November 29, 2018

Alta Energy Affirms Treaty Benefits: A Canadian Case Study for Applying the M.L.I.

November 29, 2018/ Ruchelman P.L.L.C.

As part of its attack on B.E.P.S., the O.E.C.D. published its Multilateral Instrument, a device that revised more than 1,200 income tax treaties. One of the provisions of the M.L.I. targets treaty shopping by the adoption of, among other things, a principal purpose test ("P.P.T."). In simple terms, the P.P.T. disallows a treaty benefit when a principal purpose of a transaction is to obtain that benefit. Transactions in accordance with the object and purpose of the provisions of a treaty are not affected by the P.P.T. Many North American tax advisers know that the P.P.T. is based on a provision of Canadian law known as the General Anti-Avoidance Rule or G.A.A.R. A recent decision of the Tax Court of Canada addresses the application of G.A.A.R. to a cross-border tax plan set up by a U.S. financial institution designed specifically to obtain enhanced Canadian tax benefits by rechanneling a U.S. investment in Canada into a U.S. investment into Luxembourg that was then invested into Canada. The Canada Revenue Agency ("C.R.A.") attacked the Luxembourg company's entitlement to treaty benefits relying heavily on G.A.A.R. Kristy J. Balkwill and Benjamin Mann of Miller Thomson L.L.P., Toronto, explain the decision and its potential impact on the P.P.T. The case has been appealed by C.R.A.

May 09, 2018

A Comparative View of the Principal Purpose Test – U.S. Tax Court v. B.E.P.S.

May 09, 2018/ Ruchelman P.L.L.C.

In a post-B.E.P.S. world, aggressive tax planning is a mortal sin. If a principal purpose or a main purpose of entering a transaction is tax avoidance, the tax benefits are lost. A ruling in a recent pre-trial hearing in the U.S. Tax Court addressed a clearly abusive transaction aimed at importing high-basis, low-value assets into a U.S. partnership so that the U.S. investors could benefit from losses on nonperforming loans. The I.R.S. moved for summary judgment in its favor, but the motion was denied. Under applicable case law, a transaction can be respected even if it is tax motivated as long as economic substance is present. Consequently, the taxpayer is entitled to a day in court, even if the prospect of victory is slim. Rusudan Shervashidze and Stanley C. Ruchelman compare the approach followed by the U.S. Tax Court with the principal purpose test rules of the A.T.A.D. and B.E.P.S.

July 15, 2015

Can B.E.P.S. Survive Without U.S. Support?

July 15, 2015/ Web Admin

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On May 28, 2015, the O.E.C.D. announced the countries that will participate in a meeting to begin substantive work on drafting a multilateral instrument under B.E.P.S. Action 15. Currently, more than 83 countries have expressed interest in joining the discussion, which will take place on November 5 and 6, 2015. The United States was noticeably absent from the list. However, the O.E.C.D. hopes that support will continue to grow in the intervening months and that the meeting may ultimately include as many as 100 countries.

The U.S. Treasury chose not to participate in negotiating a multilateral instrument under B.E.P.S. Action 15. After a careful review of the agenda for the discussion on the multilateral instrument, the U.S. Teasury felt that participation did not seem like a good use of its scarce resources. This decision was prompted by the question, “What is there for U.S. to gain by participating in the discussions?”

February 15, 2015

Follow-Up Draft of Report on Action 6 (Treaty Abuse) and Public Comments Released

February 15, 2015/ Web Admin

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Comments on the O.E.C.D.’s public discussion draft to the follow-up work on B.E.P.S. Action 6 (the “Follow-Up Draft”) were released on January 12, 2015. Action 6 of the B.E.P.S. Action Plan focuses on preventing treaty abuse and treaty shopping, which the O.E.C.D. has identified as being one of the most important sources of B.E.P.S. concerns.

The Follow-Up Draft modifies the “Report on Action 6 (Prevent the granting of treaty benefits in appropriate circumstances)” and identifies 20 issues on which interested parties may provide comments. It focuses on matters related to the application of the limitation on benefits (“L.O.B.”) rule and principal purpose test (“P.P.T.”) as well as the treaty entitlement of collective investment vehicles (“C.I.V.’s”) and non-C.I.V. funds. The 20 issues identified by the Follow-Up Draft and addressed in the comments are as follows:

Issues Related to the L.O.B. Provision

C.I.V.’s: application of the L.O.B. and treaty entitlement,
Non-C.I.V. funds: application of the L.O.B. and treaty entitlement,
Commentary on the discretionary relief provision of the L.O.B. rule,
Alternative L.O.B. provisions for E.U. countries,
Requirement that each intermediate owner be a resident of either Contracting State,
Issues related to the derivative benefit provision,
Provisions dealing with “dual-listed company arrangements,”
Timing issues related to the various provisions of the L.O.B. rule,
Conditions for the application of the provision on publicly-listed entities, and
Clarification of the “active business” provision.

October 15, 2014

Action Item 6: Attacking Treaty Shopping

October 15, 2014/ Web Admin

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BACKGROUND

Action Item 6 addresses abuse of treaties, particularly focusing on treaty shopping as one of the most important sources of B.E.P.S. The approach adopted amends the O.E.C.D. Model Convention that borrows from the U.S.'s approach to treaties but expands upon it in a way that can be very helpful to the U.S. and other developed countries if adopted by the C.F.E. next year in their final report. Among other measures, the report recommends inclusion of a Limitation on Benefits (“L.O.B.”) provision and a general anti-avoidance rule called the Principal Purpose Test (“P.P.T.”) to be included in the O.E.C.D. Model Convention. While it is expected the report will be finalized next year, whether countries will adopt the recommendations is the crucial factor that is still unclear.

RECOMMENDATIONS

The key recommendations can be found in Paragraph 14. It contains two basic recommendations:

Countries should agree to include in the tax treaties an express statement of the common intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance through use of treaties.
Countries should demonstrate their commitment to this goal by adopting an L.O.B. provision and a P.P.T. provision in income tax treaties.

The report also notes that special rules may be needed to address application of these rules to collective investment funds (“C.I.F.’s”). The provision should be supplemented by a mechanism that would deal with conduit arrangements not currently dealt with in tax treaties.