Introduction
Article 1 of the conventional model deals with working on the subjective scope of application, that is, it will deal with defining the subjects that may be covered by its provisions.
Let us remember that although the conventions are international agreements, in our country, they have supra-legal status.[1] and, ultimately, they are obligations assumed by the different jurisdictions or contracting States, the recipients of which are the subjects contemplated therein. International agreements to avoid hypotheses of double taxation (and tax evasion) will be aimed at binding the contracting States insofar as their residents require the application and on the basis of their specific provisions.
In this sense, the condition of resident will be important since it can only be required by the aforementioned subjects in each contracting jurisdiction. Due to its importance, we will proceed to transcribe Art. 1 of the conventional model:
“Art. 1: This Convention applies to persons who are residents of one or both of the Contracting States.”
With this simple guideline, the reference article will focus on a condition that will be fundamental for the purposes of any tax analysis: the status of resident for tax purposes of a certain subject (person).[2] in one or both States for the purposes of requesting the application of the aforementioned international agreement. Only a person who is considered a resident for tax purposes may request recognition of the guidelines established by the international treaty.
Residence must always be considered for tax purposes, that is to say: the immigration patterns or nationality of a particular subject will not matter, but rather, the focus must be on the tax provisions for the purposes of the connection (or moment of connection) defined by tax law generally for the purposes of local income tax.
The pattern indicated here may not be the only one, given that some international agreements allow for reference to the status of “citizens”[3] while others are oriented towards the simple definition of “taxpayers”, thus covering even those who, without being classified as “tax residents” in a given State, end up being taxpayers by simply receiving income with withholding tax (to mention an example).
The term “resident” of a given State, although it is defined by internal rules of that tax jurisdiction, must be given to the application of the particular agreement[4] It is also found in Article 4 of the conventional model where, after referring to the aforementioned rules, in the case of “double residence” conflicts, it establishes the applicable rule for resolving the aforementioned situation.
The definition of the status of residence for tax purposes in natural persons, or even in regular companies, ends up being relatively simple given that, on this point, it is not usually a matter of conflict to clearly establish the definition of "subject" or personality in legal terms.[5].
II.- Lthe particularity of entities incorporated under partnership statute
The definition of a “subject” with the intention of considering a patrimony or activity as resident for tax purposes in a certain jurisdiction has been the subject of long-standing debate in the case of partnerships due to the different legal treatment, within the framework of their personality, that they receive between the jurisdictions involved.[6].
The use of partnerships, and their importance at the level of international taxation, will be given by their condition of hybrid companies (from the fiscal perspective) since some jurisdictions may consider said company as a taxable person (with entity and tax personality) while many others report said companies (by option or by default) as transparent vehicles (disregard) in such a way that they will not be taxable persons but, eventually, each participant.[7].
Tax transparency essentially implies that the partnership will not be considered subject to tax and, consequently, the status as a tax resident will be in question based on the definitions given by the internal law of the jurisdiction that must apply the treaty. The rule or definition will be given by the definitions given in the article of the agreement that, as far as we are concerned, will imply the tax liability (liable to tax) of the partnership under analysis.
In short, when dealing with a partnership incorporated in a foreign jurisdiction, it must be verified whether it is subject to taxes in that jurisdiction in the same way as a resident for tax purposes.[8]. If this is the case, we will be dealing with a taxpayer (person) considered a resident for tax purposes in said jurisdiction of incorporation and, consequently, will be able to access the benefits of the international treaty. If this is not the case, that is, if we are dealing with a partnership in which the jurisdiction of incorporation considers it transparent (disregard), the company will not be able to request the benefits of the international treaty.[9].
In the event of the foreign company's status as a resident for tax purposes being unknown (due to the attribution of income to each partner), it will be the latter who may request the application of any treaty entered into, but considering only their status as a resident for tax purposes in the jurisdiction that corresponds to their particular situation.
In summary: what must be recognized is that the fact of being faced with a structure with legal personality does not mean, by that fact alone, that it can also be classified as a "person" (taxable person included in the treaty) for tax purposes.
At this point, it is worth noting the difficulty that this type of entity presents when, regardless of whether they are set up under the status of a partnership (a partnership with direct attribution of income to partners), they are recognised as a taxable person in their jurisdiction of incorporation. This being the case, in terms of the agreement to avoid international double taxation, we will be dealing with a subject qualified as a resident for tax purposes in said jurisdiction and, consequently, (the company) will be able to claim the benefits of the aforementioned agreement.
