(c) tax analysts 2008. all rights reserved. tax analysts does...

(C) Tax A

nalysts 2008. All rights reserved. Tax A

nalysts does not claim copyright in any public dom

ain or third party content.

457 IN THIS ISSUEby Cathy Phillips

HIGHLIGHTS

459 Black Holes, Tax Shelters, and OtherSurprises — Proof by Databy Joann M. Weiner

465 Anti-Treaty-Shopping Proposals CouldAid U.S. Economyby Kristen A. Parillo

466 Transfer Pricing Remains Top Tax Issuefor Multinationalsby Lisa M. Nadal

Dean

Lip

off

468 ECJ Nixes German InheritanceValuation Rulesby Tom O’Shea

473 COUNTRY DIGESTAustraliaBelgiumCanadaChileCroatiaCzech RepublicDenmarkIndiaIrelandJapanKazakhstanKenya

Korea (R.O.K.)KuwaitLebanonNetherlandsNigeriaNorthern MarianasPeruRussiaTaiwan (R.O.C.)United KingdomUnited StatesUruguay

CURRENT & QUOTABLE

499 Isle of Man Reps Urge Change to TaxHaven Billby Linda E. Carlisle and Geoffrey B. Lanning

FEATURED PERSPECTIVES

503 Spain’s Tax Treatment of ForeignTakeovers: Enter the EuropeanCommissionby Mayra O. Lucas-Mas

PRACTITIONERS’ CORNER

507 Canada’s Taxation of Foreign-SourceEmployment Bonuses: Has theUncertainty Been Put to Rest?by Marisa Wyse

SPECIAL REPORTS

511 Reforming the Taxation of ForeignDirect Investment by U.S. Taxpayersby George K. Yin

523 Eligibility for Treaty Benefits Under theFrance-U.S. Income Tax Treatyby John Venuti, Ron Dabrowski, Douglas Poms, andAlexey Manasuev

535 CALENDAR

Cover photo: Jackson Mt. Studios, Images.com(Businessman on a black hole)

TAX NOTES INTERNATIONAL FEBRUARY 11, 2008 • 455

(C) Tax A




tax notes international®Copyright 2008, Tax Analysts ISSN 1048-3306

President and Publisher: Christopher BerginExecutive Vice President: David BrunoriEditor in Chief: Robert Goulder

Editor: Cathy Phillips

Contributing Editors: Lee A. Sheppard,Martin A. Sullivan, Joann M. Weiner

Managing Editor: Doug Smith

Legal Editor: Kayleen Fitzgerald

Legal Reporters: Charles Gnaedinger, Randall Jackson,Lisa M. Nadal, Kristen A. Parillo, David D. Stewart

Senior Editors: Herman P. Ayayo,Cindy Heyd, Ann M. Miller

Chief of Correspondents: Cordia Scott

Editorial Staff: Joe Aquino, Lucy Biederman, Fran Briney, MelClark, Matthew Ealer, Eben Halberstam, Cynthia Harasty, Sonya V.Harmon, Stephanie Hench, Grant Hilderbrandt, Larissa Hoaglund,Amy Kendall, Taylor McClure, Betsy Sherman, Julie Wedan

Production Integration Manager: Carolyn Caruso

Production Manager: Stephanie Wynn

Production Staff: Gary Aquino, Paul Doster, Nikki Ebert,Christopher Fannon, Saad Manasterli, Elizabeth Patterson,Natasha Somma, Durinda Suttle, Veronica Warner

CUSTOMER SERVICE800.955.2444703.533.4400*Canada: 800.955.3444U.K.: 800.89.8901*Within the continental U.S.FAX: 703.533.4444

www.taxanalysts.com

CORRESPONDENCE: Correspondenceregarding editorial matters and submis-sions should be sent to the Editor, TaxNotes International, 400 S. Maple Ave.,Suite 400, Falls Church, VA 22046 USA,or e-mailed to [email protected]

SUBSCRIPTIONS, ADDRESS CHANGES:Change of address notices, subscriptions,and requests for back issues should besent to the Customer Service Department,

Tax Analysts, 400 S. Maple Ave.,Suite 400, Falls Church, VA 22046 USA,or e-mailed to [email protected]

FREQUENCY: Tax Notes International ispublished 52 weeks of the year by TaxAnalysts.

DELIVERY: Tax Notes International isdelivered by first-class mail, hand delivery,or international air mail, without addi-tional charge.

PRICES: The annual subscription is$1,099. Subscribers may pay for the sub-scriptions and other services either in U.S.dollars or in one of the currencies speci-fied below. Billings reflect the exchangerates in effect when the invoices are firstsent; they are not adjusted thereafter.

Prices: Australia (AUD 1,224); Austria(€751); Belgium (€751); Canada(C $1,103); Denmark (DKK 5,600); Finland(€751); France (€751); Germany (€751);Hong Kong (HKD 8,573); Ireland (€751);Japan (¥117,188); Luxembourg (€751);Malaysia (MYR 3,551); Netherlands (€751);New Zealand (NZD 1,397); Norway(NOK 6,051); Singapore (SGD 1,556); SouthAfrica (ZAR 8,438); Spain (€751); Sweden(SEK 7,078); Switzerland (CHF 1,208);U.K. (£561); U.S. ($1,099)

FORM OF CITATION: Articles appearing inTax Notes International may be cited byreference to the date of the publicationand page, thus: Tax Notes Int’l, Jan. 5,2004, p. 25.

© Tax Analysts 2008. All rights reserved. Users are permitted to reproduce small portions of this work for purposes of criticism, comment, news reporting,teaching, scholarship, and research only. Any permitted use of these materials shall contain this copyright notice. We provide our publications for informa-tional purposes, and not as legal advice. Although we believe that our information is accurate, each user must exercise professional judgment, or involve aprofessional to provide such judgment, when using these materials and assumes the responsibility and risk of use. As an objective, nonpartisan publisher oftax information, analysis, and commentary, we use both our own and outside authors, and the views of such writers do not necessarily reflect our opinion onvarious topics.

456 • FEBRUARY 11, 2008 TAX NOTES INTERNATIONAL

(C) Tax A




by Cathy Phillips

Most tax shelter activity takes place comfortablyunder the radar, but that could change in the

future. New research being done in the United Statescould shine light into the dark corners of corporate taxshelters and, in doing so, help the U.S. governmentrecoup about $10 billion a year in lost revenues.

This week contributing editor Joann Weiner dis-cusses the work on tax shelter detection being done byPetro Lisowsky, a doctoral candidate at the BostonUniversity School of Management. By matching confi-dential IRS data with publicly available financial infor-mation, Lisowsky has been able to identify a list ofactivities potentially associated with tax shelters. Takena step further, the research could be used to identifyfirms involved in shelter activities.

But don’t look for tax authorities to start shuttingdown shelters just yet. As Weiner notes, Lisowsky’sresearch is only a tool to help identify who might bedoing what; it’s still up to the tax authorities to deter-mine how much income corporations are spiritingaway in tax shelters and then do something about it (p.459).

Two anti-treaty-shopping proposals could be revenueraisers for the United States. According to a Congres-sional Research Service report, a pair of House billscould significantly curb treaty shopping while bringingin $6 billion to $7 billion over 10 years. The bills’ sup-porters claim the measures would level the playingfield between U.S.-based companies and foreign com-panies that pay low U.S. taxes. Opponents, however,contend that some of the bills’ provisions would abro-gate current U.S. treaties, a charge that is all too famil-iar in the United States, where treaties are often viewedwith suspicion (p. 465).

Speaking of familiar themes, stop me if you’veheard this one before. In yet another judgment con-cerning inheritance tax rules in the EU, the ECJ hasdetermined that Germany’s inheritance tax valuationrules are not simpatico with the EC Treaty. TNI’strusty Tom O’Shea contributes an in-depth analysis ofthe Jäger judgment (p. 468).

This Just In . . .

A new global transfer pricing survey confirms what

many of us have known for some time: Transfer pric-

ing is a complex affair that consumes an ever-

increasing amount of multinational companies’ time

and resources. Ernst & Young polled 850 corporations

on a variety of transfer pricing issues, and came away

with some compelling responses that varied widely by

country and industry. Legal reporter Lisa Nadal has a

complete wrap-up of the survey’s results (p. 466).

Special Reports

A report by George K. Yin expands on a proposalincluded in the 2005 report of President Bush’s Advi-sory Panel on Federal Tax Reform. The panel recom-mended a dividend exemption system for foreign-source earnings of U.S. taxpayers. While Yin agreesthat the proposal is an improvement over current law,he offers three modifications to strengthen the panel’srecommendation (p. 511).

We continue our series of flowcharts to assist practi-tioners in determining a company’s eligibility for treatybenefits. This week’s report, by John Venuti, Ron Dab-rowski, Douglas Poms, and Alexey Manasuev, includesnine flowcharts analyzing the limitation on benefitsprovisions in the France-U.S. income tax treaty (p.523).

* * *

We were saddened to learn last week of the death oflongtime TNI correspondent Martin Przysuski. Martinwas widely recognized in Canada as a transfer pricingexpert, although TNI readers everywhere benefitedfrom his unique perspective on all things transfer pric-ing. I personally will miss Martin’s e-mails and voicemails, which were unfailingly upbeat and cordial, andalways welcome. We extend our deepest sympathies toMartin’s family and friends. ◆

Cathy Phillips is editor of Tax Notes International.


(C) Tax A




In-House AdvertisementIntentionally Removed

(C) Tax A




NEWS ANALYSIS

Black Holes, Tax Shelters, andOther Surprises — Proof by Data

by Joann M. Weiner

Tracking down tax shelter activity is a top priorityof the Internal Revenue Service. Unfortunately, identi-fying tax shelter activity can be as difficult as findingobjects trapped inside a black hole — their presence isknown only through inference.

‘‘The primary problem with tax shelters from re-search, investment, tax administration, and enforce-ment perspectives is detecting them,’’ according toPetro Lisowsky.

Lisowsky, a doctoral candidate in business adminis-tration at the Boston University School of Manage-ment, made these remarks in his paper ‘‘Seeking Shel-ter: Empirically Modeling Tax Shelters and ExaminingTheir Link to the Contingent Tax Liability Reserve,’’presented at the 11th annual Tax Symposium held atthe University of North Carolina on January 25-26 inChapel Hill.

The U.S. Treasury Department defines a tax shelteras a transaction or arrangement that generates taxlosses without incurring economic losses or risk. Be-cause ‘‘it is very hard to measure an absence of in-come,’’ Treasury does not estimate the amount of rev-enue lost due to tax shelters. However, in its study TheProblem of Corporate Tax Shelters: Discussion, Analysis andLegislative Proposals (July, 1999, p. 31), Treasury notesthat other sources estimate that corporate tax sheltersmay cost the U.S. government about $10 billion eachyear.

With Lisowsky’s research, however, corporate taxshelter detection may no longer be as elusive as it was.Using confidential information from the IRS Office ofTax Shelter Analysis (OTSA), which identifies firmsthat have used one or more of 64 specific illegal tax-sheltering activities — such as son-of-BOSS, leasestrips, partnership straddles, and corporate-owned lifeinsurance — from 2000 through 2004, Lisowsky is ableto shine a bit of light on the black hole of tax evasionand tax shelters.

By matching OTSA data with publicly available fi-nancial information, Lisowky presents a relatively longlist of activities that may reflect the characteristics oftax shelters. Interested parties may then use these datato help identify these shelters. Specifically, firms withtax-haven-based subsidiaries, material foreign opera-tions, complex financial transactions, litigation losses,and relationships with tax promoters are all more likelyto be involved in tax shelters than firms without thesefeatures.

Lisowsky also establishes an empirical link betweenthe tax cushion, which is the contingent tax liabilityreserve that firms use to report their uncertain tax ben-efits in their financial statements, and the use of taxshelters. Lisowsky finds that the tax cushion is not onlypositively related to tax risk but also is positively re-lated to tax shelter use.

Lisowsky’s research confirms what has long beensuspected. On average, a nontrivial portion of the taxcushion is likely attributable to tax shelters. In turn,this finding suggests that financial earnings may also bea function of tax shelters to the extent that shelters af-fect tax expense via the tax cushion.

Since the tax cushion data are publicly available,unlike the tax return data, this evidence is likely tobenefit greatly those researchers who must rely on fi-nancial statements to uncover tax shelter information.Until now, the evidence that tax shelters affect financialstatements through the tax cushion was largely anec-dotal. Earlier studies that had examined financial state-ments for evidence of tax shelter use had inferred, forexample, that large differences between book and taxincome suggested the use of tax shelters. However, di-rect evidence for tax shelter use and suggestions to in-crease the probability of their detection was not avail-able. This evidence, therefore, greatly benefitsresearchers who must rely on financial statementsalone to detect tax shelter use.

Lisowsky has highlighted a number of characteris-tics that may identify firms involved in tax shelters. Itis now up to the tax authorities to identify exactly howmuch income these firms may be hiding through thesetax shelters.

The Consequences of JGTRRA

The evidence keeps rolling in on how U.S. taxpayerstook advantage of the favorable tax treatment provided


(C) Tax A




to domestic and certain foreign dividends to reducetheir tax liabilities. The Jobs and Growth Tax ReliefReconciliation Act (JGTRRA) of 2003 provided a rela-tively narrow tax break for certain foreign dividendsthat may have strongly influenced the internationalportfolio choices of U.S. individual investors. JGTRRAsharply changed the dividend tax treatment at the indi-vidual level by specifying that dividends would betaxed at the capital gains rate. The tax benefit was fur-ther enhanced by the corresponding reduction in thecapital gains rate to a maximum 15 percent. Dividendspaid by domestic corporations and by certain qualifiedforeign corporations qualified for the reduced rate oftaxation.

Lisowsky’s researchconfirms that thenontrivial portion of thetax cushion is likelyattributable to tax shelters.

Dhammika Dharmapala of the University of Con-necticut presented a paper, ‘‘Taxes, Dividends, andInternational Portfolio Choice,’’ coauthored with MihirDesai of Harvard University, that examined how thereduced personal taxation of dividends paid by quali-fied corporations located in tax treaty countries af-fected individuals’ portfolio choices.

In an unprecedented act, JGTRRA restricted therelief provided to foreign corporations to those corpo-rations that met one of three tests: the ‘‘possessionstest,’’ the ‘‘market test,’’ and the ‘‘treaty test.’’ The firsttwo tests essentially covered dividends from corpora-tions resident in a U.S. possession and dividends fromcorporations whose shares are traded in the UnitedStates. Under the treaty test, which is the case Dhar-mapala discussed, only corporations located in one of52 IRS-specified treaty countries — those with effectivelimitation on benefits and exchange of informationprovisions — qualified for the tax break. Thus, divi-dends from corporations located in most Europeancountries received favorable tax treatment, while divi-dends from corporations located not only in ‘‘tax ha-ven’’ locations but also in countries such as Argentina,Brazil, and Chile would not receive the benefit.

Using data from the Treasury International Capital(TIC) reporting system, the authors found that indi-viduals reacted strongly to the up-to-20-percentagepoint advantage granted to dividends received fromcertain foreign corporations. Individuals disproportion-ately increased their portfolio investment in treatycountries relative to nontreaty countries.

Other factors could have explained the changes inportfolio choice. However, the changes are not ex-

plained by changes in the underlying trends for foreignportfolio investment, nor are they explained by unob-servable nontax factors correlated with treaty status orby the existence of exceptional returns in stock marketslocated in treaty countries. None of these factors ex-plained the differences.

This paper builds on earlier research Dharmapalapresented at the National Tax Association annualmeeting in November that also used the TIC data.That paper, ‘‘Taxes, Institutions, and Foreign Diversifi-cation Opportunities,’’ also coauthored with Desai,compared the pattern of U.S. foreign portfolio invest-ment (FPI) in foreign equities with the pattern of for-eign direct investment (FDI) holdings by U.S. firms.Since returns from FDI are subject to an additionallayer of U.S. corporate tax on repatriation while thereturns from FPI are not subject to U.S. corporate taxa-tion, the researchers expected to find that U.S. FPIwould be more sensitive to foreign countries’ corporatetax rates than is U.S. FDI.

Using cross-country and panel data from 1994 to2005, and controlling for U.S. FDI holdings and othervariables, the authors found that U.S. individual hold-ings of equity FPI are highly sensitive to foreign corpo-rate tax rates. Countries with lower corporate tax ratestend to have a higher ratio of U.S. FPI to U.S. FDI.The authors suggest that the high U.S. corporate taxrate may disadvantage U.S. MNCs as a vehicle for in-vesting in foreign countries. U.S. investors may preferto invest in a foreign economy through portfolio invest-ment in foreign firms rather than through Americanfirms.

The authors did not make this specific point, buttheir results may provide another explanation for therelatively low corporate income tax receipts despite therelatively high U.S. corporate tax rate. U.S. investorsmay be able to avoid paying the U.S. corporate tax rateby investing in foreign economies through foreign cor-porations rather than through U.S. multinational corpo-rations.

Taxes and Stock Ownership

Since World War II, investors in many industrial-ized countries have significantly reduced their directinvestment in stocks, preferring to invest indirectly viamutual funds, pension funds, and other tax-favored in-stitutions. For example, U.S. individuals owned morethan 90 percent of the stock market following WorldWar II, compared with 27 percent in 2006. Over allindustrialized countries, individuals own directly just17 percent on average of the stock market.

Ilya Strebulaev of Stanford University presentedthese results in a paper, ‘‘The Evolution of AggregateStock Ownership: A Unified Explanation,’’ coauthoredwith Kristian Rydqvist and Joshua Spizman of Bing-hampton University. According to the authors, changes

HIGHLIGHTS


(C) Tax A




in the relative tax advantages offered for owning stocksindirectly rather than directly explains the decline indirect share ownership.

While the explanations differ by country — indirectownership through financial institutions provides theexplanation in the United States and the United King-dom, while it is indirect ownership through large busi-ness groups that provides the explanation in Swedenand Japan — the implications are not different. Fourdecades of historically high individual income taxationthat existed until the major tax reforms in the 1980sdrove individuals to invest in the stock market indi-rectly via tax-favored investment vehicles.

The authors evaluated the time series and cross-country data of aggregate equity ownership and taxsystems since World War II in the United States, theUnited Kingdom, Sweden, Canada, and Japan. Theimplications of the authors’ research could be very far-reaching. Their evidence suggests that taxes affect notonly investor behavior but also affect the developmentof financial institutions. In particular, the sustainedhigh level of individual income taxation in a range ofcountries led to the development of tax-favored institu-tions, such as mutual funds and life insurance compa-nies, and pension funds, as well as to the developmentof the financial intermediaries.

Individualsdisproportionatelyincreased their portfolioinvestment in treatycountries relative tonontreaty countries.

In the United States, for example, pension funds aretaxed under a consumption-tax basis whereas regularsavings are taxed under an income-tax basis. Thus,contributions to pensions occur before tax, investmentreturns accrue tax free, and distributions are taxed aspersonal income. To obtain these tax benefits, individ-uals must invest indirectly through pension funds. Asconsumption tax advocates note, investment in regularsavings is subject to double taxation — once when theincome is earned and once when it is reinvested —whereas investment via pension funds or other retire-ment accounts is taxed only once.

The authors’ evidence has profound implications forusing tax policy to provide tax relief. In particular,with households investing relatively small amounts intaxable forms, such as stocks, the economic effects ofmodifying marginal tax rates on individuals may berelatively small as well. Tax policies, such as JGTRRA,

that attempt to provide tax relief by reducing indi-vidual tax rates may provide much less relief than an-ticipated.

As the authors note, ‘‘Government regulation hasshaped financial institutions by creating tax clientelesand leading economic agents to invent ways to circum-vent their tax obligations.’’

Furthermore, if individual income taxation is nolonger practical or relevant, the authors’ research mayhave implications well beyond the study of tax policy.Classic finance papers written before the sharp reduc-tions in personal income taxation in the 1980s may nolonger provide relevant information for purposes ofevaluating issues such as the cost of capital or for pur-poses of the capital asset pricing model.

Strebulaev, Rydqvist, and Spizman recognize thatthey have additional research to conduct on the sys-tems in other countries. Nevertheless, this research pro-vides a fruitful start into understanding how tax policymay impose significant unintended consequences.

Upsetting the Conventional Wisdom

Some academic conferences are profitable to at-tend . . . literally.

In a paper, ‘‘Tax Expense Surprises and FutureStock Returns,’’ coauthored with Jake Thomas of theSchool of Management at Yale University, FrankZhang, also of Yale University, shows that seasonallydifferenced quarterly tax expenses — which are aproxy for tax expense surprise — predict future stockreturns over the next two quarters. They conductedtheir study using quarterly data available from Standard& Poor’s Compustat database and the University ofChicago’s Center for Research in Security Pricesmonthly and daily return files for the period from 1977through 2005.

In layman’s terms, their research shows that it maybe possible to make profits systematically by exploitingthis anomaly in stock returns. Stock prices incorporatethis information with a delay because investors do notrecognize fully that surprises in reported tax expensespredict two key variables — future book income andfuture tax expense — that companies release in theupcoming two quarters.

Since book income, pretax income, and tax expensesare interrelated, it is important to control for surprisesin book income to focus on the impact of surprises intax expenses. Controlling for book income surprisesalso ensures that the tax expense strategy is not unin-tentionally mimicking the well-known earnings mo-mentum investment strategy, which is based on earn-ings surprises.

After controlling for these issues, the researchersfound that tax expenses that were higher than expected

HIGHLIGHTS


(C) Tax A




were ‘‘good news’’ for investors because these unex-

pectedly high tax expenses indicated that pretax in-

come would also be higher than expected. In all of

their specifications, tax expense surprise was consis-

tently and significantly positively related to future stock

returns. The information provided by the tax expenses

surprise provided incremental explanation beyond the

information provided by future book income surprises.

Tax policies that attemptto provide tax relief byreducing individual taxrates may provide muchless relief than anticipated.

In other words, markets are not fully efficient over

this short time period, and traders can profitably ex-

ploit these pricing anomalies.

This research goes against the efficient market hy-

pothesis, which says that stock prices fully reflect all

available information. Ever since Princeton economist

Burton G. Malkiel published his book A Random WalkDown Wall Street (W.W. Norton and Co., first in 1973and regularly updated), investors have been cautionedthat they cannot beat the market. Stock prices follow arandom walk, perhaps with a drift, making it impos-sible to predict future share prices.

Before you race off and call your broker, the Yaleresearchers warn that their results are not designed tohelp pick individual stocks. The evidence also does notimply substantial and sustained mispricing. However, itdoes suggest that stocks with extreme earnings sur-prises have deviated from their efficient prices by about5 percent and that this deviation is corrected overabout a six-month period.

Although the results go against conventional wis-dom, they are built on a solid logical foundation andone that anyone who has tried to decipher a Fortune500 company’s financial statements will understand. Asthe researchers note, ‘‘We believe that some of this in-formation contained in tax expense may be reflected instock prices with a delay because tax disclosures aretoo complex to be fully understood by most investors.’’

In particular, since the tax expense reported forbook purposes reflects both a current component,which is based on income defined under tax rules, anda deferred component, which reflects attempts to man-age book income, there may be information in the re-ported tax expense that reflects pretax income but notbook income.

Many tax conferences merely provide participantswith valuable investment knowledge. This conferencepotentially provided its participants with profitable in-vestment returns.

More Surprises From FIN 48

In July 2006 the Financial Accounting StandardsBoard introduced new rules for accounting for uncer-tainty in income taxes that became effective in 2007.These new rules, known as FIN 48, ‘‘Accounting forUncertainty in Income Taxes,’’ are intended to improvethe accuracy and visibility of a publicly traded firm’sreporting of these uncertain tax benefits.

Under the old standard, firms would establish anaccount that represented their expected tax benefits.The rule firms generally followed was based on howmuch of the tax benefit the firm expected to retain if itwere audited. For example, if a firm engaged in R&Dand claimed a tax credit for its expenses, there wassome probability that the IRS would audit the taxpayerand reject some or all of that claim.

The taxpayer would interpret the tax law — whichcan be subject to significant ambiguities — and thendetermine its filing position. This tax filing positionwould reflect the firm’s own judgment about whetherthe IRS would challenge the claim and, if so, howmuch of the claim the IRS would sustain.

Because the firm had more information about its taxposition than the IRS did, the firm was likely to makea larger claim of its expected tax benefit than it mighthave if the IRS had had the same information. Sinceauditing is costly to the IRS, firms may have won theaudit lottery more often than they should have.

The new rules for accounting for income tax uncer-tainty have dramatically changed this situation.

The new rules require publicly traded firms to fol-low a two-step approach — recognition and measure-ment — to account for the tax uncertainty. Before be-ginning this new process, the firm identifies anuncertain tax position, which may, for example, involvethe R&D credit. The firm then determines whether thecourt is ‘‘more likely than not’’ to recognize the claim,based on the technical merits of the tax position. Then,for tax positions that the court is likely to recognize,the firm measures the uncertain tax position as thelargest amount that, on a cumulative probability basis,is ‘‘more likely than not’’ to be realized upon ultimatesettlement.

Tuck School of Business at Dartmouth Prof. LeslieRobinson presented research in ‘‘FIN 48 and TaxCompliance,’’ a paper coauthored with Lillian Mills ofthe University of Texas at Austin and Richard Sansingof the Tuck School of Business at Dartmouth that ex-plores a new aspect of the FIN 48 rules. The authorsmodeled how the new rules for reporting uncertaintyin income tax benefits, which they call ‘‘the most sig-nificant change in financial accounting for income

HIGHLIGHTS


(C) Tax A




taxes over the past decade,’’ affect the strategic relation-ship between publicly traded corporations and the gov-ernment.

They were particularly interested in how the newrules might affect not only how much uncertainty ataxpayer reveals through its tax filing position, but alsohow that disclosure might affect the taxpayer’s strategicinteraction with the government. They examinedwhether the new rules would give the IRS previouslyunreported information concerning potentially aggres-sive tax positions.

This research exploits the fact that ambiguities inthe tax law create uncertainty over the facts and cir-cumstances that apply to a particular tax position. Thisambiguity may encourage taxpayers to report an ‘‘ag-gressive’’ tax position knowing that the facts and cir-cumstances of the case may lead the IRS to acceptnone, some, or all of that position on audit. In otherwords, tax law ambiguity may often work to the tax-payer’s advantage.

The authors’ model presents some surprising impli-cations, all of which are contrary to popular impres-sion. First, FIN 48 may actually ‘‘protect’’ taxpayerswho establish small tax reserves for large tax benefits.In the post-FIN 48 world, taxpayers that have a strongfactual case may have a higher expected payoff fromreporting a relatively large tax benefit than in the pre-FIN 48 world. The large benefit claimed for an uncer-tain tax position may signal a strong factual position.

Second, the firm’s disclosed tax liability does notnecessarily overstate the actual tax expense the firmexpects to incur. The reported tax expense depends onhow the taxpayer evaluates the likelihood that it will beaudited and the distribution of its postaudit tax ben-efits.

Finally, FIN 48 does affect tax reporting for posi-tions that the taxpayer believes the IRS may not sus-tain. In other words, if the tax position does not meetFIN 48’s new ‘‘more likely than not’’ standard, thenthe firm is less likely to report an aggressive tax posi-tion than it would have been under the old rules.

Therefore, FIN 48’s biggest impact may be on thesubset of firms that have a weak set of facts. Thesefirms are unlikely to report a large tax reserve if theyestimate they have a less than 50 percent chance ofprevailing on audit. FIN 48, however, does not leadtaxpayers to overstate their expected tax liabilities asso-ciated with uncertain tax positions.

In responding to the implications of their model,Mills explained that the model does a good job of ex-plaining behavior of ‘‘companies that are involved withonly one tax authority and do not have multinationalissues.’’

‘‘We’ll be obtaining FIN 48 data over the next fewyears and will be able to test our theoretical model onreal data at that time,’’ Mills said.

Understanding Marginal Tax Rates

Analysts use marginal tax rates (MTRs) to under-stand why corporations undertake activities rangingfrom where they choose to invest, why they pay divi-dends, how they compensate their employees, and howthey decide to finance that investment. Unfortunately,there is much disagreement on exactly which ‘‘taxrate’’ is important for these types of decisions.

Jennifer Blouin of the Wharton School at the Uni-versity of Pennsylvania attempted to shed some lighton this issue in her paper ‘‘Improved Estimates ofMarginal Tax Rates: Why They Are Needed, Ap-proach, and Implications,’’ coauthored with John E.Core and Wayne Guay, also of the University of Penn-sylvania.

Blouin first establishes that the MTR she is discuss-ing is the present value of current and expected futuretaxes paid on an additional dollar of income earnedtoday. The MTR is neither the statutory tax rate northe average tax rate, which is the ratio of taxes paid toincome. The MTR depends on both the tax code andon expectations of future taxable income. Becausefirms can use negative taxable income in one period tooffset taxable income in prior and future periods, taxesowed are not a linear function of taxable income.Thus, the MTR depends on estimates of the distribu-tion of future taxable income.

Using Compustat data from 1980 to 1994, the au-thors simulate future expected income using the ‘‘ran-dom walk with a drift’’ income simulation method.They find that this method introduces importantmeasurement errors into estimates of future taxableincome, which in turn significantly affect the MTR cal-culations. In particular, the standard deviation offuture taxable income is, on average, too low under therandom walk income simulation (the random walkstandard deviation is only about half as large as theactual standard deviation).

Using an alternative nonparametric estimationmethod, the authors identify the rough direction of themismeasurement. Compared with conventionalmeasures of MTRs, the revised estimated MTRs arehigher for firms with relatively low current profitabilityand are lower for firms with relatively high currentprofitability.

These revised MTRs have important implications forunderstanding how taxes affect firms’ financial deci-sions, among other issues. For example, the authorsnote that their MTR estimates indicate that very fewfirms could increase their debt by more than a factor oftwo and still earn tax benefits at the top statutory rate.Thus, firms may not necessarily be underleveraged.

A Tar Heel Tradition

Prof. Douglas A. Shackelford, Meade H. Willis Dis-tinguished Professor of Taxation at the University of

HIGHLIGHTS


(C) Tax A




North Carolina’s Kenan-Flagler Business School,organized the 11th annual UNC Tax Symposium,which brought together accountants, economists, andlawyers from academe, practice, and the governmentwho share a common interest in tax research.

As Shackelford said:

The purpose of the UNC Tax Center is to pro-vide a point of connection for tax scholars, prac-titioners, and policymakers. The three groups of-ten work in parallel universes, interested in thesame issues, but approaching them differently andin isolation. The Center provides a neutral settingfor the three groups to interact to their mutualbetterment. My experience has been that the in-teraction leads to mutual understanding, respect,and cooperation with a goal of better tax educa-tion, practice, and policy.

Shackelford also announced the UNC Tax DoctoralSeminar, which will hold its inaugural meeting January

5-9, 2009. The seminar is designed to encourage stu-dents who might not otherwise have considered taxresearch and education to develop an interest in under-taking a tax dissertation and entering the job market asa tax professor. In so doing, the Tax Center hopes toturn around the recent decline in tax faculty in busi-ness schools.

Copies of the symposium papers and informationabout the doctoral seminar are available at http://areas.kenan-flagler.unc.edu/Accounting/taxsym/Pages/default.aspx.

♦ Joann M. Weiner is a contributing editor to TaxAnalysts. E-mail: [email protected]

Prof. Douglas Shackelford — providing a point of connec-tion for tax scholars, practitioners, and policymakers.

Photo courtesy of the Kenan-Flagler Business School

HIGHLIGHTS


(C) Tax A




Anti-Treaty-Shopping ProposalsCould Aid U.S. Economy

by Kristen A. Parillo

A Congressional Research Service report releasedJanuary 22 that analyzed two U.S. anti-treaty-shoppingproposals said both proposals would likely improveU.S. economic welfare.

The report examined H.R. 2419 and H.R. 3970,both of which contain revenue-raising tax provisionsdesigned to curb treaty shopping — a practice in whichinvestments are funneled through a treaty country by athird-country resident for the purpose of avoiding orreducing taxes.

The CRS report was originally issued on November8, 2007, but was released again on January 22, 2008.(For the report, see Doc 2007-25271 or 2007 WTD 221-24.)

The Proposals

H.R. 2419, the omnibus farm bill approved by theHouse of Representatives on July 27, 2007, integratedthe provisions of H.R. 3160, a bill introduced byHouse Ways and Means Committee member LloydDoggett, D-Texas. The Doggett proposal would deny atreaty withholding rate reduction on any deductiblepayment made to a foreign affiliate if the withholdingrate on the payment is less than the rate that would beimposed if payment were made directly to the foreignparent company. It would appear, then, that even ifboth the foreign affiliate and the foreign parent residein countries that have a tax treaty with the UnitedStates, but the reduced withholding rate in the foreignparent’s country happens to be higher than the foreignaffiliate’s, the foreign parent’s rate would still apply(even though the foreign parent is not in a tax haven).

The Senate passed its own version of the farm billon December 14, 2007, that did not contain a provi-sion similar to the Doggett proposal. The House andSenate have not yet reached compromise on a finalversion of the bill, though it must be finished byMarch. The White House has threatened to veto bothversions, in part over objections to the major tax provi-sions. (For prior coverage, see Tax Notes Int’l, Jan. 14,2008, p. 247, Doc 2008-618, or 2008 TNT 10-1.)

House Ways and Means Committee Chair CharlesB. Rangel, D-N.Y. on October 25, 2007, introducedH.R. 3970, the Tax Reduction and Reform Act, anomnibus tax bill that would eliminate the alternativeminimum tax and reduce the corporate tax rate. Thatbill contained a revenue provision similar to the Dog-gett bill contained in H.R. 2419 but modified to pur-portedly reduce the possibility of conflict with existing

U.S. tax treaties. The House has not yet considered thebill. (For prior coverage, see Doc 2007-23763 or 2007TNT 208-1.)

While the Doggett provision would apply the parentcompany’s withholding tax rate in any case when it ishigher than the withholding rate applicable to a pay-ment made to a foreign affiliate, the Rangel provisionprovides that the reduced treaty withholding rate on apayment made to a foreign affiliate will not apply un-less the withholding rate would also have been reducedif payment were made directly to the foreign parentcompany. In other words, H.R. 3970’s restrictionswould not apply if there is a tax treaty between theUnited States and the foreign parent’s country and thetreaty reduces the relevant withholding rates.

While the report did not delve into the details ofRangel’s proposal, it appears that his provision wouldstill leave room for conflict with existing U.S. tax trea-ties. If the foreign affiliate to which a U.S. corporationmakes a deductible payment is a resident of a countrythat has a tax treaty with the United States, but thecommon foreign parent is located in a country thatdoes not have a tax treaty with the United States, itseems that the foreign affiliate would never be able totake advantage of the treaty between its country ofresidence and the United States, even though it quali-fied under a limitation on benefits provision.

