conservancy & tax recovery  Information can be passed to criminal investigation authorities (T & C apply)
  9. 9. MCMAATM (OECD) 9  Assistance Covered (on request, spontaneous & automatic)  exchange of information, tax examinations abroad, assistance in recovery & measures of conservancy, acceptance & service of legal documents  Taxes Covered  Income tax, corporate tax, capital gain, wealth tax, not customs duty levied by central govt., local taxes, compulsory social security contribution, estate, inheritance & gift  Rights & Safeguards  Rights & safeguards under national law remains, expressly recognizes limitations to oblige assistance
  10. 10. MCMAATM (OECD) 10  Confidentiality  standards of confidentiality and protection of personal data  Co-ordinating Body  representatives of each of the parties- monitors the implementation of the Convention  Flexibility  Nation specific reservations reflected in the convention- can be inserted/withdrawn at any point of time  Denunciation  Simultaneous tax examinations, joint audit- similar to mutual agreement procedure (MAP) in bilateral arangemnt
  11. 11. UN Model of Double Taxation 11  DTAA between developed and developing nations- special attention to developing countries  Cooperation among tax authorities  No Tax Treaties- prevent transfer of technology to developing nations-double taxation by both countries- higher royalty in the absence of arm’s length price  UN Model- limited taxing right to source/ developing countries on royalty etc.  OECD Model- No taxing right to developing countries
  12. 12. DTAA Conventions 12  Protect multinational industry from double taxation  Promote flow of investment, technology and knowledge  Framework of legal and fiscal certainty  Prevent discrimination between foreign and domestic firms  Improve cooperation among tax authorities
  13. 13. New Features of UN Model 2011 13  Modification of Art 13 (Capital Gains) Para 5  Optional version of Art 25 (MAP)  New version of Art 26 (Exchange of Information)  New Article 27 (Assistance in collection of Tax)  Commentary to Art 1- Survey on improper use of DTAA provisions by countries  Alternative Commentary to Art 5 if Art 14 deleted  Addn in commentary to Art 7-attribution of profit to PE  Revision in commentary to Art 10-12-beneficial ownership  Add in commentray to Art11-not interest bearing loan
  14. 14. Anti Abusive Provisions in UN Model 14  Agent- Art 5 Para 5  Beneficial Owner- Art 10,11,12  Special Relationship-interest & royalty- Art 11 Para 6, Art 12 Para 6  Alienation of shares of immovable property- Art13 Para 4  Star Companies- Art 17 Para 2- Sports Bodies-Dubai Golf Club holding events in India for few days, earning revenue and making payment to Sports Persons, Other examples media, cinema industry  Limited force of attraction/ Proportionate to the PE-Art 7 Para 1  Treaty Shopping-persons not entitled to benefit under a treaty use other persons  Financing Arrangement- US  Tax reduced due to intermediary  Tax avoidance plan  Intermediary existed only for the plan  Intermediary is associated entity of the financing entity
  15. 15. Anti Abusive Decree 15  Swis Federal Court-if the requirements specified in the tax treaty (such as residence, beneficial ownership, tax liability, etc.) are not fulfilled & it constitutes an abuse  Countries allowing relief of withholding tax shall be informed by Swis Tax authority to act for abuse of double taxation treaty  Swiss tax authorities shall refuse to certify a claim form, refuse to transmit the claim form and revoke a certification already given and recover the withholding tax, on behalf of the State of source to the extent that the tax relief has been claimed improperly
  16. 16. “look-through” provision 16  A company that is a resident of a Contracting State shall not be entitled to relief from taxation under this Convention with respect to any item of income, gains or profits if it is owned or controlled directly or through one or more companies, wherever resident, by persons who are not residents of a Contracting State
  17. 17. Subject-to-Tax Provisions 17  Where income arising in a Contracting State is received by a company resident of the other Contracting State and one or more persons not resident in that other Contracting State  have directly or indirectly or through one or more companies, wherever resident, a substantial interest in such company, in the form of a participation or otherwise, or  exercise directly or indirectly, alone or together, the management or control of such company, any provision of this Convention conferring an exemption from, or a reduction of, tax shall apply only to income that is subject to tax in the last-mentioned State under the ordinary rules of its tax law.
