Worldwide: The World Tax Advisor (Part Two - Continued)

In January 2005, a second case involving the Ramsay principle was decided in a Hong Kong court, this time in favor of the taxpayer. The case at issue, Graceful Mark Limited v. The Commissioner of Estate Duty (Graceful Mark), involved estate duty and the taxpayer successfully convinced the court that the deceased had a commercial purpose to dispose of the property (thus making Ramsay inapplicable).

The Ramsay principle is a common law tax principle that allows the tax authorities to look at the intent of a transaction and ignore the transaction for tax purposes if it had no commercial reason other than the avoidance of tax. The first successful application of this principle against a taxpayer in Hong Kong took place in December 2003, in the Court of Final Appeal’s decision in The Collector of Stamp Revenue v. Arrowtown Assets Limited.

In Graceful Mark, the company (Graceful Mark Limited) acquired two properties with a total market value of HKD 15.3 million from the deceased (X) four days before his death. Graceful Mark Limited used a HKD 10.58 million loan provided by a bank to make the acquisition. X remitted the disposal proceeds to Macao where he gave the money to his son as a gift. The son was the director of Graceful Mark Limited. The son lent the money he received from X to the company as a loan from a director and the company subsequently repaid the loan from the bank with the money injected. X's son and daughter-in-law held 90% and 10%, respectively, of the shares in the company.

One of the Commissioner’s main arguments was application of Ramsay: X’s round-robin transactions had no commercial purpose and should be ignored according to the Ramsay principle. Ignoring the intervening transactions, the sale of properties was in substance a "gift" to the company by X made within the three years preceding his death and the full value of the properties (i.e. HKD 15.3 million) should be subject to estate duty.

Convinced by the evidence X’s son provided, the court concluded there was a commercial purpose for X to dispose of the properties because X had shown an intent to dispose of the properties a year before his death but the disposal did not take place at that time because of an objection by the co-owner of the properties. Thus, the court concluded, the Ramsay principle was not applicable and the properties were not a gift within three years of death.

Ireland’s Finance Act 2005, which was passed into law on 25 March 2005, confirms a number of measures announced in Budget 2005, including a 50% reduction in Ireland’s capital duty rate (now 0.5%) and changes to Ireland’s holding company regime, the latter of which has been approved by the European Commission.

The Finance Act 2005 also addresses the Irish tax implications of International Financial Reporting Standards (IFRS), confirms the tax transparent status of common contractual funds (CCFs), relaxes the stamp duty rules on stock-lending and repurchase transactions and extends the benefits of EC Directives. Other welcome amendments include EU-driven changes to the deductibility of pension contributions, relief for interest on borrowings and an exemption from withholding tax on intragroup payments.

A significant feature of Ireland’s 2004 Finance Act was the introduction of an exemption from the Irish 20% capital gains tax on the disposal by a company of shares in qualifying companies. Even in the short length of time the capital gains tax participation exemption has been in existence, it has generated significant interest from multinational companies, particularly U.S. multinationals. European Commission approval of the exemption regime was secured on 23 September 2004, subject to certain amendments that, although included in Finance Act 2005, will apply retroactively from 2 February 2004. The key change reflected in this year’s Finance Act is the removal of the Euro 50 million and Euro 15 million thresholds and the introduction of a 5% shareholding requirement, thereby broadening the range of participations that can potentially benefit from the exemption.

This amendment, combined with the reduction in Ireland’s capital duty rate to 0.5%, should continue to attract significant investment opportunities from foreign business for the foreseeable future.

The CCF was introduced into Irish funds legislation in 2003. The main driver for the creation of the CCF was to have a specialized funds structure that facilitated the pooling of cross-border pension fund assets, which typically is of interest to multinationals. Pension pooling allows companies operating pension funds in several countries to "pool" assets into a single pension pooling vehicle, which then invests in assets, such as global equities, bonds and cash, on behalf of the investing pension funds. Pooling offers considerable economies of scale, particularly for smaller pension funds, leading to cost savings and enhanced returns. It also provides greater consistency in asset management and enhances control over investment risks. In some cases, the pooled fund can employ the services of asset managers who would not otherwise accept their business.

