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3.1  Section 1 of the Constitution of the Republic of South Africa, No. 108 of 1996 (“the Constitution”) makes it clear that the rule of law and principle of legality form part of the cornerstone of the Constitution and SARS’ administrative action and conduct.

3.2  Section 2 of the Constitution states that not only law, but conduct by SARS, must be consistent with the Constitution, otherwise it is invalid.

4      Section 195 of the Constitution sets out the Constitutional obligations SARS must meet as set out below:

4.1  SARS must display a high degree of professional ethics, which means collegiality between SARS, the taxpayer and the taxpayer’s advisors, so that a lawful and purposeful scope of audit is achieved. In this regard, the taxpayer seeks more information from SARS below as to the scope and purpose of this audit;

4.2  there must be an efficient and economically effective use of resources being, primarily, manpower – which is not only on the part of SARS but also that of the taxpayer. It is important to note that the taxpayer does not have a large tax department which can dedicate extensive time and people to continuous correspondence and queries emanating from SARS in this audit, hence the precise scope and purpose of the audit should be made known to the taxpayer to ensure proper management of its resources by both SARS and the taxpayer.

4.3  the obligations imposed on SARS to act in an impartial, fair and equitable manner without any bias. It is practice for SARS to develop a scope and purpose for any audit which should be applied in an impartial manner towards all taxpayers, the position of this taxpayer should be no different to this internal procedure being applied to other taxpayers. Furthermore, our concern is that what tends to happen is assessors are appointed, conduct the audit and issue a letter of findings. The taxpayer then has an opportunity to submit a response but that response is reviewed by the assessor team, which clearly demonstrates a risk of a strong bias against the taxpayer because the very work performed by the assessors is criticized. We therefore request an undertaking that a senior SARS official will be engaged to review our response and in light of the extensive nature of the audit, we also want an opportunity to present in person our response to SARS’ letter of findings at the conclusion of this matter to a senior SARS official as well.

4.4  SARS must be accountable. We therefore request, and are entitled to, reasons for this audit – particularly the scope and purpose of the audit.

4.5  SARS must be transparent. Accordingly, please explain the tax risk research carried out to subject the taxpayer to this audit, as well as the reasons therefor.

5      In order to address and support the obligations imposed on SARS, we request the following additional information:

5.1  A letter of authorisation for the assessors conducting this investigation, any other official who expects to receives reports in respect hereof, as well as the senior SARS official in charge of this matter;

5.2  Adequate reasons for the scope and purpose of this audit, in line with SARS’ internal guidelines, as requested above; and

5.3  An undertaking that there will be a letter of findings at the conclusion of the audit and that our detailed response will not only be presented in writing to SARS but we will be entitled to make a presentation to the SARS senior official concerned.

6      As per our internal risk processes, we have discussed your request for information with our legal advisors. They have advised that in order for us to establish the lawfulness, fairness and reasons for the request for information, we should seek responses to the following questions from SARS, prior to providing any information. These questions will also assist SARS in addressing the scope and purpose of the audit and give us a better understanding of SARS’ intention in respect thereof:

6.1  Do objective criteria exist to justify SARS’ purpose to embark upon the investigation of this taxpayer?

6.2  Precisely what purpose is sought?

6.3  What concrete evidence exists to justify this investigation and why should it not be perceived as a fishing expedition?

6.4  State whether the disclosure of the requested information is mandatory or voluntary?

6.5  Explain why and how the enquiry for information is relevant to the actual purpose and scope of the audit?

7      We fully intend to comply with our lawful obligations to SARS. However, since the proposed audit and request for information/documentation of this taxpayer will consume a significant amount of time, you will appreciate our concern to ensure that SARS is acting lawfully and in accordance with its constitutional duties.

8      Apart from the legal obligation that SARS in our view has to provide the reasons we have requested, such a reply will make future interaction between SARS and us on the subject of your audit more meaningful for both parties. If we understand your reasons we may be able to furnish additional explanations that will avoid the drawing of incorrect conclusions and the adopting of entrenched positions.

9      If, upon receipt of your reply, we conclude that we are in law obliged to proceed with the audit and completion of the Payroll and VAT questionnaires, we shall confirm a suitable date and time and identify the documents and information you have requested as best we can so that there will be no delay.

10   We look forward to hearing from you.

Yours faithfully

…………………..

IF SARS REFUSES TO FURNISH YOU WITH THE INFORMATION YOU HAVE REQUESTED PER THE ABOVE LETTER, THEN YOU ARE TO WRITE TO SARS AS FOLLOWS:

Please note that a formal PAIA request may be made to the information officer of SARS in Pretoria for the information sought in our letter. Accordingly this matter, and any further steps SARS wishes or intends to take, must be held in abeyance pending the outcome of the PAIA request.

YOU WILL THEN NEED TO LODGE A PAIA REQUEST TO THE INFORMATION OFFICER AT SARS’ HEAD OFFICE IN PRETORIA RESTATING WHAT HAS SPECIFICALLY BEEN REQUESTED IN THIS LETTER. PLEASE DOWNLOAD THE PAIA MANUAL FROM www.sars.gov.za AND FOLLOW THE INSTRUCTIONS CAREFULLY. SARS MUST FORMALLY RESPOND TO SUCH A PAIA REQUEST, AND UNTIL SARS DOES SO, THE TAXPAYER HAS GROUNDS NOT TO PROCEED WITH THE AUDIT/FURNISHING OF INFORMATION ETC].

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originally POSTED BY JIMMY SEXTON | MAY 11TH, 2013 at  http://nomoretaxtrouble.com/blog/flexible-foreign-llc/

People form foreign Limited Liability Companies (LLC) for a variety reasons. They do this because foreign LLCs are very flexible entities and can be used for anything from holding a portfolio to running a business. Foreign LLCs generally offer superior asset protection combined with tax flexibility. This publication is intended to discuss how foreign LLCs are taxed. There are significant differences compared to domestic LLCs and if you or your tax advisor aren’t familiar with these differences you could find yourself with a serious tax problem.

As an American, anytime you move assets overseas, earn income overseas or have an interest in a foreign entity – including an LLC – complex tax rules are triggered and possible reporting requirements arise. This publication takes an in-depth look at how foreign LLC‘s are taxed. A foreign LLC is what is known in the tax world as an eligible entity for U.S. entity classification purposes. Eligible entities are able to choose how they will be treated by the U.S. for tax purposes.

A foreign eligible entity with one owner can choose to be taxed as a disregarded entity or a corporation. A foreign eligible entity with more than one owner can choose to be taxed as a partnership or corporation. If a foreign eligible entity has not made an entity classification election, the default classification applies.

The default classifications for foreign eligible entities are as follows:

1. Partnership – if two or more owners and at least one owner does not have limited liability.

2. Corporation – if all members have limited liability.

3. Disregarded Entity – one owner who does not have limited liability.

The default classification rules are important because they are different from how US based LLCs’ default classifications.

The default classifications for a US LLC are as follows:

1. Partnership – more than one owner.

1. Disregarded Entity – one owner.

As you can see the default classifications for foreign LLC‘s and US LLC‘s are quite different. This is very important to note because many people think the US default LLC classifications apply to foreign LLC‘s as well; that‘s not the case. We will give a brief description of how the U.S. taxes foreign disregarded entities, foreign partnerships and foreign corporations. As you will see the taxation between the different tax classifications is quite different and can have potentially negative consequences if the proper tax classification is not chosen for your specific situation. 

TO ESTABLISH WHICH entities are regarded as Foreign LLC where a taxation election can be made see

http://en.wikipedia.org/wiki/Entity_classification_election

FOREIGN DISREGARDED ENTITIES

U.S. taxation of foreign disregarded entities is fairly simple. A foreign disregarded entity is nonexistent for US tax purposes, so a U.S. owner of a foreign disregarded entity reports its income and expenses on his/her/its tax return. For foreign disregarded entities, a U.S. owner must file with their tax return, Form 8858, Information Return of US Persons With Respect To Foreign Disregarded Entities.

An important thing to note is that foreign LLCs are not disregarded for FBAR purposes. If a foreign disregarded entity has a foreign financial account the U.S. owner as well as the LLC itself must file an FBAR.

FOREIGN PARTNERSHIPS

A U.S. partner in a foreign partnership is taxed on his or her distributive share of partnership income in the year it’s earned, regardless of whether or not the income is actually distributed. Losses from a foreign partnership are available to a U.S. partner to offset income. Furthermore, a U.S. partner will be entitled to his or her proportionate share of foreign tax credits for foreign taxes paid or accrued by the partnership. For foreign partnerships, certain U.S. partners must file, with their tax return, Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships.

