prevent treaty abuse

754 Pages·2015·8.3 MB·English

COMMENTS RECEIVED ON
PUBLIC DISCUSSION DRAFT

FOLLOW-UP WORK ON
BEPS ACTION 6:
PREVENT TREATY ABUSE

12 January 2015

Table of contents
AFME and BBA 5
Alternative Investment Management Association 14
American Chamber of Commerce in the Netherlands 20
Association of British Insurers 31
Association of Global Custodians 33
Association of the Luxembourg Fund Industry 41
Aztec Group (Enclosure) 48
Aztec Group 86
BEPS Monitoring Group 90
BIAC 96
BlackRock and JP Morgan Chase 123
British Property Federation 146
BUSINESSEUROPE 155
BVCA British Private Equity and Venture Capital Association 162
Canadian Pension Funds 173
CBI 208
CFE 215
Commercial Real Estate Finance Council Europe 219
Confederation of Swedish Enterprise 221
Consultative Committee of Accountancy Bodies - Ireland 227
Deloitte UK 231
Dublin Chamber of Commerce 239
Dutch Association of Tax Advisers 241
EFAMA 247
Ernst & Young 252
European Banking Federation 260
European Business Initiative on Taxation 263
European Private Equity and Venture Capital Association 270
European Public Real Estate Association 290
Fédération Bancaire Française 297
Federation of European Accountants 302
Federation of German Industries (BDI) 307
German Property Federation (Zentraler Immobilien Ausschuss e.V.) 310
Grant Thornton International 313
Herbert Smith Freehills LLP 323
IBA Taxes Committee 332
Ibec 345
ICAEW 350
ICI Global 356
IDW 365
IFA Grupo Mexicano 385
INREV 405
InterContinental Hotels Group 411
International Alliance for Principled Taxation 415
International Chamber of Commerce 442
International Underwriting Association 444
Investment Association 447
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Investment Funds Institute of Canada 455
Irish Debt Securities Association 463
Irish Funds Industry Association 472
Irish Tax Institute 486
Japan Foreign Trade Council 502
KPMG (Queensland Investment Corp and New Zealand Superannuation) 516
KPMG Ireland 554
KPMG LLP (US) 571
KPMG UK 582
Law Society of Ireland 587
Loan Market Association 592
Loan Syndications and Trading Association 594
M&G Group 598
Matheson 604
MEDEF 615
MN 620
NAREIT 621
National Association of Publicly Traded Partnerships 634
NN Group 642
Osler 646
PGGM & APG 658
Phonographic Performance Limited 666
Private Equity Growth Capital Council 675
PwC (Appendix) 685
PwC 697
Ropes & Gray 702
SwissHoldings 709
Tax Executives Institute 713
Taxand 716
TD Bank 721
The Family Entrepreneurs - ASU 729
USCIB 734
VNO-NCW 751

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Finance for Europe

St Michael's House British Bankers’ Association
1 George Yard Pinners Hall
London EC3V 9DH 105-108 Old Broad Street
Telephone: [phone] London EC2N1EX
Email: [email protected] T [phone]
Website: www.afme.eu W www.bba.org.uk

9 January 2015

By email to: [email protected]

Marlies de Ruiter
Head, Tax Treaties
Transfer Pricing and Financial Transactions Division
OECD/CTPA

Dear Marlies,

BEPS action 6 Discussion draft on preventing the granting of treaty benefits in
inappropriate circumstances

AFME1 and the BBA2 welcome the opportunity to respond to the OECD’s discussion draft
entitled: “Follow up work on BEPS action 6: preventing treaty abuse” published on the 21
November 2014 (the discussion draft). We wish to make clear that while AFME and the BBA
have separate and distinct memberships, for the purposes of the OECD discussion draft, both
organisations have decided to submit a single, combined response since our respective
members share the same concerns with respect to the proposals in the discussion draft.

Given the relatively short time available to respond to the discussion draft it has been difficult to
consider all aspects of the proposals and we are therefore providing our initial comments on the
most important issues of concern to us. We may decide to write to you again with further
observations once we have had a chance to consider the proposals in greater detail.

1 The Association for Financial Markets in Europe (AFME) represents a broad range of European and global participants in the
wholesale financial markets. Its members comprise pan-EU and global banks as well as key regional banks and other financial
institutions. AFME advocates stable, competitive and sustainable European financial markets, which support economic growth and
benefit society.
2 The BBA is the leading trade association for the UK banking sector with more than 230 member banks headquartered in over 50
countries with operations in 180 jurisdictions worldwide. Our associate membership includes over 80 of the world’s leading financial
and professional services organisations.

