1 Seminar Panel I: Race to the bottom? The Taxation of Mobile Activities INCOME FROM FINANCIAL SERVICES Lucie Vorlíčková, LL.M.Diane Ring LeitnerLeitner, Czech Republic Boston College Law School, USA

I. What is a “mobile financial service”? 1998 OECD Report “Harmful Tax Competition: An Emerging Global Issue” –Banking and insurance –Fund management 1999 Report Code of Conduct Group OECD identified several harmful tax regimes (2000 Report “Towards Global Tax Co-operation) 2

I. What is a “mobile financial service”? (Offshore) banking services to HNWI (deposits, asset management, trust services, tax driven structures) Specific banking services (Securitization, Trading, REPO and similar (tax driven) transactions) Investment Funds and Fund management Insurance services (i.e. life insurance services) Holding activities Group financing 3

4 II. Example 1: Mobile Banking Services Bank Asset Management (“Booking State“) Clients Travelling Employees or Freelancers Marketing Banking secrecy No/or few bilateral treaties on EoI (e.g. Singapore) Special tax regimes for trusts and private foundations Post Marketing Services Fee

General principles (still) apply to specific business activity Permanent Establishment Concept –No tax liability as long as there is no PE –Representative office does not create a PE (preparatory or auxiliary activities) Agency PE, if, –dependent agents –right to conclude contracts (“factual”/HQ decision) 5 III. How is such income sourced to a particular jurisdiction?

Broadening of the PE concept – Service PE: –Creation of a permanent establishment based on the mere rendering of services in the other State for a certain period of time (OECD Comm Art. 5) 6 III. How is such income sourced to a particular jurisdiction? (Cont.)

7 High Net Worth Individual

HNWI uses offshore banking services –Wealth management subject to foreign law: –No taxation on the basis of residence in the “booking state” –Income from capital may be subject to foreign WHT HNWI remains subject to tax in his Residence State –Portfolio income (vs. financial trading) –To avoid direct attribution of income, the assets may be held via a foundation or trust 8 III. How is such income sourced to a particular jurisdiction? (Cont.)

9 II. Example 2 : Investment Funds Fund management Investment Fund Investor No or low tax rates e.g. IRL, LUX Lack of transparency UK Hedge Funds Dividends Interest Capital gains Fee Source Country of Income Host’s Country Investor’s Country of Residence

Investment fund profits subject to host’s country’s and investor’s country’s national tax law –non-transparent in Host Country –special investment fund legislation (e.g. UK, Ireland) –transparent: direct allocation to the Investor’s Residence State –funds income may be also taxed in source country of income –treaty network of Fund’s Host State important –2009 OECD Report regarding Application of DTC’s to CIV’s 10 III. How is such income sourced to a particular jurisdiction? (Cont.)

Management fees and/or carried interest (share in the fund) –Structure of fund decisive (trust, partnership, corp, etc.) –Income attribution under general rules to separate legal entity –Substance over form/TP principle 11 III. How is such income sourced to a particular jurisdiction? (Cont.)

III. How is such income sourced in terms of connecting it to a particular jurisdiction? (cont) 12 Management Corp. “advisor” Investment Fund Management Corp. “CIV” Fee Investment Proposals Investment Decisions Profit Share

Direct taxation depends on national tax law Not clear on OECD level, however, kind of agreement how NOT to tax – low or no tax AND: –Negotiable tax rate or tax base –Ring fencing –Lack of transparency –Lack of exchange of information –Existence of secrecy provisions EU Code of Conduct Group listed criteria for the evaluation of harmful tax measures 13 IV. International agreement on how such income should be taxed?

OECD recommendations to counter harmful tax practices: –CFC rules –Foreign Investment Fund Rules –Thin Capitalization Rules –Deny deductions, exemptions, tax credits and other allowances related to transactions with tax havens –Impose withholding taxes –Restrictions on the application of participation exemption rules –General Anti Abuse Rules –Increased international cooperation between tax administrations 14

V. Summary No specific allocation rules: General principles apply –PE Concept o active income: Source State (capital import neutrality) –Income from capital will further be shared between Source and Residence State o passive income: Residence State (capital export neutrality) –Services rendered by separate legal entity are attributed to such unless substance over form/TP rules apply 15

V. Summary (Steps already taken) Countering harmful tax practices at OECD level: –All 30 member countries agreed to implement Art. 26 Standard –Elimination of banking secrecies of several OECD-Member States with regard to non-resident tax payers –Most of the initially identified harmful tax regimes lost this status EU Savings directive: –(Automatic) Information exchange on interest income –Withholding tax (AUT, LUX, BEL) –Draft directive to include trusts and foundations Draft EU Directive on administrative cooperation in the field of taxation: banking secrecy is no argument for refusing exchange of information within the EU 16

V. Summary (Recent developments) OECD: Tax Collectors Worldwide to Co-operate in Revenue- Raising to Offset Fiscal Deficits (May 29, 2009) –Engaging with High Net Worth Individuals on Tax Compliance –Building Transparent Tax Compliance by Banks US/UK: Hole blown in Bank Secrecy –Switzerland agreed to implement Standard Art. 26 OECD –LIE signed Tax Information Exchange Agreement and LIE Disclosure Facility EU Proposed directive on Alternative Investment Fund Managers 17

VI. What Comes Next ? Introduction of the Service PE into tax treaties –Attribution of Profits to a PE (Art. 7 OECD) – AOA –Intensified exchange of information proceedings (Art. 26 OECD) Introduction of “Swiss Compensation – Tax”? Foreign investment funds to be deemed “transparent”: –All income is directly allocated to the investor (regardless of a distribution) 18

Final Thoughts 19