However, the income is fiscally attributable to the partners. This legal attribution, unless otherwise provided by local law, will imply an economic attribution in the jurisdiction of residence of each of the partners, consequently impacting their local tax determination.[10]. Additionally, since the company is the only one qualified as a resident for tax purposes in a foreign jurisdiction, it will be the one that can request the benefits of the treaty and not its partners for the income derived from said company. This can be illustrated as follows:
The illustration invites us to recognize that we are dealing with a partnership that in its jurisdiction of incorporation has been considered a taxpayer for tax purposes.[11]. The qualification of a taxpayer for tax purposes will allow the person to be recognized as a taxpayer with a tax determination in his head for the accumulation of income. However, this will be independent of the provisions of the corporate bylaws that may require direct attribution of income to the partners or an express decision of accumulation in said entity.[12].
Regardless of the flow of income from the legal or fiscal perspective, at this point we are concerned with analyzing the "subject" for the purposes of the international agreement where, having said that, the subject will be the company qualified as a resident for such purposes and not its partners (local residents) who obtain income derived from said company.
In this context, a contract between the foreign partnership and a local entity could be subject to taxation according to the rules of the paying jurisdiction (for example) but under the protection of the CDI, while the partners, unless otherwise provided, could not request the protection of said agreement in the jurisdiction of their own residence for the income derived from the referred entity. The income derived from the partnership company is entirely subject to tax in the jurisdiction of residence of its participants.[13].
Complicating our scheme a little further, we present a situation in which we involve a third jurisdiction:
We are dealing with a company incorporated under the partnership statute in the jurisdiction of Country A, where its partners are based in Country C while it obtains income (let us assume a service that qualifies under the provisions of Art. 12 of the conventional model) derived from Country B. There is a DTA between Country A and Country B and also between Country B and Country C. There is no DTA between Country A and Country B.
In this case, the taxpayer (resident for tax purposes) in connection with the income paid by the local contractor (based in Country B) is the company qualified as a partnership, such that it will be the one that can request the benefits of the applicable agreement between Country A and Country B and this will be independent of the provisions of the international agreement entered into between Country B and Country C, except in the case of tax transparency in a partnership company and a specific reference in the agreement between Country B and Country C.
II.a.- PParticularities of hybrid structures derived from the use of entities classified as partnerships
A discussion that cannot be overlooked at this point is the quality of hybrids for tax purposes that may arise in this type of company. A company is considered hybrid for tax purposes when, in the interaction of two jurisdictions (jurisdiction of incorporation vs. jurisdiction of residence of its components), it is considered a taxable person in one of them while in the other it applies tax transparency rules.
An example of this is seen when a partnership company is incorporated in a jurisdiction where this type of entity is considered transparent for tax purposes in said jurisdiction in such a way that the income is attributed directly to the partner, bearing the tax consequences derived from said attribution. In this context, when the partner is resident for tax purposes in a jurisdiction where companies incorporated under the statute of a partnership are considered a taxable person (such as a shareholder company) the partner (component of the foreign company) will not be able to request the benefits of the international agreement for the part of the income derived from said legal vehicle because there is a “conflict” in the attribution of income.[14].
The aforementioned “conflict” will arise even when we are dealing with an income that must be paid from a “source State” that, according to its internal legislation, considers entities classified as partnerships in the same way as other types of companies to be subject to tax, while the “beneficiary entity”, in the jurisdiction of incorporation, will qualify as a transparent vehicle. In this case, the transparent company (beneficiary of the income) could not request the benefits of the CDI. However, in the event of an international agreement between the jurisdiction of residence of the components (partners) and the source jurisdiction, they (the partners) could claim application of said CDI:
In this case, we observe how the income paid by a company resident in Country A is transferred to a company that should not be considered a tax resident in Country B (in view of its tax transparency in the aforementioned jurisdiction). The income “transits” through a vehicle to the (tax) assets of the partners based in Country C. The treaty to be applied will be the one corresponding to Country A – Country C (if any) since, fiscally speaking, we are dealing with an income that is assigned to the latter jurisdiction. The above applies only in the case where we are dealing with components (partners) who are classified as tax residents in Country C.[15].
II.b.- Specific application guidelines for cases of vehicles incorporated under the status of a partnership
As regards the subject of our discussion, we believe it is necessary to highlight the three rules for the application of international agreements that we are working on:
- In the case of a company classified as a partnership in the jurisdiction of incorporation and for tax purposes (transparent company), it will not be able to claim the benefits of the agreement entered into between the source State and the State of incorporation;
- In the case of a company classified as a partnership in the jurisdiction of incorporation but considered for tax purposes as a taxpayer in the jurisdiction of residence of each of the components based in a third jurisdiction, they may not request the application of an agreement entered into between the jurisdiction of the State of source of income and the State of residence of each of them due to lack of imputation of income unless said jurisdiction does impute the income to each component (it considers the partnership vehicle transparent). In this last case, the source State must apply the least burdensome prescription in comparison of both treaties.[16];
- In the event that the State of incorporation of the company considers said vehicle to be transparent for tax purposes but the jurisdiction of residence (third State) of each component considers said vehicle to be “non-transparent”, in this case, the source State may deny the application of the treaty concluded between said State and the State of incorporation of the corporate vehicle as well as the treaty concluded between said State and the State of residence of each of its components.
