Adv Treaties

8/12/2019 Adv Treaties

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*Look at prior exams online

Tax notes International!

A Jewish individual who arrived on Israel land have the option to become residents.

FEBRUARY 28, 2014

Tax treaties are agreements between countries that divide up the right to tax(allocate rights to taxa)

Tax treaties: Not legally binding, unless participants (2 countries) enter into ito OECD Model Tax Treaty

OECD (Org for Economic Cooperation Development (Paris)): research,think pack, and funded by developed countries to develop economicpolicies (trade and tax policies), however, cannot command anycountry to do anything.

Tilted toward capitalism (carl marks theory), generally fundedby countries with more money

o United Nations Model Tax Treaty Tilted towards labor, and favorable to countries where metal

resources are located, and developing countries Not commonly used to negotiate tax treaties (thus not focused on in

class)o US Model Treaty

US is the worlds reserve currency thus it has the power to create itsown model treaty

Corporations: look to domestic law of the country who is party to treatyo Corporations: may be specific (UK), or ordinary

Public Ordinary Corporation: AG, Inc., NV, SA Small entities (that may or may not be corporations under domestic

laws, but most of the time they are): LLC, BV, SARL, SPA, GMBHo Partnership: conducting of enterprise by 2 or more persons, or PS to invest

(not an enterprise) GP LP PS by Guarantee

o Trust: Common law, based on right/equity

o Foundation: a legal entity with juridical personality Civil law Has directors rather than trustee Can be sued, or can sue (trust cannot) Based on contract No concept of right/equity, rather based on contract law


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Grantor transfers X to A Certain countries (i.e. Napoleon code), special statutes required to set

up trusts

3 Important Ruleso Protect yourself (even from client)o Protect client (even from themselves)o Help client achieve goals

Tax Treaties only help and never hurt: if under the treaty the outcome would beworse than domestic law, then apply domestic law

2 Step Tax-Treaty Analysiso 1) What does the domestic law require, and what is the result? Must consult

expert of that domestic countryo 2) Can we obtain a better resultany other way?

Treaties (treaties trump domestic law, except for Germany-UStreaties where latter enacted law trumps)

If within EU, must use additional step: 1) Can be obtain better resultunder EU law? 2) Is there a tax treaty that gets a better result?

Capital Export Neutrality

MARCH 7, 2014

Michael J, born in UK, and has UK password, files taxes in UK Father came from Germany escaped from Nazi, and was successful in English real

estate.

Michael inherited office buildings in London which generate nice income, House inLondon

When MJ was younger, went skiing in Italy, fell in love with her and has 2 childrenwho are British and Italian

Children come visit often in London and US, but live mostly with mother in Italy MJ divorced, and became involved with Jewish philanthropy, and spends 2 months

in Israel. Has a department in Israel, and resident of Israel b/c he owns an apt there While there attending charity functions, met a woman from NY. Married woman.

Spends 8 months in NY, remainder in Israel and England. Wifes accountant claims that he must pay WW income to US; Israel claims bc has

apt in Israel must pay tax there; English accountant informed him that under UKlaw, he is English tax resident and must pay tax on England taxes.

1. As between US and Israel, who has right to tax? US model tax treaty exists betweenUS and Israel. Under domestic law, in Israel and US, MJ fully taxable under both laws.

a. Article 4 defines residence/resident. Tiebreaker rule require more facts:i. Permanent home: Art 4.1

1. Permanent home is a home that is permanently available


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2. Habitual abode:ii. Center of vital interests (persona and economic relations)

1. Children spend time in Italy, US and England2. Economic interests are in UK3. Spouse is in NY4. Spends time in Israel for charity5. his center of vital interests is likely nowhere

iii. Habitual Abode:1. 8 months in the US thus, likely this is his habitual abode2. few weeks in UK3. few months in Israel

iv. werely on accountants, and assume they are rights, we will assumefor purposes of this letter that these opinions are correct, and ouropinion is based on the aforementioned. There is a treaty in forcebetween US and Israel. Under article 1 and article 4 he is a resident ofboth. Under 3(a), he has a permanent home in both states. Under art

3.1, he has vital interests in family in US and charity work in Israel.Under art 3.b, based on amount of time he spends in US, his habitualabode is in the US, thus resident of US, thus not taxed in Israel.

2. As between US and UK, who has right to tax? US model tax treaty exists between USand UK.

a. Art 4, paragraph 2i. Permanent home: both in US and UK

ii. Center of vital interestsnot determinativeiii. Habitual abode: both US and UKiv. Thus, must determine where he is a national national of UKv. If national of both, must settle by mutual agreement

3. As between US and Israel OECD appliesa. 4.2 provides that he is a resident

Whenever dealing with US treaty, must look at limitation on benefits (article 22)*

b/c he is an individual, he is a qualified personWhere is a Company Resident?

Order: Domestic law, EU, treatyo Domestic Law: must look at corporate laws of country

US: place of incorporation controls OECD: place of management (effective management where decisions

are made to run corporate enterprise) Art 4.3 UK: mind and management Germany: Directors have authority to bind company Anglos: directors cannot bind company E.x: English company that meets in France, but all corp decisions

made in Germany under OECD must determine effective


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management: under domestic law its likely resident of England by

incorporation, residence of France due to domestic law, Germany mayclaim effective management. Thus, treaty between US-UK iscontrolling. Germany can tax. Art 4 section 1 and 3.

o Stateless income: corporations is not resident anywhere OR corporationresides in tax have.

Ring Fencing: treating other corporations differently from its owncorporations

Side noteo If resident under domestic law?