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Executive Summary

We support the OECD’s consultative approach on the development of these proposals. We
believe that this will benefit both policymakers and business, by helping to reduce any
unintended consequences arising from the OECD’s proposals. We also believe that it is
essential for the OECD to take account of the views of business on the practical aspects of
operating the intended policy.

As noted in our response dated 9 April 2014 to the14 March 2014 OECD discussion draft
entitled “Preventing the granting of treaty benefits in inappropriate circumstances” we are
concerned that, when considered as a whole, the OECD’s proposals represent a
disproportionate response to any potential abuse of the tax treaty system. The broad scope of
these proposals means that activity which we would consider low risk in relation to treaty abuse
could be inadvertently affected by the anti-abuse provisions. We therefore believe that the
OECD’s policy objectives would be better served by targeting the proposals in manner which
addresses specific areas of concern identified by tax administrations. We have previously
highlighted areas where we believe the anti-abuse provisions may inadvertently apply. The main
body of this provides additional detail in this respect for the OECD’s consideration.

If the broad scope of the proposals is not clarified, this could introduce uncertainty into whether
treaty relief is available in ordinary commercial circumstances. This uncertainty risks
undermining the usefulness of tax treaty networks that states have spent decades putting in
place in order to facilitate international trade and promote economic growth. Whilst we
recognise that tax administrations require assurance that treaty benefits are only being granted
in appropriate circumstances, this should be applied in a proportionate manner to ensure tax
treaties are able to achieve their objective which is to encourage cross border investment.

The latest discussion draft states that the proposals do not represent the consensus view of the
Committee on Fiscal Affairs (CFA). Whilst we recognise that there may be a need to
accommodate different anti-abuse instruments within a framework, we are concerned that these
instruments may be subject to more than one interpretation by tax administrations. For banks
facilitating cross border investment on behalf of their clients this will likely result in inconsistent
and unpredictable data requests from tax administrations to support treaty benefit claims. We
would strongly encourage the OECD to provide additional clarification to each of the different
anti-abuse provisions, particularly with respect to the evidential requirements. This will help to
ensure consistent and predictable interpretation by both tax administrations and business.

In addition to the uncertainty which may arise from the proposals in the discussion draft, we
would also highlight the need for the OECD to consider the interaction of the proposals with
existing domestic anti-avoidance provisions and other areas currently being addressed under
separate BEPS actions. Whilst it is welcome that the discussion draft recognises the interaction
of these proposals with other BEPS action points under discussion (specifically actions 2, 3, 4,
8, 9 and 10), we would encourage the OECD to also ensure that any final proposals to combat
potential treaty abuse make reference to the need for tax administrations to align any domestic
measures already in place to tackle perceived abuse. This will help ensure a proportionate
approach to the potential abuse of tax treaties whilst preventing the benefits of tax treaties from
being undermined.

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General Comments

Application of the Principal Purpose Test (PPT) and Limitation on Benefit (LOB) rules

We are concerned that the current proposals are too ambiguous and open to inconsistent
interpretations by Tax Authorities. This will lead to uncertainty for business in how tax authorities
will apply the PPT and LOB rules and is likely to disrupt the relief at source process
administered by banks. For example the customers of banks make financial investments – such
as owning shares and debt securities. Such investments are often held in custody by the bank,
on behalf of customers. In such cases, it is the customer’s eligibility for treaty relief that the
bank may have to administer, which could include relief at source from withholding tax on the
income arising on the shares or securities.

The current proposals will present additional complications for both tax administrations and
banks and we would foresee the following consequences unless greater certainty is provided:

- Source tax authorities may experience additional demands on their resources to process
increased volume of reclaims;
- Increased cross border investor uncertainty especially for pension fund
investors/sovereign wealth funds and cross border investors where the potential for tax
treaty abuse is low;
- Increased cost to business arising from inconsistencies in each source tax authority’s
method of testing eligibility and associated documentation requirements;
- Additional complexity and cost will reduce the attractiveness for cross border investors,
as they factor in the risk and cost to achieving the level of income return they believe
that they are entitled to;
- Uncertainty on the accruing of relief in markets which currently operate a relief at source
model;
- Uncertainty for Collective Investment Vehicles (CIVs) on time taken to actually achieve
repayment of tax deducted at source which will impact the Net Asset Value of the fund
(calculable on a daily basis);
- Investors may forego claiming relief due to the complexity.

