Summary of IFA 59TH CONGRESS - BUENOS AIRES

I had the privilege of joining this big family of tax practitioners in Buenos Aires, Argentina during the IFA Congress. For professional reasons I had follow almost all sessions and make summaries of the discussions. As promised I want to share with the readers some core points of the congress without being to detailed. The ones interested may request to my mail the complete summary.

The following sessions were held during the congress:
Subject I: Plenary Session – Source and residence: new configuration of their principles. This included (i) Break-out Session IA – Source taxation: practical issues in determining the amount to tax and (ii) Break-out Session IB – Residence taxation: practical issues in relief of double taxation.
Subject II: Plenary Session – Tax treatment of international acquisitions of businesses.
This included (i) Break-out Session IIA – Post-acquisition restructuring and Break-out Session IIB – Tax aspects of financing the acquisitions
In addition there was also the following seminars: (A) Fundamental rights of taxpayers; (B) IFA/OECD – the definition of royalties in the OECD Model Convention; (C) Coordination of taxes in economic unions/common markets; (D) Recent developments in international tax; (E) Moving away from source taxation: re-organizing supply chains; (F) Capital gains dealing with shares of real estate companies; and a special Seminar on Perspectives of foreign investment and taxes in Argentina.
I will try to outline the best performances during the congress:

A - Source Taxation
Plenary Session - This discussion framed by the General report presented to the IFA and published in the Cahiers was very academical to some of the audience. Nevertheless, I enjoyed some remarks of the panellists. Special because there was a very evident influence of the school of supporting source taxation (probably because it was a Argentinean Congress), the discussion was political to a certain extent. I mean tax policy was on the background of the issues discussed. I was very well impressed by the comments of Prof. Reuven S. Avi-Yonah (United States), Dr Dale A.M. Pinto (Australia) and Dr Ian Roxan (United Kingdom). I personally enjoyed the discussion on (1) whether or not the jurisdiction on interest should be allocated exclusively to the State in which the enterprise, which is the debtor, carries out its business activity; and (2) whether royalties should only be taxed in the State in which the intangible property is produced rather than in the State where the intangible property is used.
Source taxation: practical issues in determining the amount to tax - Nothing very special to report (besides perhaps a funny example on deduction of expenses related to a hostage situation in Brazil).
Residence taxation: practical issues in relief of double taxation – In this break-out session I enjoyed the points raised by Prof. John Prebble (New Zealand), Stephen E. Shay (United States) and Dr Matthias Werra (Germany). In particular, Dr Werra addressed a specific situation of the deductibility of general administrative expenses and financing costs both in the situation of business conducted through a permanent establishment and through a subsidiary to question whether or not the new authorized OECD approach concerning the allocation of profits to permanent establishments would impact on the deduction of these general administrative expenses and financing costs. Prof. Prebble intervention on the relationship of the controlled foreign corporation (CFC) rules with the methods to avoid double taxation was interesting and controversial (mainly because the views expressed were not coincident with the view of several scholars).

B - International acquisitions of businesses
Unfortunately, I was not able to attend the plenary Session, which followed the General report presented to the IFA (and published in the Cahiers), consisted of different views and positions of the members of the Panel. This topic was followed by two Break-out Sessions, i.e. Break-out Session A: Post-acquisition restructuring and Break-out Session B: Tax aspects of financing the acquisitions. From comments of other congresses, I understand that this topic was well chosen and discussed. Although some people mentioned to me that the panellist tried to cover too much issues in a short time.

