Friday, February 24, 2006


“An economy breathes through its tax loopholes.”
by Barry Bracewell-Milnes, Institute of Economic Affairs (IEA), author of Euthanasia for Death Duties

Thursday, February 23, 2006

Constructive dialogue between the Advocate General and the ECJ

Today several judgments and opinions of the European Court of Justice were made available, namely the Judgments in the CLT-UFA case (C-253/03) and Keller Holding (C-471/04) , both dealing with the freedom of establishment, van Hilten case (C-513/03) dealing with free movement of capital and the Opinion from the Advocate General on Class IV of the ACT Group Litigation (C-374/04) dealing with the freedom of establishment and the free movement of capital.

In such a productive day, you are bound to find interesting stuff! I refer to the sharp critics from the Dutch Advocate General Geelhoed, in the ACT Group Litigation case, on the previous ECJ decision on the famous Bosal case. Those critics are not new (see for example Wattel in European tax law, 2005). What is interesting is that on the same day the Advocate General states its points of view, a German case, which has evident similarities with the Bosal case, was also decided by the ECJ (going the opposite way suggested by the AG).

What did the Advocate General said:

62. As regards home State obligations in the field of corporate income taxation, I should like to add a brief comment on the Court’s judgment in Bosal. In that case, the Court held contrary to Article 43 EC a Dutch rule by which Dutch-resident parent companies could only deduct costs relating to a subsidiary if that subsidiary was taxable in the Netherlands, or if its costs were indirectly instrumental in the making of profits taxable in the Netherlands. The Court used an essentially three-step reasoning in reaching this conclusion. First, after concluding that the Dutch limitation on deductibility of costs was in principle compatible with the Parent-Subsidiary Directive, (60) the Court observed that such a limitation ‘might dissuade’ a (Dutch) parent company from carrying on its activities via a subsidiary established in another Member State, and so constituted a hindrance to the establishment of subsidiaries within the meaning of Article 43 EC. Second, the Court rejected the possibility that the rule could be justified on so-called ‘fiscal cohesion’ grounds (i.e., the need to preserve the coherence of the Dutch tax system). It reasoned that no ‘direct link’ existed in the present case between the granting of a tax advantage - the right of a parent company to deduct costs connected with holdings in the capital of their subsidiaries - and the liability to tax of its subsidiary. In this regard, the Court cited its judgment in Baars that no direct link could be found to exist when dealing with different taxes or the tax treatment of different taxpayers. Third, the Court dismissed the argument that, because of the territoriality principle, the situations of a Dutch parent company with Dutch-taxable subsidiaries, and a Dutch parent company with non-Dutch taxable subsidiaries, could not be considered ‘comparable’ for Article 43 EC purposes. On this point, the Court confined itself to citing its judgment in Metallgesellschaft and observing that, while the application of the territoriality principle in its Futura judgment concerned the taxation of a single company (active in another Member State via a branch), the present case concerned the taxation of parent and subsidiary (i.e., two legal persons, taxable separately).

63. With respect, this judgment did not, in my view, accord sufficient recognition to the Member States’ division of tax jurisdiction in that case. I refer in particular to the Court’s finding that the comparability criterion was satisfied. It is in my view crucial to the analysis that the Netherlands exempt from taxation all profits coming ‘inward’ from non-domestic subsidiaries. That is to say, the division of tax jurisdiction between the Netherlands and the Member States of residence of the subsidiaries was such that jurisdiction to tax the foreign subsidiaries’ profit fell solely to the latter - the source State. As a result, it would seem to me to be wholly consistent with this division of jurisdiction for the Netherlands to allocate those charges paid by the Dutch parent, which were attributable to the exempted profits of the foreign subsidiaries, to the Member State of the subsidiaries. In other terms, it would seem clear that the position of a domestic parent company with a subsidiary whose profits are taxable in that Member State, on the one hand, and such a parent company with a subsidiary whose profits are not taxable (exempt) in that Member State, on the other hand, are not comparable. In sum, this would appear to be a classic example of a difference in treatment resulting directly from dislocation of tax base. It seems to me that the result of the Court’s judgment was to override the Member States’ choice of division of tax jurisdiction and priority of taxation - which choice, as I observed above, lies solely within Member States’ competence.

64. I would add that, in principle, the result of the Bosal judgment also means that the (same) charges could equally be deducted in the Member State of the subsidiary. While it can be presumed that the Court would not have intended to allow ‘double relief’, its judgment gives no indication which of the two States - that of the parent company or the subsidiary - should have priority of taxation in this cost deduction. Indeed, this was the second question referred by the Hoge Raad in that case, to which the Court did not explicitly respond. Suffice to say, as I observed above, that Community law does not contain any basis for allocating such jurisdiction and priority.

In response to a similar argument raised by the German and United Kingdom Governments, namely that the position of a parent company established in a Member State having an indirect subsidiary in the same State is not comparable to that of a parent company whose indirect subsidiary is established in another Member State, the ECJ held in the Keller Holding (the case similar to the Bosal case):

37. In that regard, it is noteworthy that, as far as the taxation of dividends received is concerned, parent companies subject to unlimited tax liability in Germany are in a comparable position whether they receive dividends from an indirect subsidiary established in that Member State or from an indirect subsidiary having its registered office in Austria. In both cases, the dividends received by the parent company are, in reality, exempt from tax. Accordingly, a restriction on the deductibility of a parent company’s financing costs – as a corollary of the non-taxation of dividends – which affects solely dividends from abroad does not reflect a difference in the situation of parent companies according to whether the indirect subsidiary owned by the latter has its registered office in Germany or in another Member State.

38. In that regard, the fact that indirect subsidiaries established in Austria are not subject to corporation tax in Germany is not relevant. The difference in tax treatment at issue in the main proceedings relates to parent companies according to whether or not they have indirect subsidiaries in Germany, even though those parent companies are all established in that Member State. As far as the tax situation of the latter is concerned as regards the dividends paid by their indirect subsidiaries, the fact remains that those dividends do not give rise to tax being levied on the parent companies, whether they are derived from indirect subsidiaries taxable in Germany or in Austria.

I particularly like this type of constructive dialogue! Nevertheless, I personally have my doubts as to whether the relevant forum to expose such critics is on an advisory opinion to the ECJ. All being said, we at least know that controversial judgments are still being discussed and the Bosal was definitely one of them!

Saturday, February 18, 2006

US Treaty-Based Non-discrimination: Can You See It?

Accounting issues are interrelated with tax and can give rise to interesting international tax issues, as the case below will demonstrate.

Allow me to set the grounds for the problem discussed in this US case (Square D). Under US Tax, accounting determines when a receipt becomes taxable income and when a payment becomes deductible. Individuals and corporations generally compute their tax liability based on a cash method or an accrual method. Under a cash method, which is primarily used by individuals and small businesses, transactions count as income in the year of actual receipt, and count as deductions in the year of actual payment. Under an accrual method, which is used by large businesses, a taxpayer has income when (i) all events have occurred that fix the right to the income and (2) the amount of the income can be determined with reasonable accuracy.

In general terms, Schneider, a French company (yes that one of the famous CFC case in France), acquired Square D, a US accrual basis taxpayer based in Illinois. For the purposes of acquiring the shares of this US Company, Schneider created a highly leveraged US New Co. The New Co obtained loans from Schneider and after the purchase of Square D, Schneider then merged the New Co (highly leveraged) into Square D, thus passing the responsibility for repaying the loans to Square D. In fact, an acquisition of shares of a US target by a foreign acquirer generally takes the form of (i) a merger of a newly formed US subsidiary of the foreign acquirer into the US target with the target surviving and the target shareholders receiving consideration or (ii) the purchase from the target shareholders of the target shares directly by the foreign acquirer.

In 1991 and 1992, Square D accrued large amounts of interest on loans but did not attempt to deduct these amounts in its tax returns for those years. Square D then paid off the interest on these loans only in 1995 and 1996. Under the treaty between France and the US, interest payments were exempt from US withholding tax. During an audit procedure, Square D argued that it should be allowed to deduct the loan interest amounts in the years in which they accrued, i.e. 1991 and 1992. The US IRS considered that such deductions had to be taken only when the interest payments were actually made, not when they accrued. Until here, every thing clear. Interest accrued and the taxpayer was thereby attempting to deduct such amounts on the basis of the accrual method and not the cash method.

The problem was that US rules restricted the possibility to deduct such interest in case of interest accruing to foreign persons. The US Tax Law allows a taxpayer to take a deduction on all interest paid or accrued within a taxable year on indebtedness, with certain provisions of the code determining which of these two alternatives apply. Differently than in a situation of interest payable to a US taxpayer, a US Treasury Regulation (1.267(a)-3) In general, provides for the cash method of accounting when claiming interest deductions for payments to a related foreign person.

Using an example from the said regulation, assume that FC, a company incorporated in Country X, owns 100 percent of the stock of C, a domestic company. C uses the accrual method of accounting in computing its income and deductions, and is a calendar year taxpayer. In Year 1, C accrues an amount owed to FC for interest. C makes an actual payment of the amount owed to FC in Year 2. Regardless of its source, the amount owed to FC by C will not be allowable as a deduction in Year 1 and deduction will only be allowed in Year 2.

Square D went first to the US Tax Court (2002) and later to the Seventh Circuit Court of Appeals (13 February 2006) against the denial to take the mentioned deductions for interest payments to its French parent company. Square D argued that Treasury Regulation § 1.267(a)-3 was invalid as it went beyond section 267 and in alternative that it violated the non-discrimination clause contained in the 1967 Tax Treaty between the US and France.

I am not a US tax lawyer and therefore I will skip the first plea, which amounts to a statutory interpretation of the internal revenue code, and focus on the second plea that relates to non-discrimination issues. Just for reference, both courts rejected the first plea.

With regards to the second alternative plea, Square D refers to Article 24(3) of the Treaty that provides that a U.S. company owned by French residents shall not be subjected to U.S. taxation that is “other or more burdensome” than the taxation to which a U.S. corporation owned by U.S. residents (U.S.-owned corporation), “carrying on the same activities” as the French-owned corporation, is subjected.

