1. United States: US taxpayers sentenced to prison for hiding assets offshore
A US District Court chief judge sentenced US taxpayers to 12 months and 1 day in prison for hiding assets in secret offshore bank accounts. The US taxpayers were also ordered to pay restitution to the US Internal Revenue Service (IRS) and to pay a civil penalty for failing to file Form TD-F 90-22.1 (Report of Foreign Bank and Financial Accounts, FBAR).
The sentencing was announced in a Press Release dated 30th July 2012, issued by the US Department of Justice.
The Press Release states that the US taxpayers failed to report their financial accounts at UBS (a Swiss bank) and several other foreign accounts in the Isle of Man, Hong Kong, New Zealand, and South Africa. The Press Release further states that the US taxpayers failed to report any income earned on the foreign accounts and that they also under-reported their income by using their Swiss bank accounts.
UBS AG entered into a deferred prosecution agreement with the US Department of Justice on 19th February 2009 on charges of conspiring to defraud the United States in the ascertainment, computation, assessment, and collection of US federal income taxes. As part of the agreement, UBS AG provided the United States with the identities of, and account information of certain US clients.
An FBAR is a form separate from an income tax return that a taxpayer is required to file with the US Internal Revenue Service (IRS) every June, to disclose information about foreign financial accounts over which the taxpayer has signature authority or other control, and which have an aggregate value exceeding $10,000 at any time during the year.
2 Netherlands : Court of Appeal ‘s-Hertogenbosch decides that sportsman is entitled to avoidance of double taxation for foreign employment income attributable to a test match
On 29th July 2012, the Court of Appeal ‘s-Hertogenbosch (Hof ‘s-Hertogenbosch) gave its decision in X. v. the Tax Administration (Case No. 12.0024, BX 0587) on the avoidance of double taxation for a sportsman, who derived foreign employment income from playing test matches in Spain and Thailand. Details of the case are summarised below.
(a) Facts:
The Taxpayer was a Dutch resident who played as a sportsman for a Dutch club. In 2002, he played test matches with his club in Spain and Thailand. He claimed avoidance of double taxation for the part of his employment income attributable to the days spent in Spain and Thailand, based on article 25 of the Netherlands – Spain Income and Capital Tax Treaty (1971) and article 23 of the Netherlands – Thailand Income and Capital Tax Treaty (1975) (the Treaties). The tax inspector refused to grant avoidance of double taxation for those days arguing that the test matches did not constitute a public performance.
(b) Legal Background:
Article 18 of the Treaty with Spain and article 17 of the Treaty with Thailand provide that income derived by sportsmen from their personal activities may be taxed in the state where those activities are exercised. Based on article 25 and 23 of those Treaties, the Netherlands applies an exemption with progression method for foreign employment income.
(c) Decision
Contrary to the Lower Court of Breda, the Court decided that avoidance of double taxation must also be granted with respect to the foreign employment income attributable to test matches played in Spain and Thailand. The Court held decisive that the test matches were open for the public, which meant that the sportsman was carrying out personal activities. Therefore, the Court decided that the sportsman was entitled to avoidance of double taxation for the days spent in Spain and Thailand.
Note: For the attribution of the employment income, reference can be made to a Decision of the Dutch Supreme Court of 7th February 2007 , in which it was held that the part of the basic salary of a sportsman, which can be classified as income from personal activities, depends on the intention of the contracting parties as expressed in the employment contract. If that contract obliges a sportsman to participate in games and races in foreign countries, the basic salary, generally, has to be allocated to his income from personal activities in the state of performance on a pro-rata basis, unless the employment contract indicates otherwise.
In addition, the Supreme Court indicated that the term “personal activities” covers the performance aimed at an audience and time spent for activities related to such performance as training, availability services, travels and a necessary stay in the country of performance. Due to the fact that the test matches were open for the public, this requirement seems to be met in the case at hand.
3 Treaty between Spain and Ireland – Spanish Administrative Tribunal considers commission agent acting in his own name as PE
Spain’s Tribunal Económico-Administrativo Central gave its resolution on 15th March 2012 (No. 00/2107/2007), published in June 2012, in a case relating to a multinational group involved in the design, development and manufacture of computer products which are commercialised through entities of the group. Details of the resolution are summarised below.
(a) Facts :
An Irish company, without human or material resources, commercialises computer products in Spain (as in other several countries) through a commission agent, a Spanish affiliate company, acting on behalf of the Irish enterprise but in its own name, with the support of foreign entities that provide after-sales services as technical assistance or repair. The commercialisation in the Spanish market was formerly realised directly by the Spanish affiliate. However, a group reorganisation took place under which the customer’s profile was transferred to the Irish company. For commercialisation purposes, the Spanish market was segmented into two areas:
– large customers who require personalised and customised attention so they were addressed to the Spanish commission agent; and
– retail customers with whom contact is made through foreign call-centres or on-line through a web page registered under a “.es” domain, hosted in server located outside Spain.