The CCF is transparent for Irish legal and tax purposes – it is not a separate legal entity. As a result, investors in the CCF are treated as if they own a proportionate share of the underlying investments of the CCF rather than shares or units in an entity that itself owns the underlying investments.

A CCF is currently only available in a UCITS (undertakings for collective investments in transferable securities) type structure, although the Act introduces two major changes:

• The introduction of both a non-UCITS and a UCITS CCF structure, thus expanding the investment base of the CCF so that a wider variety of assets can be considered as part of the asset allocation decision; and
• The elimination of the requirement for CCF investors to be pension funds. The new rule is that the beneficial owner of the CCF investment must not be an individual. This enhancement broadens the investor base significantly because the current UCITS structure is only available to pension fund investors.

The Act introduces amendments that should allow the Irish Revenue to approve pension schemes provided to Irish employees by qualifying and approved pension providers in other EU Member States. Consequently, Irish employers should now have the flexibility to choose between approved Irish and EU-based pension providers with the knowledge that tax relief should be available for associated pension contributions in either context. This should open up competition in the Irish market with regard to pension providers, as well as potentially enabling the use of a single EU pension scheme for employees of both Irish and other EU group companies.

Stamp Duty Rules on Stock Lending and Repurchase Transactions

In addition to the reduction in capital duty to 0.5%, which arises on certain issues of shares, stock borrowing and repurchase transactions concluded within a 12-month timeframe (previously six months) are now exempt from stamp duty.

The Finance Act 2005 provides that certain interest payments, which heretofore only qualified for tax relief as a charge if paid to an Irish bank, will now qualify for relief where paid to a bank in an EU Member State.

The Act also extends the exemption from withholding tax applicable to certain payments to qualifying consortium or 51% group companies that are either tax resident in Ireland or an EU Member State, subject to certain conditions being satisfied. Under pre-Finance Act 2005 rules, both the paying and recipient companies had to be Irish resident to qualify for this exemption. This group relief is wider in a number of respects than the EC Interest and Royalties Directive and, therefore, may further extend the range of withholding tax exemptions available under Irish law.

With effect from 1 July 2005, Ireland will extend the benefits of the EC Interest and Royalties Directive and Parent-Subsidiary Directive (which abolished withholding tax on certain interest, royalty and dividends payments in an EU context) to qualifying interest, royalty and dividend payments made to Swiss companies.

The Finance Act 2005 addresses the Irish tax implications of accounts prepared under IFRS and under existing Irish GAAP that converges with IFRS principles. The objective of the provisions is to make the change from Irish GAAP to IFRS as tax neutral as possible. Extensive provisions detail both the ongoing tax treatment of transactions prepared under the revised accounting principles and the adjustments arising on transition. One issue of note is that recharges by parent companies to subsidiaries for the issue or transfer of shares to employees of the subsidiaries is tax deductible if it does not exceed the amount payable in an arm’s length transaction. This rate is modified for unapproved schemes.

A statement of practice to be issued by the Irish tax authorities later this year will provide further clarification on any relevant tax issues.

IRD Issues Warning on Use of Trading Trusts

In early March 2005, the New Zealand Inland Revenue Department (IRD) issued a warning that professional and other individuals who reduce their taxable income by operating through trading trusts may be subject to review. The practice, known as "income splitting," involves allocating one’s income to other persons to reduce the tax payable. This announcement follows a 2004 Taxation Review Authority (TRA) case, which was decided against a dentist who had restructured his business affairs.

Facts

The case involved a dentist who terminated a partnership agreement with another dentist and restructured his business affairs into a trading trust with a corporate trustee. The dentist became an employee of the trading trust and derived a salary. The salary payable by the trading trust to the dentist represented a portion of his past earnings. The net income derived from the trading trust, after deduction of the salary, was distributed to the beneficiaries of the trust and the money was lent back to the dentist.