Another difficulty that arises in the use of vehicles qualified as partnerships to which tax transparency is applied may arise when the source State of the income considers that the recipient of the same (disregard partnership) does not qualify as a resident for tax purposes in the State of incorporation. In this case, as we saw, the subjects “qualified for tax purposes” will be its components, as well as these same ones who may request the benefits of an international treaty but only in the case of an agreement between the source jurisdiction and the jurisdiction of their own residence (of the partner himself).
The comments on the conventional model show that, in this case, the income is observed applied to a specific component, that is, in total transparency (disregard) of the vehicle company through which it is obtained. This transparency will not only impact the capacity to apply (claim) the provisions of a given agreement but also the classification of its income (income included between Art. 6 and Art. 21 of the conventional model).
The interposition of a transparent vehicle, for this reason alone, will not be able to promote a qualification based on Art. 7 of the conventional model (business services) if, economically, that income presents another qualification in the head of a natural person (to mention an example).[17].
III.- The impact of SPVs and the importance of their regulation for developing countries
Particular attention will be paid to the ability of specific vehicle companies (SPV) to be considered a beneficiary of the guidelines of an international treaty, aimed at accumulating funds from different investors to subsequently make investments in different financial or other instruments.
In these schemes it is normal for special purpose vehicles (SPV) to be located in low tax jurisdictions.[18] While both investors and the recipient jurisdiction are located in other jurisdictions where there may be an international treaty between the two to avoid double taxation.[19].
In relation to these vehicles, the general guideline given by the conventional model in its comments is that the SPV should be considered resident in the jurisdiction of incorporation.[20] as well as the effective beneficiary of the income for the purposes of Articles 10 and 11 of the modular agreement.
We could also find specific purpose vehicles of a contractual nature (trusts or other type of specific adhesion agreement) where the general guideline will be the consideration as resident in the jurisdiction of its registration or incorporation (with exceptions). The definitive thing will be, for the purposes of the point under study, that it is considered affected by the general tax regime in the jurisdiction of registration (liable to tax).
Please note that for the purposes of our objective, an SPV may be considered a subject with the capacity to claim the benefits of the treaty even when the corporate rate affecting it is zero (exemption) or tending to zero (substantial tax relief on the basis). The analyst must differentiate, for all types of vehicle and regardless of whether we are dealing with corporate instruments or another type of contract, whether we are dealing with a hypothesis of transparency, tax relief or exemption. In the case of dealing with situations of transparency of the collective vehicle, what is indicated in previous paragraphs must be considered when dealing with the subjective qualification of entities incorporated under the status of partnership and without tax personality (disregard).
A specific vehicle instrument generally follows a specific policy of the jurisdiction that hosts it within its regulatory framework. In general terms, vehicles will be arranged in jurisdictions that ensure the minimum effective impact on the taxation associated with their course. In this sense, we could (among others) find SPV-type structures that follow the following situations:[21]:
- Reduction of tax base according to the amount of distributions made;
- Taxation on a full basis but at reduced and special rates depending on the activity[22];
- Taxation on a full basis but integrated into the investor's tax base in order to avoid double taxation;
- Exemption from income tax or subjection to zero rate of income tax[23].
However, not every SPV could qualify for the purposes of the discussion we are giving at this moment, but only those that meet a series of conditions such as: (a) a significant number of investors such that the position of each investor in relation to the total is not significant, (b) a diversified portfolio of securities, (c) subjection to specific regulations for the protection of investors in the country of incorporation or registration; (d) significant functions of managers in the direction of the fund and analysis of assets, that is, managers with discretionary powers of administration and management of assets that make up the fund. In this case, the SPV could be considered the effective beneficiary of the income and subject with the capacity to claim the benefits of the CDI.
In this type of collective investment vehicle, both at the level of the design of international agreements and in their effective application, the total taxation by sum of all the aspects involved must be taken into account: source, SPV and investor. The final intention in the application of the treaty must be that which guides its conclusion: to avoid hypotheses of double or multiple international taxation, that is, to direct the application towards a hypothesis of neutrality through the use of the SPV (no differentiation between direct investments and investments conducted via SPV).[24].
Developing countries (a category that also includes the Argentine Republic) require significant investments, generally foreign, in order to initiate or continue an internal plan for the design and management of infrastructure, as well as for the creation and advancement of key industries in accordance with the induction of the national policy of said jurisdiction.
If the international treaties that are the subject of our study are aimed at mitigating the harmful effects that could generate hypotheses of double or multiple taxation for the foreign investor and if, additionally, we recognize that certain critical industries may require investment plans in the making over several years[25], as well as multiple investors, and where it is usual for them to be condensed into specific investment vehicles (SPV-type conduit companies) for the purposes of unifying the representation of said group and management capabilities, we will quickly understand the importance of special guidelines for legal stability in the treaties signed and which specifically contemplate the tax treatment of this type of conduit companies.