Article 24(3), which follow closely Art. 24(6) of the OECD Model, reads as follows:
“A corporation of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which a corporation of that first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned by one or more residents of that first-mentioned State, is or may be subjected.

In that regard, Square D argued that being a French-owned corporation it is subjected to other or more burdensome taxation than a US-owned company would be. In fact, Treasury Regulation § 1.267(a)-3 by requiring a taxpayer owned by a French corporation to use the cash method for deducting interest payments to its parent, rather than the more advantageous accrual method would contravene the non-discrimination clause of the treaty. More specifically, Square D argues that different treatment is connected to the residence of the owners since Square D is denied an accrual basis deduction for interest amounts owed to its foreign owner while a hypothetical U.S.-owned company (using the accrual method) would be permitted accrual basis deductions for interest amounts owed to its U.S. owner.

The Tax Court and the Court of Appeals rejected such arguments, stating that the US regulation in scrutiny operated independently of the residence of the owners of the payor of the interest and that the fact that such payments might be treated differently from payments to a comparable US owner is merely incidental. The Courts relied on the IRS arguments that “the basis for deferring the interest deduction is dependent entirely on the U.S. tax treatment of the payment in the hands of the foreign corporation, not the identity or nationality of the owner of the payor”. In the Courts view, if a US company is making a payment of interest to a related foreign person, the accounting method for deducting the amount depends on whether the interest is or is not effectively connected income, and on whether the payee uses the accrual method, not on the residence of the owners of the U.S. corporation. Thus, both Courts ruled that there was no violation of Article 24(3).


Generally speaking, discrimination arises when different rules are applied to comparable situations or when the same rules are applied to different situations. In this case, where different rules are applied to comparable situations, it is crucial to determine which comparative scenario should be taken into consideration when evaluating whether there is a discriminatory treatment. Art. 24(3) of the Treaty cited above refer that the comparative scenario here is between a US company owned by foreign shareholders and a US domestically owned company. And in this case the subsidiary that is held by the French parent appears to be subject to a more burdensome taxation.

With regards to the line of argumentation of the US Courts, I have personally my doubts. My doubts rest in the fact that, to my knowledge, non-resident companies are taxable on their U.S. source income and, in certain limited situations, on foreign source income that is effectively connected (ECI) with the conduct of a trade or business in the United States (i.e. ECI or effectively connected income). I

In this case, the French company did not derive ECI from the US and therefore was not taxable in the US. Therefore saying that the accounting requirement depends on whether the interest is ECI or not is in my view connected to the fact that non-ECI is generally income derived by non-residents. As such, one can argue that the connection between the said regulation and the residence of the owners exists! One can see it or one can prefer to ignore it! The Court simply preferred to ignore it!

Another point I would like to add relates to the potential bridge between Art. 24 and the European Community non-discrimination rules, as developed by the ECJ. The European Community is a new legal order of international law established for the benefit of nationals of the various Member States. In essence, the provisions of the EC Treaty (just as those of a Treaty) are capable of subjugating domestic provisions incompatible with EC law. In a recent article, Van Raad provides a useful analysis on the comparison between the non-discrimination rules of Article 24 OECD Model and the rules developed by the EC Court of Justice on the basis of the non-discrimination and freedom of movement provisions in the EC Treaty (in: A tax globalist, IBFD Publications, 2005, p. 129-143).

Just give you an example of the difference in the analysis under the two principles, consider the recent decision by the ECJ on the Bouanich case (C-265/04). The first issue on that case was whether or not it was compatible with the free of movement of capital (Arts. 56 and 58 of the EC Treaty), a tax rule wherby income derived by a non-resident shareholder from the repurchase of own shares by a Swedish resident company is taxed as dividends without the right to deduct the acquisition cost of those shares, whereas such income in the case of a resident shareholder is taxed as capital gains with a right to deduct the acquisition costs. There were additional questions that related to the connection between treaties but we will skip them for now.

In relation to this first issue, the ECJ observed that the right to deduct the acquisition costs of shares on the occasion of their repurchase by the issuing company constitutes a tax advantage, which is reserved solely to resident shareholders under the challenged Swedish domestic rules. In the ECJ's view, the effect of such rules is that it is less attractive for investors to make cross-border transfers of capital such as buying shares in companies resident in Sweden and, consequently, the opportunities available to Swedish companies to raise capital from non-resident investors are therefore restricted. Consequently, the ECJ held that the differential treatment of non-resident and resident shareholders in the case of a repurchase of shares constitutes a restriction on the movement of capital within the meaning of Art. 56 EC.

As to the possible grounds of justification (which is a particularity of the EC rules when compared with the OECD Model), the ECJ found that, as the cost of acquisition of the shares is directly linked to the payments made in respect of their repurchase, there is no objective difference between the situations of resident and non-resident taxpayers when receiving such income. No other grounds of justification were relied on by Sweden. Consequently, the Swedish domestic legislation constitutes an arbitrary discrimination against non-resident shareholders in as far as it taxes them more onerously than resident shareholders in an objectively comparable situation.

The question that remains is if a rule (such as the one described above), whereby a cash method of accounting would be required when claiming interest deductions for payments to a related foreign person, would be enacted by a EU Member State - would such rule be in line with the freedom of movement provisions of the EC Treaty?

Thursday, February 16, 2006

Belgium Coordination Centres - they are gone but discussion continues coming back

“The problem with practicing tax law is that the general rule never seems to apply to anything”

The European Commission, as the (legal) guardian of the EC Treaty, has the daunting task of monitoring the application of EU law. This includes assessing the lawfulness of fiscal state aid, whether notified or not, that is granted by any of the 25 EU Member States. We already talked, in previous posts, about the EU commitment to “fight” harmful tax competition in the Code of conduct on business taxation. Today we focus a bit on State aid through fiscal measures!

In the EU, tax systems have to be in line with EU State aid rules, which deems incompatible with the common market any aid, granted through fiscal measures, that distorts or threatens to distort competition, provided it affects trade between Member States. But no rule comes without exceptions and in State Aid Rules the maze of exceptions, regulations, notices, block exemptions, guidelines, action plans is so immense that even specialists have difficulty in keeping with the pace! In fact, even if a measure fulfils the criteria for being State aid there are a number of situations where an aid can be deemed as compatible State aid. The challenge then is to pass an elephant through a key hole!

As you can imagine, sometimes that task of assessing the lawfulness of fiscal state aid can be said to be easy, but most of the times it can become a very complex analysis where substantial and procedural issues interrelate. This introduction serves to frame a recent decision from the ECJ on the famous Belgium coordination centres. Belgium, which brought to the spotlight of tax planning the Coordination Centres, hosts by coincidence the capital of Europe and therefore what better forum to evaluate and discuss whether such beneficial regime falls within the scrutiny of EU rules.

Belgium was and is keen in attracting foreign investment. Its governmental site ( even talks about how Belgium has become one of the most profitable countries for US companies to do business in the world. This was in part achieved sby using the Coordination Centres regime as a flag to attract large MNE.

Nevertheless, the Belgian coordination centres have figured first on the EU harmful tax competition list of 66 six harmful measures. In addition, the EU changed its focus to the State Aid, reassessing the regime under the new guidelines issued in 1998. So there was considerable pressure from the European Commission to abolish coordination centre legislation but as always when the lobbies are also large and strong the pressure for an arrangement that satisfies all parties is also considerable. No wonder that Belgium amended, as of 1 January 2006, its tax law to provide Belgian companies and Belgian branches of foreign companies a (notional) tax deduction based on their equity. This new regime, which applies off the board, substitutes in practice the Coordination Centres scheme.

If the regime was so important, no wonder that there is litigation still going on within the European Courts. On the 9 February 2006, the Advocate General of the European Court of Justice (ECJ) gave his opinion in the joined cases of Kingdom of Belgium v. Commission (C-182/03), Forum 187 v. Commission (C-217/03) and Commission v. Council (C-399/03). Unfortunately this decision is still not available in English so you will have to stick with my summary.

The Belgium Coordination Centres are basically undertakings belonging to MNE providing services to other members of the group. By way of derogation from the ordinary tax system, the taxable revenue of the Belgium Coordination Centres was, under a 10-year licence, basically determined as a fixed amount on the basis of costs incurred (cost-plus method). This beneficial regime, which dated back to 1984, played a crucial role in attracting MNE performing financial schemes, such as centralized borrowing, intragroup cash and treasury management.

Although initially the Commission initially did not consider the Belgian Coordination Centres regime scheme to constitute State aid, subsequent to the Code of Conduct initiative to tackle harmful tax competition (1997) and the Commission notice on the application of the State aid rules to measures relating to direct business taxation (1998), the Commission reviewed the system again.
Upon decision of 17 February 2003, the Belgian Coordination Centres regime was considered by the Commission to constitute state aid incompatible with the Common Market. The decision was determined by the deviation from the OECD guidelines on the cost-plus method (i.e. use of a default mark-up rate of 8% without verifying if this reflects the underlying economic reality and exclusion of certain operating costs from the tax base).

The Commission therefore ordered Belgium to discontinue the scheme and refrain from new admissions and renewals of existing approvals. Nevertheless, recognising legitimate expectations on the part of beneficiaries of the scheme, the Commission allowed the Coordination Centres that hold an approval as from the date of notification of the Decision, to continue to enjoy the benefits of the scheme until 31 December 2010.

Following this decision, the Kingdom of Belgium and Forum 187 (Belgium association of Coordination Centres) brought an action under Article 230 EC for the suspension and partial or full annulment of the decision of the Commission (C-182/03 and C-217/03). On 26 June 2003, the President of the ECJ preliminarily agreed with the applicants and ordered that the ban on renewals be lifted.