If so, are you resident under treaty (b/c treaty may make you not residentunder treaty under article 4). If article 4 makes you non-resident, thenindividual is not part of savings clause

o EUo Treaty

Do you get better result under treaty.Where is a Residence of a Civil Law Foundation?

A foundation is a body corporate, and it has BoD. Thus, look at location of managingdirectors (effective management)

o if creating one of these for tax purposes, must find managing directors whereyou want to create foundation.

Hire Philippino crew members and direct business on boat.

How do we determine where Philippinos are taxed? Article 10o UK flag,o

Enterprise: carrying on of any business Article 3.c. Enterprise is not equivalent to businesso Takes place in france, Germany is place of effective management, and france

has some employees in france who are employed by france where are theseemployees taxed?

Treat them as individuals, however, is company required to ensurewhether the employees pay taxes?

Individual must pay tax on 100 worldwide income received. 70percent is earned by eee for working in country R, and theother 30 is given to eee for services to be performed in case of

need in another country where services are not taxes. Is

company responsible for making sure that eee pays tax on theother 30 dollars to country R?

1. Is there a legitimate basis for allocating 30% of the salary toanother country where services could be performed in thefuture on the basis of sudden need to have eee move to othercountry to perform services there? There may be. If there iseconomic justification, what is the percentage allocation (howmuch are the potential services worth)? Also, what are the


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potential challenges that the main country could bring againstcountry (risks and challenge to tax, reputation)? Also, what arethe obligations to the eee is eor required to force eee to paytax on 100NO, that is the eees obligation.

Note: it is best for company attorney to restrict advisingcompany, and not advise eee.

Where is a residence of a Trust?

1. is a trust treated as a legal entity? It dependsa. An ordinary trust does not have legal personality, however, a trust created

under statutory law (Delaware Statutory Trust) is a legal personality.2. FATCA: system of law imposed by US that requires every financial institution that, if

it chooses to invest in the US, it must enter into an agreement to discloseinformation when US person deposits money in foreign institution, otherwise, US

will withhold 30% of funds transferred to the financial institution.a. Trusts are defined as entities under intergovernmental agreements the

implication is that the trust is required to report, not the trustee.b. 30% withholding effective 2014.c. FATCA would hurt any investor wanting to invest in US property, if the

foreign institution is not compliantd. FBAR: US person tells US that it has foreign account and has paid interest

Article 22 Limitation of Benefits

Article 22 Limitation of Benefitso What Article 22 is trying to avoid

1) A resident (Bolivia) buys shares in Microsoft (US) No Bolivia/US treaty. Dividends subject to 30% withholding

2) A sets up NL company which buys shares in Microsoft NL-US treaty reduces withholding tax to 0%, and NL company

payment out to A has 0% withholding taxo Thus, Article 22 kicks in, and because A is not a qualified person treated

just as in scenario 1. Cannot obtain tax treaty benefits if person uses company as a conduit

to eliminate taxation have all money coming in and going out. (2)(e)

Must have Substance when planning (in every country other than US)o If its a real company, there should not be a concerno A company is resident where its effective management is located (OECD,

sectiono Netherlands Revenue Service Ruling Criteria: has issued guidelines when it

will or will not issue certificate that a company is a resident Note: could still meet residence reqt under treaty provisions


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MARCH 8, 2014

Article 1: Talks about persons; ties into article 4 re residence

Article 4: residence

US Model Code: excludes social security and unemployment taxes

Article 2: Income taxes and capital taxes (not estate or inheritance taxes, estate taxes,excise taxes, sub-national taxes (state taxes), VAT). Thus, only covers taxes

Must always consider article 2: What kind of tax are we talking about; Federal excisetax imposed on insurance policies issued by foreign insurers and with respect toprivate foundations (insurance company is a legal entity that spreads risks)

Insurance companies has two components: 1) determining premium for risks and 2)investing premiums (must determine whether assumed investment yield is correct

(timing of pay out is important insurance company has to reach expectedinvestment profit before pay out))

o Reinsurance: Insurance company takes some of its risks and insures it withanother insurance company

o Retro Session: Reinsurance Company reinsurance Indemnity Company: form of insurance company, that guarantees that in case party

has to pay another the indemnity company covers costs Source of Insurance: where risks are located Reinsurance Company: the location of reinsurance company is important b/c the tax

on proceeds are based on country where company resides (theo Excise Tax may be imposed on insurance policies issued by foreign insurer

with respect to private (tax treaties are crucial b/c can negotiate eliminatingexcise tax; however, tax havens do not give taxing countries any incentive tonegotiate)

Interest equalization taxes (IET): excise tax imposed by a country based upon thedifference of the borrowing rate domestically and internationally

o LIBOR (IET): E.x: borrowing in US on 5%, whereas borrowing in London at 2.5% --

if can borrow cheaper outside of country for countrys currency, thenthat country can impose 2.5% excise tax on amount borrowed, so thatthere is no incentive to borrow abroad.

Exchange control: cannot take currency out of country beyond limitwithout seeking permission (US, EU, YEN do not have exchangecontrols)

Totalization Agreements: for national insurance (tax treaty but not for incometaxes)

o When Spanish person is sent to Japan for 2 years, Spanish person pays taxesto Spain, which is OK per Japan b/c its temporary stay. During this period,Japan will not provide any benefits as it provides to other taxpayers.


