A summary of the taxation of offshore indirect transfers toolkit An in-depth look at a new toolkit on the taxation of offshore indirect transfers In June, the Platform for Collaboration on Tax (PCT), co-founded by the International Monetary Fund, Organization for Economic Cooperation and Development (OECD), World Bank Group and the United Nations (UN), released a toolkit on the taxation of offshore indirect transfers (OITs) providing guidance on tax treatment and implementation issues for developing countries when one country seeks to tax gains on the sale of interests in an entity owning assets located in that country by an entity which is a tax resident of another country. The toolkit is a technical reference or guidance instead of a law or an agreement with binding powers. In the absence of appropriate legal basis under domestic law to assert the taxing right on OITs, tax certainty cannot be assured. Nonetheless the guidance is welcomed by the tax professional community.
Background OITs, defined in the toolkit as “disposition of an indirect ownership interest in an asset, in whole or in part, in which the transferor of the indirect interest is resident in a different country from that in which the asset in question is located,” have emerged as a significant issue in many developing countries. Tax administrations may find tax collection on OITs a difficult task due to the complications, complexities and technical judgements involved. For taxpayers, different definitions, scope of taxable assets and interpretations in domestic laws in different jurisdictions lead to uncertainties. Taxation on OITs often relates to taxation on non-residents, which usually involves the allocation of taxing rights and economic interests between two or more jurisdictions. A more uniform approach to OIT taxation at the international level is therefore urgently required. It is accepted by the Model Tax Conventions (MTCs) of the OECD and the UN that capital gains derived from OITs of “immovable” assets can be taxed by the July 2020
asset location country. The toolkit provides analysis of two options for OIT taxation, with a focus on the perspective of developing countries. The key questions addressed include: • What considerations arise in deciding whether transfers should be taxed in the country in which the underlying asset is located? • Which types of assets should be included in the OIT taxation bases? • How can such taxation, if adopted, be best designed and implemented from practical and legal points of view? The toolkit proposes that location countries may wish to tax OITs of at least those assets which are immovable, i.e. within the meaning defined in both of the OECD and UN MTCs, and perhaps other assets that also generate location specific economic income. The toolkit suggests two models for domestic legislation for location countries wishing to extend their taxing rights. The toolkit also provides enforcement and tax collection guidance. As previously stated, some location countries may wish to tax gains realized on OITs as is currently the case for direct transfers of immovable assets. Those location-specific incomes exceed the minimum returns projected by the investors and cannot be generated in other jurisdictions. These assets might include, for instance, telecommunication licenses and other rights granted by local governments. The PCT advocates that location countries should have the right to tax OITs, and such assets should at least include property that generate location-specific income (such as natural resources, including physical property and related rights, regional telecom licenses or other rights), including those thoughts of as “immovable property,” regardless of whether equivalent tax in regard to the transfer would be paid elsewhere. In other words, such taxation could apply not only as an anti-avoidance device to combat
“double non-taxation,” but rather could constitute a fundamental aspect of the country’s domestic tax laws.
The two OIT taxation models The toolkit provides two OIT taxation models, which are not mutually exclusive. However, if both models are adopted, an ordering rule is required to ensure they do not apply at the same time. Appropriate enforcement and collection rules are also critically important. The detailed treatments, tax enforcement and collection rules under these two models are discussed below: Model 1: impose tax on a local assetowning entity and treat it as disposing of and reacquiring the assets (e.g. Corp. A in Figures 1 and 2 on page 41) Model 1 is designed to tax the actual owner of the assets (e.g., Corp. A), rather than the non-resident seller, by treating the actual owner as disposing of and reacquiring the assets for their market values. Tax treatment under Model 1 Key technical points regarding tax treatments under Model 1 are summarized as follows: • Tax the unrealized gain, recognize losses where there are no accrued gains. • Safe harbour rules may apply on corporate reorganization. • Tax liability is triggered if the sale led to effective change in control by more than 50 percent. • Change of control – the toolkit encourages jurisdictions to include definitions for “ownership” or “change of ownership” in the relevant domestic provisions. • Deemed disposal of assets – where a change of control occurs, the local assets owner is deemed as disposing of the assets for their market value. • Reacquiring the assets – the local entity is regarded as reacquiring the assets at the market value during the indirect 30