We therefore urge the OECD to provide additional clarification within the commentary to reduce
areas of subjectivity and provide business with greater certainty regarding the application of the
PPT and LOB rules.

Impact of PPT and LOB rules on Non-CIVs

We are concerned that non-CIVs such as pension funds and sovereign wealth funds will be
negatively impacted by the provisions of action 6. Currently, these types of entity are able to
receive either a lower withholding tax rate or exemption under double tax treaties. We would
also highlight that these types of entities are intended to provide pension and long term savings
vehicles for individuals or a return for a particular state which may assist the provision of public
goods and services. Therefore it is important that these benefits are not negatively impacted by
any changes to the PPT and LOB rules.

We also believe that non-CIVs should be treated as “look at” rather than “look through” entities
for the purposes of determining eligibility for treaty benefits. This will be consistent with tax
information exchange requirements under FATCA and the Common Reporting Standard (CRS)
where there is no requirement to look through these entities. These entities are seen to

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represent a low risk of tax evasion and we therefore feel it would be appropriate for them to only
be required to evidence their status.

Information requests to determine eligibility for treaty benefits

We believe that there should be greater standardisation of how tax authorities request
information from business to establish eligibility for treaty benefits. This is a significant concern
for banks that make investments via a custody arrangement on behalf of their customers. Tax
administrations are increasingly requesting information from banks making investments on
behalf of their customers in a custody arrangement which requires the collation and provision of
data which was not previously understood to have been necessary to support the granting of
treaty benefits. Introducing retrospective requirements in this manner creates significant
practical challenges for banks from a number of perspectives:

- The information, or level of detail required, may not be held as there were no
requirements at the time to record this data for tax or regulatory purposes;
- The request may require firms to collate date across multiple business lines and
products where the original income was not received;
- If enquiries are of a historical nature, systems may have changed or evolved and data
may be even harder to obtain;
- Depending on the nature of an enquiry, third parties, such as custodians or agents, used
to support any business may have changed. It may therefore be harder to obtain support
for any such enquiry where there is no longer a business relationship;
- There may also be practical issues such as obtaining certifications, notarisation from
third parties when these are required within a specified time period.

In recent years banks have seen various examples of jurisdictions requesting additional layers
of non-standard documentation to establish whether the claimant was the true beneficial owner,
for example in relation to the dividend income for all cross border investors wishing to file
reclaims (with limited exceptions). We would also note that in some jurisdictions treaty relief at
source procedures are also inconsistently applied across regional tax offices within a jurisdiction
which creates further complexity for banks.

We would highlight how the level of detail and supporting documentation requested by tax
administrations is often disproportionate in comparison to the risk of potential treaty abuse, as
well as the volume and costs of the claims. Examples of this include requirements to provide
P&L information with respect to specific equity trades or on a per instrument basis. Where the
cost of meeting these additional information requests outweighs the benefits, this may result in
entitled cross border investors choosing to waive their rights under the double tax treaty.

Whilst we recognise that tax administrations need to be satisfied that treaty benefits are not
being unduly granted, we believe that there needs to be greater standardisation over what
information is required to evidence treaty eligibility. Information requests should also be
proportionate to the risk of tax treaty abuse and value of claims to ensure that investors are not
unduly prevented from receiving the benefits to which they are entitled.

We would urge the OECD to consult further with business on how the relevant facts and
circumstances can be established at the time of a claim for treaty relief as we believe that
greater dialogue in this respect will deliver significant cost savings for both industry and tax
administrations.

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Reduction in the ability of investors to receive treaty relief at source

In addition to greater uncertainty with respect to ordinary commercial transactions, we are
concerned that the proposals may exacerbate a tendency in the approach of tax authorities
globally towards the application of more onerous information and evidential requirements at the
time of the claim for treaty relief. One consequence is that this may result in a significant
decrease in the ability of investors to receive treaty relief at source as the only way in which
banks acting on the customer’s behalf would be able to satisfy the information requested is via a
reclaim process.

