Tuesday, January 30, 2007

Does Cross-Border Tax Arbitrage warrants an international solution?

Cross-border tax arbitrage is generally used to qualify transactions, which exploit differences in the tax systems of two (or more) countries. The subject is very current, not only due to the increasing international tax planning through complex transactions undertaken by multinational companies but also by the recent national reactions to the problem (e.g. New UK Rules on International Arbitrage).

Since the “holy grail” of international tax planners is the so-called double non-taxation, it is natural that taxpayers attempt to exploit “conflicting” tax rules in different jurisdictions so as to achieve a reduction of the total tax liability. Residence arbitrage through dual resident companies, entity characterisation through hybrid entities, hybrid financing, repos and double dip lease transactions are examples of “labelled” cross-border tax arbitrage transactions. Nevertheless, since in most cases of cross-border tax arbitrage, the taxpayer takes advantage of publicly known differences in tax regimes and technically complies with the said laws, it is difficult to say that the taxpayer is violating the law by planning in such manner. As such it is no surprise that some taxpayers maintain that the existence of cross-border tax arbitrage warrants no government action. Others consider that the problem of tax arbitrage needs an international solution.

This topic arises today because of an interesting paper entitled "Tax Competition, Tax Arbitrage, and The International Tax Regime" from the Prof. Reuven S. Avi-Yonah (University of Michigan), which brings interesting arguments to the theoretical discussion around the topic of tax arbitrage.

International tax is in fact a difficult concept to define. Traditionally, international taxation refers to treaty provisions relieving international double taxation but in broader terms, it also includes all domestic legislation with an international element (e.g. rules concerning foreign income of residents or source income of non-residents).

In "Tax Competition, Tax Arbitrage, and The International Tax Regime", Prof. Avi-Yonah argues that a "coherent international tax regime exists, embodied in both the tax treaty network and in domestic laws, forms a significant part of international law (both treaty-based and customary)". This ultimately means that countries are not free to adopt any international tax rules they please, but rather operate in the context of the so-called international tax regime.

For the purposes of defining the structure of the international tax regime, Prof. Avi-Yonah guides the reader through the content of what he calls the two basic principles that form part of such regime: (1) the single tax principle (i.e., that income should be taxed once- not more and not less) and (2) the benefits principle (i.e., that active business income should be taxed primarily at source, and passive investment income primarily at residence).

Accordingly, although the benefits principle is broadly accepted and reflected in both domestic rules and tax treaty network, there is a debate on whether (if one would assume that a international tax regime exists) the said regime incorporates the single tax principle. This is important when for example one has to address if the prevention of double non-taxation is an objective of the so-called international tax regime.

At the opening of the paper, Prof. Avi-Yonah asks if there is an International Tax Regime? In support of a positive answer, elements such as the existence of an extensive bilateral tax treaty network (similar in policy and language), the remarkable convergence of domestic tax systems in the recent year and the need of some degree of integration between tax systems are put forward. They play a role in arguing that a coherent international tax regime does exist.

The next question is whether such treaties and the domestic tax laws can be said to form an international tax regime that is part of customary international law. In dealing with this issue, Prof. Avi-Yonah refers the readers back to the argumentation set out in a previous paper, International Tax Law as International Law (published in Tax Law Rev. 57, no. 4, 2004), where he concluded that international tax law is part of international law, even if it differs in some of its details from generally applicable international law.

In fact, if one takes the example of tax treaties, one easily reaches the conclusion of the exceptional aspect of tax treaties (when compared with other treaties), mainly due to their profound interaction with domestic legislation, through the use of the same language and even by incorporating elements of domestic law of each party.

In support his view (that international tax law can be seen as customary international law and therefore as binding even in the absence of treaties), Prof. Avi-Yonah provides insightful examples where one can argue that international tax regime rises to the level of customary international law. These examples are the jurisdiction to tax, the non-discrimination, the arm's length standard, and the foreign tax credits. In his view, this is important step specially when dealing with a transversal issue such as tax arbitrage, whereby transactions are simply structured to take advantage of differences between tax systems and achieve double non-taxation.