FOREIGN CORPORATIONS

Generally speaking, earnings and profits of a foreign corporation are not taxed by the U.S. until dividends are distributed to its U.S. shareholders; at which point the shareholders pay tax on the dividends received; i.e. the tax is deferred. If, however, the foreign corporation is considered a controlled foreign corporation (CFC), its U.S. shareholders could have to pay tax on their pro rata share of certain types of income earned by the CFC, regardless of whether or not that income was distributed to the U.S. shareholder. In essence, the U.S. shareholder could wind up paying tax on income not actually received. U.S. shareholders of a CFC with Subpart F income must include as income their pro rata share of Subpart F income. The income inclusion is reported as a dividend on Schedule B of the U.S. shareholders’ U.S. tax return. The U.S. shareholders pay tax on the inclusion amount at their applicable tax rate.

What is a CFC you wonder? A CFC is a foreign corporation in which more than 50% of its combined voting rights or value are directly, indirectly or constructively owned by U.S. shareholders. For this purpose, a US shareholder is a U.S. person who directly, indirectly or constructively owns 10% or more of the CFC’s total voting rights or stock value.

Direct ownership is exactly what the name infers; stock owned directly by that person. Indirect ownership is stock owned indirectly through a foreign corporation, partnership, trust, estate or other entity in which the person owns an interest. Constructive ownership is ownership through attribution; family members’ ownership can be attributed to other family members. A person is also considered to constructively own stock owned by a foreign entity in which that person owns an interest. Attribution can also occur from a shareholder, partner or beneficiary to a corporation, partnership, trust or estate. There are several different categories where deferral is not available; most notably, Subpart F, which we will briefly touch on next.

The most common type of Subpart F income is passive income, such as dividends, interest, rent, royalties and annuities. A U.S. shareholder of a CFC is required to report his or her pro rata share of these types of income whether or not actually received. There are several other types of non-deferrable income as well as special rules when disposing of CFC stock, but they are beyond the scope of this discussion. U.S. persons who transfer tangible property, intangible property, cash or securities to a foreign corporation may be required to file Form 926. U.S. persons that are considered U.S. shareholders of a foreign corporation may have to file, with their tax return, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

As you can see the various tax classifications are quite different from one another and each has their own advantages and disadvantages. The correct classification for one person may not be the correct the classification for another. For example, someone looking to protect their portfolio within a foreign LLC would likely want to choose disregarded entity status so that all income flows through to them and does not get caught up in the CFC rules, which could have negative tax consequences due to Subpart F. Conversely, a business owner operating a business may want to choose corporation status to allow for deferral of business profits.

For the reasons outlined above, it is important that you consult an experienced international tax advisor to determine the proper classification of your foreign LLC. Furthermore, your international tax advisor can advise you of your compliance requirements – i.e. what forms need to be filed – and ensure they are filed timely and accurately.

So, if you already have a foreign LLC or are planning on forming one and have questions about what tax classification to choose – give us a call, we can help.

The post USA The Flexible Foreign LLC appeared first on Tax Risk Management.

Here are the interim tax survey results:

1. Do you have an in-house tax team?

YES – 45%

NO – 55%

2. What degree is your business tax compliant

100% – 33%

Don’t know – 10%

3. Do you have a documented tax strategy?

YES – 53%

NO –  47%

4. Regular tax risk management meetings?

YES – 57%

NO – 43%

5. Who are tax management meetings other than CFO and tax managers?

Outside accountants? 67%

Outside tax attorneys? 33% – THIS IS WORRISOME AS WITHOUT this party present – no legal professional privilege – SARS can attach the minutes of the meetings!  For more information contact daniel@TaxRiskManagement.com

6. Is your tax risk management report subject to attorney/client privilege?

YES – 25%

NO – 75%

7. SARS audit in last 2 years – 60% say YES

8. SARS information verification – 76% say YES

9. Object to a SARS revised assessment 62% say YES

Note: On these last three points, www.TaxRadar.net provides tax audit and tax litigation insurance for as little as R150 per month with cover starting at R200,000 per year for professional fees if you are subjected to a SARS audit or tax litigation. Contact corinne@tax-radar.com for more information.

The post Tax Risk Management Survey results appeared first on Tax Risk Management.

Below are extracts from the most recent SARS Annual Report.

Highlights:

• 843 972 taxpayers have been penalised with a total penalty amount of R3.9 billion
• 52.5% of taxpayers received administrative penalties and 96% of these taxpayers have paid R862 million for penalties due
• 26 612 audit cases completed against the target of 14 900, an achievement of some 79% above target within only nine months
• an improvement in the audit hit rate, with an achievement of 83% against the target of 75%
• the average assessment per auditor and per case for the 2011/12 financial year was R11.7 million and R157 994

Click here to take a survey on tax audits

1.2.5 CUSTOMS AUDITS
During the reporting period, 2 806 audits were conducted, comprising of 1 069 risk audits and 1 737 regulatory audits.Due to the continued improvements delivered by the modernisation journey to enhance the speed and accuracy of the risk engines, a 59% success rate was achieved during post clearance audits on cases encompassing either invalid tariffs or valuations (risk audits). A 57% success rate was achieved through post clearance audits pertaining to customs storage and manufacturing warehousing (regulatory audits).

Tax and Customs compliance
The true story of the growth in tax contributions is reflected in the figures since the birth of our democracy 18 years ago as
follows:
• The number of registered individual taxpayers increased from 1.7 million in 1994 to more than 6 million in 2010. This
number has doubled following policy changes in 2011 to register all individuals in the country who are formally employed
(13.7 million individuals by 31 March 2012) despite changes to the tax thresholds
• Over the same period the number of companies registered for income tax increased from 422 000 in 1994 to more than
2 million in 2011/12
• Registered VAT vendors increased from 397 000 in 1994 to 664 000 at present. This number has increased while the
threshold for VAT registrations has also risen substantially to the present R1 million turn-over per year
• The number of registered employers grew from 177 000 in 1994 to 385 000 to date

The Modernisation Programme has also significantly improved the ability of SARS
to detect and deter non-compliance through its risk engine including:
• VAT vendors selected for further verification of their refund claims are requested to submit documents in support
of their declaration or given the option to revise their declaration. In the year under review this process resulted in
adjustments in SARS’s favour of almost R12 billion
• Since the introduction of our new risk engine for CIT in November 2011 we have seen adjustments in SARS’s favour
of almost R500 million until 31 March 2012
• Our PIT risk engine and process resulted in adjustments of over R2 billion this year in SARS’s favour

1.3.4 ADMINISTRATIVE PENALTIES
A new administrative penalty regime was introduced in 2009 to improve compliance with administrative requirements
including on-time filing. The system is based on the concept of proportionality, i.e. the penalty amount levied on noncompliant taxpayers is linked to the degree of the transgression. The administrative penalty regime in SARS was introduced in
a phased approach with penalties levied for outstanding income tax returns in the first phase. Since the first penalties were
levied in January 2010, 843 972 taxpayers have been penalised with a total penalty amount of R3.9 billion. During the last
financial year penalties in the amount of R2.1 billion were levied in respect of 723 844 taxpayers.
A total of 52.5% of taxpayers who received administrative penalties have subsequently submitted the outstanding returns
and 96% of these taxpayers have paid R862 million for penalties due, of which R553 million was received in the 2011/12
financial year.

1.3.7.2 AUDIT COVERAGE
Since the introduction of the revised audit architecture in which traditional “audits” were divided into assurance and audit,
these changes have yielded productivity improvements in the audit area with a total number of 26 612 audit cases completed
against the target of 14 900, an achievement of some 79% above target within only nine months.
This financial year also saw an improvement in the audit hit rate, with an achievement of 83% against the target of 75%. The
total audit assessments amounted to R4.7 billion, consisting of revised assessments to an amount of R4.2 billion and savings
through the reduction of assessed losses or refunds of R491 million.

Also attributed to the new architecture changes, the average assessment per auditor and per case for the 2011/12 financial
year was R11.7 million and R157 994, respectively, as compared to R7.1 million and R72 124 for the previous year.
Debt collected by Audit amounted to R1.4 billion for the 2011/12 financial year. This is R524 million more than collected the
previous year. A total of R400 million was collected in the month of March 2012 due to new collection initiatives introduced.
Forensic audits completed in the financial year resulted in assessments of R1.5 billion, relative to a target of R450 million (cash
collections amounted to R112 million). The complex nature of forensic audit cases often results in significant time being spent
to finalise these cases. Included in the assessments of R1.5 billion is an amount of R164 million which related to assessments
raised from forensic audits carried out on significant cases and High Net-Worth Individuals.

The post South Africa – Statistic extracts from the SARS Annual report appeared first on Tax Risk Management.

