Re: Consultation Response to BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

Transcription

1 January 9, 2015 Ms. Marlies de Ruiter Head, Tax Treaties, Transfer Pricing and Financial Transactions Division Centre for Tax Policy and Administration (CTPA) Organization for Economic Co-operation and Development (OECD) By Re: Consultation Response to BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Dear Ms. De Ruiter, The Taxes Committee of the International Bar Association (IBA) would like to take this opportunity to respond to the Discussion Draft on Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, of the BEPS Action Plan. The International Bar Association (IBA), the global voice of the legal profession, includes over 45,000 of the world s top lawyers and 197 Bar Associations and Law Societies worldwide. The IBA is registered with OECD with number We are submitting our comments on behalf of the IBA Taxes Committee, comprised of 1037 members from around the world. The IBA Taxes Committee formed a Working Group to respond to this Consultation. The Working Group includes: Claire Kennedy, Bennett Jones, Canada; Joanne Dunne and Elissa Romanin, Minter Ellison, Australia; Francesco Capitta, Macchi di Cellere Gangemi, Italy; Leandro M. Passarella, Passarella Abogados, Argentina; Peter Maher, A&L Goodbody, Ireland; Mark van Carstensen, Loyens & Loeff, Netherlands; Stuart Chessman, Vivendi, U.S.A.; Shefali Goradia, BMR & Associates, India; and Ricardo Leon, Sánchez Devanny, Mexico. The comments made in this report are the personal opinions of the Working Group participants (the Working Group ) and should not be taken as representing the views of their firms, employers or any other person or body of persons, including the IBA as a whole, apart from the IBA Taxes Committee of which they are a member. All references to the IBA Taxes Committee, or we or our should be understood to be references to the Working Group and its participants. Sincerely yours, /s/ Simon Yates Co-Chair of the Working Group IBA Taxes Committee United Kingdom /s/ Ricardo León Co-Chair of the Working Group IBA Taxes Committee Mexico

2 1. This is a submission in relation to certain of the issues upon which comments were invited in the paper issued on 21 November 2014 entitled 'Follow Up Work on BEPS Action 6: Preventing Treaty Abuse'. 2. Our comments are succinct in nature and relate only to selected issues because the limited timeframe given for the response coincided with yearend work commitments and the holiday season for members. We would be happy to supplement any aspect by submission in person, or by further written submissions if that would be helpful. We would welcome any such opportunity. A. Issues related to the LOB provision 1. Collective investment vehicles ( CIV ): application of Limitation of Benefit ( LOB ) and treaty entitlement. Comments are invited as to whether the recommendations of the 2010 CIV Report continue to be adequate for widely-held CIVs and whether any improvements should be made to the conclusions included in that Report. Comments are invited, for example, on whether it would be advisable to provide a preferred approach with respect to the issues related to the tax treaty entitlement of the income of CIVs and the application of the LOB to CIVs, and if yes, on what that approach should be We consider that the recommendations of the 2010 CIV Report continue to be adequate for widely held CIVs A CIV, as referred to in the 2010 report, typically is "widely held, holds a diversified portfolio and is subject to investor protection regulation in its country of establishment". Many of the challenges faced by CIVs in obtaining treaty relief were articulated in the 2010 Report. The BEPS initiative was prompted largely by the taxation of the digital economy and the evidence of treaty abuse on any significant scale by CIVs is far from apparent. Such entities are not typically established in order to obtain the benefit of treaties; as outlined, they typically are widely held entities, subject to regulation in their country of establishment and, more often than not, are established so as to pass on to investors the benefits and economies of scale inherent in collective investment To the extent that LOB provisions are adopted as the principal mechanism for combatting treaty abuse, we consider that CIVs should expressly be stated to be a "qualified person" without further qualification. Applying an LOB style ownership test to CIVs (1) is likely to impose additional administrative burdens on CIVs over and above those that already apply; (2) hinder the continued development of cross-border international funds (e.g. UCITS); (3) discriminate against some of the leading international fund jurisdictions (e.g. Ireland and Luxembourg in Europe) because of difficulties in demonstrating ownership of the CIV only by residents of the two contracting states, and (4) in an EU context, potentially creates Treaty of Rome issues by limiting "good" ownership for LOB purposes to residents of the two contracting states.

