*Look at prior exams online

Tax notes International!

A Jewish individual who arrived on Israel land have the option to become residents.

FEBRUARY 28, 2014

Tax treaties are agreements between countries that divide up the right to tax
(allocate rights to taxa)
Tax treaties: Not legally binding, unless participants (2 countries) enter into it
o OECD Model Tax Treaty
OECD (Org for Economic Cooperation Development (Paris)): research,
think pack, and funded by developed countries to develop economic
policies (trade and tax policies), however, cannot command any
country to do anything.
Tilted toward capitalism (carl marks theory), generally funded
by countries with more money
o United Nations Model Tax Treaty
Tilted towards labor, and favorable to countries where metal
resources are located, and developing countries
Not commonly used to negotiate tax treaties (thus not focused on in
class)
o US Model Treaty
US is the worlds reserve currency thus it has the power to create its
own model treaty
Corporations: look to domestic law of the country who is party to treaty
o Corporations: may be specific (UK), or ordinary
Public
Ordinary Corporation: AG, Inc., NV, SA
Small entities (that may or may not be corporations under domestic
laws, but most of the time they are): LLC, BV, SARL, SPA, GMBH
o Partnership: conducting of enterprise by 2 or more persons, or PS to invest
(not an enterprise)
GP
LP
PS by Guarantee
o Trust:
Common law, based on right/equity
o Foundation: a legal entity with juridical personality
Civil law
Has directors rather than trustee
Can be sued, or can sue (trust cannot)
Based on contract
No concept of right/equity, rather based on contract law
Grantor transfers X to A
Certain countries (i.e. Napoleon code), special statutes required to set
up trusts
3 Important Rules
o Protect yourself (even from client)
o Protect client (even from themselves)
o Help client achieve goals
Tax Treaties only help and never hurt: if under the treaty the outcome would be
worse than domestic law, then apply domestic law
2 Step Tax-Treaty Analysis
o 1) What does the domestic law require, and what is the result? Must consult
expert of that domestic country
o 2) Can we obtain a better result any other way?
Treaties (treaties trump domestic law, except for Germany-US
treaties where latter enacted law trumps)
If within EU, must use additional step:
1) Can be obtain better result under EU law?
2) Is there a tax treaty that gets a better result?
Capital Export Neutrality


MARCH 7, 2014

Michael J, born in UK, and has UK password, files taxes in UK
Father came from Germany escaped from Nazi, and was successful in English real
estate.
Michael inherited office buildings in London which generate nice income, House in
London
When MJ was younger, went skiing in Italy, fell in love with her and has 2 children
who are British and Italian
Children come visit often in London and US, but live mostly with mother in Italy
MJ divorced, and became involved with Jewish philanthropy, and spends 2 months
in Israel.
Has a department in Israel, and resident of Israel b/c he owns an apt there
While there attending charity functions, met a woman from NY. Married woman.
Spends 8 months in NY, remainder in Israel and England.
Wifes accountant claims that he must pay WW income to US; Israel claims bc has
apt in Israel must pay tax there; English accountant informed him that under UK
law, he is English tax resident and must pay tax on England taxes.

1. As between US and Israel, who has right to tax? US model tax treaty exists between
US and Israel. Under domestic law, in Israel and US, MJ fully taxable under both laws.
a. Article 4 defines residence/resident. Tiebreaker rule require more facts:
i. Permanent home: Art 4.1
1. Permanent home is a home that is permanently available
2. Habitual abode:
ii. Center of vital interests (persona and economic relations)
1. Children spend time in Italy, US and England
2. Economic interests are in UK
3. Spouse is in NY
4. Spends time in Israel for charity
5. his center of vital interests is likely nowhere
iii. Habitual Abode:
1. 8 months in the US thus, likely this is his habitual abode
2. few weeks in UK
3. few months in Israel
iv. we rely on accountants, and assume they are rights, we will assume
for purposes of this letter that these opinions are correct, and our
opinion is based on the aforementioned. There is a treaty in force
between US and Israel. Under article 1 and article 4 he is a resident of
both. Under 3(a), he has a permanent home in both states. Under art
3.1, he has vital interests in family in US and charity work in Israel.
Under art 3.b, based on amount of time he spends in US, his habitual
abode is in the US, thus resident of US, thus not taxed in Israel.
2. As between US and UK, who has right to tax? US model tax treaty exists between US
and UK.
a. Art 4, paragraph 2
i. Permanent home: both in US and UK
ii. Center of vital interests not determinative
iii. Habitual abode: both US and UK
iv. Thus, must determine where he is a national national of UK
v. If national of both, must settle by mutual agreement
3. As between US and Israel OECD applies
a. 4.2 provides that he is a resident

Whenever dealing with US treaty, must look at limitation on benefits (article 22)*
b/c he is an individual, he is a qualified person

Where is a Company Resident?

Order: Domestic law, EU, treaty
o Domestic Law: must look at corporate laws of country
US: place of incorporation controls
OECD: place of management (effective management where decisions
are made to run corporate enterprise) Art 4.3
UK: mind and management
Germany: Directors have authority to bind company
Anglos: directors cannot bind company
E.x: English company that meets in France, but all corp decisions
made in Germany under OECD must determine effective
management: under domestic law its likely resident of England by
incorporation, residence of France due to domestic law, Germany may
claim effective management. Thus, treaty between US-UK is
controlling. Germany can tax. Art 4 section 1 and 3.
o Stateless income: corporations is not resident anywhere OR corporation
resides in tax have.
Ring Fencing: treating other corporations differently from its own
corporations
Side note
o If resident under domestic law?
If so, are you resident under treaty (b/c treaty may make you not resident
under treaty under article 4). If article 4 makes you non-resident, then
individual is not part of savings clause
o EU
o Treaty
Do you get better result under treaty.

Where is a Residence of a Civil Law Foundation?