The report noted that the Joint Tax Committee hasestimated that the Doggett provision would raise about$3.2 billion over 5 years and $7.5 billion over 10 years.The Rangel provision would raise about $2.7 billionover 5 years and $6.4 billion over 10 years.

Weighing the Pros and Cons

The report noted that supporters of the bills believethe provisions would level the playing field betweenU.S.-based companies and treaty-shopping foreign com-panies that pay low U.S. taxes. These supporters arguethat foreign companies that engage in treaty shoppingto minimize their U.S. withholding taxes are reducingthe tax revenue the United States collects on U.S.-source income and depriving the United States, in itscapacity as the source country, of its right to tax therevenue it generates.

The bills’ opponents, the report said, argue that theprovisions would increase the cost to foreign compa-nies of doing business in the United States and thusharm U.S. employment and wages. Moreover, oppo-nents argue that the provisions would abrogate existingU.S. treaties (though the Rangel proposal would do soto a lesser extent).

The report said that in analyzing the potential im-pact of the provisions, one must look beyond the extrarevenue they would bring in and analyze whether theproposals would enhance U.S. economic welfare. Whilesuch an analysis would still involve the proposals’ taxrevenue impact, the report said it also seeks to strike a

HIGHLIGHTS


(C) Tax A




balance between the benefit from collecting tax revenueagainst the benefit from attracting foreign investment tothe United States.

The report noted that an increase in taxes on foreigninvestors will increase tax revenue and that an increasein foreign investment will produce higher wages. Thereport said that in drafting a policy that reconcilesthese two goals, the government must keep in mindthat a tax increase on foreign companies will also re-duce the U.S. investment they undertake and their posi-tive impact on wages. The optimal policy is to tax for-eign investors so that the added revenue fromincreasing taxes is just equal to the reduction in wagesthe increase would cause.

An optimal U.S. tax rate on foreign companies de-pends on how sensitive foreign firms are to U.S. taxes.The more sensitive they are, the report said, the lowerthe optimal rate should be. The report suggested thateven if the U.S. government curbs treaty shopping,there will still be foreign investors that want to investin the United States. When considering that the UnitedStates could still maintain its tax base while at thesame time increase its tax revenue from foreign compa-nies, the report said that the treaty-shopping restric-tions in the Doggett and Rangel proposals would likelyimprove U.S. economic welfare.

The report cautioned that there are two importantqualifications to that analysis. One factor not analyzedis possible counteractions by foreign countries that arehome to companies that would be affected by thetreaty-shopping proposals. These countries may imposetheir own anti-treaty-shopping restrictions that wouldaffect U.S. companies with investments in those coun-tries, the report said. Also not taken into account is theargument that the proposals would abrogate existingU.S. tax treaties. An analysis of these issues, however,is ‘‘beyond the scope of this report,’’ the report said.

♦ Kristen A. Parillo is a legal reporter with Tax NotesInternational. E-mail: [email protected]

Transfer Pricing Remains TopTax Issue for Multinationals

by Lisa M. Nadal

Multinational companies ‘‘are under increasing pres-sure to manage transfer pricing risks with greater preci-sion, yet a rapidly developing regulatory environment,new enforcement tactics, and shifting fiscal policiesmake this even more complex to achieve,’’ according toErnst & Young’s 2007-2008 Global Transfer Survey.

The survey, a biennial publication since 1995, wasreleased in December 2007. It polled 850 multinationalcorporations in 24 countries, asking about transfer pric-ing issues such as the current audit landscape, disputemanagement, the interaction between customs andtransfer pricing, and the impact of financial reportingon transfer pricing. (For the survey, see Doc 2008-2219or 2008 WTD 26-17; for prior coverage, see Tax NotesInt’l, Jan. 7, 2008, p. 43, Doc 2007-27835, or 2007 WTD247-5.)

‘‘Globally, more parent companies identified transferpricing as the most important tax issue they faced thanany other issue,’’ the survey says. And the trend is ex-pected to continue, with 74 percent of parent compa-nies and 81 percent of subsidiaries surveyed saying thatover the next two years, transfer pricing will be either‘‘very important’’ or ‘‘absolutely critical’’ to their op-erations.

Although the importance of transfer pricing in taxplanning is clear, the degree to which transfer pricing isparamount over other tax issues varies by country andindustry. For example, a high number of respondentsin Germany and Switzerland (76 percent of parentcompanies in both countries) identified transfer pricingas the most important tax issue. At the other end ofthe spectrum was Brazil, where only 4 percent of re-spondents identified transfer pricing as the top tax is-sue. European and Asia-Pacific respondents also werevery concerned about transfer pricing, with 42 percentof the European companies surveyed and 44 percent ofthe Asia-Pacific respondents identifying transfer pricingas the top tax issue.

From an industry standpoint, the pharmaceuticalsector appears to be the most concerned with transferpricing matters, with 76 percent of respondents in thatindustry identifying it as their top tax issue, followedby the automotive sector (49 percent) and the con-sumer products sector (47 percent). Only 15 percent ofrespondents in the media and entertainment industry,and only 8 percent in the insurance sector, identifiedtransfer pricing as the most important issue.

Audits, Adjustments, and Penalties

Fifty-two percent of all corporations surveyed havebeen subjected to a transfer pricing audit since 2003,

HIGHLIGHTS


(C) Tax A




with 28 percent of the audits of parent companies and23 percent of the audits of subsidiaries resulting in ad-justments. In general, respondents also indicated thatthey believe there is an increased likelihood of beingaudited in the future.

The increase in transfer pricing audits seems to bethe result of tax authorities’ increased focus on en-forcement strategies, the survey says.

The pharmaceutical industry reported having thelargest number of adjustments, with 56 percent of thetransfer pricing examinations in that industry since2003 resulting in adjustments. The consumer productssector followed, with 31 percent, and the utilities andreal estate sector reported that 8 percent and 11 percentof their audits, respectively, resulted in adjustments.

Penalties were imposed in only 15 percent of thecases in which adjustments were made, but tax authori-ties threatened to impose them in 31 percent of thecases. Based on that data, the survey estimates thatcorporations facing an adjustment have a one-in-three

chance of being threatened with a penalty, but a one-

in-seven chance of actually receiving one.

APAs, Competent Authority

APA programs seem to be working more efficiently,

as 51 percent of parent companies that applied for uni-

lateral APAs reported that the process was completed

within a year, an improvement from the previous year,in which only 32 percent of parent companies said theprocess was finished within 12 months.

Only 21 percent of parent corporations surveyedreported using APAs, although 86 percent of those thathave used the process said they would use it again.

APAs appear to be most popular in the UnitedStates, the United Kingdom, and Australia, a findingthat has been consistent since 2003. However, the num-ber of countries in which multinationals seek APAs isincreasing — up to 28 countries from 23 in 2005 and13 in 2003.

According to a new survey by Ernst & Young, transfer pricing is the single most important tax issue faced by multina-tional companies.

Dean Lipoff

HIGHLIGHTS


(C) Tax A




The survey also found that respondents are becom-ing slightly less reliant on the competent authority proc-ess, with a small decline in the number of respondentsthat said they have used it in the past four years. In2005, 18 percent of parent companies and 13 percentof subsidiaries said they had referred a matter to acompetent authority, compared with 17 percent of par-ent companies and 11 percent of subsidiaries in 2007.However, the survey notes that the competent authorityprocess is the ‘‘preferred method among parent respond-ents for resolving transfer pricing disputes,’’ with 47percent of respondents preferring it, whereas 31 per-cent of respondents prefer APAs.

Litigation is the least preferred alternative for man-aging transfer pricing disputes, with only 8 percent ofrespondents preferring it and only 3 percent of respond-ents reporting that they have litigated a transfer pricingdispute since 2003.

Financial Reporting, Other Issues

Financial reporting developments have increased thecost of transfer pricing compliance, according to 53percent of respondents. The survey attributes perceivedrisks to the issuance of Financial Accounting Stand-ards Board Interpretation No. 48, which imposes newrequirements for disclosing uncertain tax positions on areturn. Forty-four percent of parent companies saidtheir dependence on audit firms has increased becauseof the changes in financial reporting.

Customs and transfer pricing also overlap, with 19percent of parent corporations responding that theircustoms pricing has been questioned based on thetransfer pricing for the same goods and vice versa. Ac-cording to the survey, many countries are moving to-ward combining customs and tax administrations.Canada, Norway, Spain, Sweden, and the United King-dom are among the countries that have integrated thetwo, the survey says.

The problem, according to the survey, is that ‘‘mostcountries that have integrated customs and tax officesor adopted combined enforcement approaches havedone so without providing taxpayer-focused guidanceon harmonization.’’

♦ Lisa M. Nadal is a legal reporter with Tax NotesInternational. E-mail: [email protected]

ECJ Nixes German InheritanceValuation Rules

by Tom O’Shea

The European Court of Justice on January 17 is-sued its judgment in Theodor Jäger v. Finanzamt Kusel-Landstuhl (C-256/06), ruling that Germany’s inherit-ance tax valuation rules are incompatible with the ECTreaty principle of free movement of capital. (For thejudgment, see Doc 2008-1144 or 2008 WTD 14-17.)

In Jäger, Germany calculated the inheritance taxpayable on agricultural and forestry assets situated inGermany more favorably than for similar assets locatedin France. The appellant challenged those tax rules onthe ground that they breach his right to the free move-ment of capital as guaranteed by the EC Treaty. Thematter was appealed to the German Federal FinanceCourt (Bundesfinanzhof), which took the view that thematter should be referred to the ECJ under the prelimi-nary ruling procedure.

Facts of the Case

The German inheritance tax rules impose taxationon the entire estate of a person who died while domi-ciled in Germany. Assets situated outside Germany arealso subject to the tax, with a credit granted for foreigninheritance tax payable on those foreign assets in theabsence of treaty provisions relating to inheritance tax.

Under the German rules, property consisting of ag-ricultural land and forestry assets situated outside Ger-many is valued according to its fair market value. Dif-ferent valuation rules are used if the agricultural landand forestry assets are situated in Germany, reducingthe taxable valuation to around 10 percent of the cur-rent market value.

Moreover, the German tax rules provide for an addi-tional tax-free amount of DEM 500,000 in the case ofacquisition by inheritance of agricultural land and for-estry assets situated in Germany, and only 60 percentof the remaining value of the property (after deductionof the tax-free amounts) is taken into account for in-heritance tax purposes. The tax-free amount and thevaluation at the reduced rate do not apply to agricul-tural land and forestry assets situated outside Germany.

Jäger, a French resident, was the sole heir of hismother, who died in Germany. Her estate containedassets in Germany and some agricultural land and for-estry assets situated in France. Jäger was denied the taxadvantages granted under the German tax rules be-cause the agricultural land and forestry assets are notlocated in Germany.

Free Movement of Capital

The ECJ noted that while the EC Treaty does notdefine the term ‘‘movement of capital,’’ Annex I of

HIGHLIGHTS


(C) Tax A




Directive 88/361 retains the same indicative value forthe purposes of defining capital movements. Accord-ingly, because the transfer of assets of a deceased fallswithin the heading of personal capital movements, aninheritance is a movement of capital ‘‘except in caseswhere its constituent elements are confined within asingle Member State,’’ the ECJ said. That purely do-mestic situation did not apply to the Jäger case becausethere was a cross-border dimension: A resident of Ger-many had left to another person resident in France as-sets situated in Germany and France. Therefore, thefree movement of capital applied.

Restriction on the Free Movement of Capital

The ECJ noted that inheritance tax rules such asthose in Germany could:

• discourage the purchase of agricultural land andforestry assets in EU member states other thanGermany;

• deter the transfer of the financial ownership insuch assets to persons resident in other memberstates; and

• reduce the value of an inheritance of a resident ofa member state other than that in which the prop-erty was situated.

The ECJ determined that ‘‘the national provisions. . . insofar as they result in an inheritance consisting ofagricultural land and forestry situated in another Mem-ber State being subject, in Germany, to inheritance taxthat is higher than that which would be payable if theassets inherited were situated exclusively [in Germany]. . . have the effect of restricting the movement of capi-tal by reducing the value of an inheritance consistingof such an asset situated outside Germany.’’ The ECJwent on to reject the arguments of the German govern-ment justifying such inheritance tax rules.

Justification

The ECJ rejected the notion that the effect of theGerman legislation was the unavoidable consequenceof the coexistence of national tax systems, stating thatthe ‘‘reduction in the value of the estate flows solelyfrom the application of the German legislation.’’

Moreover, the ECJ rejected the German govern-ment’s argument that it was entitled to reserve the taxadvantages at issue to assets situated within its terri-tory, noting that such rules could be compatible withthe free movement of capital provided that they ap-plied to situations that were not objectively compa-rable, but that the national provisions must not consti-tute a means of arbitrary discrimination or a disguisedrestriction on the free movement of capital.

Also, ‘‘the difference in treatment between the agri-cultural land and forestry assets situated in Germanyand those situated in the other Member States mustnot go beyond what is necessary to achieve the objec-

tive pursued by the legislation at issue,’’ the ECJ said.

Therefore, to be considered compatible with the free

movement of capital, the difference in treatment must

concern situations that are not objectively comparable

or must be justified by overriding reasons in the generalinterest, it said.

Comparability

In this case, the calculation of the inheritance taxwas ‘‘directly linked to the value of the assets includedin the estate, with the result that there is objectively nodifference to justify unequal tax treatment,’’ the ECJsaid. In other words, the situation involving agricul-tural land and forestry assets located in France wascomparable to that of any other heir whose inheritanceconsists only of agricultural land and forestry situatedin Germany bequeathed by a person domiciled in thatstate, according to the Court.

Overriding Reasons in the General Interest

Next, the ECJ examined the German government’sargument that its legislation was justified because itwas designed to ‘‘compensate for the specific costs in-volved in maintaining the social role fulfilled by agri-cultural land and forestry holdings . . . [which] makes itpossible to prevent . . . the heir . . . from being forced tosell or relinquish it in order to be able to pay the inher-itance tax and . . . [to prevent] the break-up of agricul-tural land and forestry holdings guaranteeing produc-tivity and jobs.’’ The government argued that there wasa direct link between the specific obligations resultingfrom the subordination of those holdings to the generalinterest and the particular kind of valuation applied tothose holdings in inheritance tax matters.

While the Court accepted that there may be situa-tions in which rules related to agricultural and forestryholdings and the preservation of jobs connected tosuch holdings might concern objectives in the publicinterest capable of justifying a restriction on the freemovement of capital, in the circumstances of this case,the Court found that the government had not demon-strated ‘‘a need to refuse the benefit of a favourableassessment and other tax advantages to any heir whoacquires by inheritance an agricultural or forestry hold-ing which is not situated within German territory.’’The ECJ found that there was no evidence to supporta finding that the holdings established in other memberstates are not in a comparable situation to that ofholdings established in Germany.

Practical Difficulties

The Court also examined the government’s argu-ment that its tax rules were justified because of thepractical difficulties of valuing agricultural land andforestry assets situated in other member states. The

HIGHLIGHTS


(C) Tax A




assessment and valuation procedure used by the Ger-man tax authorities was based on ‘‘statistical docu-ments compiled by the German authorities,’’ the Courtobserved. ‘‘Similar data [were] not available in respectof agricultural land and forestry assets situated in otherMember States.’’

However, the Court rejected that justification, com-menting that while it may prove difficult to apply thenational assessment procedure to agricultural and for-estry assets situated in another member state, ‘‘thatdifficulty cannot justify a categorical refusal to grantthe tax advantage in question since the taxpayers con-cerned could be asked themselves to supply the au-thorities with the data which they consider necessaryto ensure application of that procedure in such a waythat it is adapted to holdings in other Member States.’’The Court observed that ‘‘any disadvantages encoun-tered in determining the value of assets situated in theterritory of another Member State under a special na-tional procedure cannot, in any event, be sufficient tojustify restrictions on the free movement of capitalsuch as those arising under the legislation at issue.’’

The Court’s Conclusion

The ECJ therefore concluded that the German in-heritance tax rules at issue were incompatible with thefree movement of capital and that it had not been es-tablished that the tax rules at issue were justified byoverriding reasons in the general interest.

Analysis

The Jäger decision is the latest in a line of ECJ judg-ments concerning the inheritance tax rules of EUmember states. The variety of inheritance tax rules thathave come before the Court has restricted tax conces-sions to property located in the national territory(Jäger) or to persons who resided and died in the na-tional territory (Barbier C-364/01).

In Geurts and Vogten (C-464/05), Belgium’s inherit-ance tax exemption rules came under scrutiny becausethey restricted a tax exemption relating to the assets ofa family undertaking to situations in which at least fivefull-time workers were employed in the Flemish regionof Belgium in the three years preceding the death ofthe deceased. The exemption was not granted if thefamily undertaking employed the requisite number ofworkers in another EU member state. (For the ECJjudgment in Geurts and Vogten (C-464/05), see Doc 2007-23781 or 2007 WTD 208-13; for related coverage, see Doc2007-24638 or 2007 WTD 216-2.)

In van Hilten (C-513/03), the Netherlands taxed theestates of Dutch nationals who died within 10 years ofceasing to reside in the Netherlands as if they had con-tinued to reside in the Netherlands (with credit for anyinheritance taxes paid in the country to which the de-ceased transferred his residence). (For the ECJ judg-ment in van Hilten, see Doc 2006-3763 or 2006 WTD 39-

7.) The ECJ’s jurisprudence in the area of inheritancetaxes indicates that this is an area that the memberstates need to reconsider to ensure that their inherit-ance tax rules fully comply with EU law and do notrestrict the fundamental freedoms guaranteed by theEC Treaty.

The Concept of Restriction

The Jäger case provides a nice contrast to the vanHilten decision, in which the ECJ held that the Dutchinheritance tax rules did not constitute a restriction onthe free movement of capital because they treated theestates of Dutch nationals who had transferred theirresidence abroad in a similar way to the estates ofDutch nationals that remained in the Netherlands (themigrant/nonmigrant test). The Court noted that ‘‘suchlegislation cannot discourage the former from makinginvestments in that Member State . . . nor the latterfrom doing so in another Member State . . . nor can itdiminish the value of the estate of a national who hastransferred his residence abroad.’’

‘‘Since it applies only to nationals of the MemberState concerned, it cannot constitute a restriction onthe movement of capital of nationals of the otherMember States,’’ the ECJ concluded.

By contrast, in Jäger, the Court found that the Ger-man inheritance tax rules did restrict the free move-ment of capital. The reduction in the value of the es-tate flowed solely from the German legislation, and theinheritance tax on the agricultural property and for-estry assets situated in France was higher than the in-heritance tax that would be payable if the assets hadbeen situated in Germany. That tax ‘‘disadvantage’’had ‘‘the effect of restricting the free movement ofcapital by reducing the value of an inheritance consist-ing of such an asset situated outside Germany,’’ theCourt said.

The distinction between van Hilten and Jäger is im-portant because in the former, there was no restrictionon the free movement of capital. Moreover, van Hiltendemonstrates that reverse discrimination is possible inan EU setting because a member state is entitled totreat its own nationals less favorably from a taxationpoint of view than the nationals of other memberstates who exercise their EU law rights in relation to itsterritory. In van Hilten, the Dutch inheritance tax rulesapplied only to nationals who moved abroad; the rulesdid not apply to nationals of other member states whohad resided in the Netherlands and then movedabroad. Consequently, this is an example of a situationin which a member state taxes its own nationals whomove abroad but not the nationals of other memberstates who leave the Netherlands after residing there.

Practical Obstacles

In Jäger, the ECJ dismissed the German govern-ment’s arguments about the practical difficulties in-volved in valuing agricultural land and forestry assets

HIGHLIGHTS


(C) Tax A




situated in other member states as a justification for theless favorable tax treatment of the French agriculturalproperty. This was in line with its earlier case law re-garding the freedom of establishment (Geurts andVogten) and the free movement of workers and the free-dom to provide services (Commission v. Belgium, C-300/90). Moreover, in Manninen (C-319/02), the Courtnoted that difficulties in determining the tax actuallypaid cannot justify an obstacle to the free movement ofcapital. (For the ECJ judgment in Manninen, see Doc2004-17814 or 2004 WTD 174-17.)

In Jäger, the Court emphasized that any ‘‘practicaldifficulties’’ cannot justify a ‘‘categorical refusal togrant the tax advantage in question since the taxpayersconcerned could be asked themselves to supply the au-thorities with the data they consider necessary.’’ TheCourt had already made similar statements in Commis-sion v. Belgium, Commission v. France (C-334/02), andELISA (C-451/05). (For the ECJ judgment in EuropeanCommission v. France, see Doc 2004-5316 or 2004 WTD50-19. For the ECJ judgment in ELISA (C-451/05), seeDoc 2007-23006 or 2007 WTD 199-16.)

Tax Consequences of Inheritance Tax

The Jäger case is also interesting because of theCourt’s comments on the effects that inheritance taxrules have on the free movement of capital. These rules

can discourage the purchase of immovable property inother member states and reduce the value of an inher-itance of a resident of a member state other than thatin which the property is situated, the Court said. Therules were, therefore, protectionist in nature and restric-tive of the free movement of capital.

The Court delivered a similar response in Barbier,noting that ‘‘the tax consequences in respect of inherit-ance rights are among the considerations which a na-tional of a Member State could reasonably take intoaccount when deciding whether or not to make use ofthe freedom of movement provided for in the Treaty.’’This echoed its reasoning regarding the freedom of es-tablishment in Halliburton (C-1/93), in which the ECJdetermined that a ‘‘payment of tax on the sale of im-movable property constitutes a burden which rendersthe conditions of sale of the property more onerousand thus has repercussions on the position of the trans-feror.’’ The inheritance tax rules of the EU memberstates can therefore have an impact on any of the fun-damental freedoms, and any different treatment of EUnationals under such rules must be justified.

♦ Tom O’Shea is a lecturer in tax law with the Centrefor Commercial Law Studies at Queen Mary,University of London.

HIGHLIGHTS


(C) Tax A





(C) Tax A




Australia

Rudd Seeks to Attract More Global

Investment Funds

In a bid to make Australian managed funds morecompetitive, Australian Prime Minister Kevin Rudd’snew Labor government announced on February 1 thatit will cut the withholding tax in half (from 30 percentto 15 percent) on distributions to foreign investors inlocally managed funds as of July 1. According to areport on Bloomberg.com, Minister for Finance andDeregulation Lindsey Tanner predicted that the cutsmay attract as much as AUD 13 billion (about US $11billion) a year. (For prior coverage of proposed Austra-lian tax reform, see Tax Notes Int’l, Oct. 29, 2007, p.447, Doc 2007-23474, or 2007 WTD 204-2.)

The distributions affected are Australian-source nettaxable income of the managed funds, for examplerental income, foreign exchange gains, income fromfinancial transactions, and capital gains on taxableAustralian property. The distributions affected do notinclude dividends, royalties, or interest. The new taxwill be flat and will apply to nonresident trustees andcompanies.

Another benefit is that the new tax will be final; atax return will not have to be filed. This system willappeal to many overseas investors who do not wish toplace themselves within the Australian tax net that fil-ing a return (to claim a possible refund in a nonfinalregime) would require. The waiving of a tax return willhave a cost, however: Claiming debt as a deductionwill be abolished. The idea is that the lower tax rateand final status of the tax will more than offset the lossfrom the elimination of debt deduction, thereby mak-ing Australia a more desirable investment location. Sin-gapore and Hong Kong, two prime competitors interms of attracting Asian investment, have flat, finaltax rates of 10 percent (0 percent for individuals) and15 percent, respectively, on these kinds of distributions.

A reduced withholding tax has also been called forby the incoming chief executive of AMP Financial Serv-ices, Craig Dunn. AMP is a leading wealth manage-

ment company in Australia and New Zealand. Dunn

said at a November 27 press conference that the tax

put barriers in place to developing Australian financial

services overseas. ‘‘The missing piece so far in the de-

velopment of the Australia funds management industry

is the widespread management of global funds,’’ he

said. ‘‘I would like to see Australia exporting more of

its funds management expertise to the world.’’

The Labor government had promised such cuts in

speeches and policy papers leading up to the Novem-

ber 24 election in which it defeated the Liberal coali-

tion under John Howard that had been in power since

1996. Labor won 83 seats in the 150 seat House of

Representatives (lower house) and took 32 seats in the

Senate (upper house) to the Liberal coalition’s 37. (The

Senate has 76 seats, 40 of which were contested in this

election.) The balance of power in the Senate will beheld by the five Greens, Independent Nick Xenophon,and Family First’s Steve Fielding.

As early as spring 2007, Labor had announced itsplans should it attain power. The May 17, 2007, an-nouncement that a Labor government would cut thewithholding tax to 15 percent was well received by avariety of interests looking to attract more foreign in-vestment money to Australia. Richard Gilbert, chiefexecutive of the Investment and Financial Services As-sociation, praised Rudd as a man with vision. ‘‘Theproposed reduction in the withholding tax will removea significant and burdensome administrative require-ment for nonresident investors and Australian fundmanagers,’’ he was quoted in Investor Weekly as saying.Peter Verwer, chief executive of the Property Councilof Australia, added, ‘‘The Property Council of Austra-lia applauds Mr. Rudd’s commitment to reform Aus-tralia’s outdated withholding tax system.’’

Australia is eager to tap into the huge amount ofinvestment circulating within the global managed fundsindustry. According to a May 10, 2007, Labor partyrelease, there are currently US $50 trillion in interna-tionally managed funds, with that figure projected toreach US $60 trillion in three years. This generallyagrees with a 2006 report issued by the Boston Con-sulting Group that found US $49.1 trillion in global

COUNTRYDIGEST


(C) Tax A




professionally managed assets. The group’s study foundthat much of the growth has been in the Asia-Pacificregion.

Australia’s financial services sector has alreadyemerged as a large part of the nation’s economy. Ac-cording to the government agency Axiss (the financialservices team of the government’s Department of In-novation, Industry, Science and Research), the financialservices industry is the third largest sector in Austra-lia’s economy, accounting for AUD 60 billion of GDP(about US $54 billion). Australia’s 2007 GDP is esti-mated at AUD 766.8 billion (about US $687.9 billion),and the U.S. 2007 GDP is estimated at more than $13trillion. ‘‘The world wants to give us more of theirmoney to manage, which is good for the country. Thefees generated by the investment stay in Australia andbuild our capacity as a financial sector hub,’’ Verwersaid.

The Liberal coalition has opposed Labor’s initiativefrom the start, claiming that it will cost the treasuryAUD 100 million per year (about US $90 million). La-bor argues that the tax cut will cost only about AUD15 million per year (about US $13.5 million) and willbring much more investment to the country. Politically,the positions line up in a fashion counterintuitive fromthe point of view of U.S. politics. Labor, the govern-ment of the left, is carrying out the kind of tax reformmore typically advocated by the U.S. Republican Party,while the Australian right seems to be pursuing a moretraditional fiscally conservative position; that is, oppos-ing tax cuts that could negatively affect the budget.Granting tax breaks to wealthy overseas investors, de-spite the proposed downstream benefits to the nationaleconomy, tends not to be associated with the U.S.Democratic Party.

♦ Randall Jackson, Tax Analysts.

E-mail: [email protected]

Belgium

Belgium, Chile Sign Tax Treaty

Belgium and Chile signed an income tax treaty andprotocol on December 6, 2007, in Brussels. The agree-ment is the first income tax treaty concluded betweenthe two countries.

For Belgium, the treaty covers individual incometax, corporate income tax, the income tax on legal en-tities, the income tax on nonresidents, the supplemen-tary crisis contribution, and all prepayments and sur-charges on those taxes and contributions. For Chile, itapplies to income taxes imposed under the ChileanIncome Tax Act.

Under the treaty, dividends generally will be subjectto a 15 percent withholding tax rate. However, divi-dends will not be taxed in the contracting state inwhich the dividend payer is resident if the beneficialowner of the dividends is a company that is resident inthe other contracting state and that, at the time of pay-ment of the dividends, holds and has held for an unin-terrupted period of at least 12 months shares directlyrepresenting at least 10 percent of the dividend payer’scapital.

The treaty provides that a 5 percent withholding taxrate will apply to interest derived from:

• loans granted by banks and insurance companies;

• bonds and securities that are regularly and sub-stantially traded on a regulated securities market;and

• sales on credit paid by a buyer of machinery orequipment to a beneficial owner that is also theseller of the machinery or equipment.

In all other cases, interest payments will be subjectto a 15 percent withholding tax rate.

Royalties payable for the use of, or the right to use,any industrial, commercial, or scientific equipment willbe subject to a 5 percent income tax rate. A 10 percenttax rate will apply to other royalty payments.

The treaty will enter into force after the two coun-tries exchange ratification instruments.

♦ Iurie Lungu, Graham & Levintsa, Chisinau

Canada

Think Tank Urges Adoption of

Carbon Tax

The Conference Board of Canada, a nonprofit,Ottawa-based Canadian think tank dedicated to re-searching and analyzing economic trends, has urgedthe Canadian government to institute a carbon tax sys-tem along with a cap-and-trade system to reduce Cana-da’s greenhouse gas emissions.

The Conference Board on January 31 released a re-port calling for the pricing of carbon dioxide emissionsas the best strategy for reducing Canadian emissionsand combating climate change. In so doing, the organi-zation joined an expanding roster of research, business,and environmental groups calling for the Canadiangovernment to increase its efforts to slow down andreverse the growth of coal, oil, and other fossil fuelemissions. The report stressed that the tax should berevenue-neutral, as its goal is to reduce emissions andbring about positive climate change, not increase gov-ernment revenue.

AUSTRALIA


(C) Tax A




In a statement accompanying the report, ChiefEconomist Glen Hodgson said, ‘‘Green taxes should beintroduced for industries and consumers to establish avisible price for carbon dioxide as a way of slowing thegrowth of, and then reducing, emission.’’ The state-ment echoes the report’s recommendation that compa-nies and individuals must be made to feel a sting inorder to motivate them to adopt climate-friendly strate-gies and technology.

‘‘The Conference Board has added its voice to thechorus calling for a strong price on greenhouse gasemissions,’’ said Matthew Bramley of the Pembina In-stitute, a nonprofit Canadian environmental think tank.‘‘It’s yet more pressure on John Baird [minister of theenvironment and Conservative MP from Ottawa West-Nepean] to accept that his proposed regulations needto be radically strengthened,’’ Bramley was quoted assaying on thestar.com Web site.

Baird has rejected all independent group, economist,and environmentalist criticism of the government’splan, insisting he will stick with its goal of limiting thegrowth of pollution from large industries instead offorcing them to make absolute reductions in theirgreenhouse gas emissions. The plan would requirelarge polluting facilities to reduce greenhouse gas emis-sions per unit of production by 18 percent starting in2010. It would also require them to increase the so-called intensity target by 2 percentage points in everysubsequent year, according to a January 7 CanWestNews Service report. Ottawa and Alberta have alsoproposed a partial trading system that would cap theprice of emissions at C $15/metric tonne (1 metrictonne = 0.907184 U.S. tons, and C $1 = about US $1as of February 1, 2008). In Europe, carbon dioxideprices are allowed to change with the supply and de-mand, but are currently about C $25/metric tonne, ac-cording to an article on thestar.com.

The Conference Board’s report recommends meas-ures far tougher than what the report calls the federalgovernment’s ‘‘modest’’ climate change plan. Specificideas include a starting carbon tax of C $25 per metrictonne, with continued increases; regulations and pro-grams to promote fuel-efficiency improvements, such asa beefed-up version of the current rebates for fuel-efficient cars and fees for gas guzzlers in Ottawa; and,for Canada’s largest greenhouse gas emitters (mainly inthe oil and gas industry, electricity generators, and ma-jor energy users such as makers of steel, aluminum,chemicals, mining, cement, and forest products), theimposition of both a carbon tax and an accompanyingemissions cap-and-trade system. The challenge, theboard says, is to find a price that reflects the cost ofemitting greenhouse gases into the atmosphere and willcause people to change their behavior, but still notchoke off economic activity.

Last month the National Round Table on the Envi-ronment and Economy, a federally funded advisorygroup chaired by Glen Murray, former mayor of Win-

nipeg and president and CEO of the Canadian Urban

Institute in Toronto, called for a carbon tax and emis-

sions trading. The group said the carbon dioxide price

should reach C $75/metric tonne by 2020, thereby rais-

ing the cost of gasoline by C $0.18/liter (one liter =

about 0.264 gallons). The costs of creating a carbon

tax were estimated to be equivalent to two years of

economic growth (assuming an average annual growth

rate of 2 percent) and would achieve a 65 percent re-

duction in greenhouse gases by 2050. (For prior cover-

age of the group’s report, see Doc 2008-447 or 2008

WTD 6-6.)

The government rejected the group’s recommenda-

tions, with Baird dismissing the carbon tax as a ‘‘Lib-

eral idea’’ (referring to the opposition Liberal Party, led

by Stéphane Dion). The Liberal Party also rejected the

group’s proposals, however, saying that while it op-

poses a tax, it supports the concept of a cap-and-trade

system to ensure that businesses — not consumers —

would shoulder the burden of reducing emissions.

Only the Green Party welcomed the group’s proposals,

with Green leader Elizabeth May saying she was en-

couraged by the group’s recommendations and stress-

ing that the Green Party was the only party clearly ad-

vocating a carbon tax as part of a fiscal plan that

would result in a reduction in payroll and income

taxes.

A carbon tax could be problematic politically for

Conservative leader Stephen Harper as well. According

to a January 7 report on Bloomberg.com, Suncor En-

ergy Inc. and other companies are preparing to spend

more than C $80 billion over 10 years on oil sands

projects. A carbon tax linked to pollution could make

those projects significantly more expensive. The article

adds that tar sands in Alberta hold the largest pool of

oil reserves outside the Middle East. Alberta is also

Harper’s electoral district.

The Conference Board report doesn’t suggest to

what level the carbon tax should ultimately rise, but it

does say that while C $25/metric tonne ‘‘might encour-

age short-term adjustment . . . it will not on its own

induce significant change’’ in many parts of the

economy where the cost of reducing emission exceeds

C $25.

At the current level of emission (about 750 million

metric tones), a C $25 tax would cost about C $19 bil-

lion.

According to the Conference Board of Canada, the

division of greenhouse gas emission sources is as fol-lows: transportation, 27 percent; fossil fuel productionand upgrading, 21 percent; electricity generation, 17percent; other industries, 13 percent; residential andcommercial, 10 percent; agriculture, 8 percent; and

CANADA


(C) Tax A




waste, 4 percent. Leading provincial emitters are Al-berta, at 30 percent; Ontario, at 26 percent; and Que-bec, at 12 percent.



Chile

New Tax Credit Available for

Research and Development

Historically, research and development in Chile hasbeen carried out mainly through projects developed byvarious government agencies. Almost 70 percent ofChile’s current R&D investment is made with govern-ment funding.