3 1.4. Moreover, we believe that the qualified person classification should include holding entities through which the investments of CIVs are made provided that such holding entities are controlled by CIVs. 2. Non-CIV funds: application of the LOB and treaty entitlement Comments are invited as to whether the preceding paragraphs accurately describe the treaty entitlement issues of sovereign wealth funds, pension funds and alternative funds / private equity funds. Comments are also invited as to how to address these issues without creating opportunities for treaty shopping Sovereign wealth funds 2.1 The tax treaty entitlement for special purpose vehicles established by sovereign wealth funds in jurisdictions other than their home jurisdiction may be governed by the derivative benefits test. In other words, such special purpose vehicles should be entitled to tax treaty relief only to the extent provided by the tax treaty between the sovereign wealth fund s home jurisdiction and the source jurisdiction. Pension funds Whether and how the issue of the treaty residence of pension funds should be addressed: The issue of treaty residence of pension funds needs to be addressed by specifically considering pension funds to be qualified persons and, for the purposes of Article 4, by considering them to be tax resident in jurisdiction in which they are set up and regulated Pension funds are predominantly constituted for the benefit of citizens of the jurisdiction in which they are established and, therefore, should be entitled to access the provisions of the applicable tax treaty. Admittedly, in addition to resident individuals, beneficiaries of pension funds may include (a) foreigners who contribute to the pension funds by virtue of their deputation / secondment to a particular jurisdiction, (b) individuals who may have migrated from the home jurisdiction on account of deputation / secondment to another country but continue contributing to pension funds in their home country and (c) beneficiaries of the pension fund who have retired and migrated to other countries. However, this should not disentitle pension funds from accessing the applicable tax treaty, since (a) they are not set up for tax avoidance purposes or with an objective to obtain treaty benefits, (b) a substantial part of a pension fund s income provides retirement benefits for resident population, and (c) distributions from the pension funds do not retain the character of the underlying income that the pension fund receives The taxability of retirement benefits by the individual beneficiaries will be governed by the tax laws in the home country and the recipient individual s residential status. Contributions to pension funds would present very limited, if any, opportunities for individuals to abuse tax treaty provisions. Thus, a look through approach should not be adopted for

4 pension funds and no threshold tests (in terms of percentage beneficiaries who are locally resident in home jurisdiction) should be included For jurisdictions whose pension funds earmark contributions received from individuals and implement investments through dedicated accounts for each individual beneficiary, a separate approach to be agreed to bilaterally between the two treaty partners may be considered by applying a look through approach. (ii) Whether drafting changes should be made to the alternative provision included in paragraph 69 of the Commentary on Article 18 (e.g. restricting its application to portfolio investment income). 2.3 As an alternative to paragraph, 69 of the Commentary to Article 18 current wording contracting states could bilaterally agree that the exemption to foreign pension funds will be restricted to income arising from portfolio investments. (iii) How the 50% ownership test applicable to pension funds could be modified in order to address cases where it may produce inappropriate results (eg in the case of the individual retirement fund of a pensioner who moves abroad) without creating opportunities for treaty shopping. 2.4 As discussed above, in the context of pension funds that do not segregate investments per individual beneficiary, no threshold on home jurisdiction ownership should be included. The inclusion of a 50 percent ownership test may be presented as an alternative that contracting states may agree bilaterally, considering typical structure or practice of pension funds in their jurisdictions. Alternative funds / private equity funds 2.5 We generally agree with the description of the treaty entitlement issues of alternative funds / private equity funds under paragraphs 15, 16 and 17 of the Discussion Draft subject to the following specifications. 2.6 As a first remark, if alternative funds / private equity funds meet the conditions to be defined as CIVs ( funds that are widely held, hold a diversified portfolio and are subject to investor-protection regulation in the country in which they are established ), then they should be granted the same treatment reserved to CIVs (see paragraph 1. of this document) and therefore treated as a qualified person for LOB purposes (including holding entities controlled by such funds). 2.7 If an alternative fund / private equity fund does not qualify as a CIV (e.g. due to a limited number of investors, say less than 10, or because neither the fund nor the fund manager are regulated), our preferred approach is to treat the fund as a qualified person provided that at a certain date (i) it is owned for at least 50% by investors that would be entitled to treaty benefits had they directly invested in the source country ( equivalent