The above will be consistent with what is recognized in the comments of the conventional model under study from paragraphs 6.21 to 6.28 where the OECD itself proposes guidelines for inclusion in future treaties to be signed, or even modify existing ones, in order to define under which situations the vehicles indicated can be qualified as residents of the jurisdiction of incorporation and, consequently, request the benefits of the treaty with respect to income originating from a local source (destination of investments).
The OECD proposal will focus on the definition of a collective investment vehicle (SPV) as well as on the design of the “equitable beneficiary” dimension, thereby seeking to involve both the specific vehicle (SPV) and the participant of said vehicle resident in a jurisdiction with which the source State also has an international agreement.
As the reader will be able to observe, the existence of a wide network of treaties, in order to benefit the channel of foreign investments (at least in order not to repress them with hypotheses of high taxation at source), will be fundamental for the development and channel of investments in national space.
Among the hypotheses considered, as proposals for negotiation between contracting States, the OECD proposes considering the concept of “comparable beneficiary” and obtaining data periodically on the participations, by jurisdiction, of the different investors in the specific purpose vehicle.[26]However, in the face of certain proposals for the “classification” of foreign SPV, the OECD itself, in its recommendations, recognizes the practical difficulties for some of them.[27]For the above reasons, it is proposed to collect and report on participations on an annual or quarterly basis.
It is true that collective investment vehicles (SPV) can be used with the intention of obtaining the benefits of an international treaty by those who, according to their jurisdiction of residence, do not have said benefit (due to the non-existence of an international treaty or because they work with higher tax rates than originally intended). This situation is unlikely to arise with listed SPVs given the atomization of their components, since when faced with this type of foreign vehicle, it is recommended to consider said structure as a resident and beneficiary of the income.
IV.- The status of "resident" in the case of legal vehicles with dominant state participation
In the previous title we have indicated that the benefits of the international treaty may be requested by any subject (person) qualified as a resident in the other contracting State, while the definition of “residence” can be found in article 4, section 1 of the conventional model under study. This, in short lines, indicates that it will be the one who, “… by virtue of the legislation of that State, is subject to taxation in the same by reason of his domicile, residence, headquarters, address or any other criterion of a similar nature…”. The indicated article will later be used to declare that the contracting States themselves and their internal political divisions (provinces and municipalities considering the division of jurisdictions in the Argentine Republic) will also be considered residents for these purposes.
The comments on the agreement address the crisis that could be presented by entities that are wholly incorporated with state participation and that, for this reason, have a local tax exemption in their jurisdiction of incorporation.
In this context, income derived in the source country, in claim of the benefits of the CDI by the foreign entity incorporated in the other contracting jurisdiction, would be subject to taxation only by withholding at source and up to the maximum permitted by said treaty.
The situation, the comments under reference warn, may present some hypotheses of conflict and points out in comments to paragraph 6.35 the different options that can be located in some agreements entered into.[28].
V.- Misuse of international agreements
It is not unknown that another of the objectives pursued by the aforementioned treaties is to avoid tax avoidance and evasion practices, taking into account the different anti-avoidance and qualification clauses observed in the conventional model, as well as those aimed at the exchange of information and collaboration in tax matters between the contracting States.
International treaties, in accordance with the above-mentioned guidelines, will therefore be responsible for coordinating the exercise of tax jurisdiction of the different contracting States, whether in limiting the tax authority of the source State or the obligation of the State of residence of the recipient of the income to arbitrate specific means to avoid over-taxation (credit for foreign tax, exemption, etc.).
It will be the situation mentioned in the previous paragraph that can guide (tempt) the subjects to make an abusive use of the international treaties, either by obtaining a benefit that would not originally correspond to a reduction in the withholding tax rate, computation of foreign credits in excess or, directly, by arbitrating double non-taxation schemes.[29].
In order to combat the proliferation of abusive practices such as those mentioned, the possibility has been recognized that the affected jurisdiction may apply anti-abuse regulations incorporated into its internal law.[30]It is the system itself (network of agreements) which, on the one hand, promotes international trade in goods and services through its stability.[31], as well as the coordination of tax powers of all the linked jurisdictions but, on the other hand, determines the construction of a system that, due to its own structure, favors the creation of legal constructions aimed at exploiting benefits not originally understood by its ideologues.[32].
Taxes are applied in accordance with the guidelines of norms incorporated into domestic law. International treaties are a source of law, but their function is to coordinate the exercise of tax jurisdiction of different States, but always in a subsidiary (screening) manner of the provisions of domestic law. A norm of domestic law cannot subvert what is established in an international agreement, but the latter cannot “forget” the organizing guidelines of domestic law itself. In this sense, the OECD itself has pointed out that “… any abusive use of the provisions of a tax agreement could also be considered as an abusive use of the provisions of the national legislation under which the tax is levied.”[33].