According to the tax authorities, the restructuring of the business from a partnership to a trading trust was part of a tax avoidance arrangement that enabled the dentist to draw a salary that was artificially lower than the earnings that would have been derived under the previous partnership structure. The Commissioner argued that the basis for determining the salary of the dentist was incorrect and considered that the appropriate market salary was NZD 159,000 rather than the NZD 80,000 he was actually paid. The Commissioner believed that the taxpayer, in setting a low salary that was considered artificial, was diverting a portion of the income earned from personal exertion to the beneficiaries of the trading trust and not to himself.

The taxpayer argued that the choice of a trading trust was to provide him with flexibility as well as limited liability and protection of his assets. The dentist also asserted that the choice of restructuring as a trust was one permitted by the Income Tax Act 1994 (ITA) and, therefore, was a choice he was allowed to make.

The judge ruled in favor of the tax authorities for one of the two years under review for the following reasons:

• Tax had been avoided as there was an indirect relieving of the tax liability of the dentist by virtue of reduced income derived under the arrangement;
• The effect of tax avoidance was more than incidental as there was a pretense to fix such a low salary from the trading trust where previously the dentist had operated an extremely successful practice; and
• The dental practice was essentially being carried on as it had before with the alteration of the structure being the only significant change.

The warning issued by the IRD is cause for concern for taxpayers contemplating a restructure of their business affairs where their income tax liability is reduced as a result of the restructuring. Based on the facts of the case, what came into question was the reduction of the dentist’s salary. The choice of the trading trust as a structure allowed the payment of a low salary to the dentist, and the residual profits of the trading trust to be distributed to beneficiaries to be taxed at lower marginal tax rates.

In light of the warning, it is anticipated the IRD will compare a person’s income tax liability before and after a restructuring of business affairs. While a reduction in a person’s income tax liability may attract the scrutiny of the IRD, not all changes fall within the scope of tax avoidance. The IRD will typically consider each case on its own merits.

A taxpayer’s decision to structure his business affairs is allowable under the Income Tax Act. The court concluded that the tax avoided, as a result of fixing a low salary, was more than an incidental part of the overall arrangement. While the court’s decision does not mean the IRD will challenge every business restructuring, it highlights the importance of showing that the tax benefits arising are a natural result of the restructure to achieve the commercial drivers that led to the restructure. What will be unacceptable to the IRD is where a taxpayer uses a restructuring to obtain tax advantages to such an extent that the commercial drivers become incidental.

Major Tax Reform Introduced

A package of recently passed tax reforms includes changes to raise revenue, reduce tax avoidance and increase penalties for tax evasion. The government is drafting an Executive Decree to implement the reform measures.

Corporate Income Tax

Tax Rate -- The 2005 reform increases the tax rate for corporations from 28% to 30%. In 2002, the Income Tax Code prescribed a lowering of the then-existing 30% corporate tax rate to 29% in 2005 and 2006, and 28% from 2007. This provision has now been rolled back to the pre-2002 30% tax rate.

Presumptive Taxation -- As of 2006, corporations will have to assess their income tax liability on the higher of the normal 30% rate on net income or 30% over 4.77% of taxable income. The latter method of taxation is equivalent to a presumptive income tax assessment. According to the government, the presumptive method is aimed at eliminating taxpayer abuses of deductible expenses to minimize their tax burdens. Because taxable income is calculated on a gross basis under the presumptive method, it adversely affects corporations with losses or profit margins below 4.77%. To alleviate the burden on such taxpayers, the law allows these taxpayers to request that the presumptive method not be applied. To avoid presumptive taxation, however, the taxpayer will have to prepare its financial statements using IFRS. Corporations defined as "small businesses" are not subject to the presumptive method.

Accrual-Based Accounting -- Accrual-based accounting is mandatory for corporations as from 2006. Exceptions to this general rule will be considered by the Panamanian Revenue Service according to the economic activities of the taxpayer.

Capital Gains -- Capital gains derived from the disposition of shares in a public offering, which previously were exempt from taxation, now are subject to income tax. Capital gains derived from trading on the Panamanian Stock Exchange are still tax free provided the gains are not derived from a public offering.

Individual Income Taxation

Income Splitting -- The reform closes a loophole where salaries were split to reflect a so-called "representation allowance," representing an "expense" for amounts used by an employee to represent the employer. The full amount is now taxable and withheld at source at a rate of 10%. Previously, 25% of this "expense" was recognized as a deduction up to a maximum of USD 6,000 per year.

