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How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

How to Handle Dual Residents: The I.R.S. View on Treaty Tie-Breaker Rules

The first step in advising a foreign individual who is neither a U.S. citizen nor a green card holder on U.S. income tax laws is to determine the person's residence for income tax purposes. But what is to be done when the individual is resident in multiple jurisdictions? A recent LB&I International Practice Unit offers a quick understanding of the tax issues I.R.S. examiners raise when dealing with individuals who are dual residents for tax purposes. Virtually all income tax treaties entered into by the U.S. contain a tiebreaker rule under which the exclusive residence of an individual is determined for purposes of applying the income tax treaty. Fanny Karaman and Beate Erwin explain how these rules are applied. One point to remember is that the tiebreaker test for treaty residence purposes does not affect an individual's obligation to file an F.B.A.R. form.

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

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

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.

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German Anti-Treaty Shopping Rule Infringes on E.U. Law

German Anti-Treaty Shopping Rule Infringes on E.U. Law

When do attacks on cross-border tax planning move from enough to too much? The European Court of Justice (“E.C.J.”) provided an answer in connection with German tax rules limiting access to the E.U. Parent Subsidiary Directive for dividends leaving Germany. For many years, German law provided an irrebuttable presumption of fraudulent or abusive tax planning when a multinational structure failed to meet a “one size fits all” set of factual parameters. The provision was struck down by the E.C.J. last year, modified slightly in response, and struck down again in July of this year. Pia Dorfmueller of P+P Pollath explains why the German tax law was found to violate European law – it provided a response that was not proportional to the alleged wrong-doing.

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I.R.S. Announces Six Compliance Campaign

I.R.S. Announces Six Compliance Campaign

The I.R.S. Large Business and International division ("LB&I") recently announced compliance campaigns that are principally directed at compliance in cross-border fact patterns.  Included are campaigns to address (i) non-compliance with respect to Form 3520, (ii) compliance issues related to Form 1042, (iii) nonresident, non-citizen individuals inappropriately claiming tax treaty exemptions, (iv) nonresident, non-citizen individuals inappropriately claiming itemized deductions on tax returns, and (v) inappropriate credits claimed by nonresident, non-citizen individuals. Elizabeth V. Zanet looks into the various campaigns and places into context the effect on individuals.

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New Tax Treaty Between France and Luxembourg: French Tax Implications for Investors

New Tax Treaty Between France and Luxembourg: French Tax Implications for Investors

France and Luxembourg signed a new double tax treaty on income and capital in late March.  Ratification by the end of the year is anticipated.  The new treaty reflects the current post-B.E.P.S. environment.  Among other things, the residence definition is tightened, the test for the existence of a permanent establishment is loosened, real estate funds face higher withholding tax, a credit method is adopted to avoid double taxation.  Christophe Jolk, Attorney at Law, Paris, explains the implications for investors.

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Insights Vol. 4 No. 10: Updates & Other Tidbits

Insights Vol. 4 No. 10: Updates & Other Tidbits

This month, Sheryl Shah, Neha Rastogi, and Nina Krauthamer look briefly at certain timely issues: (i) Swiss nexus requirements to be eligible for treaty benefits, (ii) the impact of technology tax reporting and information sharing, (iii) an I.R.S. pilot program expanding the scope of letter rulings to Code §355 stock and security distributions, and (iv) recent application of the 2016 anti-inversion regulations issued by the Obama Administration under Code §7874.

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention.  Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and provides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues.  Areas covered include whether competent authority agreements can define undefined terms thereby removing the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty. 

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Bilateral Investment Treaties: When Double Taxation Agreements Are Not Enough

Bilateral Investment Treaties: When Double Taxation Agreements Are Not Enough

The U.S. enters into bilateral investment treaties to protect and promote foreign investment.  Unlike double taxation agreements, which relate exclusively to tax matters, they are not usually seen as a defense mechanism when dealing with foreign tax authorities.  Interestingly, they are!   Rusudan Shervashidze and Nina Krauthamer explain.

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Insights Vol. 3 No. 8: Updates & Other Tidbits

Fanny Karaman, Galia Antebi, and Nina Krauthamer address recent developments involving (i) the U.S. Treasury Department’s Priority Guidance Plan in the international arena, (ii) the negotiation of a new income tax treaty between the U.S. and Ireland, and (iii) a recently discovered abuse when a disregarded L.L.C. owned by a single foreign member sells U.S. real estate.

