Lecture with actual examples on tax treaty interpretation

1. Case Studies in Tax Treaty Interpretation
May 23rd 2012, The Fullerton Hotel, Singapore

2. Our Vision Our Commitment
Southeast Asia’s first full service We sell results, not time.
international law firm with a major We believe that you don’t want our time.
specialization in taxation.
We believe you want results.
That’s our value. That’s how we bill.
May 23rd 2012 2

3. At a Glance
Laos
4 countries
40+ staff:
 4 partners
Cambodia  5 directors
 32 professional advisors
Vietnam
Specializing in:
 Tax Advisory
 Legal Advisory
 Government Relations
Singapore
 Compliance and Accounting
Partners
 Edwin Van der Bruggen was formerly with Loyens &  Christopher Muessel was with Baker & McKenzie
Loeff and a partner at DFDL, and is an academic, Vietnam, a partner at Duane Morris LLP, Watson
author, and government/World Bank adviser. Farley & Williams and Rajah & Tann and advised the
Cambodian Council of Ministers.
 Jean Loi is a CPA and was a tax partner with  Potim Yun was formerly a partner with Gordon &
PricewaterhouseCoopers in Southeast Asia, RSM Associates and Deputy Head of the Corporate &
Chio Lim in Singapore and DFDL. Commercial Practice Group at DFDL.
May 23rd 2012 3

4. Our Practice Areas
Tax Advisory Government Relations
 Corporate tax planning strategies In a region where regulations and legal precedents are
 Tax efficient market entry advisory services not always clear, local knowledge and relationships are
 Real estate tax structuring the key to getting results. Our advisers’ excellent and
 Oil, gas and mining tax services long-standing working relationships with government
 Customs and excise advisory authorities throughout the region enable us to advise
 Mergers & acquisitions and tax due diligence you on relationships with government agencies and
 International and regional tax optimization provide strategic guidance on maneuvering the
 Transfer pricing advisory and benchmarking intricacies of a country’s regulatory and legislative
 Taxation of banks, insurance & financial services framework.
 Controversy and litigation in tax matters
Compliance & Accounting
Legal Advisory
 Expatriate employee tax services
 Cross-border mergers and business acquisitions  Payroll administration
 Legal structuring of real estate projects  Corporate tax compliance
 Corporate & commercial law  Accounting services
 Investment licensing and market entry
 Project finance
 Compliance (including FCPA)
 Trade (treaty analysis and anti-dumping)
May 23rd 2012 4

5. Our Advisers’ Experience with Major Projects
Collectively our advisers have extensive experience across Southeast Asia, including Our advisers have
in Cambodia, Vietnam, Singapore, Laos, Indonesia, Thailand and the Philippines.
Some of our major projects include: extensive experience
 Representing a US$20M listed property fund with the structuring, acquisition, with taxation, M&A,
and divesting of properties in Vietnam, Cambodia and Singapore. corporate finance and
 Tax structuring of a new supply chain covering Thailand, Singapore, Vietnam, real estate.
China and the Philippines.
 Regional tax structuring advice for a large petrochemical joint venture project
in Vietnam, including foreign contractor taxes, transfer pricing issues and the
optimal method for profit repatriation.
 Structuring of a US$2B complex government-leased island resort in Cambodia,
including airport, marinas, hotels and infrastructure.
 Advising on customs duty valuation and defense of a manufacturer of tobacco
products.
 Representing a multinational telecom operator with an asset transfer/merger
in Cambodia and Singapore.
 Representing an international enterprise in the acquisition of a majority stake
in a Cambodian telecom operator.
 Conducting transfer pricing analysis, risk assessment, documentation and
defense for a multinational telecommunications operator in Indonesia.
 Providing tax structuring advice on infrastructure and villa leases for a US$1.2B
resort project in Vietnam by a private equity fund.
 Providing advice on bond issues for Asian companies under a US$12B
Government bond program.
May 23rd 2012 5