But in a move designed to shift most investment inresearch and development from the government to theprivate sector, Chile recently enacted Law 20,241, un-der which the government will finance 35 percent ofprivate-sector expenditure on R&D activities through acorporate tax credit. The new law will enter into forceon May 1.

Only significant R&D activities are expected to trig-ger the new tax credit. Trials, assessments, improve-ments, adaptations, routine analysis, aesthetic or minorchanges, and the acquisition of intellectual propertywill not be deemed R&D activities under Law 20,241.

The tax credit will be available to most domesticand foreign companies doing business in Chile (even ifthe R&D activities are carried out abroad). Access willbe granted by entering into a preapproved, writtenagreement with a research center or university. Theagreement must envisage R&D expenditures exceedingan amount equal to $8,000 (approximately CLP3,719,200 at current exchange rates), and the entity

entering into the agreement must not be related to thecertifying research center or university.

The corporate tax credit will be equal to 35 percentof the total cash disbursements made by a private en-tity under the R&D agreement, up to a limit of either15 percent of the taxpayer’s annual gross revenues or apredetermined statutory amount equal to $360,000 (ap-proximately CLP 167,364,000 at the current exchangerate). Any credit resulting from R&D in excess ofthose amounts may be carried forward for the paymentof taxes in future years. However, taxpayers benefitingfrom this incentive are entitled to deduct their R&Ddisbursements from their taxable income, even if thosedisbursements exceed the amounts that can be creditedagainst their income tax.

The R&D activities do not need to be for the benefitof the taxpayer claiming the tax credit, even if the ac-tivity goes beyond the ordinary course of that taxpay-er’s business. Also, it appears there is no limit on theamount of R&D that may be conducted to benefit enti-ties resident outside Chile. However, Chilean entitiesthat own the knowledge generated by R&D activitiesconducted abroad must be compensated at arm’slength for the use or transfer of that knowledge.

The incentive will be available through 2017, afterwhich its effectiveness and continuance will be ana-lyzed. Therefore, those wishing to take advantage ofthe tax credit should begin work on their R&D projectsas soon as possible.

♦ Matías Concha, Ernst & Young, Santiago

Croatia

New Income Bases Established for

Mandatory Pension Contributions

Croatian Minister of Finance Ivan Suker recentlyannounced new minimum and maximum income basesfor mandatory pension insurance contributions in 2008and issued a document (published in official gazetteno. 119/07) that contains regulations for calculatingthose contributions.

There are four types of mandatory contributions inCroatia:

• contributions for pension insurance (20 percent);

• contributions for health insurance (15 percent);

• contributions for accident insurance and illness(0.5 percent); and

• contributions for the employment insurance (1.7percent).

Correction

An article in the February 4, 2008, issue of TaxNotes International contained an error (‘‘Canadian CourtRevisits CFC Treaty Provisions,’’ p. 391). The thirdsentence of the second-to-last paragraph should read:‘‘Rather, the court appears to have adopted the viewthat the language of the relevant treaty provisionsthemselves demonstrated sufficient meaning and pur-pose, thereby obviating the need to comprehensivelyconsult extrinsic sources in an attempt to determine themeaning and purpose.’’

Tax Analysts regrets the error.

CANADA


(C) Tax A




Contributions for pension insurance are paid by theemployee, while the other mandatory contributions arepaid by the employer.

Previously, the base for the compulsory 20 percentpension insurance contribution was the taxpayer’s sal-ary (gross income). Therefore, if an employee had anannual salary of $10,000, the mandatory pension insur-ance contribution was $2,000 (20 percent) and the per-sonal income tax base was $8,000.

However, with salaries in Croatia rising, the govern-ment felt that the mandatory pension insurance contri-bution was too high, so it established new minimumand maximum income bases for the mandatory pen-sion insurance contribution by way of the Act on Con-tributions for Compulsory Insurance.

The maximum base for pension insurance contribu-tions is now calculated by multiplying by six the aver-age monthly gross salary for payments received be-tween January and August of the previous year, basedon data from the Central Bureau of Statistics. The av-erage monthly gross salary amounted to HRK 6,975(approximately $1,435) in 2007, so the maximum in-come base for calculating monthly pension insurancecontributions was HRK 41,850 (approximately $8,600).

On the other hand, the minimum base cannot beless than 35 percent of the average salary. Therefore,the minimum base for calculating monthly pension in-surance contributions is HRK 2,441.25 (approximately$502), or HRK 29,295 (approximately $6,000) per year.

The new income bases apply throughout 2008 forfull-time employees. The income bases may be differentif taxpayers work part time, are retirees, or are artists,craftsmen, and so on.

♦ Hrvoje Šimovic, Faculty of Economics and Business,

University of Zagreb

Czech Republic

Amendment Introduces New

Participation Exemption Rules

An amendment to the Czech Income Tax Act thatentered into force January 1 introduces the possibilityof exempting some capital gains from corporate in-come tax. An exemption for dividends received byCzech parent companies from non-EU subsidiaries alsowas introduced.

Rules Valid Until December 31, 2007

Under the previous Czech income tax law, capitalgains realized on the sale of shares and participationswere fully subject to corporate income tax of 24 per-

cent. As such, sales of shares and participations weresubject to a significantly higher tax burden than inother European countries.

Only dividends received by a Czech parent companyfrom their subsidiaries located in the Czech Republicor other member states of the European Union wereexempt from the corporate income tax.

Rules Applicable as of January 1, 2008

Under the new tax legislation, dividends and capitalgains of parent companies realized on sales of sharesand participations in their subsidiaries qualify for thecorporate income tax exemption if conditions are met.Some conditions apply to all subsidiaries, and somevary according to the location of the subsidiary.

The overall requirements for corporate income taxexemption are:

• the capital gain must be realized by a parent com-pany established or effectively managed in theCzech Republic, and by a Czech permanent estab-lishment of a tax resident from another EU coun-try;

• the parent company must have the legal form of alimited liability company, a joint stock company,or a cooperation under the Czech commerciallaw;

• the parent company must be an actual beneficiaryof the capital gain;

• the parent company must keep at least 10 percentof the registered capital of the subsidiary for atleast 12 months;

• the subsidiary must not be in the process of liqui-dation; and

• shares or participations that are subject to salemust not have been acquired within a transfer ofbusiness or its part.

The conditions for corporate income tax exemptionfor three types of subsidiaries are listed below.

Czech Entity:

• the subsidiary is established or effectively man-aged in the Czech Republic; and

• the subsidiary has the legal form of a Czech lim-ited liability company, joint stock company, orcooperation under Czech commercial law.

Foreign Entity Located in EU or Switzerland:

• the subsidiary is a tax resident of an EU memberstate or Switzerland;

• the subsidiary has the legal form mentioned in theannex to the Council Directive 90/435/EEC ofJuly 23, 1990, on the common system of taxationapplicable in the case of parent companies andsubsidiaries of different member states;

CZECH REPUBLIC


(C) Tax A




• the subsidiary is subject to tax mentioned in theannex to the Council Directive 90/435/EEC ofJuly 23, 1990, on the common system of taxationapplicable in the case of parent companies andsubsidiaries of different member states; and

• the subsidiary is not exempt from corporate in-come tax and does not have an option for exemp-tion.

Foreign Entity Located Outside EU andSwitzerland:

• the subsidiary is a tax resident of a country thatconcluded a double tax treaty with the Czech Re-public;

• the subsidiary has a legal form similar to that of aCzech limited liability company, joint stock com-pany, or cooperation; and

• the subsidiary is subject to tax similar to theCzech corporate income tax, with a minimum taxrate of 12 percent; this criterion must be met inthe tax period of transfer and in one previous taxperiod.

To benefit from the corporate income tax exemp-tion, the company must satisfy all the conditions men-tioned above. Otherwise, capital gain from the transferof shares is subject to 21 percent corporate income tax.The original purchase price and some other costs re-lated to the transferred shares may be used, with someexceptions, as tax-deductible items.

Due to the planned reduction of the corporate in-come tax rate, the tax burden related to even non-exempt capital gains will be decreased in the future aswell. Under the current legislation, the corporate in-come tax rate will be reduced to 20 percent startingJanuary 1, 2009, and to 19 percent starting January 1,2010.

♦ Pavel Fekar and Daniela Vykysala, Baker & McKenzie,

Prague

Denmark

Denmark Ratifies Treaties With

Austria, Croatia

The Danish parliament on January 29 passed billsratifying Denmark’s adoption of new tax treaties withAustria and Croatia. Both treaties will have effect inDenmark from March 1.

Austria-Denmark Tax Treaty

The previous tax treaty between Denmark and Aus-tria, which dates back to the 1960s, was adopted before

the OECD model income tax treaty came into exist-ence. However, like the vast majority of Denmark’smore recent tax treaties, the new treaty with Austria isbased on the OECD model. The major changes in-clude:

• Dividends — Under the new tax treaty, dividendsare not taxable in the country of source whenpaid by a subsidiary in one treaty country to aparent company located in the other treaty coun-try. In all other cases, the dividends are taxable ata rate of 15 percent. Under the previous taxtreaty, the country of source could tax all divi-dends at a maximum rate of 10 percent. A fullexemption from the Danish dividend withholdingtax for some Austrian qualifying shareholders hasapplied under Danish domestic law since 1999.

• Pensions — Under the new tax treaty, the countryof source may tax all types of pensions. The newrules do not apply to pension recipients who hadalready moved from the country of source beforethe enactment of the new treaty. Under the previ-ous treaty, the country of residence had the rightof taxation.

• Relief method — The new tax treaty applies thecredit method rather than the exemption method.

Croatia-Denmark Tax Treaty

In 1995, Croatia acceded to the 1981 tax treaty be-tween Denmark and the former Yugoslavia, which wasbased on the 1977 version of the OECD model incometax treaty. The new Croatia-Denmark treaty is basedon the 2005 version of the OECD model. The majorchanges include:

• Dividends — Under the new Croatia-Denmarktreaty, the country of source may tax dividends ata maximum rate of 10 percent (or 5 percent if therecipient is a company holding at least 25 percentof the votes in the distributing company or is apension fund or similar entity). Under the previ-ous tax treaty, the country of source could tax thedividends, but the tax could not exceed a rate of15 percent (or 5 percent if the recipient was acompany holding a minimum of 25 percent of thevotes in the distributing company).

• Pensions — Under the new treaty, all types ofpensions are taxable in the country of source. Inprinciple, no change has been made with regard tosocial pensions (and other social benefits) and thepensions of public servants. However, in the fu-ture, other pensions (mainly from private pensionfunds) will be taxable in the country of source,provided that contributions to the pension schemepreviously were tax deductible (or otherwise taxprivileged) in that treaty country. Under the previ-ous tax treaty, social pensions (and other socialbenefits) and the pensions of public servants weretaxable in the country of source. Other pensions,

CZECH REPUBLIC


(C) Tax A




including payments from private pension schemes,were taxable only in the country of residence.

♦ Nikolaj Bjørnholm, partner, Bech-Bruun, Copenhagen

India

Transfer Pricing Audits on the Rise,

Practitioner Says

Transfer pricing audits are becoming commonplacein India, a PricewaterhouseCoopers practitioner saidduring a live webcast hosted by the global accountingfirm on February 5.

Shyamal Mukherjee, a partner and Indian transferpricing leader with PwC, India, said the completion ofthree rounds of transfer pricing audits in India indi-cates that transfer pricing officers are taking ‘‘quite ag-gressive’’ positions in audits, particularly for servicetransactions. Taxpayers need to be careful in planningtheir transfer pricing transactions and maintaining theirdocumentation, which must be certified and updatedannually, he said.

Mukherjee explained that there is a separate team inplace to conduct transfer pricing audits, and said alltaxpayers engaged in international related-party trans-actions above a certain threshold (the equivalent of ap-proximately $3.75 million) are subjected to audits.

Several transactions have been targeted, Mukherjeesaid, pointing to transfers of intangibles, including roy-alties and technical know-how fees; business restructur-ings; the development of intangibles; and managementfees. For all of those transactions, extensive documen-tation should be maintained and a separate, in-depthanalysis should be conducted, he said.

Other trends in India include increased interactionbetween customs and transfer pricing authorities, astransfer pricing officers have been looking at taxpayers’customs valuations to evaluate their transfer pricingpositions, Mukherjee said. He suggested that taxpayersevaluate their customs and transfer pricing positions atthe same time to ensure convergence between the two.

Dispute Resolution

Tarun Arora, associate director in transfer pricing,PwC, India, discussed the most recent dispute resolu-tion mechanisms in India.

He said India does not have an advance pricingagreement program and probably will not implementone until the tax authority has had more experiencewith dispute resolution in transfer pricing matters.However, Arora said there has been ‘‘much discussion’’

about the possibility of an APA program and that apolicy statement on the matter may be issued in thenear future.

Arora said the mutual agreement procedure (MAP)in the India-U.S. income tax treaty is an effectivemechanism for dispute resolution. The MAP has sev-eral advantages, he said, including that a companydoes not have to give up its domestic appeal rights touse the MAP and that an agreement reached through aMAP sets a precedent for future years.

A particular advantage for taxpayers covered bymemorandums of understanding (MOUs) between In-dia and the United States and between India and theUnited Kingdom is that the collection of taxes is sus-pended until the MAP process is concluded, subject toa bank guarantee such as a letter of credit being postedby the taxpayer, Arora said. The U.K. and U.S. taxtreaties are the only two treaties with India that havesuch MOUs, he said.

Arora concluded by giving tips for taxpayers en-gaged in transfer pricing in India. He said taxpayersmust have robust annual transfer pricing documenta-tion, should plan transfer prices in advance and be wellprepared, and should evaluate target transactions indetail.

♦ Lisa M. Nadal, Tax Analysts.


Authorities Creating Uncertainty

About Bad Debt Deduction

Though Indian law has been clear on the issue ofbad debt deduction for more than a decade, authoritiesin some cases have been applying an earlier standardwhen reviewing claims for the deduction.

Under India’s Income Tax Act as amended by theDirect Tax Laws (Amendment) Act, 1987, businessesare permitted a deduction for unrecoverable debts thatare owed to them and are recognized as income intheir books of accounts, either for a previous tax yearor the current tax year. Under the current law, busi-nesses are not required to prove that the debts are un-recoverable; they are merely required to recognize theamount at issue as unrecoverable in their books. (Be-cause Indian businesses are permitted to use eithercash or accrual accounting methods, the deduction isapplicable only to businesses that use an accrualmethod.)

In Circular 551, issued in 1990, India’s CentralBoard of Direct Taxes (CBDT) explained that underthe previous provisions of the ITA (before the 1987amendment), businesses were required to prove that adebt became unrecoverable in the year in which thededuction was claimed.

INDIA


(C) Tax A




‘‘This led to enormous litigation on the question ofallowability of bad debt in a particular year, becausethe bad debt was not necessarily allowed by the assess-ing officer in the year in which the same had beenwritten off, on the ground that the debt was not estab-lished to have become bad in that year,’’ the CBDTwrote.

The circular goes on to say that the relevant subsec-tions of the ITA were amended to eliminate the dis-putes and ‘‘to provide that the claim for bad debt willbe allowed in the year in which such a bad debt hasbeen written off as irrecoverable in the accounts of theassessee.’’

However, several cases brought by the Commis-sioner of Income Tax (CIT) in recent years appear todisregard the language of the statute and the explana-tory circular. In those cases, assessing officers have de-nied the bad debt deduction even when businesses havewritten off the debts in their books.

In CIT v. Global Capital Ltd. (decided on May 30,2007), the assessing officer denied the corporation’sbad debt claim, saying the company could not provethat the debt became unrecoverable (on the company’sbooks) during the tax year when it was claimed. Thecorporation appealed the assessment and won. TheCIT in turn appealed, and suffered another defeat be-fore ultimately losing its appeal in the High Court ofDelhi.

The assessee ‘‘was not required to establish that theconcerned debt has actually become bad in the relevantyear for the purpose of claiming deduction under. . . [section 36 of the ITA] and the only requirementfor claiming this deduction is that the Assessee has towrite off the relevant debts in its books of accountstreating the same as bad,’’ Judge V.B. Gupta wrote.

In CIT v. Morgan Securities and Credits P. Ltd., also de-cided by the High Court of Delhi, and in the OmanInternational Bank case heard before the Income TaxAppellate Tribunal in Mumbai (both decided in 2006),similar decisions were reached, overturning an assess-ment officer’s determination that the company had notproved that the debt had become unrecoverable.

It is unclear whether, with decisions against its posi-tion mounting, the CBDT will act to rein in assessmentofficers by issuing new guidelines to prevent a continu-ation of the litigation that the 1987 amendment soughtto address.

♦ David D. Stewart, Tax Analysts.


Tribunal Upholds Ruling for New

Transfer Pricing Assessment

The Delhi bench of India’s Income Tax AppellateTribunal on January 22 issued its decision in Ranbaxy

Laboratories Ltd. v. Additional Commissioner of Income-tax,New Delhi, finding that the assessing officer’s order ac-cepting the assessee’s transfer pricing declaration waserroneous and that the Commissioner of Income-taxwas justified in setting aside the order with directionsto recalculate the transactions at issue.

Facts of the Case

The assessee is a multinational company that manu-factures and sells pharmaceutical products in India.

For the 2004-2005 assessment year, the assessee hadundertaken international transactions (exports of goodsand services, and so on) with 17 associated enterprisesin countries such as Thailand, Malaysia, Nigeria, Bra-zil, Peru, the People’s Republic of China, the Republicof Ireland, Germany, Egypt, the Netherlands, and theUnited Kingdom.

In determining arm’s-length prices for those transac-tions, the assessee used the associated enterprises (to-gether) as the tested party and adopted the transac-tional net margin method, with profit on sales as theprofit-level indicator. Because the net profit margin be-fore tax of the entire group’s business was lower thanthe average net profit margin before tax of the compa-rable overseas companies, the assessee was of the opin-ion that the value of the transactions as per its booksof account met the arm’s-length principle.

The assessee’s transfer pricing declaration was ac-cepted by the assessing officer (AO), who held that theprices charged by the assessee for transactions with itsassociated enterprises were at arm’s length and that noadjustment was required.

The Commissioner of Income-tax, taking the viewthat the AO’s assessment was erroneous, initiated ac-tion under section 263 of the Indian Income Tax Act,1961, arguing that:

• the issue of determination of the arm’s-lengthprinciple was not referred to the transfer pricingofficer (TPO) as required by Instruction 3 of 2003of the Central Board of Direct Taxes (CBDT);and

• the method employed by the assessee to deter-mine the arm’s-length price appeared to be incor-rect, because the assessee had applied the transac-tional net margin method by using the associatedentities, operating in diverse conditions andbunched together in a group, as the tested partywhen reliable data for comparison with the asses-see were available in India.

Contention of Assessee

The assessee responded that:

• the failure to refer to the TPO was a proceduralflaw and the assessment therefore could not beheld to be erroneous and prejudicial to the interestof the Revenue; and

INDIA


(C) Tax A




• the overseas associated enterprises of the assesseewere rightly used as the tested party because theywere less complex than those of the assessee.

Decision of the Tribunal

The tribunal found that the assessment order passedby the AO was erroneous for a number of reasons, asoutlined below.

It was reasonable to assume that the pharmaceuticalproducts manufactured by the assessee were sold toindependent concerns as well as to associated enter-prises. Had the assessee provided the names and quan-tities of the products sold to the associated enterprises,then it could have been determined whether the asses-see had sold the same or similar medicines to other,independent concerns. The assessee did not provide inthe report or in any other document the specific char-acteristics of the transactions, the property transferred,or the services provided, except for giving the amountof the transactions and merely mentioning that phar-maceuticals were sold in the form of dosages, activepharmaceutical ingredients, and so on.

Further, the AO accepted what was stated by theassessee in its declaration and completed the assess-ment without examining the fundamental question re-lated to the application of transfer pricing regulations— the characteristics of the transactions.

Although the assessee had selected the overseas as-sociated enterprises as the tested party, on examinationof the transfer pricing declaration and submissions, itwas found that there was no profile or location ofeight of the comparable companies. Similarly, whatconstituted turnover and total cost of the comparablesfor each of the foreign associated enterprises was leftout and not disclosed.

The tribunal said the transfer pricing declarationwould have been credible if, instead of comparing theentire results of 17 associated enterprises with compa-rable companies situated in different locations, the as-sessee had considered the associated enterprise in eachcountry and compared its profits with the profit marginof pharmaceutical companies of the same size carryingon similar transactions in that country.

The tribunal said the tested party normally shouldbe the party for which reliable data for comparison areeasily and readily available and for which fewer com-putational adjustments are needed. If the assesseewanted to consider the foreign associated enterprises asthe tested party, then it needed to ensure that the rel-evant data for comparison were available in the publicdomain or were furnished to the tax administration.The assessee is not entitled, later on, to take the posi-tion that it cannot be required to provide that data.

Alternatively, the tribunal stated that there was goodand reliable evidence for taking the assessee itself as

the tested party, as comparable or almost comparableentities and controlled and uncontrolled transactionswere available in its case.

The order of the AO was erroneous because theassessment showed little concern for crucial aspectsregarding the selection of a tested party, the tribunalsaid.

The justification provided by the assessee for group-ing of all the transactions was that they could not beevaluated ‘‘adequately on a separate basis.’’ However,the separate transactions related not only to pharma-ceutical sales, but also to transfers of know-how andtechnology, sharing of expenses, and so on.

The tribunal found that the assessee provided nojustification for grouping fundamentally separate andindependent transactions carried on at different timesand related to different parties on different continents.

Apart from legal infirmities, the tribunal found thatthe assessment of the AO was factually erroneous. TheAO stated in his order that ‘‘on comparison of pricescharged by the assessee on international transactions,the net margin thereon [was] at arm’s length.’’ Thetribunal found that observation to be erroneous, be-cause the assessee did not give details of the transac-tions although ‘‘numerous products and voluminoustransactions’’ were involved.

The tribunal said officers functioning under theCBDT must follow instructions issued by the CBDT toregulate assessment proceedings. The AO was thereforeduty-bound to refer matters involving internationaltransactions exceeding a specific amount to the TPO.

♦ Vaishali Mane, Indian transfer pricing specialist, Mumbai

Ireland

Finance Bill Targets Tax Avoidance,

Provides Business Relief

Irish Minister of Finance Brian Cowen on January31 published the 2008 Finance Bill, which includesprovisions to reduce businesses’ tax administrative bur-dens, to provide tax incentives for research and devel-opment and reduced energy consumption and carbondioxide emissions, and to combat tax avoidance.

The Finance Bill generally follows the blueprint pro-vided by the 2008 financial budget that Cowen intro-duced on December 5. (For prior coverage, see TaxNotes Int’l, Dec. 17, 2007, p. 1125, Doc 2007-26963, or2007 WTD 237-1.)

IRELAND


(C) Tax A




Administrative Relief and Incentives

The 2008 Finance Bill contains several provisionsintended to assist small businesses by reducing taxcompliance and administrative burdens, including revis-ing preliminary corporation tax payment arrangementsand increasing VAT registration thresholds to €37,500for services and to €75,000 for goods.

Cowan said the Finance Bill would enhance the ex-isting R&D tax credit scheme by extending it ‘‘for afurther four years to 2013.’’ He said the extensionwould provide ‘‘more certainty to industry in relationto the tax credit scheme and also assist in competingfor major new foreign direct investment.’’

Cowen also announced that film investment reliefprovided under section 481 of the Taxes ConsolidationAct 1997 would be extended to December 31, 2012,and that the eligible expenditure cap for any one filmwould increase from €35 million to €50 million.

The Finance Bill includes several environmental pro-tection measures, he said, including a new tax incen-tive to encourage the purchase of energy-efficientequipment by allowing business to fully claim the costof qualifying equipment against taxable income in theyear of purchase.

Other environmental provisions would make iteasier for recycling business investors to take advantageof the business expansion scheme and would provideup to €2,500 of vehicle registration tax relief for somemodels of hybrid and flexible-fuel cars.

Promoting Tax Fairness

The Finance Bill includes provisions to increase‘‘the personal credits and bands to ensure that low-income earners are kept out of the standard rate bandand average earners are kept out of the higher rateband,’’ Cowen said. ‘‘It also provides for a further in-crease in the ceilings up to which first-time buyers canclaim mortgage interest relief and for increases in rentrelief.’’

New measures to counter tax avoidance would tar-get the use of convertible securities and employee ben-efit trusts. Convertible securities would be subject to anadditional income tax charge in a variety of cases, hesaid, ‘‘including but not limited to conversion to a se-curity of a higher value and disposal.’’ For employeebenefit trusts, ‘‘the meaning of an employee benefitcontribution is being expanded to ensure that, as in-tended by current provisions, companies only get a de-duction for such contributions when the employeesreceive the benefit,’’ according to a Department of Fi-nance release.

Cowen said Irish Revenue officers will be given thepower to question suspects in custody of the Garda

(the police force of the Republic of Ireland) regardingrevenue offenses, primarily in the areas of customs andexcise.

♦ Herman P. Ayayo, Tax Analysts.


Documents

• Finance Bill 2008. Doc 2008-2071; 2008 WTD 23-21

• Explanation of Finance Bill 2008. Doc 2008-2074; 2008WTD 22-21

• Irish Department of Finance release. Doc 2008-2069;2008 WTD 22-19

• Statement of Finance Minister Brian Cowen. Doc 2008-2075; 2008 WTD 22-20

Prime Minister’s Tax Status Could Be

Resolved Soon

Irish Prime Minister Bertie Ahern on January 30said Revenue commissioners could resolve his tax sta-tus before the Mahon Tribunal completes its investiga-tion of his personal finances, which means that theRevenue could finalize his application for a tax clear-ance certificate before February 24.

The timing for obtaining the tax clearance certificateis important because, as a result of winning reelectionin Ireland’s May 2007 general election, Ahern must filea tax clearance certificate with the Standards in PublicOffice Commission by February 24. If he is unable tofile the tax clearance certificate by that date, he mustsubmit a statement of application admitting that he hasoutstanding tax issues.

The Mahon Tribunal, which is the informal name ofIreland’s Tribunal of Inquiry Into Certain PlanningMatters & Payments, is investigating the presence inAhern’s bank accounts in 1993 and 1994 of largeamounts of money on which Ahern allegedly didn’tpay tax. (For prior coverage, see Tax Notes Int’l, Jan. 21,2008, p. 237, Doc 2008-859, or 2008 WTD 12-1.)

On January 22 Ahern told reporters that Revenuecommissioners couldn’t complete their work on his taxstatus until the Mahon Tribunal had reported on hiscase. If that is the case, Revenue commissioners prob-ably would not finalize his tax clearance certificate ap-plication before the standards commission’s February24 deadline, because the tribunal is not expected to befinished with Ahern’s case by then.

On January 30 Ahern recanted his earlier statement,saying he did not mean to say that Revenue commis-sioners could not deal with his tax affairs until the Ma-hon Tribunal completed its work. In comments in theDáil, the lower house of Parliament, he said the Rev-enue Commission’s decision is not directly linked tothe Mahon Tribunal’s work.

IRELAND


(C) Tax A




Opposition party Fine Gael submitted a Dáil mo-tion to express confidence in the Mahon Tribunal’sinquiry, which led to fierce exchanges on January30-31 between Fine Gael parliamentarians and those inAhern’s Fianna Fáil Party, The Belfast Telegraph reportedon January 31. Fianna Fáil ultimately triumphed, de-feating the opposition motion and passing a counter-motion that also expressed confidence in the tribunal’swork.

♦ Charles Gnaedinger, Tax Analysts.


Japan

Ruling Coalition Withdraws Stopgap

Bill to Extend Gasoline Tax

Japan’s Liberal Democratic Party (LDP)-led rulingcoalition on January 30 withdrew a contentious stop-gap bill that would have extended through May 31 agasoline tax that is scheduled to expire on March 31,the end of the fiscal year. The withdrawal came afterthe ruling and opposition coalitions agreed to ‘‘reach aconclusion’’ on the fiscal 2008 budget and other relatedbills by March 31. (For prior coverage, see Doc 2008-1974 or 2008 WTD 21-1.)

The stopgap bill had been pushed through the lowerhouse’s financial and internal affairs committees earlierin the day on January 30. It was initially submitted tothe Diet (legislature) on January 29 despite oppositionlawmakers from the Democratic Party of Japan (DPJ)doing everything in their power — including shoutingout protests — to stop it.

The measure would have extended the controversialgasoline tax, first instituted in the 1970s as a temporarymeasure, through May 31, thereby precluding its auto-matic expiration on March 31. The ruling coalitionhoped the extension would buy it enough time to ex-tend the gasoline tax for 10 more years. The opposi-tion, however, wants to abolish the tax.

The opposition was particularly upset over the rul-ing coalition’s threat to override anticipated rejectionby the opposition-controlled upper house. The rulingcoalition holds a two-thirds majority in the lowerhouse, and Japan’s Constitution allows a bill receivinga two-thirds vote on its second reading in the lowerhouse to become law despite upper house rejection.According to a report in Japan’s Asahi Shimbun news-paper, opposition lawmakers threatened to block pas-sage of the bill through the use of ‘‘physical resis-tance,’’ including forming human barricades to preventlawmakers from entering the voting venue.

Under the six-party agreement, mediated by lowerhouse Speaker Yohei Kono and upper house PresidentSatsuki Eda, the upper house has committed to vote onthe budget and related bills by March 31. The agree-ment calls for the parties to ‘‘come to a certain conclu-sion by the end of the fiscal year, after holding delib-eration, over the budget and [related] revenue bills byholding public hearings and summoning witnesses,’’The Japan Times reported. That means that the LDP-ledcoalition can be sure all of the bills clear the Diet be-fore the new fiscal year begins on April 1.

It does not, however, put an end to the debate. Asenior ruling coalition lawmaker said that some vagueelements of the agreement could lead to diverging in-terpretations by the opposition. How that would ulti-mately affect an upper house vote is unclear, however.Yukio Hatoyama, secretary general of the DPJ, toldThe Japan Times that the DPJ will not change its posi-tion that the tax should be abolished. He did, however,say that compromise is possible. ‘‘This is not the endof everything,’’ he said. The DPJ ‘‘is about to beginthe battle for the people and we would like to hold dis-cussions that will be understood’’ by the public.

The agreement on the March 31 vote was reachedas the ruling bloc was preparing to force the billthrough the lower house by holding a plenary sessionon January 30. The six parties reached consensus intime for the bill to be withdrawn. The opposition thatmorning had threatened to disrupt all Diet proceed-ings.

‘‘I hope the deliberations will return to normal andbe fruitful,’’ Kono told reporters in Tokyo. ‘‘We mustcontinue producing agreements in the unfamiliar terri-tory of a divided Diet to ensure that decisions getmade.’’ According to the January 31 Asahi Shimbunreport, the January 30 agreement marked only thethird time in postwar Japan that leaders of the upperand lower houses mediated a dispute between rulingand opposition blocs.



Kazakhstan

Energy Minister Proposes Export

Duties on Oil

Kazakhstani Minister of Energy and Mineral Re-sources Sauat Mynbayev on January 29 proposed theimposition of a new export duty on foreign companiesfor oil and oil products beginning January 1, 2009.

At first, the new duties would affect only producerswith contracts that do not contain tariff stability

KAZAKHSTAN


(C) Tax A




clauses. Mynbayev did not offer insight into the pro-

posed rate for the duty, but did acknowledge that im-

position of an export duty may complicate Kazakh-

stan’s attempt to join the World Trade Organization.

Kazakhstan has sought membership in the WTO since

1996, but is currently in an observer status.

News of the proposed duty follows closely after sev-

eral actions by the Kazakhstani government that have

alarmed Western investors. The government recently

amended a law governing contracts with foreign invest-

ors. Under the amendments signed into law in Novem-

ber 2007, the government now has the ability to

change or cancel its contracts with foreign firms.

The Kazakhstani government also recently forced

concessions from a consortium of oil producers, in-

cluding Exxon Mobil, that was developing the

Kashagan oil field. The consortium agreed to a pay-

ment and a transfer of an additional share of the owner-

ship of the operation to KazMunaiGaz, the national

oil company, to settle a dispute over cost overruns and

development delays at the field that have delayed the

start of oil production.

Those actions by the Kazakhstani government are a

source of great anxiety for Western investors. Reaction

to the news of the proposed duty was swift on the

London Stock Exchange, where shares of KazMunai-

Gaz Exploration and Production, a subsidiary of Kaz-

MunaiGaz, fell sharply for the two days following the

proposal. Company executives have since expressed

their intention to discuss the establishment of a stable

tax and customs regime for its operations with the Ka-

zakhstani government.

However, S. Frederick Starr, chair of the Central

Asia-Caucasus Institute and Silk Road Studies Program

at Johns Hopkins University, cautions against becom-ing alarmed by recent events. ‘‘We have repeatedlyrushed to judgment assuming the worst of intentionson the part of the Kazakh government,’’ he said.

‘‘The anxieties derive from the very bitter experi-ences energy companies have experienced in Russia,’’said Starr. He believes that the desire in the Kazakh-stani government for legitimacy outside its borders willlessen the chances for such a duty to ultimately be im-posed. According to Starr, members of the govern-ment, such as Foreign Affairs Minister Marat Tazhin,are likely to oppose efforts to impose additional exportduties. Starr points to the lesson of an earlier effort torenegotiate the country’s oil production contractssigned in the 1990s, which ended with the Kazakhstanigovernment ultimately backing off of its plan.



Kenya

Political Crisis Hinders Tax

Collections

The ongoing political unrest in Kenya has seriouslydisrupted tax collections. According to a January 5 ar-ticle in the Daily Nation, a Nairobi publication, the gov-ernment has been instructed to be ‘‘flexible’’ in collect-ing taxes this month, even allowing businesses to paytaxes in installments. This is bad news for the Ministryof Finance. The government had already been gearingup for a budget deficit, and the loss of extensive taxrevenue now will only deepen the problem.

‘‘A lot of man hours and tax collection opportuni-ties have been lost,’’ Geoffrey Shimanyula, board mem-ber of the Telecommunications Service Providers Asso-ciation of Kenya and managing director of UUNET,was quoted as saying in the Daily Nation article. Headded that many businesses have not been able to op-erate or generate income since the disturbances beganfollowing the disputed elections on December 27, 2007.

The elections returned President Mwai Kibaki topower. However, his main rival, Raila Odinga, has ac-cused Kibaki of rigging the election. According to aJanuary 31 article in The Washington Post, internationalelection observers have said the tally was so flawed thatit is impossible to know who actually won. The con-frontation has touched off the worst political and eth-nic upheaval since Kenyan independence in 1963. Vio-lence, particularly in poor rural areas and city slums,between the Kikuyu and Luo tribes (the ethnic commu-nities of Kibaki and Odinga, respectively) has displacednearly 300,000 people and resulted in more than 800deaths. Other groups such as the Kalenjin (the tribe oflongtime former President Daniel arap Moi) and theGusii have been attacked and driven out because ofperceived biases toward one politician or the other.