  18. 18. Subject to Tax Provisions (Alternative) 18  Where income arising in a Contracting State is received by a company that is a resident of the other Contracting State and one or more persons who are not residents of that other Contracting State  have directly or indirectly or through one or more companies, wherever resident, a substantial interest in such company, in the form of a participation or otherwise, or  exercise directly or indirectly, alone or together, the management or control of such company any provision of this Convention conferring an exemption from, or a reduction of, tax shall not apply if more than 50 per cent of such income is used to satisfy claims by such persons (including interest, royalties, development, advertising, initial and travel expenses, and depreciation of any kind of business assets including those on immaterial goods and processes).
  19. 19. General bona fide provision 19  The foregoing provisions shall not apply where the company establishes that the principal purpose of the company, the conduct of its business and the acquisition or maintenance by it of the shareholding or other property from which the income in question is derived, are motivated by sound business reasons and do not have as primary purpose the obtaining of any benefits under this Convention
  20. 20. Activity provision 20  The foregoing provisions shall not apply where the company is engaged in substantive business operations in the Contracting State of which it is a resident and the relief from taxation claimed from the other Contracting State is with respect to income that is connected with such operations
  21. 21. Amount of tax provision 21  The foregoing provisions shall not apply where the reduction of tax claimed is not greater than the tax actually imposed by the Contracting State of which the company is a resident
  22. 22. Stock exchange provision 22  The foregoing provisions shall not apply to a company that is a resident of a Contracting State if the principal class of its shares is registered on an approved stock exchange in a Contracting State or if such company is wholly owned—directly or through one or more companies each of which is a resident of the first mentioned State—by a company which is a resident of the first-mentioned State and the principal class of whose shares is so registered
  23. 23. Alternative relief provision 23  In cases where an anti-abuse clause refers to non- residents of a Contracting State, it could be provided that the term “shall not be deemed to include residents of third States that have income tax conventions in force with the Contracting State from which relief from taxation is claimed and such conventions provide relief from taxation not less than the relief from taxation claimed under this Convention
  24. 24. Triangular Cases 24  dividends, interest or royalties are derived from State S by a resident of State R, which is an exemption country; that income is attributable to a permanent establishment established in State P, a low tax jurisdiction where that income will not be taxed  Under the State R-State S tax treaty, State S has to apply the benefits of the treaty to such dividends, interest or royalties because these are derived by a resident of State R, even though they are not taxed in that State by reason of the exemption system applied by that State  Enterprise will transfer assets such as shares, bonds or patents to permanent establishments in State P that offer very favourable tax treatment  Personal/Corporate income, dividend, interest, royalty not taxed in any state
  25. 25. Thin capitalization 25  interest is a deductible expense whereas dividends, being a distribution of profits, are not deductible  foreign company wants to provide financing to a wholly-owned subsidiary, beneficial for tax purposes, through debt rather than share capital  General anti-abusive rule- real nature of finance debt or equity, arm’s length principle-if a third party would have financed under similar condition and under similar terms and condition, fixed debt- equity ratio-interest on excess debt disallowed
  26. 26. Use of Base Companies 26  Mere shell-insignificant employees/ economic activity  Effective management of base company from the resident state of parent company  subsidiary was managed in the state of residence of its parent in such a way that the subsidiary had a permanent establishment (e.g. by having a place of management) in that state to which all or a substantial part of its profits were properly attributable  CFC Rules-Contracting State taxing its residents on income attributable to their participation in certain foreign companies  Back to Back Arrangements
  27. 27. Directors’ fees and remuneration of top-level managers27  salary split arrangement could be used in order to reduce the taxes  Company A, a resident of State A, has two subsidiaries, companies B residents of State X and Company C resident of Y. Mr. D, a resident of State X, is a director and an official in a top- level managerial position of subsidiary B. State X levies an income tax at progressive rates of up to 50 per cent. State Y has a similar income tax system but with a very low tax rate. Countries X and Y have a tax treaty which provides that State X applies the exemption method to income that may be taxed in State Y. For the purpose of reducing the tax burden of Mr. D, company A may appoint him as a director and an official in a top-level managerial position of company C and arrange for most of his remuneration to be attributed to these functions
  28. 28. Star Companies 28  allows the State in which the activities of an entertainer or sportsman are exercised to tax the income derived from these activities and accruing to another person to tax the income in accordance with its domestic law  where both the entertainer or sportsman and the other person to whom the income accrues, e.g. a star-company, are residents of the same Contracting State  derived by a star-company resident of the other Contracting State even where the entertainer or sportsman is not a resident of that other State.  Conversely, where the income of an entertainer resident in one of the Contracting States accrues to a person, e.g. a star-company, who is a resident of a third State with which the State of source does not have a tax convention