In parallel, Belgium requested to the Council, in accordance with Article 88(3) of the EC Treaty, to renew licences until 31 December 2005 to certain undertakings authorised to act as Coordination Centres and whose authorisations were due to expire between 17 February 2003 and 31 December 2005. This application would partly overrule the Commission decision of 17 February 2003. The Council decision of 16 July 2003 concluded that exceptional circumstances existed, making it possible to extend the scheme until 31 December 2005, to Coordination Centres authorised as at 31 December 2000 and whose authorisations would expire before 1 January 2006. Following this decision, the Commission brought an action against the Council (C-399/03).

- Case C-399/03: The Commission filed an appeal to the ECJ on the following grounds: (i) Lack of competence of the Council, since its decision-making power, under the third paragraph of Art. 88(3), is an exceptional power, which must be strictly interpreted; (ii) Misuse of powers and procedure by the Council on the basis that the power of the Council was used to neutralise the Commission's Decision and thereby produce the same effects as an annulment judgment by the ECJ; (iii) Infringement of the institutional equilibrium established by the EC Treaty and of the general principles of Community law; (iv) Infringement of the State Aid Rules and Directive 69/335/EEC (concerning indirect taxes on the raising of capital); (v) manifest error of assessment and misuse of powers as to the existence of exceptional circumstances.

- Cases C-182/03 and C-217/03: The subject matter of the actions brought by the Kingdom of Belgium and by Forum 187 are not exactly the same. Whereas Forum 187 seeks the annulment of the whole decision, Belgium seeks the annulment of the decision only in so far as it does not authorise it to grant, even temporarily, renewal of authorisation to Coordination Centres, which benefited from the regime at issue as at 31 December 2000.
In summary, the Kingdom of Belgium grounds of appeal were: (i) Firstly, it maintains that the Commission infringed Art. 88(2) and the principles of legal certainty, protection of legitimate expectations and proportionality, by not granting a reasonable period following notification of the contested decision; (ii) Secondly, it claims that the Coordination Centres had acquired legitimate expectations that their authorisations would be renewed; (iii) Thirdly, it alleges infringement of the principle of equality, since Coordination Centres whose authorisations expired in the months following notification of the decision were placed in a different situation than others which benefited from a reasonable period; (iv) Fourthly, it holds insufficient grounds of the decision as to the reasons which led the Commission, after acknowledging the need for a reasonable transitional period, to prohibit indiscriminately any renewal of authorisations after the date of notification of the decision; (v) Finally, it is argued that the corrigendum made to the decision made its interpretation extremely uncertain.
In its pleading, Forum 187 raised four pleas: (i) In first place it maintains that the decision has no legal basis and infringes the principle of legal certainty; (ii) Secondly, it claims that the substantial analysis made in the decision contains several errors; (iii) In third place, it alleges infringement of the legitimate expectations, which the Commission had created for the Coordination Centres; (iv) The fourth and final plea relies on insufficient grounds to reverse previous commission decisions of 1984 and 1987 and the lack of justification for the transitional period granted.

Given the juridical connection between the various cases the ECJ decided to join them for procedural purposes.

The Advocate General suggests that in the action against the Council (C-399/03), the ECJ should declare admissible the appeal brought by the Commission and therefore annul Council Decision 2003/531/EC.

The Advocate General referring to Commission v Council (Case C-110/02), pointed out that the power conferred upon the Council by the third subparagraph of Art. 88(2) EC is clearly exceptional in character. In that case, the court ruled that if no application to the Council was made before the Commission declared the aid incompatible with the common market, the Council was no longer authorised to exercise the exceptional power conferred upon it by the said third subparagraph. The court noted that such interpretation avoids situations where the same State aid is subject of contrary decisions taken successively by the Commission and the Council and contributes to legal certainty. The advocate General therefore suggests the ECJ to annul the Council Decision on the basis of the lack of competence of the Council to adopt such decision.
With regards to the actions brought by the Kingdom of Belgium and by Forum 187 (C-182/03 and C-217/03), the Advocate General suggests that the ECJ should uphold the action for annulment and therefore partially annul the decision of the Commission C 564 (2003) of 17 February 2003, in so far as it does not authorise Belgium to grant, even temporarily, renewal of authorisation to Coordination Centres which benefited from the regime until the date of the decision and whose authorisations expire before 31 December 2010.

In a long and complex opinion, the Advocate General started by suggesting that the ECJ should reject the pleas for the annulment of the whole decision. Nevertheless, the Advocate General stated that the principle of equality, whereby comparable situations may not be treated differently unless difference of treatment is objectively justified, warrants that the Commission decision should be partially annulled. Accordingly the Advocate General pointed out that a prohibition to renew licences gives rise to an unjustified difference in treatment, since the Coordination Centres whose authorisations expire in the months following notification are not able to enjoy the scheme until 31 December 2010, while Coordination Centres whose licences were renewed between 2001 and 2002 may benefit for such reasonable period. As such, the Advocate General concluded that the ECJ should partially annul the decision of the Commission, in so far as it does not authorise Belgium to grant, even temporarily, renewal of authorisations in place at the date of the notification and whose authorisations expire before 31 December 2010.

Wednesday, February 15, 2006


"I am glad I learned EC Tax Law, it opened my eyes. But I am grateful I never got to practice it, for my eyes need occassional rest."

Kennedy Munyandi, Zambia, LL.M, Leiden (04-05)

Note: It was with great pleasure that I received the first quote from a reader. It is a greater satisfaction that it comes from Zambia where my friend Kennedy resides. I see this quote as a reminder for me to write more on international issues and I have to answer, “point taken!”. My next two entries (in the next days) will be on two tax treaty cases (one recent from the US and another from India).

Monday, February 13, 2006

“Não há duas sem três” (if you have two, you’ll have three)

“Não há duas sem três” is a popular Portuguese proverb which basically means that if you have two, you’ll have three. Since I covered in the last posts, two UK cases (UBS and NEC), I feel obliged to attempt to cover the third. Pirelli case ([2006] UKHL 4) is another case in the mounting assault by foreign companies operating in the UK on the famous advance corporation tax (ACT) provisions. In this case, the House of Lords concluded, contrary to the Court of Appeals ([2003] EWCA Civ 1849) that UK subsidiaries that claim compensation for ACT paid on dividends to their EU parent companies will have their claims reduced by the parent company's tax credits set out in tax treaties.

As mentioned above, this litigation concerns compensation for ACT paid on dividends paid to their EU parent companies. In broad terms the UK imputation system provided that when a UK company resident paid a dividend to its shareholders it became liable to pay ACT in respect of the dividend. ACT was then set against the company's liability to MCT (mainstream' corporation tax). A recipient of the dividend, if resident in the United Kingdom, became entitled to a tax credit. The amount of the tax credit corresponded to the current rate of ACT. In the case of an individual a tax credit was utilised primarily as a credit against his income tax. Any excess was paid to the individual. Where the recipient of the dividend was a company the amount of the dividend plus the amount of the tax credit constituted franked investment income. This could be used to frank dividends paid by the company so the company would not be liable to ACT on its dividends.

Within a group of companies, and provided group election was made, no ACT was payable upon distribution to the parent company. Group election allowed a deferral of corporation tax until the subsidiary was liable to MCT, or until the parent company distributed the profits to a recipient outside the group and accounted for ACT itself. In summary, dividends paid by a subsidiary to its parent while the election was in force did not trigger liability to pay ACT. Nor did their receipt trigger entitlement to a tax credit. Shortly after ACT was abolished, the ACT group election scheme, whereby deferral of ACT was only available if the parent company was resident in the UK, was held contrary to the freedom of establishment by the ECJ (Joined Cases C-397/98 and C-410/98 - Hoechst Case). It should be noted that the ECJ also decided the U.K. subsidiary was entitled to compensation from the UK tax authorities for the cost of having to pay ACT until it could be offset against their corporation tax liabilities.

The ECJ ruling lead to widespread consequences in the UK system, with several groups of companies seeking, by way of group litigations, to exploit the apparent debilities of the imputation system. The Pirelli case was a test case, in one category of claims within the ACT group litigation order, namely involving UK subsidiaries with parent companies in the Netherlands and Italy, whose treaties included entitlement to tax credit refunds on dividends (this was relevant since the ECJ case covered the UK-Germany tax treaty, where no UK imputation tax credit was available).

Under the Pirelli case, since group income election was not available, ACT was paid on dividends paid by a UK subsidiary to parent companies resident in Italy or the Netherlands. Nevertheless, the respective tax treaties entitled the parent companies to tax credits of a reduced amount.

Three issues were raised in this case: (i) whether, if a group income election had been made the EU parent companies would have been entitled to a treaty tax credit (ii) if that was not the case, whether the tax credits received by the EU parent companies should be brought into account in assessing the compensation payable to the UK subsidiaries for the breach of freedom of establishment under Hoechst case and (iii) whether ACT is a withholding tax within the meaning of article 5(1) of the Parent/Subsidiary Directive.

As mentioned above the first issue in debate was, assuming UK law had permitted EU parent companies to make a group election (as held by the ECJ), would the EU parent companies, at the same time, remain entitled to a tax credit under the tax treaty?

According to the House of Lords, whether EU parent companies would still be entitled to treaty tax credits depends upon the proper interpretation of the tax treaties. For example, under Article 10(3)(c) of the treaty with the Netherlands, a Dutch resident company which received dividends from a UK company was entitled to a tax credit calculated and payable as follows:
a tax credit equal to one half of the tax credit to which an individual resident in the United Kingdom would have been entitled had he received those dividends, and to the payment of any excess of that tax credit over its liability to tax in the United Kingdom.
In order to understand the mechanics of the repelled imputation system and its interaction with tax treaties, it is helpful to attempt to articulate a numerical example. Assuming that ACT rate was 25% and the amount of the dividend was 750, a UK company paying the dividend to a UK individual would pay ACT of 250 generating a tax credit of the same amount for the individual. If the recipient was a Dutch individual, he would be entitled to claim a payment of the tax credit of 250, less the tax of 15% on the sum of the dividend (750) plus the full credit (250), i.e. 150. The individual could, under the treaty, submit a claim to the UK authorities for the payment of 100 (i.e. 250 – 150). According to Article 10 (3)(c) a qualifying Dutch company would also be entitled to a tax credit of half that amount, i.e. 125. Under the treaty the UK withholding tax is set as 5% of (750 +125) which would correspond to 43,75. Therefore, the half tax credit to be refunded in accordance with the treaty would then be 81,25 (125 - 43,75).