Former U.N. Secretary General Kofi Annan is medi-ating between the two sides, and the European Unionand several countries have threatened to cut aid toKibaki’s government if he does not reach a compro-mise with Odinga and address the violence. Shouldsuch aid be cut, it would further starve the governmentof operating revenue.

According to Shimanyula, small and medium-sizeenterprises are among the businesses that have been hithardest. ‘‘SMEs will be most hit in meeting their ex-penses since they do not have capital reserves fromwhich they can draw salaries and other costs,’’ such astaxes and rent, he was quoted as saying in the DailyNation article.

Ninety percent of Kenya’s national budget revenuecomes from local taxation. Collections have improveddramatically since the Kenya Revenue Authority was

KAZAKHSTAN


(C) Tax A




launched on July 1, 1995, allowing Kenya to providepublic services such as free primary education and HIVtreatment. But with the political violence shuttingdown much of the nation’s economic activity, and thephysical challenges to tax collection created by the un-rest, maintaining a buoyant level of revenue collectionwill be a challenge.

The impact may not be limited to Kenya, either.Uganda’s economic growth will be stunted if the vio-lence in Kenya is not contained soon. ‘‘Uganda’sgrowth projections are within reach if the disruption iscontained. But if the situation worsens, that wouldraise a question of the impact it would have on theeconomy,’’ Ugandan Finance Minister Ezra Surumawas quoted as saying in a January 15 article in NewVision, a Kampala publication. ‘‘If the Kenyan situa-tion persists, there will be disruption in fuel supply.Our tax collections would be impacted since delays inmovement of oil products delay revenue collection. Butwe hope there will be increased supply from the south-ern route through Tanzania to compensate for theshortfall from the Kenyan route.’’

A recent Uganda Revenue Authority report showedthat losses in tax revenue have been averaging UGX1.1 billion (about $640,000) a day because of the dis-ruption in the flow of goods. Uganda, Rwanda, andBurundi, along with Kenya and Tanzania, make up theEast African Community, and all the member countriesexcept Tanzania rely on the Kenyan port of Mombasaas the gateway to international markets. The East Afri-can Community established a customs union in 2005and is working toward the establishment of a commonmarket by 2010, a monetary union by 2012, and ulti-mately, a political federation of East African states.



Korea (R.O.K.)

Thailand-R.O.K. Treaty Enters Into

Force

The Thailand-R.O.K. income tax treaty and protocolentered into force on June 29, 2007, and their provi-sions generally became applicable on January 1, Thai-land’s Revenue Department has announced. The treatyand protocol were signed on November 16, 2006, inHanoi.

For Thailand, the treaty covers income tax and pe-troleum income tax. For the Republic of Korea, it ap-plies to income tax, corporation tax, inhabitant tax,and the special tax for rural development.

Under the treaty, dividends are subject to a 10 per-cent withholding tax rate. Interest payments are subjectto:

• a 10 percent withholding tax rate if the interest isbeneficially owned by any financial institution,including an insurance company, or by a residentof the other contracting state, and is paid on in-debtedness arising as a consequence of a sale oncredit by a resident of that other contracting stateof any equipment, merchandise, or services, ex-cept when the sale was between persons not deal-ing at arm’s length; and

• a withholding tax of 15 percent of the grossamount of the interest in all other cases.

The following withholding tax rates apply to royal-ties:

• 5 percent for royalties payable for the use of, orthe right to use, any copyright of literary, artistic,or scientific work, including software, and motionpictures and works on film, tape, or other meansof reproduction for use in connection with radioor television broadcasting;

• 10 percent for royalties payable for the use of, orthe right to use, any patent, trademark, design ormodel, plan, secret formula, or process; and

• 15 percent for royalties payable for the use of, orthe right to use, industrial, commercial, or scien-tific equipment, or for information about indus-trial, commercial, or scientific experience.


Kuwait

Kuwait-R.O.K. Treaty Protocol Enters

Into Force

A protocol to the Kuwait-R.O.K. income tax treaty,signed October 2, 2007, entered into force on January1 and will remain in effect as long as the treaty is ineffect.

The protocol clarifies that only profits arising fromthe activities of a building site or construction or in-stallation project in Kuwait may be attributed to thatbuilding site or construction or installation project. Asa result, profits arising from the delivery of goods, ma-chinery, or equipment will not be attributed to thebuilding site or construction or installation project.Furthermore, profits arising from planning, projectwork or research, or technical services that a Koreanresident performs for a building site or construction orinstallation project located in Kuwait will — insofar as

KUWAIT


(C) Tax A




those activities are performed outside of Kuwait — notbe attributed to the building site or construction or in-stallation project.

Under article 3 of the protocol, the withholding taxon dividends paid by a Korean company has been re-duced from 10 percent to 5 percent, as has the with-holding tax on interest payments. However, interestpaid to a statutory body or institution wholly owned bythe government is exempt from withholding tax.

Korean interest paid to the following institutions isexempt:

• the Bank of Korea;

• the Export-Import Bank of Korea;

• the Korea Development Bank;

• the Korea Export Insurance Corporation; and

• the Korea Investment Corporation.

Kuwaiti interest paid to the following institutions isexempt:

• the Central Bank of Kuwait;

• the Kuwait Investment Authority;

• the Public Institution for Social Security;

• the Kuwait Petroleum Corporation; and

• the Kuwait Fund for Arab Economic Develop-ment.

The protocol also amended article 16 of the treatyto provide that remuneration paid to Korean residentdirectors may be taxed in Kuwait at a maximum rateof 17 percent.

A new limitation on benefits article (article 28A) hasbeen added to restrict treaty benefits if a taxpayer iscontrolled by third-country residents and one of theprincipal goals of the establishment, acquisition, exist-ence, or carrying on of the activities is to take advan-tage of the benefits under the Kuwait-R.O.K. treaty.

♦ Ihab Abbas, Deloitte, Kuwait. Copyright © 2008 Deloitte

Development LLC. All rights reserved.

Income Tax Law Amended

The Kuwait National Assembly on December 26,2007, passed a law that amends several provisions ofIncome Tax Decree 3 of 1955. The changes, which aredesigned to attract foreign investment and clarify exist-ing rules, will be effective from the tax period followingthe date the amendments are published in the officialgazette.

Tax Rate and Taxable Income

The most important change is a reduction in theincome tax rate on net profits of entities operating inKuwait. The amendments set a flat rate of 15 percent(instead of the current range of 0 percent up to 55 per-

cent, which are not progressive rates). The 15 percenttax will be levied on the income of any corporate bodycarrying on a trade or business in Kuwait, regardless ofwhere the company is incorporated. The new flat taxrate will substantially reduce the tax liability of thoseforeign entities.

The following types of income will be subject totax:

• profits derived from a contract executed in wholeor in part in Kuwait;

• income derived from the sale, lease, or grant of aconcession for the use or exploitation of a trade-mark, patent, or copyright;

• commissions due or received from representationsor trade brokerage;

• profits derived from industrial and commercialactivities;

• gains derived from the disposal of assets;

• profits derived from the purchase and sale ofgoods or property or rights thereto and from theopening of a permanent office in Kuwait wherecontracts of sale and purchase are executed;

• profits from the leasing of property; and

• profits derived from the provision of services.

The amendments also clarify that gains derived byforeign entities from the sale of shares on the KuwaitStock Exchange will be exempt from tax in Kuwait.

Determination of Taxable Income

The new legislation includes much-needed guidancefor foreign entities to help them determine sources ofincome on which tax is payable, as well as which ex-penses are deductible. The amendments clarify thattaxable income is determined after deducting all ex-penses and costs incurred, including the following:

• salaries, wages, bonuses, and end-of-service in-demnities, and so forth;

• taxes and fees, except for income tax due underthe law;

• depreciation of assets in accordance with the ratesspecified in the executive regulation;

• grants, donations, and subsidies paid to public orlicensed private Kuwaiti entities according to therates specified in the executive regulation; and

• head-office expenses as specified in the executiveregulation.

The following are nondeductible:

• personal and private expenses and any charges notrelated to the taxable activities or not for the pur-pose of generating profits;

• fines; and

• reimbursed losses.

KUWAIT


(C) Tax A




The tax authorities may request that the entity re-examine any expenses deemed to be overstated andprovide documentation supporting them. The authori-ties may approve, adjust, or disregard the expenses.

Loss Carryforwards

The new law limits the carryforward of net operat-ing losses to three years (currently, losses may be car-ried forward indefinitely), and no carryforward will beavailable if the entity ceases to carry out its activities(unless the cessation of activities is mandatory underthe law).

Compliance

The term ‘‘Gregorian year’’ will be replaced by theterm ‘‘tax Christian year’’ wherever stated in the de-cree.

The decree has no specific provisions regarding thestatute of limitations, so the tax authorities have beenrelying on the civil code, which provides that no claimfor taxes or other annual charges due to the state maybe enforced after five years. A new amendment hasbeen introduced specifying that the government maychallenge a tax return for up to five years from the datethe return was filed, or five years from the date theauthorities were notified of activities not stated in thereturn or when the authorities become aware of anyundisclosed information affecting the tax liability ofthe entity.

♦ Ihab Abbas, Deloitte, Kuwait. Copyright © 2008 Deloitte


Lebanon

Finance Ministry Issues Guidance on

Interpretation of Tax Regs

The Lebanese Ministry of Finance recently issued aseries of decisions and guidelines to clarify ambiguitiesin the interpretation by the tax administration of cer-tain aspects of the tax regulations. The guidelines areimportant to ensure consistency and fairness in theimplementation of the law and to restore trust in thetax system.

Penalties

Taxpayers who fail to file the consolidated statementof withholding tax on interest, or who file a late state-ment, will be subject to penalties only on the unpaidtax at a rate of 10 percent per month, up to 50 percentof the tax amount, plus the usual delayed interest pen-

alty at a rate of 3 percent per month. Previously, thepenalties were applied on the total tax amount.

Holding Companies

Capital gains arising from the disposal of invest-ments in subsidiaries and associates in Lebanon are nottaxable if the participation has been held for at leasttwo years. Capital gains on overseas investments areexempt regardless of the length of time the participa-tion has been held.

Income earned on financial assets overseas and fromloans to foreign subsidiaries is exempt from the tax onmovable assets without regard to any holding periodcriteria.

Interest earned on loans made to Lebanese subsid-iaries will be tax exempt if the term of the loan is atleast three years and the following criteria are met: forloans funded from equity, the interest rate equates tothe interest payable on government bonds issued for asimilar period (net of tax); for loans funded frombonds, shareholder loans, or bank loans, interest doesnot exceed 200 basis points over the related cost offunds; and for loans funded by non-interest-bearingshareholder loans, interest does not exceed 3 percentper annum.

Management fees charged by a holding company toits subsidiaries are deductible if they do not exceed 2percent of the revenue of the subsidiaries on an indi-vidual basis and the fees are adequately documentedand backed by a management agreement.

Offshore Companies

Offshore companies incorporated in Lebanon underLegislative Decree 46 may trade with each other ingoods and services executed outside Lebanon.

Deductible Expenses

All business-related charges incurred by a taxpayermay be deducted if they are properly documented.Such charges include travel expenses; telephone chargesfor company calls, including cellphone charges (cell-phones given to directors and employees for use as partof the management/employment responsibilities willbe accepted up to 80 percent, with the remaining 20percent of the charge added back to taxable income);gifts not to exceed LBP 1 million per item (at cost) upto an aggregate amount of LBP 150 million a year, notto exceed 2.5 percent of the company’s annual rev-enue; and all vehicle costs, such as costs incurred by acompany’s employees for business purposes.

Remuneration of the chairman and members of theexecutive board of joint stock companies and of man-aging directors of limited liability companies is taxableunder the salaries tax and is considered a deductibleexpense for the company up to a maximum of 50 per-cent over the salaries paid for similar positions in the

LEBANON


(C) Tax A




entity. Any remuneration in excess of this threshold isdeemed to constitute a profit distribution and must beincluded in taxable income. The remuneration of theowner of a sole proprietorship or partners in a partner-ship is treated as taxable income by virtue of Part I ofthe Income Tax Law.

Any bonus approved for payment after the balancesheet date is considered a deductible charge and will besubject to the tax on salaries.

Advertising Expenses

Advertising expenses charged between related partiesare deductible expenses for the paying company andare income for the receiving company if the expensesare arm’s length and are not intended to reduce profitsfor one company and reduce a deficit for the othercompany. Any material increase in advertising costsfrom year to year must be business-related and justifi-able. Major advertising costs related to the launch ofnew brands or the opening of new branches may beamortized for tax purposes over a period of threeyears. (From an accounting perspective, this representsa period cost as per IAS 38.)

Advertising charges paid to an unrelated residentparty are deductible in full if properly documented.

Advertising charges paid by a branch of a foreigncompany to its head office overseas will be included aspart of the allowable deductible charges applicable tothe headquarters’ overhead (up to the lesser of 3 per-cent of revenue or a pro rata allocation of the head-quarters’ overhead among the entire group).

Advertising charges paid to nonresident related orunrelated companies are deductible charges for exportsales to the extent of the ratio of total advertising coststimes the export sales, divided by total sales, providedthe aggregate amount does not exceed 1.5 percent oftotal sales. Any excess will be added back to taxableincome.

♦ Joe El-Fadl, Deloitte, Beirut. Copyright © 2008 Deloitte


Netherlands

OECD Pushes for Work-Friendly

Dutch Tax Changes

The Netherlands should further reduce its tax incen-tives for early retirement to counter the weak labormarket participation of older persons and should lowerthe marginal effective tax rate on second earners toencourage full-time work among women, the OECDsays in its 2008 economic survey of the Netherlands.

Generous Dutch social entitlements provide benefitsto almost 17 percent of working-age persons in theNetherlands today, and the OECD says that those ben-efits, coupled with labor market policies, discouragework in general and, for persons who do work, encour-age part-time over full-time employment.

The Netherlands’ 2008 budget includes some taxmeasures to boost employment. (For a related release,see Doc 2007-21315 or 2007 WTD 183-11.) However,while it acknowledges those measures, the OECD saysthat ‘‘more ambitious and broad-based reforms will beneeded to keep growth on a strong trend in the me-dium term.’’

Older Workers

The OECD says the government did the right thingin ending tax incentives for early retirement and pre-pension regimes, as those changes have increased therate of labor market participation of older Dutch work-ers. The OECD also praises a planned increase in theemployment tax credit for workers who are 58 andolder.

However, it recommends the Dutch government re-duce other benefits and tax incentives for leaving workearly. For example, it strongly recommends that it endtax-favored saving regimes such as the life course re-gime, which Dutch workers can use to retire early.

The OECD also says that the government has beentoo slow in introducing a new tax on pensioners whostopped working before age 65 and that the Nether-lands shouldn’t allow older workers to use both unem-ployment benefits and severance payments to fundearly retirement.

Second Earners

Dutch tax policy and inadequate child-care servicesin the Netherlands probably encourage women to takepart-time jobs, the OECD survey says. About two outof every three Dutch female workers are employed parttime, according to the report, and the result is thatoverall, the average number of hours worked in theNetherlands is among the lowest of all the OECDmember countries.

To end the tax disincentive for full-time female em-ployment, the OECD recommends the Netherlandslower the marginal effective tax rate on second earners,which generally affects married women. That could bedone by reducing the rate at which housing and childbenefits are removed as a family’s income rises, for ex-ample.

The OECD says the tax system also could be ad-justed to ensure that employment tax credits are avail-able only if workers work a minimum number ofhours weekly or annually.

LEBANON


(C) Tax A




The Dutch tax system also discourages marriedwomen from working because aspects of the tax sys-tem are based on joint taxation, such as a nonworkingpartner’s right to transfer his general tax credit to aworking partner. That could be corrected by ending thetransferability of the tax credit. The government al-ready has plans to phase out transferability, starting in2009, but the OECD recommends ending it sooner.

The OECD says the Netherlands has made headwayin making child care more available and affordable.Still, the OECD suggests taking other steps, includingdesignating child-care centers as essential facilities un-der zoning laws. Any measures that would provide forgreater child-care services would make it easier for par-ents to work longer hours, it says.

Tax Expenditures

The OECD also recommends the Netherlands assessthe generous income tax deductions that are now avail-able under Dutch tax law. The OECD says those taxbreaks fail to achieve a clear purpose; are not reportedproperly under budget rules; and, to the extent thatthey do achieve a policy purpose, don’t do so in a cost-effective manner.



Severance Payments Ineligible for

Special Regime, Court Rules

The Dutch Supreme Court, in a January 25 decision(HR 43.396), held that severance payments do not fallunder the 30 percent ruling special tax regime for expa-triates.

30 Percent Ruling

Under the 30 percent ruling, a tax-free allowance forextraterritorial expenses can be granted to qualifyingexpatriates who are assigned to an employer who isconsidered a resident of the Netherlands for Dutch taxpurposes. The regime provides for a reduction of tax-able income of 30 percent of the employee’s salary.The remaining 70 percent of the salary is taxable atthe regular domestic progressive individual income taxrate (with a maximum of 52 percent), leading to aneffective maximum rate of 36.4 percent. The tax-freeallowance is intended to compensate for additional ex-penses incurred as a result of living outside the countryof origin. To qualify for the 30 percent ruling, the fol-lowing conditions must be met:

• the employee must be recruited from abroad orassigned to the Netherlands;

• the employer must make a reasonable case thatthe employee has specific expertise that is unavail-able or is scarce on the Dutch labor market;

• the employer must be a Dutch wage tax withhold-ing agent; and

• the employer and employee must agree in writingthat the 30 percent ruling will be applied.

The employer will automatically be considered aDutch wage tax withholding agent if it is established inthe Netherlands for tax purposes or has a permanentestablishment or permanent representative in theNetherlands, provided conditions are met. If the em-ployer does not qualify, it should register as a with-holding agent with the Dutch tax authorities.

The application for the 30 percent ruling should befiled within four months of the date of the employee’sarrival in the Netherlands in order to be effective fromthat day. If the application is filed after four months,the ruling is applicable as of the first month followingthe application.

The 30 percent ruling is, in principle, available for amaximum period of 10 years. However, at the begin-ning of the sixth year, the tax authorities can ask theemployer to demonstrate that the employee still meetsthe conditions. If the employee no longer meets theconditions, the 30 percent ruling can be terminatedretroactively. In that case, the ruling is no longer avail-able, as of the moment (after the five-year period) thatthe employee does not qualify. The maximum period of10 years also is reduced by the duration of any previ-ous stay or previous period of employment in theNetherlands (unless a 10-year period has elapsed sincethe previous stay or employment in the Netherlands).

The basis on which the 30 percent ruling is calcu-lated is the sum of the total salary (including the 30percent tax-free allowance) minus income that is eli-gible for relief from double taxation.

The Case at Issue

In the case at issue, the taxpayer was employed as amanaging director of the employer starting November1, 1996. The tax inspector notified the employee thatthe 30 percent ruling was granted for a period of 10years, ending on October 31, 2006. On March 31,2001, the employment agreement ended. The employeragreed to a severance payment of NLG 896,806, withthe net amount of the compensation calculated usingthe 30 percent ruling. It was up to the employee to ac-count for any income tax differences. In 2001 the em-ployee filed an income tax return and failed to applythe 30 percent ruling. The employee made an objectionto the tax return, but the tax inspector ruled againstthe objection. The employee then appealed to theCourt of Appeal in The Hague.

The dispute before the Court of Appeal waswhether the tax-free allowance for extraterritorial ex-penses includes wages for current and former employ-ment, or only for current employment. The Court ofAppeal in The Hague ruled that the severance payment

NETHERLANDS


(C) Tax A




fell under the tax-free allowance. The minister of fi-nance then appealed in cassation before the Dutch Su-preme Court.

The Supreme Court followed the opinion of theDutch advocate general, who stated that the legislationintended that compensation, within the meaning of thetax-free allowance, may not consist of compensationfor former employment. Therefore, it is now clear thatseverance payments and other payments related toformer employment do not qualify for the tax-free al-lowance.

♦ Gabriël van Gelder, Allen & Overy LLP, Amsterdam

Nigeria

State Imposes Sharia Wealth Tax

Paying taxes is widely considered to cause figurativepain, but in the Nigerian state of Bauchi not paying anew tax may lead to a more literal type of pain. Bau-chi has instituted a new wealth tax that it plans to col-lect from a list of affluent individuals within the state,according to a BBC News report. Punishment for non-compliance with the new tax includes jail or flogging.

Bauchi is located in the predominantly Muslimnorthern region of Nigeria. It is one of 10 Nigerianstates that officially enforces Sharia, or Islamic law.

The tax institutionalizes the practice of zakat, oralms-giving, one of the five pillars of Islam. UnderSharia, zakat is established as a 2.5 percent tax on anindividual’s wealth that must be paid annually in cashor through donations of food and goods.

The Bauchi government has sent letters to 3,000individuals informing them that they must pay zakat tothe government or face three months in jail, a fine, or20 lashes, according to the BBC report.

Zakat generally can either be given to a charity orpaid directly to poor Muslims. Some governments ofpredominantly Islamic countries have created officiallysanctioned charities to administer the giving.

Many Muslim governments also officially administerthe zakat, collecting the payment from individuals andbusinesses. In 2006 the Kuwaiti parliament passed acontroversial law charging zakat on 1 percent of theprofits of domestic companies. The revenue fundsZakat House, a government-run charity. (For prior cov-erage, see Doc 2006-22782 or 2006 WTD 217-2.)



Northern Marianas

Personal Exemption Claims Subject to

New Rules

In an effort to combat fraud and abuse of tax ex-emptions, tax officials of the Commonwealth of theNorthern Mariana Islands on February 1 started re-quiring detailed verification of personal exemptions,according to an announcement by the CNMI Depart-ment of Finance.

Under the new verification program, employees inthe CNMI are required to file a new withholding ex-emption certificate (Form W-4) whenever a change incircumstances occurs that results in an employee beingentitled to fewer withholding exemptions than previ-ously claimed. According to Northern Marianas Terri-torial Income Tax (NMTIT) section 3402(f)(2)(B) andNMTIT Regulation section 31.3402(f)(2)-1(b), such anemployee must furnish his employer with a new with-holding certificate within 10 days of the change. Will-ful failure to supply the information required byNMTIT section 3402, or the willful supply of false orfraudulent information, is punishable by a fine of up to$1,000, up to one year in prison, or both. Those penal-ties are in addition to any other penalty that may beimposed by law.

The new verification program aims to identify andrequire detailed justification by taxpayers claiming anunusually high number of exemptions. The Division ofRevenue and Taxation soon will begin a review ofwithholding exemption certificates and impose penal-ties on those found to have willfully furnished false orfraudulent information.

In its announcement, the Department of Financeoffered several examples of changes in status that mayrequire the filing of a new withholding certificate, in-cluding the following:

• the death of a spouse or dependent;

• a divorce or legal separation of the taxpayer fromhis spouse for whom an exemption was claimed;

• a claim by the taxpayer of his own withholdingexemption on a separate certificate from thespouse;

• the receipt of income by a dependent (except achild who is a student or is under age 19) forwhom an exemption was claimed that exceeds thegross income limit for the immediately previoustax year, and is expected to exceed the gross in-come limit in the current tax year;

• the discontinuation of a second job by the tax-payer or his spouse;

NETHERLANDS


(C) Tax A




• the transfer of responsibility for the support of adependent for whom the taxpayer claimed an ex-emption, so that the taxpayer no longer expects tofurnish more than half the support for the year;and

• any situation in which there would be an increasein income that is not subject to withholding, suchas interest income, dividend income, capital gains,self-employment income, or an IRA distribution.

The Department of Finance warns that this list isnot exhaustive and advises taxpayers to consult withtheir own tax advisers to determine when a new with-holding certificate may be required. Employers also areadvised to review their payroll records to ensure thatthe withholding for CNMI taxes complies with the ex-emptions claimed on their employees’ W-4 forms.

♦ Kenneth E. Barden, attorney, Saipan, Northern Mariana

Islands

Peru

Tax Administration OKs Transfer

Pricing Adjustments

In a recently issued memorandum (157-2007-SUNAT/2B0000), the Peruvian tax administration(SUNAT) has confirmed that tax authorities can maketransfer pricing adjustments in some cases without hav-ing to show that the pricing methods originally usedhad a negative impact on tax collections.

Under Peruvian tax law, transfer pricing adjustmentsgenerally are made when a tax payment is found to beinadequate as a result of the application of differenttransfer pricing values from those established under thearm’s-length principle.

However, Peruvian law is unclear about the applica-tion of adjustments in related-party transactions inthree specific cases:

• international transactions;

• transactions with companies that receive specialtax benefits; and

• transactions with companies that have had lossesin the past five years.

Notably, Peru’s transfer pricing regime applies bothto domestic and international related-party transac-tions.

In its recent memorandum, the SUNAT confirmedthat in the three cases mentioned above, tax authoritiescan adjust the transfer pricing without having to verifythe underpayment of taxes.

The opinion of the SUNAT is binding and thereforecreates a risk of tax collection even in cases whenrelated-party transactions have not adversely affectedPeruvian tax collections.

Transfer Pricing Penalties

Separately, the SUNAT, responding to requests by anumber of corporate associations, has published Letter201-2007-SUNAT/200000 (December 2007), whichprovides for the waiver of sanctions in some cases ofnoncompliance with the transfer pricing requirements,provided that the noncompliance does not result in adecrease in tax revenues.

To that effect, no sanctions will be applied to viola-tions related to the preparation and filing of the affida-vit of transfer prices, or to the filing of the technicalstudy that supports the calculation of the transferprices, for transactions carried out in 2006 between un-related parties.

It is important to mention that Peruvian law re-quires taxpayers to file a transfer pricing declarationand to prepare and keep a transfer pricing study fortransactions with companies domiciled in tax havens,such as Panama and the Bahamas, regardless ofwhether the parties to the transactions are related. Thismeans that a Peruvian company that buys productsfrom a company in a tax haven must comply with therequirements to file a declaration and prepare thetransfer pricing study.

However, imports and exports of goods with compa-nies domiciled in tax havens are among the transac-tions contained in the amnesty granted by the SUNAT.

♦ Italo Fernández and Renzo Medina, Osterling Law Firm,

Lima

Band Taxable on Peruvian-Source

Income, Tax Court Says

Peru’s Tax Court recently issued Resolution 162-1-2008, which states that expenses incurred by a residentperson on behalf of foreign persons hired to render aservice or develop an activity in Peru will be consid-ered Peruvian-source income of the foreign persons forwithholding tax purposes.

In the case at issue, the court was asked to deter-mine whether airfare, lodging, and other travel-relatedexpenses incurred by a Peruvian company that broughtan unidentified foreign rock band into the countryshould be recognized as part of the Peruvian-sourceincome of the rock band.

The court said that because the Peruvian companypaid all of the foreign musicians’ expenses and was notreimbursed for those expenses, the payments made bythe resident company should be recognized as taxable

PERU


(C) Tax A




Peruvian-source income of the foreign rock band be-cause the payments constitute a direct monetary ben-efit.

♦ Italo Fernández and Renzo Medina, Osterling Law Firm,

Lima

Russia

Court Clarifies Rules for Zero Rate

VAT

The Plenum of the Russian Supreme ArbitrationCourt on December 18, 2007, issued Resolution 65clarifying the application of the Tax Code in tax dis-putes involving VAT deductions and refunds undertransactions subject to a zero rate VAT. The resolutionserves as guidance for other arbitration courts.

The Supreme Arbitration Court stated that TaxCode Chapter 21 (Value Added Tax) established a pro-cedure for claiming VAT deductions or refunds undertransactions that are subject to a zero rate VAT. Underthat procedure, a VAT payer is allowed to deduct(claim a refund of) the VAT that it de facto paid tosuppliers for goods, works, services, or property rightspurchased if it duly registered the goods, works, ser-vices, or property rights for tax purposes and had therequired primary documents (sales receipts and docu-ments confirming the de facto VAT payment). The taxauthorities are vested with powers to adopt decisionsauthorizing or refusing VAT deductions or refunds totaxpayers.

A VAT payer may initiate judicial proceedings if thetax authorities did not allow him to deduct VAT de-spite the VAT payer’s due compliance with the aboveVAT deduction procedure and filing the required docu-ments to confirm its right to deduct VAT. In that case,the VAT payer may petition an arbitration court to in-validate the tax authority’s decision refusing a VATdeduction and require the tax authority to adopt a newdecision authorizing the VAT deduction to the VATpayer in the claimed amount.

The Supreme Arbitration Court instructed arbitra-tion courts to invalidate any tax authorities’ decisionsrefusing a VAT deduction to a taxpayer if those deci-sions are based solely on the fact that the taxpayer’sVAT return, in which that VAT deduction or refund isclaimed, was not accompanied by the required confir-mation documents when that VAT tax return was filedwith the tax authorities. The court stated that the TaxCode does not require a taxpayer to enclose confirma-tion documents when filing a return in which a VATdeduction or refund is claimed.

The tax authorities may not refuse a VAT deductionor refund based on the grounds that there is no evi-dence confirming the lawfulness of such a VAT deduc-tion or refund, if they failed to request from the tax-payer, and did not examine, the required confirmationdocuments. Also, any confirmation documents that thetaxpayer, for a reasonable, valid excuse, failed topresent to the tax authorities for examination may bepresented to court after the start of the judicial pro-ceedings.

If a VAT payer petitions an arbitration court toadopt a decision, requiring the tax authorities to autho-rize a VAT deduction to the VAT payer in the claimedamount and the tax authorities fail to produce any ob-jections against that VAT deduction or refund, thecourt must adopt a decision satisfying the VAT payer’sclaims.


Treaty Not Applicable in Real Estate

Tax Dispute, High Court Says

The Presidium of the Russian Supreme ArbitrationCourt has held that the Russia-Turkey income taxtreaty does not cover real estate tax and that arbitrationcourts were wrong to use the treaty definition of anonresident’s permanent establishment to decide a realestate tax dispute.

The court delivered its decision (8585/07) in CaseA56-29835/2006 on November 27, 2007. The decisionhas not yet been officially published, but it was avail-able in Russian, as of February 5, on the court’s Website (http://www.arbitr.ru/?id_sec=353&id_doc=3860&id_src=650039E576C15BC398E987A7FDA9F1C3&p=-1).

Case Background

The Federal Tax Service’s tax inspectorate for theLeningrad region’s Lomonosov district conducted a taxaudit of the plaintiff, Turkish company Enka Insaat veSanayi Anonim Sirketi, for the period from January 1,2003, through December 31, 2005. During the tax au-dit, the tax authority established that the plaintiff hadgenerally paid its tax liabilities and had been filing therequired documents on its taxable activities in Russia(specifically, conducting business on a building site).

However, the tax authority found that the plaintifffailed to pay real estate tax in Russia and therefore hadnot filed the required real estate tax reporting docu-ments. The tax authority therefore issued decision 05-13/30 (dated June 30, 2006), requiring the plaintiff topay RUB 811,918 in real estate tax and imposing onthe plaintiff tax penalties and fines based on Tax Codearticles 119, section 2, and 122, section 1.

PERU


(C) Tax A




The plaintiff filed a petition with the ArbitrationCourt for the City of St. Petersburg and Leningrad Re-gion (the court of first instance), asking it to invalidateDecision 05-13/30. The court on December 12, 2006,ruled in favor of the plaintiff, invalidating the decision.The 13th Arbitration Court of Appeal and the FederalArbitration Court of the North-West Circuit, to whichthe tax inspectorate appealed the case, upheld the deci-sion of the court of first instance on February 21,2007, and May 24, 2007, respectively.

The courts agreed that foreign legal entities shouldbe treated as payers of the real estate tax if they oper-ate in Russia through a PE and that the conditions un-der which a foreign legal entity’s PE is considered tobe created in Russia should be determined uniformlyfor purposes of both the corporate income tax and thereal estate tax. Based on article 5 of the Russia-Turkeyincome tax treaty of December 15, 1997, a buildingsite or a construction, assembly, or installation project,or supervisory activities related thereto, form a PE inRussia only if the site, project, or activities continue fora period of more than 18 months.

The plaintiff entered into contract nos. 1588-1(dated October 24, 2003) and 1664-1 (dated March 5,2004) with Philip Morris Izhora, under which theplaintiff agreed to renovate and expand a tobacco proc-essing plant owned by Philip Morris Izhora.

However, the courts ruled that the plaintiff’s opera-tions on the building site did not last more than 18months and thus did not result in the creation of a PEin Russia. The courts therefore ruled that the tax au-thority did not have legal grounds to require the plain-tiff to pay the real estate tax in Russia or to impose taxpenalties and fines.

The tax authority petitioned the Supreme Arbitra-tion Court to invalidate the lower courts’ decisions onthe grounds that those courts incorrectly construed andapplied the Russia-Turkey income tax treaty and appli-cable domestic tax legislation. The tax authority alsoasked the court to adopt a new decision rejecting all ofthe plaintiff’s claims. The plaintiff filed a written re-sponse to that petition, arguing that the lower courts’decisions were in full compliance with current legisla-tion and should be left intact.

Supreme Arbitration Court’s Findings

The Supreme Arbitration Court noted that theRussia-Turkey income tax treaty applies to taxes onincome imposed on behalf of each of the contractingstates. Under the treaty, the phrase ‘‘taxes on income’’applies to all taxes imposed on total income, or on ele-ments of income, including taxes on gains from thealienation of movable or immovable property. In thecase of Russia, the treaty also covers corporate andindividual income taxes.

The court held that the terms and definitions — in-cluding the definition of a PE — contained in the

treaty should be used exclusively for purposes of theapplication of the treaty and the taxes covered therein.The court further clarified that the treaty does notcover taxes imposed on real estate owned or otherwisepossessed by Russian or Turkish residents. The courttherefore ruled that the lower courts incorrectly usedthe definitions contained in the treaty in deciding theplaintiff’s case, which is a real estate tax dispute.

The court held that foreign legal entities operatingin Russia through a PE, or that have ownership titleover real estate located in Russia, are treated as payersof the real estate tax in Russia on the basis of TaxCode article 373, section 1.

Furthermore, a foreign legal entity’s operations inRussia result in the creation of a PE in Russia on thebasis of the provisions of Tax Code article 306, unlessdifferent provisions are established by an applicableincome tax treaty, the court said.

Under Tax Code article 306, section 2, a PE meansa branch, representative office, division, bureau,agency, any other structural subdivision, or any otherplace through which a foreign legal entity regularlycarries out business in Russia, including the executionof construction work, an installation or an assembly,and the adjustment and servicing of equipment.

The court also pointed out that Tax Code article306 does not impose any restrictions on the practice ofthe aforementioned activities by a foreign legal entitythat could prevent the qualification of that foreign legalentity as a payer of the real estate tax in Russia.

For those reasons and considering that the lowercourts decided the plaintiff’s case incorrectly using theRussia-Turkey income tax treaty (which does not applyin the plaintiff’s case), the Supreme Arbitration Courtoverturned the lower courts’ decisions as violating theprinciple of uniform construction and practical applica-tion of law by arbitration courts and referred the casefor reexamination to the Arbitration Court for the Cityof St. Petersburg and Leningrad Region.