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Ex: US person dies in US, leaving heirs in Germany. US estate tax taxes transfer ofestate estate tax. German tax law taxes on receipt of estate inheritance tax. Thisdouble taxation could be avoided through an estate tax treaty.

o German person dies, leaving money to US person. Germany taxes on receipt here no one receives funds. US taxes on transmission of estate here, no one

is transferring, only receiving. Thus, no tax treaty needed (tax treaty helps,never hurts)

The Lords of Finance history of central banking france, Germany, UK, and US.Article 7 OECD

Business Profits

Profits: Revenue COGS (determined based on data and domestic tax law)o Financial accounting (GAAP) is different from tax accounting (which is based

on domestic tax laws). For tax accounting purposes, must take domestic tax

laws into consideration. Thus, financial accounting must take domestic ta Enterprise: an enterprise carried on by a resident of a contracting state and an

enterprise carried on by a resident of the other contracting state.

Business: buying/selling for profito Dealing/investing for self is not a business

A foundation (which is a legal entity created under a law)o If law that governs foundation states that it may not carry on a business

(Ultra Vires), can the foundation be an enterprise? No, Enterprise of a Contracting State: an enterprise carried on by a resident of a

contracting state(Germany/Poland treaty, thus another state to enterprise is notcontracting state)

Permanent Establishment (article 5): mere dividing line determining whethercountry can tax

o Place of Management: where effective management occurs. Company can change place of management easily by appointing

different directorso Branch:

For US purposes, a company is only permitted to practice where it isincorporated. However, when it opens an official branch in anothercountry it can practice there. However, note that it may qualify as apermanent establishment.

oOffice

o Factoryo Workshop: Where skilled labor is employed. (today, same/similar to factory)o Mine, oil or gas wells, etc.o Building site, construction or installation project(Page 579): if lasts more

than specified amount of time. Generally, requires set up a trailer on site. If itdoes not qualify as a PE, other state has authority to tax.


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Article 5, section 1: PE means a fixed place of business throughwhich the business of an enterprise is wholly or partly carried on.

Article 5, section 1: PE includes Place of management Branch Office Factory Workshop Mine, oil, etc.

Article 5, section 3: a building site of construction of installationproject constitutes a permanent establishmentonly if it lasts morethan 12 months. (time limitation)

Note that section 3 trumps section 2. Article 7, section 1: Profits of an enterprise of a contracting state shall

be taxable only that state unless the enterprise carries on business inthe other contracting state through a permanent establishment

situated therein (thus, if there is no PE, no right to tax). If theenterprise carries on business as aforementioned, the profits that areattributable to the PE in accordance with the provisions of paragraph2 may be taxed in that other state.

Note that this does not address whether the residence statecan also tax the income if the permanent establishment statealso taxes the income. Must refer to methods for elimination ofdouble taxation (article 23 A and B)

o Services Permanent Establishment Provision: constituent of a companythat provides services in another country for more than 183 days (see page2148, Article 5.5, 5.9)

Business profits of Germano Fixed place of business through which the business of an enterprise is wholly

or partly carried on.o Ex: a company placed his software on a leased server in Denmark used for

distribution purposes general consensus that a server does not constitute aPE (except US and India do not have definite view on this). Compare,however, a company owning a server and placing it in Denmark server doesconstitute a PE (unless domestic law rules otherwise).

Enterprise shall be taxable in Germany unless enterprise is also resident in Poland(Permanent Establishment). Poland can tax profits attributable to the branch in

Poland, and Germany must grant exemption or credit to avoid double tax. Thus, paytax on profits once. Tax Sparring: Where US TP does not owe tax to a foreign country, US will not

subsequently tax that income in the US (not used in the US, Used frequently by EU)o Capital Export Neutrality: capital should be taxed same rate no matter

where deployed US practices pure CEN, thus should pay same amount of tax whether

invest outside of US or inside of the US


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o Capital Import Neutrality (European view): wherever capital is used (notwhere it comes from) should determine what tax rate is

As long as its treated same as every other capital employed in foreigncountry, then home country will not tax activity (European view)

MARCH 21

Consortion of 2-3 companies. Hire an architectural firm based in Amsterdam thefirm does the business in Amsterdam?

Branch payment to home office is a intercompany payment subject to branch tax(measure assets at beginning and end of year if goes down at end of year, deemedto have made distribution subject to branch tax). An intercompany payment this isnot a dividend to 3rdparty, thus no withholding.

o Could set up a branch in a jdx without branch tax, and thereby save moneyupon distribution, rather than having it be treated as a dividend subject towithholding tax.

Is Swiss branch a resident under US Model(triangular structures)(Art 4, pg 576)o US parent, with NL sub, and NL sub has a swiss branch. Any distribution paid

from NL to US is really income from Swiss branch. Can the swiss branch beconsidered a resident under the US model.

OECD: under OECD, yes, it can be a residence US: under US model, no b/c of article 1 limitation

Agency (Article 5, section 5, pg 581)o Agency is irrelevant with regard to determining PE.o 1) A person is acting on behalf of an enterprise, ando 2) Habitually exercises in a contracting state an authority to conclude

contracts in the name of the enterprise

Habitually: traveling to Poland 3 times in 1 year to sign contractsconstitutes habitually

Commissioner Cases (read)(different countries apply the commissioner rulesdifferently)

o Dell Case (Commissioner case): was the commissioner related? Yes, thus, notan agent of independent status. Does the commissioner, have the authority,and are they habitually exercising the authority to enter into contracts onbehalf of manufacturer?

o Zimmer Case: Example (2:46pm)

o J Corp has a sub, E, in another country (Parent-Sub relationship Article 5.7) The fact that a company which is a resident of a contracting state

controls or is controlled by a company which is a resident of the othercontracting state, or which carries on business in that other state shallnot of itself constitute either company a PE of the other.

o J Corp sents its employees to work at E, who are not officers nor directors. Article 1:


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o One of the employees is a director of J, and has signatory authority, but neversigned anything on behalf of J while at E

Does J have PE in E.o 3 of employees are from special branch of J, ensuring quality stds for brand

name of E, and work in quality control dept that was created for the 3

employees. Does J have PE in E. Does J have a fixed place of business under which

carrying out business through E? Yes.

o Morgan Stanley: Sends eees to india to supervise eees and operations inindia. Does morgan Stanley US have a PE in India?

