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Seminar Panel I: Race to the bottom? The Taxation of Mobile Activities INCOME FROM FINANCIAL SERVICESLucie Vorlíčková, LL.M. Diane RingLeitnerLeitner, Czech Republic Boston College Law School,
USA
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I. What is a “mobile financial service”?• 1998 OECD Report “Harmful Tax Competition: An Emerging
Global Issue”– Banking and insurance– Fund management
• 1999 Report Code of Conduct Group
• OECD identified several harmful tax regimes (2000 Report “Towards Global Tax Co-operation)
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I. What is a “mobile financial service”?• (Offshore) banking services to HNWI (deposits, asset management,
trust services, tax driven structures)
• Specific banking services (Securitization, Trading, REPO and similar (tax driven) transactions)
• Investment Funds and Fund management
• Insurance services (i.e. life insurance services)
• Holding activities
• Group financing
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II. Example 1: Mobile Banking Services
BankAsset Management
(“Booking State“)
ClientsTravelling Employees
or Freelancers
Marketing
• Banking secrecy
• No/or few bilateral treaties on EoI (e.g. Singapore)
• Special tax regimes for trusts and private foundations
Post Marketing Services
Fee
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• General principles (still) apply to specific business activity
• Permanent Establishment Concept– No tax liability as long as there is no PE
– Representative office does not create a PE (preparatory or auxiliary activities)
• Agency PE, if,– dependent agents– right to conclude contracts (“factual”/HQ decision)
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III. How is such income sourcedto a particular jurisdiction?
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• Broadening of the PE concept – Service PE:– Creation of a permanent establishment based on the mere
rendering of services in the other State for a certain period of time (OECD Comm. 2008 Art. 5)
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III. How is such income sourcedto a particular jurisdiction? (Cont.)
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High Net Worth Individual
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• HNWI uses offshore banking services– Wealth management subject to foreign law:– No taxation on the basis of residence in the “booking state”– Income from capital may be subject to foreign WHT
• HNWI remains subject to tax in his Residence State– Portfolio income (vs. financial trading)– To avoid direct attribution of income, the assets may be held via a foundation or trust
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III. How is such income sourcedto a particular jurisdiction? (Cont.)
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II. Example 2 : Investment Funds
Fund
management
Investment Fund
Investor
Investor
Investor
• No or low tax ratese.g. IRL, LUX
• Lack of transparency
•UK Hedge Funds
Dividends
Interest
Capital gains
Fee
Source Country of Income
Host’s Country Investor’s Country of Residence
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• Investment fund profits subject to host’s country’s and investor’s country’s national tax law
– non-transparent in Host Country– special investment fund legislation (e.g. UK, Ireland)– transparent: direct allocation to the Investor’s Residence State– funds income may be also taxed in source country of income – treaty network of Fund’s Host State important– 2009 OECD Report regarding Application of DTC’s to CIV’s
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III. How is such income sourcedto a particular jurisdiction? (Cont.)
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• Management fees and/or carried interest (share in the fund)
– Structure of fund decisive (trust, partnership, corp, etc.)– Income attribution under general rules to separate legal entity– Substance over form/TP principle
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III. How is such income sourcedto a particular jurisdiction? (Cont.)
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III. How is such income sourced in terms of connecting it to a particular jurisdiction? (cont)
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Management Corp.
“advisor”
Investment Fund
Management Corp.“CIV”
Fee
Investment Proposals
Investment Decisions
Profit Share
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• Direct taxation depends on national tax law
• Not clear on OECD level, however, kind of agreement how NOT to tax – low or no tax AND:– Negotiable tax rate or tax base– Ring fencing– Lack of transparency– Lack of exchange of information– Existence of secrecy provisions
• EU Code of Conduct Group listed criteria for the evaluation of harmful tax measures
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IV. International agreement on how such income should be taxed?
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IV. International agreement on how such income should be taxed?• OECD recommendations to counter harmful tax practices:
– CFC rules
– Foreign Investment Fund Rules
– Thin Capitalization Rules
– Deny deductions, exemptions, tax credits and other allowances related to transactions with tax havens
– Impose withholding taxes
– Restrictions on the application of participation exemption rules
– General Anti Abuse Rules
– Increased international cooperation between tax administrations
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V. Summary• No specific allocation rules: General principles apply
– PE Concept o active income: Source State (capital import neutrality)
– Income from capital will further be shared between Source and Residence Stateo passive income: Residence State (capital export neutrality)
– Services rendered by separate legal entity are attributed to such unless substance over form/TP rules apply
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V. Summary (Steps already taken)
• Countering harmful tax practices at OECD level:– All 30 member countries agreed to implement Art. 26 Standard– Elimination of banking secrecies of several OECD-Member States with regard to non-
resident tax payers– Most of the initially identified harmful tax regimes lost this status
• EU Savings directive:– (Automatic) Information exchange on interest income– Withholding tax (AUT, LUX, BEL)– Draft directive to include trusts and foundations
• Draft EU Directive on administrative cooperation in the field of taxation: banking secrecy is no argument for refusing exchange of information within the EU
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V. Summary (Recent developments)
• OECD: Tax Collectors Worldwide to Co-operate in Revenue-Raising to Offset Fiscal Deficits (May 29, 2009)– Engaging with High Net Worth Individuals on Tax Compliance – Building Transparent Tax Compliance by Banks
• US/UK: Hole blown in Bank Secrecy– Switzerland agreed to implement Standard Art. 26 OECD– LIE signed Tax Information Exchange Agreement and LIE Disclosure
Facility
• EU Proposed directive on Alternative Investment Fund Managers
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VI. What Comes Next ?• Introduction of the Service PE into tax treaties
– Attribution of Profits to a PE (Art. 7 OECD) – AOA– Intensified exchange of information proceedings (Art. 26 OECD)
• Introduction of “Swiss Compensation – Tax”?
• Foreign investment funds to be deemed “transparent”:– All income is directly allocated to the investor (regardless of a
distribution)
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Final Thoughts
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