The backbone of the paper is perhaps that since an international tax regime (part of customary international law) should be said to exist, a recent phenomena's such as cross-border tax arbitrage, which puts at risk the single tax principle (i.e. income should be taxed once), should be tackled under the framework of this same regime. Recent developments demonstrate, in his view, that there is an increasing consensus rejecting the ultimate result of tax arbitrage, i.e. double non-taxation and that still more can be done. In his conclusion, Prof. Avi-Yonah suggests that the OECD should take the single tax principle "more explicitly into consideration in revising its model treaty, and revise the model so that it functions better to prevent both double taxation and double non-taxation".

The problem of such view is that although one may see the non-taxation arising from tax arbitrage as the flip side of double taxation that does not mean that the tax treaties are the best equipped tool to deal with this issue. Domestic laws are inherently different and warranting a solution through treaties may well prove a difficult and frustrating exercise. In addition, domestic sudbstance over form tests may be useless in cross-border cases and international coordination fruitless, unless it is focused on the wider policy issue of tax competition.

Although I have my reservations as to whether cross-border tax arbitrage deserves an international solution, I will continue to follow the international debate around and wait for somebody to really convince me to abandon the“sceptics” club.

Further Listening
International Tax Arbitrage, A lecture by Prof. H. David Rosenbloom

Further Reading
Diane M. Ring, One Nation Among Many: Policy Implications of Cross-Border Tax Arbitrage,

Labels: ,

Wednesday, January 17, 2007

2007 Tax Agenda: What to expect from the usual suspects?

Will a new deal for a European constitution boost the possibility for further agreement concerning other EU wide-ranging tax project such as the common consolidated corporate tax base? Will the newly elected Democrat congress stall the Bush corporate tax reform projects? Will the OECD finally conclude its PE attribution project? Will the UN “wake up” in terms of international tax issues and become a larger player in the policy discussions?

Enough of open questions and let’s make a “tour de table” of some of the issues that are in the agenda and may receive fresh inputs during 2007. Personally, I have a feeling that 2007 will probably be a transitional year in terms of international and European tax issues and that more challenging and exciting times await us in 2008. But that does not mean that the developments are not expected from the prolific “usual suspects”, namely OECD, the EU Commission and the ECJ.

The OECD tax agenda
The winds and waves are always on the side of the ablest navigators.
By Edward Gibbon, The Decline and Fall of the Roman Empire

As usual, the agenda of the OECD is impressive and several topics are expected to see the green light. In the tax treaty topics, a good news is that the ongoing project on profit attribution to permanent establishments is finally close to an end. The OECD published in December 2006 the long expected new versions of Parts I, II and III of its Report on the Attribution of Profits to Permanent Establishments, along with a cover note containing an update on the status of that project. As to the announced necessary changes to the language of OECD Model Tax Convention and Commentaries, somewhere in 2007 appears to be the target of the OECD.

But the issues under discussion go well beyond profit attribution and include, dispute resolution, taxation of services, non-discrimination, collective vehicles, employment income and last but not least the place of effective management.

Dispute resolution in the framework of tax treaties (Art. 25 of the OECD Model) is one of the hot topics at the moment. The discussion draft "Proposals for Improving the Process for the Resolution of Tax Treaty Disputes", of 1 February 2006, examines the ways of improving the effectiveness of the mutual agreement procedure under Article 25 of the OECD Model, including the consideration of other dispute resolution techniques. The 2006 draft, proposes a system for the mandatory arbitration of tax disputes (new paragraph 5) between two treaty countries when the tax authorities of those countries have been unable to resolve those disputes within a two-year period. Strangely enough the recent protocol concluded between the US and Germany adopted a different arbitration approach than the one suggested by the OECD (the so-called baseball arbitration).

The application of tax treaties to services (Art. 7 of the OECD Model) is a new topic in the agenda. The recently disclosed discussion draft entitled “The Tax Treaty Treatment of Services” includes new paragraphs 42.11 to 42.45 to the Commentary on Art. 5 of the OECD Model. The new paragraphs address the appropriateness of the current provisions of the OECD Model to deal with the tax treatment of services, views (and policy reasons) of States that do not agree with the principle of exclusive residence taxation of services and finally a alternative paragraph for Art. 5 of the OECD Model that secures additional source taxation rights, in certain circumstances, with respect to services performed within the territory of the source State.