• THE MORE DETAILED EXPLANATIONS APPEAR BENEATH THIS LIST
• Australia
  Treasury consults on modern global economy
• Bahrain; Estonia
  Treaty between Bahrain and Estonia ratified by Bahrain
• Brazil
  Tax deduction for donations and sponsorships to PRONON and PRONAS – Regulations issued
• Czech Republic; Kazakhstan
  Protocol to treaty between Czech Republic and Kazakhstan – second round of negotiations
• EFTA; Norway
  EFTA Surveillance Authority approves Norwegian rules on financing municipal waste collectors
• Egypt; Iraq
  IPA between Egypt and Iraq signed
• European Union
  Data on tax-to-GDP ratio in EU-27 and EA-17 published
• European Union; Czech Republic
  Preliminary ruling requested from ECJ regarding Czech rules on international hiring-out of labour – case number available
• Gibraltar; France; Germany; Italy; Spain; United Kingdom
  Gibraltar agrees to pilot scheme for automatic exchange of information
• Greece; European Union; International Monetary Fund
  New duty imposed on buildings powered by electricity
• Greece
  Extension of deadlines for certain income tax returns and 2012 VAT returns
• Guernsey; France; Germany; Italy; Spain; United Kingdom
  Guernsey interested in participating in pilot scheme for automatic exchange of information
• Hungary
  Amendments to Act on a More Competitive District Heating
• Hungary
  New tax rate for casinos
• India; Gibraltar
  Exchange of information agreement between Gibraltar and India enters into force
• India; United Arab Emirates
  Protocol to treaty between India and United Arab Emirates entered into force
• Isle of Man; France; Germany; Italy; Spain; United Kingdom
  Isle of Man agrees to pilot scheme for automatic exchange of information
• Isle of Man; Singapore
  Treaty between Isle of Man and Singapore enters into force
• Japan; Saudi Arabia
  IPA between Japan and Saudi Arabia signed
• Kenya
  VAT Appeals Tribunal rules rent on part of premises to provide exempt services not self supply
• Korea (Rep.); Turkey
  FTA between Korea (Rep.) and Turkey enters into force
• Netherlands
  Updated annex to Decree on classification of foreign entities published
• Netherlands; European Union
  Preliminary ruling requested on whether first occupation of a building by a municipality constitutes a supply for consideration if building is only for a small part used for taxable activities
• New Zealand
  Draft interpretation statement on definition of “shareholder decision-making right”
• South Africa
  Legislative proposal to curb excessive interest tax deductions
• United Kingdom
  VAT: supply of motor breakdown insurance services – Supreme Court dismisses taxpayer’s appeal in WHA case

Australia

Report from Tom Toryanik, Sydney

Treasury consults on modern global economy

The Treasury released an Issues Paper on the Implications of the Modern Global Economy for the Taxation of Multinational Enterprises.

The paper says that there is a growing concern that the key rules of international taxation may not have kept pace with the evolution of the global economy. Noting this concern, the paper seeks comments on the following three questions:

Submissions are sought by 31 May 2013, with the Treasury Scoping Paper expected to be released in late June 2013.

Bahrain; Estonia

Report from Monia Naoum, IBFD Research Associate

Treaty between Bahrain and Estonia ratified by Bahrain

On 29 April 2013, Bahrain ratified the Bahrain – Estonia Income Tax Treaty (2012), by way of Decree 11 of 2013. Further details of the treaty will be reported subsequently.

Brazil

Report from Maria Bocachica, IBFD Research Associate

Tax deduction for donations and sponsorships to PRONON and PRONAS – Regulations issued

Decree No. 7,988/2013, published in the Official Gazette of 18 April 2013 and in force as of that date, regulates articles 1 to 13 of Law 12,715/2012 concerning the National Programme for Oncologic Support (Programa Nacional de Apoio à Atenção Oncológica, PRONON) and the National Programme for Support of the Physically Disabled (Programa Nacional de Apoio à Atenção da Saúde da Pessoa com Deficiência, PRONAS). Details of the provisions regarding the deduction of donations and sponsorships to PRONON and PRONAS for income tax purposes, are summarized below:

Czech Republic; Kazakhstan

Report from our correspondent Mr Vaclav Zika, Prague

Protocol to treaty between Czech Republic and Kazakhstan – second round of negotiations

The second round of negotiations for an amending protocol to update the Czech Republic – Kazakhstan Income and Capital Tax Treaty (1998) is scheduled to take place from 13 to 16 May 2013, in Prague. Further details will be reported subsequently.

Note. Negotiations to update the 1998 treaty started in 2008 and were concluded by initialling of an amending protocol on 3 June 2009. These negotiations were not finalized.

EFTA; Norway

Report from Laura Pakarinen, IBFD Senior Research Associate

EFTA Surveillance Authority approves Norwegian rules on financing municipal waste collectors

On 2 May 2013, the EFTA Surveillance Authority (the Authority) announced that it had closed a case concerning the financing of municipal waste collectors. The case was closed after Norway agreed to amend its legislation before 1 January 2014 as to comply with the State aid rules under the EEA Agreement.

The Authority found that the current system of financing of the municipal waste collectors in Norway may lead to cross-subsidization of economic activities because some municipal waste collectors that are funded by the state also engage in economic activities (i.e. bid for household waste contracts in public tenders, provide other services on the market and collect household waste in their own municipality).

Norway has agreed to implement the following changes into the current system as required by the Authority:

Egypt; Iraq

Report from Monia Naoum, IBFD Research Associate

IPA between Egypt and Iraq signed

On 2 May 2013, Egypt and Iraq signed an investment protection agreement (IPA). Further details will be reported subsequently.

European Union

Report from Tonia Pediaditaki, IBFD Senior Research Associate

Data on tax-to-GDP ratio in EU-27 and EA-17 published

On 2 May 2013, Eurostat issued a news release on the overall tax-to-GDP ratio in the 27 EU Member States, revising the previous news release, following a correction of relevant data on France and Slovakia.

According to Eurostat published information, the overall tax-to-GDP ratio in the EU-27 stood at 38.8% in 2011, from 38.8% in 2010 and 38.4% in 2009. The overall tax ratio in the Eurozone (EA-17) increased to 39.5% in 2011, up from 39.0% in 2010 and 39.1% in 2009.

The tax burden varies among Member States, ranging in 2011 from less than 30.0% in Lithuania to 42.0% in Austria.

Details of the report will be published subsequently.

European Union; Czech Republic

Report from Tamas Kulcsar, IBFD Research Associate

Preliminary ruling requested from ECJ regarding Czech rules on international hiring-out of labour – case number available

As previously reported, see Czech Republic-4, News 2 April 2013, reference has been made to the Court of Justice of the European Union (ECJ) by order of the Czech Supreme Administrative Court (Nejvyšší správní soud) for a preliminary ruling in the case ACO Industries Tábor s. r. o. v. Appellate Tax Directorate (Odvolací finanční ředitelství) (C-80/13) concerning the compatibility of the rules on international hiring-out of labour with EU law.

The referring court requested the ECJ to answer the following questions:

“Do Articles 18, 45, 49 and 56 of the Treaty on the Functioning of the EU (TFEU) preclude provisions under which an employer established in one Member State is obliged to make advance payments of tax on the income of workers (nationals of another Member State) temporarily assigned to the employer by a temporary work agency established in another Member State through a branch established in the first Member State?

Do Articles 18, 45, 49 and 56 of the Treaty on the Functioning of the European Union preclude provisions under which the basis of assessment of such workers is set at a flat rate of at least 60% of the amount invoiced by the temporary work agency in cases where the intermediation fee is included in the amount invoiced?

If the answer to the first or second question is yes in the affirmative, is it possible, in a situation such as the present case, to restrict the said fundamental freedoms for reasons of public policy, public security or public health, or for the effectiveness of fiscal supervision?”

This case is the first recent case from Czech Republic out of the two concerning international hiring-out of labour. On 30 January 2013, the Ostrava Regional Court also made a request in the case Strojírny Prostějov a.s. v. Odvolací finanční ředitelství (C-53/13). For previous coverage on that case, see Czech Republic-1, News 26 April 2013.

Gibraltar; France; Germany; Italy; Spain; United Kingdom

Report from Giulia Gallo, IBFD Research Associate

Gibraltar agrees to pilot scheme for automatic exchange of information

On 2 May 2013, the government issued Press Release No. 289/2013, communicating Gibraltar’s commitment to the pilot scheme for automatic exchange of information, recently announced by the United Kingdom, France, Germany, Spain and Italy (see France-3, News 10 April 2013).

The scheme involves automatic multilateral tax information exchange, based on the model intergovernmental agreement, aiming at the improvement of international tax compliance and the implementation of the US Foreign Account Tax Compliance Act (FATCA), which was developed to counter tax evasion by US residents using foreign accounts (see United States-1, News 12 November 2012).

Further developments will be reported subsequently.

Greece; European Union; International Monetary Fund

Report from Tonia Pediaditaki, IBFD Senior Research Associate

New duty imposed on buildings powered by electricity

On 28 April 2013, a new Greek law has been enacted, which includes measures agreed with the Troika (EU/ECB/IMF) in the framework of negotiations for the next loan instalment to the Greek government. This law introduces a new property tax entitled “Extraordinary Real Estate Special Duty” (the New Duty). The New Duty will be imposed on all buildings that are powered by electricity any time within the period from 1 May to 31 December 2013. The New Duty is imposed on the owner of the real estate property or the holder of usufruct rights on 1 May 2013.