(b) Issue :
The tax authorities considered that the Irish company deemed to have a permanent establishment (PE) in Spain because the Irish company had in this country:
(i) a fixed place of business or, alternatively,
(ii) a dependent agent.
(i) Fixed place of business: Contrary to the taxpayer ´s argument that having an affiliate was insufficient to give rise to a PE, the Tribunal held that the Irish company had a PE in Spain. To support its consideration, the Tribunal held that the Irish company did not merely realise auxiliary or preparatory activities through a steady business framework in Spain.
(ii) Dependent agent: Alternatively, the Tribunal maintained that in case no fixed place of business was found to exist, the Irish company could be deemed to have a PE in Spain as a dependent agent. It based this result on the grounds that the Spanish company was sufficiently empowered to bind the Irish company, which was its sole client, and had to follow its instructions, provide reporting, request its authorisation before setting prices or delivery, allow record inspections as well as copyright control.
In addition, the tax authorities considered that income derived from all sales in Spain of the Irish company should be allocated to its Spanish affiliate, including those made through the web page, although the server was outside the Spanish territory (reference is made to the Spanish reservation included in the OECD Model (2005) and OECD Model (2003) versions in this respect). Only part of the Irish costs was directly allocated to the Spanish PE.
(c) Decision:
The Spanish Tribunal resolution, following the Supreme Court decision of 12th January 2012, confirmed the existence of a PE based on the facts that demonstrate the substance of the activities and the operational reality of the Spanish company as well as the opinion of the tax authorities in respect of the attribution of income to the PE.
4 Treaty between Singapore and Japan : Unutilised losses of de-registered branch allowed for offset against profits of re-registered branch of a foreign company
The Income Tax Board of Review gave its decision recently in the case of AYN v. The Comptroller of Income Tax [2012] SGITBR1 on the availability of unutilised tax losses for offset against the profits of a foreign branch in Singapore. Details of the decision are summarised below.
(a) Facts :
In 1992, a Japanese company called AYN Corporation (the Appellant) registered a branch in Singapore (the “old branch”) to carry on business there. The old branch was de-registered in 2004, at which time it had accumulated unutilised losses amounting to SGD 30 million. In 2006, the Appellant re-registered itself in Singapore and carried on business activities through a newly-registered branch (the “new branch”).
The Appellant sought to deduct the unabsorbed losses of the old branch against the business profits of the new branch for the year of assessment 2008. However, the claim was disallowed by the Comptroller of Income Tax, on the basis that pursuant to article 7 of the Japan – Singapore Income Tax Treaty (1994) (the Treaty), a branch is treated as a distinct and separate entity from the enterprise of which it is a part for income tax purposes. As such, the losses incurred by the old branch cannot be utilised against profits earned by the new branch.
The Appellant argued that a branch is from a legal perspective, an extension of the head office, and that section 37(3)(a) of the Income Tax Act (ITA) dealing with unabsorbed losses refers to the amount of loss incurred by a “person”, which refers to the legal entity, i.e. AYN Corporation and not the Singapore branch.
(b) Issue :
The issue was whether the unabsorbed tax losses of the de -registered branch could be utilised against the profits earned by the new branch of the same company, i.e. whether they were the same “person”, as required by the ITA.
(c) Decision:
The Board of Review held that the unutilised losses of the old branch could be used to offset the profits of the new branch, on the following grounds:
- Section 37(1) of the ITA provides that “the assessable income of any person…shall be the remainder of his statutory income for that year after the deductions in this Part have been made”. Section 37(3)(a) allows the deduction of “the amount of loss incurred by that person in any trade, business, profession or vocation”.
- The term “person” is defined in the ITA to include a company. The Appellant was a company incorporated under the laws in Japan, and was in the Board’s view, a “person” as covered by section 37 of the ITA. On the other hand, a branch is an extension or arm of the foreign company in Singapore and exists to carry on the business of the foreign company in Singapore. It has no separate legal status, and is for all intents and purposes the same legal person as the parent company formed outside Singapore.
- Article 7 of the Treaty deals with the allocation of profits to a permanent establishment and does not modify the provisions of section 37.
The Board concluded that the unabsorbed tax losses belonged to the Appellant and therefore were available for offset, provided that there was no substantial change (more than 50%) in the shareholders and their shareholdings of the Appellant.