As regards, place of effective management as a tie-breaker rule (Art. 4 of the OECD Model), the discussion draft dates back already to May 2003. The OECD Model was already updated in 2005 but nothing was said about the OECD abandoning this topic. On the contrary, recent case-law from OECD countries may trigger an interest in having a fresher look at the topic (See UK Court of Appeal decision in Wood v. Holden (2006) STC 443 on the question of corporate management and control/residence). The 2003 draft develops the two alternative proposals to improve the place of effective management concept under Article 4 paragraph 3 of the Model Tax Convention. The first proposal seeks to refine the concept of “place of effective management” by expanding the Commentary explanations as to how the concept should be interpreted. The second proposal puts forward the tie-breaker rule for persons other than individuals to modify Article 4 paragraph 3 of the Model Tax Convention together with Commentary thereon. I would expect further discussion on the topic.

Another project, where a draft is available but no recent news was received on its status, is the OECD plans to revisit the scope of paragraph 2 of Article 15. The discussion draft "Proposed Clarification of the Scope of Paragraph 2 of Article 15 of the Model Tax Convention" of 5 April 2004, clarifies its application in situations when services are provided through “offshore” intermediaries by addressing the interpretation of the word “employer”, the distinction between employment and self-employment. The issue, touching upon a wide industry practice of hiring-out of labour, may have large impact and that may well explain that no further developments are available.

A release of a draft concerning the ongoing project of revising the non-discrimination article (Art. 24), may well prove to be one of the highlights of the year. Taking into account the developments in the EU and the fact that the OECD Commentaries on Art. 24 remain largely unchanged since 1977, it is expected that the project of re-examining the non-discrimination principle will probably focus on: (i) the application of Article 24 to various existing group relief concepts (e.g., consolidation, inter-corporate dividend exemptions, tax-free intra-group asset transfers); (ii) the application of Article 24 to branch level taxation; and (iii) the application of Article 24 to the thin capitalization concept, particularly its relationship to Article 9.

A far-reaching project, which recently received new impetus, is the one concerning the Taxation of Collective Investment Vehicles. After the CTPA roundtable (including tax authorities and tax specialists of the financial sector) met in Paris on 1-2 February 2006 to discuss a number of issues related to the application of tax treaties to collective investment, the OECD decided to form an informal consultative group. This group of government and private sector representatives, under the auspices of the OECD, will tackle the tax treaty issues raised by the large cross-border portfolio investments held through collective investment vehicles and global custodians. The project will examine both substantive issues and practical administrative issues related to the application of tax treaties to these investments.

But OECD is not only a synonym of work in the field of tax treaties. The OECD global tax agenda includes, amongst others, developments in the field of (i) Transfer Pricing (i.e. monitoring of the OECD Transfer Pricing Guidelines); (ii) Consumption Taxes/VAT (iii) Transparency and Information Exchange and (iv) Tax Policy. Basically it is a very wide range of issues.

The European hidden tax agenda
“Much good work is lost for the lack of a little more”
By Edward H. Harriman

The state of uncertainty in Europe is already commonplace and presidential manoeuvres in France, political changes in the UK, hard politics with Turkey and digestion problems related to the latest enlargement are probably bound to be decisive in maintaining that feeling in 2007. Europeans may expect in addition to sluggish economic growth, a new attempt to approve a new (redux) constitution, probably as an outcome of a downsizing EU summit sponsored by Germany. All this facts may have hardly any impact on the European tax agenda for 2007. Apart of the new push towards the Constitution, the development and breeding of new ideas in the tax area will continue to come from the two main players, i.e. EU Commission and from the ECJ.