Taiwan (R.O.C.)

Tax Ruling May Adversely Affect

Mergers

The Taiwanese tax authority on January 4 unexpect-edly issued a tax ruling that may negatively affect do-mestic and cross-border mergers. Under the ruling, amerged company would realize capital gains ondeemed dispositions of fixed assets arising from amerger under a purchase method if the merger waseffectuated on or after January 1, 2008.

TAIWAN (R.O.C.)


(C) Tax A




This ruling, unlike a private letter ruling in theUnited States, is not taxpayer specific but is binding onall taxpayers. The ruling does not apply, however, to asubsidiary that merges into its parent, because themerger is considered as a restructuring transaction andtherefore remains tax free.

Under the January 4 tax ruling, a surviving com-pany may apply purchase accounting to the transac-tion. Under this scenario, the acquisition price is allo-cated to acquired fixed assets, resulting in assets beingstepped up to their fair market values, provided theacquisition price represents the fair market value of theassets; is substantiated by documents such as a valua-tion report, merger agreement, a shareholder meetingresolution, and other applicable supporting documents;and is approved by the Taiwanese tax authority. As aresult, the merged company would be deemed to havedisposed of its assets at their fair market values, result-ing in potential capital gains on its deemed disposition.

This is a significant departure from the current non-taxable treatment for Taiwanese tax purposes and po-tentially would cause the merged company additionaltax costs. The tax ruling itself covers fixed assets; how-ever, based on an informal discussion with an officialin the Ministry of Finance, it appears the term ‘‘as-sets’’ may be sufficiently broad to include other assetssuch as intangible assets, depletable assets, and long-term investments. Without further guidance from theTaiwanese tax authority, it will remain uncertain whatassets fall under the ‘‘covered asset’’ category.

The tax ruling may also significantly affect mergersthat have already been negotiated (but not yet fullycompleted) before its issuance, unless the parties agreeto renegotiate the purchase price, taking into accountthe ruling’s impact.

While the January 4 tax ruling provides an acquir-ing company with a potentially higher depreciable basisin acquired assets resulting from mergers occurring onor after January 1, 2008, a merged company could besubject to the 25 percent corporate income tax on capi-tal gains from a deemed disposition of assets.

♦ Lisa Lim and Peter Su, Ernst & Young Asia Business

Group, New York, and ChiChang Hsu, Ernst & YoungTaipei

Leaders Agree on Proposed Tax

Changes

Taiwanese government officials and business leaderson February 3 broadly agreed on a tax policy reformpackage that would lower the 25 percent corporate taxrate, end the 10 percent corporate undistributed incometax, lower some personal income tax rates, and in-crease personal tax deductions.

Negotiations over specific details of the proposed

package are still ongoing, however, and the government

will not give its final blessing to the package until after

the Lunar New Year holiday concludes on February

11, at the earliest.

Ending existing tax breaks provided under the Stat-

ute for Industrial Upgrading would provide about NT

$140 billion (approximately $4.4 billion) in new rev-

enue to pay for the corporate and personal income tax

changes. The Statute for Industrial Upgrading allows

accelerated depreciation of machinery and equipment,

tax credits for investment, and the choice of a five-year

tax holiday for companies or investment tax credits for

shareholders. It is set to expire in 2009.

‘‘The Cabinet has shown great sincerity in providing

tax incentives to help local businesses,’’ Chinese Na-

tional Federation of Industries Chair Chen Wu-hsiung

said on February 4, according to the Taipei Times.

‘‘The government will meet with various ministries

to review the feasibility of reducing business taxes and

increasing income tax deductions,’’ Premier Chang

Chun-hsiung also said on February 4, according to The

China Post online news service.

Vice Premier Chiou I-jen suggested a variety of re-

form options at the February 3 meeting, according to

The China Post, including repealing the tax on corporate

undistributed income, lowering the regular corporate

rate to 20 percent or 17.5 percent, lowering the per-

sonal income tax rate for high-income earners, and

raising caps on personal income tax deductions.

Business leaders say lowering Taiwan’s corporate

tax rate to 17.5 percent is especially important because

it would allow Taiwan to compete with Hong Kong

and Singapore, which have corporate tax rates of 17.5

percent and 18 percent, respectively.

Taiwan’s personal income tax rate of 40 percent for

high-income earners might be lowered to 35 percent,

although business leaders reportedly favor lowering it

to 30 percent. The standard deductions for single tax-

payers might be raised to NT $60,000 (approximately

$1,875) from NT $46,000 (approximately $1,438), and

the standard deductions for married couples might be

raised to NT $120,000 (approximately $3,750) from

NT $92,000 (approximately $2,875), with increases in

several special personal deductions as well. (For prior

coverage, see Tax Notes Int’l, Jan. 21, 2008, p. 252, Doc

2008-823, or 2008 WTD 11-3.)



TAIWAN (R.O.C.)


(C) Tax A




United Kingdom

Number of High-Rate Taxpayers on

The Rise, Accounting Firm Finds

The number of U.K. taxpayers in the top incometax bracket has increased 20 percent since 2002-2003because the government has not matched increases inthe top tax rate threshold with pay inflation, accordingto a January 31 press release from U.K. accountingfirm UHY Hacker Young.

UHY Hacker Young tax specialists reviewed figuresreleased recently by HM Revenue & Customs that re-veal the number of taxpayers in each of the UnitedKingdom’s three income tax brackets: the starting rateof 10 percent, the basic rate of 22 percent, and thehigher rate of 40 percent.

The specialists found that the number of basic-ratetaxpayers has grown by only 5.4 percent in the pastfive years (from 22 million to 23 million), while thenumber of taxpayers in the higher-rate bracket has in-creased over the same period by 20.4 percent (from 3million to 3.7 million).

However, UHY Hacker Young said calculationsshow that wages have increased 20.8 percent since2002-2003, while the threshold for meeting the higher-rate tax bracket has increased only 15.7 percent. Be-cause the government has not moved the higher-ratethreshold in line with wage increases, ‘‘the cumulativeeffect has been a dramatic rise in the number of peoplepaying the higher rate of tax,’’ Roy Maugham, a taxpartner at UHY Hacker Young, said in the release.

The data show that the income tax has become amajor ‘‘stealth tax,’’ according to the release. ‘‘The vastmajority of people who have moved into the higher taxbracket have quite modest lifestyles and purchasingpower,’’ Maugham said. ‘‘The increase is not attribut-able to a rise in the number of millionaires.’’

For the 2006-2007 tax year, the threshold for the toptax rate was income in excess of £33,300. For the2007-2008 tax year, the threshold is income in excessof £34,600.

The UHY Hacker Young specialists said the major-ity of higher-rate taxpayers would be better off thisyear by £705.84 (not including national insurance) ifthe government increased the threshold for the top rateby 5.1 percent, to £36,364.60, to bring it in line withwage inflation. They said the government is takinghundreds of millions of pounds in extra tax each yearas a result of not increasing the tax bands in line withwage inflation.

‘‘The government needs to link increases in thehigher rate income tax threshold to pay rises so thatthe proportion of taxpayers actually in the top bandremains static over time,’’ Maugham said.

The U.K. Treasury responded in a statement that

‘‘the basis of a fair, progressive income tax system is

that as individuals’ real income rises, the average tax

they pay goes up. The increase in higher-rate taxpayers

is a sign of economic success and increased national

prosperity.’’

It added that since 1997, 2.6 million people have

been added to the employment rolls in the United

Kingdom.

♦ Kristen A. Parillo, Tax Analysts.


Online Self-Assessment System Fails

On Last Filing Day

In yet another in a string of embarrassments for

HM Revenue & Customs, its online self-assessment

filing system failed on the final day before the filing

deadline.

Taxpayers trying to log in to complete their self as-

sessments online on January 31 before the midnight

deadline received an error message saying that the sys-

tem was unavailable.

A spokesman for HMRC said not all tax filers were

affected, but that it was too early to know the full ex-

tent of the problem. He told Tax Analysts that the out-

age lasted for about 3-1/2 hours.

In an official statement provided to Tax Analysts,

HRMC said, ‘‘HMRC’s Self Assessment on-line filing

service has experienced technical difficulties this morn-

ing which has meant that some tax payers have experi-

enced difficulties filing on-line. The system is now rap-

idly returning to normal levels of service. A record

number of 3.6 million taxpayers have already success-

fully filed on-line with 104,000 filing today.’’

HMRC was forced to reassure online filers that thesystem was secure after it was revealed that membersof Parliament and other VIPs had been informed thatthey would not be permitted to use the system for se-curity reasons. (For prior coverage of the concerns overHMRC’s online filing security, see Doc 2008-1772 or2008 WTD 19-2.)

Both episodes follow closely on the heels of lastyear’s revelation that HMRC lost two disks containing25 million child benefit records. That incident led tothe resignation of HMRC Chief Paul Gray.



UNITED KINGDOM


(C) Tax A




United States

Customs Eyes Change in First Sale for

Export Rule

U.S. Customs and Border Protection (CBP) on Janu-ary 24 announced a proposal to make a major changeto its interpretation of statutory language underlyingthe first sale for export (FSFE) rule in determining thetransaction value of goods imported into the UnitedStates.

Specifically, the CBP intends to change its interpre-tation of the phrase ‘‘sold for exportation to the UnitedStates’’ as it pertains to the use of the transaction valuemethod of customs valuation in a series of sales. Ifadopted, this proposed new interpretation would elimi-nate the ability for U.S. importers to employ the FSFEduty reduction strategy, thereby significantly increasingduties owed on most goods imported into the U.S. thatcurrently benefit from an FSFE structure or that wouldhave benefited from such savings in the future.

Background

The FSFE allows U.S. importers to use as a basisfor transaction value the price paid on a lower-value,earlier sale in a series of sales (for example, the saleprice to a foreign manufacturer by a foreign intermedi-ary) rather than the higher price paid on a subsequentsale (for example, the last sale price to a U.S. buyer bya foreign intermediary), provided certain conditions aresatisfied.

The CBP’s current interpretation of ‘‘sold for expor-tation to the United States,’’ which is consistent withexisting U.S. case law and administrative rulings, al-lows the transaction value to be based on the pricepaid by the buyer in a first or earlier sale if the im-porter can establish by sufficient evidence that the firstsale was a bona fide arm’s-length sale and that, at thetime of the sale, the goods were clearly destined forexportation to the U.S.

The CBP’s proposed new interpretation would re-quire that the sale value to the U.S. buyer, or the lastsale value, be used as the basis for transaction value.Moreover, the CBP has indicated that this new inter-pretation, if adopted, would result in its revocation ofTreasury Decision 96-87 (which sets out the FSFErule), as well as the modification or revocation of sev-eral administrative rulings that currently allow for theuse of the FSFE rule.

The CBP’s proposed reversal in position reflects theconclusions of Commentary 22.1, ‘‘Meaning of theExpression ‘Sold for Exportation’ in a Series of Sales,’’published in April 2007 by the World Customs Organi-zation’s Technical Committee on Customs Valuation.In the commentary, the Technical Committee con-

cluded that in a series-of-sales situation, the price actu-ally paid or payable for the imported goods when soldfor export to the country of importation is the pricepaid in the last sale occurring before the introductionof the goods into the country of importation, insteadof the first (or earlier) sale.

Effect on U.S. Importing Community

If adopted, the proposed rule would have an enor-mous impact on U.S. importers, many of which arecurrently saving, or have planned to save, hundreds ofmillions of dollars in duties as a result of FSFE struc-tures in which they have heavily invested.

The Federal Register notice provides for a commentperiod during which support for and opposition to therule may be filed by interested parties. The commentperiod is scheduled to close on March 24. It is ex-pected that some interested parties will seek an exten-sion to the comment period to allow sufficient time forindividuals and coalitions of importers to prepare andsubmit comments to the proposed rule.

Also, the Departmental Advisory Committee onCommercial Operations of U.S. Customs and BorderProtection and Related Homeland Security Functionshas announced that its February 13 meeting in Tucson,Ariz., will be open to the public. It is expected that thisproposed change will be a key topic of discussion dur-ing the meeting.

♦ Michele McGuire, Deloitte Tax LLP, Chicago. Copyright

© 2008 Deloitte Development LLC. All rights reserved.

Speakers at IRS Hearing Say Proposed

Withholding Regs Not Administrable

Two speakers at a February 6 IRS hearing were em-phatic in telling the Service that its proposed withhold-ing regulations were impracticable.

On October 17 the IRS released proposed regs thatwould require withholding agents to keep in escrowwithholding on self-tender payments made to nonresi-dent aliens (NRA) in respect of distributions by pub-licly traded corporations in redemption of their stock.(For REG-140206-06, see Doc 2007-23150 or 2007 WTD201-35.) The proposed regs set out a process in which asection 302 payment made by a U.S. corporation to anNRA is presumed to be a dividend subject to the appli-cable withholding rate (typically 30 percent) and keptin escrow for up to 60 days by the withholding agentuntil it can be determined whether the payment is adividend or a payment in exchange for stock. Underthe proposed regs, NRAs must submit a certificationletter to the withholding agent stating whether the pay-ment is a distribution or exchange.

UNITED STATES


(C) Tax A




Barbara Amsden, director of Capital Market, repre-senting the Investment Industry Association ofCanada, told government officials at the hearing thatthe certification requirements were ‘‘overly onerous andcomplex.’’ The inclusion of all distributions under sec-tion 302 — not just self-tenders — would lead to ap-proximately 600 to 800 corporations being affected in2007, she said, which is a significantly higher numberthan what the IRS considered in its analysis. Amsdenalso noted that in Canada a large number of exemptentities hold U.S. securities.

Amsden also addressed escrow procedures, anotherconcerning area. Operationally, the proposed regswould severely complicate the processing of payments,she said. And the incremental costs incurred fromcomplying with the procedure and the increased report-ing burden could result in costs 120 times greater thanwhat the IRS estimated in its special analysis under theRegulatory Flexibility Act.

Timing of the proposed regs was also a problem,Amsden said. There had not been enough time to com-ment, and the IRS’s framework was unworkable forintermediaries, she suggested. Amsden said she hopedthe IRS would allow 100 percent passthrough of with-holding until the proposed regs were finalized.

Amsden recommended that the IRS consider mak-ing changes to the proposed regs, including allowingpayments as payments in exchange for stock withoutcertification, creating a 5 percent threshold for dividendtreatment in self-tender distributions, and giving foreignwithholding qualified intermediaries the same treat-ment as U.S. withholding agents.

Frederic Bousquet, vice-president of State StreetBank and Trust Company, representing the SecuritiesIndustry and Financial Markets Association, said thatwhile the regs were detailed and technically correct,that are not administrable. The IRS should move awayfrom the default dividend treatment toward a presump-tion of exchange treatment, he said. Like Amsden,Bousquet stated that a de minimis test of less than 5percent could be adopted.

It is bad public policy to penalize foreign share-holders who redeem stock, Bousquet said, and there isminimal tax revenue derived from non-U.S. share-holders. ‘‘The rule defies logic,’’ he said, ‘‘because theproposed reg allows for inconsistent treatment betweenshareholders. Instead, exchange treatment is a betteravenue to go down.’’

After the speakers finished their remarks, a govern-ment official inquired whether the industry wouldrather have the IRS make changes to the regulations assuggested in submitted comments or have the IRS es-tablish a presumption of exchange treatment. Both

Amsden and Bousquet agreed that the industry wouldbe better served by a presumption so as to avoid theburden of certification.

♦ Jeremiah Coder, Tax Analysts.


Uruguay

Government Adopts New Agrofuel

Tax Regime

Uruguay’s Parliament recently passed a new law(Act 18,195) that regulates the production and market-ing of agrofuels — specifically, biodiesel and alcoholfuel — and grants tax breaks to companies that pro-duce them.

The law excludes the production and exportation ofbiodiesel and alcohol fuel by the state-run ANCAPmonopoly. Further, production by private companiesmust be destined for the external market, self-consumption, the supply of captive fleets, or sale toANCAP. Domestic sales of biodiesel and alcohol fuel,and the mixture of those fuels with gasoline and dieseloil for consumption by the general public, is restrictedto ANCAP.

Sales of biodiesel under the regime introduced byAct 18,195 will be subject to the same tax regime as isapplicable to diesel oil, and sale of alcohol fuel will besubject to the same tax regime as for gasoline. Thatmeans that, in principle, the agrofuels will be subject toexcise tax and, for biodiesel, a minimum rate VAT.

However, the new law exempts domestic biodieselfrom excise tax for a period of 10 years and also stipu-lates that the executive branch may exempt all domes-tic agrofuels from taxes.

Agrofuel producers operating under the new regimemust file for inclusion in a registry kept by the Minis-try of Industry, Energy and Mining. The new lawstipulates that registered companies may have access to:an exemption from the net worth tax on fixed assetsdestined for the production of data processing equip-ment, as well as intangible assets such as trademarksand patents; and a 100 percent income tax exemptionfor a period of 10 years. Those benefits are in additionto the benefits that companies may obtain under Uru-guay’s Investments Law.

The executive branch is currently drafting regula-tions that will stipulate how and under what conditionsthe benefits will be made effective.

♦ Gianni Gutiérrez, senior associate and manager, tax

department, Ferrere Attorneys at Law, Montevideo

URUGUAY


(C) Tax A





(C) Tax A




Isle of Man Reps Urge Change to Tax Haven Billby Linda E. Carlisle and Geoffrey B. Lanning

Dear Bob:

On November 8, 2007, government officials from theIsle of Man and I met with you to discuss S. 681

the ‘‘Stop Tax Haven Abuse Act of 2007,’’ introduced bySenators Carl Levin, Norm Coleman, and BarackObama. S. 681 includes an initial list of 34 foreign juris-dictions that will be treated as ‘‘offshore secrecy jurisdic-tions,’’ including the Isle of Man. As you know, the listof jurisdictions in S. 681 is based on a 2005 request ofthe Internal Revenue Service (‘‘IRS’’) for a ‘‘John Doesummons’’ regarding bank and credit card transactionsbetween U.S. persons and banks and financial institu-tions located in the 34 specified jurisdictions.

The Isle of Man is concerned that being listed as anoffshore secrecy jurisdiction would impugn its well-deserved reputation for meeting or exceeding interna-tional standards for the regulation of its financial serv-ices sector and cooperating with other jurisdictions,including the United States, to counter tax evasion. Inaddition, being treated as an offshore secrecy jurisdic-tion would deter U.S. persons from entering into legiti-mate and fully disclosed transactions involving entitiesor financial accounts located in the Isle of Man.

As we have noted before, the initial list of offshoresecrecy jurisdictions in S. 681 does not reflect the rel-evant facts as they exist today. In our meeting, it wassuggested that if it is necessary to have a list of off-shore secrecy jurisdictions, such a list should not in-clude any jurisdiction that lacks all objective character-istics of an offshore secrecy jurisdiction. This approachwould encourage jurisdictions to cooperate in counter-ing tax evasion by eliminating such characteristics.

The attached memorandum identifies and discussesthe objective criteria that we suggest be incorporated inS. 681 to determine if a jurisdiction should be treatedas an offshore secrecy jurisdiction. If a jurisdiction hasnone of the objective characteristics, such jurisdictionwould not be considered to be an offshore secrecy ju-risdiction. If a jurisdiction has one or more of the ob-jective characteristics, the jurisdiction would be consid-ered to be an offshore secrecy jurisdiction.

Thank you for taking the time to review this memo-randum. If you have any questions regarding this issue,please contact me at (202) 626-3666 or [email protected].

Sincerely,

Linda E. CarlisleWhite & Case LLP

LEC:jw

Attachment

* * *

Date: January 16, 2008

To: Robert L. Roach

From: Linda E. Carlisle,Geoffrey B. Lanning

Re: Isle of Man — Objective Criteria for Defining an‘‘Offshore Secrecy Jurisdiction’’

On November 8, 2007, government officials fromthe Isle of Man met with you to discuss S. 681, the‘‘Stop Tax Haven Abuse Act of 2007,’’ introduced by

Linda E. Carlisle of White and Case LLP, on January 16, 2008, sent the following letter and attachedmemorandum, written by Carlisle and Geoffrey B. Lanning, also of White and Case LLP, to Robert L.Roach, counsel and chief investigator to the majority of the Senate Permanent Subcommittee on Investi-gations, regarding the objective criteria for defining an ‘‘offshore secrecy jurisdiction.’’

Copyright © 2008 Linda E. Carlisle and Geoffrey B. Lanning. All rights reserved.


(C) Tax A




Senators Carl Levin, Norm Coleman, and BarackObama. As explained by Senator Levin in his introduc-tory statement, ‘‘offshore secrecy jurisdictions’’ are for-eign jurisdictions that maintain corporate, bank, andtax secrecy laws and industry practices that enable U.S.taxpayers to evade U.S. taxes by preventing U.S. taxauthorities from gaining access to key financial andbeneficial ownership information. S. 681 includes aninitial list of 34 foreign jurisdictions that will be treatedas ‘‘offshore secrecy jurisdictions,’’ including the Isle ofMan. The list of jurisdictions in S. 681 is based on a2005 request of the Internal Revenue Service (‘‘IRS’’)for a ‘‘John Doe summons’’ regarding bank and creditcard transactions between U.S. persons and banks andfinancial institutions located in the 34 specified juris-dictions.

The Isle of Man is concerned that being listed as anoffshore secrecy jurisdiction under S. 681 would im-pugn its well-deserved reputation for meeting or ex-ceeding international standards for the regulation of itsfinancial services sector and cooperating with otherjurisdictions, including the United States, to countertax evasion. In addition, being treated as an offshoresecrecy jurisdiction would deter U.S. persons from en-tering into legitimate and fully disclosed transactionsinvolving entities or financial accounts located in theIsle of Man.

As we have noted before, the initial list of offshoresecrecy jurisdictions in S. 681 does not reflect the rel-evant facts as they exist today. No jurisdiction shouldbe ‘‘blacklisted’’ as an offshore secrecy jurisdictionbased on out-of-date facts. In addition, in our meetingit was suggested that if it is necessary to have a list ofoffshore secrecy jurisdictions, such a list should notinclude any jurisdiction that lacks any objective charac-teristics of an offshore secrecy jurisdiction. In order toencourage jurisdictions to cooperate in countering taxevasion, S. 681 should include a ‘‘safe harbor’’ of ob-jective criteria that a jurisdiction can satisfy in order tobe excluded from the list of offshore secrecy jurisdic-tions.

We suggest that S. 681 set forth specific objectivecharacteristics that if present indicate that a jurisdictionshould be treated as an offshore secrecy jurisdiction. Ifa jurisdiction has none of the objective characteristics,such jurisdiction would not be considered to be an off-shore secrecy jurisdiction. If a jurisdiction has one ormore of the objective characteristics, the jurisdictionwould be considered to be an offshore secrecy jurisdic-tion.

The following discusses the characteristics that wesuggest should be incorporated in S. 681.

I. Objective Characteristics

A. The jurisdiction allows for the issuance ofbearer shares.

A ‘‘bearer share’’ is a stock certificate that is theproperty of whomever is in possession of the certifi-

cate. Where a jurisdiction permits the issuance ofbearer shares, the share register of the issuing companygenerally shows only the fact that the share has beenissued, the date of issuance and the number of sharesissued. The share register does not contain informationregarding the identity of the shareholder. Because theowner of bearer shares cannot be determined, bearershares may be used for tax evasion or avoidance, i.e.,because tax authorities do not know who holds bearershares, they cannot determine which parties may besubject to tax with respect to such shares.

B. The jurisdiction has statutory bank or businesssecrecy laws.

Statutory bank secrecy laws protect the identity ofbank customers. Such laws inhibit countries from en-forcing their tax laws or cooperating with other coun-tries’ efforts to enforce their tax laws.

Foreign jurisdictions may also have laws which havethe effect of prohibiting or restricting the disclosure ofbusiness information (‘‘business secrecy laws’’). Busi-ness information hidden by statutory business secrecylaws may include information regarding the identity ofbusiness owners, the identity of relevant non-businessowners, e.g., fiduciaries, agents, trustees, as well as ac-counting information. Because such information is of-ten needed in a tax compliance investigation, it is im-portant that the United States have the ability to obtainsuch information from other countries. If other coun-tries lack the authority to obtain such information, theability of the United States to enforce its tax laws isdiminished.

C. The jurisdiction lacks a tax information ex-change agreement (‘‘TIEA’’) or income taxtreaty in force with the United States coveringthe exchange of information with respect to bothcivil and criminal tax matters.

A TIEA provides the legal authority for a signatorycountry to provide information requested by the taxauthority of the other signatory country for the pur-pose of investigating tax evasion or avoidance by per-sons subject to the internal tax laws of the requestingcountry. Since the mid-1980s, the United States hasmaintained a policy of not entering into comprehensiveincome tax treaties, which generally provide for taxinformation exchange, with no or low income tax juris-dictions because a principal purpose of such incometax treaties, i.e., the elimination of double income taxa-tion of cross-border activities and investment flows,would not be served.1 The United States initiated itsTIEA program in 1983 to encourage entry into infor-mation exchange agreements by jurisdictions with

1Statement of Paul H. O’Neill before the Senate Committee on Gov-ernmental Affairs Permanent Subcommittee on Investigations OECDHarmful Tax Practices Initiative, PO-486 (July 18, 2001), available athttp://www.treas.gov/press/releases/po486.htm.

CURRENT & QUOTABLE


(C) Tax A




which the United States would not enter into compre-hensive income tax treaties.2 Under a TIEA, theUnited States may obtain information from the signa-tory country that enables the United States to enforceits internal tax laws and prosecute U.S. taxpayers fortax evasion. The ability of the United States to obtaininformation from signatory countries also serves to de-ter U.S. taxpayers from attempting to evade taxthrough entities or accounts formed in such signatorycountries.

D. The jurisdiction lacks ‘‘know-your-customer’’rules approved by the IRS pursuant to RevenueProcedure 2000-12.

A qualified intermediary (‘‘QI’’) is any foreign fi-nancial intermediary, e.g., a bank, broker or financialinstitution, that has entered into a QI withholdingagreement with the IRS. Revenue Procedure 2000-12,2000-1 C.B. 387 (‘‘Rev. Proc. 2000-12’’) provides guid-ance for entering into a QI withholding agreement andcontains the application procedures for becoming a QI.Pursuant to Rev. Proc. 2000-12, the IRS will not enterinto a QI withholding agreement with a foreign finan-cial intermediary unless the IRS has approved of the‘‘know-your-customer’’ rules that apply to the foreignfinancial intermediary. ‘‘Know-your-customer rules’’are the applicable country’s laws, regulations, rules andadministrative practices and procedures that apply toforeign financial intermediaries and require that theyobtain documentation regarding the identity of theircustomers. Pursuant to Rev. Proc. 2000-12, the IRSpublishes lists of countries for which it has approvedsuch ‘‘know-your-customer rules.’’ The IRS will notapprove ‘‘know-your-customer rules’’ for countries thatdo not provide effective procedures for providing taxinformation to the United States for both civil tax ad-ministration and criminal tax enforcement purposes orhave not taken significant steps towards achieving ef-fective provision of such information.3

E. The jurisdiction lacks anti-money launderingrules that comport with Financial Action TaskForce recommendations or similar internationalstandards.

The Financial Action Task Force (‘‘FATF’’) is aninter-governmental body whose purpose is the develop-ment and promotion of international standards andpolicies to combat money laundering. The UnitedStates has been a member of FATF since 1990. In1990, the FATF issued a report containing a set offorty recommendations that countries may implementto effectively combat money laundering.4 These recom-mendations include measures that make the identity of

account holders readily available to governmental au-

thorities. For example, recommendation 5 provides that

financial institutions should not maintain anonymous

accounts or accounts in obviously fictitious names, and

furthermore that financial institutions should undertake

customer due diligence measures, including verification

of the identity of their customers. Similarly, recom-

mendation 10 provides that financial institutions

should maintain records on domestic and international

transactions in order to swiftly comply with informa-

tion requests from governmental authorities. The rec-

ommendations, although aimed primarily at combating

money laundering, seek to make information on the

identity of account holders readily available to govern-

mental authorities, information which may also be

used to prevent tax evasion. The FATF periodically

updates its recommendations to reflect changes that

have occurred in money laundering practices and tech-

niques.

Since 2000, the FATF has, on an annual basis, des-

ignated jurisdictions that do not adequately apply the

FATF recommendations as ‘‘Non-Cooperative Coun-

tries and Territories.’’5 If, however, a jurisdiction desig-

nated as a Non-Cooperative Country or Territory

makes substantial progress in implementing anti-money

laundering reforms, i.e., the jurisdiction enacts laws and

regulations necessary to adequately apply the FATFrecommendations, the jurisdiction will not be desig-nated a Non-Cooperative Country or Territory in thesucceeding annual review.6

F. The jurisdiction lacks laws requiring that in-formation regarding the ownership of trusts,partnerships and other business entities formedin the jurisdiction be obtained and made avail-able to the jurisdiction’s tax authority for pur-poses of exchanging tax information with theUnited States.

Foreign jurisdictions often have laws which requirethat information regarding the ownership of trusts,partnerships and other business entities formed in thejurisdiction be kept by governmental authorities, theentities themselves, or third party service providers, e.g.,trustees, or persons in the business of setting up part-nerships or trusts. These laws assist in preventing theuse of trusts or business entities to hide the identity ofthe ultimate owners of property held by such entities,which can facilitate tax evasion.

2Id.3Rev. Proc. 2000-12, 2000-1 C.B. 387.4The list of forty recommendations is available at

http.www.fatf-gafi.org.

5Financial Action Task Force on Money Laundering, Reporton Non-Cooperative Countries and Territories (February 14, 2000),available at http.www.fatf-gafi.org.

6See, e.g., Financial Action Task Force on Money Laundering,FATF Annual Review of Non-Cooperative Countries and Territories (Oc-tober 12, 2007) June 23, 2006), available at http.www.fatf-gafi.org.

CURRENT & QUOTABLE


(C) Tax A




II. Application of Objective Characteristics

If a jurisdiction lacks all of the characteristics de-scribed above, it would not be considered to be an off-shore secrecy jurisdiction under S. 681. If a jurisdictionhas one or more of the characteristics described above,it would be considered to be an offshore secrecy juris-diction. This approach provides certainty to jurisdic-tions and encourages them to adopt practices that al-low the United States access to information necessaryto enforce U.S. tax laws.

Applying the above characteristics, the Isle of Man

would not be categorized as an offshore secrecy juris-

diction for purposes of the list in S. 681 because it has

none of these characteristics. ◆

* * *

Please let me know if you have any questions.

Thank you for your consideration of this proposal.

CURRENT & QUOTABLE


(C) Tax A




Spain’s Tax Treatment of Foreign Takeovers: Enter theEuropean Commissionby Mayra O. Lucas-Mas

The European Commission has launched a formalinvestigation into the Spanish tax regime for the

acquisition of shares in foreign companies.1 Accordingto EU Competition Commissioner Neelie Kroes, open-ing this formal investigation will allow the commissionto determine whether the tax regime, set out in article12(5) of the Spanish Corporate Income Tax Act(CITA),2 constitutes illegal state aid under article 87 ofthe EC Treaty.3 If so, because article 12(5) was not no-tified to the European Commission before its imple-mentation, Spain may have to recover the illegallygranted aid unless that recovery infringes the recipients’legitimate expectations.

The provision at stake essentially provides that whena Spanish company acquires shares in a foreign com-pany, the financial goodwill (which would stem fromthe difference between the acquisition price and theshare’s book value that is not attributable to unrealizedgains of assets and rights of the nonresident company)may be written off over a 20-year period.

To qualify for this tax deduction, the following re-quirements must also be met:

• the shares acquired must amount to at least 5 per-cent of a nonresident company’s equity; and

• the nonresident company whose shares are ac-quired must be subject to a tax regime equal orsimilar to the one established in the CITA.

The nonresident company whose shares are ac-quired must carry out business activities abroad. Thisrequirement may be assessed through the income ob-tained by the nonresident company in the last tax year.As long as 85 percent of the nonresident company’sincome comes from the sale of goods or services, therequirement will be deemed fulfilled.

Since this tax deduction was enacted in 2002, vari-ous voices have expressed their unhappiness with theprovision. These critics, ranging from politicians to thebusiness community, claim that the Spanish companiesreceive an unfair advantage when bidding for shares inforeign companies. The provision at stake would alleg-edly allow Spanish companies to pay a higher pricethan their competitors, since the surplus identified withthe ‘‘financial goodwill’’ would be deductible for taxpurposes over a 20-year period. In fact, some of themost important companies in Spain — includingBanco Santander Central Hispano, Telefónica, BBVA,Iberdrola, Ferrovial, and Abertis — have undertakentransactions that seem to fall within the scope of thisscheme.4

1See Mayra Lucas-Mas, Cristian Lucas-Mas, and TonyFernández-Arias, ‘‘Spanish Tax Treatment of Foreign Takeoversby Resident Companies,’’ Tax Notes Int’l, June 25, 2007, p. 1342.

2Royal Legislative Decree 4/2004, of Mar. 5, 2004, on corpo-rate income tax.

3See European Commission Press Release IP/07/1469, ‘‘StateAid: Commission Opens Formal Investigation Into Spain’s TaxScheme for the Acquisition of Shares in Foreign Companies,’’Oct. 10, 2007.

4The New York Times, ‘‘Spanish Companies Flex Their Acqui-sition Muscle,’’ June 8, 2006.

Mayra O. Lucas-Mas is a tax consultant with Deloitte Belgium. The views expressed are those of the au-thor and are not intended to reflect the opinion of any institution or firm.


(C) Tax A




The following examples illustrate the significance of

the tax provision in terms of total taxable base deduc-

tions:

• The 2004 acquisition of U.K. credit institutionAbbey National by Spain’s Banco Santander Cen-tral Hispano. According to the Banco SantanderCentral Hispano’s annual reports, this transactiongave rise to financial goodwill amounting to €10billion ($14 billion, £7 billion).5 Santander CentralHispano was also recently involved in the acquisi-tion of ABN Amro, a transaction in which thefinancial goodwill reportedly amounted to €3.6billion.6

• The 2005 takeover of U.K. mobile operator O2 bySpanish telecom incumbent Telefonica. The acqui-sition cost €28 billion, of which €9 billion consti-tuted financial goodwill.

Some members of the European Parliament haveechoed the above complaints, especially those of some

bidding rivals, and have formallyquestioned the commission on thecompatibility of article 12(5) CITAwith EC state aid rules.

