OECD BEPS ACTION 6. Prevention of Treaty Abuse Case Study

Transcription

1 OECD BEPS ACTION 6 Prevention of Treaty Abuse Case Study

2 TREATY ENTITLEMENT Country A Co. A Treaty Entitlement depends upon the following: Resident of one of the State Income recipient Person as defined in Treaty India Income Co. B Under BEPS, Not anymore New rules on Treaty Entitlement: [LOB+PPT rules] Qualified Person [all income from Source State] Qualified Activities [an item of income] Residuary [Equivalent Benefit] Refer to pg. 23, 25, 26 of PDF attachment [Final Report]

3 Summary of the BEPS Anti-treaty abuse rules Proposal Conditions for treaty benefits Exceptions Limitation on benefits (LOB) Art. 22 US TT Principle Purpose Test (PPT) 3 rd Country PE Test The resident person must Be qualified person in relation to R Co.; OR Pass an active trade or business test in R Co.; OR Be more than 95% owned by 7 or fewer equivalent beneficiaries in other countries and pass a base erosion test ( derivative benefits rule ) Obtaining treaty benefits must not be one of the main purposes of the arrangement or transaction For income earned via a 3 rd country PE, the total tax rate in the residence and PE countries must be more than 60% of the residence country s general tax rate Obtaining treaty benefits was not one of the principle purpose for establishing or operating the person (discretionary powers) Granting the benefit would be in accordance with the object and purpose of the relevant provisions of the treaty (discretionary powers) For royalties: IP was developed through PE For others: PE passes the active trade or business test in the PE country

4 LOB clause Concept Qualified Person Active Trade or Business Test Summary Type A Type B Type C Resident individuals, government entities, charities and pension funds (a, b, d) R Co. listed on RSE and primarily traded / managed in R State (c(i)) R Co. Subsidiary (50%) of qualified listed company (c(ii)) R Co. and satisfying ownership and base erosion test (e) The resident is engaged in active conduct of trade or business in R Co. (making or managing investments is generally Income is unconnected with or incidental to that trade or business and R Co. activities are substantial relative to S Co. activities of the resident person/affiliates N

5 DIAGRAMMATIC LOB A Co (List Co) Listed in R State or POM in R State Listed requirements: Principle shares; and disproportionate shares (such as differential voting rights, Preference Shares **) Will below diagram change the answer: Income B Co. (Op Co) Income C Co (List Co) India Refer to pg. 74, 75 India D Co. (Op Co)

6 DIAGRAMMATIC LOB A Co (List Co) 50 % Listed in R State or POM in R State Subsi to Listed requirements 50% of : Principle shares; and disproportionate shares (such as differential voting rights, Preference Shares **) B Co. (Hold Co) Each Intermediary to be Resident in or India - Optional India Income C Co. (Op Co)

7 DIAGRAMMATIC LOB BASE EROSION A Co (Listed Co) 50 % Entity (non- Individual) Same Dedn 50% to non [Resident & Listed] Ownership requirements 50% of : Principle shares; and disproportionate shares (such as differential voting rights, Preference Shares **) Each Intermediary to be Resident in Only Optional India Income C Co. (Op Co) Base erosion: excludes: Tax Deduction claimed but income subject to full taxation Arms length payment Depreciation and amortization

8 DIAGRAMMATIC LOB - ATB A Co (Op Co) Active Business in R State Active conduct of business Other than business of making or managing investments for Residents own account Income must be derived in connection with or incidental to that business Treaty Entitlement towards that item of income India Income (activity nexus) B Co. (Op Co) Income derived from business activity in S State: If business activity in R State substantial to Business activity in S State Income derived from AE: same as above Qualify if engages in de minimis connected business activities

9 DIAGRAMMATIC LOB - ATB ATB in S State ATB in R State A Co (Op Co) A Co (Hold Co) A Co (Hold Co) A1 (Op Co) Income (activity nexus) B Co. (Op Co) Income B Co. (Op Co) (AE) Income B Co. (Op Co) India India India E.g. 7 and E.g. 8

10 DIAGRAMMATIC LOB EQVI BENEFITS /P A Co (Listed Co) EQVI Intermediary also equivalent beneficiaries (not optional) Country P Country S 95 % B Co Dedn <50% to non EQVI EQVI: under -S DTAA R + Listed Company of Other State; and Dividend, FTS, Royalty tax rate per item of income under R-S DTAA is at least as low as the rate under P- S DTAA ATB for an item of income and not for others cannot satisfy this item. Income C Co. (Op Co) Refer to pg. 79

11 PRINCIPLE PURPOSE TEST The term benefit includes all limitation in the hands of the Source Country. Can deny entitlement under general rule, even if LOB is satisfied Interpreted along with the Preamble and Object of DTAA Group transactions or inter-linked transactions Eg: Back to back loans, where no DTAA available directly Transfer of right to receive dividends, where no DTAA available directly (usufruct) Manufacturing plant build in Country S where beneficial tax rates availed With increased concessional tax rate, Company increased its shareholding.