Presumptive Taxation -- The reform introduces a presumptive method of taxation for individuals, which will apply to all individuals with taxable income exceeding USD 60,000. Under the presumptive method, a rate of 6% is imposed on taxable income. The higher of this amount and the amount payable under the normal tax rate applied to net income will be the amount payable for income tax purposes. Individuals with losses will be particularly affected by the presumptive method of taxation. To alleviate the burden on such taxpayers, the law allows taxpayers in a loss position the option to request that the presumptive regime not apply. The new rules on presumptive taxation enter into force for tax returns filed in 2006, which will correspond to the 2005 fiscal year.

Taxation on Full Income -- Until now, Panama has operated a territorial-based tax system, i.e. individuals were taxed only on Panamanian-source income. Beginning in 2005, individuals resident in Panama for 70% or more of the calendar year will be taxed on their full income where the taxpayer derives income from services performed partly inside and partly outside the country. The 2005 reform does not include provisions to relieve double taxation that arises as a result of the "30-70" rule and Panama has not concluded any tax treaties that would relieve any such double taxation.

Interest payments made to nonresidents are subject to a withholding tax of 15% (the law provides for 50% of the interest to be subject to the normal corporate tax rate of 30%). Previously, the rate was 6% on the full amount of the interest remitted. Dividends remain subject to a 10% withholding tax for nominal shares and 20% for bearer shares. Other payments (e.g. royalties, services payments) to foreign residents may be subject to a 15% withholding tax if the payments benefit a Panamanian resident or if the expense has been deducted in Panama. Previously, only Panamanian-source income paid to nonresidents was subject to withholding tax. Under the reform, withholding applies regardless of where the income is sourced. However, if the payment is made by a taxpayer carrying on activities outside Panama and the payments are in connection with transactions entered into, financed or executed outside the country, no withholding tax is levied.

The penalties for the late filing of tax returns are increased. Taxpayers now are required to attach a sworn declaration to the tax return, stating that (inter alia):

• The taxpayer has not made or received payments (directly or indirectly) without reporting such payments as expenses or income to the Revenue Service;
• The taxpayer has complied with all laws in declaring an expense or income;
• The taxpayer has done due diligence to determine that no payments to foreign residents have benefited a Panamanian resident; and
• Foreign payees are materially and formally different from the local payor, so that no simulation has taken place to lower the taxpayer’s burden.

The statement for corporations must be signed by the company’s legal representative, general manager and the chief financial officer (i.e. the person in charge of financial affairs), and these individuals are jointly liable for the veracity of the statement. A fine equal to five to 10 times the amount evaded will be imposed for false statements, or the signatories may be subject to an imprisonment of two to five years.

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Update on New Corporate Tax Anti-Avoidance Provisions

The U.K. government’s proposals to introduce major new corporate tax anti-avoidance provisions, announced in the 2005 Budget on 16 March 2005 and the Finance Bill published on 24 March 2005, have been interrupted by the calling of a General Election in the U.K. for 5 May 2005.

Provisions to restrict double taxation relief in respect of trading receipts and to restrict double taxation relief where certain anti-avoidance arrangements had been implemented were enacted in a short Finance Act for 2005 passed in April.

The controversial measures to prevent avoidance through arbitrage and many detailed provisions to combat tax avoidance through financing arrangements were not passed, however, because of shortage of time before Parliament was dissolved for the Election. However, the government has committed to re-introduce the provisions immediately if it is re-elected and to apply the measures with the same commencement date as was previously planned (i.e. generally either 16 March 2005 or certain specified earlier dates).

The major opposition parties have indicated they are not opposed to these anti-avoidance provisions in principle, but consider that the measures require detailed consideration by Parliament, so it appears likely that provisions similar to those originally proposed in the 2005 Finance Bill may be enacted during 2005.

In a decision of 8 April 2005, in the case of Wood v. Holden, the High Court reversed the decision of the Special Commissioners that a Netherlands company was resident in the U.K. for tax purposes. The Court indicated that, based on a proper understanding of the law, the only correct conclusion was that the company was resident in the Netherlands.

