1 seminar panel i: race to the bottom? the taxation of mobile activities income from financial...

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Seminar Panel I: Race to the bottom? The Taxation of Mobile Activities INCOME FROM FINANCIAL SERVICESLucie Vorlíčková, LL.M. Diane RingLeitnerLeitner, 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)

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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

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II. Example 1: Mobile Banking Services

BankAsset Management

(“Booking State“)

ClientsTravelling 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)

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III. How is such income sourcedto 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. 2008 Art. 5)

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III. How is such income sourcedto a particular jurisdiction? (Cont.)

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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

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III. How is such income sourcedto a particular jurisdiction? (Cont.)

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II. Example 2 : Investment Funds

Fund

management

Investment Fund

Investor

Investor

Investor

• No or low tax ratese.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

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III. How is such income sourcedto 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

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III. How is such income sourcedto a particular jurisdiction? (Cont.)

III. How is such income sourced in terms of connecting it to a particular jurisdiction? (cont)

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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

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IV. International agreement on how such income should be taxed?

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

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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 Stateo passive income: Residence State (capital export neutrality)

– Services rendered by separate legal entity are attributed to such unless substance over form/TP rules apply

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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

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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

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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)

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Final Thoughts

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