This document discusses various topics related to international taxation, including: 1. A list of offshore financial centers and tax havens around the world. 2. An overview of the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMAATM), which facilitates international cooperation on tax matters. 3. Examples of anti-avoidance rules and provisions that countries can include in double tax agreements to prevent tax avoidance, such as thin capitalization rules, controlled foreign corporation rules, and transfer pricing adjustments.

1. INTERNATIONAL TAXATION
Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena

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. Offshore Financial Centres
3

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. Tax havens
5

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 DTAA will be superseded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. 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. 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. 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. 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. 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. 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. 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. 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. 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. “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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
 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
 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
 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. 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. 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. 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. Chidananda Jena
Email: chidananda.jena@gmail.com
Skype/ YM: chidanandajena