5 beneficiary concept) and (ii) at least 50% of the fund profits are paid or accrued to such investors. Such approach - based on the assumption that a minimum 50% ownership by equivalent beneficiaries grants adequate protection from treaty shopping - would allow to avoid double taxation for investors and to maintain the application of the LOB relatively simple. 2.8 As an alternative (non-preferable) approach, the fund could be regarded as a qualified person for LOB purposes only in relation to the income that is preferable to investors that would be entitled to treaty benefits had they invested directly. Such approach would eventually determine the application of a distinguished tax treatment to a certain flow of income from the source country to the fund depending on the portions attributable to the investors, thus determining additional compliance and complexity. For example, if a dividend of 100 is distributed from a company resident in the source country, it will be necessary to identify which part of such dividend shall then be paid to investors who would be entitled to treaty benefits had they invested directly and which part shall be paid to investors who would not be entitled to treaty benefits. Issues may arise in relation to the type of documentation that the withholding agents should require in order to correctly apply treaty provisions. 3. Commentary on the discretionary relief provision of the LOB rule In our comments to the Discussion Draft on Action 6 of March 2014, we indicated our concern that the introduction of concepts such as a limitation of benefits provision (LOB provision) and general anti-abuse provisions, which are relatively unknown in many countries, will in itself create much uncertainty. With respect to the LOB provision, our main concerns were that the LOB provision is not a mechanical test, with a predictable outcome and that absent a derivative benefits test, the group of persons/entities potentially qualifying for the benefits of a treaty is too limited. The working of the discretionary relief provision of the proposed LOB is particularly unpredictable and unclear The discretionary relief provision provides the possibility to request the competent authority to grant treaty benefits in a specific situation, where the resident of the contracting state would otherwise be denied treaty benefits under the LOB provision. As described in the proposed paragraph 63 of the Commentary to the Convention, to obtain discretionary relief, it must be demonstrated to the competent authority that there were clear reasons, unrelated to obtaining treaty benefits, for its formation, acquisition, or maintenance and that any reasons related to obtaining treaty benefits were clearly secondary to those unrelated reasons. We are concerned that countries will not be inclined to easily accept the existence of such clear reasons. Or that any reasons to the obtaining of treaty benefits were clearly secondary to those clear reasons. On top of that, paragraph 19 of the Discussion Draft states that the proposed paragraph 63 of the Commentary on the LOB rules should be adjusted to clarify that, in the case of a resident subsidiary company with a parent in a third state, whilst the fact that