If there is a PE in india, then must look to article 7.1 to determinetaxation of business profits.

Article 7.2 and Article 9 Employment Fees and Directors fees do not necessarily tie to PE

o Income from Employment (US Art 14, OECD Art 15)o Directors fees (fees derived in capacity as a member of the BoD) may be

taxed in both states under Article 16.

MARCH 22

Read handouts, tax articles (in his email) Article 17 Artistes and Sportsmen

o Must determine whether taxable under Article 17 (Artistes and Sportsmen),Article 7 (Business Profits), or Article 15 Compensation)

o Under Article 17, look to whether there is an entertainment visao See Commentary on page 376, 377

Former president is paid 150K for making public appearanceo Likely not an entertainer under article 17o An entertainer has entertainment visao Otherwise may be treated as business profits OR compensation

Tennis players stay in Australia for 1 week to play Australian open. Under whatprovision can Australia tax:

o Not residents under article 4o Not employment money b/c playing for themselves and they are the taxpayero Is it a business profit under article 7? Likely not, also there is no personal

establishmento Taxable under article 17

Note that US model has a 20K limitation on it Bulay: never had an ownership interest in the recordings.

o Royalty: sourced where rights exist (here, a copyright would be created onrecording)


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A copyright is IP, and Mr Bulay is the copyright holder. Bulay thengrants license to RCA 1) w/out geographical restriction, 2) forperpetual time, and 3) no limitation on scope

o Services: where performance is made (which here would be subject to

greater tax)o Service rules top article 15

Services rules would tax himo Bulay

Royalty: right to use intellectual propertyo OECD Commentary: 8.2 (page 310), compare to 17 (320)

Royalties (article 12): royalties arising in a contracting state and beneficially ownedby a resident of the other contracting state shall be taxable only in that other state.

Royalties arising in khasakstan, and beneficially owned by residentof NTH, shall betaxable only in NTH. Khasakstan domestic law: 20% withholding on royalties

o Is the dutch owner entitled to rely on the treaty? Must first start with article1 and article 4 (do not start with article 12

Khazakstan pays royalty to Ireland, and KH- IR treaty exists that reduces 20%withholding to 0%.

o First look to Article 1 and 4.o Residency: Ireland residency for corporations is determined based on where

the directors are. Here, the directors are in the United States.o Is the royalty beneficially owned by residents of the Ireland company? No

b/c the residence of corporation is the US,. Thus, payment is to a non-resident of Ireland, thus treaty does not

apply. No treaty relief, and domestic law of 20% withholding applies. KZ pays royalty to dutch company, then dutch company (resident in Netherlands)

pays the same amount to BVI company. What is the withholding tax from KZ to NL(the withholding between NL and BVI is 0). What is the withholding tax from KZ toNL? This is a conduit transaction.

o Scenario 1: The beneficial owner of the royalty is not the NL b/c the royaltycomes in and comes out.

o S 2: Assuming that the dutch company is owned by BVI, and later NL pays adividend to BVI. Here, NL would be the beneficial owner. Thus, could satisfytreaty reqt and avoid 20% withholding

o S 3: Assuming that the NL is owned by a dutch individual (which avoidslimitation of benefits), and NL receives royalties from KZ, then pays royaltyto BVI. In this scenario the treaty does apply, unlike scenario 2, because thefact that there is a 3rdparty individual who owns NL creates real economicreality since the NL individual has invested and has risk.

For dividends, royalty, and interest always refer to residency first. US Model: first look for residency, then look to article , then if satisfied, go to 10, 11,

and 12


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MARCH 28

Article 12 Royalty

Distributor pays 4% royalty per vacuum cleaner sold, and is located and resident in

Canada, and has offices in US.

Withholding tax (red herring): should have noticed that it is not a royalty b/c mere right tosell vacuum. Thus, it should be treated as business profits. Thus, must determine PEexistence. Right to tax is in Latvia b/c Latvia has no PE in Canada b/c they are merelyselling.

- Just b/c its a royalty in the agreement, doesnt mean its a royalty for treatypurposes

- Issues we spotted:- Whether there are withholding reduction under Canada and Latvia treaty?- There may also be tax consequences if any of the royalties are attributable to the PE

(if there is a PE in the US) in the US -- article 12, section 3- Under US domestic law exclusive distribution law give rise to royalty- Pg 776, the US position with respect to beneficial owner refers to domestic law. If

royalty for domestic purposes, it is considered a royalty for treaty purposes. Here,the payments made with respect to Canada are not royalties, but the paymentsmade with respect to US to Latvia may be royalties, based on US domestic law.

- Royalties may or may not be royalties for treaty purposes.Agreement- 1. LatviaCanada exclusive distribution rights

- 3.a. in exchange for exclusive distribution rights, Canadian company will pay royaltyof X percent to Latvia.

o By dividing up terms of contract, can pay less withholding for exploitationrights (intellectual property right) compared to exclusive distribution right.

o Latvia company msut determine whether it is worth it to pay less tax bygranting a portion of exploitation rights for lower tax rates.