A foundation is a body corporate, and it has BoD. Thus, look at location of managing
directors (effective management)
o if creating one of these for tax purposes, must find managing directors where
you want to create foundation.

Hire Philippino crew members and direct business on boat.
How do we determine where Philippinos are taxed? Article 10
o UK flag,
o Enterprise: carrying on of any business Article 3.c.
Enterprise is not equivalent to business
o Takes place in france, Germany is place of effective management, and france
has some employees in france who are employed by france where are these
employees taxed?
Treat them as individuals, however, is company required to ensure
whether the employees pay taxes?
Individual must pay tax on 100 worldwide income received. 70
percent is earned by eee for working in country R, and the
other 30 is given to eee for services to be performed in case of
need in another country where services are not taxes. Is
company responsible for making sure that eee pays tax on the
other 30 dollars to country R?
1. Is there a legitimate basis for allocating 30% of the salary to
another country where services could be performed in the
future on the basis of sudden need to have eee move to other
country to perform services there? There may be. If there is
economic justification, what is the percentage allocation (how
much are the potential services worth)? Also, what are the
potential challenges that the main country could bring against
country (risks and challenge to tax, reputation)? Also, what are
the obligations to the eee is eor required to force eee to pay
tax on 100 NO, that is the eees obligation.
Note: it is best for company attorney to restrict advising
company, and not advise eee.


Where is a residence of a Trust?

1. is a trust treated as a legal entity? It depends
a. An ordinary trust does not have legal personality, however, a trust created
under statutory law (Delaware Statutory Trust) is a legal personality.
2. FATCA: system of law imposed by US that requires every financial institution that, if
it chooses to invest in the US, it must enter into an agreement to disclose
information when US person deposits money in foreign institution, otherwise, US
will withhold 30% of funds transferred to the financial institution.
a. Trusts are defined as entities under intergovernmental agreements the
implication is that the trust is required to report, not the trustee.
b. 30% withholding effective 2014.
c. FATCA would hurt any investor wanting to invest in US property, if the
foreign institution is not compliant
d. FBAR: US person tells US that it has foreign account and has paid interest


Article 22 Limitation of Benefits

Article 22 Limitation of Benefits
o What Article 22 is trying to avoid
1) A resident (Bolivia) buys shares in Microsoft (US)
No Bolivia/US treaty. Dividends subject to 30% withholding
2) A sets up NL company which buys shares in Microsoft
NL-US treaty reduces withholding tax to 0%, and NL company
payment out to A has 0% withholding tax
o Thus, Article 22 kicks in, and because A is not a qualified person treated
just as in scenario 1.
Cannot obtain tax treaty benefits if person uses company as a conduit
to eliminate taxation have all money coming in and going out. (2)(e)
Must have Substance when planning (in every country other than US)
o If its a real company, there should not be a concern
o A company is resident where its effective management is located (OECD,
section
o Netherlands Revenue Service Ruling Criteria: has issued guidelines when it
will or will not issue certificate that a company is a resident
Note: could still meet residence reqt under treaty provisions


MARCH 8, 2014

Article 1: Talks about persons; ties into article 4 re residence
Article 4: residence

US Model Code: excludes social security and unemployment taxes

Article 2: Income taxes and capital taxes (not estate or inheritance taxes, estate taxes,
excise taxes, sub-national taxes (state taxes), VAT). Thus, only covers taxes
Must always consider article 2: What kind of tax are we talking about; Federal excise
tax imposed on insurance policies issued by foreign insurers and with respect to
private foundations (insurance company is a legal entity that spreads risks)
Insurance companies has two components: 1) determining premium for risks and 2)
investing premiums (must determine whether assumed investment yield is correct
(timing of pay out is important insurance company has to reach expected
investment profit before pay out))
o Reinsurance: Insurance company takes some of its risks and insures it with
another insurance company
o Retro Session: Reinsurance Company reinsurance
Indemnity Company: form of insurance company, that guarantees that in case party
has to pay another the indemnity company covers costs
Source of Insurance: where risks are located
Reinsurance Company: the location of reinsurance company is important b/c the tax
on proceeds are based on country where company resides (the
o Excise Tax may be imposed on insurance policies issued by foreign insurer
with respect to private (tax treaties are crucial b/c can negotiate eliminating
excise tax; however, tax havens do not give taxing countries any incentive to
negotiate)
Interest equalization taxes (IET): excise tax imposed by a country based upon the
difference of the borrowing rate domestically and internationally
o LIBOR (IET):
E.x: borrowing in US on 5%, whereas borrowing in London at 2.5% --
if can borrow cheaper outside of country for countrys currency, then
that country can impose 2.5% excise tax on amount borrowed, so that
there is no incentive to borrow abroad.
Exchange control: cannot take currency out of country beyond limit
without seeking permission (US, EU, YEN do not have exchange
controls)
Totalization Agreements: for national insurance (tax treaty but not for income
taxes)
o When Spanish person is sent to Japan for 2 years, Spanish person pays taxes
to Spain, which is OK per Japan b/c its temporary stay. During this period,
Japan will not provide any benefits as it provides to other taxpayers.
Ex: US person dies in US, leaving heirs in Germany. US estate tax taxes transfer of
estate estate tax. German tax law taxes on receipt of estate inheritance tax. This
double taxation could be avoided through an estate tax treaty.
o German person dies, leaving money to US person. Germany taxes on receipt
here no one receives funds. US taxes on transmission of estate here, no one
is transferring, only receiving. Thus, no tax treaty needed (tax treaty helps,
never hurts)
The Lords of Finance history of central banking france, Germany, UK, and US.