6 the relevant withholding rate provided in the Convention is not lower than the corresponding withholding rate in the tax treaty between the state of source and the third state would be a relevant factor, that fact would not, in itself, be sufficient to establish that the conditions for granting the discretionary relief are met. Adding such a clarification would be a missed opportunity to turn the discretionary relief provision from a theoretical into a more realistic possibility to claim treaty benefits in situations that are not abusive A simple example to clarify. Country S levies 20% withholding tax on dividend payments under its domestic law. Country S has a treaty with Country R, which allows S to levy 10% withholding tax on dividend payments to qualifying residents of R. Country S also has a treaty with Country P, which allows S to levy 10% withholding tax on dividend payments to qualifying residents of P. If an entity, resident in S distributes a dividend to a resident of R, which is held by an entity resident in P, it is clear that R has not been interposed in order to abuse the S-R treaty, because without R in the structure, S would be entitled to the same withholding rate under the S-P treaty. If a country of source may withhold tax upon a payment made to an entity that is resident in turn the fact that a treaty does not result in a lower rate of withholding than the rate that would have applied for payments made to the parent of the specific entity 3.4. In our view, the Commentary should clearly provide that in such a case discretionary relief be granted without the necessity of demonstrating clear reasons, unrelated to the obtaining of treaty benefits, for its formation, acquisition, or maintenance. This will make it clear that discretionary relief will be available in such a situation, without any of the uncertainties caused by the interpretation of terms such as clear reasons and clearly secondary. In addition, we suggest adding to the discretionary relief provision, the possibility to apply the withholding rate between the source state and the resident state of the parent company, if this is higher than the treaty rate between the state of source and the state of residence of the intermediary entity, but lower than the domestic rate of the state of source Another example to clarify. Country S levies 20% withholding tax on dividend payments under its domestic law. Country S has a treaty with Country R, which allows S to levy 10% withholding tax on dividends to qualifying residents of R. Country S also has a treaty with Country P, which allows S to levy 15% withholding tax on dividend payments to qualifying residents of P.

7 If an entity, resident in S distributes a dividend to a resident of R, which is held by an entity resident in P, the discretionary relief provision should entitle S to levy withholding tax up to 15%. If so, it is clear that R has not been interposed in order to abuse the S-R treaty, because without R in the structure, S would be entitled to the same withholding rate under the S-P treaty A similar result could be obtained while applying the derivative benefits test if the derivative benefits test would be amended so that the derivative benefits test would not only provide that the source country taxation will be reduced in accordance with the treaty in case of an equivalent beneficiary, but also, ultimately, to the rate provided by the treaty between the country of the shareholder (not qualifying as an equivalent beneficiary) of the company and the source country, if this is higher than the rate provided for by the treaty between the country of residence of the company and the source country, but still lower than the source country s domestic rate. We will discuss this, alternative approach below Another recommendation we would like to make, in order to make the application of the discretionary relief provision more practical and useable, would be to include a grandfathering-application. Based upon this provision, an entity could still claim the benefits of the treaty for at least one year if it qualified for the treaty benefits for an uninterrupted period of at least 3 years and stopped qualifying for the benefits of the treaty because of a change in the facts. As an example, this provision could be effective, if a publicly listed entity would qualify as a qualifying person for 3 years in a row and would in year 4, stop meeting the minimum trading requirements of its stock. As it is clear that such a structure was not implemented to abuse the treaty, it would be reasonable that the benefits of the treaty would still be available, at least for a certain time even though the conditions would no longer be met. Based on the grandfathering-application, we recommend the discretionary relief provision provide that an entity would still be entitled to the treaty benefits for at least one year, provided that it qualified for treaty benefits for a period of at least three years and stopped qualifying due to a change in the relevant facts, such as the minimum trading requirements of its listed stock or the size or nature of activities (for the application of the active business provision). Depending on the circumstances, the competent authority could still decide that discretionary relief would be available for a longer period, but the provision we recommend would make clear that in any case a grandfathering period would be applicable Finally, even if our suggestions as described above would be included, the fact that it is not possible to file an appeal against a negative decision and the fact that the states do not have the obligation to process a request within a certain period of time, may still make a request for discretionary relief a theoretical possibility. We therefore recommend adding rules on the formal process of requesting discretionary relief, including certain legal terms as well as the possibility to appeal a negative decision.

