Tax Treaties (Fall 2015) Professor Brauner. First Tentative Syllabus

Transcription

1 Tax Treaties (Fall 2015) Professor Brauner First Tentative Syllabus Required Text: * 2010 OECD Model Convention and Commentaries available through the OECD library database * 2006 United States Model Convention and the Treasury s Technical Explanation available on the web or through the Tax Analysts database. * 2011 UN Model Convention and Commentaries available on the web or through the Tax Analysts database. * Current Internal Revenue Code and Regulations * Global Tax Treaty Commentary ( GTTC ) available through the IBFD platform. * All other materials are posted on the course s TWEN site, including weekly reading assignments Class I: Introduction, History and the Models a. Treaties in International Law and the Vienna Convention b. History c. Model Conventions d. Protocols and Renegotiations Familiarize yourself with: (a) OECD Model Convention (b) Vienna Convention on the Law of Treaties ( VCLT ) Guiding Questions (These questions are intended to prepare you to class. You should be prepared to orally respond in class. You may be unsure whether you can comprehensively answer these questions do not worry about it, just do your best (for now )): 1. What is a treaty? 2. Are U.S. tax treaties subject to the VCLT? 3. What is the legal status of tax treaty signed by the U.S. under U.S. law? 4. What are the purposes of tax treaties? 5. What exactly is the concern with double taxation? 6. What is the distinction between juridical and economic double taxation? 7. What double taxation is relieved by tax treaties? 8. What is the exact effect of tax treaties? 9. How does a tax treaty come into effect in the U.S.?

2 10. Why do we sign tax treaties? 10A. Are tax treaties necessary to accomplish their purposes (articulated in Q4)? 11. Think about the relationship between tax treaty provisions and domestic law? 12. What is tax treaty override? 13. What happens when a tax treaty permits a country to tax income that would otherwise be exempt under its domestic law? For example, article 10 permits a withholding tax on dividends. May a country that domestically does not tax dividend income require that its resident companies withhold tax on dividends paid to residents of their treaty partners? 14. Read IRC 163(j), 884, and Treas. Reg Do they represent treaty override? 15. Read art. 1 of the 2010 OECD model convention. Can a U.S. LLC, wholly owned by a Canadian individual, and operating a warehouse in Mexico (its sole source of income) enjoy the benefits of the treaty between the United States and Mexico in order not to pay tax on its income above in Mexico (read also articles 4, 5, and 7 of the 2010 OECD model and assume that all relevant treaties are identical to this Model). 16. A is an individual citizen of country X. He works in country Y (just across the border of his hometown located in country X) as a technical service provider mostly for clients of corporation B that resides in country Z, out of an office located in country Y. 30% of his time he spends in another neighboring country, P, helping similar clients. A was trained for his very specific job in country T, and is required to travel for continuous training to country T at least 4 times a year, for three days of training each time. Training is done by a service provider of corporation B, corporation C that is resident in country T. Both corporations B and C are 50% owned by corporation D that resides in country U (the rest of their shares are owned by the public). Which tax treaties may be relevant to the above simple scenario and how? 17. May a resident of a treaty country claim an exemption under a tax treaty in his country of residence with respect to income not taxed to him in the country of source? Class II: Legal Status and Scope Legal Status Substantive Scope Personal Scope The Savings Clause Treaty Shopping and Limitation on Benefits (postponed) Commentaries Observations and Reservations Familiarize yourself with: U.S. Model Convention

3 Questions: 1. What is the legal status of the OECD Model? (Is it a treaty?) 2. What is the legal status of the OECD Model Commentaries? 3. What is the legal status of the reservations and observations on the OECD Model? 4. What is the legal status of the U.S. Model? 5. May X, a U.S. citizen resident of Canada rely on a reservation made by the U.S. on the OECD Model Convention to benefit from the U.S.-Canada treaty? How about the Canada-Germany treaty? Or the U.S.-Germany treaty? 6. May an Israeli resident rely on a change made by the 1992 OECD Commentaries to the former version to benefit from the 1975 U.S.-Israel tax treaty? Does the fact that the treaty came into force in 1995 change your answer? 7. May treaty partners agree about an interpretation of an in force tax treaty that differs from the commentaries interpretation? 8. Assume that a treaty includes a definition of interest income yet does not include nonvoting nonparticipating preferred in it. How should one tax a distribution on such shares? 9. What if a treaty does not include a definition of interest (or dividend) income under the above circumstances? 10. The term employment is not defined in most tax treaties. It is essential to interpret article 15. A is an individual scientist who works on land surveys exclusively in his state of resident R. Assume that he is doing surveys that in turn are sold by corporation X to clients worldwide. Corporation X is resident in country X. A provides his services solely to corporation X and effectively cannot be employed in his profession y any other entity in country R. He is not considered an employee of X under the laws of country R yet he is considered an employee of X under the laws of country X. Should article 7 or 15 govern his income from the abovementioned services provided? 11. A is a citizen of the U.S. and resident of Canada. She leaves in Canada and has not been in the U.S. in the last 3 years. She owns no U.S. property. She owns stock of COKE. Coca Cola wishes to distribute (Dividend) 100 USD to her on the stock. How much tax should the company withhold under the U.S.-Canada treaty? 12. Assume now that she is not a citizen but rather holds a green card. Has your answer to 11 changed? 13. Assume now that she lives in Toronto and travel for work to the U.S., spending 185 days a year partly in the U.S. How does this fact change your answer to 11? 14. Assume also that she rents a studio apartment in Buffalo, NY, in which she spends about 25 nights a year. How does this fact change your answer to 13?

