Wednesday, May 27, 2015


Treasury Proposes Significant Changes to U.S. Model Tax Treaty

May 26, 2015
On May 20, 2015, the Treasury Department released five proposed changes to the U.S. Model Income Tax Treaty (the U.S. Model). The changes represent part of an extensive and ongoing overhaul of this document, which was last updated in 2006. According to Treasury officials, the proposed revisions are intended to ameliorate the problem of so-called "stateless income" and to influence the work of the Organization for Economic Cooperation and Development's Base Erosion and Profit Shifting Project, which is soon due to release its final report on tax treaty abuse.
The proposals were introduced at a May 20 meeting of the District of Columbia Bar's Taxation Section. Danielle Rolfes, Treasury's International Tax Counsel, remarked at the meeting that "when we take a step back and look at our tax treaties, [they are], in fact, facilitating double nontaxation." Rolfes indicated that Treasury had considered and ultimately rejected the possibility of addressing this problem through a general anti-abuse rule, but opted instead for a targeted approach. The release of these provisions, which are discussed below, differs from past revisions of the U.S. Model in two ways. First, the changes have been released as drafts, with Treasury seeking public comment on the new rules. Second, past releases have been of the entire U.S. Model as opposed to this piecemeal approach. Treasury has indicated its intention to release the completely revised U.S. Model by the end of the year, but apparently does not intend to issue any other proposed changes in draft form. It would be easier to assess the overall impact of the proposed changes in the context of the entire revised U.S. Model.
1.  Exempt Permanent Establishments
A typical tax avoidance strategy involves a treaty-eligible foreign company setting up a Permanent Establishment (PE) in a third country that imposes little or no tax on the PE's income. This strategy also requires that the company's country of residence refrain from taxing the income earned by the PE, which may result from either an exemption provision in the residence country's domestic law or a tax treaty between that country and the third country. If the PE earns U.S. source income that is subject to little or no U.S. tax under the treaty between the U.S. and the residence country, and that income is also subject to little or no tax in both the residence country and the third country, "double [or, indeed, triple] nontaxation" will have been achieved because the income would be subject to low or zero taxation by the country of source, the country of residence, and the jurisdiction in which the PE is located. The PE need not be located in a third country; the strategy can work equally well if the PE is located in the country of source. For example, a Luxembourg PE located in the United States that is not engaging in a U.S. trade or business will be subject neither to Luxembourg tax (because of its statutory exemption system) nor to U.S. tax (because there is no U.S. trade or business).
A proposed paragraph 7 of Article 1 is intended to stymie this scheme. The paragraph states that when: (1) a resident derives income from the other state; and (2)the residence state's domestic law attributes that income to a PE located outside the company's country of residence, then the treaty benefits that would ordinarily apply are inapplicable if: (a) the PE's profits are subject to a combined, aggregate, effective tax rate of less than 60% of the generally-applicable corporate tax rate in the residence state, or (b) the state in which the PE is situated does not have a comprehensive income tax treaty with the residence state (unless the residence state includes the PE's income in its tax base, in which case this prong does not apply).
2.  Expatriated Entities
These revisions are targeted at so-called corporate inversions and the earnings-stripping transactions that often accompany them. The new draft paragraphs, which are to be inserted into Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 21 (Other Income), provide that the United States reserves the right to tax income paid by any "expatriated entity" in accordance with its domestic law for a period of up to ten years following expatriation, notwithstanding treaty provisions reducing or eliminating source-based withholding on such income.
The draft Technical Explanation of the provision defines "expatriated entity" by reference to Internal Revenue Code section 7874(a)(2)(A). Very generally, that section states that where a domestic entity has been acquired by a foreign parent and there is significant continuity of ownership between the domestic entity's former shareholders and the foreign entity's new shareholders, the domestic entity is an "expatriated entity."
3.  Special Tax Regimes
These draft paragraphs generally provide that if interest, royalties, or "other income": (1) is paid between related parties; and (2) the recipient is "subject to a special tax regime" in its country of residence with respect to that item of income, then the source country may tax the category of income in accordance with its domestic law notwithstanding the treaty.