8 4. Issues related to the derivative benefits provision 4.1. As indicated in our comments to the Discussion Draft on Action 6 of March 2014, the Working Group is of the view that if an LOB provision will be implemented, it should include a derivative benefits clause, for two reasons. First of all, an LOB provision without a derivative benefits clause will violate the non-discrimination clause of article 24(5) of the Model Convention. Secondly, absent a derivative benefits provision, the group of persons that will be entitled to the treaty benefits will be too limited, while including a derivative benefits clause should not lead to treaty abuse The Working Group believes that the derivative benefits test as currently proposed is too limited. Specifically intermediately held entities will not be able to qualify for treaty benefits under the derivative benefits test as currently proposed. This, because of the requirement that in case of intermediate ownership of the company that claims the treaty benefits, each intermediate owner is itself an equivalent beneficiary. In practice, only a publicly listed company can qualify as an equivalent beneficiary. As a result, in practice, the derivative benefits test will not be applicable for intermediately held entities (regardless of whether the ultimate owner is publicly listed and regardless of whether the intermediate owners have been included in the structure for commercial reasons) Therefore, we strongly recommend deleting the requirement that in case of indirect ownership, each intermediate owner is itself an equivalent beneficiary. This would be identical to the derivative benefits test as included in the LOB provision of most of the treaties of the US Finally, the Working Group suggests that the derivative benefits test should not only provide that the source country taxation will be reduced in accordance with the treaty in case of an equivalent beneficiary, but also, to the ultimate rate provided by the treaty between the country of the shareholder (not qualifying as an equivalent beneficiary) of the company and the source country, if this is higher than the rate provided for by the treaty between the country of residence of the company and the source country, but still lower than the source country s domestic rate. Alternatively, this can be implemented in the discretionary relief provision, as further explained above. B. Issues related to the PPT 1. Principal purposes test: Possible inconsistencies between the Commentary in relation to the LOB discretionary relief rule and the proposed Commentary on the PPT rule

9 General Comments: GAARs and other anti-avoidance rules 1.1. In relation to the LOB discretionary relief rule and the PPT, the Working Group considers that the combination of the LOB discretionary relief rule, the PPT rule and domestic GAAR provisions or specific anti-avoidance provisions with different tests of purpose (e.g. "dominant purpose" (Australia), "main purpose" (UK), "more than merely incidental purpose" (New Zealand)), will lead to complexity and confusion that is antithetical to the purpose of bilateral tax treaties The existence of a GAAR or other avoidance provisions is noted in paragraphs 6 and 13 of the September 16, 2104 paper 'Preventing the Granting of Treaty Benefits in Inappropriate Circumstances: Action: 6: 2014 Deliverable' as a factor suggesting that for all countries a combination of both a LOB and PPT in Treaties may not be required. We note that in paragraph 14 of the September 16, 2014 paper that a general statement could be adopted in Treaties instead, but this is stated as something to be accompanied by a LOB and/or PPT. It is suggested that at least one is needed presumably a LOB is the more likely. In our submission, this point goes further. If there is a GAAR or other anti-avoidance provision at domestic law that can counter Treaty abuse, then we submit that there is potentially no need for either a LOB or a PPT; that is, both could be unnecessary and indeed undesirable if the result is material lack of certainty. In this regard, we emphasize that taxpayers need to be able to determine with reasonable certainty, in advance of an investment decision, what their treaty position will be. In our opinion, it is not adequate, especially in the modern context of extensive cross-border investment (which we note OECD member states actively encourage in many cases), to leave taxpayers to the remedy of Competent Authority negotiation that can take years to complete and in respect of which taxpayers have no direct input The Working Group considers if there is a GAAR or other anti-avoidance provision under domestic law and it applies a different test of purpose (i.e. not "one of the principal purposes"), then countries should be encouraged where possible for there to be consistency in the purpose test in its Treaty provisions (be it the discretionary relief provision in a LOB or a PPT) with the domestic provision at issue. Such consistency would only assist in promoting certainty and compliance with both the domestic tax system and the international regime. 2. Whether some form of discretionary relief should be provided under the PPT rule 2.1. The Working Group considers there are two options here. The first is to establish a discretionary relief provision similar to that provided in the LOB (taking into account our comments made to the LOB provision), and the other is to adapt the PPT so that it only applies to situations of Treaty abuse In our opinion, the latter is to be preferred. The PPT should be better tailored only to abusive situations. This is especially the case if it arises in conjunction with a LOB. The existence of Treaty abuse should be established before the PPT can apply, not just the