In the Pirelli case, the first important point the House of Lords noted was that entitlement to a tax credit under the treaty “marched hand-in-hand with liability to pay ACT”. Accordingly, for the House of Lords, the treaty assumes that the dividend whose receipt attracts a tax credit will also have attracted liability to ACT. As such, in the wake of ECJ decision, the House of Lords considers that when interpreting article 10(3)(c) the treaty tax credits should not apply to election dividends (i.e. dividends not subject to ACT). In this point the House of Lords diverged from the High Court and Court of appeals reasoning.

Nevertheless, Pirelli had more arguments as to why no account should be given to treaty tax credits received by EU parent companies, such as Pirelli. Under the second issue under discussion, it was argued that the UK subsidiary and its parent are separate legal entities and the breach of EU Law (in the ECJ case referred above) was suffered by the UK subsidiary while the tax credits were received by the parent companies.

The House of Lords did not receive in a better manner this second argument, even referring that Pirelli were seeking to have the best of both worlds! In the House of Lords view, assessment of the overall loss (i.e. money paid as ACT and tax credits received) represents the only fair way to assess the amount of loss suffered where a subsidiary and its parent have been denied the opportunity jointly to obtain a single package such as group election.

Pirelli raised an additional point of Community law by attempting to apply by analogy the tax cohesion principle (two separate taxes levied on different taxpayers). The House of Lords held that the grounds on which a restriction on a fundamental freedom may be justified say nothing about the principles applicable in assessing compensation for breach of a Treaty freedom and thereby denied a reference to the ECJ. The House of Lords stated that assessment of compensation is primarily a matter for the domestic legal system, provided that the principles of equivalence and effectiveness are duly observed.

Finally, the third issue raised before the Court was based on the Parent-Subsidiary Directive, namely that ACT was a withholding tax within the terms of the Directive. On this point the House of Lords considered Art. 5(1) and 7(1) of the Directive, coupled with the ECJ decision in the ECJ decision on Océ van der Grinten (C-58/01), on what represented a dividend withholding tax, sufficiently clear not to refer any question to the ECJ.

In the previous High Court and Court of Appeal decisions the first and second questions had been answered in favour of Pirelli and therefore there was no need to evaluate the third issue. Conversely, in the House of Lords decision, the third issue needed to be addressed since both of the two grounds were answered in favour of the revenue.

According to Art 5(1) of the Directive ”profits which a subsidiary distributes to its parent company shall … be exempt from withholding tax …". However, Art. 7(1) of the Directive states “The term 'withholding tax' as used in this Directive shall not cover an advance payment or prepayment (précompte) of corporation tax to the Member State of the subsidiary which is made in connection with a distribution of profits to its parent company …"

In that regard, Pirelli submitted that certain passages of ECJ cases make it arguable that ACT is indeed a withholding tax and that the point should be referred to the European Court for a definitive ruling. The House of Lords noting that ACT is not a tax charged on the shareholders considered that ACT does not qualify as a withholding tax under the description of a withholding tax given by the ECJ. The judges mentioned a passage of the Océ van der Grinten Case, where the ECJ referred to the Athinaiki case (and the Epson Europe case) as establishing that:

"(47) … any tax on income received in the State in which dividends are distributed is a withholding tax on distributed profits for the purposes of art.5(1) of the directive where the chargeable event for the tax is the payment of dividends or of any other income from shares, the taxable amount is the income from those shares and the taxable person is the holder of the shares …"
In conclusion and as a result of this decision by the House of Lords, it is expected that the compensation to be payable by the UK tax authorities for ACT compensation (in line with the ECJ Hoechst decision) will be significantly lower than initially thought.

Saturday, February 11, 2006

Treaty-Based Nondiscrimination:UK Sees It!

Cases on the non-discrimination clauses of tax treaties are scarce. Therefore a reference to a recent case from the UK should be of interest to the readers. The case, even though revelling the intricacies of UK law, can be said to prove a position increasingly stated by several scholars, namely that there will be in the years to come increasing litigation in the courts about the scope of the non-discrimination article. Such surge can also be said to be linked to the broadening of the boundaries of the nondiscrimination principle under EC Law.

In an article titled “Treaty-Based Nondiscrimination: Now You See It Now You Don't”, Sanford H. Goldberg demonstrated the difficulties of articulating a consistent and rational standard to apply to determine when discrimination exists. Several articles of Scholars have also demonstrated that the consequences of Art. 24 of the OECD Model are more uncertain than those of any other article of the OECD Model. In the case summarized below, the UK high court granted, on the basis of the non-discrimination clause, the possibility for a permanent establishment (PE) to claim tax credits that were otherwise only available to resident companies.

The U.K. High Court, in the case UBS AG v. Her Majesty's Revenue and Customs (HMRC), ([2006] EWHC 117 (Ch)) allowed a claim by UBS's U.K. branches that the PE nondiscrimination article in the tax treaty between the UK and Switzerland. allows UBS to offset losses against certain dividend income to claim the U.K. tax credits applicable to such dividends.

UBS, a Swiss bank, was appealing from a decision of 7 June 2005 from the UK Special Commissioners (lead by tow renowned specialists such as John Avery Jones and Julian Ghosh) that denied a claim on the basis of Article 23(2) of the treaty between the UK and Switzerland that is entitled to the same tax credits on dividends received by the branch as could be claimed by a UK resident company. In their decision, the Special Commissioners basically agreed with UBS that the Treaty entitles the branch to the tax credits but held that such right under the Treaty was not incorporated into UK law.

UBS, which acted as a market maker on the London Stock Exchange received dividends from UK resident companies and received and paid “manufactured dividends” (primarily in consequence of stock lending transactions). The UBS case concerned years 1993 to 1996, when ACT and the right to receive a tax credit were still in force (the right to receive a tax credit was first abolished in 1997, and the full Advance Corporation Tax system was abolished in 1999). Under U.K. domestic law such a claim could be made by a UK resident company, but not by a non-resident company like UBS.

Under the UK “imputation” system of corporation tax a company paid corporation tax on all its profits, whether or not distributed. A company making distributions to its shareholders made a payment of (ACT) in respect of such distributions. The ACT paid was then set off against the corporation tax, often called mainstream corporation tax (MCT), on the company’s profits for that period. A non-corporate shareholder could set the tax credit off against his or its liability for income tax. A corporate shareholder resident in the UK would have received a tax credit in the form of franked investment income which franked its liability to account for ACT in respect of dividends which it paid.

For the purposes of the UBS case, the two critical issues of the ACT system were that, firstly, ACT was credited against the paying company’s corporation tax and, second, a UK resident individual recipient of the dividend was entitled to a tax credit corresponding to the ACT which covered his liability to pay basic rate tax on the dividend.

The decision analysed two issues: (1) whether the UBS claims to a tax credits are within the nondiscrimination article of the Treaty; and (2) whether the UBS claim to a tax credit is a claim for “relief… from corporation tax” within the UK law that incorporates treaties into UK legal system (dualist system).

With regards to the first issue, the Court started by stating that Art. 23(2) of the treaty between the UK and Switzerland is based on the OECD Model of 1977, and reads as follows:
“(2) The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.”
The High Court ultimately agreed with the Special Commissioners, which considered that payment of the tax credit is part of the levying of taxation and that the taxation on UBS was less favourably levied. The UK resident company in exactly the same circumstances could claim from the UK tax authorities a payment in respect of the tax credit and UBS could not.

The High Court rejected therefore all aspects of the UK tax authorities objections to the application of the PE nondiscrimination article.

First, the UK revenue contended that Art. 23(2) had no application because no taxation was “levied” “on” UBS within the meaning of that Article. There were merely claims to a tax credit, which were rejected. The UK revenue submitted, in effect, that the PE non-discrimination article is not engaged at all if there are no taxable profits, after offset of losses, capable of giving rise to a charge to tax. The High Court, rejecting thereby the references made to both Klaus Vogel and the OECD Commentaries, considered that there is nothing in Art. 23(2) to restrict it to a narrower meaning.

Secondly, the UK revenue submitted that Art. 23(2) requires a comparison between UBS branch, as if it were an independent company, and a UK company “carrying on the same activities”, including the distribution of all its profits to its parent company. If that assumption would be correct the UK Company would not have been able to invoke the said tax credits. The High Court, referred to the arguments of the Special Commissioners, to reject such claim and considered that it is the nature of a permanent establishment that it cannot pay dividends and so that should be outside the comparison (i.e. the two entities are different in this respect and no meaningful comparison can be made).

With regards to the second issue under discussion (i.e. whether the UBS claim is a claim for “relief… from corporation tax” within the UK law), it is important to note that the Special Commissioners previously concluded that the relevant provisions of the treaty had not been incorporated into U.K. law. The Special Commissioners concluded on their Decision, that “the right to the payment of the tax credit under (the relevant sections of UK law) was not a payment which “reduces the [corporation] tax which would otherwise be payable”.

In this regard, the High Court noted that no conclusive answer to this part of the appeal can be found in the recent decisions of Park J. in NEC Semi-Conductors or the judgments of the Court of Appeal on the appeal from his decision which were discussed in a recent post.

In summary, the High court considered that a tax credit payable to the company does not reduce any corporation tax liability of the company and is not a repayment of corporation tax deducted or withheld at source. That tax credit produces a financial benefit to the company invoking such tax credit mechanism, but it has nothing to do with giving relief from corporation tax. In conclusion, the High Court considered that the right to invoke the tax credit mechanism and the consequent payment of the tax credit did not fall within the words “relief… from corporation tax” as incorporated into UK domestic law.