- 3.b. Canadian company will pay x percent for exploitation rights (which is not asublicense) to Latvia

Netherlands has royalty ruling: Netherlands will provide ruling that depending on size ofroyalty, can get deduction for royalty if there is taxable income.

When Indonesia pays 100 in royalties to Netherlands for use of Coke TM in Indonesia, itpays 0 withholding and Indonesia gets 100 deduction. Then Netherlands pays minimal taxon the 100 income (per the royalty ruling). The remainder of the 100 income after tax is99.96, which is then paid out by Netherlands as royalty to Nevis for use of Coke TM in Asia.Netherlands then gets deduction for this royalty payment. Nevis then has tax-free income.This money can then be distributed from Nevis to US (taxable). If it is used by Nevis, then itpays lower tax rates. Netherlands is the beneficial owner.


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- note that conduit rules are not applicable jere because there is a stream of differentintellectual rights its not the same IP rights being transferred. Also, theNetherlands has an important business purpose and business function, which is tomanage the IP.

- Tax favorable: Bahamas, nevis, turks & , carousel, st. martin, Isle of Man, etc.

Article 11 Interest

- 1. Look at Canadian domestic law as to withholding. Does Canada imposewithholding on payment of interest? If not, then do not get to treaty provisions.

o There is 25% withholding tax.- 2. Is there a treaty between Canada and Latvia? Yes, and its OECD.

o 1. Is Latvian country a resident (article 1 and 4)? b/c its not a US treaty, must not worry about limitation of benefits however, b/c it is OECD must worry about substance under art 4.

o Latvians effective management is Latvia, thus resident in Latvia. Thus, wenow move to Article 11.- If it is not really interest, and it appears like something else, then it is taxed like a

dividend at 15% (see US Article 11.2)-

MARCH 29

- Philippines has a PE in Philippines, and if its a branch of Singapore company, thenany money earned by Philippines is not taxes at Singapore level

- Singapore domestic law has a foreign profits account (income from foreign sourcesare not taxable in Singapore dividends and interests paid from foreign account are

not taxable to Singapore). Because all income to Singapore is from this foreignprofits account, under Singapore domestic law, the Singapore entity does not holdany taxable income. Thus when it pays the interest to the NL, this interest paymentis from the foreign profits account, thus under domestic law Singapore must not payany tax. Thus, no need to even get to treaty.

- However, if money is paid out of Singapore directly, rather than foreign profitsaccount, then look to domestic law, under which the tax is 25% for payment ofinterest.

o Article 11.3: interest: money from any debt claim, subject to 10%. Thus, b/cits less than 25% go with treaty.

Under Netherlands and Singapore treaty, there is a provision that ifinterest paid to central bank, then subject to 0%. However, here itsbetween private companies, thus 10% controls.

- Exchange gain and losses treated under Art 21. If Dollar loan from Dutch company(lending Euro to US) then taxed at Dutch level. If Euro loan from Dutch company(lending Dollars to US) then taxed in the US.

- If EU entered into contract with Saudi to build domestic water system inBangladesh. Thus, there is EU aid to Bangladesh. Even if not treaty between NL andBang, as part of the contract, the EU will incorporate benefits of the OECD model


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into the contractual agreement thus, it is a special purpose contract that has theeffect of the treaty. When EU hires EU contractors to do the job, they will be exemptunder Bangladesh and EU law, which reduces cost of the contract which is to EUs

benefit thus always ask if there is EU involvement- Exemption method ARTICLE 23A: all the dividends coming up from Sub, all the

dividends qualify for, thus not subject to tax in the Netherlands.Credit method ARTICLE 23B: not exempt from tax, but get credit if paid at lower tier

April 2 and 3, 2014

In 1960, German tried to come to US, but was not able to. Instead, went to Canada. Thencame to US. Then went back to Germany. Got married in Germany. Move to US. Have a child.Husband entered 1968 citizenship lottery, and got citizenship. In 1970, family moves toGermany. Since then, pay taxes in Germany. Placed money in Swiss bank account. In 1998,Swiss merged with union bank of Swiss, forming UBS. Should they have known that US

requires payment of taxes? Ignorance of law is a defense to tax penalty. An examination under 1040 is different from examination under information tax

return. Could argue that on basis of reasonable cause (german citizens who thought they

were being compliant this is reasonable b/c everyone else in the world is notaware of worldwide taxation) no penalty should be imposed.

A president giving speech is not taxable under Land is not always land, just like royalty is not always royalty. Article 6 Income from Immovable Property: the state where the immovable

property is has the right to tax.o Includes immovable propertyo Does the sale of cows from an agriculture business fall into article 6 or article

7 (business profits; note that article 7 trumps article 21). Although income from agriculture or forestry is included in Art 6,

contracting states are free to agree in their bilateral conventions totreat such income under art 7.

The farm is a permanent establishment. Drilling platform is on site 11 months, in an area belonging to Norway. is it a

permanent establishment of UK company in Norway. Does article 6 or 7 apply?o If covered by Art 6, Norway would have rights to tax b/c profits from

immovable propertyo If covered by Article 7, under Art 5 there likely is PE in Norway under 5.2.fo If section 5.2.f were not applicable, and we were under US model, article 5.3

would rule that it is taxable to UK.

article 6 itself does not require PE Article 8 (trumps art 7)

o international traffic under the OECD requires the effective management tobe in a Contracting state. (transport by ship that has its EM in US, but under


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US model if ship is going between US ports it is not engaging in internationaltraffic).

o If shipping cargo of goods from China to Austria, look to place of effectivemanagement.