In relation to the question raised here, an “agreement” has been reached in relation to the fact that when the anti-avoidance rules of the internal law of a given State form part of what could be considered “general rules and basic guidelines for the application of tax law”, not directly linked to the material dimension of the tax, these anti-avoidance rules are not included in the normative (limiting) guideline of the international treaty and, consequently, are not subject to its rule; that is, they can act freely to avoid situations of abuse of law, fraud or odious simulation.[34].
The above-mentioned would not be the only position in relation to the point under reference given that some proposals are oriented towards considering that certain practices should be considered abuses of the treaty and not abuses of internal legislation in order, on this basis, to maintain that if the international treaty does not present a coverage standard for said practice (allegedly abusive) then the parties (contracting States) have so desired and, therefore, there is no need to apply internal anti-abuse standards.[35].
As we have anticipated, the OECD recommendations are oriented towards the first of the positions brought together[36]; position followed by the Argentine Republic in the interpretation of our highest judicial court[37].
The general position assumed and accepted will be that there is no need to recognise the benefits of the international agreement when dealing with constructions where the only expected benefit is to achieve a more favourable tax position, which is also contrary to the objective of the aforementioned agreement. The typical characteristics will be (a) the sole motivation and (b) contradiction with the purposes pursued by the international agreement. If these typical characteristics are not presented together, then, in principle, there will not be a situation of abuse of law (domestic or conventional).
The reader should not confuse the function covered by the anti-abuse provisions included in international treaties. It is true that those who propose that internal anti-abuse rules cannot reach the constructions of international rules, thereby maintaining the need for the pact itself to contain its exclusive “defense” rules, see in their inclusion the justification for the position that the inclusion of said rules in the international treaty is necessary. They understand that the mere inclusion of said rules explains the impossibility of “invasion” of internal anti-avoidance law in business with international impact.
We do not share the position stated above. The inclusion of specific anti-avoidance rules in international treaties is done for “use or convenience”[38] since they bring closer the primary objective of this type of international agreements: legal security plus the stability inherent to the instrument under reference.
Additionally, we highlight that the inclusion of this guideline allows us to ensure the perspective that the State presents regarding a certain technique used by various taxpayers that, it must be said, can only be considered in an international negotiation or even accepted by the models in its massiveness and capacity to cause damage.[39].
The convenience or utility mentioned above cannot attempt to set aside the guidelines for interpretation and application of local positive law when faced with a legal transaction undertaken by the taxpayer that subverts the final cause of the same.[40]. Conventional guidelines are, therefore, oriented towards detected and widely disseminated practices in search of homogeneity (reason for incorporation into models and recommendations) without thereby seeking inaction of domestic law in the face of anomalous situations.[41].
Conventional guidelines apply to detected economic realities. Subsidiaries without substance, conduit companies, base companies, among others, are examples of widely used schemes with the sole objective of trying to access the benefits of specific international treaties without, in substance, actually having the possibility of accessing them if it is not based on an excessively formal construction.[42]The use of shell companies, in a situation not provided for by the international agreement, consequently becomes a hypothesis of abuse of the treaty and of application of formal law over an underlying economic reality.
From the above we affirm that: (a) the existence of specific anti-abuse guidelines in international treaties does not exclude the application of local defense rules in the event of a hypothesis of abuse of rights or odious simulation; (b) attention must be paid to artificial constructions aimed at obtaining benefits from an international treaty that, otherwise, could not be accessed and (c) defense measures at the treaty level and at the level of internal law, general or specific, can be the subject of analysis and consideration by the tax planner but always within the framework of recognizing that one is facing a strategy of abuse of rights and, consequently, inconsistent with the long term.
As regards anti-abuse strategies, different methodologies can be observed, followed by States, as well as those recommended by the OECD, depending on the context and historical time. Among them we can point out:
- Lifting the legal veil: This involves preventing access to the benefits of the agreement in the case of companies that are not owned (directly or indirectly) by persons resident in the State of incorporation of said entity requesting the benefits of the treaty;
- Orientation towards taxation: under this perspective, it is argued that the benefits of the CDI may be requested in the source State of the income only when said income is subject to tax in the jurisdiction of residence of the beneficiary requesting the specific treatment by international agreement. Regardless of the “simplicity” of the proposal outlined here, it has been noted that this type of anti-avoidance mechanism does not offer protection against “stepping-stone” type strategies.[43].