6. Partner
Edwin Van Der Bruggen
Formerly with Loyens & Loeff and a partner at DFDL, Edwin has 20 years of
experience as a tax lawyer, academic, author and government adviser. He has
worked 15 years in Southeast Asia. Edwin has assisted with structuring some
of the largest acquisitions, investments and property deals in the region,
including the US$4.2B petrochemical plant of SCG Chemical in Vietnam, the
US$425M Mobitel acquisition in Singapore and Cambodia, and the US$275M
listed property fund JSM Indochina.
He has taught international tax law at six different universities in Europe and
Asia, including delivering a number of lectures at the prestigious
International Tax Center in Leyden. He has published seven textbooks and
over 50 scholarly articles, some winning scientific awards. He was an adviser
to the Minister of Economy and Finance of Cambodia, provided training on
tax issues to government officials in a number of Southeast Asian countries,
and has supplied expert testimony to tax courts on tax treaty interpretation. Edwin Van Der Bruggen
Edwin has consulted for the World Bank and the ADB on tax policy and has won recognition for his
administration. outstanding practice
including “Best Tax Law
As a partner at regional law firm DFDL, he advised multinational enterprises,
funds and governmental organizations on international taxation in Southeast Firm” and “Best Corporate
Asia, and has won recognition for his outstanding practice, including “Best Tax Law Firm.”
Tax Law Firm” and “Best Corporate Tax Law Firm”.
Edwin is accredited for Income Tax Advisory by the Singapore Institute of
Accredited Tax Professionals (SIATP).
May 23rd 2012 6

7. Managing Partner
Jean Loi
Jean Loi is widely recognized as one of the region’s most experienced tax
specialists. She was formerly a tax partner with PricewaterhouseCoopers in
Southeast Asia, RSM Chio Lim in Singapore and with leading regional law firm
DFDL.
Jean is a highly successful tax adviser with a CPA background. She has
assisted on a large number of projects and market entries in Cambodia,
Vietnam and Thailand, such as hydro and coal power plant projects, oil
exploration blocks, and the market entry of international banks into Vietnam,
and of multinationals into Indonesia. She has particular expertise in projects
related to the infrastructure, energy, telecommunications and financial
services industries in the region, as well as having extensive experience with
supply chains. Jean has assisted investment funds and other clients with their
international tax structures, addressing their tax risks and formulating their
transfer pricing strategies in Southeast Asia. She oversaw the growth of Jean Loi is widely
PricewaterhouseCoopers in Cambodia and was recognized for her recognized as one of the
outstanding practice with a number of awards, including “Best Tax Law Firm” region’s most experienced
and “Best Corporate Tax Firm” in Vietnam. She speaks Mandarin, Bahasa
tax specialists, and was
Malay, Cantonese and English.
formerly a tax partner
Jean is accredited for Income Tax and GST Advisory by the Singapore Institute with PwC in Southeast
of Accredited Tax Professionals (SIATP). Jean is also a member of the Institute Asia.
of Chartered Accountants of New Zealand. She graduated with a Bachelor’s
of Commerce and has obtained a Master’s of Taxation from the University of
Auckland, New Zealand.
May 23rd 2012 7

8. Partner
Christopher Muessel
Chris Muessel is one of Southeast Asia’s most experienced foreign lawyers. He has
in-country experience in Cambodia (1998-1999), where as a World Bank Counsel, he
advised the Council of Ministers on new commercial laws, and in Vietnam (2001-
2007), where as a Baker & McKenzie lawyer, he advised MNCs on a broad range of
legal matters. As a partner with the US firm Duane Morris LLP, Chris headed the
firm’s Ho Chi Minh City office, and later undertook equally high-profile partnership
roles with Watson Farley & Williams and Rajah & Tann, where he focused principally
on Vietnam, Cambodia, Laos and Thailand. In his 20-year career, Chris has
developed an expertise in cross-border M&A (incl. PE funds), real estate, project
finance (energy and mining), compliance (incl. FCPA) and trade (treaties and anti-
dumping claims).
Examples of matters that Chris has advised on are: bond issues for Asian companies
under a US$12B US Government bond program; a real estate transaction for a
US$2B Vietnam investment fund with an Omani sovereign fund; a US$300M loan by
a major French bank for an oil refinery in Vietnam; and a US$170M financing of an Chris Muessel is one of
FPSO vessel to be operated in Vietnam by a Japanese consortium. He has also Southeast Asia’s most
assisted a multinational with a large real estate investment in Cambodia,
represented multiple US defense contractors on sales of military goods and services experienced foreign lawyers
in Southeast Asia, advised global financial players (e.g., JP Morgan, Lehman and a former partner at
Brothers, BNP, IFC, etc.) on SEA projects, and structured high-profile LNG deals in
Indonesia, India, Japan and Qatar.
Duane Morris LLP, Watson
Farley & Williams and
Chris has previously served on several boards of the American Chamber of Rajah & Tann.
Commerce (AmCham), including AmCham Vietnam (Chairman 2007) and AmCham
Singapore (Governor 2008-2011). He has been a recommended lawyer by Chambers
Asia (Leading Overseas Counsel; Vietnam), Chambers Global (Global Leading Lawyer
– Corporate; Vietnam) and the Legal 500 (Leading Lawyer – Corporate; Vietnam).
May 23rd 2012 8