The main features of the New Duty are described below:

The above law has not been yet published in the Official Gazette.

Further developments will be reported subsequently.

Greece

Report from Tonia Pediaditaki, IBFD Senior Research Associate

Extension of deadlines for certain income tax returns and 2012 VAT returns

On 2 May 2013, the Deputy Minister of Finance issued a decision on the extension of deadlines until 15 May 2013 for the submission of:

In order to ensure the e-filing of the VAT returns, all periodical VAT referring to 2012 should have already been submitted and the VAT due should have already been paid by 9 May 2013.

Guernsey; France; Germany; Italy; Spain; United Kingdom

Report from Giulia Gallo, IBFD Research Associate

Guernsey interested in participating in pilot scheme for automatic exchange of information

On 1 May 2013, in a letter to the UK Prime Minister, the Chief Minister expressed Guernsey’s interest in participating in the pilot scheme for automatic exchange of information, recently announced by the United Kingdom, France, Germany, Spain and Italy (see France-3, News 10 April 2013).

The scheme involves automatic multilateral tax information exchange, based on the model intergovernmental agreement, aiming at the improvement of international tax compliance and the implementation of the US Foreign Account Tax Compliance Act (FATCA), which was developed to counter tax evasion by US residents using foreign accounts (see United States-1, News 12 November 2012).

Further developments will be reported subsequently.

Hungary

Report from Tamas Kulcsar, IBFD Research Associate

Amendments to Act on a More Competitive District Heating

With effect from 21 April 2013, the Act on a More Competitive District Heating (Act) has been modified. The amendments have implemented a new tax credit but also broadened the scope of the “Robin Hood Tax”, an income tax levied on certain – mainly energy – suppliers regulated by the Act, to new taxpayers. Accordingly, taxpayers will be able to deduct from the energy tax the mining contribution up to HUF 1.5 billion. Based on the amendments, the definition of “public service provider” – a taxable person – covers water utility service providers, service providers of waste water collection and of waste treatment.

The Act was also substantially changed with effect from 1 January 2013, including an increased 31% tax rate and a new tax credit (the unused part of the development tax credit in corporate tax). For previous coverage, see Hungary-2, News 19 November 2012 and Hungary-1, News 9 July 2012.

Hungary

Report from Tamas Kulcsar, IBFD Research Associate

New tax rate for casinos

With effect from 21 April 2013, a new 10% tax rate of the gambling tax has been adopted to net gambling receipts of casinos, including the receipts from slot machines operated within casinos. With the adoption of the new tax rate, the gambling tax on casinos has been levied progressively. A 30% tax rate applies to annual net gambling receipts up to HUF 10 billion (approximately EUR 33 million) whereas the tax on proceeds exceeding HUF 10 billion is HUF 3 billion plus 10% of the receipts above HUF 10 billion.

India; Gibraltar

Report from our correspondent Shreyas Shah, Ambalal Thakkar & Associates, Mumbai

Exchange of information agreement between Gibraltar and India enters into force

On 11 March 2013, the Gibraltar – India Exchange of Information Agreement (2013) entered into force. The agreement generally applies from 11 March 2013. The entry into force information was published in Notification No. 28/2013 of 1 April 2013 by the Indian Tax Department.

India; United Arab Emirates

Report from IBFD Tax Treaties Unit

Protocol to treaty between India and United Arab Emirates entered into force

On 12 March 2013, the amending protocol, signed on 16 April 2012, to the India – United Arab Emirates Income and Capital Tax Treaty (1992), as amended by the 2007 protocol, entered into force. The protocol generally applies from 12 March 2013.

The entry into force information was published in Notification No. 29/2013 of 12 April 2013 by the Indian Tax Department.

Isle of Man; France; Germany; Italy; Spain; United Kingdom

Report from Giulia Gallo, IBFD Research Associate

Isle of Man agrees to pilot scheme for automatic exchange of information

On 1 May 2013, the Chief Secretary communicated that Isle of Man intends to participate in the pilot scheme for automatic exchange of information, recently announced by the United Kingdom, France, Germany, Spain and Italy (see France-3, News 10 April 2013).

The scheme involves automatic multilateral tax information exchange, based on the model intergovernmental agreement, aiming at the improvement of international tax compliance and the implementation of the US Foreign Account Tax Compliance Act (FATCA), which was developed to counter tax evasion by US residents using foreign accounts (see United States-1, News 12 November 2012).

Further developments will be reported subsequently.

Isle of Man; Singapore

Report from IBFD Tax Treaties Unit

Treaty between Isle of Man and Singapore enters into force

On 2 May 2013, the Isle of Man – Singapore Income Tax Treaty (2012) entered into force. The treaty generally applies from 1 January 2014. For details of the treaty, see Isle of Man-1, News 23 January 2013.

Japan; Saudi Arabia

Report from Monia Naoum, IBFD Research Associate

IPA between Japan and Saudi Arabia signed

On 30 April 2013, Saudi Arabia and Japan signed an investment protection agreement (IPA), in Saudi Arabia. Further details will be reported subsequently.

Kenya

Report from Catherine Mutava, IBFD Research Associate

VAT Appeals Tribunal rules rent on part of premises to provide exempt services not self supply

The VAT Appeals Tribunal gave its decision on 30 April 2013 in the case of National Bank of Kenya Ltd v. Commissioner of Domestic Taxes [Case No. 17 of 2012]. Details of the decision are summarized below.

(a) Facts. The appellant, National Bank of Kenya Ltd (NBK), provides banking and financial services, as its core business, which services are exempt from Value Added Tax (VAT).

NBK is also the registered owner of a commercial building in Nairobi. It occupies and uses part of the building for its banking activities and leases out the rest. The rent received from the leased part is, however, taxable under the VAT Act. NBK accounted for VAT on the rent it received from the leased part of the building. It did not account for VAT on the part of the building it occupies for its banking business.

The Respondent, Kenya Revenue Authority (KRA), was of the view that NBK should have accounted for VAT on the rent attributable to the space it occupied as it amounts to a self supply. KRA raised an assessment on account of this self supply.

(b) Issue. The issue was whether, by occupying part of its own building to provide exempt services, NBK was making a taxable self supply according to section 2(h) of the VAT Act. Section 2(h) defines a “taxable supply” as the appropriation by a registered person of taxable goods or services for his own use inside the business where, if supplied by another registered person, the tax on such goods or services is excluded from the deduction of input tax.

(c) Decision. The Tribunal held that the occupation of the building did not meet the criteria for a taxable “self supply” as defined in section 2(h). In reaching its decision, the Tribunal stated that the input tax that would have been charged on the occupation of the commercial building is not excluded within the meaning of the VAT Act. Instead, the input tax is restricted within the meaning of paragraph 17 of the VAT Regulations, which restricts the input tax incurred in providing exempt services.

Since NBK provides exempt services, the input tax would have been restricted and not excluded. Therefore, the self supply does not meet the definition of a taxable self supply and NBK does not need to account for VAT on the self supply.

Korea (Rep.); Turkey

Report from IBFD Tax Treaties Unit

FTA between Korea (Rep.) and Turkey enters into force

The free trade agreement (FTA) between Korea (Rep.) and Turkey, signed on 1 August 2012, entered into force on 1 May 2013.

Netherlands

Report from Dr. René Offermanns, IBFD Senior Research Associate

Updated annex to Decree on classification of foreign entities published

On 14 April 2013, the Dutch tax administration published an updated annex to Decree No. CPP/2009/519M of 11 December 2009, on the classification of foreign entities (Decree). The Decree lists the criteria used to decide whether a foreign entity must be classified as a transparent or non-transparent entity (see Netherlands-1, News 23 December 2009). This distinction is particularly relevant for the tax treatment of taxpayers holding an interest in a foreign entity. Corporations are always treated as a non-transparent entity, while partnerships are always treated as a transparent entity, which means that the profits are directly attributed to the underlying participants.

For the classification, the laws of the foreign entity’s jurisdiction and the articles of association and bylaws are decisive.

Finally, it must be noted that the list is not exhaustive, but of an indicative nature. Entities who want to obtain certainty in advance can request an advance ruling from the tax authorities.

Netherlands; European Union

Report from Dr. René Offermanns, IBFD Senior Research Associate

Preliminary ruling requested on whether first occupation of a building by a municipality constitutes a supply for consideration if building is only for a small part used for taxable activities

On 25 February 2013, reference was made to the European Court of Justice (ECJ) by the Dutch Supreme Court (Hoge Raad der Nederlanden) in Gemeente ‘s-Hertogenbosch v. Staatssecretaris van Financiën (C-92/13).