Article 9 (US model): could result in effective double taxation, if the US does notagree to make the adjustment. However, often the OECD model applies, and thusthis issue does not exist b/c the contracting state would be required to make theadjustment.

Article 13: Capital Gainso Note that whether you define it as income (art 7) or gain (art 13) will

result in same result. If selling a cow, its income (b/c not capital asset) (art 7) However, if selling a farm, its capital gain (art 13)

Article 18 Pensionso Pensions paid in respect of private employment are taxable only in the state

of residence of the recipient.o Payment must be in consideration of past employment.o US Model art 17: any pensions owned by resident of state is taxable only in

that state. (thus if someone earns pension in the US, but are not residents ofthe US, if they move back to home country then taxable in home country)

US can always tax social security, despite residency (totalizationagreement does not supersede this)

Article 19o If working for govt of Netherlands, govt of Netherlands has right to tax.

However, if govt eee of Netherlands but sent to another state to provideservices may be taxable there .

Article 20o Money received to be a student is not subject to tax. However, if receiving

addtl funds, taxable as if never left home countryo US model: full-time student reqd.

Article 21o If not covered by other provisions, covered by 21 based on residency

Article 22 Capitalo Taxation of capital is going out of style (European countries used to tax net

wealth, but less commonly done today)o If domestic law doesnt impose capital tax, then treaty not applicable.

Article 23o

23A: Capital Import Neutrality: Capital should be taxed only where it is used(thus resident country shouldnt have right to tax if its being employedelsewhere) often this provision translates into an exemption

Article 23a(2) only applies where a CIN country does not permit full100% participation exemption (i.e., japan has 95% participationexemption, so 5% is taxed, subject to credit),

o 23B: Capital Export Neutrality: Usually translates into tax credit systemo The US model, only practices Capital Export Neutrality (art 23)


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Offshore Voluntary Disclosure: self-denouncement by persons who have offshoreaccounts. (created in 2009 by memoranda issued by IRS, not law)

Treaties

Class 12 12 April

Story from last class

02/2009: UBS decided would deliver client files on 255 US clients. US govt wasnt happyand continued to put pressure re threats of rescinding US banking license.

08/2009: Swiss govt caved. Went to Swiss govt to do whatever it takes to give US thatinformation. UBS entered into Deferred Prosecution Agreement and notified all affected UScustomers re disclosure to US government (including IRS).

Controversy (and related) Costs $75k-$100k per US client.US amnesty programs

First Program of This Type Caribbean basin programo Bank accounts in Caribbean used by US persons to access accounts using debit

cards.o US govt started investigating payment networks and issuer of cards because these

companies are located in US.o Germany then asked for the information of the US government under Article 26.o What if client from country where blocked currency? This method might be

necessary.

Global Information

Through tax treaties way to get this global information (greatly facilitated byimprovements in tech).

UBS then closed accounts for those US clients and referred them to Swiss bank that didnthave any locations except for Switzerland.

o This approach failed to account for 2 things: ONE: Worlds reserve currency is the USD*

Context:o LIBOR (bank interest rate offering USD)o EURO dollar (LIBOR for euro)o Use of futures markets for international tax planning

TWO: Need access to US correspondent accountsForeseeably Relevant Standard Under Article 26

Whats Not Foreseeably Relevant:o Passports (discussed in Class 11)o Country A requesting information regarding a company that is not the actual TP

under audit from Country B, and while the request is outstanding, Country A closesits audit on the actual TP.

Example. Tax inspector auditing Company A. See A has borrowed $$ fromCompany B. Start looking at B. B is not a bank, look to see whethercompanies are related (if it presents an intercompany transaction).


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Inspector requests information re Company B from Company A. Company A responds by saying arms lengthtransaction, and have

no information (including ownership information) on Company B.

Make Article 26 information request. Country B tax inspector receives request (reaches inspectors desk 1

year later).

In the meantime, Inspector from Country A closes tax audit onCompany A.

When Country B requests information from Company B, new taxyear (the audit for the relevant tax year has been closed).

No longer foreseeably relevant.

Wegelin BankCriminal Indictment

Backgroundo All USD transactions clear through New York (Federal Reserve Bank of New York).

Example of sending $$ Hong Kong account to Tokyo account.o Correspondent bankaccounts among banks for moving $$ to each other forclients.o If US sanctions on Iran (for example), banks essentially means that cant do anything

in USD. Transaction in USD would necessitate use of US correspondent banks

(through New York). OFACSDN list

2 problems with Wegelino needed to do business in USD for US customerso needed to go through US banks accounts (used UBS correspondent accounts)

jurisdictional nexus requirement met Evidence

o US got the information necessary for the indictment through the voluntarydisclosure program UK Approachin context of Wegelin example

o UK also interested in evidence.o Information initially came from Liechtenstein bank where somebody stole a disk.o UK ENACTED Lichtenstein disclosure initiative. If anytime among 4 year period, can

disclosure and be subject to 10% penalty. Contrast with yesterdays administrative fiat. Could also move $$ from say Caribbean bank accounts to Liechtenstein bank

to avail themselves of program.