As regards the first player, a special attention should be given to advances on the creation of a common consolidated corporate tax base (CCCTB) in the EU. The target is only to release a proposal is 2008, but it is expected that position making of the EU member states will become more visible during 2007. The Commission will in fact attempt to reach in 2007 a consensus agreement on a draft CCCTB project and for that will receive the additional support of the German EU presidency. The Commission will have to convince with the “carrot” some reluctant Member States (and even Commissioners such as the Irish Charlie McCreevy) that the best way forward is not to prolong tax competition amongst member states and adopt a common tax base. The “stick” to be used is the enhanced cooperation, which would allow one-third of EU Member States (9 out of 27) to adopt legislation that couldn't be passed unanimously.

However the CCCTB is hardly the remedy for the entire panacea, since there also continues to be a need for more targeted measures for short & medium term problems and for individual taxpayers. Hence, the need for better coordination of un-harmonised direct tax systems.

For this purposes, the new soft-law approach of the EU Commission is also expected to receive further developments. The end of 2006 saw the release of a set of Communications on a co-ordination of national direct tax systems, with a special emphasis on exit taxation and cross-border loss relief. The year of 2007 will probably be the year of the Commission communications ultimately directed to: (i) remove discrimination and double taxation; (ii) prevent inadvertent non-taxation and abuse; and (iii) reduce the compliance costs associated with cross-border investment.

In fact, the Commission considers a key topic that of the control of the application of specific Community tax provisions and of the Treaty freedoms. For that purposes, it plans, besides watching over the correct application of EU law by member states, to issue soft policy communications and guidelines designed to lead the member states to the desired result through coordination. This will probably be followed by benchmarks of best practices in several areas intended to pave the way for reform and alignment of domestic law with EC Tax principles. It would be no surprise if the Commission future work would focus on issues such as withholding taxes, group taxation, taxation of permanent establishments and anti-avoidance rules.

Other areas where inputs from the EU Commission are expected include, the ongoing project of the one stop shop in the area of VAT, the fight against tax fraud through the revamp of the mutual assistance directive and finally the area of environmental taxation (by means of ‘green taxes’, CO2 tax, vehicle taxes and tax incentives).

Finally, a topic where much development is expected in the near future is the area State Aid. The past year was marked in this area by new communications on the effective use of R&D tax incentives and the State Aid decision concerning the Luxembourg 1929 Holding regime. As regards 2006, the highlights will probably be the decision on the recent Dutch tax reform and the forthcoming decision of the Court of First Instance in the Gibraltar case, where the court will have the first opportunity to test the line of defence based on regional autonomy (see Azores case).

As regards the European Court of Justice, the last year has demonstrated that European Tax Law has maintained its importance. The key cases of the last year were definitely Marks & Spencer (cross-border losses), Cadbury Schweppes (CFC), Denkavit international (Outbound Dividends), Kerkhart & Morres (Relief for juridical double taxation), N case (Exit tax) Bouniach (withholding tax), Halifax (VAT Avoidance) and Banca Popolare de Cremona (IRAP). The year of 2007 will probably be the year of consolidation of the important jurisprudence issued in 2005 and 2006. It may also well be the year where the scope of the EC freedom of capital as regards third countries will be finally clarified (the non-tax case of Fidum Finanz set the grounds on 2006).

As regards the year to come, the ECJ continues to have an agenda rich of tax cases. Amongst the currently pending cases (some of them to be decided in 2007 or 2008), one may highlight the following:

