CAPÍTULO IV. EL PRD EN SONORA: AVANCES Y RETROCESOS
4.1. Breve semblanza histórica
Para. 26.14 very appropriately distinguishes the issue of income attribution from the beneficial ownership requirement. Accordingly, as illustrated by the example in this paragraph, the fact that a person derives an item of income as a resident does not necessarily mean that this person is the beneficial owner thereof. In particular, the State of source should not be expected
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to grant treaty benefits where the person deriving the income as a resident acts a mere agent, nominee or conduit for a non-resident.
This being said, in some cases, the State of residence may fictitiously attribute an item of income to a person (pursuant for example to a substance/anti-avoidance attribution rule) without this person having any form of enjoyment or control over such item. This particularly holds true in the field of trust relationship as regards the attribution of income to the settlor pursuant to provisions such as “grantor trust rules”. Where such a deemed attribution rule is applied by the residence state, income may well be regarded as paid to the recipient within the meaning of the distributive rules, but, strictly speaking, this person may not be regarded as the beneficial owner of the income. At the same time, however, the item is here effectively taxed in the hands of the recipient in the State of residence. In our view, it would be appropriate for the commentary to refer to this problem and possibly to suggest that, where, under a deemed attribution rule, the recipient is taxed on an item of income arising in the source state, the contracting states may agree to deem this person to be the beneficial owner, even if, in this particular instance, this person does not hold any ownership attribute over the income received.
IV. Right of a State to tax its own residents
Para. 26.16 mirrors the principle of the saving clause proposed by the discussion draft on action item N 6 as well as the conclusions taken in examples 16 and 17 of the partnership report and reiterated by para. 6.1 of the commentary to art. 1. Where however a State taxes its own resident, the obligation to provide relief under the terms of art. 23 A and B remains applicable. Therefore, as illustrated by example 16 of the partnership report, if for example a partnership regarded as a taxable entity and resident in State P derives royalty income from State R, a jurisdiction in which one of its partners also resides, this latter country could rely on its own attribution rules to directly assess this partner as a resident. Yet, in such case, the obligation for State R to provide double taxation relief under art. 23 A and B may remain applicable. Indeed, if State R attributes the partnership income to a resident partner, article 7 OECD MC applies. Accordingly, State R may, depending on the circumstances, consider that this partner maintains a permanent establishment in State P at the place of organization of the partnership. Following this line of reasoning, State R should therefore provide double taxation relief pursuant to article 23 A or B OECD MC as regards the partnership income attributed to the fixed place of business4. Moreover, as discussed above, State R should provide double taxation relief to its
resident partner through the credit method even if, in State P taxes are levied in the hands of the partnership.
However, this outcome is specific to partnerships but may well not hold true where a different type of hybrid entity is at stake. Consider for example a similar fact pattern involving a trust. Assume that T is a trust established under the laws of State R. The settlor of T, S, is a State R resident individual. Under the settlement, S has retained certain powers so that under the attribution rules of State R, all income of the trust is assigned to S. The beneficiary of T, B, is entitled to receive all periodical income derived by T. B is a resident of State S and under the laws of this State, on the contrary, all income of the trust is attributed to B. Assume finally that T derives royalty income from State S5.
Following the foregoing principle, article 12 of the S-R tax treaty would not apply and would not prevent State S from taxing its resident individual taxpayer. Rather, from the perspective of State S, this internal situation would be falling under article 21 OECD MC. State R, by contrast, would be taxing the same income in the hands of the settlor of T. However, unlike in the case contemplated the OECD partnership report, B does of course not maintain a permanent establishment in State R so that it is impossible to argue that State B should provide double taxation relief under article 23 of the tax treaty. In this particular scenario, therefore, the approach taken leads to full double taxation.
Since the foregoing outcome typically comes into play with respect to trusts to which the provision proposed by the discussion draft is intended to also apply, the proposed commentaries could clarify that, in these instances, the contracting States may wish to agree that one State would provide relief for the taxes levied by the other (for example the State of residence of the settlor for the taxes levied by the other State in the hands of the beneficiary). Such understanding is for example provided in the exchange of notes to the US-UK tax treaty which expressly provides for double taxation relief in such situation and in a specific trust situation: “In the case where the same item
of income, profit or gain derived through a trust is treated by each Contracting State as derived by different persons resident in either State, and a) the person taxed by one State is the settlor or grantor of a trust; and b) the person taxed by the other State is a beneficiary of that trust, the tax paid or accrued by the beneficiary shall be treated as if it were paid or accrued by the settlor or
5 See Robert Danon, Switzerland's direct and international taxation of private express trusts, Zurich (Schulthess),
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grantor for the purposes of determining the relief from double taxation to be allowed by the State
of which that settlor or grantor is a resident (or, in the case of the United States, a citizen)”6.
V. Alternative approach
Finally, while the proposed provision is limited to conflicts of attribution involving hybrid entities or arrangements, let us observe that a more comprehensive approach to solve conflicts of attribution in general would also be technically conceivable. For this purpose, the proposed provision could simply be turned into a general one with the following alternative language: “For
the purpose of the purposes of this Convention and unless the context otherwise requires, an item of income, profit or gain shall be considered as directly derived by a resident of a State to the extent that the item is treated for purposes of the taxation law of such Contracting State as
the income, profit or gain of a resident”7. In order to ensure perfect consistency with the
distributive rules, the expression “derived by” could then be included in all distributive rules (instead of “paid to”, “of” etc.). Technically, this alternative provision would really consist in a definition of a term contained in the distributive rules. Therefore, from a systematic standpoint, it would be more logical to include it into article 3 OECD MC. This rule would of course still not prevent the source State from taxing its own residents in accordance with the saving clause. Further, under this rule, treaty benefits to be granted by the State of source would remain subject to the other usual conditions. Accordingly, treaty benefits could be denied where the person “deriving” the income is not the beneficial owner or where a main purpose rule or LOB (contemplated by the discussion draft on Action Item 6) applies. Finally, it must be recognized that generally requiring the State of source to follow the attribution rules of the State of residence may raise concerns as regards the possibility of this latter State to expand its taxing right by adopting new attribution rules. States concerned with this problem could however simply reserve not to apply the proposed rule in cases where a conflict of attribution results from a modification to the internal law of the State of residence subsequent to the conclusion of the Convention8.
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Exchange of notes to the new US-UK DTC 2001 ad Art. 24 (Relief from double taxation)
7 The proposed approach is similar but still different from the one suggested by Wheeler J, The Missing Keystone of
Income Tax Treaties, Amsterdam 2012 (IBFD doctoral series), see in particular p. 165 et seq. which is even more comprehensive and innovative. This author suggests indeed a fundamental change to the structure of the OECD MC by shifting treaty entitlement from persons to income through inter alia an amendment to art. 1. Our approach is by contrast less ambitious and simply amounts to propose a uniform definition of « derived by » for the purpose of the distributive rules and without affecting art. 1, which would thus continue to place the emphasis on persons rather than income.
8 This is the approach taken by Switzerland in its observation to art. 23 (para. 81) in the context of conflicts of
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