  29. 29. Transactions modify classification of Income 29  Convert dividend to interest  Allocation of price under mixed contract- goods, service, intangibles (licensing, patent, royalty)  Increase price of goods and service (not taxable in the absence of PE) and reduce price of intangibles ( taxable even without PE)-same effect on Franchisee  Parties different- hence transfer pricing and arm’s length principle not applicable  Customs duty gradually reduced- franchiser be more inclined to increase valuation of goods  Inventory of goods raw or finished can’t be attributable to income & hence can’t be taxed  Conversion of Royalties to Capital Gains  A non-resident who owns the copyrights in a literary work wishes to grant to a resident of State S the right to translate and reproduce that work in that State in consideration for royalty payments based on the sales of the translated work. Instead of granting a license to the resident, the non-resident enters into a “sale” agreement whereby all rights related to the translated version of that work in State S are disposed of by the non-resident and acquired by the resident. The consideration for that “sale” is a percentage of the total sales of the translated work is capital gain. The contract further provides that the non-resident will have the option to reacquire these rights after a period of five years.  This violates treaty- royalty is masked as capital gain
  30. 30. 30  Use of derivative transactions  company X, a resident of State A, wants to make a large portfolio investment in the shares of a company resident in State B, while company Y, a resident in State B, wants to acquire bonds issued by the government of State A. In order to avoid the cross-border payments of dividends and interest, which would attract withholding taxes, company X may instead acquire the bonds issued in its country and company Y may acquire the shares of the company resident in its country that company X wanted to acquire. Companies X and Y would then enter into a swap arrangement under which they would agree to make swap payments to each other based on the difference between the dividends and interest flows that they receive each year; they would also enter into future contracts to buy from each other the shares and bonds at some future time. Through these transactions, the taxpayers would have mirrored the economic position of cross-border investments in the shares and bonds without incurring the liability to source withholding taxes (except to the extent that the swap payments) Transactions modify classification of Income
  31. 31. 31  Circumvent Thresholds  Lower limit of source tax on dividends to non resident / resident company by a resident company, if the former holds at least 10% control/ capital in the later  Non resident company having <10% share acquires from/ transfers share to another to make the capital > 10 % just before the declaration of dividend  Dividend is structured to be given later as capital gain, which attracts lower or no tax in source country  Thresholds on Capital Gains on shares against immovable assets > 50% of all immovable assets of non-resident entity  Dilute value of assets <50% prior to sale of shares by issuing bonds or preferred shares, with condition that such instruments shall be redeemed after alienation of shares Transactions modify classification of Income
  32. 32. 32  Time Limit for PE  Splitting same project among associated non-resident entities to avoid PE  Splitting one project into many and entering several contracts Transactions modify classification of Income
  33. 33. Fiscally Double Residence within a Year 33  Permanent home  Apportionment of period between two resident state  Determination by a set of subsidiary criteria  Discretion to officers minimized
  34. 34. Permanent Establishment 34  Fixed Base Test for individual services-UN Model days of physical presence- not in OECD  6 months test/183 days for companies providing service through personnel, construction site, supervisory, consultancy etc  Developing countries oppose 6 months- Enterprise sub contracting one project in parts may not have PE at all-all partners, principal and sub contractors shall be PE, same or related projects-assembly project in UN Model and not in OECD  Action of dependent agent may be PE  Independent agent devoting most of time to one non resident firm and not having arm’s length basis-PE  Subsidiary-Parent Company relationship decides PE for parent  Preparatory and Auxiliary Activity not PE  Delivery- PE under UN Model, but not under OECD  Special provision of PE for insurance- through several independent agents  Leasing of Tangible- scientific equipments or intangible-patent for a 6 months-PE  Offshore Exploration, fishing vessels, moving drilling platforms-territorial water, exclusive economic zones
  35. 35. Permanent Establishment 35  Electronic Commerce-  Presence of employee not required to be a PE  Internet web site, combination of software and electronic data, not tangible property. No location/ place of business, no premises even in certain instances, no machinery or equipment”  web site and the server on which the web site is stored and used: enterprise that operates the server different from the enterprise that carries on business through the web site. web site hosted on the server of an Internet Service Provider (ISP), disk space used to store the software and data, server and its location not at the disposal of the enterprise having website  Website is auxiliary/ preparatory- advertizing to sell  Actual sale takes place, where contract executed, payment and delivery made- count towards PE
  36. 36. Chidananda Jena Email: chidananda.jena@gmail.com Skype/ YM: chidanandajena

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