10 existence of evidence that Treaty benefits were taken into account. Tax costs are a factor in business, and the choice of jurisdiction to, for instance, lend from, may have some linkage with the existence of a Treaty when that is a purpose, let alone one of the principal purposes gives rise to business risk, affects decision making, and simply leads to uncertainty. The PPT needs, we submit, to be targeted to the mischief it is countering benefits not otherwise covered by a LOB which are Treaty abusive If a LOB does not apply or if discretionary relief is granted under a LOB, there should be a presumption of no Treaty abuse, with the tax authority being required to establish abuse before a PPT could possibly apply. It is of concern that a competent authority could grant discretionary relief from the LOB, after application from a resident and the accompanying compliance costs associated with any such application, yet that resident could still be denied Treaty benefits under the PPT by the same competent authority, in relation to the same issue. The Working Group position is that a Treaty abuse threshold would ensure that the PPT targets abuse it is intended to target, not that covered already by a LOB and it would ensure that a PPT with a widely drafted purposes provision (such as "one of the principal purposes" as compared to a "dominant purpose" or "the main purpose"), is appropriately focused on the relevant mischief it is designed to counteract Abuse must also be viewed in light of a comprehensive analysis of the PPT and not a tax driven analysis as proposed under the examples provided. The use of conduit companies is not necessarily tax driven. Factors, such as the existence of Bilateral Investment Protections treaties, often outweigh tax treaties. This is particularly true upon investment into emerging markets where investors seek to safeguard their patrimonial investment before they seek efficiencies that can stem from the benefits of a tax treaty. When structuring an investment, businesses consider variables that affect the structure used to try to fend off variables such as fair and equitable treatment, protection from expropriation, freedom of transfer of interest, rule of law and political risk and others. Financial risk is also a key consideration, country credit risk and a new entity credit risk are also business drivers that affect a business' decision making analysis. Using legal mechanisms that allow that business to reduce or eliminate such variables must be given greater relevance over tax when assessing a PPT, failure to do so will surely result in abuse As a general comment, CIV and non-civ fund structures are aimed at achieving tax neutrality, i.e., granting to investors the same tax treatment that would have applied had they directly invested - and are therefore not characterized by tax avoidance purposes. Consequently, the PPT rule should simply not apply in relation to CIV and non-civ funds in light of the fact that investors would have benefitted from treaty benefits had they invested directly. In fact, in such cases there is no additional tax benefit deriving from a particular arrangement or transaction.

11 2.6. In addition to the above, the PPT rule may raise issue in relation to investments of CIV / non-civ funds made through holding entities that could deny treaty benefits, thus determining double taxation (assuming that investors are taxed on fund profits in their country of residence). Examples where discretionary relief should be granted 2.7. The following example can be made to illustrate that obtaining an undue treaty benefit is not one of the main purposes of the typical fund structures, bearing in mind (as noted) that the treaty benefit can never be considered undue if it would in any case be granted to investors had they invested directly Example 1: An investment fund established in State F sets up a subsidiary in State S that will act as holding entity for an investment in a target company resident of State T. The decision to incorporate a holding entity in State S depends on the following reasons: (i) certain investors would be obliged to additional compliance obligations in case of direct investment of the fund (implying massive reporting obligations to the fund managers in relation to each underlying investment) and therefore the holding entity serves as blocker, thus limiting compliance obligations in relation to such holding entity (that aggregates all underlying investments); (ii) the holding company may borrow money from a bank resident of State S, the loan normally being granted under the condition that the borrower is a resident of that state; (iii) specific corporate governance rules applicable in State S accommodate the needs for the investment. Under the tax convention between State F and State T, the dividend withholding tax rate is 15%. Under the tax convention between State F and State S and the tax convention between State S and State T, the dividend withholding tax rate is 5%. In making its decision to invest in State T through a holding entity in State S, the fund considered the benefit deriving from the combination of the tax convention between State F and State S and the tax convention between State S and State T; however this would not determine the application of the PPT rule. It is clear that there are prevailing non-tax reasons that the investment fund considered to incorporate the holding entity in State S without which the investment fund would have not chosen such location. Therefore, the tax benefit cannot be regarded as one of the principal purposes of the transaction for PPT purposes Example 2: An investment manager establishes a CIV in State T. The CIV expects to receive investments from several jurisdictions and will deploy its capital for making investments predominantly in State S. The tax treaty between State T and State S provides an exemption from taxation of capital gains, unlike tax treaties between the home jurisdictions of the investors in the CIV and State S. The CIV has been set up in State T on account of a combination of any of the following considerations:

