Tax Treaty Planning Financing Activities

1
Tax Treaty PlanningFinancing Activities

• Mario Petriccione
• Mauritius, 15 May 2009

2
What do treaties have to say about interest?

• Article 11
• Limitation on source country tax
• Article 23A/23B
• Credit in residence country for source country
  tax
• Article 24 (4)
• Non-discrimination re deductibility

3
Limiting source country tax the Beneficial
Ownership text

• Is Intermediary the beneficial owner of the
  interest paid by Borrower?
• A conduit company cannot normally be regarded as
  the beneficial owner if, though the formal owner,
  it has, as a practical matter, very narrow powers
  which render it a mere fiduciary or
  administrator acting on account of the interested
  parties
• (Para 12.1 of the OECD Commentary on Article 10)

Country A
Lender
Loan
Interest
Intermediary
Country B
Interest
Loan
Borrower
Country C
4
The Indofoods case

• Indofoods International Finance Ltd v. JP Morgan
  Chase Bank (UK Court of Appeal, 2 March 2006)
• Indonesia terminated its treaty with Mauritius,
  resulting in additional Indonesian withholding
  tax
• Loan documentation allowed borrower to repay if
  an additional interest withholding obligation
  arose which could not be avoided by taking
  reasonable measures
• Lenders argued Indonesian parent could replace
  Mauritius subsidiary with Dutch subsidiary and
  continue the borrowing
• Indonesian parent argued the Dutch company would
  not have beneficial ownership of the interest

5
The Indofoods case (continued)

• Documentation required Mauritian company to use
  all payments received from Indonesian parent to
  pay the lenders
• No margin in Mauritian subsidiary
• Judgment
• The meaning to be given to the phrase
  beneficial owner is plainly not to be limited
  by so technical and legal an approach. Regard is
  to be had to the substance of the matter
• In practical terms it is impossible to conceive
  of any circumstances in which the Mauritian
  company or a hypothetical new Dutch subsidiary
  could derive any direct benefit from the
  interest
• Therefore the Mauritian company structure fails
  the beneficial ownership test

6
Hybrid financing what is interest?

• Interest definitions in treaties vary
• OECD Model income from debt claims of every
  kind, whether or not carrying a right to
  participate in the debtors profits
• Some treaties include items assimilated to
  interest by the tax law of the source country

7
Credit for source country tax

• Credit may in principle be given by source, by
  country or by type of income
• Measure of income from interest or interest less
  attributed expenses?

Parent
Loan
InterestNil WHT
Loan
Italy Opco
Brazil Opco
Italy Opco
Interest15 WHT
8
Non-discrimination

• Art. 24(4) interest, royalties etc. deductible
  under the same conditions as if paid to a
  resident of the same country
• Example Italy Art. 110(7) TUIR
• non deductibility of payments to listed tax
  havens
• Mauritius is included on the list of tax havens
• Italy Mauritius treaty includes art. 24(4)
• Relationship between treaties and domestic law

9
The OECD concept of Abuse of Treaties

• Appears first in 2003 MC commentary
• A guiding principle is that the benefits of a
  double taxation convention should not be
  available where a main purpose for entering into
  certain transactions or arrangements was to
  secure a more favourable tax position and
  obtaining that more favourable treatment would be
  contrary to the object and purpose of the
  relevant provisions
• Example 1 a person, whether or not a resident of
  a Contracting State, acts through a legal entity
  created in a State essentially to obtain treaty
  benefits that would not be available directly
• Example 2 an individual who has in a Contracting
  State both his permanent home and all his
  economic interests, including a substantial
  shareholding in a company of that State and who,
  essentially in order to escape his tax liability
  on capital gains transfers his permanent home to
  the other Contracting State where such gains are
  subject to little or no tax

10
OECD 2003 MC commentary dealing with treaty
abuse

• OECD suggests two practical approaches
• Domestic law anti-avoidance rules can be used to
  deny treaty benefits in the same way as to deny
  benefits under domestic law
• A proper construction of treaties allows a court
  to disregard abusive transactions, based on the
  interpretation rules in the Vienna Convention

11
Presenters contact details Mario
Petriccione KPMG LLP London 44 (0)20 7311
2747 mario.petriccione_at_kpmg.co.uk www.kpmg.co.uk