US Approacho Art. 26 approachall countries get information & every country does what it wants

with it

Use of Banks in Complianceo Banks are agents for the governments

Information sharing Assumes trust of government


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2009: US Offshore Voluntary Disclosure Initiative

o Referred to as an amnesty, but it is not. None of these so-called programs actually forgave anything.

o Not allowed to use initiative if investigation has been opened for TP Accounts doesnt have to be flagged by reason of offshore bank accounts ISSUE: how does TP know whether under audit?!

Given the fact that can be under audit and never know about it In US, for example, once flagged (DIF program), TP is under audit.

Practitioners Approach to issue: TP must disclose before TP is given noticeof investigation.

o Designed to be one-size-fits-all programs Agree to file all income, information tax returns, declare all income, pay tax,

pay interest, pay 20% penalty on amount of tax owed, miscellaneous penaltyof 20% on $$ held outside US

FBAR Form (discussed below)o US / Italian / UK system of taxation

Special forms required to file where $$ assets outside of the country US: Form 1040, Schedule B (interest)2 questions on bottom of form

(7(a)): Do you have ownership interest/signatory authority on anaccount outside the US?

(7(b)): Have you received a distribution from a foreign trust outsidethe US?

If yes to either of these questions, have to file additional forms Commonly see foot faults but that counts here Form 3520-K

Information return required to be filed if create non-US Trust If received distribution from non-US Trust account above a certain

amount What question 7(b) leads into If dont file this form, SOL doesnt run

o So can go back to 2006 ((Part of Higher Act--date ofenactment was 2010 but applied to all tax years still open, so2006))*

o 26 USC 6501(c)(8) FBAR (FinCEN Form 114)

o Filed onlineo Important: not required under IRC. Required under BSA.

Critical. B/C if govt makes an assessment of taxes under IRC, that assessment is

collectible.o Higher Actchanged rules re penalties.

Simply assesses [certain] penalty and is immediately collectible Dont go through deficiency procedures Theres CDP hearing whether thats really due process is another question.

o Penalty for FTF FBAR


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Even though IRS says it wants to assess it, its different from the assessmentprocess under the IRC.

Assessment but its not self-executing Only way can collect is to bring a civil action

Procedure for FBAR penalties and procedure for tax penalties arecompletely different

US Offshore Voluntary Disclosure Program (contd)o Set deadlines for compliance without extensions.o Then, restarted program under different year (e.g., now 2012 OVDP)o Example. US entrepreneur interested in purchasing Swiss company. Puts $$ in Swiss

escrow account to show good faith. While pursuing due diligence, decides not tobuy. Earns small amount of interest while in Swiss account. Illustrates tax, interest,penalties due under this program, and how potentially unfair it is.

o 2011 program: increased miscellaneous penalty to 25%.o 2012 program: increased miscellaneous penalty to 27.5% and increased base to all

assets outside and everything bought with those assets. Issues

o Facts & Circumstancesindividual agents have not been able to take account facts& circumstances

o How to calculate taxCertain types of investment entities do not collect certaininformation thats requested by certain tax authorities

Want to get TP in same position as if taxed currently. Problem: these types of entities do not produce the type of

information requested.

E.g., countries that dont have capital gain tax. Accordingly, entitiessubject to that jurisdictions tax wouldnt collect that information.

PFIC. Foreign investment fund earning passive income. Special admin: on tax for PFICs ---- but IRS position is that its only

available for those in disclosure program [check cite]: IRS can extend time to make any election unless statute

explicitly provides that must make election within specific timeframe

QEF: can elect retroactively for PFIC to QEF. Mark-to market for thattaxable year. Various assumptions made.

Solves problem re missing information SICAV: special type of Luxembourg entity for funds.

Can be flow-through entity under US check-the-box UCITS: securities law regulation in Europe that regulates

US Special agent criminal side Revenue agent civil side In other countries, distinction not readily apparent

Germany Amnesty Program Program of self-denunciation


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10% penalty (civil side) criminal: jail but no additional fine

Australia Amnesty Program (announced last week) 10% penalty

Canada Amnesty Program 10% penalty

Different governmental agencies discussed IRS, FinCEN (unit of Treasury), DoJ FinCEN: principally responsible for tracking $$ 2013: published request for comment re due diligence for financial institutions, which

proposed to require that any bank or securities firm that is required to have a AML programis required to track and disclosure beneficial ownership information on those accounts

o Professor thinks this isnt likely. Political. DE (Biden). DE could potentially loose30% of its revenue.

OECD: Art. 27 Assistance in the Collection of Taxes (p.643)

Section 2:inserto Revenue Claim = Whatever taxes are owed under domestic law plus interest and

penaltieso FBAR is not a revenue claimo Historically:revenue rule= no state will collect taxes on behalf of another stato NOW: Each state will help each other collect taxes

Section 6[insert provision]o Redress is with requesting state only, not with requested state

This article is not in many of the bilateral tax treaties (see headnote under p. 643) CR Mutual Administrative Assistance Article 2, Section 11 provides for same thing

oSubject to reservations

o A number of countries have expressed reservations for same reason as headnote inArt. 27

o Impact on Analysis: Domestic law EU law Treaty (4thStep) If Art. 26/27 issue**Did contracting state become signatory

on treaty with this provision Section 3.

o First sentence means it needs to be a final assessment under domestic law US Model (p. 646)o Nothing in US model re collection

o Cross Reference US-Germany treaty no collection provision US-Canada includes collection provision assistance in collection (very

similar to Art. 27) p. 2176o Compare with approach to LOB

US always has a LOB provision, but collection assistance provision isdifferent.


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US will agree to collection assistance provision, but have to look at thespecific treaty (illustrated by US-Germany and US-Canada treaties) to seewhether applicable to particular matter.

