TAX TREATY: Investment Funds Planning

1
TAX TREATYInvestment Funds Planning
Mohammad Akshar MaherallyInternational Financial
Services Limited
2
SETTING THE SCENEThe Current Economic
Environment

• Collapse of household names in the financial
  industry
• Global Economic Recession
• Massive Unemployment
• Fingers pointed at OFCs for the debacle
• G20 Summit Crackdown on OFCs
• OFCs accused of encouraging capital flight from
  poor countries

3
INVESTMENT FUNDS PLANNINGImplications of Current
Environment
Recession
Collapse of Financial institutions
Unemployment
INCREASED GOVT SPENDING
Credit Crunch
4
INVESTMENT FUNDS PLANNINGImplications of Current
Environment

• The correct spelling of the word aid is
  T-A-X
• Trevor Manuel,
• Ex - South African Finance Minister

5
INVESTMENT FUNDS PLANNINGImplications of Current
Environment

• Closer scrutiny of investment transactions by tax
  authorities from investee jurisdictions
• Aggressive role of taxman within OFCs
• Tighter tax laws / regulations in both investor
  and investee jurisdictions

6
IMPLICATIONSCloser scrutiny of transactions

• China
• Chongqing case Taxing a transaction outside
  Chinese jurisdiction

7
IMPLICATIONSCloser scrutiny of transactions

• Xinjiang Case Denial of Treaty Benefits to
  Barbados Company

8
IMPLICATIONSCloser scrutiny of transactions

• India is also a land of opportunity.
• Everyone can become a tax payer
• Anonymous

9
IMPLICATIONSCloser scrutiny of transactions

• India
• Vodafone case
• Transaction involving two non-Indian residents
  carried out outside India
• ETrade Mauritius case
• Transaction carried out by a treaty-protected
  entity
• Aditya Birla Nuvo case
• Tax authorities coming back on their decision
  for a NIL withholding tax on capital gains

10
IMPLICATIONSAggressive role of taxman in OFCs

• Mauritius
• Deductibility of Management / Advisory fees
  incurred by Investment Funds
• Strict application of Sections 18 and 26 of the
  Income Tax Act
• Tax ruling carried interest earned by
  Mauritius-based Investment Manager
• Review of previous income tax returns at
  winding-up stage

11
IMPLICATIONSTighter Tax Laws / Regulations

• US
• Obamas tax proposals
• Check-the-box elections
• Blocker corporations
• Proposed legislation on carried interest
• Income and gains earned by Fund managers as
  carried interest characterized as compensation
  income and taxed at ordinary income tax rates
• Stop Tax Haven Abuse Bill
• Any foreign corporation managed and controlled
  in the US taxed as a domestic corporation

12
IMPLICATIONSTighter Tax Laws / Regulations

• Cyprus
• New Protocol to Cyprus-Russia treaty
• Gains on sale of shares held by Cypriot company
  in Russian company taxable in Russia if over 50
  of assets in Russian real estate
• China
• Major changes in Chinese tax landscape
• Enterprise Income Tax Law
• Implementation guidelines

13
CHANGES IN CHINESE TAX LAWS

• Tax residency in China extended to cover foreign
  corporations effectively managed from China
• Dividend withholding tax exemption for Foreign
  Invested enterprises withdrawn
• Credit against chinese tax on dividends from
  foreign subsidiaries
• CFC rules introduced
• Thin capitalisation rules
• Ability of the tax authorities to collect unpaid
  withholding taxes from the taxpayers other
  China-sourced income

14
CHANGES IN CHINESE TAX LAWSImplementation of
Dividend ArticlesIn China Tax Treaties

• 10 withholding tax under domestic law can be
  reduced under treaty provided that
• - The recipient of the dividends is a tax
  resident of the treaty partner jurisdiction
• - The recipient of the dividends is the
  beneficial owner of the dividends
• - The dividend income must be regarded as
  dividend / equity income under domestic tax law
  
• Holding period 12-months period preceding the
  receipt of dividends

15
INVESTMENT FUNDS PLANNING Demise of Tax
Planning via OFCs?

• "How much safer would everybody's savings be if
  the whole world finally came together to outlaw
  shadow-banking systems and offshore tax havens?"
• Gordon Brown
• Can emerging economies do without OFCs for their
  FDI requirements?
• India Mauritius, Singapore Cyprus account
  for 60
• China Top 10 investors include Hong Kong, BVI,
  Singapore, Cayman Islands and Mauritius (69
  of total FDI)

16
INVESTMENT FUNDS PLANNING Demise of Tax
Planning via OFCs?

• Consequence of globalisation Multinational
  investors always on the look-out for a suitable
  investment platform
• Investors always seek to maximise post-tax
  returns - even more relevant in this climate of
  economic recession and financial chaos
• Tax planning via OFCs remains an important driver
  of investment, economic growth and enhanced
  standard of living

17
INVESTMENT FUNDS PLANNING What has to change?

• Traditional routes may not be as useful anymore
• Preference for treaty-based jurisdictions
• - Residence
• - Permanent Establishment
• - WHT rates
• - Tax credits
• Golden Rules of Tax Planning

18
INVESTMENT FUNDS PLANNING Going Back to Basics

• Secure treaty protection
• Avoid mere reliance on TRCs
• Establish beneficial ownership of assets
• Keep away from PEs
• Avoid transfer pricing issues

19
INVESTMENT FUNDS PLANNING Going Back to Basics

• Careful on documentation drafting
• Decision-making process
• Avoid treaty shopping labels
• Build substance / value added
• Conduct regular compliance audits from
  international tax perspective

20
Concluding Note
The avoidance of taxes is the only
intellectual pursuit that still carries any
reward John Maynard Keynes

21
Thank You