9. Contents
 Which Rules Apply to the Interpretation of DTAs?
 Moving or Instant PEs
 Who is the Real Employer?
 The Case of the Thai Singer
 Beneficial Ownership
May 23rd 2012 9

10. Which Rules Apply to
the Interpretation of DTAs?
May 23rd 2012 10

11. Vienna Convention on the Law of Treaties
Article 31
 General rule of interpretation:
1. A treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall
comprise, in addition to the text, including its preamble and annexes:
a) any agreement relating to the treaty which was made between all the
parties in connection with the conclusion of the treaty;
b) any instrument which was made by one or more parties in connection with
the conclusion of the treaty and accepted by the other parties as an
instrument related to the treaty.
May 23rd 2012 11

12. Vienna Convention on the Law of Treaties
Article 31
 General rule of interpretation:
3. There shall be taken into account, together with the context:
a) any subsequent agreement between the parties regarding the
interpretation of the treaty or the application of its provisions;
b) any subsequent practice in the application of the treaty which establishes
the agreement of the parties regarding its interpretation;
c) any relevant rules of international law applicable in the relations between
the parties.
4. A special meaning shall be given to a term if it is established that the
parties so intended.
May 23rd 2012 12

13. Vienna Convention on the Law of Treaties
Article 32
Supplementary means of interpretation
 Recourse may be had to supplementary means of interpretation,
including the preparatory work of the treaty and the circumstances of its
conclusion, in order to confirm the meaning resulting from the application
of article 31, or to determine the meaning when the interpretation
according to article 31:
a) leaves the meaning ambiguous or obscure; or
b) leads to a result which is manifestly absurd or unreasonable.
May 23rd 2012 13

14. DTAs in Other Language Versions
Article 33
Interpretation of treaties authenticated in two or more languages
1. When a treaty has been authenticated in two or more languages, the text is
equally authoritative in each language, unless the treaty provides or the
parties agree that, in case of divergence, a particular text shall prevail.
2. A version of the treaty in a language other than one of those in which the text
was authenticated shall be considered an authentic text only if the treaty so
provides or the parties so agree.
3. The terms of the treaty are presumed to have the same meaning in each
authentic text.
4. Except where a particular text prevails in accordance with paragraph 1, when a
comparison of the authentic texts discloses a difference of meaning which the
application of articles 31 and 32 does not remove, the meaning which best
reconciles the texts, having regard to the object and purpose of the treaty,
shall be adopted.
May 23rd 2012 14

15. Article 3(2) DTA
Pre-1995 OECD Model Current OECD Model
“As regards the application of the “As regards the application of the
Convention by a Contracting State Convention at any time by a Contracting
State, any term not defined therein shall,
any term not defined therein shall,
unless the context otherwise requires,
unless the context otherwise have the meaning that it has at that time
requires, have the meaning which it under the law of that State for the
has under the law of that State purposes of the taxes to which the
concerning the taxes to which the Convention applies, any meaning under
Convention applies.” the applicable tax laws of that State
prevailing over a meaning given to the
term under other laws of that State.”
“general rule of interpretation”
OECD Commentary on art. 3, par. 11
May 23rd 2012 15

16. Role of the UN and OECD Commentary
OECD Commentary as a recommendation
 OECD Model and its Commentary are “recommendations” under art. 5 (b) of the
OECD Convention. Contrary to “decisions”, they are not binding upon the members.
 But they are not legally irrelevant either. When a member state denies any effect at
all to each and every recommendation issued by the international organization
under a treaty to which the state is a party, it violates the legitimate expectations of
the treaty partner, which may at least expect that the state shall give the
recommendations some serious consideration.
 A recommendation can be influential without being binding. “correspondence of
behavior is not the same as compliance”.
OECD Commentary binding under 31-32 Vienna Convention?
 Tacit agreement between the contracting states when using the Model text,
depending on the circumstances (reservations, other expressions that there is no
consent). (Engelen)
May 23rd 2012 16

17. Difference between UN and OECD Commentary
 Reproduction
 Not created by state representatives but by state-nominated experts
 Does it matter? (ICJ Mazilu case)
 No reservations possible
Possibilities:
 OECD member with OECD member Difference in
legal status of
 OECD member with non-member
the
 Non-member with non-member Commentary?
May 23rd 2012 17