There have been four prelimi-nary questions on this subject:

• Parliamentary QuestionE-4431/05, of November 30,2005, by Erik Meijer, follow-ing the interest of Abertis,Cintra, and Sacyr Valleher-moso on the shares in capitalof three listed French toll roadcompanies (Autoroutes du Sudde la France, Autoroutes Paris-Rhin-Rhône, and Autoroutesdu Nord et de l’Est de laFrance);

• Parliamentary QuestionE-4772/05, of December 19,2005, by Sharon Bowles, re-garding the acquisition of O2by Telefonica;

• Parliamentary QuestionP-5509/06, of December 12,2006, by David Martin, re-garding Iberdrola’s bid for thetakeover of Scottish power;and

• Parliamentary Question E-5800/06, of January 9,2007, by Ashley Mote, regarding, in generalterms, the acquisitions of U.K. companies bySpanish companies.

EU Internal Market Charlie Commissioner CharlieMcCreevy answered the first two questions. Referringto the tax provision under scrutiny, McCreevy stated inhis interventions that ‘‘such national legislation doesnot fall within the scope of application of state aidrules, because they rather constitute general deprecia-tion rules applicable to all undertakings in Spain.’’Moreover, when addressing the ‘‘selectivity’’ or ‘‘speci-ficity’’ criteria of state aid provisions, McCreevy con-sidered that article 12(5) CITA did not fulfill those re-quirements, because ‘‘the Spanish (tax) rules related tothe write off of goodwill are applicable to all undertak-ings in Spain independently from their size, sectors,legal forms or if they are privately or publicly ownedbecause they constitute general depreciation rules.’’7

Those public statements may have great importance,because they could be the basis to invoke the principleof ‘‘legitimate expectations,’’ legal grounds to avoid the

5Financial Times, ‘‘Spain faces takeover tax relief probe,’’ Oct.11, 2007.

6Cotizalia, ‘‘Botin se juega 3.600 millones en ABN si Bruselassanciona a España por deducir el fondo de comercio,’’ Oct. 9,2007.

7Answer given by Charlie McCreevy on behalf of the Euro-pean Commission to Parliamentary Question E-4772/05, Feb.17, 2006.

European Commissioner for Competition Neelie Kroes is looking into Spain’stax regime for acquiring shares in foreign companies.

Dominique Faget/AFP/Getty Images



(C) Tax A




recovery of the alleged state aid for the Spanish com-panies that have applied article 12(5) CITA.

As for the last two parliamentary questions, Kroeswas more cautious and avoided giving a clear positionon the compatibility of article 12(5) CITA with ECstate aid rules. In fact, when discussing Iberdrola’s ac-quisition of Scottish Power, she mentioned the possibil-ity of later investigations of the possible aid measuresand the existing possibility of a recovery of any ille-gally granted aid that might have distorted competition.

Those public statementscould be the basis toinvoke the principle of‘legitimate expectations.’

The European Commission indeed initiated a pre-liminary review of the Spanish tax scheme a few weekslater. A formal complaint by a third party was submit-ted to the European Commission’s attention, althoughthe identity of the complainant will not be discloseddue to confidentiality reasons.

In the framework of the preliminary request for in-formation issued by the European Commission to theSpanish government, it appears that the latter arguedthat article 12(5) CITA was not state aid, because, inthe event of sale of the shares in the foreign entity,Spanish companies would have to pay taxes on thecapital gains, which would in turn take into accountthe amount written off until the divestment.8 In otherwords, according to the Spanish government, article12(5) CITA would at most imply a deferment of taxesrather than an exemption.

However, the European Commission does not ap-pear to be satisfied with this line of defense. This maybe due to the fact that the commission notice on theapplication of the state aid rules to measures relatingto direct business taxation expressly states that the ‘‘ad-vantage’’ giving rise to a state aid may be providedthrough various means, including a deferment of a taxliability.9

As a result, the European Commission has launcheda formal investigation. For the moment, the only clearallegation from the European Commission is that ar-ticle 12(5) CITA ‘‘appears to provide an exception

from the general Spanish tax system’’ in permittingamortization of goodwill ‘‘even where the acquiringand the acquired companies are not combined into asingle business.’’10 That idea may arise from the factthat the other provisions of the CITA that provide forthe amortization of the goodwill relate to (i) asset ac-quisitions (article 11(4) CITA) or (ii) mergers (article89(3) CITA), whose theme seems to be the accountingintegration of the two businesses, in contrast withshares acquisitions in which the two businesses remainindependent for accounting purposes.

Even if the European Commission were able toprove the existence of an advantage — that is, a dero-gation from a general rule in the Spanish CITA regard-ing the amortization of goodwill — and to rule out ajustification based on the nature of the tax scheme,there is a growing consensus that the major obstacle toits case will be that, as pointed out by the EuropeanCommission itself in its responses to parliamentaryinquiries, article 12(5) CITA applies to any undertakingsubject to the CITA, regardless of its size or sector.Both the commission decisional practice and the corre-sponding case law have made clear that article 87 ECrequires a ‘‘selective’’ nature for a tax measure to bedeclared a state aid.

Other defense arguments that the Spanish govern-ment has put forward in the media,11 such as the lackof harmonization of corporate income tax at the EUlevel or the existence of low corporate tax rates inother EU member states (for example, Ireland, with12.5 percent), do not seem compelling, at least from alegal point of view, given that it is clear in EC case lawthat the powers granted by article 87 of the EC Treatyto the European Commission would prevail over thetax sovereignty of the member states.

Even if the European Commission made its casecharacterizing article 12(5) CITA as ‘‘state aid,’’ itwould still need to discredit the possibility that its pre-vious public approach to this measure may have trig-gered legitimate expectations to the recipients of thatallegedly illegal state aid and could therefore begrounds for avoiding the recovery of the amountsdeducted (or still to be deducted within the 20-yearperiod) by Spanish resident companies.

The opening of an investigation does not prejudgethe European Commission’s final decision. In this re-spect, it allows interested parties to comment on themeasures under scrutiny. In any event, it is not a clear-cut case, and the outcome regarding key elements isstill uncertain. ◆

8See supra note 6.9‘‘Commission Notice on the Application of the State Aid

Rules to Measures Relating to Direct Business Taxation,’’ O.J. C384, Dec. 10, 1998, pp. 3-9.

10See supra note 3.11Europa Press, ‘‘Ocaña dice que las empresas no tendrán que

devolver las deducciones, pese al expediente de Bruselas,’’ Oct.12, 2007.



(C) Tax A





(C) Tax A




Canada’s Taxation of Foreign-Source EmploymentBonuses: Has the Uncertainty Been Put to Rest?by Marisa Wyse

Generally, under the Income Tax Act (Canada),once an individual has become resident in

Canada, he is subject to tax on his ‘‘worldwide in-come,’’ including income from sources both inside andoutside Canada.1 Several decisions of the Tax Court ofCanada have considered the Canadian income taxtreatment of a payment received by a taxpayer afterbecoming resident in Canada for services rendered out-side Canada before becoming resident. In the past,somewhat inconsistent results in the relevant jurispru-dence suggested that the courts were undecided aboutthe issue. Much of the uncertainty stemmed from theTax Court’s controversial 1989 decision in Hewitt v.Minister of National Revenue,2 in which the court foundthat income to be beyond Canada’s jurisdiction to tax.Subsequent decisions, however, have refused to followthe reasoning in Hewitt. The Tax Court’s decision inGarcia v. The Queen,3 released on September 28, 2007, isanother decision that appears to limit the authority ofHewitt.

Facts

The facts in Garcia are straightforward. In 1993 thetaxpayer, a French engineer, moved to the UnitedStates on account of his employment and obtained agreen card. In December 2002 he obtained a work per-

mit in Canada and moved to Canada. In 2002, the lastyear he worked in the United States, his employmentcontract provided that he was entitled to a bonus basedon base salary and calculated on the basis of perform-ance objectives. His employer’s year-end was December31, 2002, and the amount of the taxpayer’s bonus wasestablished in February or March of the following year.The taxpayer received his bonus in 2003 for his em-ployment during 2002. The taxpayer filed a 2002 Cana-dian income tax return, including his bonus in his in-come, but deducting it as foreign-source income. Theminister of national revenue (MNR) reassessed the tax-payer on the basis that the ITA required the bonus tobe included as employment income received in 2003,while he was a resident of Canada.4

The residence of the taxpayer in 2003 was not indispute. The taxpayer had sufficient ties to Canada5 toestablish that he was resident in Canada in 2003. Theparties agreed that because of his green card, the tax-payer was resident in the United States as well.6 Apply-ing the tie-breaker rule under the Canada-United States

1Section 2 of the ITA.2Hewitt v. Minister of National Revenue, 89 D.T.C. 451 (TCC).3Herve L. Garcia v. The Queen, 2007 TCC 548 (TCC).

4Sections 3 and 5 of the ITA.5The taxpayer had a house, family, medicare protection, cars

with Ontario license plates, an Ontario driver’s license, employ-ment in Ontario, and a bank account in Canada.

6In Allchin v. R., [2004] 4 C.T.C. 1 (reversing 2003 D.T.C.935), the Federal Court of Appeal said that ‘‘green card status isa criterion of a nature similar to United States residence’’ so asto bring a taxpayer within the definition of resident of a con-tracting state under the treaty.

Marisa Wyse is an associate with Goodmans LLP in Toronto.


(C) Tax A




Income Tax Convention (1980), as amended (thetreaty),7 the court said that preference was to be givento the country in which the individual has a permanenthome available to him. Since the taxpayer owned ahome in Canada in which he and his family livedthroughout 2003 and did not have a home in theUnited States, the court held that the taxpayer shouldbe deemed a Canadian resident.

Taxpayer’s Arguments

Paragraph 1 of Article XV of the treaty provides:

Subject to the provisions of Articles XVIII (Pen-sions and Annuities) and XIX (Government Serv-ice), salaries, wages and other similar remunera-tion8 derived by a resident of a Contracting Statein respect of an employment shall be taxable onlyin that State unless the employment is exercisedin the other Contracting State. If the employmentis so exercised, such remuneration as is derivedtherefrom may be taxed in that other State.9

The taxpayer argued that even if he was a residentof Canada in 2003, the bonus was derived from em-ployment while he was resident in the United States.Accordingly, the taxpayer argued that the bonus he re-ceived was ‘‘remuneration derived by a resident of theUnited States in respect of an employment,’’ so thatthe above-noted paragraph would cause the payment tobe taxable only in the United States unless the employ-ment was exercised in Canada, which, the partiesagreed, it was not.

In support of his argument, the taxpayer relied onthe controversial decision of the Tax Court of Canadain Hewitt. In that case, while a nonresident of Canadaand performing employment services outside Canada,the taxpayer contributed to a savings plan to which hisemployer also contributed. On leaving his employment,the taxpayer requested a single cash payment from theplan. The taxpayer received this amount after ceasinghis employment and establishing Canadian residence.

In Hewitt, the Tax Court noted that the source ofthe amounts received by the taxpayer was the tax-

payer’s employment outside Canada at a time when hewas a nonresident of Canada:

When a person is not resident in Canada, he isliable for tax in Canada only if (a) he was em-ployed in Canada; (b) he carried on business inCanada; or (c) he disposed of taxable Canadianproperty.10

The court noted that during the time the taxpayerwas not resident in Canada, the taxpayer did nothingthat would give rise to liability for Canadian incometax (since none of the above listed conditions applied).The court found that the amounts were:

derived from a source which is exempt from in-come tax in Canada: the employment outsideCanada of a person not resident in Canada. Thefact that those amounts were received soon afterthe appellant’s return to Canada and the resump-tion of his residence in Canada does not discon-nect those amounts from their tax exemptsource.11

In response to the MNR’s argument that incomefrom employment is taxable in Canada at the time thatit is received, the court said, ‘‘There is no question thatincome from employment is taxable in Canada whenreceived assuming, of course, that the employment it-self, as an income source, is liable for tax inCanada.’’12

MNR’s Arguments

The MNR relied on a trilogy of more recent deci-sions in support of the government’s position that theemployment bonus received by Garcia was taxable atthe time of its receipt. First, in Tedmon v. Minister ofNational Revenue,13 as a result of his employment in theUnited States, the taxpayer received options to pur-chase shares in his employer. The taxpayer exercisedthese options after he became resident in Canada andstarted working for a different employer in Canada.The MNR assessed the taxpayer on the basis that theexercise of the options resulted in an employment ben-efit that was taxable under the ITA since, at the timeof exercise, the taxpayer was a resident of Canada.The taxpayer argued that his options accrued while hewas a resident of the United States and exercising em-ployment in the United States and that therefore anybenefit derived therefrom could not be subject to Cana-dian income tax. Relying on the wording of sections 5and 7 of the ITA,14 the court held that such income is

7Subparagraph 2(a) of Article IV of the treaty provides thatwhen an individual is a resident of both contracting states, hewill be deemed to be a resident of the contracting state in whichhe has a permanent home available to him.

8In the fifth protocol to the treaty, signed on September 21,2007, the word ‘‘similar’’ has been deleted from the phrase‘‘other similar remuneration.’’

9Article XV gives Canada jurisdiction to tax employment in-come earned by a Canadian resident. If the employment is exer-cised in the United States, the United States also has jurisdictionto tax, should it choose to do so. If the income is taxed in bothstates, the treaty and the ITA operate to provide a credit to offsettax paid in the United States.

10Hewitt, supra note 2, at para. 7.11Id. at para. 8.12Id. at para. 9.13Tedmon v. Minister of National Revenue, 91 D.T.C. 962 (TCC).14Section 5 of the ITA states: ‘‘a taxpayer’s income for a

taxation year from an office or employment is the salary, wages


(Footnote continued on next page.)


(C) Tax A




taxable at the time of receipt. Since the taxpayer was a

resident of Canada at the time he acquired the shares,

the court held that the benefit was taxable to the tax-

payer under the ITA. The court distinguished Hewitt on

the basis that in that case, the taxpayer ‘‘exercised all

his rights and entitlement to income and receipt thereof

while a non-resident of Canada,’’15 referring to the fact

that in Hewitt, the taxpayer had signed all the relevant

documents and requested the cash payment before be-

coming a Canadian resident.

Second, in Shultz v. The Queen,16 the taxpayer was aresident of the United States, except for a brief periodduring which he was resident in Canada and employedby a Canadian employer. While so employed, the tax-payer received an amount from his former U.S. em-ployer due to a recalculation of benefits under an in-centive plan. Again relying on the wording of section 5of the ITA, the court found that the liability for pay-ment of tax is determined at the point of receipt of thebenefit. Since the taxpayer was resident in Canada atthe time of receipt of the payment, the amount wastaxable in Canada. The court was not persuaded by thedecision in Hewitt, saying ‘‘while the decision in Hewitt

may well be an equitable one it is not supported by thelegislation which I am bound to follow.’’17

Finally, the MNR relied on the more recent decisionin Kuwalek v. The Queen.18 In Kuwalek, the taxpayer re-ceived an employment bonus after becoming a Cana-dian resident. The Tax Court found once again thatthe ITA provided that employment income is taxablein the tax year in which it is received. In Kuwalek, thejudge said that ‘‘while I understand that the Appellantfeels that it would be more sensible to tax employmentincome in the year the work was done, that is not whatthe Act provides.’’19

The Tax Court’s Decision

In Garcia, the Tax Court appears to have had nodifficulty agreeing with the MNR and finding that theemployment bonus was taxable at the time of receipt.Of particular importance to the court’s reasoning wasthe Supreme Court of Canada’s decision in Nowegijickv. The Queen,20 in which the Court expressly stated thatthe liability for tax is determined at the point of re-ceipt.21 The Tax Court went further and stated that‘‘while the Court’s reasoning in Hewitt may have pro-duced an equitable result in the circumstances, it didnot take into account either the statute or the SupremeCourt of Canada’s decision in Nowegijick.’’22 Therefore,although Hewitt has not been expressly overruled, itappears to have little, if any, authority. ◆

and other remuneration, including gratuities, received by him inthe year.’’ (Emphasis added.) Paragraph 7(1)(a) of the ITAstates:

where a corporation has agreed to sell or issue shares . . .of the corporation . . . to an employee . . . if the employeehas acquired shares under the agreement, a benefit equalto the amount by which the value of the shares at thetime he acquired them exceeds the amount paid by himshall be deemed received by the employee in the taxationyear in which he acquired the shares.15Tedmon, supra note 13, at para. 9.16Shultz v. The Queen, 97 D.T.C. 836 (TCC).

17Id. at para. 29.18Kuwalek v. The Queen, 2007 D.T.C. 199 (TCC).19Id. at para. 9.20Nowegijick v. The Queen, 1983 1 S.C.R. (SCC).21Id. at para. 19.22Hewitt, supra note 2, at para. 44.



(C) Tax A





(C) Tax A




Reforming the Taxation of Foreign Direct InvestmentBy U.S. Taxpayersby George K. Yin

Our tasks in this report are to cherry-pick and dis-cuss one or more of the tax reform ideas in-

cluded in the 2005 report of the President’s AdvisoryPanel on Federal Tax Reform. There is a little irony inthis assignment, given the panel’s admonition to con-sider its recommendations as a comprehensive wholerather than piecemeal. As some panel members havepointed out, adoption of only some of the recommen-dations, such as the expensing of capital investments,without making other reforms, such as changing thetax treatment of interest, may produce a less coherenttax system than the one we already have.

Nevertheless, one important panel recommendationthat can be profitably considered in isolation is its pro-posal to adopt a dividend exemption system for someforeign-source earnings.1 A similar proposal was rec-ommended in 2005 by the Joint Committee on Taxa-tion staff.2 This proposal addresses an area in signifi-cant need of reform and continues to be a realistic onedespite the change in political climate since issuance ofthe report.

In brief, under the panel’s proposal, foreign-sourceactive business income of U.S.-controlled foreign cor-

porations and branches would be exempt from U.S. tax

both at the time the income is earned and when it is

later repatriated into the United States in the form of a

dividend. Other foreign-source income, encompassing

investment income and specified ‘‘mobile’’ forms of

active income, would be taxed by the United States as

it is earned, in the same manner as under current sub-

part F. Nondividend payments to controlling U.S. tax-

payers from investments abroad, such as interest and

royalties, would be fully taxed by the United States.

The foreign tax credit would play a much more lim-

ited role under the panel’s proposal. Credit would be

permitted only for foreign taxes paid on foreign-source

income that is taxed by the United States. Because

much of this income would bear low rates of foreign

tax, foreign tax credit baskets would be eliminated and

there would be only a single, overall limitation on the

availability of the foreign tax credit. A portion of the

deductions for interest and overhead-type expenses al-

locable to the exempt foreign-source income would be

disallowed for U.S. tax purposes.

I will briefly discuss why the panel’s recommenda-

tion should represent an improvement over current law,

compare it with a proposal to repeal deferral altogether

and with some international tax reform ideas recentlyput forward by House Ways and Means CommitteeChair Charles B. Rangel, D-N.Y., and describe threepossible modifications to the panel’s proposal.

1President’s Advisory Panel (2005), pp. 102-105, 132-135,239-243.

2JCT (2005), pp. 186-197.

George K. Yin is the Edwin S. Cohen Distinguished Professor of Law and Taxation and Class of 1966 Re-search Professor at the University of Virginia. An abbreviated version of this report was presented at theNational Tax Association’s 100th Annual Conference on Taxation in November 2007. The report will beincluded in the proceedings of that conference. The author thanks Rosanne Altshuler, David Lenter, andDavid Noren for reviewing and commenting on an earlier draft. All errors belong to the author.

Copyright © 2007 George K. Yin. All rights reserved.


(C) Tax A




The Unhappy State of Current Law

Current law provides very favorable tax treatment toU.S. persons making foreign direct investments. Thetaxpayer generally can defer paying U.S. tax on anyactive business income from the investment throughoutthe period of the initial investment and its later rede-ployment in other foreign locales. Moreover, throughcross-crediting and other techniques, the taxpayer gen-erally can reduce considerably the magnitude of anyU.S. tax on repatriation. Grubert and Mutti reportedthat in 1996, the repatriation tax raised the equivalentof only a 5 percent tax on all repatriated nonfinancialbusiness income, which represented, of course, a muchlower rate if measured against all such income, bothrepatriated and not repatriated.3 It is little wonder,then, that if the tax benefit from the U.S. deduction ofexpenses allocable to this very low taxed income is alsotaken into account, current law may well provide abetter than U.S. tax exemption result for some U.S. tax-payers with active business income from foreign directinvestments.4

In providing this favorable result to active business

income, current law places the U.S. taxable event at the

back end — the time of repatriation. The U.S. tax con-sequence is elective as to timing and is nontransparent,in the sense that the ultimate amount of any U.S. taxliability will vary with (1) how the investment is madeand redeployed, (2) potentially changing foreign anddomestic tax rates and laws between the time of invest-ment and the tax consequence, and (3) other factors.When strategies to reduce the amount of the repatria-tion tax prove to be unavailing, the design of currentlaw distorts the free flow of capital back to the UnitedStates.5

3Grubert and Mutti (2001), p. 2.4See President’s Advisory Panel (2005), p. 104; JCT (2005), p.

189; American Bar Association Section of Taxation (2006), p.689. This conclusion is reached even without taking into account

the highly aggressive tax avoidance techniques sometimes usedtoday, such as the claiming of credits for foreign taxes on incomenot taxed by the United States. The U.S. tax authorities will needto vigorously combat these types of strategies no matter what setof tax rules are ultimately adopted. Cf. Lokken (2006), pp. 770-771; prop. reg. section 1.901-2(f) (2006).

5See Desai, Foley, and Hines (2001), p. 849; Grubert andMutti (2001), pp. 21-23. An application of the ‘‘new view’’ ofdividend taxation shows that if the repatriation tax is invariantover time, the tax does not distort the repatriation decision. Thereason is that the more repatriations are delayed, the greater theamount of trapped earnings outside the United States and there-fore the greater the future repatriation tax liability. See Hartman(1985), pp. 115-118. But for a variety of reasons, the conditions

Table 1. Pretax E&P, Foreign Income Taxes, and Average Foreign Income Tax Rates of 7,500 Largest

Controlled Foreign Corporations of U.S. Corporations With Total Assets of $500 Million or More,

Selected Tax Years 1986-2002 ($ millions)

(1) (2) (3) (4)

Tax Year Current E&P (Less Deficit)Before Taxes

Foreign Income Taxes (Net) Avg. Tax Rate(col. (3)/col. (2))

1986 56,591 19,229 33.98%

1988 79,811 23,930 29.98%

1990 88,688 23,937 26.99%

1992 69,613 18,472 26.54%

1994 98,428 23,268 23.64%

1996 141,010 32,395 22.97%

1998 143,840 34,745 24.16%

2000 207,576 43,143 20.78%

2002 200,670 38,610 19.24%

Note: Data are from 7,500 largest CFCs of U.S. parent corporations with total assets of $500 million or more in each selected year. In tax year

2002, the 7,500 largest CFCs accounted for 92.5 percent of total end-of-year assets, 81.7 percent of total receipts, and 89.9 percent of current

E&P (less deficit) before taxes reported by all active CFCs of such U.S. parent corporations.

Source: Redmiles and Wenrich (2007) (Fig. D) and Masters and Oh (2006), p. 200.

SPECIAL REPORTS

(Footnote continued in next column.) (Footnote continued on next page.)


(C) Tax A




Those effects have been exacerbated by recent ad-

ministrative and legislative developments. The check-

the-box rules that took effect in 1997 increased the at-

traction of foreign investment and the advantage of

delayed repatriations by providing taxpayers with an

easy way to shift their foreign income to low-tax coun-

tries without U.S. tax consequences.6 This practice wasessentially codified for three years in 2006.7 Anothervery recent administrative change — to narrow thescope of activity that constitutes substantial assistanceto a CFC for purposes of determining whether theCFC has foreign base company services income — hasfurther enhanced the tax advantage of foreign invest-ment.8 Also, legislative changes enacted in 2004, in-cluding liberalization of the foreign tax credit limita-tion rules, have had the same effect.9

The 2004 legislation also included passage of theinfamous homeland investment provision effectivelyallowing taxpayers to repatriate their foreign earningsat a 5.25 percent tax rate for, generally, a one-year pe-riod following enactment of the law.10 The basic ration-ale for the provision was the business downturn in theUnited States and the domestic need for the capitallocated outside the country. Because Congress has notyet figured out a way to repeal the business cycle, oneassumes that the same need will arise again with per-haps the same solution, despite congressional assur-ances to the contrary. Thus, even though the homeland

investment provision has now expired, its historicalexistence has increased the distortive effects of currentlaw by enhancing the perceived return from a foreigninvestment and value of parking any investment off-shore.11 To those few businesses that previously playedby the rules and repatriated income at the cost of fullor close to full U.S. tax, the clear lesson is ‘‘fool meonce, shame on you, fool me twice, shame on me.’’The recent experience with the provision also showedhow much capital was, in fact, trapped outside theUnited States, or was at least situated in a way that a5.25 percent repatriation tax looked like a bargain.12

Even though the homelandinvestment provision hasnow expired, its historicalexistence has increasedthe distortive effects ofcurrent law.

In summary, the U.S. tax treatment of foreign directinvestment by U.S. persons has become so favorable asto exert a potentially powerful lure in favor of suchinvestment. At the same time, the law serves in somecases to block, or at least delay, the return of such in-vestment and accumulated earnings to the UnitedStates when it would be economically sensible to doso. Many empirical studies have documented the sensi-tivity of locational and financing decisions of multina-tionals to tax considerations.13

Improvement Over Current Law

The panel’s proposal would change the tax treat-ment of foreign direct investment in modest but impor-tant ways. Although it would exempt foreign activebusiness income from U.S. taxation, the overall pro-posal would increase the U.S. effective tax on foreigninvestment because of its changes to the treatment ofU.S. deductions and foreign tax credits.14 Those

necessary for this result to occur do not exist. Cf. Altshuler,Newlon, and Randolph (1995) (attributing changes in repatria-tion behavior to endogenously and exogenously caused changesto the tax cost of repatriation); Altshuler and Grubert (2002)(showing the effect of different repatriation strategies on bothinvestment and repatriation decisions). The repatriation decisionalso has an important financial accounting effect. Companies arenot required to book any U.S. income tax expense with respectto foreign earnings designated as permanently reinvested abroad.If a firm later repatriates earnings, it must record an expense forany resulting U.S. income tax liability. See Accounting PrinciplesBoard Op. No. 23; Krull (2004).

6See reg. section 301.7701-2, -3; U.S. Dept. of Treasury(2000), pp. 62-64, 68-70; Altshuler and Grubert (2006); Lokken(2005). Table 1 shows the declining average foreign income taxrates of the 7,500 largest U.S. CFCs over tax years 1986-2002.

7Section 954(c)(6) (effective for tax years 2006-2008).8Notice 2007-13, 2007-5 IRB 410, Doc 2007-726, 2007 WTD

7-21 (change effective beginning in 2007).9Section 904(d) (generally effective for tax years after 2006).

Another important change, scheduled to take place in tax yearsafter 2008, is a modification to the interest allocation rules thatwould also make foreign investment more attractive. See section864(f) (to be effective for tax years after 2008). Recent legislativeproposals, however, would either delay or repeal this scheduledchange. See H.R. 3996, 110th Cong., 1st Sess. section 621 (2007),as approved by the House Ways and Means Committee (woulddelay change until after 2017); H.R. 3970, 110th Cong., 1st Sess.section 3203 (2007) (would repeal change).

10Section 965.

11See JCT (2005), p. 193; cf. Grubert and Altshuler (2006), pp.22-23.

12See Weiner (2007) (reporting preliminary analysis from Sta-tistics of Income indicating over $300 billion of earnings repatri-ated under the homeland investment provision).

13For summaries of earlier studies, see Clark (2000); Hines(1997), Hines (1999a). See also supra note 5.

14Grubert and Mutti (2001), p. 13, concluded that the overallburden under current law, meaning the repatriation tax plus thecost of avoiding that tax, is smaller than the tax cost under adividend exemption approach similar to the panel’s proposal.

SPECIAL REPORTS

(Footnote continued on next page.)


(C) Tax A




changes should also reduce some of the incentive un-

der current law to locate intangible property in low-tax

countries, because credits for high foreign taxes on ac-

tive income would not be available to shield any U.S.

residual tax on foreign-source royalty income.15 For the

same reason, however, the proposal would provide

greater reason for U.S. taxpayers to develop their intan-

gible assets offshore and then to repatriate their income

as dividends rather than royalties.

The proposal also changes the timing and transpar-

ency of the principal U.S. tax consequence relating toforeign active business income by denying a portion ofU.S. tax deductions rather than imposing U.S. tax atrepatriation. In adopting an open-door stance towardthe return of foreign investment to the United States inthe form of dividends, the proposal should reduce theeconomic distortion at that margin as well as the trans-actions costs incurred under current law to overcomethe repatriation barrier.

After comparing the state of the law as of the mid-1990s with a dividend exemption proposal similar tothe panel’s proposal, Altshuler and Grubert found thatthere was ‘‘no consistent or definitive evidence that[investment] location decisions would be significantlychanged’’ if the dividend exemption approach wereadopted.16 The panel explained this initially surprisingfinding in the following way:

For some firms, the U.S. international tax systemproduces tax results that are as good [as] or evenbetter than those that would apply under a terri-torial system. Exempting active foreign-sourceincome repatriated as a dividend from U.S. taxprovides no additional incentive to invest abroadif, in response to the current tax system, firmshave already arranged their affairs to avoid therepatriation tax.17

The Altshuler and Grubert conclusion should onlybe strengthened if they were to compare today’s state of

the law with the modified version of the panel’s pro-posal I will describe shortly.18

The impact of the panel’s proposal on tax compli-ance and administrative costs is uncertain.19 Certainly,there will be much greater controversy than under cur-rent law regarding the proper allocation of deductions.Also, transfer pricing problems may become more se-vere as U.S. taxpayers attempt to take maximum ad-vantage of the active income exemption and also tolocate U.S.-exempt income in the most favorable for-eign jurisdiction. However, given the favorable treat-ment of active business income under current law,much of that planning already takes place today.20

Also, as noted, the panel’s proposal may reduce some-what the attraction of locating intangible assets in low-tax countries. There should also be reduction in foreigntax credit planning and efforts to avoid the repatriationtax.

Making changes to the international tax rules is atricky business. For the most part, the taxpayers af-fected are big boys with lots of money at stake and arevery well-advised. As Marty Ginsburg likes to say, thereis a high probability that no matter how carefullycrafted a change, the affected taxpayers and their advis-ers will ‘‘do you in.’’21 Still, I resist the notion that thisvery real concern should paralyze policymakers intoaccepting a world that produces better than exemptionconsequences for some U.S. taxpayers making foreigninvestments and, in the process, generates significantdistortion and administrative cost.22

Consistently, they estimated that dividend exemption would raiserevenue relative to current law, an estimate confirmed by the JCTfor a dividend exemption proposal slightly different from thepanel’s. Id., pp. 38-40; JCT (2005), p. 427. Grubert (2001)showed that estimated revenue gains from dividend exemptionare likely to persist even after taking into account anticipatedbehavioral changes of shifting some overhead expenses outsidethe United States and converting some U.S.-taxable foreign-source royalty income into exempt dividend income.

15Grubert and Altshuler (2006), p. 11, estimate from Treasurydata for tax year 2000 that about two-thirds of foreign-sourceroyalty income was shielded from U.S. tax by credits for foreigntax imposed on income repatriated through dividends.

16Altshuler and Grubert (2001), p. 790; see also Grubert andMutti (2001), pp. 12-13, 24.

17President’s Advisory Panel (2005), p. 135.

18As Jim Repetti has noted, increasing the transparency ofthe tax consequence of cross-border direct investment could beviewed as a two-edged sword because some U.S. taxpayers, suchas young companies with limited planning opportunities undercurrent law, may find the tax result under a dividend exemptionsystem to be predictable and favorable enough to induce greaterforeign investment. See Repetti (2007), pp. 316-318. However, ifthe effective tax rate on foreign investment increases as expectedunder dividend exemption, some mature companies that cur-rently make maximum use of tax-reduction opportunities mayfind foreign investment to be less attractive. Both of those conse-quences would be affected by the changes in the law since earlierstudies and by the suggested modifications to the panel’s pro-posal.

19For discussion of likely compliance and administrative is-sues under a dividend exemption approach, see ABA tax section(2006), pp. 722-727; Ault (2003); Fleming and Peroni (2005), pp.1560-1568; Graetz and Oosterhuis (2001); Kleinbard (2007), pp.550-555; McDaniel (2007).

20See Department of Treasury (2007), pp. 36, 55-61 (reportingtax return data consistent with existence of non-arm’s-lengthpricing or income shifting among related parties); Bosworth(2007); Sullivan (2004a); Sullivan (2004b); Sullivan (2004c); Sulli-van (2006).

21Paul McDaniel refers to this aspect of U.S. law as its ‘‘taxculture.’’ McDaniel (2007), p. 299.

22For a general critique of current law and support for re-form, see ABA tax section (2006), pp. 716-717.

SPECIAL REPORTS


(C) Tax A




Complete Repeal of Deferral

An alternative to the panel’s proposal that wouldpotentially reduce the distortive effect of the law on thechoice of both investment location and repatriation,but in a manner different from the panel’s proposal,would be to repeal deferral altogether. If deferral wererepealed, direct investment by U.S. taxpayers outsidethe United States would generally be taxed in the samemanner as domestic investment. Further, because U.S.taxation of foreign income would have taken placewhen the income was earned, the repatriation of after-tax earnings would no longer be a taxable event.23

Although a repeal of deferral is generally associatedwith a goal of capital export neutrality, it alone wouldnot achieve that high theoretical ground. Capital exportneutrality would require both unlimited crediting andpotentially U.S. refunding of taxes paid abroad —something that surely will not occur24 — as well ascomparable tax treatment of domestic and foreignlosses. Also, repeal of deferral would not remedy, andindeed might exacerbate, distortions in the location ofU.S. portfolio investment. As long as U.S. and foreigncorporations are not taxed alike, tax considerationswould still influence the location of that capital. Re-cent research by Desai and Dharmapala has shown thepotentially large impact taxes have on that economicdecision.25 Thus, like current law and the panel’s pro-posal, a repeal of deferral would still leave us in thenebulous realm of the second best.

More generally, although a complete repeal of defer-ral would create greater conformity at one margin —the tax treatment of domestic and foreign direct invest-

ment by U.S. taxpayers — it would do so only at thecost of producing greater nonconformity at two others.First, it would increase the difference between the U.S.tax treatment of inbound and outbound investment.With deferral completely repealed, the latter wouldmore closely resemble a true worldwide system oftaxation, but the former would continue to be largely asystem under which only U.S.-source income is taxed.The greater divergence in those two sets of tax resultswould place much greater pressure on the tax residencerules that determine whether a taxpayer is subject toone regime or the other.

A complete repeal ofdeferral would increase thedifference between the U.S.tax treatment of inboundand outbound investment.