The Wood case concerned a complex planning arrangement designed to defer the taxation of capital gains potentially arising on the disposal by an individual of shares in a U.K. company. The arrangement involved two offshore trusts, which owned companies established in the British Virgin Islands (BVI) and the Netherlands. The shares to be disposed of were subsequently sold to the Netherlands company, which then sold the shares to the bidder who was seeking to acquire the U.K. company.

Before the transfers of the shares, the Netherlands company had been dormant. Following its acquisition by the BVI company, however, a Dutch trust company, owned by a Dutch bank, became its managing director and undertook responsibility for day-to-day management of the Netherlands company. Five days after the appointment of the Dutch trust company as managing director of the Netherlands company, it acquired the shareholding in the U.K. company, which was the subject of the planning arrangement, from its BVI parent company.

The sole issue under consideration in the appeal to the High Court was the residence of the Netherlands company for U.K. tax purposes.

The planning arrangements had been put in place at the request of an individual who had been the major shareholder of the U.K. company, and who had engaged an accountancy firm in the U.K. to act as corporate finance and tax advisers and who organized all of the arrangements for the share sales and planning. The Special Commissioners concluded that the taxpayers had failed to establish that the Netherlands company was not resident in the U.K. for tax purposes. The Commissioners had noted that the only acts of management and control of the Netherlands company were the making of board resolutions and the signing or execution of documents and these were not sufficient for actual management. The Commissioners considered that effective decisions as to whether or not the resolution should be passed and the documents signed or executed were needed and that the Dutch trust company did not have sufficient information to make these key decisions relating to the company’s business.

In the High Court, Mr. Justice Park referred to the leading case as the House of Lords' decision in De Beers Consolidated Mines Limited v. Howe, for the proposition that a company is resident where its central management and control is located. He further noted that, in normal cases, central management and control is identified by the control of the company’s board of directors and the principle almost always followed is that a company is resident in the jurisdiction where its board of directors meets.

Mr. Justice Park distinguished the subsequent House of Lords decision in Unit Construction Co. Limited v. Bullock, where foreign subsidiaries of a U.K. parent company had been held to be U.K. resident, as a highly exceptional case where the local boards of directors had stood aside altogether and the parent company effectively usurped their functions.

Mr. Justice Park went on to note there was a difference between exercising management and control and being able to influence those who exercise it.

In the absence of recent U.K. court decisions on corporate residence, Mr. Justice Park referred to decisions of the Australian and New Zealand courts, where arguments by the tax authorities that companies established in the Norfolk Islands and the Netherlands Antilles, as part of tax planning arrangements, were resident in Australia or New Zealand by virtue of management and control there, had been rejected.

Mr. Justice Park specifically disagreed with the conclusions of the Special Commissioners. He indicated that the facts showed that the Dutch trust company, in its capacity as managing director of the Netherlands company, made the decisions concerning the purchase and sale of the shares at its offices in Amsterdam and that this meant that the central management and control of the company was in the Netherlands and the company was resident there. The judge further rejected the Special Commissioners’ view that the Dutch trust company had insufficient information on which to make effective decisions. He noted that the Dutch trust company had engaged the U.K. accountants to advise and represent with respect to the negotiations for the sale of the shares so that the critical responsibility to evaluate the terms of the sale rested with the accountants. The evidence showed that the accountants had reported to the Dutch trust company about the negotiations and the Dutch trust company had judged as independently as possible whether the transactions were in the interests of the company and did not damage their own position as directors.

The High Court also disagreed with the Special Commissioners' interpretation of the residence of the Netherlands company for purposes of the U.K.-Netherlands double tax treaty. The Special Commissioners had indicated there was no difference between central management and control and the place of effective management. They further indicated that the place of effective management must be the place where effective management decisions are taken and there was no indication that any effective management decisions were taken in the Netherlands. Mr. Justice Park indicated that the residence article 4(3) of the U.K.-Netherlands treaty requires there to be identified a "place of effective management," and that must be a place situated in one of the two states. He noted that the Special Commissioners had not identified the place situated in the U.K., which was the Netherlands company’s place of effective management. He indicated there was no evidence that the individual decisions, which were necessary, were taken either at the shareholder’s home or offices or the offices of the accountants who were advising on the transaction. Mr. Justice Park concluded that the evidence showed that the place of effective management of the Netherlands company was in Amsterdam, where the Netherlands company had its offices, as were the offices and personnel of its managing director, the Dutch trust company.