It is known that taxation is a highly dynamic branch of economic law; a reality that is evident in the interaction with other jurisdictions where the only connection point oriented towards stability is an international treaty. The dynamism inherent to tax law, the tools offered by civil law and the variation of jurisprudential guidelines to innovate in the interpretation of law[44] In many cases, they require specific provisions that establish a “safety framework” for the application of the particular anti-avoidance clauses contained in the international agreements under reference.
An overly rigid anti-avoidance guideline will impede the development of businesses that, without pursuing a hypothesis of abuse of rights, could otherwise be developed. An open-ended anti-avoidance guideline could not provide security in the application of the rule, which is the ultimate goal of entering into a treaty.
For the reasons stated, the OECD in paragraph 19 in its commentary on article 1 of its conventional model maintains the importance of incorporating guidelines for the application of these specific anti-avoidance regulations protecting schemes designed in good faith, based on verifiable and underlying activity in the jurisdiction of tax residence, when the benefit requested does not exceed the tax payable in the jurisdiction of tax residence or in the case of listed companies, among others.
Va- Limitation of benefits as a defense method
The guidelines referred to in this title are aimed, among other strategies, at limiting the benefits of the treaty that respond to a long-known reality: “treaty shopping”[45].
The core of the problem will be the consideration of tax residence in the terms of the treaty that refers to the rules of the internal law of the host jurisdiction. Thus, an excessively formal criterion (tax registration in a jurisdiction of tax incorporation – for example -) would result in the affirmative definition of resident for tax purposes in a certain jurisdiction, would qualify as a resident of the contracting State for the objective agreement and, consequently, without a specific limiting clause, could access the benefits of the treaty.
The benefit limitation clauses analyse the underlying reality of the applicant for said benefits and, in this sense, adapt that formal reality (tax residence registration) to the anti-avoidance terms of the international treaty.
Regular companies, as well as contracts (trusts or similar) will be those that present the greatest problems, which is why the definition of empirical data regarding participation in capital, as well as direction and management, will be fundamental as anti-avoidance rules on this type of construction of "fictitious" tax residence.[46].
Lastly (but not least) we must take into account the space for arbitration of international agreements presented by corporate structures that in their State of incorporation present a specific tax treatment (tax privileges), known as instrumental companies.[47].
Tax exemption (or taxability tending to zero)[48]) leads to the temptation of the (harmful) tax planner to use this type of company either for the abuse of treaties or for the accumulation of income in a foreign jurisdiction; income free of substantive taxation. The limitation in the application of the international agreement can be oriented to specific articles (Art. 10, 11 and 12)[49] or to the treaty in its entirety.
The above may be in conflict, if there are no specifications, with the internal policy followed by one of the contracting States, since, for example, the State of residence may have determined the use of its internal tax policy as a promotional tool by exempting a certain income tax rate. A network of international treaties with more such a policy may demonstrate the intention of international expansion for the residents of said State. In this context, a clause limiting benefits aimed at the internal taxability of a certain income could have a negative impact on foreign state policy.
The misuse of the treaty will come from the interposition of a business vehicle formally resident in a certain State (necessary counterparty of the treaty) but where the beneficial owner(s) are resident in a foreign jurisdiction. The application of rules on limitation of benefits associated with rules regarding beneficial owners will be of necessary connection in the specific design of the treaty. The tax analyst must observe both guidelines and their capacity to apply to specific income or to the generality of the treaty.
The existence of special regimes (tax benefits) applicable only when business vehicles obtain income outside the jurisdiction of incorporation (off-shore) or only when their components are not qualified as residents of the jurisdiction of incorporation constitutes a clear and objective guideline to delimit access to the benefits of the international agreement.
Preferential treatment income will also be subject to specific observation in the design of specific anti-avoidance rules for the purposes of applying an international agreement. Income that is exempt from tax is considered to be of special treatment, subject to taxation, but only at the time of transfer or payment to components of the vehicle used, provided that a lower tax component is supported for non-tax residents of said economy or they benefit from fictitious tax credits or base reductions that result in a substantial reduction of the effective tax rate.[50].
VI.- The “Molinos Case” (51)
If we take into account the comments made in previous sections, we quickly see that the guidance given by our highest court will be consistent with the general guidelines for interpretation and adoption of this type of convention.
For our part, we do not agree with the position of those who maintain that since the previous treaty was based on the model of the "Andean Pact" and on the basis of an idea of integration, the OECD interpretations regarding treaty abuse and the ability to apply internal anti-avoidance guidelines on the provisions of an international treaty could not be applied.
We are not using “soft law” guidelines to apply a conceptual framework outside the OECD modular proposal, but rather, as far as it is of interest, and regardless of the body issuing the recommendation, the discussion applies to any application of any type of contractual framework (including international ones and those signed under the guidelines of the Vienna Convention on the Law of Treaties) since it involves verifying the pursuit of the benefits of a given legal framework (whether the conventional guideline or the internal law by the civil vehicle executed) without the source cause that is the reason for the intelligence of its original design.
