Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘tax treaty’

Beneficial ownership: Italy’s top court’s significant findings

For purposes of the French-Italian double tax treaty, Italy’s Supreme Court has rendered an important decision re: holding companies and the level of substance required to determine beneficial ownership.  This decision is fact specific, although is significant as it applies to pure holding companies and the subjective interpretations of beneficial ownership that are being applied globally.

The Supreme Court held that the status of beneficial owner is ultimately to be determined, as a matter of fact, based on the particular nature of the recipient holding company and the functions typically performed in its operations.

For a pure holding company, a level of organizational structure able to carry out an activity of mere coordination and control over the subsidiary, attend the shareholders’ meetings and collect dividends, should be deemed as adequate.  The analysis should instead be based on the actual capability of retaining the dividends received as opposed to having the obligation to repay them to another entity.

In particular, the Supreme Court did not find any merit to the proposition that the French company should be regarded as a conduit, concluding that a holding company that does not have the same organizational structure (premises, personnel, etc.) as an operating company does not necessarily mean that it would be regarded as not being the beneficial owner of dividends.

This case is very interesting as it does not rely on the regular substance of a regular operating company, and thoughtfully distinguishes the legal rights of a holding company to receive and hold dividends without an intertwined obligation to distribute such monies as one may find in a tax-driven conduit structure.

EY’s Global Tax Alert, provided for reference, is an interesting and refreshing insight into this subjective issue that merits no consistency on a global basis.

http://www.ey.com/Publication/vwLUAssets/Italian_Supreme_Court_issues_important_guidance_on_beneficial_ownership_conditions_for_pure_holding_companies/$FILE/2017G_00686-171Gbl_Italian%20SC%20issues%20guidance%20on%20beneficial%20ownership%20conditions%20for%20pure%20holding%20companies.pdf

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Tax Risk Management

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GAAR: Poland’s reintroduction

Click to access com_2012_722_en.pdf

Poland’s Minister of Finance plans to reintroduce a general anti-abuse rule (GAAR).  GAAR was in brief existence from 2003-2004, however the vague principles led to its removal.

The GAAR reintroduction follows the European Commission’s recommendation in December 2012, with a link attached for reference.  The European Commission Initiatives, Section 8, Recommendation on aggressive tax planning, states “The Commission also recommends a common GAAR.  This would help to ensure coherence and effectiveness in an area where Member State practice varies considerably.”

The GAAR proposal would apply to all types of taxes, with a 30% penalty of avoided tax via a “tax avoidance” transaction.  Appeal provisions are envisioned, in addition to advance rulings, although the time and expense for advance certainty may prove to be impractical.  A GAAR Council would provide an “expert” GAAR opinion that is not binding on the tax authorities.

Poland’s GAAR proposal should be analyzed for Best Practices, coupled with insights from prior posts: EY GAAR survey (7 August) and UK Finance Act 2013: GAAR has arrived (21 July).

It is hopeful that Poland will focus on learnings from the original GAAR introduction, as well as gain insight for Best Practices from other countries that have adopted a fair, and effective, GAAR.  It will be important to observe how the new GAAR legislation will correspond, or override, its double tax treaty provisions, and if the burden of proof will reside with the taxpayer and/or the tax authorities.

Most importantly, Best Practices should be continually reviewed, and revised,  for inclusion of new GAAR proposals and principles that are an integral part of the global Tax Risk Framework.  As stated in the European Commission report, each country’s practice is , and will continue to be, significantly different.  Robust documentation, in proactive tax risk management and planning memorandums, will provide directly relevant evidence to defend the subjective principles and guidelines of GAAR.

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Tax Risk Management

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EY 2013 survey: GAAR history/trends & Tax Treaty vs. domestic law application

Click to access GAAR_rising_1%20Feb_2013.pdf

The EY report is invaluable in explaining the origins of a general anti-avoidance rule (GAAR), recent developments and future trends.  It provides a comprehensive background on GAAR, including results from a survey of 24 countries.  The February 2013 report looks at various countries developing GAAR, European Commission recommendations, how and when GAAR measures may be invoked, and what companies can do to mitigate risk in their tax risk management.  One of the many highlights in the report is the comparison of tax treaties and domestic application of GAAR.