The High Court, therefore, concluded that even if the central management and control of the Netherlands company could have been shown to have been in the U.K. because of the degree of influence emanating from the U.K., its place of effective management was in the Netherlands. Accordingly, as the Dutch tax authorities had accepted that the company was resident in the Netherlands for purposes of Dutch tax law, it was a Netherlands resident company for purposes of the U.K.-Netherlands treaty and, therefore, for all purposes of U.K. tax, in accordance with section 249 Finance Act 1994.

The High Court decision is very helpful in clarifying for multinational groups the way in which the residence rules should be interpreted. It is not yet known whether the Inland Revenue will appeal against the High Court decision.

In a decision of 12 April 2005, in the case of Sempra Metals Limited v. CIR and Attorney General, the Court of Appeal confirmed the previous decision of the U.K. High Court as to how compensation payable by the Inland Revenue should be calculated where U.K. subsidiaries of a parent company resident in the European Economic Area (EEA) had paid advance corporation tax (ACT) contrary to EC law. The case concerned the 2001 decision of the European Court of Justice (ECJ) in the case of Metallgesellschaft Limited and others v. CIR, in which the ECJ had held that the requirements for U.K. subsidiaries paying dividends to parent companies resident in the EEA to pay ACT on their dividends was illegal under EC law because the ACT could be avoided by a group income election where the parent company was resident in the U.K. The ECJ had further held that the companies concerned were entitled to restitution or compensation from the Inland Revenue where they had paid ACT contrary to EC law.

The appeal concerned the compensation due in respect of the period from when the ACT was paid by the U.K. subsidiary up to the date on which it was able to utilize the ACT by offset against its corporation tax liabilities. The Court of Appeal confirmed that, to provide the full compensation to restore equal treatment with the position where there was a U.K. parent company, the interest rates for this period should be calculated on a compound basis.

This decision is subject to any further appeal by the Inland Revenue to the House of Lords (the highest court in the U.K.).

Court Allows Direct Foreign Tax Credit for Taxes Paid by Disregarded Parent of Luxembourg Consolidated Group

In a tax refund case, the Court of Federal Claims granted summary judgment for the taxpayer, holding that the U.S. owner of the disregarded Luxembourg parent of a Luxembourg consolidated group was entitled to claim the entire group’s Luxembourg corporate tax liability as a direct foreign tax credit (FTC) under §901 of the U.S. Internal Revenue Code. The court held that only the disregarded Luxembourg parent was liable for the Luxembourg tax and that there was no joint and several liability for the Luxembourg tax among the members of the Luxembourg group.

Facts

Guardian Industries Corporation, the parent of a U.S. consolidated group (Guardian), wholly owned Interguard Holding Corporation, a U.S. corporation (IHC), which wholly owned Guardian Industries Europe, Sarl (GIE), a Luxembourg corporation that was treated as a disregarded entity for U.S. federal income tax purposes. GIE held nine Luxembourg corporations that, together with GIE, comprised a Luxembourg fiscal unitary group (the "Guardian Luxembourg Group") filing a consolidated return for Luxembourg corporate income tax purposes. During 2001, GIE made or accrued advance payments to Luxembourg for 2001 corporate income taxes of the Guardian Luxembourg Group. On its 2001 amended tax return, Guardian claimed a tax refund, asserting that it was entitled to a direct FTC for the 2001 Luxembourg taxes accrued by GIE with respect to the taxable income of the Guardian Luxembourg Group.

Guardian argued that, under the technical taxpayer rule (Reg. §1.901-2(f)(1)), it was entitled to claim an FTC for the Luxembourg tax because it alone was liable for the tax (through its disregarded subsidiary, GIE). The special rule in Reg. §1.901-2(f)(3), which apportions the foreign tax among members of a foreign consolidated group that are jointly and severally liable for the foreign tax, was inapplicable because only GIE was liable for the tax under Luxembourg law. Guardian submitted to the court expert reports finding that Luxembourg law did not impose joint and several liability on the subsidiaries of a Luxembourg fiscal unitary group.