Article 7 OECD

Business Profits

Profits: Revenue COGS (determined based on data and domestic tax law)
o Financial accounting (GAAP) is different from tax accounting (which is based
on domestic tax laws). For tax accounting purposes, must take domestic tax
laws into consideration. Thus, financial accounting must take domestic ta
Enterprise: an enterprise carried on by a resident of a contracting state and an
enterprise carried on by a resident of the other contracting state.
Business: buying/selling for profit
o Dealing/investing for self is not a business
A foundation (which is a legal entity created under a law)
o If law that governs foundation states that it may not carry on a business
(Ultra Vires), can the foundation be an enterprise? No,
Enterprise of a Contracting State: an enterprise carried on by a resident of a
contracting state (Germany/Poland treaty, thus another state to enterprise is not
contracting state)
Permanent Establishment (article 5): mere dividing line determining whether
country can tax
o Place of Management: where effective management occurs.
Company can change place of management easily by appointing
different directors
o Branch:
For US purposes, a company is only permitted to practice where it is
incorporated. However, when it opens an official branch in another
country it can practice there. However, note that it may qualify as a
permanent establishment.
o Office
o Factory
o Workshop: Where skilled labor is employed. (today, same/similar to factory)
o Mine, oil or gas wells, etc.
o Building site, construction or installation project (Page 579): if lasts more
than specified amount of time. Generally, requires set up a trailer on site. If it
does not qualify as a PE, other state has authority to tax.
Article 5, section 1: PE means a fixed place of business through
which the business of an enterprise is wholly or partly carried on.
Article 5, section 1: PE includes
Place of management
Branch
Office
Factory
Workshop
Mine, oil, etc.
Article 5, section 3: a building site of construction of installation
project constitutes a permanent establishment only if it lasts more
than 12 months. (time limitation)
Note that section 3 trumps section 2.
Article 7, section 1: Profits of an enterprise of a contracting state shall
be taxable only that state unless the enterprise carries on business in
the other contracting state through a permanent establishment
situated therein (thus, if there is no PE, no right to tax). If the
enterprise carries on business as aforementioned, the profits that are
attributable to the PE in accordance with the provisions of paragraph
2 may be taxed in that other state.
Note that this does not address whether the residence state
can also tax the income if the permanent establishment state
also taxes the income. Must refer to methods for elimination of
double taxation (article 23 A and B)
o Services Permanent Establishment Provision: constituent of a company
that provides services in another country for more than 183 days (see page
2148, Article 5.5, 5.9)
Business profits of German
o Fixed place of business through which the business of an enterprise is wholly
or partly carried on.
o Ex: a company placed his software on a leased server in Denmark used for
distribution purposes general consensus that a server does not constitute a
PE (except US and India do not have definite view on this). Compare,
however, a company owning a server and placing it in Denmark server does
constitute a PE (unless domestic law rules otherwise).
Enterprise shall be taxable in Germany unless enterprise is also resident in Poland
(Permanent Establishment). Poland can tax profits attributable to the branch in
Poland, and Germany must grant exemption or credit to avoid double tax. Thus, pay
tax on profits once.
Tax Sparring: Where US TP does not owe tax to a foreign country, US will not
subsequently tax that income in the US (not used in the US, Used frequently by EU)
o Capital Export Neutrality: capital should be taxed same rate no matter
where deployed
US practices pure CEN, thus should pay same amount of tax whether
invest outside of US or inside of the US
o Capital Import Neutrality (European view): wherever capital is used (not
where it comes from) should determine what tax rate is
As long as its treated same as every other capital employed in foreign
country, then home country will not tax activity (European view)

MARCH 21

Consortion of 2-3 companies. Hire an architectural firm based in Amsterdam the
firm does the business in Amsterdam?
Branch payment to home office is a intercompany payment subject to branch tax
(measure assets at beginning and end of year if goes down at end of year, deemed
to have made distribution subject to branch tax). An intercompany payment this is
not a dividend to 3
rd
party, thus no withholding.
o Could set up a branch in a jdx without branch tax, and thereby save money
upon distribution, rather than having it be treated as a dividend subject to
withholding tax.
Is Swiss branch a resident under US Model (triangular structures)(Art 4, pg 576)
o US parent, with NL sub, and NL sub has a swiss branch. Any distribution paid
from NL to US is really income from Swiss branch. Can the swiss branch be
considered a resident under the US model.
OECD: under OECD, yes, it can be a residence
US: under US model, no b/c of article 1 limitation
Agency (Article 5, section 5, pg 581)
o Agency is irrelevant with regard to determining PE.
o 1) A person is acting on behalf of an enterprise, and
o 2) Habitually exercises in a contracting state an authority to conclude
contracts in the name of the enterprise
Habitually: traveling to Poland 3 times in 1 year to sign contracts
constitutes habitually
Commissioner Cases (read)(different countries apply the commissioner rules
differently)
o Dell Case (Commissioner case): was the commissioner related? Yes, thus, not
an agent of independent status. Does the commissioner, have the authority,
and are they habitually exercising the authority to enter into contracts on
behalf of manufacturer?
o Zimmer Case:
Example (2:46pm)
o J Corp has a sub, E, in another country (Parent-Sub relationship Article 5.7)
The fact that a company which is a resident of a contracting state
controls or is controlled by a company which is a resident of the other
contracting state, or which carries on business in that other state shall
not of itself constitute either company a PE of the other.
o J Corp sents its employees to work at E, who are not officers nor directors.
Article 1:
o One of the employees is a director of J, and has signatory authority, but never
signed anything on behalf of J while at E
Does J have PE in E.
o 3 of employees are from special branch of J, ensuring quality stds for brand
name of E, and work in quality control dept that was created for the 3
employees.
Does J have PE in E. Does J have a fixed place of business under which
carrying out business through E?
Yes.
o Morgan Stanley: Sends eees to india to supervise eees and operations in
india. Does morgan Stanley US have a PE in India?
If there is a PE in india, then must look to article 7.1 to determine
taxation of business profits.
Article 7.2 and Article 9
Employment Fees and Directors fees do not necessarily tie to PE
o Income from Employment (US Art 14, OECD Art 15)
o Directors fees (fees derived in capacity as a member of the BoD) may be
taxed in both states under Article 16.


