BEPS Final Reports: An Update on Treaty Shopping
The Organisation for Economic Co-operation and Development (OECD) sees treaty shopping as an important source of Base Erosion and Profit Shifting (BEPS). In this context, it identified the prevention of treaty abuse as one of fifteen issues or “actions” in respect of which recommendations were to be formulated as part of its Action Plan on BEPS, released in July 2013 (Action 6). Following a two-year consultation process between the OECD and G20, the OECD presented final reports with respect to its BEPS project on October 5, 2015. This article provides an overview of the consensus that was reached between the OECD and G20 with respect to Action 6.
Building upon a preliminary discussion draft released in March 2014, the OECD published a package of initial proposals with respect to the prevention of treaty shopping and treaty abuse strategies in September 2014 (2014 Report). The 2014 Report was promptly followed in November 2014 by a list of 20 issues that remained to be addressed, and which invited comments from members of the tax community. A response to these comments and ensuing proposals were provided in a discussion draft released in May 2015 (2015 Draft). Unsurprisingly, the Final Report on Action 6 (Final Report) has made certain superseding changes to the 2014 Report. The Final Report is divided in three sections.
Anson v. HMRC: Another Approach to LLCs
On July 1st, 2015 the UK Supreme Court released its judgment in the case of Anson v. Commissioners for Her Majesty’s Revenue and Customs (Anson), in which the issue was how a taxpayer's interest in a Delaware limited liability company (LLC) should be treated under UK tax law. The Court’s decision has received a great deal of attention in the UK, as it contradicts, to a certain extent, Her Majesty’s Revenue and Customs (HMRC)’s historic position that an LLC should be treated as “opaque” for UK tax purposes.
The facts in the case may be summarised as follows. The taxpayer in the case (Anson) was a non-domiciled UK resident and member of an LLC which carried on the business of managing venture capital funds in the US. The LLC was treated as a partnership for US tax purposes and thus, a transparent entity for US tax purposes, meaning that the partners were liable to tax on its income, rather than the LLC itself. Anson received distributions from the LLC (net of non-resident withholding tax which was applied against his US tax owing in respect of the LLC’s income) and “remitted” them to the UK, causing them to be included in his income subject to UK tax. When Anson claimed double taxation relief under Article 23(2)(a) of the 1975 UK/US Double Taxation Convention (the Treaty) and its successor, Article 24(4)(a) of the 2001 UK/US Double Taxation Convention, the HMRC refused to provide a credit for the US taxes paid on the LLC’s income. These provisions stated that “United States tax payable under the laws of the United States […] on profits or income from sources within the United States (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against United Kingdom tax computed by reference to the same profits or income by reference to which the United States Tax is computed.” According to the HMRC, Anson had paid taxes in the US on the income of the LLC, and in the UK on the distributions declared by the LLC. These were two separate sources of income and so the “profits or income” subject to tax in the two jurisdictions were consequently not “the same”. As noted by the UK Supreme Court in its reasons, the result was that Mr. Anson paid an effective tax rate of 67% on the income derived from the LLC.