FATCA (Foreign Account Tax Compliance Act)

Premise:o if anyone outside US

wants to invest in US securities markets, wishes to purchase debt issued by US person, engage in any financial transaction with US

o is a foreign financial institutiono US going to w/h 30% on all cash remitted to USo UNLESS

Agree to remit information regarding all US persons to US Definition of foreign financial institution

o not intuitive definitiono broken up into categories

custodial institutions (i.e., banks, investment banks, brokerage houses) investment entities

most discussion: Trust / Foundation rule appears to be:

o if trustee and invest assets in trust directly, not a FFI anddont have to register with FATCA

o if avail oneself of investment advice from a FFI / third-party,then = FFI and have to register with FATCA

o GIIN number for registered entitieso US has developed its standard for FATCA reporting which is supposed to go into

affect 7/1/14.

OECD Automatic Exchange of Information (Global FATCA)

o Based upon the US reporting, o Implementation date jan 2016.

April 25

Article 29 doesnt apply in practice much b/c colonies do not exist Article 28: Nothing in this treaty affects diplomatic Article 24

o Nationalsof a Contracting State: a person National (article 3.1(g)): nationality or citizenship (residency is irrelevant)

o This provision extends to (national of Greece could live in UK, who is not a residentof Greece nor UK. Article 4 would not apply b/c of residence, however, non-discrimination provision would still apply.

o Article 24(3): the same business in the same state shall be treated the sameo Article 24(6):o US Model: carves out exception for residents of US who are subject to worldwide

taxation. Thus, non-discrimination provision is carved under US model


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The US model does not permit discrimination based on nationality for anytaxes for persons in the same circumstances (except US model permits US totax its residents differently from non-residents)

o Swiss national who is resident in nicaraqua, who owns property in US (property tax1 cent per 1000 for American, 2 cents per 1000 for nonamerican). Only pays 1 cent,otherwise discriminatory

Discrimination based on residence (rather than nationality) may not runfoul of treaty

NOT TESTED

Worlds favorite entity for tax planningo American LLC (Delaware, south Dakota): can be transparent

State tax: zero Federal tax rate (if check the box): the tax rate of person

If person is non-american: zero percent b/c LLC is transparent(disregarded entity thus does not file US tax return)

o US Trusts If domestic, subject to tax. However, domestic rules require meeting 2 part

test to qualify as domestic trust

1) law to which its subject in US and 2) law of admin is both in US Otherwise, not subject to US law and no US tax.

o Unlimited Liability Company (Canada): persons use this to dip in and out mostlyused for Canadian tax purposes, not international planning

Belize often used as tax haven Honduras Panama: territorial jdx if non-panama resident, do not pay tax there.

o Has not abolished bear-shareso Great for shippingo Legal system in Spanish

South America: Not a lot of tax savings there. Aruba: Historically part of netherland-antilles, Tax haven, stable Carousel: Stable govt, good court system St Vincent: Low-tax jdx, Yacht jdx 0 tax to register boat Barbados: Tax treaties: good network w/tax treaties (not as strong relationship with US) Nevis: Good trust laws, but not good court system Antigua: red flag country. Angia British Virgin Islands: US dollar currency, BVI companies, offshore jdx of choice

o BVI Star trust: used for a lot of things that they dont work for USVI (US virgin Islands Company): US corporate law subject to US law but exempt from tax,

so long as not doing business in US

Cayman Islands: US dollar Turks & Caicos: corrupt govt, no tax, british tax, offshore Bahamas: major offshore site for Europe, but less for US, foundation law, trust law Bermuda: most heavily regulated offshore jdx in the world, expensive to do business,

proximity and cleano Has been replaced by Switzerland and Ireland b/c more beneficial to be located

there


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Treaty for Switzerland and Ireland eliminates excise tax, thus morebeneficial to be located there

Ireland: not a tax haven, but low corporate tax rate (12.5 tax rate on manuf, 25% on otherincome), EU tax treaties, lot of insurance, software, distribution development, IPpowerhouse

Isle of Man (and including its islands jersey, gernsie): a lot of banking, offshore, not treaty UK: Netherlands: civil law, favorable tax rulings, strong law/acctg firms, holding company jdx of

choice around the world

Luxembourg: Italy, Germany, france, Switzerland: not recommended. Switzerland is not stable

o Switzerland: agreed upon tax system Saint Marino: East Coast of Italy, zero tax Monaco: once you can get residence permit pay very little tax (fixed basis taxation), only has

a tax treaty w/france

Hungary: New tax treaty w/US, Limitation of benefits provision Luxemboug, iraland, malta: preferably for hedge funds Africa: not a lot going on in Africa from offshore perspective Middle east generally: remittance taxes, ownership percentages problems, political

instability

Maritius (Indian ocean): lots of treaties (0-1% tax at election), stable, gateway to india(along with Singapore)

Singapore: competitive to Netherlands: if not remitted to Singapore not taxed there,extensive network of tax treaties, detail administrative requirements, needsubstance/presence

Hong Kong: manufacturing, banking, not stable b/c part of republic of china, income taxedon source

Australia New Zealand: offshore sector in oil sector, no income tax on NZ trust where neither settlor

nor grantor are in NZ (new Zealand non-resident trust)o However, must have economic nexus with NZo Prof suggests that it may be preferable to have US non-resident trust (if tied to US

bank account): trust in jdx where bank accounts, etc. thus, there is a nexus.

Dubai: requires 50% ownership by UAEo In free zone can set up 100% owned company, in which case are offshore and thus

excluded from tax treaty

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