18. Qualification of the Source State?
32.7 This situation may be illustrated by reference to a variation of the example
described above. A business is carried on through a fixed place of business in
State E by a partnership established in that t State and a partner, resident in State
R, alienates his interest in that partnership. Changing the facts of the example,
however, it is now assumed that State E treats the partnership as a taxable entity
whereas State R treats it as fiscally transparent; it is further assumed that State R
is a State that applies the exemption method. State E, as its treats the partnership
as a corporate entity, considers that the alienation of the interest in the
partnership is akin to the alienation of a share in a company, which it cannot tax
by reason of par 5 of Article 13. State R, on the other hand, considers that the
alienation of the interest in the partnership should have been taxable by State E
as an alienation by the partner of the underlying assets of the business carried on
by the partnership to which par 1 or 2 of Article 13 would have been applicable. In
determining whether it has the obligation to exempt the income under par 1 of
Art 23, State R should nonetheless consider that, given the way that the
provisions of the convention apply in conjunction with the domestic law of State
E, that State may not tax the income in accordance with the provisions of the
convention. State R is thus under no obligation to exempt the income.
(OECD Commentary on Art. 23)
May 23rd 2012 18

19. Anti-avoidance dictating interpretation
 “To the extent that anti-avoidance rules are part of the basic domestic
rules set by domestic tax laws for determining which facts give rise to a
tax liability, they are not addressed in tax treaties and are therefore not
affected by them. Thus, as a general rule, there will be no conflict
between such rules and the provisions of tax conventions.” OECD
Commentary 1/9.2).
 The DTA can be interpreted in such a manner that states would not have
to grant benefits in abusive transactions, notably “those entered into with
the view to obtaining unintended benefits under the provisions of these
conventions”. “It is agreed that States do not have to grant the benefits of
a double taxation convention where arrangements that constitute an
abuse of the provisions of the convention have been entered into” (OECD
Commentary 1/9.4).
 The OECD agrees that the DTA does not restrict substance-over-form and
general abuse rules of the states (OECD Commentary 1/22.1).
May 23rd 2012 19

20. International Case Law (“parallel treaties”)
 “Common international tax language” advocated by international scholars
 Possible legal basis?
- Through OECD Commentary
- “Good faith”, ut regis valeat quam pereat
- DTAs are meant to be applied internationally, income from third
states, standardization is a must
 Citing decisions of courts in other countries can be very authoritative IF
these are high courts and IF the decisions are consistent
 Problems:
- Influence of domestic issues in each case
- Transparency of information , language barriers
- IBFD database of court decisions
May 23rd 2012 20

21. DTA Interpretation Crucible
STRONG
Good Faith - Object & Purpose
Text Context DTA Meaning
Agreements Meaning in the
other language
Subsequent
Meaning in other
Rules of treaty
International Law
Domestic
Special Meaning Meaning (possibly
including Anti-
Avoidance)
OECD &
Supplementary UN Commentary
Means
Circumstances
Other Sources
(parallel treaties)
1 WEAK 2
May 23rd 2012 21

22. Moving or Instant PEs
May 23rd 2012 22

23. Moving or Instant PEs
Thailand:
Indonesia  PE: 30% on net profit
Thailand
India
 WHT: 15% on gross fees (subject
to DTA)
Indonesia:
 PE: deemed profit taxed at 10-
30% plus branch profit tax
 WHT: 20% (non-residents)
India:
 PE: Readily assumed. See Fugro
Engineers case (40%)
Oilfield Service
Provider  WHT: as a rule, services at 10%
May 23rd 2012 23

24. Moving or Instant PEs
Article 5 of UN Model
PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, the term “permanent
establishment” means a fixed place of business through which the
business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially:
a) A place of management;
b) A branch;
c) An office;
d) A factory;
e) A workshop;
f) A mine, an oil or gas well, a quarry or any other place of extraction of natural
resources.
May 23rd 2012 24

25. Moving or Instant PEs
Article 5 of UN Model
PERMANENT ESTABLISHMENT
3. The term “permanent establishment” also encompasses:
a) A building site, a construction, assembly or installation project or supervisory
activities in connection therewith, but only if such site, project or activities last
more than six months;
b) The furnishing of services, including consultancy services, by an enterprise
through employees or other personnel engaged by the enterprise for such
purpose, but only if activities of that nature continue (for the same or a
connected project) within a Contracting State for a period or periods
aggregating more than 183 days in any 12-month period commencing or
ending in the fiscal year concerned.
May 23rd 2012 25

26. Moving or Instant PEs
Specific rules, e..g:
Specific provision for Technical Fees:
 Source taxation for all “services of a management, consulting or technical
nature” (within or outside scope of royalties)
DTA between Vietnam and Hong Kong (Article 5(2))
 The term “permanent establishment” includes especially:
h) an installation structure, or equipment used for the exploration of natural
resources.
May 23rd 2012 26

