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Total Number of Subscribers: 1626 |
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Date: 26th Aril 2May 20010 |
Compiled by: M Sathya Kumar |
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Despite the
historical existence of ‘beneficial ownership', very little
jurisprudence is available on the meaning of the term. The concept of ownership is of both legal and social
interest. The meaning of the term is seen as an instrument of
judicial policy that has assumed political significance. Historically,
Salmond noted that “ownership in its most comprehensive signification denotes
the relation between a person and any right that is vested in him. That which
a man owns in this sense is in all cases a right.” Therefore,
analytically ownership is said to consist of bundle of claims, liberties
powers and immunities. Modern developments in the context of severance of
control from ownership signify that now it is the person's position and role
that determines the relation with things and not vice versa as it used be. Tax systems, in the light of severance of the concept of
control and ownership, have pronounced a new order by qualifying the term
“ownership”, and requiring it to be “beneficial” in
nature. The reference to the concept of beneficial ownership was
incorporated in various significant articles in the Organization for Economic
Co-operation and Development (OECD) Model Tax Convention on Income and
Capital in 1977 without providing an unequivocal meaning thereof. Reference to beneficial ownership is found in the
Commentary on Articles 10, 11 and 12 of the OECD Model. Further, it is
provided in Articles 10 to 12 of the OECD Model that the limitation of tax in
the State of source on dividends, interest and royalties would be denied if
the conduit company is not its “beneficial owner”, which can be said
to be the defining moment giving universality to the term “beneficial
ownership” in international tax. However, this was not really the first appearance of the
term “beneficial ownership” in the arena of international tax.
The term draws background from various treaties on inheritance tax; to
exemplify; Article III of the 1945 UK/US treaty on the estates of deceased
persons refers to “shares or stock held by a nominee where the
beneficial ownership is evidenced by scrip certificates or otherwise”. However, no further guidance has been provided to the
term. Prior to 1977, the use of the term was also found when
in the supplementary protocol in 1966 in the US/UK treaty when the term
“subject to tax” requirement in dividends, interest and royalty
articles was substituted. Amongst myriad illustrations, other examples of the use
of beneficial ownership in pre-1977 treaties include the 1968 UK/Netherlands,
the 1969 Australia/Japan, the 1975 UK/Spain and the 1968 Ireland/France
treaties, and the 1968 protocol amending the 1947 UK/Antigua treaty. Despite its historical existence and the important role
of beneficial ownership, being incorporated in the significant articles of
the OECD Model as stated above, very little jurisprudence is available on the
meaning of the term “beneficial ownership”. International practices Though there is little legislative or administrative
guidance on the concept, there has been significant development on the
interpretation of the term by the judicial forums and authorities worldwide. The concept of “beneficial ownership” is not
new for the domestic tax laws in many overseas jurisdictions. The French General Tax Code has included the term in two
provisions involving anti-abuse directions. Moreover, various EC directives
have included beneficial ownership condition in relation to interest,
royalties and dividends. The term also finds its relevance in the various tax
treaties of numerous countries when dealing with dividends, interests,
royalties and other income clauses. However, the term has not been
exhaustively defined anywhere in the statute books, leaving the heinous task
at the behest of the judiciary. The recent interpretations to the term have demonstrated
the meaning and helped understand the true nature of the term. The Indonesian
Tax Court in the P. T.Transportasi Gas Indonesia vs Direktur Jenderal Pajak
case has observed that to determine the beneficial ownership of certain
income, the facts of the case should be examined so as to determine if the
person could freely enjoy such income and if the country of residence had
taxed such income. Furthermore, in the celebrated case of Prevost Car, the
court concluded that the `beneficial owner' of dividends is the person who
receives the dividends for his/her own use and enjoyment and assumes the risk
and control of the dividend he or she received. Further, the Indonesian Directorate General of Taxation
issued two key regulations dated November 5, 2009, laying down the conditions
for income recipients to enjoy the treaty benefits include that the company
is not established in the jurisdiction of the relevant treaty's counterparty
merely to obtain the treaty benefits, and the transaction itself is not
structured solely to take advantage of the treaty benefits. Therefore, the recent evolution in this regard reveals
that the approach taken for determination of the meaning of the term
"beneficial ownership" is based on the substance over form doctrine
allowing the authorities to examine the transaction despite the legal
situation created by the parties. Furthermore, countries such as Vietnam are seeking to
disregard the legal entity set up for determination of the euphemistically
known practice "abusive transfers" and impose the corporations
income-tax on such transfers, thereby giving the term "beneficial
ownership" a new dimension to explore. Also, over recent months, the authorities in various
jurisdictions have brought in several significant circulars and regulations
introducing additional prerequisites for persons seeking to claim tax treaty
benefits. The significant developments in this regard in China are
as under: Guoshuihan (2009 No. 601 "Circular 601 ") deals with the
requirement in tax treaties that the recipient of interest, dividends and
royalties sourced in People's Republic of China should have "beneficial
ownership" over the income in order to qualify for any protection under
the treaty. The circular, inter alia, requires that a beneficial
owner must have substantive operating activities and should not be an agent
or a "conduit". The Circular further identifies the various
"adverse factors" which may be reviewed by the tax authorities to
conclude that a recipient of income should not qualify as the beneficial
owner. Guoshuihan (2009 No. 698 "Circular 698") deals
with "indirect offshore share disposals" undertaken by investors.
Such disposals may be required to be disclosed to the tax authorities and may
potentially be subject to taxation in the country where they are considered
to be motivated by tax-avoidance purposes. Therefore, it can be seen that the recent judicial and
legislative mandate worldwide is hovering around taxation of transactions
disregarding the legal standing of the parties and determination of the true
nature and the beneficial owner of the income at hand. Article by Amarchand & Mangaldas & Suresh A. Shroff & Co, reputed chartered accountant specializing in the field of taxation. Article
by Sarah Johnson, article was earlier published in one of the reputed
website. |
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