To be sure, it might be possible to accompany a fullrepeal of deferral with a reform of the tax residencerules. For example, the existing U.S. ‘‘place of incorpo-ration’’ rule26 for corporations might be supplementedby a ‘‘real seat’’ rule such as one that determines a cor-poration’s residence for tax purposes based on the loca-tion of its day-to-day management activity.27 But thismanner of reform becomes more problematic whenone considers the second type of nonconformity in-creased by a full repeal of deferral — the greater diver-gence in the outbound taxation rules of the UnitedStates with those of other countries. Currently, virtu-ally all countries permit deferral or exemption of homecountry taxation of foreign active business incomeearned by their residents through foreign subsidiaries.28

If the United States completely repealed deferral, itwould break with this international consensus andopen up many attractive alternative venues for corpora-tions that desire to escape the U.S. rule. With so manyoptions available, a real seat corporate residence ruleadopted by the United States would create clear riskthat headquarters and associated economic activity ofmultinationals would be moved offshore (or set up off-shore at the outset). This possibility should be con-trasted with the current-law situation in which alterna-tive venues for firms that wish to relocate for taxpurposes (or locate in a favorable tax jurisdiction from

23For discussion of a complete repeal of deferral, see Dept. ofTreasury (1993), pp. 46-52; Dept. of Treasury (2000), pp. 88-90;ABA tax section (2006), pp. 731-735; Brumbaugh and Gravelle(2007), pp. 16-18; Fleming, Peroni, and Shay (2000); Peroni,Fleming, and Shay (1999), pp. 507-519. It is beyond the scope ofthis report to discuss the administrative issues raised by a fullrepeal of deferral, but many difficult questions would need to beresolved.

24No limit on the use of the foreign tax credit existed in theUnited States for the first three years that a credit was allowed(1918-1921), but no refunding of the credit was granted. Withthe fall of high U.S. tax rates after World War I, an overall limitwas placed on the credit in 1921 and it has been a fixture of thetax law ever since. See Graetz and O’Hear, pp. 1054-1055.

25See Desai and Dharmapala (2007a) (strong influence of dif-fering home and host country taxation on location of U.S. port-folio investment); Desai and Dharmapala (2007b) (large effect ofthe Jobs and Growth Tax Relief Reconciliation Act of 2003’sdifferential treatment of foreign-source dividends on U.S. port-folio choices). See also Avi-Yonah (2006), p. 578 (different integra-tion benefits provided by foreign and domestic corporations toU.S. shareholders would bias their choice of portfolio invest-ment); National Foreign Trade Council (NFTC) (2001), pp. 122-123 (different taxation at corporate level biases location of port-folio investment capital); Fleming, Peroni, and Shay (2000), p.847 (same); Merrill (1999), p. 1803.

26Section 7701(a)(4), (5), and (30).27See President’s Advisory Panel (2005), p. 135; JCT (2005),

pp. 178-181.28See President’s Advisory Panel (2005), pp. 242-243; Ault

and Arnold (2004), p. 377; NFTC (2001), p. 69.

SPECIAL REPORTS


(C) Tax A




the start) are pretty much limited to the fewer, and gen-erally less attractive, jurisdictions that do not have rig-orous CFC-type rules.

A goal of pure capitalexport neutrality has neverbeen the policy throughoutthe entire tax history ofthis country.

A goal of pure capital export neutrality has alsonever been the policy throughout the entire tax historyof this country.29 The closest we came was in 1962,when the Kennedy administration urged repeal of de-ferral for income from foreign investments in developedcountries, but even then, there is some questionwhether the legislative initiative was designed more tofavor domestic investment during a period of economicdownturn rather than to achieve any sort of neutral-ity.30 In any event, the end result of that legislative ef-fort, as we know, was the blend of compromises en-compassed by current subpart F.

It is hard to see what changes occurring since 1962might warrant a complete rethinking of deferral today.Since that time, economic opportunities outside theUnited States and foreign competition have increased,and the United States has changed from being princi-pally a capital exporting country to one whoseeconomy relies increasingly on large amounts of bothcapital exports and imports. Which of those develop-ments would justify a repeal of deferral? Moreover, inpart because of the U.S.’s dominant economic role inthe world in 1962, this country might reasonably haveexpected any change in the tax treatment of foreigndirect investment to be copied by other countries,something that in fact transpired when the UnitedStates enacted subpart F. Would such an expectation bereasonable today if the United States completely re-pealed deferral? If not, then as previously noted, a re-peal of deferral by the United States would move this

country further away from international tax norms andthereby be antagonistic to another policy objective,which is to achieve greater international conformity inthe tax treatment of cross-border income.31

Supporters of complete repeal might take heart fromcurrent prospects for Democratic control of the WhiteHouse and both houses of Congress beginning in 2009.Of course, it is worth remembering that Democratsalso controlled all of those levers of power in 1962when subpart F, and not repeal of deferral, was en-acted. Indeed, the Democratic control of Congress in1962 was by a much greater margin than will be likelyin 2009.32

Supporters might nevertheless hope that the currentgeneration of Democrats would be different from thosein 1962.33 Recall, however, that in the 2004 presidentialcampaign, Sen. John F. Kerry, D-Mass., supported onlya partial repeal of deferral. Also, he advocated a repa-triation relief provision similar to what was eventuallyenacted.34 In contrast, the Bush administration opposedthat provision to the end. Thus, I doubt very much thatchange in party control would result in a major shift inthis country’s basic attitudes toward deferral and thetaxation of foreign direct investment. To repeal defer-ral, how much change would be needed in the Con-gress (and in the society that Congress mirrors) thatapproved the homeland investment provision by widemargins just three years ago, and how long would ittake to see that transformation?

Rangel’s International Tax Reforms

Would a more modest modification, such as the re-cent proposal by Chairman Rangel, be preferred overthe panel’s proposal? Under the Rangel bill, U.S. de-duction of expenses allocable to deferred foreign-sourceincome would generally be delayed until the incomebecomes subject to U.S. tax on repatriation. The repa-triation tax would remain the same as under current

29See NFTC (2001), pp. 37-38; Peroni, Fleming, and Shay(1999), p. 470.

30In addition to urging broad repeal of deferral, the Kennedyadministration supported enactment of a new tax credit for do-mestic investment. See Graetz (2001), p. 275; Merrill (1999), p.1802; NFTC (2001), pp. 42-43. However, some years earlier,Stanley Surrey, assistant Treasury secretary for tax policy in theKennedy administration, had written critically of deferral andother features of the U.S. international tax system on generalpolicy grounds. See Surrey (1956). An earlier change that resultedin a partial repeal of deferral occurred in 1937 when the foreignpersonal holding company provisions were enacted.

31See Dept. of Treasury (1993), p. 2; Frisch (1990), p. 590.Earlier this year, HM Revenue & Customs and the U.K. Treas-ury published a discussion document with proposals to adopt aparticipation exemption system in the United Kingdom that weresomewhat similar to the panel’s proposals. See U.K. Revenue andCustoms (2007).

32The 87th Congress (1961-1963) had 65 Democrats and 35Republicans in the Senate, and 263 Democrats and 174 Republi-cans in the House. The 88th Congress (1963-1965) had 67Democrats and 33 Republicans in the Senate, and 258 Demo-crats and 177 Republicans in the House. Source: ‘‘Political PartyAffiliations in Congress and the Presidency,’’ 1789-1999, in 2Guide to Congress 1094, 1095 (5th ed. 2000).

33When I was in public service, I was often reminded by vari-ous members of Congress that the current generation of Repub-licans were not the same as those of my father’s or my grandfa-ther’s generation.

34See Avi-Yonah (2004), pp. 477-478.

SPECIAL REPORTS


(C) Tax A




law. Also, taxpayers would be required to calculatetheir foreign taxes and earnings and profits on a con-solidated basis after taking into account all of theirCFCs, with the result that at repatriation, they couldclaim credit for only a pro rata share of foreign taxesequal to the portion of all deferred income representedby the repatriated amount. Thus, taxpayers would losetheir current-law ability to minimize their U.S. residualtax at repatriation by bringing back only high foreigntax earnings.35

The Rangel bill contains some creative ideas, al-though it would seem to complicate an already horren-dously complex set of laws. Like the panel’s proposal,the Rangel bill would reduce the attractiveness of for-eign investment and make some of the U.S. tax conse-quences of investment more transparent. The mainweakness of the bill is its failure to reduce any of thedistortion that arises at the time of the repatriation de-cision. The carrot of releasing some deferred deduc-tions at that juncture would appear to be more thanoffset by the stick of restricting the availability of for-eign tax credits. The net result may therefore be ahigher repatriation barrier than under current law. It isdifficult for me to understand why this country or anycountry would want to design or maintain a tax systemthat discourages the repatriation of earnings.

Although it retains deferral and the basic compro-mise worked out in 1962, the Rangel bill responds toconcerns that current law induces too much foreigninvestment principally for tax avoidance purposes. Letme therefore suggest some possible modifications to thepanel’s proposal that address this same concern whilestill retaining the key benefits of the proposal.

Possible Modifications to Panel Proposal

Although the structure of the panel’s proposal — tomove up the potential adverse tax consequences of for-eign investment by disallowing some deductions whileat the same time establishing an open-door policy tothe future repatriation of foreign earnings — is apromising one, it is a separate question of how best todistinguish exempt from nonexempt foreign-source in-come. Obviously, there is a lot of controversy sur-rounding that question today, with some contendingthat subpart F taxes the equivalent of active incomeafter taking into account modern business practices36

and others claiming that it still fails to tax foreign in-come generated purely for tax avoidance purposes.37

The panel’s proposal potentially heightens the impor-

tance of getting this balance correct, and I could seechanges being made to the definition of exempt in-come going in either direction or partly in both. I donot see the adoption of the panel’s proposal as a signalthat the United States is leading or joining an interna-tional race to the bottom regarding the tax treatment offoreign-source income.

One modification Congressshould consider is torequire exempt incometo be subject to taxsomewhere.

In that vein, I think one modification Congressshould consider is to require exempt income to be sub-ject to tax somewhere.38 This condition would beadded to whatever other requirements are used to de-fine the exempt category of income. In differentiatingbetween foreign investment undertaken in a localewhere there is real business activity and that madeprincipally for tax avoidance purposes, a subject to taxcondition may not be a bad delineator. The conditionwould respond to concerns that dividend exemptionmight induce too much purely tax-motivated foreigninvestment. Such a requirement would also take someof the pressure off of the transfer pricing rules andpossibly help to slow the practice of designing foreigntransactions to produce income having no source untilpolicymakers have had a chance to reform the sourcerules.39

The problem is in defining what it means to be sub-ject to foreign tax. A ‘‘blacklist’’ or ‘‘white list’’ of spe-cific source countries seems like a nonstarter, especiallybecause one assumes that some trading partners that

35See H.R. 3970, 110th Cong., 1st Sess. section 3201 (2007)(adding proposed sections 975-977).

36See NFTC (2005); Oosterhuis (2006a).37See Shay (2004), pp. 33-36.

38See ABA tax section (2006), pp. 722-723, 730; Shay (2006).Other countries that maintain an exemption system commonlyinclude some type of ‘‘subject to tax’’ condition on exempt in-come. See JCT (2006), pp. 34 (France), 38 (Germany), 41(Netherlands), 44 (Singapore). It is common for income tax trea-ties to contain a different term, ‘‘liable to tax,’’ which determineswhat persons qualify as residents of a treaty country and aretherefore potentially entitled to treaty benefits. See OECD 2005model tax convention on income and on capital, article 4(1);U.S. 2006 model income tax convention, article 4(1). As ex-plained in the text, my ‘‘subject to tax’’ condition would be dif-ferent from how ‘‘liable to tax’’ has been interpreted in treaties.

39See Dept. of Treasury (2000), pp. 75-81; Avi-Yonah (1999a),p. 587; Kleinbard (2007), p. 559 (discussing problem of ‘‘statelessincome’’); Noren (2001), p. 339 (describing increase in this prac-tice as ‘‘nightmare scenario’’).

SPECIAL REPORTS


(C) Tax A




Table 2. Pretax E&P, Foreign Income Taxes, and Average Foreign Income Tax Rates of 7,500 Largest

Controlled Foreign Corporations of U.S. Corporations With Total Assets of $500 Million or More, by Selected

Treaty Country of Incorporation of CFC, Tax Year 2002 ($ millions)(1) (2) (3) (4)

Countries With Tax Treaties SatisfyingSection 1(h)(11)(C)(i)(II)

(Notice 2006-101)

Current E&P(Less Deficit) Before Taxes

Foreign Income Taxes (Net) Avg. Tax Rate(col. (3)/col. (2))

Australia 4,069 951 23.37%

Austria 888 170 19.14%

Barbados 323 7 2.17%

Belgium 2,842 408 14.36%

Canada 18,204 5,060 27.80%

China 2,133 188 8.81%

Cyprus 37 4 10.81%

Czech Republic 411 113 27.49%

Denmark 9 62 688.89%

Finland 164 47 28.66%

France 5,721 1,320 23.07%

Germany 6,427 1,803 28.05%

Greece 94 39 41.49%

Hungary 499 43 8.62%

India 168 96 57.14%

Indonesia 804 289 35.95%

Ireland 14,682 792 5.39%

Israel 609 73 11.99%

Italy 3,892 1,182 30.37%

Japan 12,143 3,148 25.92%

Korea 2,005 582 29.03%

Luxembourg 5,085 377 7.41%

Mexico 7,439 1,884 25.33%

Netherlands 32,587 5,197 15.95%

New Zealand 612 94 15.36%

Norway 553 274 49.55%

Philippines 898 111 12.36%

Poland 443 149 33.63%

Portugal 895 149 16.65%

Russian Federation 363 45 12.40%

Slovak Republic 48 13 27.08%

South Africa 425 109 25.65%

Spain 3,620 1,389 38.37%

Sweden 994 250 25.15%

Switzerland 14,456 1,017 7.04%

Thailand 496 109 21.98%

Trinidad and Tobago 68 21 30.88%

Turkey 116 61 52.59%

Ukraine 44 15 34.09%

United Kingdom 20,674 4,804 23.24%

Venezuela 749 155 20.69%

Total, treaty countries listed 166,689 32,600 19.56%

Total, all geographic areas 200,670 38,610 19.24%

% treaty countries listed/all

geographic areas

83.07% 84.43%

Notes: Separate data was not available for the following additional qualifying treaty countries: Bangladesh, Egypt, Estonia, Iceland, Jamaica,

Kazakhstan, Latvia, Lithuania, Morocco, Pakistan, Romania, Slovenia, Sri Lanka, and Tunisia.

Data are from 7,500 largest CFCs of U.S. parent corporations with total assets of $500 million or more in tax year 2002. In that year, the

7,500 largest CFCs accounted for 92.5 percent of total end-of-year assets, 81.7 percent of total receipts, and 89.9 percent of current E&P (less

deficit) before taxes reported by all active CFCs of such U.S. parent corporations. Data represent amounts reported by CFCs with place of

incorporation in selected treaty countries and does not necessarily represent income earned in and taxes paid to that country.

Source: Masters and Oh (2006) (Table 2).

SPECIAL REPORTS


(C) Tax A




grant favorable tax treatment to U.S. investment would

never be placed on the blacklist.40 A focus on tax rates

is also problematic. Nominal or statutory rates in a

foreign country are pretty much meaningless for this

purpose, and average or effective tax rates would raise

difficult questions regarding timing provisions in the

foreign tax law.41 From an administrative standpoint, it

would not seem sensible to have the exempt/

nonexempt determination fluctuate very much from

one year to the next when a taxpayer simply continues

the same investment in the same manner in the same

country.

One other possible way to approach this issue is to

focus on whether the income is earned in a country

with which the United States has a comprehensive in-

come tax treaty.42 Other countries determine the ex-

empt status of foreign income in this way,43 and the

United States has used the test for other purposes, such

as whether dividends from a foreign corporation are

entitled to the 15 percent rate.44 This type of provision

would be respectful of our treaty partners while also

increasing the incentive of countries to enter into tax

treaties with the United States. It would be directly

responsive to competitiveness concerns by permittingU.S. tax exemption of active business income in theprincipal locations where real business competition ex-ists. Also, by relying on its existing treaty network, theUnited States would have potentially easy access to thetype of information necessary to implement the rule.Finally, although the provision would be in the natureof a white list, it would be a bipartisan one previouslydeveloped by both Democratic and Republican admin-istrations through their past treaty policy.45

The successful repatriation of large amounts of in-

come at the 5.25 percent tax rate leads to a second

possible modification — would it be possible to retain

some low-level repatriation tax rather than exempt the

earnings altogether?46 This issue is likely to be tied to

the question of deduction disallowance, with some ar-

guing in favor of retaining a small tax in lieu of any

loss of deductions. Some foreign countries follow this

approach.47 For reasons previously stated, this idea

should be resisted. It would clearly take away from the

expected structural improvements provided by the

panel’s proposal and would negate much of the reason

for making the proposed change. However, I would be

more open to possible retention of a small repatriation

tax in addition to a disallowance of deductions if Cong-

ress felt impelled to retain some type of safety net. In-

deed, this combination would seem to achieve a similar

consequence to the Rangel bill but in a more adminis-

trable way.

A final modification deals with transition — shouldthe open-door policy proposed by the panel apply tothe repatriation of all foreign earnings or only thoseaccumulated after the change in law? The 2004 home-land investment provision helped to drain some accu-mulation, but no doubt more has accumulated sincethe provision expired and more will accumulate in thefuture before any change in the law. The JCT staff, onone hand, recommended exempting only future earn-ings, and that proposal would have the unfortunateconsequence of requiring two sets of rules to be main-tained forever.48 The panel’s proposal, on the otherhand, would apply to all earnings, no matter when ac-cumulated, thereby offering another even greater wind-fall to many U.S. persons making foreign investment.49

Perhaps not surprisingly, my preference would be tostick with the JCT staff approach. Favorable stackingrules could probably put off most of its complexitiesfor most taxpayers. But I could also see some type ofcompromise developed to offer a bargain rate for actualor deemed repatriations of past accumulations, whichwould thereby allow most taxpayers to proceed in thefuture under only a single set of rules. I certainlywould not begin the process by offering full exemptionfor repatriation of all earnings, no matter when accu-mulated. ◆

40See Oosterhuis (2006b), p. 89; cf. Rosenbloom (2001), p.1554 (would permit U.S. exemption of business income attribut-able to permanent establishments in ‘‘foreign countries that havefull-blown, purposively administered, income tax systems, andwhich can be trusted, in most cases, to impose tax on personshaving a substantial nexus with their soil’’).

41See Dept. of Treasury (1993), pp. 12, 42-43; Oosterhuis(2006b), p. 89.

42Cf. Dept. of Treasury (1993), pp. 13, 42-43 (suggests pos-sible use of tax treaty network as a starting point for identifica-tion of countries in which exempt income could be earned);Rosenbloom (2001), p. 1545 (same); Graetz (2001), p. 331.

43See, e.g., Canada. See Ault and Arnold (2004), p. 373; Mer-rill et al. (2006), p. 802.

44Section 1(h)(11)(C)(i)(II).45Table 2 shows that roughly five-sixths of the foreign income

and taxes of the largest 7,500 CFCs in tax year 2002 was re-ported by those incorporated in the major treaty countries. Theincome and tax reported, however, were not necessarily earnedin or paid to the treaty country, and perhaps in part for that rea-son, Table 2 also shows that the average foreign income tax rateof the CFCs in treaty countries was very similar to that of all ofthe largest CFCs.

46See Shaviro (2002).47See JCT (2006), p. 37 (Germany taxes 5 percent of repatri-

ated amounts in lieu of disallowing deductions). France also ex-empts only 95 percent of earnings at repatriation even though itgenerally disallows the deduction of expenses allocable to ex-empt income. However, it does not have detailed statutory rulesspecifying the manner of disallowance. Id. at 34-35; Ault andArnold (2004), p. 376.

48JCT (2005), pp. 191-192.49President’s Advisory Panel (2005), p. 240.

SPECIAL REPORTS


(C) Tax A




References

American Bar Association Section of Taxation, ‘‘Re-port of the Task Force on International Tax Re-form,’’ 59 Tax Lawyer 649 (2006).

Altshuler, Rosanne, ‘‘Recent Developments in the De-bate on Deferral,’’ Tax Notes, Apr. 10, 2000, p. 255,Doc 2000-10559, 2000 TNT 69-97.

Altshuler, Rosanne and Harry Grubert, ‘‘Where WillThey Go if We Go Territorial? Dividend Exemptionand the Location Decisions of U.S. MultinationalCorporations,’’ 54 Nat’l Tax J. 787 (2001).

Altshuler, Rosanne and Harry Grubert, ‘‘RepatriationTaxes, Repatriation Strategies and MultinationalFinancial Policy,’’ 87 J. Publ. Econs. 73 (2002).

Altshuler, Rosanne and Harry Grubert, ‘‘Governmentsand Multinational Corporations in the Race to theBottom,’’ Tax Notes Int’l, Feb. 6, 2006, p. 459, Doc2006-754, 2006 WTD 26-16.

Altshuler, Rosanne, T. Scott Newlon, and William C.Randolph, ‘‘Do Repatriation Taxes Matter? Evi-dence From the Tax Returns of U.S. Multination-als’’ in Martin Feldstein, James R. Hines Jr. and R.Glenn Hubbard, eds., The Effects of Taxation on Multi-national Corporations, Chicago: U. Chi. Press, 1995,pp. 253-276.

Ault, Hugh J., ‘‘U.S. Exemption/Territorial System vs.Credit-Based System,’’ Tax Notes Int’l, Nov. 24, 2003,p. 725, Doc 2003-25057, 2003 WTD 226-13.

Ault, Hugh J. and Brian J. Arnold, ‘‘Comparative In-come Taxation: A Structural Analysis,’’ Aspen Publ.(2d ed. 2004).

Avi-Yonah, Reuven S., ‘‘Competition and Competitive-ness: Review of NFTC Subpart F Report,’’ TaxNotes, Apr. 26, 1999, p. 582, Doc 1999-15104, 1999TNT 79-92 (1999a).

Avi-Yonah, Reuven S., comment on Peroni, Flemingand Shay, ‘‘Getting Serious About Curtailing Defer-ral of U.S. Tax on Foreign Source Income,’’ 52S.M.U. L. Rev. 531 (1999b).

Avi-Yonah, Reuven S., ‘‘The Ingenious Kerry TaxPlan,’’ Tax Notes, Apr. 26, 2004, p. 477, Doc 2004-8069, 2004 TNT 81-31.

Avi-Yonah, Reuven S., ‘‘The Pitfalls of InternationalIntegration: A Comment on the Bush Proposal andIts Aftermath,’’ 12 Int’l Tax and Pub. Fin. 87 (2005).

Avi-Yonah, Reuven S., ‘‘The Report of the President’sAdvisory Panel on Federal Tax Reform: A CriticalAssessment and a Proposal,’’ 29 S.M.U. L. Rev. 551(2006).

Blouin, Jennifer and Linda Krull, ‘‘Bringing It Home:A Study of the Incentives Surrounding the Repatria-tion of Foreign Earnings Under the American JobsCreation Act of 2004,’’ working paper, Nov. 2006.

Boise, Craig M., ‘‘Breaking Open Offshore Piggybanks:Deferral and the Utility of Amnesty,’’ 14 Geo. MasonL. Rev. 667 (2007).

Bosworth, Barry, Susan M. Collins, and GabrielChodorow-Reich, ‘‘Returns on FDI: Does the U.S.Really Do Better?’’ working paper, Aug. 2007.

Brumbaugh, David L. and Jane G. Gravelle, ‘‘Reformof U.S. International Taxation: Alternatives, CRSReport to Congress,’’ U.S. Cong. Res. Serv., July 31,2007.

Chorvat, Terrence R., ‘‘Ending the Taxation of ForeignBusiness Income,’’ 42 Ariz. L. Rev. 835 (2000).

Clark, W. Steven, ‘‘Tax Incentives for Foreign DirectInvestment: Empirical Evidence on Effects and Al-ternative Policy Options,’’ 48 Canad. Tax J. 1139(2000).

Desai, Mihir A. and Dhammika Dharmapala, ‘‘Taxes,Institutions and Foreign Diversification Opportuni-ties,’’ working paper, May 2007 (2007a).

Desai, Mihir A. and Dhammika Dharmapala, ‘‘Taxesand Portfolio Choice: Evidence from JGTRRA’sTreatment of International Dividends,’’ workingpaper, July 2007 (2007b).

Desai, Mihir A., C. Fritz Foley, and James R. HinesJr., ‘‘Repatriation Taxes and Dividend Distortions,’’54 Nat’l Tax J. 829 (2001).

Desai, Mihir A. and James R. Hines Jr., ‘‘EvaluatingInternational Tax Reform,’’ 51 Nat’l. Tax J. 487(2003).

Desai, Mihir A. and James R. Hines Jr., ‘‘Old Rulesand New Realities: Corporate Tax Policy in aGlobal Setting,’’ 57 Nat’l Tax J. 937 (2004).

Fleming, J. Clifton Jr. and Robert J. Peroni, ‘‘Exploringthe Contours of a Proposed U.S. Exemption (Terri-torial) Tax System,’’ Tax Notes Int’l, Jan. 16, 2006, p.189, Doc 2005-24240, 2005 WTD 11-13.

Fleming, J. Clifton Jr., Robert J. Peroni, and StephenE. Shay, ‘‘Deferral: Consider Ending It, Instead ofExpanding It,’’ Tax Notes, Feb. 7, 2000, p. 837, Doc2000-3632, 2000 TNT 25-66.

Frisch, Daniel J., ‘‘The Economics of InternationalTax Policy: Some Old and New Approaches,’’ TaxNotes, Apr. 30, 1990, p. 581.

Graetz, Michael J., ‘‘Taxing International Income: In-adequate Principles, Outdated Concepts, and Unsat-isfactory Policies,’’ 54 Tax L. Rev. 261 (2001).

Graetz, Michael J. and Michael M. O’Hear, ‘‘The‘Original Intent’ of U.S. International Taxation,’’ 46Duke L. J., 1021 (1997).

Graetz, Michael J. and Paul W. Oosterhuis, ‘‘Structur-ing an Exemption System for Foreign Income ofU.S. Corporations,’’ 54 Nat’l Tax J. 771 (2001).

Gravelle, Jane G., ‘‘Issues in International Tax Policy,’’57 Nat’l Tax J. 773 (2004).

SPECIAL REPORTS


(C) Tax A




Green, Robert A., ‘‘The Future of Source-Based Taxa-tion of the Income of Multinational Enterprises,’’79 Cornell L. Rev. 18 (1993).

Grubert, Harry, ‘‘Taxes and the Division of ForeignOperating Income Among Royalties, Interest, Divi-dends and Retained Earnings,’’ 68 J. Pub. Econs. 269(1998).

Grubert, Harry, ‘‘Enacting Dividend Exemption andTax Revenue,’’ 54 Nat’l Tax J. 811 (2001).

Grubert, Harry and Rosanne Altshuler, ‘‘CorporateTaxes in the World Economy: Reforming the Taxa-tion of Cross-Border Income,’’ working paper, Dec.12, 2006.

Grubert, Harry and John Mutti, ‘‘Taxing Multina-tionals in a World with Portfolio Flows and R&D:Is Capital Export Neutrality Obsolete?’’ 2 Int’l Tax &Publ. Fin. 439 (1995).

Grubert, Harry and John Mutti, Taxing InternationalBusiness Income: Dividend Exemption Versus the CurrentSystem, Washington: AEI Press, 2001.

Hartman, David G., ‘‘Tax Policy and Foreign DirectInvestment,’’ 26 J. Publ. Econs. 107 (1985).

Hines, James R. Jr., ‘‘Tax Policy and the Activities ofMultinational Corporations’’ in Alan J. Auerbach,ed., Fiscal Policy: Lessons From Economic Research (MITPress, 1997), p. 401.

Hines, James R. Jr., ‘‘Lessons From Behavioral Re-sponses to International Taxation,’’ 52 Nat’l Tax J.305 (1999) (1999a).

Hines, James R. Jr., ‘‘The Case Against Deferral: ADeferential Reconsideration,’’ 52 Nat’l Tax J. 385(1999) (1999b).

Hines, James R. Jr. and R. Glenn Hubbard, ‘‘ComingHome to America: Dividend Repatriations by U.S.Multinationals’’ in Assaf Razin and Joel Slemrod,eds., Taxation in the Global Economy, Chicago: U. Chi.Press, 1990, pp. 161-200.

Hubbard, R. Glenn, ‘‘Tax Policy and InternationalCompetitiveness,’’ 82 Taxes 213 (2004).

Kingson, Charles I., ‘‘Taxing the Future,’’ 51 Tax. L.Rev. 641 (1996).

Kleinbard, Edward D., ‘‘Throw Territorial TaxationFrom the Train,’’ Tax Notes Int’l, Apr. 2, 2007, p. 63,Doc 2007-416, 2007 WTD 66-5.

Krull, Linda K., ‘‘Permanently Reinvested ForeignEarnings, Taxes, and Earnings Management,’’ 79Acctg. Rev. 745 (2004).

Lokken, Lawrence, ‘‘Whatever Happened to SubpartF? U.S. CFC Legislation After the Check-the-BoxRegulations,’’ 7 Fla. Tax Rev. 185 (2005).

Lokken, Lawrence, ‘‘Territorial Taxation: Why SomeU.S. Multinationals May Be Less Than EnthusiasticAbout the Idea (and Some Ideas They Really Dis-like),’’ 59 S.M.U. L. Rev. 751 (2006).

Masters, Mike and Catterson Oh, ‘‘Controlled ForeignCorporations,’’ 2002, IRS SOI Bulletin, Vol. 25, No. 4(spring 2006).

McDaniel, Paul R., ‘‘Territorial vs. Worldwide Interna-tional Tax Systems: Which Is Better for the U.S.?’’ 8Fla. Tax Rev. 283 (2007).

Merrill, Peter R., ‘‘A Response to Professor Avi-Yonahon Subpart F,’’ Tax Notes, June 21, 1999, p. 1802,Doc 1999-21319, 1999 TNT 118-108.

Merrill, Peter, Oren Penn, Hans-Martin Eckstein,David Grosman, and Martijn van Kessel, ‘‘U.S. Ter-ritorial Tax Proposals and the International Experi-ence,’’ Tax Notes Int’l, June 5, 2006, p. 895, Doc 2006-7791, 2006 WTD 110-6.

National Foreign Trade Council, ‘‘International TaxPolicy for the 21st Century: Report and Analysis(vol. 1),’’ Washington, 2001.

National Foreign Trade Council, ‘‘Comments to Presi-dent’s Advisory Panel on Federal Tax Reform onthe U.S. International Tax System and the Competi-tiveness of American Companies,’’ http://www.nftc.org/default/tax/TaxReformPanelSubmission2005.pdf, Apr. 20, 2005.

Noren, David G., ‘‘Commentary: The U.S. NationalInterest in International Tax Policy,’’ 54 Tax L. Rev.337 (2001).

Oosterhuis, Paul W., Testimony Before Subcomm. onSelect Rev. Measures of House Comm. on Waysand Means on the Impact of International Tax Re-form on U.S. Competitiveness, June 22, 2006(2006a).

Oosterhuis, Paul W., ‘‘The Evolution of U.S. Interna-tional Tax Policy: What Would Larry Say?’’ TaxNotes Int’l, June 26, 2006, p. 1119, Doc 2006-11895,2006 WTD 125-7 (2006b).

Peroni, Robert J., ‘‘The Proper Approach for Taxingthe Income of Foreign Controlled Corporations,’’ 26Brook. J. Int’l L. 1579 (2001).

Peroni, Robert J., J. Clifton Fleming Jr., and StephenE. Shay, ‘‘Getting Serious About Curtailing Deferralof U.S. Tax on Foreign Source Income,’’ 52 S.M.U.L. Rev. 455 (1999).

President’s Advisory Panel on Federal Tax Reform,‘‘Simple, Fair, and Pro-Growth: Proposal to FixAmerica’s Tax System,’’ Nov. 2005.

Rangel, Rep. Charles B. and John Buckley, ‘‘CurrentInternational Tax Rules Provide Incentives for Mov-ing Jobs Offshore,’’ Viewpoint, BNA Daily Tax Rept.,Mar. 22, 2004, p. J-1.

Redmiles, Melissa and John Wenrich, ‘‘A History ofControlled Foreign Corporations and the ForeignTax Credit,’’ IRS Statistics of Income Bulletin, Vol. 27,No. 1 (summer 2007).

SPECIAL REPORTS


(C) Tax A




Repetti, James R., ‘‘Will U.S. Investment Go Abroadin a Territorial Tax: A Critique of the President’sAdvisory Panel on Tax Reform,’’ 8 Fla. Tax Rev. 303(2007).

Rosenbloom, H. David, ‘‘From the Bottom Up: Taxingthe Income of Foreign Controlled Corporations,’’ 26Brook. J. Int’l. L. 1525 (2001).

Shaviro, Daniel N., ‘‘Splitting the Baby: An Intermedi-ate Tax Rate for Repatriations of Foreign SourceActive Business Income?’’ Nat’l Tax Assn. 95thAnn’l Conf. on Tax’n (2002), p. 1.

Shay, Stephen E., ‘‘Exploring Alternatives to SubpartF,’’ 82 Taxes 29 (2004).

Shay, Stephen E., Testimony Before Subcomm. on Se-lect Rev. Measures of House Comm. on Ways andMeans on the Impact of International Tax Reformon U.S. Competitiveness, June 22, 2006.

Slemrod, Joel, ‘‘Effect of Taxation with InternationalCapital Mobility’’ in Henry J. Aaron, HarveyGalper, and Joseph A. Pechman, eds., Uneasy Com-promise: Problems of a Hybrid Income-Consumption Tax(Brookings 1988), p. 115.

Slemrod, Joel B., ‘‘Free Trade Taxation and Protection-ist Taxation,’’ 2 Int’l Tax & Publ. Fin. 471 (1995).

Sullivan, Martin A., ‘‘Data Show U.S. CompaniesShifting Profits to Tax Havens,’’ Tax Notes Int’l, Sept.20, 2004, p. 1035, Doc 2004-17844, 2004 WTD 184-9(2004a).

Sullivan, Martin A., ‘‘Shifting of Profits Offshore CostsU.S. Treasury $10 Billion or More,’’ Tax Notes Int’l,Oct. 4, 2004, p. 13, Doc 2004-18908, 2004 WTD 194-6(2004b).

Sullivan, Martin A., ‘‘Latest IRS Data Show Jump inTax Haven Profits,’’ Tax Notes Int’l, Oct. 18, 2004, p.202, Doc 2004-19778, 2004 WTD 203-7 (2004c).

Sullivan, Martin A., ‘‘U.S. Drug Firms Move Profits toSave Billions,’’ Tax Notes Int’l, Aug. 14, 2006, p. 539,Doc 2006-14640, 2006 WTD 157-3.

Surrey, Stanley S., ‘‘Current Issues in the Taxation ofCorporate Foreign Investment,’’ 56 Colum. L. Rev.815 (1956).