27. Moving or Instant PEs
Key approaches:
1. Physical PE – how long is long enough?
2. Furnishing of Services PE
“The furnishing of services, including consultancy services, by a resident of one of the
Contracting States through employees or other personnel, provided activities of that nature
continue (for the same or a connected project) within the other Contracting State for a period
or periods aggregating more than six months[1] within any twelve-month period”.
3. Art. 3 (2)
a. “Fixed”
b. “Place of business”
c. “Permanent”
4. OECD and UN Commentary
a. A PE may not be purely temporary
b. Special type of activity?
“A place of business may, however, constitute a permanent establishment even though it
exists, in practice, only for a very short period of time because the nature of the business is
such that it will only be carried on for that short period of time. It is sometimes difficult to
determine whether this is the case” (OECD Commentary 5/6).
May 23rd 2012 27

28. Crucible on Instant PEs
assume OECD Model
STRONG
Good Faith - Object & Purpose
Text Context DTA MeaningDTA Meaning  “Permanent” and “Fixed” refers to a
situation that is not purely
Agreements Meaning in other
Domestic temporary
treaty Meaning
Subsequent
Rules of Domestic  Domestic meaning of “fixed” can
International Law Meaning
frustrate this, but context is strong.
Special Meaning
OECD & UN
Comment
OECD & UN (including  Commentaries allow for shorter
Qualification)
Commentaries periods, but not 1 day, it seems.
Supplementary Source State
Means
Other Sources
Circumstances
Other Sources  International case law is divided but
mostly supports longer periods
WEAK
May 23rd 2012 28

29. Who is the real employer?
May 23rd 2012 29

30. Who is the real employer?
Vietnam Technical Singapore
Consultant
Individual home
Assigned to
work 5 months
 2 Problems:
1. Resident of Vietnam or Singapore?
2. Taxed as an employee or as a consultant?
May 23rd 2012 30

31. Residence Question
Vietnam Residence DTA Singapore
TIE-BREAK
ARTICLE 4: RESIDENT
 Presence 183  Stay or work in
1. For the purposes of this Agreement, the term "resident of a
days or more Contracting State" means any person who, under the laws of that
Singapore at
State, is liable to tax therein by reason of his domicile, residence, least 183 days
place of management or any other criterion of a similar nature.
 Having a
2. Where by reason of the provisions of paragraph 1 an individual is a
residence resident of both Contracting States, then his status shall be
(including lease determined as follows:
for 90 days) a. he shall be deemed to be a resident of the State in which he
has a permanent home available to him;
b. if he has a permanent home available to him in both States,
he shall be deemed to be a resident of the State with which
his personal and economic relations are closer (centre of
vital interests);
c. if the State in which he has his centre of vital interests
cannot be determined, or of he has no permanent home
available to him in either State, he shall be deemed to be a
resident of the State in which he has an habitual abode;
d. if the status of resident cannot be determined according to
sub-paragraphs (a) to (c), the competent authorities of the
Contracting States shall settle the question by mutual
agreement.
Note: Vietnam non-member country position on “center
of vital interests” in favor of place of work.
May 23rd 2012 31

32. Crucible on Centre of Vital Interests
STRONG
 “Ordinary meaning” indicates that all
Good Faith - Object & Purpose
Text Context DTA MeaningDTA Meaning
facts are to be considered. No
Agreements Meaning in other definitive interpretation whether
Domestic
treaty Meaning work has more weight.
Subsequent
Rules of
International Law Domestic  Domestic meaning does not refer to
Meaning place of work.
Special Meaning
OECD & UN
Comment
OECD & UN
(including 
Commentaries: no support either
Qualification)way.
Commentaries
Supplementary Source State  NMCP!
Means
Other Sources International case law points to
Other Sources
Circumstances include all circumstances, a global
evaluation, without more weight for
WEAK one factor or another.
May 23rd 2012 32

33. Who is the real employer?
Vietnam Employee? Singapore
 Income from trading,  Trading income vs.
business = business salary
income
Income from research,  Contract of Service vs.
brokerage, teaching, … contract for service
“other services”
= salary  Risk, payment, level of
(Art 3(2) a) PIT Law) OR
control
Independent?
 Doctrine of true
employer Circular
133/2004
May 23rd 2012 33