12 DIAGRAMMATIC LOB - ATB Country T T Co (Listed) R Co maintains centralized cash management system and is responsible for disbursing or receiving cash payments. Loan USD 10 5% R Co (Op Co) Treasury Function for Group ATB in S State Whether treasury functions a commercial function? Loan USD % S Co (Op Co) Country S

13 CASE STUDY 1 Dividend #1 Dividend #2 Dividend #3 A. Co (Listed) B Co. (Hold Co) C Co (Hold Co) D Co. (Op Co) General Assumption Each entity is resident in its respective country for: Purpose of domestic law; and DTAA. Subsidiary companies are WOS of A Co, directly and indirectly. Questions: 1)Treaty A-B? 2)Treaty B-C? 3)Treaty C-D? Guidelines: To satisfy LOB test (apart from PPT) A] 1) Listed; 2) Subsidiary of listed; 3) Ownership & Base Erosion; B] ATB; C] Derivative Benefit Test

14 CASE STUDY 1 Dividend #1 Dividend #2 Dividend #3 A. Co (Listed) B Co. (Hold Co) C Co (Hold Co) A-B DTAA: 1)LOB: Listed company; But principle class of shares and disproportionate class of shares to be listed; Regularly traded on Exchange; Primarily traded in Country A; or Primary Place of Management and Control in Country A PPT test to be satisfied D Co. (Op Co)

15 CASE STUDY 1 Dividend #1 Dividend #2 Dividend #3 A. Co (Listed) B Co. (Hold Co) C Co (Hold Co) D Co. (Op Co) B-C DTAA: 1.LOB Qualified Person Publicly listed No Subsidiary of listed: Yes; But not qualified person under B-C DTAA Erosion Test: No (Needs A Co to be resident of Country B) ATB No (Holding co.) Derivative Benefits A Co need to be qualified person under A-C DTAA Dividend WHT (A-C TT) = or < than Dividend WHT (B-C TT) Discretionary grant depends 1.PPT fact specific

16 CASE STUDY 1 Dividend #1 Dividend #2 Dividend #3 A. Co (Listed) B Co. (Hold Co) C Co (Hold Co) D Co. (Op Co) C-D DTAA: 1.LOB Qualified Person Publicly listed No Subsidiary of listed: No; Indirect subsidiary not allowed Erosion Test: No ATB No (Holding co.) Derivative Benefits A Co or B Co; A Co need to be qualified person under A-D DTAA Intermediate B Co. need to be equivalent beneficiary (Opt.) Dividend WHT (A-D TT) = or < than Dividend WHT (C-D TT) Discretionary grant depends 1.PPT fact specific

17 CASE STUDY 2 Parent Co. Interest #2 Facts: - Fin Co interposed between Par Co and Sub Co. Country T Fin Co. -Less favorable TT between Par Co and Sub Co. -Minimal profits in Fin Co. Country S Whether TT apply? Sub Co. Interest #1 -Par Co Fin Co -Fin Co - Sub Co

18 CASE STUDY 2 Country T Parent Co. Fin Co. Interest #2 Fin Co LOB: No qualified person No derivative benefits test No ATB test PPT - Fails Country S Sub Co. Interest #1

19 CASE STUDY 3 Parent Co. Royalties#2 LOB test: ATB might (if IP Co. active) and Not if PE active in Country P Purpose Test Country T IP Co. 3 rd PE Test -PE Test: Taxes in PE and R State > 60% of corp. tax rate in R State Country P -IP not developed in Branch PE Country S can tax max. 15% Country S Royalties#1 Sub Co.

20 CASE STUDY 4 A Co (Op Co) Worldwide Sale of Flowers Income received from F Co G Co / H Co / I Co Country S F Co (Hold Co) Nature of Income: Business Income Royalties Dividend Interest Distribution of Flowers G Co (Op Co) H Co (Op Co) I Co (Op Co) R-S TT Entitlement? Marketing Lawn Care Fish Distribute from R to S

21 CASE STUDY 5 - ATB Dividend A Co (List Co) B Co. (Op Co) When Dividend in connection with or incidental to active business by A Co? Activities of B Co. also to be taken into account. Activity in to be Substantive in relation to Activities carried on by itself or AE in Country S Country S B Co. (Op Co)

22 CASE STUDY 6 Country A Country B A Co (Listed Co) B Co (Hold Co) Benefit obtained: No PE C CO: Purchased from D Co. 2 and sells to D Co. 3 Bears financial and commercial risk Country C Country D C Co (P) D Co 1 (LRD) D Co 2 (CM)

23 CASE STUDY 6 Country A Country B Country C Country D D Co 1 (LRD) A Co (Listed Co) B Co (Hold Co) C Co (P) D Co 2 (CM) C Co: LOB: Listed: No Subsi of Listed : No Ownership erosion: No ATB: Documentation set-up, ATB may be EQVI: No PPT: Main purpose:?? If Branch of C Co in E State carries on activity, ABT not met in C State BUT to check tax paid in C State and E State with Tax rate in C State Still fails LOB in C Co and therefore not entitled

24 THANK YOU