The referring court requested the ECJ to answer the following question:

“Should Article 5(7)(a) of the Sixth VAT Directive (77/388) (Article 18(a) of the EU VAT Directive) be interpreted as meaning that supplies are made for consideration in a situation in which a municipality takes first occupation of a building which it has had built on its own land and which it is to use at the rate of 94% for its activities as a public authority and at the rate of 6% for its activities as a taxable person, including 1% for exempt activities to which no right of deduction applies?”

New Zealand

Report from Dr. Kevin Holmes, International Tax Consultant, Wellington

Draft interpretation statement on definition of “shareholder decision-making right”

The Inland Revenue has invited public comment on a draft interpretation statement, “Income tax – whether certain rights conferred by the Companies Act 1993 could give rise to a ‘shareholder decision-making right’”.

The continuity provisions of the Income Tax Act 2007 (ITA) determine a company’s ability to carry forward losses and offset losses with other companies in a group, and its memorandum account credits and excess account credits. The calculation of shareholder continuity under the ITA requires that shareholders’ combined voting interests in a company or companies exceed certain minimum levels over a specified period. The voting interest is the percentage of “shareholder decision-making rights” in the shares held by a person. These are the rights to participate in the decision-making concerning:

Section 36(1) of the Companies Act 1993 (CA) sets out the rights attached to shares, being:

There are two further sections in the CA that give certain rights to shareholders. Section 107 allows the company to take certain action without following procedural requirements if all shareholders agree. Section 117 gives shareholders the ability to vote on matters that affect the rights attached to their shares.

Inland Revenue considers that sections 107 and 117 of the CA do not come within the definition of “shareholder decision-making right”. Section 36(1) is considered the only section to apply in defining the rights.

The closing date for submissions is 7 June 2013.

South Africa

Report from our correspondent Lutando Mvovo, South Africa

Legislative proposal to curb excessive interest tax deductions

The Minister of Finance has released a media statement requesting comments on the proposed rules to curb excessive interest tax deductions. The government is considering a four-part proposal for inclusion in the 2013 Draft Taxation Laws Amendment Bill.

The four identified issues and proposed measures are:

Comments on the draft legislation should be submitted to the National Treasury and the SARS by 24 May 2013.

United Kingdom

Report from Belema Obuoforibo, CTA, ATT, Director, IBFD Knowledge Centre

VAT: supply of motor breakdown insurance services – Supreme Court dismisses taxpayer’s appeal in WHA case

On 1 May 2013, the Supreme Court dismissed the taxpayer’s appeal in WHA Ltd and anor v. CRC.

Facts and legal background. The appellants were part of a group of companies involved in the supply of motor breakdown insurance (MBI) services. They put in place a scheme to minimize the overall VAT liability of the group.

Broadly, under the terms of an MBI arrangement, the insurer would undertake to indemnify the insured against the costs of repairing the insured vehicle in the event of a breakdown. Where the vehicle was taken to a garage for repair, the garage would invoice either the MBI insurer (who would settle direct with the garage) or the insured (who would pay the garage and be reimbursed by the MBI insurer).

The supply of insurance is exempt from VAT, with the result that the MBI insurer is unable to recover any input tax it incurs on supplies of goods and services in the course of its business. This means that, while the MBI insurer has to pay VAT in respect of the repair bill, it cannot recover that input tax. This makes the VAT a real cost to the insurer. Given that there is also a charge to insurance premium tax on premiums received, there is an increased tax liability in respect of such services.

The group (of which the taxpayer company was a part) decided to embark on a VAT minimization scheme to reduce its tax liability.

The scheme was known as Project C. It had two strands. The second strand was only to be brought into action if the first failed.

Under the first strand, the group sought to take advantage of legislation that provided that there would be no VAT burden where the supply of certain insurance and financial services were made to non-EU consumers. These services included claims handling, and the legislation ensured recovery of input tax incurred for the purposes of supplying claims handling services to such non-EU consumers.

The group therefore arranged as follows:

Viscount was the second appellant in the case before the Supreme Court.

The agreement between WHA Ltd and Viscount provided that all claims were to be settled at the expense of WHA Ltd. In practice, WHA Ltd settled the garage bills out of a cash float provided to it by Viscount.

The intended effect of the scheme was that, by exploiting the rules mentioned above dealing with certain supplies to non-EU consumers, WHA Ltd would be able to recover the input tax on the repairs, but (as the supply of insurance is exempt) would not have to charge output tax on the claims handling services made to Viscount.

However, this scheme could only work if the following two main factors were present:

Where factor (a) was present, but not factor (b), the result would be that the tax authorities would expect WHA Ltd to charge output tax on the supply to Viscount. This would be fatal to the scheme, and to prevent such an outcome, the second strand of the scheme would come into play.

The second strand sought to take advantage of VAT legislation that would enable Viscount to recover any output tax it would have had to pay to WHA Ltd had the first strand failed. This would be possible if Viscount (as a non-EU company) was itself making supplies to a non-EU recipient. The group duly ensured that such a recipient was in place – another Gibraltar-based group company known as Crystal Reinsurance. This company in fact reinsured 100% of the risk of the MBI insurance and retroceded 85% of that risk to Viscount.

The Commissioners refused the claims by WHA Ltd and Viscount for the repayment of tax, and the case made its way through the courts. The VAT Tribunal agreed with the Commissioners that neither the first nor the second strand of the VAT scheme was effective. On appeal by the taxpayer, the High Court held that the first strand of the VAT scheme was effective, and as such, the scheme worked to reduce the taxpayer’s VAT liability. The Court of Appeal held that the scheme was abusive, and the taxpayer appealed to the Supreme Court.

Decision. The appeal was dismissed.

The starting point was whether or not there was a supply of repair services from the garages to WHA.

The Supreme Court held that there was no such supply to WHA Ltd. The supply of repair services was made to the insured person, and not to WHA Ltd. Where an insurer meets the costs of repair by paying the garage, this is an instance of third party consideration within the meaning of the VAT Directive. When WHA Ltd paid the repair bill presented by the garages, it was merely discharging, on behalf of the insurer, the latter’s obligation to the insured to pay that bill. WHA Ltd did not bear the burden of the VAT paid to the garage, given that it paid the bill out of a cash float provided to it by Viscount.

The Court cited with approval the decision in CRC v. Aimia Coalition Loyalty UK Limited, where it was reiterated by the Supreme Court that the consequence of deduction of input tax is that VAT is charged, at each stage in the production and distribution process, only on the added value, and is ultimately borne only by the final consumer, or by a person who stands in the shoes of the final consumer. In the instant case, the service of WHA Ltd (that of footing the repair bill) did not add any value at any stage of the process. To secure the outcome that VAT is borne by the final consumer of the repair services, i.e. the insured person, the appeal was dismissed.

The taxpayer had also argued that, based on the principle of fiscal neutrality, WHA Ltd should be entitled to deduct the input tax. The Supreme Court rejected this contention, as WHA Ltd was not under any liability to account for output tax in the circumstances.

The post Weekly Tax News from around the Globe by IBFD appeared first on Tax Risk Management.

No. of returns filed: 237,345,000

The estimated number of returns filed by the EAs and CPAs receiving this notice is estimated at a rounded up figure of 100,000 returns per year.

Therefore, I am applying the IRS national statistics to this segment to give you an idea of % examinations/audits, appeals and tax cases you can expect. Obviously this depends on the facts and circumstances of each case. But if you are aware of what may happen, you can plan ahead, and know that you and your clients are covered by additional specialized tax expertise available to you from my office.

No. of returns subject to additional tax: 45m returns (rounded up) – 19% of returns;

No. of returns subject to civil penalties: 28m (rounded up) – 12% of returns;

No. of returns subject to criminal investigations: 2,300 (rounded up) – 0.001% of returns;

No. of cases to Tax Court: 34,000 (rounded up) – 0.01% of returns;

IRS Appeals workload:

Total cases – 135,061 – 0.06% of returns

CDP – 51,126

Examination – 42,454

Penalty Appeals – 11,507

OIC – 9,496

Innocent Spouse – 2,703

Industry cases – 2,276

Coordinated Industry Cases – 120

Other (abatement interest, collections appeals program, OPR, FOIA, other penalties) – 15,379

There are:

IRS Revenue Agents – 13,909 – case load 1% of tax returns ie.170 cases per year

IRS Attorneys – 1,573 – case load about 22 cases per year

IRS Appeals Officers – 859 – case load about 159 per year

Statistics applied to the 100,000 tax return segment of this recipient database:

No. of anticipated IRS Revenue Agent audits: 1,000

No. of anticipated appeals (0.06%): 60

No. of anticipated US Tax Cases (0.01%): 10

No. of anticipated criminal cases (0.001%): 1

The post IRS Data (Fiscal years 2011/12) statistics that affect your tax practice appeared first on Tax Risk Management.

Section 232 of the South African Constitution states: Customary international law is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament.