34. Who is the real employer?
ARTICLE 14: INDEPENDENT PERSONAL SERVICES ARTICLE 15: DEPENDENT PERSONAL SERVICES
1. Income derived by an individual who is a resident of a 1. Subject to the provisions of Articles 16, 18 and 19, salaries,
Contracting State in respect of professional services of other wages and other similar remuneration derived by a
activities of an independent character shall be taxable only in resident of a Contracting State in respect of an
that State unless he has a fixed base regularly available to employment shall be taxable only in that State unless the
him in the other Contracting State for the purpose of employment is exercised in the other Contracting State. If
performing his activities. If he has such a fixed base, the the employment is so exercised, such remuneration as is
income may be taxed in the other Contracting State but only derived therefrom may be taxed in that other State.
so much of it as is attributable to that fixed base.
2. Notwithstanding the provisions of paragraph 1,
2. The term "professional services" includes especially
remuneration derived by a resident of a Contracting State
independent scientific, literary, artistic, educational or
in respect of an employment exercised in the other
teaching activities as well as the independent activities of
physicians, lawyers, engineers, architects, dentists and Contracting State shall be taxable only in the first-
accountants. mentioned State if:
a. the recipient is present in the other State for a period or
periods not exceeding in the aggregate 183 days in the
calendar year concerned, and
b. the remuneration is paid by, or on behalf of, an employer
who is not a resident of the other State, and
c. the remuneration is not borne by a permanent
establishment or a fixed base which the employer has in
the other State.
3. Notwithstanding the preceding provisions of this Article,
remuneration derived in respect of an employment
exercised aboard a ship or aircraft operated in
international traffic by an enterprise of a Contracting State
shall be taxable only in that State.
May 23rd 2012 34

35. Crucible on Centre of Vital Interests
STRONG
 Ordinary meaning of “employment”,
Good Faith - Object & Purpose
Text Context DTA MeaningDTA Meaning
context (Art. 14, Art. 7) indicate that
Agreements service is not included.
Domestic
Subsequent Meaning
Meaning in other
Rules of
treaty  ILO ?
International Law
Special Meaning Domestic  Domestic meaning eliminated by
Meaning context. Anti-avoidance?
OECD & UN
Comment
OECD & UN
(including  Commentaries: clear difference in
Qualification)
Commentaries terms of authority and control (OECD
Supplementary Source State Comm 15/8)
Means
Other Sources
Other Sources
Circumstances
 International case law: authority
WEAK
May 23rd 2012 35

36. The Case of the Thai Singer
May 23rd 2012 36

37. The Case of the Thai Singer
“(a) 5 per cent of the gross amount of the
royalties received as consideration for the Owner Copyright
Mauritius Owner
use of, or the right to use, any copyright of
literary, artistic or scientific work, excluding
cinematograph films and films, tapes or
discs for radio or television broadcasting;
(b) 15 per cent of the gross amount of the
Payment
royalties in any other case”.
Voice
“Royalties" = means payments of any kind Performance
received as a consideration for the use of, or
the right to use, any copyright of literary,
artistic or scientific work (including
cinematograph films and films, tapes or discs
for radio or television broadcasting), any
patent, trade mark, design or model, Music
computer programme, plan, secret formula Publisher Music
or process, or for information concerning
industrial, commercial or scientific
experience. (Art. 12, Thai-Mauritius DTA)
May 23rd 2012 37

38. The Case of the Thai Singer
Owner Copyright
 Thai Copyright Act B.E. 2537 does not Mauritius Owner
include related rights such as
performance
 Berne Convention for the Protection
of Literary and Artistic Works, 1886
Payment
 Rome Convention for the Protection
Voice
of Performers, Producers of Performance
Phonograms and Broadcasting
Organizations 26 October 1961:
protection for performers
 Both Thailand and Mauritius are
parties to the Berne Convention
 TRIPS, again both Thailand and Music
Publisher Music
Mauritius acceded.
May 23rd 2012 38

39. Crucible on “Artistic Work”
STRONG
Good Faith - Object & Purpose
Text Context DTA MeaningDTA Meaning  “ordinary meaning” of “artistic”,
context imply inclusion
Agreements
Domestic
Subsequent Meaning
Meaning in other
treaty  Berne Convention, Trips -> include
Rules of
International Law
Special Meaning Domestic
Meaning  Thai law would exclude it.
OECD & UN
Comment
(including
OECD & UN
Qualification)
Commentaries  Commentaries: no guidance
Supplementary Source State
Other Sources
Means
Other Sources
Circumstances
WEAK
May 23rd 2012 39