Proposals leading to a reduced relief at source system contradict the objectives of the Treaty
Relief and Compliance Enhancement (TRACE) system, another tax-related project undertaken
by the OECD which is aimed at moving towards a “relief at source” system. A transparent and
predictable relief at source mechanism is in the interests of tax authorities, cross border
investors and business as it provides greater certainty around the granting of treaty benefits and
reduces the operational costs associated with reclaim processes for all parties.

Whilst the TRACE and BEPS projects have different objectives, we are disappointed that there
has not been greater consideration of how TRACE might allow tax authorities to mitigate some
of the concerns around potential treaty abuse whilst providing business with increased certainty
in relation to cross border investment.

Issues on which comments are invited

Given the relatively short time available consider the discussion draft it has been impractical for
us to comment all aspects of the paper. We are therefore providing specific comments on some
of the most important issues of concern identified by our members.

Collective investment vehicles: application of the LOB and treaty entitlement

Comments are invited as to whether the recommendations of the 2010 CIV Report continue to be
adequate for widely-held CIVs and whether any improvements should be made to the conclusions
included in that Report. Comments are invited, for example, on whether it would be advisable to provide
for a preferred approach with respect to issues related to the tax treaty entitlement of the income of CIVs
and the application of the LOB to CIVs, and if yes, on what that approach should be.

We believe that the recommendations of the 2010 CIV report remain broadly appropriate and
would also encourage tax administrations to adopt the TRACE implementation package which
has been designed to provide the additional assurances to tax administrations about the validity
of tax treaty claims.

Commentary on the discretionary relief provision of the LOB rule

Suggestions are invited as to possible factors or examples that could be included in the Commentary on
the discretionary relief provision of paragraph 5 of the LOB rule in order to clarify the circumstances in
which that provision is intended to apply.

A discretionary relief rule has potential value as a means to ensure that treaty benefits are
available where appropriate but should not be seen as a substitute for well thought through and
appropriate double tax treaties and administrative processes to support their application.

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Alternative LOB provisions for EU countries

Paragraph 13 of the Report acknowledges that the LOB rule (paragraph 16 of the Report) needs to be
adapted to reflect certain EU law requirements. There is therefore a need to draft alternative provisions
that would accommodate the concerns of EU member states.

In addition to accommodating the concerns of EU member states we would also encourage the
OECD to consider how the LOB provisions might be adapted to accommodate other mutual
fund recognition programmes.

Requirement that each intermediate owner be a resident of either Contracting State

Further work is required in order to determine whether and how the requirement could be relaxed without
creating opportunities for treaty-shopping; that work will be carried on in relation with the work on issues
related to the derivative benefit provision and the definition of equivalent beneficiary which are described
in section 6 below.

Whilst we understand the desire to prevent treaty shopping, we would make the general
comment that the residency of the ultimate beneficial owner should be a more relevant
consideration than the residency of an intermediate owner. Many multinational companies
establish intermediate holding companies in third countries for commercial reasons e.g.
establishment of a holding company with a management board for regional subsidiaries. It is not
clear why the existence of such an intermediate holding company in a third country is in itself an
indicator of treaty shopping and sufficient to deny an operating subsidiary “qualified person”
status. This requirement could create competitive distortions for multi-national enterprises based
on holding company structures even in circumstances where there is no evidence of treaty
shopping. Furthermore it may not be possible to exit existing holding company structures easily
or without incurring substantial costs.

The existence of a “derivatives benefit” clause may mitigate the issue in part but not entirely.
Holding companies established in third party States may not satisfy the definition of “equivalent
beneficiary” even in circumstances where treaty rate differentials are minimal. Furthermore,
holding companies could cease to be considered equivalent beneficiaries in future years if
treaties are subsequently renegotiated (e.g. source state and state of residence renegotiate a
treaty resulting in improved terms compared to the treaty between the source state and the
state of residence of the holding company).

Financial transactions at arm’s length can take place between different members of multi-
national banking groups. In such cases, as more generally, the residence of intermediate
holding companies should not be relevant to determining the entitlement of the parties to treaty
benefits.

Clarification of the “active business” provision

Comments are invited as to possible clarifications that could be made concerning the interpretation and
application of the “active business” provision found in paragraph 3 of the LOB rule (paragraph 16 of the
Report).

We would suggest that the ‘active business’ provision in paragraph 3 of the LOB rule should be
clarified to confirm that when a company meets any equivalent active business tests in the
context of domestic legislation, it will be considered to be carrying on an active business in the
context of tax treaties. For example in the UK, a company which is treated as a trading company

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