It is in this context, but with the aim of bringing certainty between the contracting parties, that the OECD recommends a specific clause in its conventional model in order to establish the position of a contracting State with respect to this type of innovation in foreign law and which could put the application and interpretation of an international treaty in crisis.[52].
Sergio Carbone is a Public Accountant (UBA), with a Postgraduate Degree in Tax Procedure (UNTDF) and a Diploma in Transfer Pricing with a focus on the Digital Economy (UB)
[1] According to Art. 75, inc. 22 CN
[2] The term will be mandatory development in the following lines.
[3] Without referring to specific international agreements, let us remember that the moment of connection with the tax regulations established in the United States of America is oriented towards the citizenship of a taxpayer regardless of his or her habitual place of residence.
[4] Let us remember that Art. 4 of the model indicates that any person who “… under the legislation of that State, is subject to taxation therein…” will be considered a “resident of a Contracting State”, referring, consequently, to local regulations to define the status of resident for tax purposes.
[5] Statement that must be qualified with the guidelines that we will work on later to avoid hypotheses of treaty abuse.
[6] The particularity of this type of entities has been analyzed in a report issued by the OECD entitled “The application of the OECD Model Tax Convention to Partnerships”. Available at https://www.oecd-ilibrary.org/taxation/the-application-of-the-oecd-model-tax-convention-to-partnerships_9789264173316-en
[7] As is the case with LLCs based in the USA.
[8] Art. 4, app. 1.- Model Agreement
[9] Unless specific consideration is introduced in the treaties that offer coverage for this type of situations – MOCDE Comments – Art. 1 – Parr. 5.-
[10] Although it is not the object of this document, we remind the reader of the rules on fiscal transparency incorporated into Argentine tax law as of 01-01-2018 by virtue of the tax reform carried out via Law 27.430, which, as far as it is of interest and with the current order, we recommend analyzing what is indicated in Art. 130 of said body and particularly its inc. e) of said body (companies without tax personality)
[11] Just as it could happen with an LLC statute incorporated in the United States of America, which, although by default are considered transparent (disregard), they can, by option, choose a tax framework such as C-Corp or S-Corp. Given that the S-Corp qualification is limited to assumptions not applicable to foreign subjects, this type of design will apply exclusively under a C-Corp type framework.
[12] In the case of US LLCs, the direct attribution to the partners will be at the fiscal level, not at the corporate level.
[13] The above will be independent of whether local law or international law enables the recognition of credits for foreign taxes borne by the company and applicable in the tax determination of each partner (Art. 165, 166 and 167 Law 20.628 as well as Art. 305 DR 862-2019)
[14] In the source State (state of incorporation of the legal vehicle) there is attribution of income to the partner while in the residence State (of the partner) there is simple social participation.
[15] The above is the interpretation proposed by the OECD in notes to its conventional model (note to Art. 1, par. 6.4). In the source jurisdiction, the interpretation of the local application authority must be verified.
[16] Treaty signed between the source State and the State of incorporation of the corporate vehicle vs. Treaty signed between the source State and the State of residence of each component.
[17] For further details on qualification conflicts regarding income derived to companies of foreign persons (or derived from these), it is recommended to study paragraphs 32.1 and 56.1 of the comments to Art. 23 of the conventional model.
[18] These may be considered to have low or no taxation or not cooperating with the international exchange of information for tax purposes for local law (Art. 19 and Art. 20 Law 20.628), a situation that will present particularities to be addressed at the tax level, whether due to the treatment of deductions, transfer pricing guidelines, traceability of the origin of funds, among other issues.
[19] To expand on the concept, it is recommended to read the report issued by the OECD entitled “THE GRANTING OF TREATY BENEFITS WITH RESPECT TO THE INCOME OF COLLECTIVE INVESTMENT VEHICLES” (2010). Available at https://www.oecd.org/tax/treaties/45359261.pdf
[20] We are clearly referring to specific purpose vehicles with legal personality.
[21] Being in all cases considered "subject" for the purposes of the application of the international treaty
[22] In this case, the OECD itself recommends in its comments the design of anti-abuse regulations.
[23] The hypotheses are not analogous. The OECD recommendations in its comments are oriented in the direction of not considering these specific types of vehicles as residents (subjects) for the purposes of international agreements.
[24] Neutrality can be defined as the situation that is achieved when the taxation to which the foreign investor is subject is not modified by the use of an SPV.
[25] As an example of critical industries and the promotion desired by the Argentine National State, even in accordance with international commitments assumed, we can mention the investments promoted in the generation of energy derived from the use of renewable natural resources (non-fossil) – Regulatory Framework Law 15.336; Law 24.065; Law 25.019; Law 26.190 and Law 27.191
[26] Investors considered resident for tax purposes either in the jurisdiction of incorporation or registration of the SPV or in the jurisdiction with which the source State has a CDI (comparable beneficiary).