1.2 What is International Tax Law and 1.3 Introduction to Organizations are extracts from the International Tax Notes prepared by the Thomas Jefferson School of Law, San Diego (the affiliated US law school of the IITF) and will give you a good reading background to some of the points I raised at the end of your first lecture (Adv Dip International Tax Law – available at www.IITF.net) with Professor Anneline Venter on International Tax Law, looking at the role of customary international law. These notes go beyond that.

The other reading material I forwarded to you will assist you in determining what that customary international law is, and what can be done through the action of State Responsibility in the article by Han Pijl. There was the distinction between jus cogens  and other customary international norms, such as unjust enrichment, where I mentioned the case of First South African Holdings (Pty) Ltd v CSARS 73 SATC 221 explaining that the shareholders were ultimately American citizens, and could approach the US government to enlist a case in the International Court of Justice against the South African government, for unjust enrichment – despite the fact that the company taxpayer lost the matter in the SCA. Unjust enrichment is a customary international law norm accepted by both the US and South Africa. If a US citizen unjustly enriches the South African government, The US government has a claim against the South African government in terms of the State Responsibility action. The US government has a choice whether or not to act in the interests of its subjects in this regard.

The extracts follow:

1.2  What is International Tax Law?

In his book, The Public International Law of Taxation^[1], Professor Asif Hassan Qureshi explains that Public international law determines the rights and obligations of the State towards one another, while municipal or national law is concerned with the individual within the State. Public international law comprises international agreements, customary international law and international agreements between States. The public international law of taxation is derived primarily from public international law. It relates to the law, which governs the economic relations between States. These laws relate to the principles of State jurisdiction, the law of treaties, international economic law (e.g. international monetary law, international trade law, investment protection, regional economic organisation, etc.), and dispute settlement.

Hence, the sources of public international tax law are very wide, including:

(a) Multilateral international agreements:

Vienna Convention on the Law of Treaties, Secondary law of international communities of States (Example: Treaty of Rome), mutual agreement procedures for equitable settlement of conflict of legal systems, etc.

(b) Comprehensive double tax treaties:

Treaty and protocols, exchange of letters and notes, memoranda of understanding, and supplementary administrative agreements; they may be bilateral or regional.

(c) Limited double tax treaties:

Reciprocal declarations, specific treaties on shipping and airlines, death duties and taxes on gifts, etc.

(d) Customary international law and general principles of law:

The principles of law recognised by civilised nations in their national legal systems, statute law, customary law and judicial decisions, as well as the practice of international organisations.

In practice, however, the public international law of taxation is concerned primarily with international tax treaties. It provides the set of legal rules governing tax jurisdictions that resolve fiscal conflict cases. Arnold A Knechtle defines international tax law, as follows:

“International fiscal law is the sum total of those legal rules emanating from international law which have as subject matter the regulation of fiscal facts where the participants are several sovereign tax jurisdictions (taxing powers) who are at the same time subjects of public international law. It is the sum total of international and national conflict rules and of substantive rules which are applied to international fiscal facts.”^[2]

International Defined:

Between or among nations; pertaining to the intercourse of nations; participated in by two or more nations; common to, or affecting, two or more nations.^[3]

“International law, the rules of regulating the mutual intercourse of nations. International law is mainly the product of the conditions from time to time of international intercourse, being drawn from diplomatic discussion, textbooks, proof of usage, and from recitals in treaties. It is called public when treating of the relations of sovereign powers, and private when of the relations of persons of different nationalities. International law is not, by the better opinion, part of the common law of the land.” – Wharton^[4]

The statute by which the United Nations established that the International Court of Justice should decipher international law states:

Article 38^[5]

1. The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

b. international custom, as evidence of a general practice accepted as law;

c. the general principles of law recognized by civilized nations;

d. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

The term “international tax” is difficult to define because there is not one accepted definition by practitioners, government officials and academics. The international tax community is a combination of national and sub-national tax systems, each with their own distinct policies, rules, and definitions, vying to claim a piece of income that is incident of some international element, be it a cross border transaction or competing claims of tax jurisdiction over a person.

From one perspective, international taxation is actually an amalgamation of the competing claims by tax authorities on any and all cross border activities juxtaposed against the applicable tax treaties and domestic international tax rules that limit the collection of any of the competing claims.

From another perspective, international tax law jurisprudence has evolved in line with the rules accepted for the identification and application of international jurisprudence among United Nations members.  This international tax jurisprudence evolved like any other international law evolves, from the recognition of bi-lateral and multi-lateral conventions amongst signatories, the identification of international custom evidenced by State practice, and from general principles of law recognised by civilized states.

This international tax jurisprudence evolved from guidelines established by the governments of various countries and international organizations, such the United Nations (UN)^[6] and the Organization for Economic Cooperation and Development (OECD).^[7] (Both the UN and the OECD and the guidelines mentioned are discussed in further detail in later modules.)

Other sources of international tax law can be found in the tax treaties and agreements between countries, the Vienna Convention of the Law of Treaties (VCLT), and the secondary law of international communities of states (the main example is the European Union).

Tax treaties are the most widely referred to and most important international aspect of tax law.  Since 1980, the entering into between States, and use of tax treaties by tax payers, has increased dramatically; there are close to 2,000 tax treaties currently in existence.^[8]  These treaties impose significant limitations on the taxation powers of the treaty partners. “Tax treaties though are not designed to actually impose a tax on individuals or companies doing business within a country. Tax treaties are mostly “exclusive,” meaning they define the limits and exceptions to taxation for individuals and companies. Tax treaties must also generally be combined into the various tax code of a country in order to be binding, otherwise, the tax treaty is not really law, it is instead mere guidelines on how taxation or relief therefrom should be assessed.”^[9]

When one is studying international tax there are two broad dimensions that countries possess that should be noted, laid out by Professor Arnold and Professor McIntyre:

1      The taxation of resident individuals and corporation on income arising in foreign countries; and

2      the taxation of nonresidents on income arising domestically.^[10]

The professors explain the dimensions. “The first dimension, mentioned above, is also referred to as the ‘taxation of foreign income.’ We refer to the second dimension as the ‘taxation of nonresidents.’ Obviously what is the taxation of foreign income for one country (generally referred to as the residence country) is the taxation of nonresidents for another country (generally referred to as the source country).”^[11]

‘A transaction involving the export of capital (e.g.. labour, money, etc.) or other resources (e.g.  natural resources) from a country is often referred to by tax analysts as an ‘outward-bound’ or “outbound” transaction. Conversely, the term “inbound-bound” or “inbound” transaction is commonly used to refer to a transaction involving the import of capital or other resources from a foreign country.’^[12]

“A transaction that a country considers to be an outward-bound transaction typically involves its rules for taxing the foreign income of resident taxpayers.”^[13] For example, a resident of Switzerland also has stock in a company in Canada. The income from the stock in the Canadian company (dividends) would be considered taxable by Switzerland and is an outward bound transaction. “Inward-bound transactions, in contrast, typically invoke a country’s rules of taxing non-residents on domestic income.”^[14] For example, Canada would be able to tax the resident of Switzerland on the income from the stock, since the stock is from a Canadian company. In some circumstances, a single transaction may have consequences under both sets of rules. An example is the liquidation of a foreign associate into a domestic parent corporation.

International tax is more inclusive that just the income tax:  “It can also include estate taxes, gift taxes, inheritance taxes, general wealth taxes, sales taxes, customs duties, and a variety of special levies.”^[15] The international aspects of estate and gift taxes are particularly important. For example, such wealth transfer taxes have important international implication when a resident receives a bequest or gift from a non-resident or non-domiciled individual or when a person owning property in a foreign country dies. These important issues are beyond the scope of this course which is restricted to international aspects of income tax law.^[16]

Internationally, tax systems should strive to be neutral, which means that are not designed to influence the economic choices of taxpayers.^[17] Moreover, the international tax system, in order to promote, “fairness and efficiency of global tax systems depends not on the tax laws of any one country, but on the cumulative effects connected with its jurisdiction.”^[18]  However, there is little uniformity among the tax systems of countries around the world. The problem with these varied and inconsistent systems of dealing with international transactions is the possibility of double or excessive taxation.^[19]  This is where the international community has collectively tried to work together to reduce and/or mitigate this excessive taxation, by creating and enforcing tax treaties, i.e. international law.^[20]

1.3 Introduction to Organizations

There are several types of international organizations by which countries join in order to engage with each other on particular issues.  Some of these organizations grow from trade or information collection associations into large administrative bodies that develop their own rules and policies, with many State and jurisdiction participants from all over the world, such as the OECD.  Below is a brief and simplified discussion of various international organizations. First will be a discussion of regional organizations, generally designed to facilitate cooperation among the regions members. Second will be a brief discussion of the larger international organizations, their history, purpose and recent developments.