12 The investment manager is located in State T and is regulated by the financial services regulator of State T. Since the CIV expects to receive investments from various jurisdictions, an appropriate and neutral jurisdiction is required to be identified in order to pool investments from such investors. Several jurisdictions were evaluated on the following parameters: (a) (b) Political stability; Geographical location; (c) Time zone for being able to efficiently trade in State S; (d) (e) (f) (g) (h) (i) (j) (k) Robustness of investor protection laws; Applicable regulatory framework; Applicable exchange control framework; Applicable corporate law framework; Ease of setup; Low setting up and ongoing operating costs; Availability of relevant qualified personnel with funds administration experience; and Applicable disclosure requirements A few jurisdictions were shortlisted as being similar / comparable based on the above parameters. Thereafter, State T was shortlisted on account of tax neutrality of the CIV and the capital gains tax exemption provided in the tax treaty between State T and State S. In that case, the PPT should not apply, as the decision to establish the pooling vehicle in a neutral jurisdiction is underpinned by various non-tax considerations, although the last mile decision of selecting State T from among comparable jurisdictions may be said to be prompted by tax considerations Rather providing additional new examples where discretionary relief should be granted and as a consequence of the limited time for comments coinciding with the holiday period, we respectfully direct your attention to the example in paragraph 27 of the public discussion draft (14 March - 9 April, 2014) and ask the OECD to reconsider it or at least to posit an example using the same basic fact pattern that should not be caught by the PPT. For

13 example, if TCo acquired shares and debt of SCo from SCo's parent in a arm's length transaction, which for example could have been part of a larger M&A transaction, and subsequently sold the debt of SCo to RCo for RCo debt on arm's length terms retaining no direct or indirect interest in the SCo debt then why should the PPT deny RCo the benefit of the R-S treaty? What if State T and State S did have a treaty, one with a lower rate of withholding on dividends from wholly-owned subsidiaries than on interest and instead of selling the loans to RCo, TCo capitalized the SCo debt. Would the PPT apply to deny the dividend rate of withholding? In both of these cases the withholding tax consequences of holding one investment versus another are relevant (as they are for any rational commercial actor) but in neither case is the result abusive or at least not necessarily so depending on the background facts and context. We encourage the OECD to develop better examples that more clearly define the strictly abusive cases that should be caught by a PPT. 3. Drafting the alternative "conduit-ppt rule" 3.1. Respectfully, conduit financings, for example those using accommodating banks, that are not caught by a PPT with an explicit abuse threshold or by the beneficial ownership test in the dividend article should be addressed outside tax treaties, in domestic legislation. We point out that Canada recently strengthened its own laws regarding back-to-back financings. It is not the role of tax treaties to prohibit every tax advantageous arrangement that governments wish to curtail, especially when the tax advantage is a form of treaty withholding tax rate arbitrage that governments have facilitated by entering into treaties with differing rates. Trying to eliminate conduit arrangements that do not fail an abuse or beneficial ownership test will mean either tightening the PPT to the point that other, non-offensive arrangements are caught resulting in double taxation or will impose a test so open-ended for authorities to apply after the fact as they see fit that unacceptable levels of uncertainty will result at significant cost to business and to governments.