Nevertheless the case did not end there, because an alternative argument, based on different paragraph of the UK section, was accepted by the High Court, which ultimately resulted in the victory of the appeal by UBS. This resulted in the admittance by the Court that UK rules, incorporating the treaty into U.K. law, automatically entitled a foreign company to payment of the tax credits.

Further Reading
Kees van Raad, Issues in the application of tax treaty non-discrimination clauses, BIFD, 1988/8-9, pp.347 – 352
In this article the author analyses various issues concerning the application of the OECD Model Convention non-discrimination provision (Art. 24). The article primarily focuses on general issues arising in connection with non-discrimination clauses in tax treaties. Included in the discussion are the permanent establishment clause, the nationality clause and the control clause of Art. 24.

John F. Avery Jones et al., The Non-Discrimination Article in Tax Treaties – part I & II, British Tax Review, 1991-10, pp. 359 – 385 and 1991-11, pp. 421 – 452
Article 24 of the OECD Model Convention, the non-discrimination article, raises several questions regarding interpretation, application and effect. The authors examine in detail these issues and each of the provisions contained in this article by drawing upon the OECD Commentary on the 1977 OECD Model Convention and the domestic legislation, court decisions and treaty practices.

Sanford H. Goldberg and Peter A. Glicklich, Treaty-Based Nondiscrimination: Now You See It Now You Don't, Florida Tax Review, Vol. 1 (1992), no. 2 ; p. 51-113
This article analyses the nondiscrimination concept, evaluates its general acceptance worldwide, explores its inconsistent application in the United States, and considers whether it makes sense to continue including a nondiscrimination article in future US income tax treaties.

Sunday, February 05, 2006


“The more tax laws that are written, the more tax evaders are produced”

Variation of “The more laws that are written, the more criminals are produced” from Lao-Tse or Laozi (major figure in Chinese philosophy credited with writing the Taoist work, the Dao De Jing, and he is recognized as the founding father of Taoism in the 6th century BCE.

Visit to the IMF Tax Resources

Today I decided to visit Washington. No I was not planning to visit Bush but only the less controverisal International Monetary Fund (IMF). The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.

The IMF has a longstanding tradition of assistance in drafting new laws or amendments to existing laws in the area of fiscal law and policy. In the framework of its work the IMF published back in 1996 Tax Law Design and Drafting (Editor: Victor Thuronyi). This book, now available free of charge on the internet, considers the development of tax legislation from a comparative law perspective. The two volumes cover a wide range of topics. I have to confess that since I received a copy during the Leiden LL.M, I never left sight of the book. The two volumes cover several topics. I take the opportunity to select the chapters I personally enjoyed more.

Volume 1:
Ch. 2. Legal Framework for Taxation Frans Vanistendael
Ch. 6. Value-Added Tax David Williams
Ch. 12. Presumptive Taxation Victor Thuronyi
Volume 2:
Ch. 14 Individual Income Tax Lee Burns & Rick Krever
Ch. 16 Taxation of Income from Business and Investment Lee Burns & Rick Krever
Ch. 18 International Aspects of Income Tax Richard Vann
Ch. 20 Taxation of Corporate Reorganizations Frans Vanistendael
Ch. 21 Fiscal Transparency Alexander Easson & Victor Thuronyi
Ch. 22 Taxation of Investment Funds Eric Zolt

In order to supplement the information available in Tax Law Design and Drafting, the IMF has also made available a series of tax law notes, designed to provide information and analysis on comparative solutions to problems in tax law design which seem to be frequently on the minds of tax officials.
What Is Meant By The Concept Of "Agent" In Tax Legislation?
What Are The Options For Taxing Capital Gains Of Residents?How Might The Law Define A Dependent Of The Taxpayer?
How Should Income Of Local Employees Of Nonresident NGOs, Embassies, International Organizations And The Like Be Taxed?
How Should The Penalty For Late Filing Of A Tax Return Be Structured?
What Are The Options For Taxing Non-Governmental Organizations?
What Are The General Options For Withholding Taxes On Employment Income?
Should Taxpayers Be Able To Obtain Binding Advance Rulings?
Financial Leases - How Can They Be Treated For Tax Purposes?
Definition Of Residence For Individuals
Definition Of Permanent Establishment
How Should The Doubtful Debt Reserve Deduction Be Computed? What Basic Approaches Have Countries Taken To Taxing Partnership Income?
How Should Tax Be Withheld On Fringe Benefits?
How Should Fringe Benefits Be Valued? Which Miscellaneous Payments Should Be Subject To Income Tax Withholding?
How Should Deductible Expenses Of Permanent Establishments Be Determined?

Another interesting resource I also found during my visit was the Tax Code of the Republic of Taxastan and a hypothetical tax law called The Commonwealth of Symmetrica Income Tax Act. The first link guides you to a sample Code based on the IMF work in several countries of the former Soviet Union (including Azerbaijan, Georgia, Kazakhstan, and Tajikistan) which contains the provisions for all the taxes applicable in the hypothetical country of Taxastan.

In the maze of resources of the IMF I was in the end able to find interesting stuff, specially for the ones studying international tax. In addition, I should also mention the IMF working papers that occasionally deal with tax. See for example, Tax Policy for Developing Countries by Tanzi, Vito ; Zee, Howell H. (2001).

Next month I will visit another organization and try to map down the tax resources.

Saturday, February 04, 2006

“Benefits or evils” of Tax Competition

“Tax competition exists when people can reduce their tax burden by shifting their resources – whether financial capital, intellectual capital, physical capital, or labour – from a high tax jurisdiction to a low one. The ability of people and companies to shift their resources in this way imposes a discipline on profligate governments. Tax competition is critical in the world economy of today and is being embraced by many of the most successful economies in Europe, including many from the former Soviet block who want to be a magnate for capital and labour to drive forward economic growth. Of course high tax countries don’t like tax competition. And they work through bureaucracies of all kinds to try and dampen it. But Governments everywhere should realise, to quote Milton Friedman “that competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods or services they offer for sale and the prices at which they offer them”. For my part, I merely want to re-state clearly my support for tax competition.”

The author of these wise words was Charlie McCreevy, European Commissioner for Internal Market and Services in a recent speech (9 December 2005), significantly called Ireland: Making the Most of the Internal Market. No wonder the Taxation Commissioner (Mr. Kovacs) has increasing issues to worry!

The EU and the OECD have visible work on the issue of tax competition. The special forum, "Forum on Harmful Tax Practices" created after the 1998 report ("Harmful Tax Competition: An Emerging Global Issue") has focussed on (i) Harmful tax practices in Member Countries; (ii) Tax havens; and (iii) Involving non-OECD economies. The EU most visible contribution to the fight against tax competition has been the Code of Conduct for business taxation of 1 December 1997. The Code of Conduct requires EU Member States to refrain from introducing any new harmful tax measures ("standstill clause") and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code ("rollback mechanism"). In addition, the EU has also the State Aid rules to attack certain measures relating to direct business taxation.

Over the last decade, the OECD initiative has slowly lost its power, due to outside attack (for example see arguments The Case for International Tax Competition:A Caribbean Perspective) or even from inside pressure (e.g. Luxembourg and Switzerland). In fact, the OECD is now concentrating on forcing low-tax jurisdictions to exchange information, by providing extensive information to the tax authorities in its member high-tax jurisdictions, to enable them to collect taxes from their residents.

The EU project has also slowly lost its initial track. Although the work under the State Aid rules closed several of the most controversial tax regimes in existence in Europe, recent disagreements have shown that perhaps some EU countries are revaluating their position on the “benefits or evils” of tax competition. For example, during the ECOFIN (EU finance ministers) meeting of December 5 and 6, 2005 the Dutch Under Minister of Finance stated to disagree with the Code of Conduct Group’s preliminary negative opinion regarding the Hungarian interest regime(*). Apparently, that intervention was supported by several Member States and resulted in the referral of the report back to the Code of Conduct Group with the following enigmatic words: “It is useful for the code of conduct group to reflect on the discussion at this Council in considering the future of the code of conduct".

This note serves to highlight a recent monography by Richard Teather on the “The Benefits of Tax Competition” (20 December 2005). This book, which the author provided a large part online, appears to be an interesting read for persons with an interest in tax competition and tax policy issues. According to the author, most governments have laws to prevent cartels and ensure competition, but most governments do not apply the same logic of competition policy to their own activities. This argument is enough for me to order a copy!

(*) Under the Hungarian interest tax regime, a taxpayer (i.e. economic association, cooperative or foreign entrepreneur) may deduct 50% of the difference between the interest received from its associated enterprises and the interest paid to its associated enterprises, provided the former amount is larger (i.e. the difference is positive). As a result, only 50% of the interest so received is taxable. The amount so deducted together with the 50% deduction for capital gains and royalties may not exceed 50% of the taxpayer's before-tax profit (i.e. positive result).


Friday, February 03, 2006

ACT Group Litigation – Class II – UK Court of Appeal decision

The U.K. Court of Appeal has upheld in 31 January 2006 the High Court judgment of 24 November 2003 in the case of NEC Semi-Conductors and others. This case is the test case for the third of the group litigation order cases, which follow the decision of the European Court of Justice (ECJ) in Hoechst Case (C-397/98 and C-410/98).

The common feature of the several cases being litigated is that they concern the liability to pay ACT in connection with the payment of dividends by companies incorporated in the UK, which are subsidiaries of other companies incorporated outside the UK. The particular aspect of this appeal is that the parent companies are established in countries outside the European Union (i.e. Japan and US).

Until 1999 UK companies paying dividends to a foreign parent company were required to pay ACT. Such ACT was later set off against the amount of mainstream corporation tax payable. Dividends payable to a UK parent were, upon group income election, not subject to the requirement to pay ACT. In the Hoechst case, the ECJ held that the requirement, that the parent be a UK company in order that a group income election could be made, was a breach of Article 43 of the EC Treaty (freedom of establishment).