Examples of EY insights include the following:

  • GAAR is defined as a set of broad principles-based rules within a country’s tax code designed to counteract the perceived avoidance of tax.
  • Tax law designed to deal with particular transactions of concern are termed as either specific anti-avoidance rules (SAARs) or targeted anti-avoidance rules (TAARs).
  • China had started 248 GAAR cases in 2011, concluding 207 cases with taxes collected of $3.8 billion.
  • Each country will have its own definition of an “abusive” or “avoidance” transaction that could be the target of its GAAR.
  • A tax benefit, transaction or arrangement within GAAR regimes are not unified, thus requiring a close review of each country’s definitions.
  • GAAR independent review panels are developing to oversee its application
  • Virtually all countries have multiple SAAR and/or TAAR provisions, although only a few have been abolished with introduction of a GAAR.
  • Inconsistency of GAAR application to arrangements that have already been subject to one or more SAAR measures in that jurisdiction, including India, China and Chile.
  • China SAT seems to be expanding its beneficial ownership test into an anti-treaty shopping/anti-abuse test, creating more uncertainty.
  • The use of GAAR also extends to benefits provided by tax treaties.  Tax treaties include bilateral anti-avoidance provisions, although several countries are applying unilateral anti-avoidance measures via interpretations of existing treaties or applying domestic law GAAR provisions to treaty benefits.
  • Countries are including in their tax treaties explicit authorization of the application of domestic law anti-avoidance provisions.
  • Approx. 12 of 24 countries surveyed allow their GAAR provisions to override existing tax treaties, unilaterally or applying domestic GAAR.
  • 30% of participants from a 2012 GAAR webcast responded that they do not address GAAR within their tax risk management approach.
  • Best Practice: Use a tax governance framework with documented processes for significant transaction sign-off.
  • Best Practice: New GAAR, SAAR and TAAR proposals should be monitored and factored into the tax life cycle of a multinational business
  • Best Practice: Transaction documents should state the intended purpose of the overall transaction, as well as each step therein.
  • Best Practice: Document alternative positions considered, demonstrating that the final position was the only reasonable position to obtain the commercial objectives, and that there were no transactional steps taken that were explicable only in a tax benefit context.
  • Best Practice: Obtain external advice on significant transactions, including opinions on GAAR.

Several tables include insightful observations, including:

  1. Table 1, GAAR introduction timeline in various countries
  2. Table 2, Burden of proof for each country; taxpayer, tax authority, or shared
  3. Table 3, Examples of 2011-12 tax treaties with reference to application of domestic anti-avoidance rules in the treaty context.
  4. Table 4, Countries providing GAAR rulings/clearances

Additionally, eight questions are posed for a Board to ask in relation to GAAR:

  1. Does the transaction have a valid commercial purpose?
  2. Is the transaction unique and complex?
  3. Is the tax benefit material to the financial statement?
  4. Could the transaction  be undertaken in a different manner, without attracting the potential application of GAAR?
  5. Has an opinion been obtained that the transaction will more likely than not withstand a GAAR challenge?
  6. Is the transaction defendable in the public eye?
  7. What is the corporation’s tax risk profile both globally and locally?
  8. How comfortable is the corporation with litigation if it is required to defend the transaction?

The Appendix of the report provides answers, for each of the 24 countries, to the following queries:

  • Does a GAAR exist?  If so, year of introduction and effective date
  • Can the GAAR be applied retrospectively?
  • Do specific anti-abuse measures exist?
  • Does your country have specific legislation in place related to the indirect transfer of assets?
  • What are the circumstances in which the GAAR can be invoked?
  • Is the burden of proof on the taxpayer or taxing authority?
  • Does your country have a GAAR panel?
  • What is the attitude of the tax authority toward invoking a GAAR?
  • Is a clearance/rulings mechanism available?
  • Can the GAAR override treaties when invoked?
  • What penalties may result from the GAAR being invoked?
  • Provide a summary of key judicial decisions involving GAAR or other anti-abuse legislation.
  • Are there any legislative proposals or open consultations that may affect the future composition of a GAAR?

Prior posts for additional reference:

  • 6 August; U.N. Committee of Experts to address the Manual for Negotiation of Bilateral Tax Treaties in October 2013
  • 21 July; UK Finance Act 2013: GAAR has arrived
  • 19 July; OECD BEPS Report & Action Plan
  • 4 July; Italy: New Co-operative Compliance Program
  • 29 June; Board Oversight and Responsibilities for Tax Risk Management
  • 13 June; OECD: A Framework for Co-operative Compliance
  • 5 June; GAAR: India & International Perspective

This report is a comprehensive review of GAAR and should form a foundation for planning significant transactions and adopting Best Practices within the global Tax Risk Framework.  For example, the eight questions to be posed by the Board could form Best Practices for planning significant transactions.  The report is a valuable tool for regional and global tax teams as the trend of GAAR, and understanding its subjective principles, is becoming more complex in today’s ever-changing tax environment.   

Category:

Tax Risk Management, Transfer Pricing

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