[27] Whether at the level of percentage of participation of investors according to jurisdiction or by the treatment (mandatory distribution) of income, among other conditions. See Par. 6.29 comments on Art. 1 conventional OECD model.
[28] Clarifying options. The principle of “sovereign immunity” is not applicable to business activities or tax matters. In order to achieve “tax immunity” it is accepted that it is necessary to resort to tax exemptions. Tax exemptions may be provided for by international law or by domestic law.
[29] Molinos Río de la Plata SA vs. General Tax Directorate s/ direct appeal from external agency CSJN 2021 – CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1 –
[30] MOCDE Comments – Art. 1, Parr. 7.1
[31] Characteristic of public international law
[32] “Treaty shopping” hypothesis, “stepping stone” type structures or non-substantial vehicle companies, among some examples, as well as tax residency arbitration hypothesis.
[33] MOCDE Comments – Art. 1, Parr. 9.2
[34] This would be the position taken by our highest court in which we could consider the Argentine “leading case” Molinos Río de la Plata SA v. General Tax Directorate s/ direct appeal from external body CSJN 2021 – CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1 –
[35] In accordance with the guidelines given by the International Convention on the Law of Treaties; specifically in its Art. 26 (pacta sunt servanda) and its Art. 27 (prohibition of innovating by internal law guidelines agreed in international norms)
[36] MOCDE Comments – Art. 1, Parr. 9.4
[37] Molinos Río de la Plata SA vs. General Tax Directorate s/ direct appeal from external agency CSJN 2021 – CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1 –
[38] MOCDE Comments – Art. 1, Parr. 9.6
[39] As an example we can mention (1) provisions on beneficial ownership (Art. 10, 11 and 12 MOCDE); (2) provisions on artists' societies (Art. 17, section 2 MOCDE); (3) clauses on limitation of benefits, among others.
[40] Art. 2 Law 11.683 – Principle of economic reality. For more information, consult the work of Alberto Tarsitano “TAX AVOIDANCE” – Ed. Astrea (2020) – Pages 84 to 101!
[41] They will also be necessary to ensure uniform application of the treaty even when a given State does not contain general or business-specific anti-circumvention rules in the international pact under consideration.
[42] For more on the point mentioned, you can consult the reports issued by the OECD entitled “Double taxation conventions and the use of Base Companies” available at https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2014-full-version/r-5-double-taxation-conventions-and-the-use-of-base-companies_9789264239081-98-en and “Double taxation conventions and the use of Conduit Companies” available at https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_df2b24ed-en#page1
[43] MOCDE Comments – Art. 1, Par. 16. In order to make the mandate stated here effective, the OECD suggests in its conventional model that not only formal taxation be analyzed but also that the destination of the funds received be considered as a percentage of payments to persons legally linked to the beneficiary of the income in order to enjoy the benefits of the agreement.
[44] It never hurts to rescue the words of Norberto Bobbio in his work “The problem of legal positivism” – Distribuciones Fontamarca SA (1991) – ISBN 978-968-476-137-7 in which he analyzes the new impulse of natural law as a legal dimension inherent in a positivism (and formalism) that is diluted in its original intended strictness in its application to give way to a written word that is adjusted to the realities and symbols of justice that invade all reading in this new legal era.
[45] “Treaty shopping” is a technique followed by those who, being residents of a jurisdiction that does not have an international treaty with jurisdiction as source of income, or if this is not convenient for their final reasons, decide to interpose a third party (generally legal or contractual with tax residency merit) so that it can request the benefits of an international treaty when operating against the source State.
[46] MOCDE Comments – Art. 1, Parr. 20
[47] An example of this can be found in the “platform companies” of international business regulated by the tax law of the Republic of Chile in Art. 41D DR 824-1974
[48] As for example happens with the regime recognized by the tax law of the Eastern Republic of Uruguay via RG RG 51-1997
[49] This would allow maintaining protection with respect to other benefits generally contained in these international treaties, such as the prohibition of discrimination, mutual agreement procedures, guidelines linked to transfer prices, etc.
[50] Please note that we are referring to specific guidelines provided for by the international agreement that do not override the guidelines provided for in domestic law (general or specific). Domestic law guidelines are not a “wild card” to be used in the absence of “defense mechanisms” in the international agreement, but rather they operate under specific situations contemplated in local law. If the specific guidelines provided locally that enable the use of local anti-avoidance rules (general or specific) are not in place, as well as in the absence of specific guidelines in the international agreement, we will be faced with a strategy that, regardless of its future predictability, may be configured as evasive and without protection by the legal system.
[51] Molinos Río de la Plata SA vs. General Tax Directorate s/ direct appeal from external agency CSJN 2021 – CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1
[52] MOCDE Comments – Art. 1, Parr. 21