MARCH 22

Read handouts, tax articles (in his email)
Article 17 Artistes and Sportsmen
o Must determine whether taxable under Article 17 (Artistes and Sportsmen),
Article 7 (Business Profits), or Article 15 Compensation)
o Under Article 17, look to whether there is an entertainment visa
o See Commentary on page 376, 377
Former president is paid 150K for making public appearance
o Likely not an entertainer under article 17
o An entertainer has entertainment visa
o Otherwise may be treated as business profits OR compensation
Tennis players stay in Australia for 1 week to play Australian open. Under what
provision can Australia tax:
o Not residents under article 4
o Not employment money b/c playing for themselves and they are the taxpayer
o Is it a business profit under article 7? Likely not, also there is no personal
establishment
o Taxable under article 17
Note that US model has a 20K limitation on it
Bulay: never had an ownership interest in the recordings.
o Royalty: sourced where rights exist (here, a copyright would be created on
recording)
A copyright is IP, and Mr Bulay is the copyright holder. Bulay then
grants license to RCA 1) w/out geographical restriction, 2) for
perpetual time, and 3) no limitation on scope

o Services: where performance is made (which here would be subject to
greater tax)
o Service rules top article 15
Services rules would tax him
o Bulay
Royalty: right to use intellectual property
o OECD Commentary: 8.2 (page 310), compare to 17 (320)
Royalties (article 12): royalties arising in a contracting state and beneficially owned
by a resident of the other contracting state shall be taxable only in that other state.
Royalties arising in khasakstan, and beneficially owned by resident of NTH, shall be
taxable only in NTH. Khasakstan domestic law: 20% withholding on royalties
o Is the dutch owner entitled to rely on the treaty? Must first start with article
1 and article 4 (do not start with article 12
Khazakstan pays royalty to Ireland, and KH- IR treaty exists that reduces 20%
withholding to 0%.
o First look to Article 1 and 4.
o Residency: Ireland residency for corporations is determined based on where
the directors are. Here, the directors are in the United States.
o Is the royalty beneficially owned by residents of the Ireland company? No
b/c the residence of corporation is the US,.
Thus, payment is to a non-resident of Ireland, thus treaty does not
apply. No treaty relief, and domestic law of 20% withholding applies.
KZ pays royalty to dutch company, then dutch company (resident in Netherlands)
pays the same amount to BVI company. What is the withholding tax from KZ to NL
(the withholding between NL and BVI is 0). What is the withholding tax from KZ to
NL? This is a conduit transaction.
o Scenario 1: The beneficial owner of the royalty is not the NL b/c the royalty
comes in and comes out.
o S 2: Assuming that the dutch company is owned by BVI, and later NL pays a
dividend to BVI. Here, NL would be the beneficial owner. Thus, could satisfy
treaty reqt and avoid 20% withholding
o S 3: Assuming that the NL is owned by a dutch individual (which avoids
limitation of benefits), and NL receives royalties from KZ, then pays royalty
to BVI. In this scenario the treaty does apply, unlike scenario 2, because the
fact that there is a 3
rd
party individual who owns NL creates real economic
reality since the NL individual has invested and has risk.
For dividends, royalty, and interest always refer to residency first.
US Model: first look for residency, then look to article , then if satisfied, go to 10, 11,
and 12


MARCH 28

Article 12 Royalty

Distributor pays 4% royalty per vacuum cleaner sold, and is located and resident in
Canada, and has offices in US.

Withholding tax (red herring): should have noticed that it is not a royalty b/c mere right to
sell vacuum. Thus, it should be treated as business profits. Thus, must determine PE
existence. Right to tax is in Latvia b/c Latvia has no PE in Canada b/c they are merely
selling.
- Just b/c its a royalty in the agreement, doesnt mean its a royalty for treaty
purposes
- Issues we spotted:
- Whether there are withholding reduction under Canada and Latvia treaty?
- There may also be tax consequences if any of the royalties are attributable to the PE
(if there is a PE in the US) in the US -- article 12, section 3
- Under US domestic law exclusive distribution law give rise to royalty
- Pg 776, the US position with respect to beneficial owner refers to domestic law. If
royalty for domestic purposes, it is considered a royalty for treaty purposes. Here,
the payments made with respect to Canada are not royalties, but the payments
made with respect to US to Latvia may be royalties, based on US domestic law.
- Royalties may or may not be royalties for treaty purposes.

Agreement
- 1. Latvia Canada exclusive distribution rights
- 3.a. in exchange for exclusive distribution rights, Canadian company will pay royalty
of X percent to Latvia.
o By dividing up terms of contract, can pay less withholding for exploitation
rights (intellectual property right) compared to exclusive distribution right.
o Latvia company msut determine whether it is worth it to pay less tax by
granting a portion of exploitation rights for lower tax rates.
- 3.b. Canadian company will pay x percent for exploitation rights (which is not a
sublicense) to Latvia

Netherlands has royalty ruling: Netherlands will provide ruling that depending on size of
royalty, can get deduction for royalty if there is taxable income.

When Indonesia pays 100 in royalties to Netherlands for use of Coke TM in Indonesia, it
pays 0 withholding and Indonesia gets 100 deduction. Then Netherlands pays minimal tax
on the 100 income (per the royalty ruling). The remainder of the 100 income after tax is
99.96, which is then paid out by Netherlands as royalty to Nevis for use of Coke TM in Asia.
Netherlands then gets deduction for this royalty payment. Nevis then has tax-free income.
This money can then be distributed from Nevis to US (taxable). If it is used by Nevis, then it
pays lower tax rates. Netherlands is the beneficial owner.
- note that conduit rules are not applicable jere because there is a stream of different
intellectual rights its not the same IP rights being transferred. Also, the
Netherlands has an important business purpose and business function, which is to
manage the IP.
- Tax favorable: Bahamas, nevis, turks & , carousel, st. martin, Isle of Man, etc.