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Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

Disallowance for Failure to Withhold on Outbound Payment Violates India-U.S. Non-Discrimination Clause

To withhold, or not to withhold: that is the question.  Neha Rastogi and Nina Krauthamer review the Herbalife case in India that allowed an Indian subsidiary to deduct an administration fee paid to a related parent company for services performed in the U.S. without imposing an obligation on the company to withhold Indian tax.  The case, which relates to the tax year 2000 to 2001, has dragged on for many years.  In 2004, the law was changed, but the litigation continued.

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Income Tax Treaties v. Domestic Law: An International Look at the Current Score

Ask most tax advisers outside the U.S. about the way to resolve a conflict between the provisions of an income tax treaty and domestic law, and the almost universal view is to look to the treaty for resolution.  However, in some countries, an income tax treaty is not the last word in resolving conflicts.  In the U.S., the saving clause of a treaty preserves the supremacy of U.S. domestic tax rules as they affect U.S. citizens and residents, as defined in the treaty.  In Brazil, a presidential decree may govern the outcome.  And in India, a domestic tax provision may be crafted in such a way as to circumvent a treaty by altering the identity of the technical taxpayer.  Elizabeth V. Zanet, Galia Antebi, and Neha Rastogi examine ways in which those three countries directly or indirectly override treaty provisions that are deemed domestically undesirable.

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The End of the Negotiation: Protocol to India-Mauritius Tax Treaty Finally Released

After several years of negotiations, a new protocol to the Mauritius-India Income Tax Treaty has been agreed between the parties.  In a nutshell, India benefits from amended provisions that are in line with other bilateral treaties, while Mauritius benefits from the adoption of grandfathering provisions regarding capital gains from the disposition of certain shares.  Investors in both countries will benefit from greater certainty in taxing outcomes.  Anurag Jain and Parul Jain of Attorneys BMR & Associates L.L.P., Gurgaon, address the highlights of the new provisions.

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Insights Vol. 3 No. 4: Updates & Other Tidbits

In this month’s update, Sheryl Shah and Stanley C. Ruchelman look at the following recent developments: (i) one-time payments for off-the-shelf software are not considered to be royalties in India, (ii) offshore voluntary disclosure in Greece, (iii) the movement of Slovak companies to other jurisdictions, and (iv) the effect of the Panama Papers on CbC reporting in Europe.

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2016 Model Treaty – B.E.P.S. and Expatriated Entities

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

The 2016 Model Treaty adopts certain B.E.P.S. provisions, including those that eliminate double non-taxation through a splintered operation which divides a long-term project among several related parties and each party maintains the project for a limited time. That type of planning no longer works. Other B.E.P.S.-related revisions are missing. Sheryl Shah and Elizabeth V. Zanet explain what is out and what is in. They also address the way payments from expatriated entities are treated. It is not all bad news.

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2016 Model Treaty – Mandatory Arbitration

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

Taking a cue from the U.S.-Canada Income Tax Treaty, the 2016 Model Treaty provides for mandatory arbitration as part of the article on Mutual Agreement Procedure. I.R.S. statistics indicate that under the Canadian treaty 80% of cases were resolved by the competent authorities in lieu of risking an adverse decision through arbitration. Kenneth Lobo explains the revised provision and places it in context.

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2016 Model Treaty – Limitation on Benefits Revisions

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

Those who thought that the limitation on benefits (“L.O.B.”) provision under the U.S.-Netherlands Income Tax Treaty was complex will find that the level of complexity in the 2016 Model Treaty has been raised several levels. Some taxpayers will be losers and others will be winners. Philip R. Hirschfeld and Galia Antebi explain how the revised provision will work.

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2016 Model Treaty – Special Tax Regimes

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

A new provision of the 2016 Model Treaty attacks special tax regimes. Treaty benefits are denied for payments to connected persons who benefit from such provisions. Patent box regimes and regimes that allow for notional interest deductions are specifically targeted. Christine Long and Stanley C. Ruchelman explain.

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2016 Model Treaty – Introduction

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.  

Stanley C. Ruchelman examines several provisions, pointing out various areas of super-complexity that are encountered in the 2016 Model Treaty in order to prevent double non-taxation. This shift in policy is a byproduct of the O.E.C.D.’s B.E.P.S. initiative.

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U.S. Treasury Announces New U.S. Model Income Tax Treaty

On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

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Tax Planning for Indian Businesses Investing in the US – Part II

Published in Taxsutra: September 2015.

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