C - Seminars
I personally enjoyed the IFA/OECD seminar on the definition of royalties in the OECD Model Convention, the seminar on recent developments in international tax, and the seminar on capital gains dealing with shares of real estate companies. I did not attend the seminar dealing with re-organizing supply chains, but I got good reviews on the content discussed during the panel.
The IFA/OECD, considered by many as the best session of the congress, was stared by the interventions of Jacques Sasseville (OECD), Mike Waters (United Kingdom) and Michael F. Mundaca (United States). The case studies were well discussed and very practical. They demonstrated the inconsistencies of the current definition of royalties and problems of interpretation when faced with certain type of transactions.
The Seminar on recent developments in international tax was structured in three main parts, dealing with (i), US tax reform and international issues expected to be addressed by the President's Advisory Panel on Tax Reform, (ii) ECJ decision regarding the "D" case, and (iii) Selected case-law on tax treaty non-discrimination. I personally enjoyed the discussion on the controversial “D” case that dealt with the issue of MFN in Europe by Malcolm J. Gammie QC (United Kingdom) and Dennis M. Weber (Netherlands). The UK UBS case outlined by Prof. Richard J. Vann (Australia) dealing with tax treaty non-discrimination raised also interesting issues. Both cases were reported earlier in this blog.
Finally, I enjoyed the seminar, which dealt with capital gains derived from the sale of shares of real estate companies. I liked the comparative approach taken by the panellists and the novelty of some of the treaty issues concerning the application of Art. 13 of the OECD Model Treaty. The contributions of Dr Stefano Simontacchi (Italy) were very important in understanding the “ins and outs” of the interpretation of the interpretation of Art. 13(4) of the OECD Model Convention (inserted in 2003), which provides that gains from the alienation of shares of a company that holds real estate are taxable in the state where the real estate is located.

QUOTE OF THE WEEK (Week XIII)

"Lack of money is no obstacle. Lack of an idea is an obstacle."
by Anonymous

2005 OECD Model Tax Convention made available

The OECD has made available yesterday (07/09/2005) the 2005 updated version of its Model Tax Convention. As you may know, the OECD Model is periodically updated to take account of new developments and to reflect the experience in the application of tax conventions. The 2005 edition incorporates the latest changes to the Model which were approved by the OECD Council on 15 July 2005 (these changes were released in draft form on 15 March 2004)

These changes result from work done by the Committee on Fiscal Affairs (CFA) on a number of issues (you find below a link to the background reports)
- Tax treatment of activities related to international shipping and air transport (see also http://www.oecd.org/dataoecd/20/53/34083450.doc);
- Cross-border income tax issues arising from employee stock-option plans (see also http://www.oecd.org/dataoecd/35/53/33700277.pdf);
- Tax issues arising from cross-border pensions (see also http://www.oecd.org/dataoecd/12/21/34562290.pdf);
- Issue of multiple permanent establishments (see also http://www.oecd.org/dataoecd/34/9/31483903.pdf);
- Revision of Article 26 and its Commentary concerning the exchange of information (see also http://www.oecd.org/dataoecd/28/4/33614065.pdf);


The update also includes the following technical changes to the Model Tax Convention:
- Changes to the Commentary on Article 11 to include alternative provisions that provide for the exclusive residence taxation of all interest or of some categories thereof and to explain the reasons underlying these provisions.
- Changes to paragraphs 29 and 30 of the Commentary on Article 11 to address more accurately the triangular problem arising in the case of interest borne by a permanent establishment located in a third state.
- Changes to the Commentary on Article 12 to clarify when payments for forbearance to grant rights to use property constitute royalties.
- Changes to the Commentary on Articles 10, 11 and 13 to include a cross-reference to the suggested provision dealing with the investment income of pension funds found in the Commentary on Article 18.
- A change to paragraph 4 of the Commentary on Article 15 to clarify how to take account of overlapping periods when applying the moving 12-month limit of subparagraph 2 b) of Article 15.
- Changes to the Commentary on Article 20 to clarify the relationship between Articles 15 and 20.
- A change to paragraph 31 of the Introduction to clarify that no reservation is required to indicate that a country merely wishes to modify the wording of a provision of the Model to confirm or incorporate an interpretation of that provision put forward in the Commentary.
- The addition of commas to the French version of subparagraph 2 b) of Article 15 to conform to the English version.
- A minor change to paragraph 10 of the Commentary on Article 15 to indicate that States may wish to deal bilaterally with the situation of employees working on trucks and trains travelling between countries.

U.S. Tax Treaty Policy and the European Court of Justice

Once again the issue of the effect of EC Law on the US tax treaty policy is addressed in this blog. The readers will remember that in May we reported that the National Foreign Trade Council (NFTC) of the United States issued on May 26 a report suggesting the U.S. government should begin to develop a negotiating strategy on the assumption that a multilateral income tax treaty with the European Union may become a practical necessity in the not-too-distant future. The report, produced by the NFTC Tax Treaty Project, also urged the U.S. business community to identify the practical and policy issues that would arise if such a treaty were to become a reality.