40. Beneficial Ownership
May 23rd 2012 40

41. Indofoods (Court of Appeal England, 2006)
Bond holders Bond holders
 Restructuring necessary due to
cancelling of Indonesia –Mauritius
DTA 0% WHT
 Cooperation of trustee, JP
Morgan, is necessary Mauritius Co. BV
Interest
 In case the loans are restructured 0% - 10%
through BV, would BV obtain WHT
reduced WHT or problems with Loan Loan
beneficial ownership
Indo Co.
 Court of Appeal: substance, object
and purpose of the DTA → BV
would not be the beneficial
owner.
May 23rd 2012 41

42. Prevost (Tax Court Canada, 2008)
Shareholder
agreement with
 Volvo and Henlys are acting as direct Volvo agreed distributions Henlys
shareholders, in practice Sweden UK
 Holding BV has no employees, etc.
 Weeghel: BV is deemed beneficial owner
of the dividends under Dutch law
 Original intention of OECD was limited to
nominees, agents
Holding BV
 Luthi: conduit holding companies,
nominee s. If the conduit company has
Dividends 5% WHT
very limited powers it is not the beneficial
(instead of 10% for
owner. The company must have UK, 15% for
ownership, possession, use, risk, control. Sweden)
 Tax Court accepts this principle but Prevost
decides that in this case, the company did Canada
have ownership, control.
See also Volvo Canada, Tax Court Canada
2012
May 23rd 2012 42

43. Danish case (Danish National Tax Tribunal, 2012)
 Corporate restructure to optimize WHT on
dividend distribution from Denmark Aps
 Cyprus Ltd has no office or employees US Inc
 Danish tax authorities argument: Cyprus
Ltd is not the beneficial owner of the
dividend (Art 10 of DTA). WHT of 28%
should apply 2. Repayment debt
 Taxpayer argument: Cyprus Ltd is not a Bermuda Ltd
conduit company and is the beneficial
owner of the dividend. Even if Cyprus Ltd
were not the beneficial owner, then US Inc
would be the beneficial owner, and US-
Denmark DTA would exempt WHT Cyprus Ltd
 Tribunal: the dividends distributed by
Denmark Aps are exempt from WHT
because Cyprus Ltd was a legally
established and properly functioning
company, and by virtue of its ownership of Denmark ApS 1. Dividend
the shares in the Danish company, was the
proper recipient of the dividends
See also ISS case, Danish High Court 2011
May 23rd 2012 43

44. OECD Draft Clarification of Beneficial Owner
“In these various examples (agent, nominee, conduit company acting as a fiduciary or
administrator), the recipient of the dividend is not the “beneficial owner” because that
recipient does not have the full right to use and enjoy the dividend that it receives and
this dividend is not its own; the powers of that recipient over that dividend are indeed
constrained in that the recipient is obliged (because of a contractual, fiduciary or other
duty) to pass the payment received to another person. The recipient of a dividend is
the “beneficial owner” of that dividend where he has the full right to use and enjoy
the dividend unconstrained by a contractual or legal obligation to pass the payment
received to another person. Such an obligation will normally derive from relevant
legal documents but may also be found to exist on the basis of facts and
circumstances showing that, in substance, the recipient clearly does not have the full
right to use and enjoy the dividend; also, the use and enjoyment of a dividend must be
distinguished from the legal ownership, as well as the use and enjoyment, of the shares
on which the dividend is paid.” (OECD Draft Clarification of the Meaning of “Beneficial
Owner”, 2011)
May 23rd 2012 44

45. Beneficial Owner
• OECD position on applying domestic anti-avoidance measures in a DTA situation,
cited above
• States do not have to grant the benefits of a double taxation convention where
arrangements that constitute an abuse of the provisions of the convention have
been entered into. (OECD Commentary 1/9.4)
• “It is important to note, however, that it should not be lightly assumed that a
taxpayer is entering into the type of abusive transactions referred to above. A
guiding principle is that the benefits of a double taxation convention should not be
available where a main purpose for entering into certain transactions or
arrangements was to secure a more favourable tax position and obtaining that
more favourable treatment in these circumstances would be contrary to the object
and purpose of the relevant provisions” (OECD Commentary 1/9.5)
• “Member countries should carefully observe the specific obligations enshrined in
tax treaties to relieve double taxation as long as there is no clear evidence that the
treaties are being abused” (OECD Commentary 1/22.1)
May 23rd 2012 45