In this case the parent companies, based in Japan or in the USA, supported their claim in two aspects: (i) their inability, as a non-resident parent company, to join in a group income election was in breach of provisions of a Tax Treaty, duly incorporated into UK law; (ii) their inability to join in a group income election was also a breach of EU law, in this case of Article 56 of the EC Treaty (freedom of capital).

In 2003, the High Court (Park J) decided rather surprisingly that the legislation was a breach of the non-discrimination article of the relevant treaty, but that these were not part of UK law, so no remedy to the claimant was available!

Allow me to try to explain! UK is a dualist country and as you may know in a dualistic system the treaty obligations have to be incorporated into domestic law. In case the relevant treaty is not incorporated or is improperly incorporated into domestic law, the treaty does not serve much the taxpayer. This is what happened in this case. The judge, based on a literal reading of section 788(3) (provision that gives effect of a Tax Treaty under UK law), simply concluded that the non-discrimination article is not made part of UK law insofar as it relates to ACT.

With regards to the second aspect of the claim, the High Court considered that it was sufficiently clear that the legislation was not in breach of Article 56 of the Treaty, and that he should not refer to the ECJ the question whether there was such a breach.

The U.K. Court of Appeal in its recent decision follows to a great extent the same line of reasoning of the High Court in order to dismiss the claims for ACT compensation by non-U.K. corporate groups. Similarly to the High Court, the Court of Appeal held that although UK’s ACT legislation can be said to be in breach of the non-discrimination clause of the Tax Treaty (Art. 24), that specific part of the Treaty (the non-discrimination clause) had not been implemented by UK legislation. Readers may recall that in the UBS case a similar issue arose.

With regards to the issue of whether the ACT provisions were consistent EC Law, namely Article 56 of the EC Treaty, the Court of Appeal upheld the decision of the High Court not to refer a question under Articles 56 and 57 to the ECJ. Nevertheless, the Court of Appeal left the door open for a possible reference to the ECJ. Accordingly, if the case is to further proceed to the House of Lords, on issues of domestic law, the Court considers preferable not to refer at this stage a question to the ECJ. The Court considers that only if the case would not proceed to the House of Lords would it be appropriate to order a reference to the ECJ.

This decision goes against the plaintiff request for an immediate reference to the ECJ. In fact, the plaintiff was in fact hoping that if the case was immediately referred, there would be a possibility to have a joint hearing with another recently referred case from Austria which raises similar issues under Articles 56 and 57 (Holböck Case - C-157/05).

To situate the readers, Holböck case concerns inbound dividends received from third States being taxed at a rate higher than dividends received from domestic entities. In that Austrian case, the taxpayer claims that the principle of the free movement of capital, which applies between EU Member States and third countries, prohibits Austria from taxing dividends distributed by a non-EU company at a rate higher than comparable domestic dividends are taxed. The Austrian Court, which made a reference to the ECJ decision in the Lenz case (C-315/02), asked the ECJ whether the eventual differential treatment falls under the “standstill clause” of Article 57, namely if such clause allows for a restriction of the transfer of capital in relation to direct investments.

In the same mode, the claim under EC law of the UK plaintiffs was that the ACT provisions were inconsistent with Article 56 of the Treaty, and not saved by Article 57(1).

Article 56(1) states that all restrictions on the movement and payments of capital between member’s states and third countries are prohibited. Article 57 and 58 contain, however, several exceptions to the main rule. More specifically, Article 57 permits restrictions on the freedom of capital relating to third countries on the basis of national or community law, provided that such restrictions existed before 31 December 1993. Accordingly, these measures must relate to direct investment, including in real estate — establishment, the provision of financial services or the admission of securities to capital markets. The scope of Article 57(1) is still far from clear!

In this case, the claimants considered that ACT provisions should be viewed as restrictions on 'payments' within the prohibition in article 56(2). The claimants submitted that the purpose of Article 57(1) is to preserve the direct and indirect effect of a number of strictly limited provisions, which must be aimed at capital movements, and in particular at investment in undertakings. In the case of the ACT provisions, since the dividend arises from capital movements which are not themselves restricted, there should be no justification for an indirect restriction.

This argument failed, apparently, on the basis of the reading by the Court of the Verkooijen case. Accordingly, the ACT provisions were considered analogous in effect to the provision of Dutch law at issue in Verkooijen and therefore should be regarded as restrictions on capital movements, which are also within the protective effect of Article 57(1).

Although it may be expected that a reference to the ECJ may be made if the case reaches the House of Lords, the present decision means ultimately that the same compensation in terms of ACT payments awarded to EU-parented companies in light of the ECJ case is not available to companies held by non-EU investors.

It should be noted that several other Group Litigation Orders (GLO) were formed to make claims against other aspects of UK tax law, which apparently are also contrary to the EU Treaty. In addition to the advance corporation tax (ACT) group litigation there are currently pending: (i) loss relief group litigation; (ii) franked investment income (FII) group litigation; (iii) controlled foreign company (CFC) and dividend group litigation; (iv) foreign income dividend (FID) group litigation; and (v) the thin capitalization group litigation.

More info on pending ECJ cases:
C-196/04 Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of
Inl.Rev. (UK) – CFC
C-374/04 Test Claimants in Class IV of the ACT Group Litigation v. Commissioners of Inland
Revenue (UK) – tax credits for dividends, MFN
C-446/04 Test Claimants in the Franked Investment Income (FII) Group Litigation v.
Commissioners of Inland Revenue (UK) – foreign dividends; Art.56 EC
C-524/04 Test Claimants in the Thin Cap Group Litigation v. Commissioners of Inland Revenue (UK)
C-201/05 The Test Claimants in the CFC and Dividend Group Litigation v. The Commissioners
Inland Revenue (UK) - Art. 43, 49, 56
C-203/05 Vodafone 2 v. Her Majesty's Revenue and Customs (UK) – CFC legislation, Art. 43, 49, 56

2005 Year review - Other Journals

Following my latest post on the 2005 year review. I provide below a list of 50 articles, besides the IBFD Journals, from other publishers covering interesting international tax topics. The articles cover from international tax, European tax to transfer pricing issues. Preference was give to articles that cover issues that are still open to discussion one way or another and are not specifically country related (i.e. purely domestic analysis). The re


(1) Tax Avoidance and the European Court of Justice: What is at Stake for European General Anti-Avoidance Rules?
Ruiz Almendral
This article first conveys the general aspects of a GAAR and anti-avoidance doctrines, connecting their main features with the new Spanish provision, and secondly, assesses the pertinent ECJ decisions and how they may affect its understanding and its use in the European context. Finally, it pays special attention to a recent Opinion of Advocate General Mr Poiares Maduro, that implies a certain change in the traditional ECJ doctrine.
Intertax, Vol. 33 (2005), no. 12 ; p. 595-602

(2) The Esab Case(C-231/05) and the Future of Group Taxation Regimes in EU
This article discusses the Esab case on the domestic law group taxation regime in Finland, pending at the European Court of Justice. As in the Marks & Spencer case, the question is whether and to what extent the domestic law group treatment has to be applied in intra-EU cross-border situations.
Intertax, Vol. 33 (2005), no. 12 ; p. 595-602

(3) The Impact of the Marks & Spencer Case on US-European Planning
This article examines the developing role of the European Court of Justice in the tax field, EC Treaty principles, the Marks & Spencer case, the Manninen decision, Advocate General Maduro's opinion in Marks & Spencer, and the extension to third countries.
Intertax, Vol. 33 (2005), no. 11 ; p. 490-502

(4) The Tax Burden on International Assignments
Eischner, Endres, Schmidt, Spengel
This article focuses on the taxes arising with international assignments. It quantifies the costs for assignments into 20 countries across Europe, the US, and Asia. The main objective is to calculate and compare the costs of cross-border assignments. The second objective is to estimate the impact of the various drivers on the assignment costs. The third objective is to rank the countries by total assignment costs.
Intertax, Vol. 33 (2005), no. 11 ; p. 490-502

(5) Cross-border Dividends from the Perspective of Switzerland as the Source State - Selected Issues under Article 15 of the Swiss-EU Savings Agreements
Danon, Glauser
After a presentation of the principles governing the treatment of dividends for Swiss withholding tax purposes, the article deals successively with outbound dividends under Swiss withholding tax, article 15(1) of the Savings Agreement and interpretative issues, payment of dividends, tax residence, minimum holding level, two-year holding requirement, anti-abuse provisions, and subject to tax requirements.
Intertax, Vol. 33 (2005), no. 11 ; p. 503-519

(6) Systems to Prevent Accumulation of Taxation in Parent-Subsidiary Relationships
This article examines the question of how the accumulation of income tax can be prevented in situations where one legal entity participates in another legal entity. It specifically addresses the issue of the avoidance of accumulation of taxation. In addition, a comparative analysis is made of the system as it exists at present in four states: Germany, the Netherlands, Spain and the US.
Intertax, Vol. 33 (2005), no. 11 ; p. 527-536

(7) Most-Favoured-Nation Treatment under Tax Treaties Rejected in the European Community: Background and Analysis of the D Case
This article discusses the background to the D case and the arguments put forward in the case by D's attorney, the governments and the European Commission. The decision is examined critically and a proposal is made for the inclusion of a most-favoured nation clause in the EC treaty.
Intertax, Vol. 33 (2005), no. 10 ; p. 429-444

(8) Most-Favoured-Nation Clauses in Double Taxation Conventions - A Worldwide Overview
This article deals with most-favoured-nation (MFN) clauses within the OECD Model and in the worldwide network of bilateral tax treaties. It includes a table of all analysed MFN clauses covering a.o. definition of permanent establishment, business profits, shipping and air transport, source taxation, capital gains, independent work, students, non-discrimination, anti-abuse regulations, arbitration, and exchange of information.
Intertax, Vol. 33 (2005), no. 10 ; p. 445-453

(9) A Slip of the European Court in the D Case (C-376/03): Denial of the Most-Favoured-Nation Treatment because of Absence of Similarity?
van Thiel
This article critically reviews the D case, concluding that the decision is very unfortunate, mainly because its wider implications undermine very basic principles of Community law, as well as the internal market without frontiers.
Intertax, Vol. 33 (2005), no. 10 ; p. 454-457