1.3.1    Regional Organizations

There are several levels of regional organizations, which vary in degree of participation, cooperation, dependence and interrelationships among their participants. There are five (5) fundamental groupings for regional organizations, ranging from the most basic, a regional cooperation group, to the most advanced, a political union.

a.         Regional Cooperation Groups

The most basic economic integration and cooperation is the regional cooperation for development. In a regional cooperation for development arrangement, governments agree to participate jointly to develop basic industries beneficial to each economy. Each country makes an advance commitment to participate in the financing of a new joint venture and to purchase a specified share of the output of the venture. An example is the project between Colombia and Venezuela to build a hydroelectric generating plant on the Orinoco River. Each country shared jointly in construction costs and they share the electricity produced.

b.         Free-Trade Area

A free trade area requires more cooperation and integration than the regional cooperation group. It is an agreement among two or more countries to reduce or eliminate customs duties and non-tariff trade barriers among partner countries while members maintain individual tariff schedules for external countries. Essentially, a free trade area provides its members with a mass market without barriers than impede the flow of goods and services. The US has free trade agreements with Canada and Mexico (North American Free Trade Agreement – NAFTA) and separately with Israel. The seven nation European Free Trade Association (EFTA) is among the better known free-trade areas; it still exist although five of its members also belong to the European Economic Area (EEC).

c.         Customs Union

A customs union represents the next stage in economic cooperation. It enjoys the free trade area’s reduced or eliminated tariffs and adds a common external tariff on products imported from countries outside the union. The customs union is a logical stage of cooperation in the transition from a free trade area to a common market. The European Community was a customs union before becoming a common market. A customs union still exists between France and Monaco, Italy and San Marino, and Switzerland and Liechtenstein.

d.         Common Market

A common market agreement eliminates all tariffs and other restrictions on internal trade, adopts a set of common external tariffs and removes all restrictions on the free flow of capital and labour among member nations. Thus, a common market is a common marketplace for goods, as well as for services (including labour) and capital. It is a unified economy and lacks only political unity to become a political union. The Treaty of Rome, which established the European Economic Community (EEC), called for external tariffs and the gradual elimination of intra-market tariffs, quotas, and other trade barriers. The treaty also called for elimination of restrictions on the movement of services, labour and capital; prohibition of cartels, coordinated monetary and fiscal policies, common agricultural policies, use of common investment funds for the regional industrial development; and similar rules for wage and welfare payments. The EEC existed until the Maastricht Treaty created the European Union, as an extension of the EEC into a political union. Latin American boast three common markets: the Central American Common Market (CACM), the Andean Common Market and the Southern Cone Common Market (MERCOSUR). The three have roughly similar goals and seek eventual full economic integration.

e.         Political Union

A political union is the most fully integrated form of regional cooperation. It involves complete political and economic integration, either voluntary or enforced. The most notable enforced political union was the Council for Mutual Economic Assistance (COMECON), a centrally controlled group of countries organized by the USSR. With the dissolution of the USSR and the independence of Eastern Europe, COMECON was disbanded.

The Commonwealth of Nations is a voluntary organization providing for the loosest possible relationship that can be classified as economic integration. The British Commonwealth is comprised of Britain and countries formerly part of the British Empire. Its members recognize the British Monarch as their symbolic head, although Britain has no political authority over the Commonwealth. Its member states also have received preferential tariffs when trading with Great Britain, but when Britain joined the European Community, all preferential tariffs were abandoned. The Commonwealth can best be described as the weakest of political unions and is mostly based on economic history and a sense of tradition. Heads of state meet every three years to discuss trade and political issues they jointly face and compliance with any decisions or directives issued is voluntary.

1.3.2    International Organizations

International Organizations are more expansive than the regional organizations. They usually entail members from all over the world, not just a single geographic area. However, depending on the organization, much of the rules and guidelines that come from these bodies are simply guidelines and not mandatory authority, unlike regional organizations, which, depending on their development, may or may not require their guidelines be implemented.  See http://www.itdweb.org/ for international organization documentation impacting the international tax profession.

a.         Organization for Economic Cooperation and Development (OECD)

The Organization for Economic Co-operation and Development has been called a think tank, a monitoring agency, a rich man’s club and an unacademic university. It has elements of all, but none of these descriptions captures the essence of the OECD.

Convention on the Organization for Economic Co-operation and Development (1960)^[21]

Article 1

The aims of the Organization for Economic Co-operation and Development (hereinafter called the “Organization”) shall be to promote policies designed:

(a) to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

(b) to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and

(c) to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations.

The OECD groups 30 member countries in a unique forum to discuss, develop and refine economic and social policies. They compare experiences, seek answers to common problems and work to co-ordinate domestic and international policies to help members and non-members deal with an increasingly globalised world. Their exchanges may lead to agreements to act in a formal way– for example by establishing legally binding agreements to crack down on bribery, or codes for free flow of capital and services. The OECD is also known for ‘soft law’ — non-binding instruments on difficult issues such as its Guidelines for multinational enterprises. Beyond agreements, the discussions at the OECD make for better-informed work within member countries’ own governments across the broad spectrum of public policy and help clarify the impact of national policies on the international community.

The OECD is a group of like-minded countries. Essentially membership is limited only by a country’s commitment to a market economy and a pluralistic democracy. It is rich, in that its 30 members produce two thirds of the world’s goods and services, but it is by no means exclusive. The core of original European and North American members has expanded to include Japan, Australia, New Zealand, Finland, Mexico, Korea and four former communist states in Europe: the Czech Republic, Hungary, Poland and the Slovak Republic. Non-members are invited to subscribe to OECD agreements and treaties, and the organization now involves in its work some 70 non-member countries from Brazil, China and Russia to least developed countries in Africa and elsewhere.

Exchanges between OECD governments flow from information and analysis provided by a Secretariat in Paris. The organization is one of the world’s largest and most reliable sources of comparable statistical, economic and social data. Parts of the Secretariat collect data, monitor trends, analyses and forecast economic developments, while others research social changes or evolving patterns in trade, environment, agriculture, technology, taxation and more.

The OECD plays a prominent role in fostering good governance in the public service and in corporate activity. It helps governments to ensure the responsiveness of key economic areas with sectoral monitoring. By deciphering emerging issues and identifying policies that work, it helps policy-makers adopt strategic orientations. It is well known for its individual country surveys and reviews.

Dialogue, consensus, peer review and pressure are at the very heart of OECD. Its governing body, the Council, is made up of Representatives of member countries.

Article 6

1 . Unless the Organization otherwise agrees unanimously for special cases, decisions shall be taken and recommendations shall be made by mutual agreement of all the Members.

2. Each Member shall have one vote. If a Member abstains from voting on a decision or recommendation, such abstention shall not invalidate the decision or recommendation, which shall be applicable to the other Members but not to the abstaining Member.

3. No decision shall be binding on any Member until it has complied with the requirements of its own constitutional procedures. The other Members may agree that such a decision shall apply provisionally to them.

Some of the rules issued by organs of the OECD, such as the Financial Action Task Force (FATF) and the Committee on Fiscal Affairs, are enacted into the law and/or brought into the jurisprudence of its members states, while other rules are issued solely to provide guidelines for approaching a certain situation.

There are about 200 committees, working groups and expert groups in all. Some 40,000 senior officials from national administrations come to OECD committee meetings each year to request, review and contribute to work undertaken by the OECD secretariat. Even from home, they have access to OECD documents and can exchange information through the OECD OLIS data network.  The 2 300 staff of the OECD Secretariat in Paris work directly or indirectly to support the activities of committees. Some 700 economists, lawyers, scientists and other professional staff, mainly based in a dozen substantive directorates, provide research and analysis.

Committee on Fiscal Affairs

Working Party No. 1 on Tax Conventions and Related Questions

Steering Group on the Revision of the Model Tax Convention

Working Group No. 1 on the Application of the Model Tax Convention to Partnerships, Trusts and Other Non-Corporate Entities

Working Group No. 6 on Technical Issues Related to Cross-Border Pensions

Working Group No. 7 on Tax Treaty Issues Related to Employee Stock Options

Technical Advisory Group on Monitoring Applications of Current Treaty Norms for Taxation of Business Profits

Working Party No. 2 on Tax Policy Analysis and Tax Statistics

Steering Group on Revenue Statistics

Working Party No. 6 on the Taxation of Multinational Enterprises

Steering Group on Transfer Pricing Guidelines

Sub-Group on Cross-Border Related Party Financial Dealings

Working Party No. 8 on Tax Avoidance and Evasion

Informal Study Group on the Taxation of Cross Border Interest Flows

Joint Working Parties No. 8 and No. 9 Tax Information Exchange System Sub-Group (TIES)

Working Party No. 9 on Consumption Taxes

Sub-Group on Electronic Commerce (WP No. 9)

Forum on Harmful Tax Practices

Forum on Tax Administration

Forum on Tax Administration Compliance Sub-Group (FTA/COMP)

Forum on Tax Administration E-Service Sub-Group (FTA/ESERV)

Directorate for Enterprises, Financial and Fiscal Affairs

The Directorate for Financial, Fiscal and Enterprise Affairs works to promote the efficient functioning of markets and enterprises in a globalised economy. It promotes open international investment, capital movements and trade in services. It monitors and analyses developments in financial markets, banking, securities and insurance. It covers anti-corruption efforts and corporate affairs, as well as enterprise development and encourages policy convergence in the areas of competition, taxation, financial markets, international investment and trade in services. Benchmarking, establishing best practices and providing policy guidelines are the typical instruments in developing frameworks for the rules of the game in each of these areas. This directorate also encourages sound competition policies and co-operation among national competition law enforcement agencies, and supports policies to protect and inform consumers. A separate intergovernmental body, the Financial Action Task Force on Money Laundering (FATF, http://www.fatf-gafi.org/ develops and promotes policies to combat money laundering. Its Secretariat is housed at the OECD.