46. Regional Approaches to Treaty Shopping: Vietnam
Interest Capital Gains
US Bank BVI
Interest
Loan
can be 0%
Interest 10% (now In case of direct
5% + 5% VAT) France Co. sale: 25% SIN Co.
Interest Shares: 0%
Loan
0% cap gain
Vietnam Vietnam OPCO
Borrower
 DTA procedures must have
 Circular 133/2004: France Co must been completed on time.
have the loan on its balance sheet.
 Can the gain be attributed to a
PE?
May 23rd 2012 46

47. Regional Approaches to Treaty Shopping: Thailand
BVI
Revenue Department
Dividend
0% WHT
 Demand COR
Manufacturing
 Recharacterize into royalties fees 15% WHT SIN Co.
 Reject deductibility of the fee for CIT HK Co.
Thai Revenue Code sec. 65 ter 13
and 14 Manufacturing
fees 0% WHT
 Review from transfer pricing
perspective
Thai Co.
May 23rd 2012 47

48. Regional Approaches to Treaty Shopping: Indonesia
 Interpretation of the Term “Beneficial Owner” under Tax Treaties
“The Director-General of Taxation has issued circular letter SE-04/PJ.34/2005 dated
7 July 2005 in which guidance is given on how the term “beneficial owner” should
be interpreted under tax treaties entered into by Indonesia. According to the
circular letter, the beneficial owner is the actual owner of the income in the form of
dividend, interest and royalty.
The beneficial owner must be either an individual or a corporate taxpayer that is
fully entitled to directly enjoy the benefits of the dividend, interest or royalty.
Special purpose vehicles like conduit companies, paper box companies, pass-
through companies, etc. are not considered to be the beneficial owner.
If the dividend, interest or royalty is paid to parties that are not considered
beneficial owners, the payer is obliged under Art. 26 of the Income Tax Act to
withhold income tax at a rate of 20% of the gross amount of the payment.” (Asia-
Pacific Tax Bulletin September/October 2005)
 Indonesia Tax Court, 14 March 2008: “In the absence of any proof offered by the
Indonesian tax authorities that the Mauritius entity is not the beneficial owner,
the certificate of residence is persuasive.”
May 23rd 2012 48

49. Regional Approaches to Treaty Shopping:
PROC Notice 601
Notice 601 specifies the following elements that are generally regarded as adverse to
an applicant’s identification as a beneficial owner:
i. the applicant has the obligation to distribute or assign all or majority (e.g., more than 60
percent) of its income to a third country (jurisdiction) resident in a prescribed period (e.g.,
within 12 months of the receipt of the income)
ii. the applicant has no or little operational activities other than holding the property or rights
based on which the income is derived
iii. the applicant, in case of being a company or entity, has relatively small or few assets, scale or
staffing, which barely match the amount of income
iv. the applicant has no or little rights to control or dispose of the income or the property or
rights based on which the income is derived, and bears no or little risks
v. the contracting country (jurisdiction) does not tax or exempts from tax the relevant income, or
imposes tax at an effective tax rate that is extremely low
vi. in addition to the loan contract from which the interest is derived and paid, there exist
between the creditor and third parties other loan or deposit contracts of which the amounts,
interest rates and contract signing dates are similar
vii. in addition to the contracts on transfer of use rights on copyright, patent, technology, etc.
based on which the royalties are derived and paid, there exists between the applicant and
third parties other contracts on transfer of use rights or ownership of the relevant copyright,
patent, technology, etc.
May 23rd 2012 49

50. Crucible on Beneficial Ownership
STRONG
Good Faith - Object & Purpose
Text Context DTA MeaningDTA Meaning  Ordinary meaning, context of
“beneficial”: hard to tell whether
Agreements
Domestic narrow legal approach (= original)
Subsequent Meaning
Meaning in other suffices. Title and preamble do refer
treaty
Rules of to combatting tax evasion (and
International Law sometimes avoidance) -> Object and
Special Meaning purpose?
Domestic
Meaning  Domestic meaning might allow any
OECD & UN re-characterization or attribution
Comment
(including  Commentaries: Between OECD
OECD & UN
Qualification)
Commentaries members that did not make a
Supplementary Source State reservation, persuasive maybe even
Means binding
Other Sources
Circumstances
Other Sources  International case law is divided
 Other state’s position?
WEAK
May 23rd 2012 50

51. Concluding remarks on beneficial ownership
 Will be highly fact-sensitive, so domestic appreciation of facts will often
prevail.
 In that case, legal principles will not be of much use
 Few, if any, states now accept that just because there is a legal entity, one
can apply the DTAs
 The OECD interpretation in the Commentary might be interpreted by
some states as a blank check to ignore DTA obligations under the guise of
combatting tax avoidance (all DTAs are supposed to lead to tax savings!)
May 23rd 2012 51

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