(10) Treaty Shopping and Domestic GAARs in the Light of a Recent Austrian Decision on Irish IFS Companies
Obermair, Weninger
This article deals with a decision by the Austrian Supreme Administrative Court of 9 December 2004, in which it denies the application of the treaty with recourse to the anti-abuse provision of s. 22 of the Austrian Federal tax Code. This article looks critically at the direct application of the Austrian domestic anti-abuse provision on double tax treaties and discusses alternative instruments to deal with treaty shopping in a dogmatic and well-founded manner.
Intertax, Vol. 33 (2005), no. 10 ; p. 466-473

(11) The European Treaties’ Implications for Direct Taxes
This article gives some orientation on the main principles derived from the European Treaties and their impact on national tax laws.
Intertax, Vol. 33 (2005), no. 8/9 ; p. 310-335

(12) Interpretation of Tax Treaties and Domestic General Anti-Avoidance Rules - A Sceptical Look at the 2003 Update to the OECD Commentary
This article examines whether the application of either statute-based or court-based domestic general anti-avoidance rules to tax treaty relations is in accordance with international law. The second part of the article expounds the general principles of treaty interpretation and explores the importance of the OECD Commentary in interpreting tax conventions. The third part of the article is devoted to the OECD's swing of opinion about the applicability of domestic general anti-avoidance rules to tax conventions over the last 20 years. The fourth part is devoted to the question whether there is a general principle of abuse of rights in tax matters. Part 5 discusses cases in which US courts applied domestic anti-avoidance doctrines to tax treaties.
Intertax, Vol. 33 (2005), no. 8/9 ; p. 336-350

(13) Agency Permanent Establishments in Securitization Transactions
This article considers whether, in circumstances where a service provider established outside the UK provides services to a UK issuer pursuant to a servicing agreement, the service provider may be treated for tax purposes as an agent permanent establishment of the issuer. Before this scenario is examined, the general rules of agency in both common law and civil law are considered. Then the concept of agency permanent establishment as developed by the OECD Model is reviewed. Following that and by way of background, the basic forms of securitization developed in the last 20 years are briefly described. In the remainder of the article, the risk of an agency permanent establishment arising in a simple wholesale securitization transaction is exposed and possible ways of averting that risk are suggested.
Intertax. - The Hague. - Vol. 33 (2005), no. 6/7 ; p. 286-296

(14) Shareholder Relief and EC Treaty Law - Supranational ’Aims and Effects’?
This article examines the effects of ECJ case law on national dividend relief provisions, concluding that the new approach of 'aims and effects' is of limited effectiveness and creates more problems than it solves.
Intertax. - The Hague. - Vol 33 (2005), no. 5 ; p. 200-214

(15) Final Amendments to the Merger Directive: Avoidance of Economic Double Taxation and Application to Hybrid Entities, Two Conflicting Goals
Benecke, Schnitger
This article describes the problems involved in the original proposal of 17 October 2003 of the European Commission and evaluates the solutions proposed in the final version of 17 February 2005.
Intertax. - The Hague. - Vol. 33 (2005), no. 4 ; p. 170-178

(16) The Relationship between Article 5, Paragraphs 1 and 3 of the OECD Model Convention
Analysis of the relation between the general PE concept and the construction PE and an overview of the developments within the OECD Model Convention.
Intertax. - The Hague. - Vol. 33 (2005), no. 4 ; p. 189-193

(17) European Transfer Pricing Trends at the Crossroads: Caught between Globalization, Tax Competition, and EC Law
Describes the international context within which the European domestic transfer pricing regulations are set, as well as the position of Spanish rules within the same context.
Intertax. - The Hague. - Vol. 33 (2005), no. 3 ; p. 103-116

(18) Is There a Future for CFC-Regimes in the EU?
The taxation of CFC income is very questionable both from the perspective of th EC Parent-Subsidiary Directive and from the perspective of the EC Treaty. According to the opinion of the author, the application of the domestic law of CFC regimes of the EU Member States to resident shareholders of companies of other Member States in most cases leads to a treatment that is not in accordance with EC law. The article first discusses the object and purpose of CFC legislation, compatibility with tax treaties, and, the Parent-Subsidiary Directive.
Intertax. - The Hague. - Vol. 33 (2005), no. 3 ; p. 117-123

(19) `Employer’ Issues in Article 15(2) of the OECD Model Convention- Proposals to Amend the OECD Commentary
Examines whether the different methods of interpretation of the term employer are in line with Art. 15 of the OECD Model, and, analyses the proposed changes and amendments as to whether their implications could already be derived from the existing version of the OECD Model or the OECD Commentary.
Intertax, Vol. 33 (2005), no. 3 ; p. 123-133

(20) The Attribution of Profits to a Permanent Establishment: Issues and Recommendations
Bennett, Dunahoo
Description of the historical US treaty policy regarding the attribution of profits to a permanent establishment. An analysis is given of the purpose of profit attribution provisions in tax treaties and their implications for business and governments. In addition, the main aspects of a recent OECD report on the allocation of profits to a permanent establishment are described with particular emphasis on political and technical issues, such as a symmetrical application, a functional analysis, the attribution of assets to a PE, risk assumptions, attribution of capital, comparability, transfer pricing methods and dependent agent PE's. The last parts deal with practical implications and issues regarding US treaty provisions.
Intertax. - The Hague. - Vol. 33 (2005), no. 2 ; p. 51-67

(21) Formulary Apportionment for Europe: An Analysis and A Proposal
Antonio Russo
This article addresses practical issues related to implementing apportionment at the European level, exploring whether such mechanism is effectively (politically and economically) viable and would clearly obtain the desired effects of reducing profit shifting through transfer pricing, curbing tax competition between Member States and creating a more favourable tax regulatory environment for Europe-based enterprises.
Intertax. - The Hague. - Vol. 33 (2005), no. 1 ; p. 1-31

EC Tax Review

(22) The implications of the judgment in the D case: the perspective of two non-believers
Janssen, de Graaf
This article discusses the judgment of the ECJ in the D case on the issue of most-favoured nation (MFN) treatment. It first looks at the various types of non-discrimination provisions in international agreements, viz. national treatment, horizontal non-disrimination and MFN treatment. It examines whether, according to international opinion, the general principle of non-discrimination entails a right to MFN treatment. It sketches the situation in practice in Germany, the Netherlands and the United Kingdom derived from the case law in which - invocation of - the MFN treatment is involved and examines several judgments of German and Dutch courts in which the claim to MFN treatment was explicitly rejected. Furthermore, it focuses on the ECJ's views with regard to applying the MFN treatment to tax treaties.
EC tax review, Vol. 14 (2005), no. 4 ; p. 173-189

(23) The Merger Directive amended: the final version
van den Brande
On 17 February 2005 the Council adopted a Directive 2005/19/EC amending the Merger Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges to shares concerning companies of different member states. This article provides an overview of amendments comparing them to the 1990 Directive.
EC tax review, Vol. 14 (2005), no. 3 ; p. 119-127

(24) Capital movements and direct taxation: the effect of the non-discrimination principles
This article examines the possible effect on the EC Member States direct taxation systems of a number of international agreements - other than the EC Treaty - that directly or indirectly relate to the liberalisation of international capital movements and of which both EC Member States and non-EC Member States are a party. It is examined to which degree these agreements prohibit the committing parties to distinguish between purely domestic situations and cross-border situations when taxing income from capital.
EC tax review. - Kingston-upon-Thames. - Vol. 14 (2005), no. 3 ; p. 128-139

(25) Fokus Bank: the end of withholding tax as we know it?
On 23 November 2004 the European Free Trade Association (EFTA) Court handed down a judgment in the Fokus Bank case that could have significant consequences for the continued application of withholding taxes on investment income within the EU (case E-1/04). This article reviews certain aspects of the EFTA Court's analysis in the light of the case law of the European Court of Justice and then addresses the potential consequences for withholding taxes generally within the EU.
EC tax review. - Kingston-upon-Thames. - Vol. 14 (2005), no. 2 ; p. 69-77

(26) Safeguarding pension taxation rights in cross-border situations
This article considers how member states can safeguard their taxing rights over occupational pensions if a (pan-European) pension fund is located in another member state. Taxing rights include both any yield tax, that is the tax on the pension capital at the level of the pension fund, and the tax on the pension out-payments. The article also briefly discusses the Pension Fund Directive, the Pension Taxation Communication, some cases decided by the European Court of Justice, the infringement cases taken up by the European Commission and the proposals by the European Federation for Retirement Provision.
EC tax review. - Kingston-upon-Thames. - Vol. 14 (2005), no. 2 ; p. 78-82

(27) Towards European international tax law
Pasquale Pistone
In the context of the opinion of Advocate General Ruiz-Jarabo Colomer in the "D" case and the signing of the EU-Switzerland savings agreement, an overview is given of the case from the European Court of Justice on tax treaties. The last 2 parts analyse the possibilities to solve conflicts between tax treaties within the European Union and with third countries and European law, such as an EU Model Tax Convention and exceptional cases such as the EU-Switzerland agreement where the Member States transferred the competence to conclude an agreement transferred to the EU.
EC tax review. - The Hague. - Vol. 14 (2005), no. 1 ; p. 4-9

Journal of International Taxation

(28) A guide to captive insurance companies
Three part article that covers fundamentals of captives and captive taxation, and U.S. court-developed "captive tax law".
Elliott, W.P.
Part 1 Journal of international taxation, Vol. 16 (2005), no. 4 ; p. 22-37
Part 2 Journal of international taxation, Vol. 16 (2005), no. 7 ; p. 28-33, 54
Part 3 Journal of international taxation, Vol. 16 (2005), no. 9 ; p. 34-43