In response, the government argued that it was unclear whether, under Luxembourg law, the group’s tax could be collected from the Luxembourg subsidiaries (although it submitted expert reports suggesting that collection procedures could be made against the subsidiaries in some situations). However, the government claimed, even if there was no formal "joint and several liability" for the Luxembourg tax, the tax was nevertheless "imposed" on the income of the subsidiaries and thus the subsidiaries were "liable" for the tax, regardless of the "collection" remedies available to the Luxembourg tax authorities. Accordingly, the subsidiaries should be treated as the taxpayers of the Luxembourg tax in proportion to their income under Luxembourg law and Guardian should not be entitled to an FTC for the entire Luxembourg tax liability.

Both parties made motions for summary judgment and the court granted summary judgment for Guardian, finding that only GIE was liable for the Luxembourg tax and that there was no joint and several liability. The court characterized the government position as asserting that "each member of the Group becomes jointly and severally liable for the Group’s aggregate tax liability," but found that "[t]here [were] no material facts at issue" and, based on the expert reports, GIE "was solely liable" for the Luxembourg tax. Accordingly, Guardian was entitled to an FTC under Internal Revenue Code §901 for this tax. The court did not discuss the government’s attempt to distinguish "collection" mechanisms from "legal liability."

The court’s holding may be relevant with respect to other foreign consolidation regimes such as those of France, Germany and Mexico, but the court’s limited analysis of the government’s position may somewhat undermine the significance of the decision. It is very possible that the government will appeal to the Court of Appeals for the Federal Circuit. It also is important to note that Treasury is currently working on a guidance project relating to the technical taxpayer rule and foreign consolidation regimes.

On 13 April 2005, Senators Dorgan and Levin introduced a bill designed to prevent the use of offshore tax havens and ensure that U.S. multinationals pay U.S. taxes "they rightfully owe." The bill would treat controlled foreign corporations (CFCs) set up in tax havens as domestic corporations for U.S. tax purposes. The Internal Revenue Code would be amended to include a new provision (§7875), which would treat a foreign corporation as a "tax-haven CFC" if it is organized under the laws of a "tax-haven" country and is, under the rules of subpart F, a CFC for an uninterrupted period of 30 days or more during the taxable year. An exception would be provided if substantially all of the CFC’s income for the taxable year is derived from the active conduct of a trade or business within the tax-haven country.

The bill also would include a "blacklist" of tax haven countries that would be subject to the new rule. Among the 40 or so listed countries are the Bahamas, Barbados, Bermuda, Cayman Islands, Mauritius, Netherlands Antilles and Panama. The bill would authorize Treasury to add or remove countries from the list to the extent such action is consistent with the purpose of the provision. As proposed, the bill would apply to taxable years beginning after 31 December 2007.

On 13 April 2005, the Internal Revenue Service announced that the competent authorities of the U.S. and U.K. reached an agreement to treat certain U.K. pension or other retirement arrangements as "pension schemes" for purposes of exempting from U.S. withholding taxes dividend payments received by such entities. At issue was the eligibility of U.K. occupational pension arrangements, which generally are established through separate trust deeds and frequently pool investments. Under the agreement between the competent authorities, the following U.K. arrangements are "pension schemes" for purposes of meeting the dividends article (10(3)(b)) of the 2001 U.S.-U.K. tax treaty:

• A U.K. resident unit trust if (i) the trust deed specifically allows only participant pension schemes that are not subject to the U.K. capital gains or corporation tax, and (ii) taxes paid by the trustee are deemed paid by the unit-holder such that the tax is refunded to the pension schemes;
• Subject to more detailed requirements than the resident unit trust, above, a fund, plan or arrangement funded by insurance premiums from occupational or individual schemes.

The arrangements must continue to satisfy the conditions of article 23(2)(e) (requiring more than 50% of the scheme’s beneficiaries to be individuals who are residents of the U.S. or U.K.). The agreement is effective as of 1 May 2003.

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