Characterisation and Taxation of Cross-Border Pipelines

Transcription

1 Characterisation and Taxation of Cross-Border Pipelines

2 Acknowledgements Foreword List of Abbreviations ix 1: Introduction Background to the research questions Research questions The importance of the research questions 5 Approach (analytical framework) and research methodology Outline of the research Contribution Chapter 2: Characterisation Introduction Conflict of characterisation - In general International Fiscal Association stresses the uncertainty of pipeline taxation 2.3. Conflict of characterisation - Pipelines Characterisation of pipelines - Lack of a uniform international approach Reasons for and consequences of lack of a uniform approach Is characterisation of cross-border pipeline a problem in real life? Conclusion 24 Chapter 3: The Concept of International Law and Tax Law Introduction What is international law? 29 Is there an international tax law? 3.3. Fundamental principles in international 34 Fundamental principles in international tax law Resident vs non-resident Source-based taxation 36

3 Conflicts in connection factors Tax treaties The purposes of tax treaties 38 Taxes and territorial areas covered in the tax treaties The importance of the OECD Model and its Commentaries 41 Are the Commentaries to the OECD Model legally binding? 43 Allocation of income - The basic principle concept Other fundamental principles in international tax law Jurisdiction to prescribe and enforce 47 Jurisdiction to tax and to conclude tax treaties 48 Jurisdiction to tax offshore Sovereignty Sovereignty over natural resources such as oil and gas Tax sovereignty and its limitations Sources of international law 57 Sources of international tax law Customary international law Customary international tax law Hierarchical ranking Hierarchical ranking - International law vs domestic law Hierarchical ranking among treaties Hierarchical ranking - Treaties vs customary international law 3.9. Interpretation of treaties under international law Interpretation tax treaties Use of the OECD Model Commentaries to interpret tax treaties Dispute settlement in international law 81 Dispute settlement under pipeline agreements Dispute settlement according to tax treaties Mutual agreement procedure (MAP) Arbitration 87 An of the Energy Charter's Model Agreements related to taxation An analysis of some concluded pipeline agreements related to taxation

4 The interstate pipeline agreement between Kazakhstan and Azerbaijan on the Trans-Caspian Aktau-Baku transport system The interstate pipeline agreement between Canada and the United States on the Northern Natural Gas Pipeline 92 The interstate pipeline agreement between Turkey and Azerbaijan on delivery of Azerbaijan natural gas to Turkey 93 Host government pipeline agreement between Azerbaijan and the pipeline operators Conclusion 94 Chapter 4: Hierarchical Ranking in International Tax Law Introduction Tax treaties vs other treaties Tax treaties vs the General Agreement on Trade in Services (GATS) Tax treaties vs investment treaties, e.g. the Energy Charter Treaty Tax treaties vs the Lisbon Treaty Tax treaties vs pipeline treaties Tax treaties vs pipeline contracts Tax treaties vs domestic law The individual articles in the OECD Model vs other articles in the treaty 4.4. The hierarchical ranking of the OECD Model Commentaries vs other sources The hierarchical ranking of the OECD Model Commentaries vs pipeline like a production-sharing contract 4.5. Conclusion Chapter 5: Characterisation of a Cross-Border Pipeline as Preparatory or Auxiliary Character, Immovable Property, Passive Income or as Other Income 5.1. Introduction 5.2. Art. 5(4)-The negative list international Art. 5(4) Preparatory or auxiliary character - Art.

5 5.5. Distinguishing between core business activity and activity of auxiliary and preparatory character 5.6. Is transportation of oil or gas in a pipeline of auxiliary or preparatory character in accordance Art. 5(4)? Is transportation of oil and gas in a pipeline storage of goods -Art. 5(4)(a)? Is transportation of oil and gas in a pipeline delivery Art. 5(4)(a)? Is transportation of oil and gas in a pipeline considered as any other activity of a preparatory or auxiliary character - Art. 5(4)(e)? Is transportation of oil and gas in a pipeline a combination of delivery of goods and of a preparatory or auxiliary character -Art. 5(4)(f)? Advantages and disadvantages if a pipeline is considered as of a preparatory or auxiliary character 5.8. Art. 6 - Immovable property Lack of a common international approach - Art Can a pipeline be characterised as immovable property? 134 Can immovable property be characterised as of a preparatory or auxiliary character? Advantages and disadvantages if a pipeline is considered as immovable property When is income from a pipeline characterised as passive income? 137 Advantages and disadvantages if income from a pipeline is characterised as passive income Can income from cross-border pipelines be characterised as other income in accordance with Art. of the OECD Model? Conclusion 140 Chapter 6: Characterisation of Cross-Border Pipelines as PE Introduction Oil or gas pipelines or part of such 142 Can a cross-border pipeline establish a PE both onshore and offshore? 142

6 One single pipeline - Several PEs in different countries A building site or construction or installation 5(3) Removal of pipelines Does a cross-border pipeline constitute a PE according to the basic rule in Art. 5(1) of the OECD Model? Lack of a common international approach - Art. 5( Relevant tests related to the basic rule in Art. 5( The "positive list" Art. 5(2) The "place of business test" The "location test" The "factual use test" The "right of use test" The "permanence test" The "four aspects of business test" 158 The business activity must be considered as a business activity under the domestic tax law The activity must be characterised as business activity under the business clause of the relevant tax treaty The business activity must be considered as a core business activity The business activity must have a certain connection to the place of business "At the disposal of test" Minimum threshold for establishing a PE The German pipeline cases The first and second pipeline cases - No PE was created The third German pipeline case - A PE was created 6.6. The West African Gas Pipeline - A PE was created The special pipeline provision in some tax treaties A pipeline constitutes a PE according to the Norway-UK tax treaty 6.8. Pipelines compared with net electricity railways and automatic equipment Do electric cables constitute PEs? Do railways constitute PEs? Does automatic equipment constitute a PE?

7 6.9. Use of substantial equipment or high technology equipment Other elements that might be of relevance Does exploration constitute a PE? Does transit in pipelines over the exclusive economic zone and on the continental shelf establish tax liability? Country examples - PE Australia Canada Germany Norway The United Kingdom The OECD's proposals for additions and changes to the Commentaries to Art. 5(1) Advantages and disadvantages if a cross-border pipeline is considered as a PE Conclusion 198 Chapter 7: Allocation of Income from Pipelines for the Different Characterisations Introduction Allocation of income onshore or offshore Allocation of income and expenses if the pipeline is characterised as of a preparatory or auxiliary 5(4) Allocation of income if the pipeline is characterised as immovable property - Art passive 5(1) Allocation of income from cross-border pipelines if the income is characterised as other income - Art Allocation of income and expenses if the pipeline is characterised as a PE, Art. 7 - In general 205 Allocation of income from a PE as from July The "functionally separate entity approach" First step: Hypothesising the PE as a separate and independent enterprise "Functional and factual analyses" Attribution of assets Attribution of risks 211

8 Attribution of "free" capital Recognition of dealings Second step: Determining the profit of the hypothesised separate and independent enterprise Allocation of expenses inclusive of overheads from 213 Allocation of capital gain Allocation of income and expenses from pipelines when characterised as a PE Allocation of income from a pipeline in Pennsylvania Allocation of income according to the WAGP agreement Allocation of income according to the Energy Charter's Model Agreements Allocation of income according to the pipeline agreement between France and Norway Allocation of income according to the pipeline agreement between Belgium and Norway income The United Kingdom Transfer pricing Tax risk management Conclusion 226 Chapter 8: Conclusion and Recommendations Conclusion and de lege lata: The present situation De lege ferenda: Recommendations 232 References