(1) Meilicke (C-292/04). This case, which deals with the German corporation tax credit for foreign dividends, will give an opportunity to the Court to further develop the theory of the temporal limitation of the effects of judgments. The Advocate General suggested that the temporal effects of the judgment in Meilicke against Germany should not be limited.
(2) Thin Cap Group Litigation (C-524/04). This case deals with the UK thin cap provisions. The Advocate General already suggested that the UK thin capitalization regime is generally compatible with freedom of establishment.
(3) Skatteverket (S) v. A (C-101/05). This case deals with the Tax-neutral spin-off and the question submitted was whether a dividend distribution from a parent company, in the form of shares in its subsidiary located in a third state (with no exchange of information provision) should be tax exempt.
(4) Skatteverket (S) v. A and B (C-102/05). This case concerns the taxation of dividends distributed by close companies located in third countries, in this case Russia.
(5) Holböck (C-157/05). This case, which deals with free movement of capital and third countries, concerns an individual shareholder resident in Austria received higher taxed dividends from a corporation resident in Switzerland on which he held two thirds of the shares.
(6) Columbus Container Services BVBA (C-298/05). This case deals with the potential compatibility of a German treaty-override provision, which provides for a switch-over from the exemption method to the credit method in respect of low-taxed passive foreign permanent establishment (PE) income, with the basic freedoms under the EC Treaty.
(7) Amurta S.G.P.S. (C-379/05). This case concerns compatibility of the dividend withholding tax exemptions for non-resident companies with the EC freedom of establishment and free movement of capital (discrimination of outbound dividends) .
(8) Orange European Smallcup Fund NV (C-194/06), this case, in which no credit was given for Portuguese and German withholding taxes, deals with the question of whether the refusal to credit this tax infringed the freedom of capital movement.
(9) Cartesio (C-210/06). This case deals with on the scope of the freedom of establishment and its effect on national company laws, in particular, on the constraints imposed by this freedom on the regulation by the home and the host EU Member State of the transfer of seat of companies established under their national laws.
(10) Deutsche Shell GmbH (C-293/06). This case deals with the treatment of currency losses from the repatriation of start-up equity of PE.
(11) Heinrich Bauer Verlag (C-360/06), this case deals with different valuation of domestic and foreign participations.
(12) M+T (C-414/06). This case is one of the two pending ECJ two cases on the deductibility of losses of a foreign permanent establishment at the level of its parent which were rejected on the basis that the exemption method in the double tax treaties applied not only to positive but also to negative income. In this case, the PE was situated in Luxembourg.
(13) SEW (C-415/06). This case is the second of the two pending ECJ two cases on the deductibility of losses of a foreign permanent establishment at the level of its parent which were rejected on the basis that the exemption method in the double tax treaties applied not only to positive but also to negative income. In this case, the PE was situated in the US.
(14) Gronfeldt (C-436/06). This case deals with different thresholds for capital gains from domestic and foreign participations.
(15) Hollmann (C-443/06). This case deals with the not application to non-residents of the reduced tax base (50%) for capital gains.

Labels: ,

Thursday, January 11, 2007

Is Switzerland under enough pressure from Europe institutions to clamp tax competition?

It is needless to say that international tax competition has become more intense as globalisation makes the world flatter. Switzerland is strategically centrally located in the hart of Europe and therefore in a privileged situation to attract foreign investment. A strong open economy, sacrosanct banking secrecy and a favourable tax system for multinationals have long made Switzerland amongst multinationals favourite headquarter locations.

As an example, the UK Times recently reported that Kraft Foods, the American multinational, recently announced that it is moving their European headquarters to Switzerland in search of efficient transport, lower taxes and an easier lifestyle.

The Swiss Federation, which includes 26 sovereign Cantons and approximately 2,900 independent municipalities, has a particular fiscally decentralised model for European standards. According to the Swiss Constitution, the Cantons have fiscal sovereignty and full right of taxation, except for particular sources that are allocated to the federal government. Basically, the Confederation (federal level) and the Cantons effectively share tax law making power for direct taxes on income and wealth.

Taking into account this decentralised model, the tax burden of a company may vary significantly depending on its Canton of residence. With a federal income tax levied at a flat rate of 8.5%, the effective income tax rate on profits for federal, cantonal, and communal taxes may be said to range between 13% and 30%, depending on the company’s place of residence. Nevertheless, at Cantonal level several tax incentives are available for example to newly established companies or holding, management and mixed companies. These incentives, which are ultimately designed to attract foreign investment, are an example of tax benefits available for multinational companies interested in locating their business in Switzerland.

The lowest corporate income tax rate in Switzerland is found in the business-friendly Cantons of Obwalden and Zug, where the effective income tax rate, including federal tax, is 13.1% and 16.44% respectively.

For much of the last decades, Switzerland has ranked amongst the wealthiest countries in Europe and recent studies have shown a boost of its international competitiveness. Low corporate tax rates, local tax incentives, favourable tax treaty network and recent access to EU free of withholding repatriation routes are amongst the main (tax) factors that explain the success of Switzerland in the international tax arena. Between international tax practitioners, Switzerland has become not only a favourable location for headquarters and holding structures, but also for finance and treasury activities (e.g. Swiss financing branches), commissioner and trading structures and last but not least a location for intellectual property and licensing activities.

