Author Rachel Galea
Supervisor Bruno da Silva and Rita Szudoczky
Table of Contents
List of Abbreviations
Executive Summary
Main Findings
1. Introduction
2. Consequences of the Inconclusive Meaning of ‘Liable to Tax’ in Art. 4.1 of the OECD Model
2.1. What is Liability to Tax?
2.2. Defining ‘Liable to Tax’ in the OECD Model
2.3. The Rippling Effect of ‘Liable to Tax’
3. Fiscally Transparent Entities and the Interaction with ‘Liable to Tax’
3.1. An Introduction to Attribution of Income
3.2. Entity Classification
3.3. Attribution of Income through the work of an Active OECD
4. Access to Treaty Benefits under the OECD Reports
4.1. The OECD Partnership Report
4.2. Other OECD Reports
5. Issues and Possible Solutions
5.1. Barriers to Claiming Tax Treaty Benefits
5.2. Additional Issues
6. Conclusion
Bibliography
Table 1: Documents
Table 2: Double Taxation Conventions
Table 3: Cases and Decisions
Executive Summary
This paper aims at delving into the concept of ‘liable to tax’ under Art. 4. 1 of the OECD Model as well as how such a concept is to be defined when applied to other types of entities such as partnerships, REITs, CIVs and also SWFs. The concept of liability to tax under the OECD Model does not come with an exhaustive definition of the term as a consequence of which ‘liable to tax’ has been, since its insertion in the Model, interpreted and analysed by several tax authors to such an extent that no one conclusive meaning of the term exists. The importance of understanding what is really meant by liability to tax lies in the fact that, whether or not a person has been deemed ‘a resident of a Contracting State’ depends on whether such person has been held to be ‘liable to tax’ in that State. this result has an effect on access to treaty benefits. Without being ‘liable to tax’ a person cannot be considered ‘a resident of a Contracting State’, such person cannot in turn be regarded as a resident recipient of a flow of income under Art. 1 of the OECD Model, and the final result being, no access to treaty benefits. The aim of the paper is to show the effect which liability to tax has on claiming treaty benefits by looking to the OECD Model itself as well as to the Partnership Report and other reports which have also been issued by the OECD concerning REITs, CIVs and SWFs.
The introductory chapter outlines the scope of the paper and brings to light the problems which exist in the area of liability to tax. In order to fully understand these problems one must first grasp what ‘liable to tax’ really means. The second chapter deals with exactly this – it aims at setting a basis on which further arguments and issues can be analysed; it sets the foundation as to what liability to tax is by comparing it to ‘subject to tax’ as well as trying to see what the OECD intended ‘liable to tax’ to mean. This second chapter also divides the meaning of ‘liable to tax’ into separate units in order to show the effect which different interpretations and different meanings given by different jurisdictions can have when seen from an international point of view.
Lack of liability to tax of a transparent entity can lead to the attribution of income to other persons, being the persons who are behind such entity, in order to ensure that no claim for treaty benefits is lost on behalf of such persons. The third chapter of the paper discusses the interaction of liability to tax with the attribution of income which stems from having entities classified differently under the domestic law of the State wherein they are established. States could treat entities differently in that some could treat them as fiscally transparent and other States could see them as taxable units, although it must be borne in mind that the level of fiscal transparency could differ from one jurisdiction to another. This difference in classification causes conflicts of attribution and this is where the rules set-out in the OECD Partnership Report come in.
The Partnership Report has been developed by the CFA to cover all sorts of possible attributions of income which are also solved in the report in such a way so as to ensure that when States are faced with fiscally transparent entities and also with problems of attribution of income, treaty benefits are granted nonetheless on legitimate grounds. This granting of treaty benefits is illustrated through a series of cases and also through case law where it can immediately be noticed that the Court is determined to grant treaty benefits and hence is not tolerant to denying benefits on unreasonable grounds. The fourth chapter analyses the REIT Report, the CIV Report and the SWF Report in order to determine the tax treatment of these entities as well as the application of the general rules set out in the Partnership Report, such as ‘source State follows attribution rules of residence State’, to these financial entities.
The chapter before the conclusion highlights the issues which are run into when dealing with liability to tax as well as some possible solutions which could be adopted with respect to such issues. Double non-taxation is one of the main issues together with the various lacunae which exist when it comes to the concept of ‘liable to tax’. There is no argument that the OECD encourages the conclusion of tax treaties so as to have co-operation on an international level for the elimination of double taxation. If one reads the title of the OECD Model as well as the titles of various tax treaties concluded between Contracting States, the words ‘avoidance of double taxation’ feature most of the times. Therefore there is an on-going debate as to whether the aim of a tax treaty is also to ensure the avoidance of both double taxation and double non-taxation. When dealing with transparent entities and conflicts in attribution of income the chances of both double taxation and also of double non-taxation exist however there are authors who argue that double non-taxation is outside the scope of the Model and there are also States which deny treaty benefits when they realise, after the conclusion of a tax treaty, that there is a transaction which is going to result in double non-taxation. Courts have held this to be unacceptable practice which should in turn act as an alert to States to ensure that during treaty negotiations they should provide for such situations.
The concluding part of the paper acknowledges the ambiguity of ‘liable to tax’ and the issues which it brings with it. Moreover, it focuses on some of the remaining issues regarding liability to tax which are to be seen as pointers which Contracting States should bear in mind when negotiating tax treaties. The OECD has emphasised the importance of granting treaty benefits by discussing such entitlement at length in its reports and therefore denying treaty benefits on grounds of failure to fulfil the liability to tax requirement is a very sensitive topic.