Ruth Mason from NYU goes one step ahead in a very detailed paper called "U.S. Tax Treaty Policy and the European Court of Justice". The issue is challenging and it is evident that the discussion is growing from both sides of the Atlantic. From the European side, still a lot of water has to pass the bridge of the ECJ concerning the relationship of EU Law with third countries. I call upon the attention of various pending cases dealing with this same issue.

Here is an abstract of the paper:

The discussion is framed by the controversy over the legality of tax treaty limitation on benefits clauses (LOBs) in the wake of recent ECJ decisions. The Article argues that the United States and the EU Member States should take positive action to conform their treaties with EC law. Such voluntary harmonization would allow the countries to take a more flexible approach to EC law compliance than they could after an adverse judgment by the European Court of Justice (ECJ). Moreover, voluntary alignment of tax treaties with EC law would help reduce the risk of further encroachment on Member State direct tax sovereignty by the ECJ. By curing EC law conflicts present in current bilateral treaties, the Member States reduce the risk that their treaties will be reviewed by the ECJ, a court hostile to both national revenue needs and Member State direct tax competence. The proposed method of alignment of tax treaties with EC law is a 26-country multilateral tax treaty between the United States and the EU Member States.

Paris Hiltonomics

For the ones that love this "American tax comedy", here is an editorial from WSJ about the repeal of the US estate tax, which some call it the Paris Hilton Benefit Act. What I like in the US (and I see less in Europe) is not only the capacity to approach some of this technical issues in a national newspaper but also the capacity to simplify and summarize the issues’. “The simplification of anything is always sensational” (even though in technical issues like tax it can be tricky to simplify). But I cannot forget one tax professor holding his tax code and saying "I hold in my hand 1,200 pages of tax simplification."
For the WSJ opinion

QUOTE OF THE WEEK (XII)

"There's a lot of work to be done."
PRESIDENT BUSH, visiting hurricane victims in Baton Rouge, La.

Previous quotes:
Week I
Week II
Week III
Week IV
Week V
Week VI
Week VII
Week VIII
Week IX
Week X
XI

Is flat tax entering into the old Europe?

While flat tax gains momentum in the rest of the world, Germany and UK are the new European states to admit looking at this issue. It is almost impossible to imagine, but Germany may be one of the next countries to adopt a flat tax. The future Finance Minister (based on the predictions that CDU will regain power after more than a decade of Labour power) is a strong supporter of tax reform, and German taxpayers are disgusted by their country's complex tax regime. Paul Kirchhof, 62, seen by Merkel as a future finance minister, has called for the sweeping away of the country’s myriad allowances and multiple tax bands and their replacement by a single flat levy of just 25%. Similar schemes are widely credited with having kickstarted the economies of several of the former communist countries of eastern Europe.
The UK case is more of a hush hush thing! Accordingly, a secret report from U.K. Treasury admits flat tax is a good idea. Two stories from the Daily Telegraph reveal that a blacked-out Treasury report acknowledged major benefits if the United Kingdom adopted a flat tax. On the other side of the Atlantic, the US President's Advisory Panel may publicize a global flat tax revolution. Taking into account that the world is moving to the flat tax, and China and India may be among the next countries to hop on the bandwagon, it is expected that the US President Bush's tax reform panel will highlight this worldwide movement in next month's report.

Read more here:
Previous posts
Times
Telegraph

When the advice goes sour!

Remeber my May post about KPMG? We have new developments on this US case. KPMG, one of the Big Four, settled a tax-fraud case with the American government that might have threatened its very existence. The charge sheet was impressive: the government claims that between 1996 and 2002, in exchange for $128m in fees, KPMG arranged dubious tax shelters that allowed rich individuals to claim over $11 billion in phoney losses and avoid $2.5 billion in taxes. KMPG agreed to pay fines of $456m and accepted a long list of other conditions. KPMG escaped an indictment of the kind that destroyed Arthur Andersen but former partners were personally indicted for selling the tax shelters to wealthy clients. Read more here:
If you are interested in knowing more there are some of the documents the from the KPMG settlement released by the U.S. District Court for the Southern District of New York:
Deferred Prosecution Agreement
Information
Statement of Facts
Proposed Order
Resolution of KPMG Board of Directors
Indictment