Article 11 Interest

- 1. Look at Canadian domestic law as to withholding. Does Canada impose
withholding on payment of interest? If not, then do not get to treaty provisions.
o There is 25% withholding tax.
- 2. Is there a treaty between Canada and Latvia? Yes, and its OECD.
o 1. Is Latvian country a resident (article 1 and 4)?
b/c its not a US treaty, must not worry about limitation of benefits
however, b/c it is OECD must worry about substance under art 4.
o Latvians effective management is Latvia, thus resident in Latvia. Thus, we
now move to Article 11.
- If it is not really interest, and it appears like something else, then it is taxed like a
dividend at 15% (see US Article 11.2)
-

MARCH 29
- Philippines has a PE in Philippines, and if its a branch of Singapore company, then
any money earned by Philippines is not taxes at Singapore level
- Singapore domestic law has a foreign profits account (income from foreign sources
are not taxable in Singapore dividends and interests paid from foreign account are
not taxable to Singapore). Because all income to Singapore is from this foreign
profits account, under Singapore domestic law, the Singapore entity does not hold
any taxable income. Thus when it pays the interest to the NL, this interest payment
is from the foreign profits account, thus under domestic law Singapore must not pay
any tax. Thus, no need to even get to treaty.
- However, if money is paid out of Singapore directly, rather than foreign profits
account, then look to domestic law, under which the tax is 25% for payment of
interest.
o Article 11.3: interest: money from any debt claim, subject to 10%. Thus, b/c
its less than 25% go with treaty.
Under Netherlands and Singapore treaty, there is a provision that if
interest paid to central bank, then subject to 0%. However, here its
between private companies, thus 10% controls.
- Exchange gain and losses treated under Art 21. If Dollar loan from Dutch company
(lending Euro to US) then taxed at Dutch level. If Euro loan from Dutch company
(lending Dollars to US) then taxed in the US.
- If EU entered into contract with Saudi to build domestic water system in
Bangladesh. Thus, there is EU aid to Bangladesh. Even if not treaty between NL and
Bang, as part of the contract, the EU will incorporate benefits of the OECD model
into the contractual agreement thus, it is a special purpose contract that has the
effect of the treaty. When EU hires EU contractors to do the job, they will be exempt
under Bangladesh and EU law, which reduces cost of the contract which is to EUs
benefit thus always ask if there is EU involvement
- Exemption method ARTICLE 23A: all the dividends coming up from Sub, all the
dividends qualify for, thus not subject to tax in the Netherlands.
Credit method ARTICLE 23B: not exempt from tax, but get credit if paid at lower tier


April 2 and 3, 2014

In 1960, German tried to come to US, but was not able to. Instead, went to Canada. Then
came to US. Then went back to Germany. Got married in Germany. Move to US. Have a child.
Husband entered 1968 citizenship lottery, and got citizenship. In 1970, family moves to
Germany. Since then, pay taxes in Germany. Placed money in Swiss bank account. In 1998,
Swiss merged with union bank of Swiss, forming UBS. Should they have known that US
requires payment of taxes? Ignorance of law is a defense to tax penalty.
An examination under 1040 is different from examination under information tax
return.
Could argue that on basis of reasonable cause (german citizens who thought they
were being compliant this is reasonable b/c everyone else in the world is not
aware of worldwide taxation) no penalty should be imposed.

A president giving speech is not taxable under
Land is not always land, just like royalty is not always royalty.
Article 6 Income from Immovable Property: the state where the immovable
property is has the right to tax.
o Includes immovable property
o Does the sale of cows from an agriculture business fall into article 6 or article
7 (business profits; note that article 7 trumps article 21).
Although income from agriculture or forestry is included in Art 6,
contracting states are free to agree in their bilateral conventions to
treat such income under art 7.
The farm is a permanent establishment.
Drilling platform is on site 11 months, in an area belonging to Norway. is it a
permanent establishment of UK company in Norway. Does article 6 or 7 apply?
o If covered by Art 6, Norway would have rights to tax b/c profits from
immovable property
o If covered by Article 7, under Art 5 there likely is PE in Norway under 5.2.f
o If section 5.2.f were not applicable, and we were under US model, article 5.3
would rule that it is taxable to UK.
article 6 itself does not require PE
Article 8 (trumps art 7)
o international traffic under the OECD requires the effective management to
be in a Contracting state. (transport by ship that has its EM in US, but under
US model if ship is going between US ports it is not engaging in international
traffic).
o If shipping cargo of goods from China to Austria, look to place of effective
management.
Article 9 (US model): could result in effective double taxation, if the US does not
agree to make the adjustment. However, often the OECD model applies, and thus
this issue does not exist b/c the contracting state would be required to make the
adjustment.
Article 13: Capital Gains
o Note that whether you define it as income (art 7) or gain (art 13) will
result in same result.
If selling a cow, its income (b/c not capital asset) (art 7)
However, if selling a farm, its capital gain (art 13)
Article 18 Pensions
o Pensions paid in respect of private employment are taxable only in the state
of residence of the recipient.
o Payment must be in consideration of past employment.
o US Model art 17: any pensions owned by resident of state is taxable only in
that state. (thus if someone earns pension in the US, but are not residents of
the US, if they move back to home country then taxable in home country)
US can always tax social security, despite residency (totalization
agreement does not supersede this)
Article 19
o If working for govt of Netherlands, govt of Netherlands has right to tax.
However, if govt eee of Netherlands but sent to another state to provide
services may be taxable there .
Article 20
o Money received to be a student is not subject to tax. However, if receiving
addtl funds, taxable as if never left home country
o US model: full-time student reqd.
Article 21
o If not covered by other provisions, covered by 21 based on residency
Article 22 Capital
o Taxation of capital is going out of style (European countries used to tax net
wealth, but less commonly done today)
o If domestic law doesnt impose capital tax, then treaty not applicable.
Article 23
o 23A: Capital Import Neutrality: Capital should be taxed only where it is used
(thus resident country shouldnt have right to tax if its being employed
elsewhere) often this provision translates into an exemption
Article 23a(2) only applies where a CIN country does not permit full
100% participation exemption (i.e., japan has 95% participation
exemption, so 5% is taxed, subject to credit),
o 23B: Capital Export Neutrality: Usually translates into tax credit system
o The US model, only practices Capital Export Neutrality (art 23)
Even though the article refers to it as a deduction, it is really a credit
b/c it is a deduction from the tax (not income)
If credit limitation is computed based on a country system, rather
than a basket method, may end up with different result. Thus, if treaty
gives more favorable result, use treaty.
If capital deployed outside of US, and if you pay more tax, if you pay less tax outside
of US then must pay balance here.
Baskets: US tax law has baskets
o Instead of using all foreign source income, we break it down. So for each item
of foreign source, we apply the same formula as the credit limitation to each
basket. (foreign source/WW income x US tax)
Tax Sparring:
o Credit for taxes that could have been charged, but that were not charged.
Only comes up in CEN (tax credit jdx). It does not come up in CIN b/c the
income is exempt. This is advantageous to CIN
o (ask Lauren for notes on this)
A company based in the US, must pay tax before it distributes to shareholders (if
effective tax rate is lower in the lower tax structure, which it likely will be, US
company must pay additional tax). In an CIN company, if overall effective tax rate is
lower that in the home country, must not pay additional tax?
Inversions: how to convert CEN to a CIN. Makes company more efficient in the
capital markets.
Note that tax credits are only applicable to income tax.
Substantial participation exemption: all EU countries have SPE if you own
substantial part (direct investment, rather than portfolio investment) of the
investment, then it will not be taxable in the jdx received. This is applicable in
Parent-Sub setting. It does not matter whether it is in the form of an investment or
in form of a loan. And since CIN applies, the capital is taxes where it is employed.
o Dutch, swiss, maltese, Singapore are often used b/c they have strong SPE
agreements, thus they permit avoidance of tax credit limitations



