Nexia International Tax Conference Geneva 31 May to 2 June 2006 Rajesh Sharma & Inez Anderson

Disclaimer This seminar is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said.

Double Taxation (Domestic) Prospect of double taxation by residence or situs of assets. At domestic level, double taxation can be avoided by: Remittance basis Unilateral relief Exemption method Credit method Attitude to double taxation agreements: Low tax countries – (BVI, Channel Islands) Territorial basis of taxation (Hong Kong) Lower tax countries (Cyprus, Ireland) Higher taxed countries

Purpose of double taxation treaties Clarification of taxing rights of each State Avoidance of double taxation Prevention of fiscal evasion DTAs’ cover: Income and capital gains tax Inheritance/Estate taxes Social security contributions

Arrangement of the OECD Model Treaty A: Clarification Article 1–Personal Scope Article 2–Taxes covered Article 3–General definitions Article 4–Residence Article 5–Permanent establishment Article 29–Entry into force Article 30–Termination

Arrangement of OECD Model Treaty (cont.) B: Avoidance of double taxation Article 6–Income from Immovable Property Article 7–Business profits Article 8–Shipping, Inland Waterways and Air Transport Articles 10, 11 & 12–Dividend, interest and royalties Article 13–Capital Gains Article 14–Independent Personal Services Article 15–Income from Employment Article 16–Directors’ fees Article 17–Artistes and sportsmen Article 18–Pensions Article 21–Other income Article 23–Methods for elimination of Double Taxation

Arrangement of OECD Model Treaty (cont.) C: Articles to prevent tax avoidance/evasion Article 9–Associated Enterprises Article 26–Exchange of information Article 24–Non-discrimination Article 25–Mutual Agreement Procedure Article 28–Territorial Extension

Modern Trends to protect tax base Limitation of benefits article Anti-conduit structures Exchange of information – EU Savings Directive Anti-money laundering legislation Task force on tax evasion USA/UK/Canada/Australia

Particular points for consideration Article 3 Definition of “person”: includes an individual, a company and any other body of persons What does “body of persons” mean? transparent entities such as partnerships included? however semi-transparent entities may be included eg. in France a Groupment d’Interet Economique (GIE) is treated as a person Trusts are not included

Permanent Establishment Article 5 Conditions under which taxation can take place in second country. No PE, no taxation. If PE, attribution of income derived by PE in the second state. 2 types of PE = “fixed place of business = agency Fixed place of business = place of management = branch, office, factory, workshop, etc. = mine, oil or gas well, etc. = building site or construction or installation project lasting > 12 months. Dependent Agent Whether the principal has an agent in the second state and whether that agent exercises the authority to conclude contracts on behalf its principal, except = is not an independent agent acting in the ordinary course of business = acts on behalf of foreign principal = has authority to conclude contracts = habitually exercises such authority

Business profits Article 7 Prerequisite is that there should be a permanent establishment in the other state. If no PE, no taxation. If there is a PE, amount taxable is the amount of profits attributable to the PE.

Dividends, Interest and Royalties Article 10, 11 and 12 Limit the tax on the dividend, interest or royalty. Absent treaty, domestic rules should apply. Concept of “beneficial owner”/limitation of benefits. Capital distributions. Multilateral treaties such as the EU Parent/Subsidiary Directive To relieve rather than impose taxes. Anti-avoidance provisions for “excessive” payments as constructive dividends. Royalties encompass patents, copyrights, film rights, trademarks, designs, models, etc., licensing activities, business profits article in Article 7 eg. software packages franchise arrangements. Lease rentals.

Capital Gains Article 13 Capital gains derived from real estate and real estate owing companies are generally taxed in the state that the real estate is situated. Other gains derived from movable property generally taxed in the state of residence, unless the gains relate to a permanent establishment situated within other state. Anti-avoidance that give the state that person was previously resident to have the taxing rights for a period of five years.

Income from Employment Article 15 General principle is that income from employment may be taxed in the country in which work carried out. Exception may apply if work carried out in a country in which employee is not treaty resident. Specific rules relating to crew on a ship or aircraft. Taxation of stock options fall under this Article.

Income from Employment (cont.) Article 15 Conditions which need to be satisfied for exception to apply : in the other country for no more than 183 days in twelve month period and remuneration is paid by, or on behalf of, an employee not resident in the other country and remuneration is not borne by a permanent establishment the employer has in the other country Meaning of ‘employer’ not defined but usually the company bearing responsibility and risk and benefiting from the work.

Artistes and Sportsmen Article 17 Level of income is generally high and therefore taxing authority cannot rely on the normal residence rules to collect their “fair share” of the taxes. Income derived from “personal activities, as such” should be taxed in the state the income is derived. “As such” would cover income derived from non- performing activities such as merchandising and endorsement contracts. Taxing rights are extended to income paid direct to the individuals, but also income that is paid to companies or other entities.

General points Treaty law generally overrides domestic legislation. But note: IRC S7852(d) “... for the purposes of determining the relationship between a provision of a treaty and a law of the US affecting revenue, whether the treaty or the law shall have preferential status by reason of it being a treaty or law. Nethelands/US – limitation of benefits article.

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