Archive for OECD

Australia’s G20 Presidency To Target Transnational Enterprise Profit Shifting

A spokeswoman for Australia’s Assistant Treasurer Arthur Sinodinos has indicated that tax-base erosion and profit shifting will be a key focus of the G20 during Australia’s Presidency.

In this connection, speaking before he left for this week’s Davos conference, Australian Prime Minister Tony Abbott said “We want to … try to ensure we have less leaky national taxation systems”.

Commentators have variously encouraged the Prime Minister to push for the publication of taxable incomes of transnational companies by local tax authorities, seek a global solution to the perceived problem and to work within the OECD tax treaty framework to Read More

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United States CFC Rules: What Is A United States Shareholder?

Like most subparts in the United States tax code (the CFC rules are a sub-part to sub-chapter N in the code), the CFC rules have specific concepts and definitions that apply only to this particular sub-part. The most important definition is that of a “US shareholder.” In addition, like most sections in the code, the CFC rules require us to reference multiple sections to get a complete definition.

Let’s start with section 957, which states:

For purposes of this subpart, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of— Read More

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The United States Controlled Foreign Corporation (CFC Rules): An Introduction

Commentators and practitioners often refer to the United States controlled foreign corporation statute (“CFC”) as extremely complex and Byzantine in their construction and application. I would agree with this assessment to a point; if someone is simply trying to learn the pure mechanics of the statute then, yes, it is very difficult to fathom. However, when one looks at the rules after understanding the underlying policy for their implementation and overall effect, the statutory scheme becomes easier to comprehend. So, let’s begin with an explanation of why the United States (and other developed, OECD countries) put these types of rules into place.

To begin we will need to know a few definitions from section 7701. A domestic corporation is Read More

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OECD v. Tax Havens Part V: Intra-Company Transfers

The Internal Revenue Service (nor any other taxing authority) does not like intra-company transfers. This is a prime reason for section 482 of the US tax code, which reads:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the Read More

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The OECD v. Tax Havens: Part IV – The Digital Economy

The current tax rules underpinning practically every tax code around the globe are derived from a “bricks and mortar” or manufacturing based economy. What this means is the underlying concepts were developed when all world economies were based on building physical products that were bought and sold (think industrial revolution). For example, the tax treaty phrase “permanent establishment” was actually developed by League of Nation’s negotiators during their preliminary discussions to develop a working tax treaty framework. Compare this to today’s digital economy where “products” are actually multiple lines of computer code that exist in cyber-space (or a trademark or patented item) or where a “store front” (the old “permanent establishment”) is in fact a web site located halfway around the globe on a server in a tax haven. This mismatch between the underlying concepts of the old Read More

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The OECD v. Tax Havens: Part III – New Concerns

On July 13, the OECD issued a new paper titled, Action Plan on Base Erosion and Profit Shifting. The purpose of this paper was to outline the OECD’s new round of concerns regarding tax havens and their use in international tax planning. It is important to understand first what is behind the issuing of this new report:

Over time, the current rules have also revealed weaknesses that create opportunities for BEPS. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation.

One of the central purposes of the OECD’s original tax treaty was to divide taxing rights and Read More

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The OECD v. Tax Havens, Part II: Initial Recommendations

As discussed in Part I, “What Is A Tax Haven“, the OECD originally went after tax havens in a 1998 document titled, Harmful Tax Competition, An Emerging Global Issue. They defined a tax haven as a low or no tax jurisdiction that employs secrecy and does not exchange information with other taxing officials. To counter-act the effect of havens, the OECD proposed a number of options. There are several that stand out.

Recommendation concerning Controlled Foreign Corporations (CFC) or equivalent rules: that countries that do not have such rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices. Read More

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OECD vs. Tax Havens, Part I: What Is A Tax Haven?

Recently, the OECD ramped up its conflict with tax havens by issuing a report titled, Action Plan on Base Erosion and Profit Sharing. Obviously, the purpose of this report is to provide a set of options that OECD countries can enact to counter the negative impact of tax base erosion, or the shifting of tax revenue away from developed/higher tax countries to lower tax/tax havens. But before I get to the report, a bit of background is necessary to provide some context to the conflict.

First, how did tax havens develop? As I noted in a post I wrote on my economic blog about the Cyprus situation:

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OECD Model Treaty Post Series – Business Profits

For the last few weeks, I’ve been talking about the OECD Model Treaty and how it deals with permanent establishments. Today, we’ll explain why all of this talk has been so important, as we’ll discuss the idea of business profits, and how the treaty deals with them. The following italicized paragraphs are from section 7 of the OECD Treaty dealing with business profits:

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of Read More

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OECD Model Treaty Post Series – Permanent Establishment & Agents, Part II

Yesterday we looked at dependent agents and their ability on the treaty to create a permanent establishment for an enterprise. Today I’ll be looking at independent agents, which do not lead to the determination of a permanent establishment for tax purposes and hence do not create a tax presence.

The commentaries provide this general definition to begin the discussion:

37. A person will come within the scope of paragraph 6, i.e. he will not constitute a permanent establishment of the enterprise on whose behalf he acts only if

a) he is independent of the enterprise both legally and economically, and Read More

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OECD Model Treaty Post Series – Agents – Part I

The permanent establishment section in the OECD Model Tax Treaty is a remarkably complete section; it anticipates the work-arounds that most attorney’s would consider to avoid PE status. Case in point: the agent rules.

Remember that a permanent establishment is “a fixed place of business through which the business of an enterprise is wholly or partly carried out. In seeing that definition, an attorney would start to think,” what if, instead of a bricks and mortar establishment, we contract with a person?” Well, the treaty has that covered as well.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an Read More

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OECD Model Treaty Series; Permanent Establishment Exceptions

Not only does the OCED model treaty provide an in-depth explanation of what a PE is, there is also a section that outlines what a PE isn’t Here is the section in its entirety:

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; Read More

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