OECD’s taxation work covers a broad range of activities, including tax evasion, harmful tax practices, electronic commerce and environmental taxes. The OECD produces internationally comparable statistics and engages in monitoring and assessment of policies, incl. in Economic Surveys. National tax systems are analyzed, also for their effect on labor, capital and product markets.

Tax Treaties: Cross-border investment would be seriously impeded if there was a danger that the returns on such investment were taxed twice. The Model Tax Convention and the worldwide network of tax treaties based upon it help to avoid that danger by providing clear consensual rules for taxing income and capital.

Transfer Pricing: A large share of world trade consists of transfer of goods, intangibles and services within multinational enterprises. To determine tax liability in each jurisdiction, the right price (arm’s length price) has to be applied, the OECD has issued guidelines on this principle to avoid double taxation.

Harmful Tax Practices: Competitive forces have encouraged countries to make their tax systems more attractive to investors. However, some tax practices are anti-competitive and undermine fair competition and public confidence in tax systems. The OECD provides a framework in which countries can work to eliminate such harmful tax practices.

Extract from document [C(98)17/FINAL]

“1. to establish a Forum on Harmful Tax Practices;

2. to implement the relevant measures identified in the attached Appendix;

3. to report periodically to the Council on the results of its work in these matters together with any relevant proposals for further improvements in the co-operation to counter harmful tax practices;

4. to develop its dialogue with non-member countries, consistently with the policy of the Organisation, with the aim of assisting these countries to become familiar with the analysis and conclusions of the Report and, where appropriate, to encourage them to associate themselves with the recommendations set out in the Report.”

b.         United Nations

            Dependent Territories

The Special Committee of 24 on Decolonization Commonly referred to as the Special Committee of 24 on Decolonization, its full title is the Special Committee on the Situation with Regard to the Implementation of the Declaration on the Granting of Independence to Colonial Countries and Peoples. The Committee examines the application of the Declaration on decolonization, and makes recommendations on its implementation.

The Committee meets annually to discuss the developments in Non-Self-Governing Territories, hears statements from appointed and elected representatives of the Territories and petitioners, dispatches visiting missions to the Territories, and organizes seminars on the political, social, economic and educational situations in the Territories. It formulates proposals and carries out actions approved by the General Assembly in the context of the Second International Decade for the Eradication of Colonialism (2001-2010). The Committee also makes recommendations concerning the dissemination of information to mobilize public opinion in support of the decolonization process and examines the assistance provided to the people of the Territories by the specialized agencies and other organizations of the United Nations system.

Since the creation of the United Nations more than 80 former colonies have gained their independence. Among them, all eleven Trust Territories have achieved self-determination through independence or free association with an independent State. There are 16 Non-Self-Governing Territories remaining today.

The Charter binds administering Powers to recognize that the interests of dependent Territories are paramount, to agree to promote social, economic, political and educational progress in the Territories, to assist in developing appropriate forms of self-government and to take into account the political aspirations and stages of development and advancement of each Territory. Administering Powers are also obliged under the Charter to convey to the United Nations information on conditions in the Territories. The United Nations monitors progress towards self-determination in the Territories.

Each year the Committee publishes a study on each dependent territory, which may be found at http://www.un.org/Depts/dpi/decolonization/docs.htm.

Global Program against Money Laundering

The Global Program against Money Laundering (GPML) was a research and technical assistance three-year program (1997-99) implemented by the Office for Drug Control and Crime Prevention (ODCCP).  Its aim is to increase the effectiveness of international action against money laundering through comprehensive technical cooperation services offered to Governments. The implementation of the Global Program against Money Laundering is carried out in the spirit of cooperation with other international, regional and national organizations and institutions. A number of activities are conducted in concert with other organizations and initiatives, including banking associations, existing Financial Intelligence Units, the Financial Action Task Force and its counterparts in Asia and the Caribbean, the Commonwealth Secretariat, the Organization of American States /CICAD, Interpol, the World Customs Organization, the Council of Europe, EC Phare Program, the IMF, the World Bank, the Egmont Group and other institutions associated with the UN such as UNDP, ISPAC, ISISC.

The International Money Laundering Information Network (IMoLIN)

is an Internet-based network assisting governments, organizations and individuals in the fight against money laundering. IMoLIN has been developed with the cooperation of the world’s leading anti-money laundering organizations. Included is a database on legislation and regulation throughout the world (AMLID) and an electronic library available at http://www.imolin.org/.

c.         International Monetary Fund (IMF)

Financial Sector Assessment Program (FSAP)

Resilient, well-regulated financial systems are essential for macroeconomic and financial stability in a world of increased capital flows. The FSAP, a joint IMF and World Bank effort introduced in May 1999, aims to increase the effectiveness of efforts to promote the soundness of financial sytems in member countries. Supported by experts from a range of national agencies and standard-setting bodies, work under the program seeks to identify the strengths and vulnerabilities of a country’s financial system; to determine how key sources of risk are being managed; to ascertain the sector’s developmental and technical assistance needs; and to help prioritize policy responses. Detailed assessments of observance of relevant financial sector standards and codes, which give rise to Reports on Observance of Standards and Codes (ROSCs) as a by-product, are a key component of the FSAP. The FSAP also forms the basis of Financial System Stability Assessments (FSSAs), in which IMF staff address issues of relevance to IMF surveillance, including risks to macroeconomic stability stemming from the financial sector and the capacity of the sector to absorb macroeconomic shocks. http://www.imf.org/external/np/fsap/fsap.asp

Offshore Financial Centers (OFCs): IMF Staff Assessments

Some OFCs have captured a significant part of global financial flows, and their linkages with other financial centers creates the potential for their activities to affect financial stability in many countries. The IMF’s Executive Board asked staff to extend financial sector work to include OFCs through a voluntary program of assessments and technical assistance to help strengthen financial supervision of OFCs, so that international rules and arrangements apply to OFCs to promote greater cooperation among supervisors. To this end, IMF staff undertake detailed assessments of the extent to which OFCs meet the standards advocated by the international standard-setters, and of any further action required to meet these standards. http://www.imf.org/external/np/ofca/ofca.asp

d.         General Agreement on Tariffs and Trade (GATT)

The GATT is designed to promote fair and open trade among the world’s nations. GATT was adopted after the Great Depression and World War II, when it became apparent that multilateral treaties for the mutual reduction of tariffs were necessary to prevent a recapitulation of the outrageous tariffs of the 1930s. Recognizing also the role international economic relations played in causing World War II, the United States hoped to avoid future conflict by seeking an international agreement on trade. To further this goal, the United States and the other founding members of GATT intended to create a counterpart trade organization called the International Trade Organization (ITO). Isolationism in United States international policy made it difficult to join an international organization, however, and in 1947 the original contracting parties signed GATT without a separate implementing trade organization. By necessity, GATT thus became a makeshift trade organization as well as a treaty. GATT contains several provisions focused on tariff reduction. The Most Favored Nation Clause requires each party to treat every nation equally with regard to imports or exports.  The National Treatment Principle in Article III requires that each member country grant the same treatment to all other countries’ goods as it gives its own goods, preventing non-tariff barriers to trade. GATT also includes exceptions to the general provisions, including a waiver authority, an escape clause, flexibility for balance of trade problems, and allowances for health and safety regulations.

e.         World Trade Organization (WTO)

The main purpose of the WTO is to facilitate trade to move smoothly, freely, fairly and predictably. At the signing of the Uruguay Round trade agreement in Marrakech, Morocco, in April 1994, US representatives pushed for an enormous expansion of the definition of trade issues. The result was the creation of the World Trade Organization (WTO). The WTO is an institution, not an agreement, as GATT was. It establishes the rules governing trade between its 147 (as of April 4, 2004) members, provides a panel of experts to hear and rule on trade disputes between members and, unlike GATT, issues binding decisions. Additionally, it requires full participation of its members.^[22]

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