The rise of Switzerland, just in the doorstep of Europe, as a favourable tax location has ignited again the tax competition debate. It is interesting to note that, both the OECD (which Switzerland is a member) and the European Union (with which Switzerland has several bilateral agreements) have been in the forefront of the discussion on tax competition.

It is important to recall that no longer than 10 years ago, OECD issued a groundbreaking report entitled, “Harmful Tax Competition: An Emerging Global Issue.” The project was based in three fronts: 1) identifying and eliminating harmful features of preferential tax regimes in OECD member countries 2) identifying “tax havens” and seeking their commitments to the principles of transparency and effective exchange of information and 3) encouraging other non-OECD economies to associate themselves with this work. As regards the first aspect, the 1998 report established a number of criteria for determining whether or not a preferential tax regime was harmful and included a commitment by the OECD Member countries to eliminate harmful tax regimes. The OECD work identified 47 preferential tax regimes as potentially harmful, out of which 19 regimes were, in the meantime, abolished, 14 amended to remove their potentially harmful features and 13 found not to be harmful on further analysis. In an annexed statement to the 1998 report, Switzerland (and Luxembourg) openly opposed the report.

In Europe, tax competition between member states has also been an issue for more than a decade now. The EU is marked by a significant diversity of company tax systems and as pointed out by the Ruding Committee report (1992), that tax differences among Member States distort foreign location decisions of multinational firms, and cause distortions in competition, especially in mobile activities. Following the OECD, the EU permissive attitude ended with the adoption on 1997 of the EU Code of Conduct for Business Taxation. On that occasion, the European Commission also made a commitment to clarify the application of state aid rules in the field of business taxation, which resulted on the 1998 Notice on the Application of State Aid Rules in the Field of Business Taxation. The EU Commission went on to defend that all 66 regimes that fell within the scope of the EU Code of Conduct for Business Taxation and were listed as harmful tax measures, were susceptible to a state aid investigation. This twin-track approach (code of conduct and state aid rules) implied a departure from the European Commission's previous policy and provided immediate success tackling tax competition within the EU borders. The problem is that outside the borders tax competition continues to increase (e.g. Singapore and Hong Kong) and only now EU Member States appear to be committed to promote the standard of the Code of Conduct with third countries.

The issue with Switzerland, from a EU perspective, stems from the fact that low cantonal tax rates and selective tax incentives may be said to contravene Art. 23 of the 1972 EU-Swiss Free Trade Agreement (FTA). Article 23 of the FTA reads as follows:

The following are incompatible with the proper functioning of the agreement in so far as they may affect trade between the Community and Switzerland:
- any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.
Should a contracting party consider that a given practice is incompatible with this article, it may take appropriate measures under the conditions and in accordance with the procedures laid down in article 27.

Taking into account this provision, the European Commission in December 2005 launched a consultation procedure with the Swiss Authorities, stating that Cantonal tax incentives granted to holding, management and mixed companies, are incompatible with the FTA and constituted a distorting state subsidy. The EU authorities also understand that such a case against Switzerland may also be substantiated under WTO and OECD rules.

The growing importance of tax competition as a factor to attract capital and business activity, the limits of the EU bilateral path with Switzerland and its already lasting suspicion of joining the EU may have been the igniters of this new diplomatic offensive. This consultation has naturally a political backdrop, since in some member States view it is hard to accept that Switzerland, which benefits under certain bilateral agreements from a privileged access to the EU internal market, maintains an aggressive tax policy with the clear objective of attracting European mobile activities.