4 15. Corporation X was organized under the laws of Delaware. It is headquartered in the UK, its board comprises of three UK residents and it is owned 75% by the same individuals. It generated in 2014 $100 of capital gains from the sale of mine in France. What country may tax the gain? Assume that the US-France/US-UK/UK-France treaties are all identical to the OECD Model. Class III: Business Income Familiarize yourself with the U.N. Model Convention Questions: 1. What is the effect of article 5? 2. XYZ corporation (Delaware) rents an office in Basel, Switzerland. It is a 100 sq. ft. shack near the train station. It has a new large sign: XYZ branch, Switzerland and is attended solely by individual A, who comes once a week to make sure the shack is in place and to wipe clean the sign. He is paid $50 a month for this service and he holds the title of sole director of the branch in Switzerland. What are the tax implications of the above facts for XYZ corporation? 3. What is the effect of article 7 when combined with article 5? 4. X, a country X company, together with Y, a country Y company, build a pipeline from Canada through the U.S. to Mexico. None of the product channeled through the pipeline is sold in the U.S. X constructs the pipeline from Canada to Utah and Y comes from the other direction from Mexico to Utah. They meet and complete the project, which they run completely independently of each other in 11 months. They are paid by the governments of Canada and Mexico, respectively. Are there any U.S. tax consequences for this project? 5. X is a country X corporation in the shipping business. It uses a delivery dock at a U.S. customer s warehouse located in Norfolk, VA, every day for a number of years for the purpose of delivering goods purchased by that customer. Do these facts trigger a PE for X in the U.S.? 6. X, a country X company builds small warehouses for a specialized industry. Assume that it built two of these consecutively during 2013, for two separate clients near a U.S. port. Staring exactly on 1/1 and completing exactly on 12/31. A survey team spent 9 days assessing the feasibility of the project during December 2012 and eventually signed both contracts on behalf of X on 12/31/2012. Does X have a PE in the U.S. in 2013? 7. X, a country X company is in the high-end care business. Its U.S. presence includes: a show room in the single most expensive (in terms of rent) spot on 5 th avenue, New York, NY, a $250m storage and maintenance facility in the Hamptons, and a state of the art delivery facility in a nearby private port. The company is owned by individual A, an X country resident, but it is run daily primarily by the children of A, who reside and operate out of a lavish suite in the Plaza hotel in Manhattan. Does X have a PE in the U.S.?

5 8. How do they change the tax consequences of a foreign investment in the U.S. by a resident of a treaty country when compared to an investment by a non-treaty investor? 9. In what way is the agency PE clause different from the rest of article 5? 10. What distinguishes dependent from independent agents? 11. Think: is the difference meaningful in terms of base division among countries? 12. Does it matter that the treaty defines (or not) the term in/dependent agent? Assume that A, a U.S. citizen is an expert software vendor that exclusively sells in the U.S. the product of company F, Company F is a resident of F country with which the United States has a tax treaty modelled after the OECD Model. A is F s exclusive vendor in the U.S. He is not permitted to sell elsewhere or to sell competing products. Company F sells the product to A for $60, and he in turn must sell it to his customers for $100. He is not allowed to give discounts or increase the price. How are the sales of the product taxed in the U.S.? 13. Assume now that company F s product is the world leading software for the relevant business. Does that change you answer? 14. Assume, in addition, that A is permitted, but does not, sell competing products? 15. Assume alternatively that A sells competing, inferior and cheaper products produced by a country X company that is 40% owned by company F. 16. Lord A, a Billionaire and a U.K. resident who has not worked a day in his life convinces the members of band X, all of which members are U.S. residents, to serve as their main promoter in the U.K. for a 1 pound salary a month. What are the likely tax implications of these facts? 17. X, a country X company sells cheap hand held computers to U.S. customers over the internet, shipped by mail (assume that all customs issues are fine). They also provide phone support from country X. Almost all of its customers use that support at least once a year. Does X have a PE in the U.S.? 18. Does the fact that X has a U.S. constructed and hosted website change your answer? 19. Does the fact that many customers require assistance provided by an independent U.S. computer support corporation (paid solely by X) change your answer? 20. Would the fact that X rents a mirror server located in the U.S. for cases when its main server, located in Bermuda, is dysfunctional (a situation that had never occurred) changes your answer?