Are International Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules? A Technical and a Political History Approach for a Normative Result
23 Pages Posted: 8 Aug 2018
Date Written: July 11, 2018
It is difficult to answer the question of whether Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules, because there is no explicit mention of CFC rules in the text of tax treaties. It is especially difficult with the OECD Model Tax Convention on Income and on Capital treats corporate entities as separate taxpayers for purposes of applying domestic tax laws and tax treaties. Indeed, there is no tax court with international jurisdiction to solve these issues-so it is important to look at the decisions from various domestic Supreme Courts. The ECJ tries not to answer issues of tax treaties between countries. The crux of this main contention seems to be that CFC rules result in attributing CFC profits to controlling shareholders in the country of corporate residency-the shareholders out of parent subsidiary, that is-even though such profits were never distributed by the subsidiary the CFC. This fundamentally contradicts the basic structure of the OECD model because there were never profits distributed cross-border and there was no application of Article 7 of the treaty or withholding taxes. Indeed, the only cognizable time when this problem could arise is when there is actual base erosion and profit shifting that would trigger use of the CFC rules by a tax administration.
Keywords: CFC, International Tax Treaties, International Law, Article 7, OECD, Business Profits
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