Nevertheless, Switzerland is not a member of the EU and State Aid, as such, is an alien and somewhat difficult concept to integrate in the existing legal order between the EU and Switzerland. Switzerland has since the rejection of the EEA agreement in 1992, adopted a different approach towards the EU, based on the conclusion of bilateral agreements. The political stakes were even raised after recently Swiss voters (narrowly) approved in November 2006 to give one billion Swiss francs (630m euros) in aid to the 10 new members of the European Union. The contribution to the European cohesion was the price agreed to pay when the EU and Switzerland agreed in 2004 a second package of bilateral treaties covering the EU-Swiss relations. On the other hand, the recent 2005 agreement between the Swiss Confederation and the European Community on the taxation of savings has even helped to reinforce the competitiveness of Switzerland tax system, by granting measures equivalent to those found in the EC Parent-Subsidiary and Interest and Royalty Directives to Swiss entities receiving or paying such items of income (see Art. 15 of the Agreement).

In this context, it is rather natural that Switzerland counter argued that the EU couldn't impose (indirectly) its State Aid rules by simply interpreting the said Art. 23 of the FTA in similar way as it interprets and applies Art. 87 of the EC treaty. In a fairly complete reply to the European Commission memorandum, the Swiss Federal Tax Administration responded by arguing:
- Firstly, that the said tax incentives do not fall within the scope of the FTA, which itself only governs the trading of certain goods, and that Art. 23 does not provide a sufficient basis for an appreciation of corporate taxation in terms of competition law;
- Secondly, that Art. 23 is not to be interpreted in the same manner as the EC treaty’s state Aid rules; and
- Thirdly, assuming that cantonal tax regulations would fall within the scope of the FTA, that the relevant incentives would not constitute a incompatible state subsidy because: (i) they take into account the (less) use of infrastructures and are justified; (ii) they are not selective; and (iii) there is no interference with the bilateral movement of goods.

The Swiss tax authorities concluded by simply rejecting any responsibility as a participant in the EU internal market and reiterated that Switzerland only "seeks to offer an attractive location for making business by providing for a package of advantageous conditions, as do all states. Corporate taxation is an important factor for choosing locations and making investment decisions – but not the only one by any means". To that effect the authorities pointed out that under the OECD parameters their system cannot be considered harmful, that in the EU one also finds a wide variety of tax levels and finally that the tax disparities in Switzerland do not arise at the federal level but instead at a Cantonal level.

The current state of play is unclear. One can argue that the fact that Switzerland is not a full EU member gives it more freedom regarding tax competition. Nevertheless, both politically and economically, Europeans should question whether Switzerland is under enough pressure from Europe institutions to clamp tax competition?

PS: this was my 201st post!

Labels: ,

Wednesday, January 03, 2007

The update to the 2006 U.S. Tax Treaty Model and Technical Explanation: Is the U.S. setting or following the pace?

You may recall a recent post on the release of the new US Model. In the meantime, I found a bit of time to prepare and share with you a Draft Article on the novelties of the new US Model.

U.S. tax policy choices may be said to reflect not only on its tax legislation but also on the U.S. Model Income Tax Convention, which serves as a starting point in bilateral treaty negotiations.

In a 2006 testimony of before a U.S. Senate Committee, Patricia A. Brown, former International Tax Counsel to the Treasury Department reinforced the importance of the wide-ranging plan to revise and conclude tax treaties or protocols that would accordingly provide a “grater economic benefit to the United States and to U.S. taxpayers”. The recent treaties and protocols concluded with the UK , Australia , Japan , Netherlands , Denmark , Germany , Sweden , and others are a good reflection of such an effort designed to reinforce the competitiveness of U.S. multinationals in the international arena.

After a decade where the U.S. Treasury Department has revamped key treaties of its treaty network, it was therefore expected that the newly released 2006 update to the U.S. Model and Model Technical Explanation would take into account some of the tax treaty policies entrenched on those recently concluded treaties. That was the case in some instances, but surprisingly so some of the novelties were simply left out.

The following article addresses the principal changes to the 2006 U.S. Model and/or Technical Explanation, which include amongst others:
- Update of the treatment of flow-through entities, with an inclusion of specific examples addressing dividends paid to fiscally transparent and hybrid entities;
- Inclusion of a new article addressing pension funds;
- Update of the discussion on attribution of profits to a permanent establishment;
- Update of the dividend article;
- Update of interest article, including a new provision addressing "contingent interest; and
- Elimination of the independent personal services article; andRevised language of the limitation on benefits article.