April 11

Article 26: foreseeably relevant is a very broad standard (for some tax purpose)
Is there a right to a TP under a tax treaty to stop government from providing
information to another government? The tax treaty does not provide such right,
thus, a TP must look to domestic law to determine whether such right exists.
Information under art 26 can be concerning taxes of every kind.
o US uses same foreseeably relevant standard (Powell Case). US law.
o Section 4: the requested country must use its information gathering
measures to gather the requested information, even if the requested country
may not need such information for its own tax purposes.
o Multinational convention on mutual administrative assistance.
Offshore Voluntary Disclosure: self-denouncement by persons who have offshore
accounts. (created in 2009 by memoranda issued by IRS, not law)


Treaties
Class 12 12 April

Story from last class
02/2009: UBS decided would deliver client files on 255 US clients. US govt wasnt happy
and continued to put pressure re threats of rescinding US banking license.

08/2009: Swiss govt caved. Went to Swiss govt to do whatever it takes to give US that
information. UBS entered into Deferred Prosecution Agreement and notified all affected US
customers re disclosure to US government (including IRS).

Controversy (and related) Costs $75k-$100k per US client.

US amnesty programs
First Program of This Type Caribbean basin program
o Bank accounts in Caribbean used by US persons to access accounts using debit
cards.
o US govt started investigating payment networks and issuer of cards because these
companies are located in US.
o Germany then asked for the information of the US government under Article 26.
o What if client from country where blocked currency? This method might be
necessary.

Global Information
Through tax treaties way to get this global information (greatly facilitated by
improvements in tech).
UBS then closed accounts for those US clients and referred them to Swiss bank that didnt
have any locations except for Switzerland.
o This approach failed to account for 2 things:
ONE: Worlds reserve currency is the USD*
Context:
o LIBOR (bank interest rate offering USD)
o EURO dollar (LIBOR for euro)
o Use of futures markets for international tax planning
TWO: Need access to US correspondent accounts

Foreseeably Relevant Standard Under Article 26
Whats Not Foreseeably Relevant:
o Passports (discussed in Class 11)
o Country A requesting information regarding a company that is not the actual TP
under audit from Country B, and while the request is outstanding, Country A closes
its audit on the actual TP.
Example. Tax inspector auditing Company A. See A has borrowed $$ from
Company B. Start looking at B. B is not a bank, look to see whether
companies are related (if it presents an intercompany transaction).
Inspector requests information re Company B from Company A.
Company A responds by saying arms length transaction, and have
no information (including ownership information) on Company B.
Make Article 26 information request.
Country B tax inspector receives request (reaches inspectors desk 1
year later).
In the meantime, Inspector from Country A closes tax audit on
Company A.
When Country B requests information from Company B, new tax
year (the audit for the relevant tax year has been closed).
No longer foreseeably relevant.


Wegelin BankCriminal Indictment
Background
o All USD transactions clear through New York (Federal Reserve Bank of New York).
Example of sending $$ Hong Kong account to Tokyo account.
o Correspondent bankaccounts among banks for moving $$ to each other for
clients.
o If US sanctions on Iran (for example), banks essentially means that cant do anything
in USD.
Transaction in USD would necessitate use of US correspondent banks
(through New York).
OFAC SDN list
2 problems with Wegelin
o needed to do business in USD for US customers
o needed to go through US banks accounts (used UBS correspondent accounts)
jurisdictional nexus requirement met
Evidence
o US got the information necessary for the indictment through the voluntary
disclosure program

UK Approachin context of Wegelin example
o UK also interested in evidence.
o Information initially came from Liechtenstein bank where somebody stole a disk.
o UK ENACTED Lichtenstein disclosure initiative. If anytime among 4 year period, can
disclosure and be subject to 10% penalty.
Contrast with yesterdays administrative fiat.
Could also move $$ from say Caribbean bank accounts to Liechtenstein bank
to avail themselves of program.

