TAX 9869 Lecture Notes - Lecture 58: Model Treaty, Tax Treaty, Withholding Tax

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11 Aug 2020
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Discussion on income tax treaties
Two themes on when a country might tax you
1. Source: where income was earned
2. Residency: if resident of a country, then subj to tax in that country
Important when talking about withholding tax
- Taxes Withholding at source: income was earned + sourced in this country so subj to tax
in this country
- US 30% WH tax on US source income: US source paid to nonUS/nonresi person (FC or
FP)
- If there’s a treaty; then doesn’t necessarily get taxed @30%
- If benefits of treaty, could be 5,10,15%,0%
- Based on income tax treaty
US Model Treaty
- Its a model
- Discuss the treaty @ that point
- Income tax treaty: is made up of diff articles
- Language//Each country w/i treaty = a state within the treaty
- Taxes covered in treaty generally = Income taxes
- VAT not included, SST, sales tax, might be some other treaties that cover
this type of income
- On top we have general definitions of how we define things (Article 3 in the
model treaty, but every article is diff)
- In order for a person to be eligible for treaty benefits (2 tests follow):
- 1. Must be resident of contracting state in order to be eligible for treaty
benefits
- For this purpose, resident is liable to tax therein by reason of
domicile resi…
- Has to do w/ tax
- If not liable to tax w/i county= not a res of country for treaty
purposes
- Not eligible for treaty benefits
- Be a resident for income tax purposes
- 2. And must meet one of limitation on benefit clause
- limitation on benefit = cannot have complete benefits
- Reason:
- EX: lets say i have a US corporation here and US
corporation is owned by a British Virgin islands company
(don’t have IT treaty)
-
- If US were to pay a dividend to BVI
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- = US source div w/ 30% WH tax [div sourced to residence
of payor]
- US SH says hmmm this is a bad thing, set up corp in BVI
bc no tax in BVI but doesn't work for me bc everytime US
Co pays div im hit w/ 30% tax in the US + no credit for it
(bc no tax in BVI)
- Lemme do something w/ the structure
-
- Lemme put a corporation that DOES have an income tax
treaty w/ the US
- Suddenly structure looks different
-
- UK company is more realistic bc UK under their statutory
law doesn’t have any WH tax on dividends(0% holding tax
on dividends)
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-
- In old structure, i had 30% WH tax, and in new structure
just by sticking in a new UK corp you have 5% so saved
25% tax
- This is called treaty shopping to reduce treaty WH
tax rate
- Countries realized people setting up artificial corps
to get treaty benefits (only purpose)
- Now you can't!
- In this structure you CANNOT get treaty benefits
(5% withholding tax) unless you meet 1) residence
2) limitation on benefits
- In order to get benefits, meet tests 1) UK company
would have to be a UK resident (easy to met →
manage and control, subject to tax in UK) + 2)
limitation on benefits
- Lets look @ what a limitation on benefits clause
looks like (Article 22)
- Make sure no exceptions apply
- A resi of a contracting state must be a
“qualified person
- “qualified person” + resi = treaty benefits
- An individual
- A contracting state/political
subdivision
- A PUBLIC company( if principal
class of shares is reg.traded on one
or more recognized stock
exchanges) ~NYSE= qualified
person, gives a further description
- A lot of companies you deal
with are private co’s
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