(29) "Conservative" and "radical" alternatives for taxing e-commerce
Dale Pinto
This two-part article considers two proposed alternatives to accommodate the taxation of electronic commerce transactions that are at opposite ends of the spectrum of possible solutions to the challenges in this area. In this part 1 is considered what may be regarded as a conservative proposal to accommodate the taxation of electronic commerce transactions by seeking to maintain existing international tax principles as they are found in the OECD Model tax Convention.
Journal of international taxation, Vol. 16 (2005), no. 8 ; p. 14-21, 64

(30) How far should the WTO reach into income tax policies?
Jung, Y.
This article explores whether the current WTO rules are adequate to address a variety of problems emanating from national income tax policies. It presents a modest proposal and takes the position that the new challenges brought by the international tax community do not necessarily require a grand new initiative. It explores the nexus between trade and income tax policy, evaluates how the current WTO framework addresses the problems that income tax policy may create; and examines possible ways to address the challenges that may result from income tax policy.
Journal of international taxation, Vol. 16 (2005), no. 3 ; p. 36-46, 63-64

(31) E-commerce and foreign retail distribution: overlooked tax benefits
Feinschreiber, R. and Kent, M.
The long-dormant foreign retail distribution provisions permit users of e-commerce technology to benefit from export sales. The foreign retail distribution provisions are narrow in scope but when they do apply, they potentially provide tax saving for U.S. manufacturers through tax deferral or exclusion mechanisms. Quite surprisingly, U.S. businesses rarely seek to apply them.
Journal of international taxation, Vol. 16 (2005), no. 3 ; p. 30-35, 52

(32) Tax information exchange and bank secrecy
Spencer, D.E.
Two part article that covers the relationship between the OECD Model Income Tax Treaty and the OECD Model Agreement on Exchange of Information on Tax Matters and the issue of the USA as a safe haven for tax evasion. Part 1 of a two-part article discusses three major issues in connection with revised Article 26 of the OECD Model.
Journal of international taxation, Vol. 16 (2005), no. 3 ; p. 22-29, 57-58

(33) The relationship between the arm's-length principle in the OECD Model Treaty and EC tax law
Kofler, G.W.
Two part article. Part 1 discussed the Lankhorst-Hohorst case and the incompatibility of the German thin capitalization rules with EC law and the relevance of Article 9 OECD Model in the case. Part 2 considers the scope of the Parent-Subsidiary and Interest and Royalties Directives in the context of Lankhorst-Hohorst.
Part 1 Journal of international taxation, Vol. 16 (2005), no. 1 ; p. 32-43
Part 2 Journal of international taxation, Vol. 16 (2005), no. 2 ; p. 34-43 ; p. 62-64

British Tax Review

(34) Cross-Border Tax Arbitrage—Policy Choices and Political Motivations
Mark Boyle
The UK Government's recent introduction of measures designed to restrict cross-border tax arbitrage is one of the bolder legislative forays of recent years into the international tax arena. This article examines some of the political motivations and policy choices behind these measures: why should cross-border arbitrage opportunities be limited, provided existing laws are not being contravened? Is there any rational, policy-led basis for the Government's actions, and if so what is it? Why has the Government chosen now as the time to act? What criticisms can be levelled against the Government in relation to these new provisions, and how fair are they? And how do other international anti-abuse techniques enter into the equation? The article recognises that there are no clear-cut answers to these questions and notes that without a clearer understanding of the politics and policies behind the new rules, it is difficult to conclude what the lasting impact of the measures will be.
British tax review, (2005), no. 5 ; p. 527-543

(35) Aspects of Constructing a Rational Framework for Loss Relief: A Sample of How Four Countries Compete
Maureen Donnelly and Allister Young
A corporate tax system seeking to be competitive and fair must offer taxpayers relief for losses. This paper presents a policy framework within which the UK may proceed, as part of its corporate tax rationalisation process, to develop a more competitive loss utilisation regime. The framework is constructed using two policy elements - the averaging of losses over time and the identification of the loss owner. Within the context of these two elements, three variables - year, business and entity - serve to differentiate competitive positions along a policy spectrum. The UK's loss utilisation rules are compared to those of Australia, Canada and the US. A case scenario illustrates how the rules adopted by the four jurisdictions operate within the policy framework. The paper concludes with an assessment of the proposed changes.
British tax review, (2005), no. 4 ; p. 432-447

(36) The Attribution of Profits-Fact or Fiction?
Arun Birla
The first part of this article sets out the background to the OECD's development of a working hypothesis of the preferred methodology for the attribution of profits to a permanent establishment. The primary focus is on the banking industry. The article then goes on to consider some of the more important aspects to the preferred methodology. However, the OECD work cannot be considered in isolation as key domestic developments in both the UK and the US add to the debate. These developments lead the author to query and briefly comment on the exact significance of the OECD Commentaries when considering double tax treaties. The analysis queries the current approach adopted by the OECD although it is acknowledged that the topic present a number of controversial issues and difficulties.
British tax review, (2005), no. 2 ; p. 207-221

Tax Notes International

(37) A comprehensive look at the Berry ratio in transfer pricing
Transfer pricing from a CFO's perspective : the benefits of activity-based costing
Przysuski, M., Lalapet, S.
This article is the first of a two-part series in which the authors examine different costing approaches for setting internal transfer prices and their implications for multinational organizations. The authors examine the application of profit-based methods to prove the arm's-length principle in transfer pricing analyses, particularly the comparable profits method and the transactional net margin method, as applied in the United States and other OECD countries.
Tax Notes International, Vol. 40 (2005), no. 8 ; p. 759-767 and Tax Notes International, Vol. 39 (2005), no. 9 ; p. 829-843

(38) Spain's antiabuse aproach and ECJ jurisprudence
Calderón Carrero, J.M.
This article discusses a case in the Spanish tax court involving Spanish anti-abuse clauses considering the European Court of Justice's interpretation of the anti-directive-shopping rules.
Tax Notes International, Vol. 39 (2005), no. 11 ; p. 1031-1044

(39) Tax treaties and antiavoidance rules in Canada
Esmail, P.
This special report examines the application of antiavoidance rules in the context of Canada's network of tax treaties.
Tax Notes International, Vol. 39 (2005), no. 3 ; p. 271-278

(40) EU law and the taxation of dividends, interest, and royalties : recent case law
Richelle, I.
This article highlights the likely effects of recent ECJ and EFTA case law on national tax laws and tax treaties that affect taxation of dividends, interest, and royalties of nonresident companies and individuals
Tax Notes International, Vol. 39 (2005), no. 3 ; p. 243-248

(41) Discriminatory treatment of dividens in the European Union : is the end near?
Liebman, H.M. and Rousselle, O.
Pressure on the European Commission (and the EU member states) to harmonize the tax treatment of cross-border dividends has intensified with recent decisions by the European Court of Justice and the European Free Trade Association Court, all of which favored the taxpayer.
Tax Notes International, Vol. 39 (2005), no. 2 ; p. 143-150

(42) A benefits-received approach to creating an international tax
Verbeek, P.
This article examines how the concept of an international tax has developed over the last 30 years as well as how a benefits-received model of the tax would work.
Tax Notes International, Vol. 39 (2005), no. 1 ; p. 43-46

(43) Replacing CFC regimes with a collective attribution system
Burnett, C.A.
This article argues for a multicountry, reciprocal, jurisdiction-based scheme through an attribution system to target tax havens and preferential tax regimes as an alternative to individual countries' CFC laws.
Tax notes international. - Arlington. - Vol. 38 (2005), no. 12 ; p. 1109-1119

(44) Angels on a pin: arm's length in the world
Rosenbloom, H.D.
Like its "polar alternative," global formulary apportionment, the arm's-length approach to transfer pricing has many quirks and anomalies that deserve greater attention.
Tax Notes International, Vol. 38 (2005), no. 6 ; p. 523-530

(45) International mergers and acquisitions : a forum for discussion
Boidman, N.
Tax treatment of target or merger party shareholders who take foreign acquirers'or merger party's stock
The ninth article of the M&A Forum considers the tax effects of transactions with shareholders of two more groups in an international merger or acquisition that receive all or substantial stock from the other upon the transaction for nine countries.
Tax notes international, Vol. 38 (2005), no. 6 ; p. 491-506
Role of a target country acquisition corporation (special purpose vehicle)
This article addresses the tax considerations of a complete acquisition of a corporate group in one country by a group in another or a merger of two of those groups and the need for a special purpose vehicle, usually a corporation, to avoid or limit taxation.
Tax notes international, Vol. 37 (2005), no. 8 ; p. 663-682

(46) The United Nation's role in international tax cooperation
Zagaris, B.
This article discusses the United Nations' Committee of Experts on International Cooperation in Tax Matters, which is responsible for international tax cooperation, and various countries' and organizations' responses to it.
Tax Notes International, Vol. 38 (2005), no. 4 ; p. 337-340

(47) A separate international tax regime for nonresident athletes
Winnie, R. (Jr.)
This article discusses the feasibility of, and potential methods for, developing a separate international tax regime for nonresident athletes in the countries in which they earn income.
Tax Notes International, Vol. 38 (2005), no. 1 ; p. 69-87

(48) Transfer pricing and related tax aspects of global supply chain restructurings
Lemein, G.D.
This paper explores the changes in multinational corporate and business structure in the modern global economy and discusses the changes in taxation and transfer pricing that have resulted from the changes in structure.
Tax Notes International, Vol. 37 (2005), no. 8 ; p. 715-724

(49) Source taxation and the OECD project on attribution of profits to permanent establishments
Edgar, T. and Holland, D.
An OECD project on the proper approach to the attribution of profits to permanent establishments appears to jeopardize much of the source jurisdiction to tax in the context of multinational enterprises organized in branch form.
Tax Notes International, Vol. 37 (2005), no. 6 ; p. 525-539

(50) Tax competition : an analysis of the fundamental arguments
Nov, A.
This article discusses two opposing views on international tax competition and details the OECD and EC proposals for limiting harmful tax competition.
Tax Notes International, Vol. 37 (2005), no. 4 ; p. 323-333