US Approach
o Art. 26 approachall countries get information & every country does what it wants
with it

Use of Banks in Compliance
o Banks are agents for the governments
Information sharing
Assumes trust of government

2009: US Offshore Voluntary Disclosure Initiative
o Referred to as an amnesty, but it is not.
None of these so-called programs actually forgave anything.
o Not allowed to use initiative if investigation has been opened for TP
Accounts doesnt have to be flagged by reason of offshore bank accounts
ISSUE: how does TP know whether under audit?!
Given the fact that can be under audit and never know about it
In US, for example, once flagged (DIF program), TP is under audit.
Practitioners Approach to issue: TP must disclose before TP is given notice
of investigation.
o Designed to be one-size-fits-all programs
Agree to file all income, information tax returns, declare all income, pay tax,
pay interest, pay 20% penalty on amount of tax owed, miscellaneous penalty
of 20% on $$ held outside US
FBAR Form (discussed below)

o US / Italian / UK system of taxation
Special forms required to file where $$ assets outside of the country
US: Form 1040, Schedule B (interest)2 questions on bottom of form
(7(a)): Do you have ownership interest/signatory authority on an
account outside the US?
(7(b)): Have you received a distribution from a foreign trust outside
the US?
If yes to either of these questions, have to file additional forms
Commonly see foot faults but that counts here
Form 3520-K
Information return required to be filed if create non-US Trust
If received distribution from non-US Trust account above a certain
amount
What question 7(b) leads into
If dont file this form, SOL doesnt run
o So can go back to 2006 ((Part of Higher Act--date of
enactment was 2010 but applied to all tax years still open, so
2006))*
o 26 USC 6501(c)(8)

FBAR (FinCEN Form 114)
o Filed online
o Important: not required under IRC. Required under BSA.
Critical.
B/C if govt makes an assessment of taxes under IRC, that assessment is
collectible.
o Higher Actchanged rules re penalties.
Simply assesses [certain] penalty and is immediately collectible
Dont go through deficiency procedures
Theres CDP hearing whether thats really due process is another question.
o Penalty for FTF FBAR
Even though IRS says it wants to assess it, its different from the assessment
process under the IRC.
Assessment but its not self-executing
Only way can collect is to bring a civil action
Procedure for FBAR penalties and procedure for tax penalties are
completely different

US Offshore Voluntary Disclosure Program (contd)
o Set deadlines for compliance without extensions.
o Then, restarted program under different year (e.g., now 2012 OVDP)
o Example. US entrepreneur interested in purchasing Swiss company. Puts $$ in Swiss
escrow account to show good faith. While pursuing due diligence, decides not to
buy. Earns small amount of interest while in Swiss account. Illustrates tax, interest,
penalties due under this program, and how potentially unfair it is.
o 2011 program: increased miscellaneous penalty to 25%.
o 2012 program: increased miscellaneous penalty to 27.5% and increased base to all
assets outside and everything bought with those assets.
Issues
o Facts & Circumstancesindividual agents have not been able to take account facts
& circumstances
o How to calculate taxCertain types of investment entities do not collect certain
information thats requested by certain tax authorities
Want to get TP in same position as if taxed currently.
Problem: these types of entities do not produce the type of
information requested.
E.g., countries that dont have capital gain tax. Accordingly, entities
subject to that jurisdictions tax wouldnt collect that information.
PFIC. Foreign investment fund earning passive income.
Special admin: on tax for PFICs ---- but IRS position is that its only
available for those in disclosure program
[check cite]: IRS can extend time to make any election unless statute
explicitly provides that must make election within specific time
frame
QEF: can elect retroactively for PFIC to QEF. Mark-to market for that
taxable year. Various assumptions made.
Solves problem re missing information
SICAV: special type of Luxembourg entity for funds.
Can be flow-through entity under US check-the-box
UCITS: securities law regulation in Europe that regulates



US
Special agent criminal side
Revenue agent civil side
In other countries, distinction not readily apparent

Germany Amnesty Program
Program of self-denunciation
10% penalty (civil side)
criminal: jail but no additional fine

Australia Amnesty Program (announced last week)
10% penalty

Canada Amnesty Program
10% penalty

Different governmental agencies discussed
IRS, FinCEN (unit of Treasury), DoJ
FinCEN: principally responsible for tracking $$
2013: published request for comment re due diligence for financial institutions, which
proposed to require that any bank or securities firm that is required to have a AML program
is required to track and disclosure beneficial ownership information on those accounts
o Professor thinks this isnt likely. Political. DE (Biden). DE could potentially loose
30% of its revenue.

OECD: Art. 27 Assistance in the Collection of Taxes (p.643)
Section 2: insert
o Revenue Claim = Whatever taxes are owed under domestic law plus interest and
penalties
o FBAR is not a revenue claim
o Historically: revenue rule = no state will collect taxes on behalf of another stat
o NOW: Each state will help each other collect taxes
Section 6 [insert provision]
o Redress is with requesting state only, not with requested state
This article is not in many of the bilateral tax treaties (see headnote under p. 643)
CR Mutual Administrative Assistance Article 2, Section 11 provides for same thing
o Subject to reservations
o A number of countries have expressed reservations for same reason as headnote in
Art. 27
o Impact on Analysis:
Domestic law
EU law
Treaty
(4
th
Step) If Art. 26/27 issue** Did contracting state become signatory
on treaty with this provision
Section 3.
o First sentence means it needs to be a final assessment under domestic law

US Model (p. 646)
o Nothing in US model re collection
o Cross Reference
US-Germany treaty no collection provision
US-Canada includes collection provision assistance in collection (very
similar to Art. 27) p. 2176
o Compare with approach to LOB
US always has a LOB provision, but collection assistance provision is
different.
US will agree to collection assistance provision, but have to look at the
specific treaty (illustrated by US-Germany and US-Canada treaties) to see
whether applicable to particular matter.