U.K. Revenue & Customs and U.K. Treasury, ‘‘Taxa-tion of the Foreign Profits of Companies: A Discus-sion Document,’’ reprinted in Doc 2007-15183, 2007WTD 124-18, Jun. 21, 2007.

U.S. Dept. of Treasury, ‘‘International Tax Reform: AnInterim Report’’ (Jan. 1993).

U.S. Dept. of Treasury, ‘‘The Deferral of IncomeEarned Through U.S. Controlled Foreign Corpora-tions: A Policy Study’’ (Dec. 2000).

U.S. Dept. of Treasury, ‘‘Report to the Congress onEarnings Stripping, Transfer Pricing and U.S. In-come Tax Treaties’’ (Nov. 2007).

U.S. Jt. Comm. on Tax’n, ‘‘Options to Improve TaxCompliance and Reform Tax Expenditures,’’ JCS-02-05, Jan. 27, 2005.

U.S. Jt. Comm. on Tax’n, ‘‘The Impact of Interna-tional Tax Reform: Background and Selected IssuesRelating to U.S. International Tax Rules and theCompetitiveness of U.S. Businesses,’’ JCX-22-06,Jun. 21, 2006.

Weiner, Joann M., ‘‘Dividend Repatriation and Do-mestic Reinvestment,’’ Tax Notes Int’l, Nov. 26, 2007,p. 827, Doc 2007-25722, 2007 WTD 224-4.

SPECIAL REPORTS


(C) Tax A




Eligibility for Treaty Benefits Under the France-U.S.Income Tax Treatyby John Venuti, Ron Dabrowski, Douglas Poms, and Alexey Manasuev

To be entitled to benefits under income tax treaties,companies must satisfy eligibility requirements.

This article includes flowcharts to assist practitioners innavigating the eligibility requirements of the France-U.S. income tax treaty applicable to companies.

Income tax treaties may exempt business incomefrom source-country income taxes and exempt fromtax, or reduce domestic withholding tax rates on, somepayments between residents of countries that are par-ties to an income tax treaty. U.S. income tax treatiescontain various eligibility requirements. A companyclaiming benefits must not only be a resident of the taxtreaty partner, but it must also satisfy the limitation onbenefits provision included in most U.S. income taxtreaties.

This article contains decision-making flowcharts thatfocus on the eligibility of companies claiming benefitsunder the France-U.S. income tax treaty.1 However, thisarticle does not address the eligibility for treaty benefits

of entities that are partnerships or are otherwise trans-parent for U.S. or French tax purposes. Also, the flow-charts do not address triangular cases under article30.5 of the France-U.S. income tax treaty. The articleis based on the provisions of the France-U.S. incometax treaty, the U.S. Treasury Technical Explanation tothe treaty, and applicable IRS guidance.

This article is the second in a series of articles thatprovide flowcharts to assist practitioners in determininga company’s eligibility for tax treaty benefits under theLOB provision of specific U.S. income tax treaties and,when applicable, in determining eligibility for a 0 per-cent withholding tax rate on dividend payments tosuch company. (For prior coverage, see Tax Notes Int’l,Jan. 14, 2008, p. 181, Doc 2007-27516, or 2008 WTD12-10.) Because the France-U.S. income tax treaty doesnot provide for a 0 percent dividend withholding taxrate, this article addresses only the general eligibility ofcompanies for treaty benefits under the LOB provision(article 30) of the France-U.S. income tax treaty.

1Convention Between the Government of the United States ofAmerica and the Government of the French Republic for theAvoidance of Double Taxation and the Prevention of Fiscal Eva-sion With Respect to Taxes on Income and Capital, signed on

August 31, 1994 (as amended by the protocol signed on Decem-ber 8, 2004). (For the income tax treaty, see Doc 94-9136 or 94TNI 200-36. For the protocol, see Doc 2004-23319 or 2004 WTD237-10.)

John Venuti and Ron Dabrowski are principals, Douglas Poms is a director, and Alexey Manasuev is amanager in KPMG’s Washington National Tax International Corporate Services Group.

The views expressed are those of the authors and do not necessarily represent the views and opinionsof KPMG.

Copyright © 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG net-work of independent member firms affiliated with KPMG International, a Swiss cooperative. All rightsreserved.

(Footnote continued in next column.)


(C) Tax A




The article contains nine flowcharts analyzing the

LOB provision as applied to companies. The flow-

charts may serve as a useful practice tool for practi-

tioners and taxpayers. Although the flowcharts provide

a comprehensive review of applicable provisions con-

tained in the France-U.S. income tax treaty, taxpayers

and their tax advisers should carefully evaluate each

individual case and make a determination of whetherthe requirements of the treaty are met based on allfacts and circumstances.

The information contained herein is general in na-ture and based on authorities that are subject tochange. Applicability to specific situations is to be de-termined through consultation with your tax adviser. ◆

SPECIAL REPORTS


(C) Tax A




Is the company aresident of France?

2

Is the company publicly

traded? (See Chart 2.)

1

Yes

No

3

4

5

7

9

Not eligible for treaty benefits.

Is the company a subsidiaryof a U.S. or French publiclytraded company?

(See Chart 3.)

Does the companymeet the alternativeownership test?(See Chart 4.)

Does the companymeet the ownershipand base erosion tests?(See Chart 5.)

Competent AuthorityDiscretionary Determination(See Chart 9.)

Eligible fortreatybenefits.

No

No

NoNo

Is the company a pension trust (more thanhalf of which beneficiaries, members, orparticipants, if any, are qualified persons) ora specified investment entity (more thanhalf of which shares, rights, or interests insuch entity is owned by qualified persons)?See Article 30.1(e) and (f), respectively.

8

Does the company meetthe headquarter companyexception?(See Chart 7.)

No

No

No

Yes

Yes

Yes

Yes

Yes

Eligible fortreatybenefits.

Yes

Yes

Yes

6Does the companymeet the active tradeor business test? (SeeChart 6.)

No

Yes* CAUTION! The flowcharts do not address article 30.5 of theFrance-U.S. income tax treaty dealing with “triangular cases.”

Does the company meetthe derivative benefits test?(See Chart 8.)

No

Chart 1. Eligibility for Treaty Benefits Under Article 30 (LOB) ofFrance-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




2

Is the companypublicly traded?

Is the principal class of its shareslisted on a recognized securitiesexchange (see definition to theright)? Article 30.1(c)(i).

Is the company’s principal class ofshares substantially andregularly traded on one or morerecognized securities exchanges?Article 30.1(c)(i).

Yes

Yes

Eligible for treatybenefits.

Not eligible fortreaty benefits.

(Go to Chart

3.)

No

No

“Recognized securities exchange"includes:(a) the NASDAQ System owned by the

National Association of SecuritiesDealers, Inc. and any stock exchangeregistered with the U.S. Securities andExchange Commission as a nationalsecurities exchange for purposes of theU.S. Securities Exchange Act of 1934;

(b) the French stock exchanges controlled bythe Commission des opérations debourse, and the stock exchanges ofAmsterdam, Brussels, Frankfurt,Hamburg, London, Madrid, Milan, Sydney,Tokyo, and Toronto; and

(c) any other stock exchanges agreed uponby the competent authorities of the UnitedStates and France.

The terms “principal class of shares” and“substantially and regularly traded” arenot defined in the treaty. The U.S. TreasuryTechnical Explanation does not contain thedefinition of these terms either.

Chart 2. Publicly Traded Company Test Under Article 30.1(c)(I)(LOB) of France-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




Is the company a subsidiaryof a publicly traded

company?

3

Is more than 50 percent of the aggregate vote and valueof the company’s shares owned, directly or indirectly(see definition to the right), by any combination of thefollowing persons:

(1) publicly traded companies that are residents of theUnited States or France (see Chart 2);

(2) a contracting state, a political subdivision (in thecase of the United States) or local authority thereof,or an agency or instrumentality of that state,subdivision, or authority; or

(3) any companies of which persons referred to in (2)above (governments, agencies, or instrumentalities)own more than 50 percent of the aggregate voteand value of the shares? Article 30.1(c)(ii).



(Go to Chart

4.)

No

Yes

“Directly or indirectly” means thatall companies in the otherwisequalifying chain of ownership mustbe residents of France or the UnitedStates, as applicable, or of amember state of the EuropeanUnion. See Article 30.6(a).

Chart 3. Subsidiary of a Publicly Traded Company Test UnderArticle 30.1(c)(ii) (LOB) of France-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




4

Is at least 70 percent of the aggregate vote and value of itsshares owned, directly or indirectly, by any combination ofcompanies that are residents of France or the United States or ofone or more member states of the European Union (seedefinition to the right), the principal classes of shares of whichare listed and substantially and regularly traded on one ormore recognized stock exchanges, “specified owners” (seedefinition to the right), one or more member states of theEuropean Union, political subdivisions, or local authorities thereof,or agencies or instrumentalities of those member states,subdivisions, or authorities, and companies of which more than 50percent of the aggregate vote and value is owned by suchmember states, subdivisions, authorities, or agencies orinstrumentalities? Article 30.1(c)(iii)(bb).


(Go to Chart

5.)


Does the company meet thealternative ownership test?

No

No

Yes

Yes

Is more than 30 percent of the aggregate vote andvalue of the company’s shares owned, directly orindirectly, by any combination of the following persons:

(1) publicly traded companies that are residents ofFrance (see Chart 2);

(2) a contracting state, a political subdivision (in thecase of the United States) or local authority thereof,or an agency or instrumentality of that state,subdivision, or authority; or

(3) any companies of which persons referred to in (2)above (governments, agencies, or instrumentalities)own more than 50 percent of the aggregate voteand value of the shares? Article 30.1(c)(iii)(aa).

Yes

“Specified owners" are:

(a) publicly traded companies that areresidents of either the UnitedStates or France or of one or moremember states of the EuropeanUnion;

(b) the contracting states, politicalsubdivisions (in the case of theUnited States) or local authoritiesthereof or agencies orinstrumentalities of such a state,subdivision, or authority; or

(c) companies of which more than 50percent of the vote and value of theshares is owned by: (i) thecontracting states, politicalsubdivisions (in the case of theUnited States), or local authoritiesthereof, agencies orinstrumentalities of such a state,subdivision, or authority; (ii)member states of the EuropeanUnion, political subdivisions orlocal authorities thereof, oragencies or instrumentalities ofsuch member states, subdivisions,or authorities; or (iii) companiesmore than 50 percent owned bythe member states of the EuropeanUnion, political subdivisions, orlocal authorities thereof, oragencies or instrumentalities ofsuch member states. U.S.Treasury Technical Explanationto the France-U.S. income tax

treaty.

“Resident of a member state of theEuropean Union" -- a person thatwould be entitled to the benefits of acomprehensive income tax treaty inforce between any member state of theEuropean Union and the contractingstate from which the treaty benefits areclaimed, provided that if such treatydoes not contain a comprehensivelimitation on benefits article (includingprovisions similar to those ofsubparagraphs (c) and (d) of paragraph1 and paragraph 2 of article 30 of theFrance-U.S. income tax treaty), theperson would be entitled to the treatybenefits under the principles of article30.1 if such person were a resident ofthe United States or France under article4 (Resident) of the France-U.S. incometax treaty. See article 30.6(d).

Chart 4. Alternative Ownership Test Under Article 30.1(c)(iii) ofFrance-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




Does the companymeet theownership andbase erosion tests?

5

Ownership Test

Is 50 percent or more of the beneficial interest in the person(or, in the case of a corporation, 50 percent or more of the voteand value of each class of its shares) not owned, directly orindirectly, by persons that are not qualified persons (seedefinition to the right)? Article 30.1(d). See Example to theright.

Base Erosion Test

(1) Is less than 50 percent of the gross income (seedefinition to the left) of such person used, directly orindirectly, to make deductible payments (see definitionto the right) to persons that are not qualified persons(Article 30.1(d)(i)); or

(2) is less than 70 percent of such gross income used,directly or indirectly, to make deductible payments topersons that are not qualified persons and less than 30percent of such gross income is used, directly orindirectly, to make deductible payments to persons thatare neither qualified persons nor residents of memberstates of the European Union? Article 30.1(d)(ii).



(Go to Chart

6.)

No

No

Yes

Yes

“Qualified person” means any person that isentitled to the treaty benefits under paragraph 1of article 30 of the France -U.S. income taxtreaty, as follows:

(a) certain individuals;(b) publicly traded companies (see Chart 2);(c) governments, agencies, or

instrumentalities;(d) subsidiaries of publicly traded companies

(see Chart 3);(e) companies meeting the alternative

ownership test (see Chart 4);(f) persons meeting ownership and base

erosion test (see Chart 5);(g) certain pension trusts (see Chart 1);(h) certain investment entities (see Chart 1);

or(i) U.S. citizens.

Example. If the shares of a Frenchcompany are more than 50 percent ownedby another French company that is whollyowned by residents of a third country thatare not U.S. citizens, that French companywould not pass the ownership test becausemore than 50 percent of its shares isindirectly owned by the third-countryresidents.

“Deductible payments” -- includespayments for interest or royalties, but doesnot include payments at arm's length for thepurchase or use of or the right to usetangible property in the ordinary course ofbusiness or remuneration at arm's length forservices performed in the contracting statein which the person making such paymentsis a resident. Types of payments may beadded to, or eliminated from, the exceptionsmentioned in the preceding definition of“deductible payments” by mutual agreementof the competent authorities. Article

30.6(c).

“Gross income” — gross income forthe first taxable period preceding thecurrent taxable period, provided thatthe amount of gross income for thefirst taxable period preceding thecurrent taxable period shall bedeemed to be no less than theaverage of the annual amounts ofgross income for the four taxableperiods preceding the current taxableperiod. Article 30.6(b).

Chart 5. Ownership and Base Erosion Tests Under Article 30.1(d) (LOB)of France-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




6

Does the companymeet the activetrade or business

test?

A resident of France is entitled to the treaty benefits withrespect to income derived from the United States if:(1) such resident is engaged in the active conduct of a

trade or business (see definition to the right) in France(other than the business of making or managinginvestments, unless the activities are banking orinsurance activities carried on by a bank or insurancecompany);

(2) the income is connected with or incidental to the trade orbusiness in France; and

(3) the trade or business is substantial in relation to theactivity in the United States that generated the income.Article 30.2(a).

“Substantiality requirement” -- whether the trade or business of theresident in France is “substantial” in relation to the activity in the UnitedStates will be determined based on all facts and circumstances. Article30.2(b).

Substantiality “safe harbor.” In any case, however, the trade orbusiness will be deemed substantial if, for the first preceding taxableperiod or for the average of the three preceding taxable periods, eachof the following ratios equals at least 7.5 percent and the average ofthe ratios exceeds 10 percent (see Example 1 to the right):(1) the ratio of the value of assets used or held for use in the conduct

of the trade or business of the resident in France to the value ofassets used or held for use in the conduct of the activity in theUnited States;

(2) the ratio of the gross income derived from the conduct of the tradeor business of the resident in France to the gross income derivedfrom the conduct of the activity in the United States; and

(3) the ratio of the payroll expense of the trade or business of theresident in France for services performed in France to the payrollexpense of the activity in the United States for services performedin the United States. Article 30.2(b).

Income is considered derived "in connection with” an activetrade or business if, for example, the activity that generates theincome is "upstream," "downstream," or parallel to the activetrade or business. (See Example 2 to the left.)


(Go to Chart

7.)

YesNo

Example 2. If the U.S. activity of aFrench manufacturer consisted ofselling its products or the same sort ofproducts in the United States orproviding inputs to the Frenchmanufacturer, the U.S. income wouldbe considered connected with theFrench business. Income isconsidered "incidental" to a businessif, for example, it arises from the short-term investment of the working capitalof the business. U.S. TreasuryTechnical Explanation to the

France-U.S. income tax treaty.

“Engaged in active trade orbusiness” applies to a personthat is directly so engaged oris a partner in a partnershipthat is so engaged, or is soengaged through one or moreassociated enterprises(wherever resident). Article

30.6(g).

Example 1. A Frenchmanufacturer that derivesincome from sales in theUnited States throughunrelated distributors of goodsit produces in France willsatisfy the substantialityrequirement with respect tothat income without the needto calculate the ratios. U.S.Treasury TechnicalExplanation to the France-U.S. income tax treaty.

“Engaged in active trade orbusiness” test is appliedseparately for each item ofincome derived by a residentof one contracting state(France) from the othercontracting state (the UnitedStates). U.S. TreasuryTechnical Explanation to theFrance-U.S. income tax

treaty.


Chart 6. Active Trade or Business Test Under Article 30.2 (LOB) ofFrance-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




©2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independentmember firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMG International.

7

Does the companyfunction as aheadquarter

company?



(Go to Chart

8.)

Yes

No

Does the company meet the following conditions?

(1) Does it provide in France a substantial portion of the overall supervision and administrationof a multinational corporate group, which may include, but cannot be principally, groupfinancing?

(2) Does the corporate group consist of companies that are resident in, and engaged in anactive business in, at least five countries, and the business activities carried on in each ofthe five countries (or five groupings of countries) generate at least 10 percent of the grossincome of the group?

(3) Do the business activities carried on in any one country other than France generate lessthan 50 percent of the gross income of the group?

(4) Is no more than 25 percent of its gross income derived from the United States?(5) Does it have, and does it exercise, independent discretionary authority to carry out the

functions referred to in subparagraph (1) above?(6) Is it subject to the same income taxation rules in France as persons described in

paragraph 2 of article 30 of the treaty? (See Chart 6.)(7) Is the income derived in the United States either derived in connection with, or incidental

to, the active business referred to in subparagraph (2) above?

If the gross income requirements of subparagraph (2), (3), or (4) above are not fulfilled, they willbe deemed to be fulfilled if the required ratios are met when calculated on the basis of theaverage gross income of the headquarter company and the average gross income of the groupfor the preceding four taxable periods. Article 30.6(h).

CAUTION!

Because France does not currently subjectheadquarter companies to the same income taxrules that apply to active trades or businesses, therequirement in subparagraph (6) above will preventFrench headquarter companies from claimingbenefits under article 30.3 of the France-U.S.income tax treaty unless French law is changed in amanner that satisfies the requirements of thissubparagraph. U.S. Treasury TechnicalExplanation to the France-U.S. income taxtreaty.

Chart 7. Headquarter Company Exception Under Article 30.3 (LOB) ofFrance-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A




8


(Go to Chart

9.)

NoYes

Ownership test

(1) Is more than 30 percent of the aggregate voteand value of the company's shares owned,directly or indirectly, by qualified persons that areresident in France? (Article 30.4(b)); and

(2) is more than 70 percent of its shares owned,directly or indirectly, by qualified persons that areresidents of France or the United States, U.S.citizens, or residents of member states of theEuropean Union? (For definition of a “resident ofMember States of the European Union,” seeChart 4.) Article 30.4(c).

Yes


No

Does the companymeet the derivative

benefits test?

Base Erosion Test

(1) Is less than 50 percent of the gross income of such personused, directly or indirectly, to make deductible payments topersons that are not qualified persons (Article 30.1(d)(i)); or

(2) is less than 70 percent of such gross income used, directly orindirectly, to make deductible payments to persons that are notqualified persons and less than 30 percent of such grossincome is used, directly or indirectly, to make deductiblepayments to persons that are neither qualified persons norresidents of member states of the European Union? Article30.4(a).

Yes

Cannot qualify underthe derivative benefitstest.

(Go to Chart 9.)

Is the relevant item of incomefor which treaty benefits aresought dividends, interest, or

royalties?No

Yes

Chart 8. Derivative Benefits Test Under Article 30.4 (LOB) of France-U.S.Tax Treaty (Only Applies to Dividends, Interest, or Royalty Payments)

SPECIAL REPORTS


(C) Tax A




9

Requesting competent authorityassistance -- Taxpayer may requestthe assistance of the U.S. competentauthority under Rev. Proc. 2006-54.The U.S. competent authority maydetermine in its own discretion that thetaxpayer qualifies for certain benefitsunder article 30 (LOB) of the France-U.S. income tax treaty.

There is a US $15,000 user fee forrequesting a discretionarydetermination under the LOB provision. Ifa request is submitted for more thanone entity, a separate user fee will becharged for each entity. Section 14.2

of Rev. Proc. 2006-54.A resident of France that is not entitled to treaty benefits under the provisionsof article 30 may nevertheless be granted treaty benefits if the competentauthority of the United States determines, upon such person's request:(a) that the establishment, acquisition, or maintenance of such person and

the conduct of its operations did not have as one of its principal purposesthe obtaining of the treaty benefits; or

(b) that it would not be appropriate, having regard to the purpose of thisarticle, to deny the treaty benefits to such person.

The competent authority of the United States will consult with the competentauthority of France before denying the treaty benefits under this provision.Article 30.7; U.S. Treasury Technical Explanation to the France-U.S.income tax treaty.

The competent authority’s discretion is quite broad. It may grant all of thebenefits of the treaty to the taxpayer making the request, or it may grant onlycertain benefits. For instance, it may grant benefits only with respect to aparticular item of income. Further, the competent authority may establishconditions, such as setting time limits on the duration of any relief granted.

A taxpayer will be permitted to present his case to the relevant competentauthority for an advance determination based on the facts. In thesecircumstances, it is also expected that if the competent authority determinesthat benefits are to be allowed, they will be allowed retroactively to the time ofentry into force of the relevant treaty provision or the establishment of thestructure in question, whichever is later. Before denying benefits of the treaty,the competent authority will consult with the competent authority of the othercontracting state.


Is discretionarydetermination by thecompetent authority oneligibility for treatybenefits granted?

Yes


No

In making its determination, the competent authority will take into account suchfactors as those enumerated in Article XXI of the Understanding to article 26 ofthe Netherlands-U.S. income tax treaty concerning the corresponding provisionof that article (see relevant excerpt to the right). U.S. Treasury TechnicalExplanation to the France-U.S. income tax treaty.

Article XXI of Understanding to theNetherlands-U.S. income tax treaty:

“XXI. In reference to paragraph 7 ofArticle 26 (Limitation on benefits)

It is understood that in applyingparagraph 7 of Article 26 (Limitation onbenefits), the legal requirements for thefacilitation of the free flow of capital andpersons within the EuropeanCommunities, together with the differinginternal income tax systems, tax incentiveregimes, and existing tax treaty policiesamong member states of the EuropeanCommunities, will be considered. Undersuch paragraph, the competent authorityis instructed to consider as its guidelinewhether the establishment, acquisition ormaintenance of a company or the conductof its operations has or had as one of itsprincipal purposes the obtaining ofbenefits under this Convention. Thecompetent authority may, therefore,determine under a given set of facts, thata change in circumstances that wouldcause a company to cease to qualify fortreaty benefits under paragraphs 1 and 2of Article 26 (Limitation on Benefits) [sic]need not necessarily result in a denial ofbenefits. Such changed circumstancesmay include a change in the state ofresidence of a major shareholder of acompany, the sale of part of the stock of aNetherlands company to a personresident in another member state of theEuropean Communities, or an expansionof a company's activities in other memberstates of the European Communities, allunder ordinary business conditions. Thecompetent authority will consider thesechanged circumstances (in addition toother relevant factors normally consideredunder paragraph 7 of Article 26) indetermining whether such a company willremain qualified for treaty benefits withrespect to income received from UnitedStates sources. If these changedcircumstances are not attributable to taxavoidance motives, this also will beconsidered by the competent authority tobe a factor weighing in favor of continuedqualification under paragraph 7 of Article26.”

Chart 9. Discretionary Determination by the Competent AuthorityUnder Article 30.7 (LOB) of the France-U.S.Tax Treaty

SPECIAL REPORTS


(C) Tax A





(C) Tax A




February 13

Doing Business in India — New York. The PractisingLaw Institute will sponsor a one-day program on topicsincluding tax and structuring considerations in foreigninvestment and mergers and acquisitions, developmentsin the Indian capital market, outsourcing to India, risksand mitigating strategies, and compliance with U.S.and Indian regulations. Tel: (800) 824-4754.

• E-mail: [email protected]

February 20

Corporate Taxation — Washington. The Tax CouncilPolicy Institute will sponsor a two-day conference onthe impact of U.S. fiscal policy on corporate taxationin the global marketplace. Tel: (202) 822-8062.


February 21

EU Tax Policy — Vienna, Austria. The Vienna Uni-versity of Economics and Business Administration willhost a three-day academic conference on the EU pro-posal for a common consolidated corporate tax base.

• Web site: http://www.wu-wien.ac.at/taxlaw

February 25

Mexican Tax — San Antonio. The Council for Interna-tional Tax Education will sponsor a two-day update onMexican taxation including a discussion of the newflat tax and its effect on doing business in Mexico. Tel:(914) 328-5656.


Tax Accounting — New York. The Council for Inter-national Tax Education will sponsor a two-day confer-ence on FAS #109, tax accounting for U.S. multina-tionals, with topics including current and deferred taxesin the corporate tax provision under FAS #109, report-ing requirements for domestic production, and howtransfer pricing and FIN 48 affect financial statementpreparation. Tel: (914) 328-5656.


Corporate Tax Accounting — Las Vegas. ATLAS willsponsor a two-day conference on corporate tax ac-counting with topics including the American Jobs Cre-ation Act and Treasury’s ongoing efforts to issue regu-latory guidance on international issues. Tel: (800) 207-4432.

• Web site: http://www.atlas-sfi.com

February 27

OECD Business Restructuring Project — Palo Alto,California. DLA Piper and the U.S. Council for Inter-national Business will host a one-day international taxforum focusing on contract manufacturing, cost shar-ing, branch rules, and the OECD special program onthe business restructuring project. Featured speakersinclude Michael DiFronzo, Steven Musher, LarryLangdon, and Alan Granwell. Contact: Debbie Siu,USCIB. Tel: (212) 575-0327.


• Web site: http://www.uscib.org

February 28

International Fiscal Association — Laguna Niguel,California. The U.S. branch of the International FiscalAssociation will hold its 36th annual conference. Thetwo-day event will feature panels on transfer pricing,tax risk and corporate governance, the Canada-U.S. taxtreaty, and other inbound and outbound topics.


• Web site: http://www.ifausa.org

March 3

Transfer Pricing — Tokyo. Baker & McKenzie willsponsor a one-day conference on topics including trans-fer pricing developments in Japan and Asia; dispute

The calendar is available online as Doc 2008-2608.

Submissions to the Tax Calendar may be sent by fax to(703) 533-4646 or by e-mail to [email protected].


(C) Tax A




resolution vehicles; and considerations for mergers, ac-quisitions, and reorganizations. Tel: +81 3 5157 2901.


March 5

Latin America — Coral Gables, Florida. Baker &McKenzie will host its 9th annual Latin American TaxConference. The two-day event will focus on a varietyof regional topics, including recent Mexican tax re-forms and current developments in Argentina, Brazil,Chile, Colombia, and Venezuela.


March 10

China: Legal, Tax, and Accounting Update — SanFrancisco. The Council for International Tax Educa-tion will sponsor a two-day program on topics includ-ing Chinese tax compliance and enforcement proce-dures, tax considerations of structuring investment inChina, transfer pricing, accounting issues, and indirecttaxes in China. Tel: (914) 328-5656.


March 13

Pacific Rim Tax Planning — San Francisco. The Soci-ety of Trust and Estate Practitioners (STEP) will spon-sor a two-day program on cross-border estate planning,with case studies on family relocations involvingChina, Hong Kong, Singapore, and Japan.

• Web site: http://www.acteva.com/go/step

March 17

Tax Accounting — New York. The Council for Inter-national Tax Education will sponsor a two-day confer-ence on FAS #109, tax accounting for U.S. multina-tionals, with topics including current and deferred taxesin the corporate tax provision under FAS #109, report-ing requirements for domestic production, and how

transfer pricing and FIN 48 affect financial statementpreparation. Tel: (914) 328-5656.


April 3

CFE Tax Forum — Brussels. The Confederation Fis-cale Europeenne will hold its annual spring tax forum,focusing on VAT issues for taxpayers and practitioners.


April 16

Asia-Pacific Trust and Offshore Issues — Kuala Lum-pur. EG Communications Pte Ltd will sponsor a two-day seminar on topics including tax treaties and theiruses in offshore planning, and cross-border tax andestate planning. Tel: +65 6468 7460.


• Web site: http://www.eg-comms.com/aptos.html

April 21

Tax Planning in Latin America — Miami. The Coun-cil for Tax Education will sponsor a two-day confer-ence on tax planning and controversies in LatinAmerica with topics including Mexico’s new flat tax,tax changes in Colombia and Venezuela, acquisitionand merger strategies, and Latin American trade blocksand restrictions. Tel: (914) 328-5656.


April 22

Reduction of Foreign Tax Credit Limitation Catego-ries — Washington. The IRS has scheduled a hearingon proposed regulations (REG-114126-07) providingguidance on the reduction of the number of separateforeign tax credit limitation categories under section904(d). The hearing is set for 10 a.m. in the IRS Audi-torium.

TAX CALENDAR


(C) Tax A





(C) Tax A




CORRESPONDENTS

Africa: Zein Kebonang

Albania: Adriana Civici

Angola: Trevor Wood

Anguilla: Alex Richardson

Antigua: Donald B. Ward

Argentina: Cristian E. Rosso Alba; Eduardo A. Baistrocchi

Armenia: Suren Adamyan

Asia: Laurence E. Lipsher

Australia: Graeme S. Cooper; Richard Krever; Philip Burgess

Austria: Markus Stefaner; Clemens Philipp Schindler

Bahamas: Hywel Jones

Bangladesh: M. Mushtaque Ahmed

Barbados: Patrick B. Toppin

Belgium: Werner Heyvaert; Marc Quaghebeur

Bermuda: Wendell Hollis

Botswana: I.O. Sennanyana

Brazil: David Roberto R. Soares da Silva

Bulgaria: Todor Tabakov; Lubka Tzenova

Cameroon: Edwin N. Forlemu

Canada: Brian J. Arnold; Jack Bernstein; Steve Suarez; Martin Przysuski

Caribbean: Bruce Zagaris

Cayman Islands: Timothy Ridley

Chile: Macarena Navarrete

China (P.R.C.): Laurence E. Lipsher; Peng Tao; Huiyan Qiu

Cook Islands: David R. McNair

Costa Rica: Alvaro Castro Mendez

Croatia: Hrvoje Šimovic

Cuba: Cristian Óliver Lucas-Mas

Cyprus: Theodoros Philippou

Czech Republic: Niko Härig

Denmark: Nikolaj Bjørnholm; Jens Wittendorff

Dominican Republic: Dr. Fernándo Ravelo Alvarez

Eastern Europe: Iurie Lungu

Ecuador: Roberto Silva Legarda

Egypt: Abdallah El Adly

Estonia: Helen Pahapill; Viktor Trasberg

European Union: Marco Rossi; Clemens Philipp Schindler

Fiji: Bruce Sutton

Finland: Marjaana Helminen

France: Olivier Delattre; Michel Collet; Hervé Bidaud

Gambia: Samba Ebrima Saye

Germany: Jörg-Dietrich Kramer; Rosemarie Portner; Thomas Eckhardt;Clemens Philipp Schindler; Wolfgang Kessler; Rolf Eicke

Ghana: Seth Terkper

Gibraltar: Charles D. Serruya

Greece: Alexandra Gavrielides

Guam: Stephen A. Cohen

Guernsey: Neil Crocker

Guyana: Lancelot A. Atherly

Hong Kong: Laurence E. Lipsher

Hungary: Farkas Bársony

Iceland: Indridi H. Thorlaksson

India: Nishith M. Desai; Shrikant S. Kamath; Vaishali Mane

Indonesia: Freddy Karyadi

Iran: Mohammad Tavakkol

Ireland: Kevin McLoughlin

Isle of Man: Richard Vanderplank

Israel: Joel Lubell; Guy Katz

Italy: Alessandro-Adelchi Rossi; Luigi Perin; Gianluca Queiroli; MarcoRossi; Federico Pacelli

Japan: Paul Previtera

Jersey: J. Paul Frith

Kenya: Glenday Graham

Korea: Sangmoon Chang

Kuwait: Abdullah Kh. Al-Ayoub

Latvia: Andrejs Birums; Valters Gencs

Lebanon: Fuad S. Kawar

Libya: Ibrahim Baruni

Lithuania: Nora Vitkuniene

Luxembourg: Jean-Baptiste Brekelmans

Malawi: Clement L. Mononga

Malaysia: Jeyapalan Kasipillai

Malta: Dr. Antoine Fiott

Mauritius: Ram L. Roy

Mexico: Jaime Gonzalez-Bendiksen; Koen van ’t Hek

Middle East: Aziz Nishtar

Monaco: Eamon McGregor

Mongolia: Baldangiin Ganhuleg

Morocco: Mohamed Marzak

Myanmar: Timothy J. Holzer

Nauru: Peter H. MacSporran

Nepal: Prem Karki

Netherlands: Eric van der Stoel; Michaela Vrouwenvelder; Jan Ter Wisch

Netherlands Antilles: Dennis Cijntje; Koen Lozie

New Zealand: Adrian Sawyer

Nigeria: Elias Aderemi Sulu

Northern Mariana Islands: John A. Manglona

Norway: Frederik Zimmer

Oman: Fudli R. Talyarkhan

Panama: Leroy Watson

Papua New Guinea: Lutz K. Heim

Philippines: Benedicta Du Baladad

Poland: Dr. Janusz Fiszer; Michal Tarka

Portugal: Francisco de Sousa da Câmara; Manuel Anselmo Torres

Qatar: Finbarr Sexton

Russia: Scott C. Antel

Saint Kitts-Nevis: Mario M. Novello

Saudi Arabia: Fauzi Awad

Serbia and Montenegro: Danijel Pantic

Sierra Leone: Shakib N.K. Basma; Berthan Macaulay

Singapore: Linda Ng

Slovakia: Niko Härig

South Africa: Peter Surtees

Spain: Cristian Óliver Lucas-Mas; Florentino Carreño; Sonia Velasco

Sri Lanka: D.D.M. Waidyasekera

Sweden: Leif Mutén

Switzerland: Thierry Boitelle

Taiwan: Yu Ming-i

Trinidad & Tobago: Rolston Nelson

Tunisia: Lassaad M. Bediri

Turkey: Mustafa Çamlica

Turks & Caicos Islands, British West Indies: Ariel Misick

Uganda: Frederick Ssekandi

United Arab Emirates: Nicholas J. Love

United Kingdom: Trevor Johnson; Nikhil Mehta; Tom O’Shea

United States: James Fuller

U.S. Virgin Islands: Marjorie Rawls Roberts

Uruguay: Dr. James A. Whitelaw; Alberto VarelaVAT Issues: Francesco Bonichi; Richard AinsworthVanuatu: Bill L. HawkesVenezuela: Ronald Evans; Pedro Palacios RhodeVietnam: Frederick BurkeZambia: W Z MwanzaZimbabwe: Prof. Ben Hlatshwayo


(C) Tax A