FATCA (Foreign Account Tax Compliance Act)
Premise:
o if anyone outside US
wants to invest in US securities markets,
wishes to purchase debt issued by US person,
engage in any financial transaction with US
o is a foreign financial institution
o US going to w/h 30% on all cash remitted to US
o UNLESS
Agree to remit information regarding all US persons to US
Definition of foreign financial institution
o not intuitive definition
o broken up into categories
custodial institutions (i.e., banks, investment banks, brokerage houses)
investment entities
most discussion: Trust / Foundation
rule appears to be:
o if trustee and invest assets in trust directly, not a FFI and
dont have to register with FATCA
o if avail oneself of investment advice from a FFI / third-party,
then = FFI and have to register with FATCA
o GIIN number for registered entities
o US has developed its standard for FATCA reporting which is supposed to go into
affect 7/1/14.

OECD Automatic Exchange of Information (Global FATCA)
o Based upon the US reporting,
o Implementation date jan 2016.


April 25

Article 29 doesnt apply in practice much b/c colonies do not exist
Article 28: Nothing in this treaty affects diplomatic
Article 24
o Nationals of a Contracting State: a person
National (article 3.1(g)): nationality or citizenship (residency is irrelevant)
o This provision extends to (national of Greece could live in UK, who is not a resident
of Greece nor UK. Article 4 would not apply b/c of residence, however, non-
discrimination provision would still apply.
o Article 24(3): the same business in the same state shall be treated the same
o Article 24(6):
o US Model: carves out exception for residents of US who are subject to worldwide
taxation. Thus, non-discrimination provision is carved under US model
The US model does not permit discrimination based on nationality for any
taxes for persons in the same circumstances (except US model permits US to
tax its residents differently from non-residents)
o Swiss national who is resident in nicaraqua, who owns property in US (property tax
1 cent per 1000 for American, 2 cents per 1000 for nonamerican). Only pays 1 cent,
otherwise discriminatory
Discrimination based on residence (rather than nationality) may not run
foul of treaty
NOT TESTED

Worlds favorite entity for tax planning
o American LLC (Delaware, south Dakota): can be transparent
State tax: zero
Federal tax rate (if check the box): the tax rate of person
If person is non-american: zero percent b/c LLC is transparent
(disregarded entity thus does not file US tax return)
o US Trusts
If domestic, subject to tax. However, domestic rules require meeting 2 part
test to qualify as domestic trust
1) law to which its subject in US and 2) law of admin is both in US
Otherwise, not subject to US law and no US tax.
o Unlimited Liability Company (Canada): persons use this to dip in and out mostly
used for Canadian tax purposes, not international planning
Belize often used as tax haven
Honduras
Panama: territorial jdx if non-panama resident, do not pay tax there.
o Has not abolished bear-shares
o Great for shipping
o Legal system in Spanish
South America: Not a lot of tax savings there.
Aruba: Historically part of netherland-antilles, Tax haven, stable
Carousel: Stable govt, good court system
St Vincent: Low-tax jdx, Yacht jdx 0 tax to register boat
Barbados: Tax treaties: good network w/tax treaties (not as strong relationship with US)
Nevis: Good trust laws, but not good court system
Antigua: red flag country.
Angia
British Virgin Islands: US dollar currency, BVI companies, offshore jdx of choice
o BVI Star trust: used for a lot of things that they dont work for
USVI (US virgin Islands Company): US corporate law subject to US law but exempt from tax,
so long as not doing business in US
Cayman Islands: US dollar
Turks & Caicos: corrupt govt, no tax, british tax, offshore
Bahamas: major offshore site for Europe, but less for US, foundation law, trust law
Bermuda: most heavily regulated offshore jdx in the world, expensive to do business,
proximity and clean
o Has been replaced by Switzerland and Ireland b/c more beneficial to be located
there
Treaty for Switzerland and Ireland eliminates excise tax, thus more
beneficial to be located there
Ireland: not a tax haven, but low corporate tax rate (12.5 tax rate on manuf, 25% on other
income), EU tax treaties, lot of insurance, software, distribution development, IP
powerhouse
Isle of Man (and including its islands jersey, gernsie): a lot of banking, offshore, not treaty
UK:
Netherlands: civil law, favorable tax rulings, strong law/acctg firms, holding company jdx of
choice around the world
Luxembourg:
Italy, Germany, france, Switzerland: not recommended. Switzerland is not stable
o Switzerland: agreed upon tax system
Saint Marino: East Coast of Italy, zero tax
Monaco: once you can get residence permit pay very little tax (fixed basis taxation), only has
a tax treaty w/france
Hungary: New tax treaty w/US, Limitation of benefits provision
Luxemboug, iraland, malta: preferably for hedge funds
Africa: not a lot going on in Africa from offshore perspective
Middle east generally: remittance taxes, ownership percentages problems, political
instability
Maritius (Indian ocean): lots of treaties (0-1% tax at election), stable, gateway to india
(along with Singapore)
Singapore: competitive to Netherlands: if not remitted to Singapore not taxed there,
extensive network of tax treaties, detail administrative requirements, need
substance/presence
Hong Kong: manufacturing, banking, not stable b/c part of republic of china, income taxed
on source
Australia
New Zealand: offshore sector in oil sector, no income tax on NZ trust where neither settlor
nor grantor are in NZ (new Zealand non-resident trust)
o However, must have economic nexus with NZ
o Prof suggests that it may be preferable to have US non-resident trust (if tied to US
bank account): trust in jdx where bank accounts, etc. thus, there is a nexus.
Dubai: requires 50% ownership by UAE
o In free zone can set up 100% owned company, in which case are offshore and thus
excluded from tax treaty