The phrase "special tax regime" is not defined in any detail in the draft paragraphs themselves; proposed paragraph (l) of Article 3 states cursorily that it "means any legislation, regulation, or administrative practice that provides a preferential effective rate of taxation" on the relevant item of income. The paragraph fleshes out the definition by providing a list of provisions that would not qualify as "special tax regimes." Those include charitable exemptions, preferences relating to retirement and pension administration, and preferential rates on royalties that entail a "substantial activity" requirement, among others.
According to Treasury, no current U.S. legislation, regulations, or administrative practices that apply with respect to interest, royalty, or other income satisfy the definition of a "special tax regime." At the May 20 meeting, Rolfes stated that Treasury would likely refrain from defining "special tax regime" with any greater specificity, explaining that the Department would not be able to "put [its] finger on, at the time of negotiation, all of the ways that a country might give preferences."
4.  Limitation on Benefits Article
The Limitation on Benefits (LOB) article has also been substantially revised. Probably the most noteworthy change is the addition of an "equivalent beneficiary" test. Under this test, a company is treaty-eligible if it is at least 95% owned by seven or fewer "equivalent beneficiaries" and if it satisfies a base erosion test.
The definition of "equivalent beneficiary" comprises two elements. First, the owner must be entitled to all the benefits of a comprehensive double-tax treaty with the United States (if benefits are being claimed against U.S. tax) or the other treaty country (if benefits are being claimed against the other country); for purposes of gauging an entity's entitlement to treaty benefits, an LOB clause is imputed to treaties that currently lack one. Second, in the case of passive income (interest, royalties, and dividends), that same double-tax treaty must entitle the owner to a maximum withholding rate on the relevant category of income that is "at least as low" as the rate specified in the U.S. Model. Finally, with respect to income governed by Articles 7 (Business Profits), 13 (Gains), or 21 (Other Income), the owner must be entitled to benefits under its treaty that are "at least as favorable" as the benefits granted under the U.S. Model.
In the case of putative equivalent beneficiaries who own companies indirectly, all intermediate owners must be "qualified." The definition of "qualified intermediate owner" is similar to, yet slightly more permissive, than the equivalent beneficiary test.
Other significant changes to the LOB Article include: (1) adding a "base erosion" requirement for a company to qualify for benefits by virtue of its status as a subsidiary of a publicly-traded company; (2) applying the base erosion test to the company's consolidated group; (3) imposing a "special tax regime" exception to the acceptable payments rule under the base erosion test; and (4) changing the definition of "gross income" under the base erosion test so as to exclude exempt dividend income.
5.  Subsequent Changes in Law
This new draft Article provides that certain changes to the domestic law of either treaty country will cause some of the provisions of the Treaty to be inoperative. Paragraphs 1 and 2 of the Article state that if the highest marginal rate of taxation for individuals or business entities falls below 15 percent in either treaty country, or if either country elects to exempt individual or corporate foreign-source income from taxation, then Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 21 (Other income) will no longer be effective for individuals or companies, as the case may be.
The Technical Explanation provides that the "special tax regime" provision (detailed in (3), above) is intended to apply in cases of specific exemptions or preferences, but that this Article is applicable to broader exemptions or rate reductions.
Rolfes stated at the May 20 meeting that the provision is "less nuclear than terminating a tax treaty [altogether]" but that it would still lead to serious consequences if either treaty partner were to aggressively lower its domestic tax rates in an effort to attract mobile income.
Since the U.S. Model typically represents the United States' opening position in treaty negotiations, these new provisions will likely have a significant impact on the content of U.S. tax treaties going forward. Multinational businesses need to be aware that tax structures that work under current treaties could be rendered obsolete or ineffective as these rules are incorporated into the U.S. treaty network. 
For more information concerning this Alert, please contact a member of Caplin & Drysdale's International Tax/Transfer Pricing Group.

NELSON DENIS : How the United States Economically and Politically Strangled Puerto Rico

Book Describes The Beginnings of the CFC Regime
This issue was emphasized and  highlighted by Attorney Luis Costas Elena in his Harvard Thesis many decades ago. Is has become our biggest obstacle in our quest for equal rights. 

Fighting this Corporate monster has brought upon me the wrath and criticism of  many, including statehood leaders in Puerto Rico
Now,  finally, my long time claims of who obstruct Statehood for Puerto Rico, and of who RULE Puerto Rico's Government, and  who RULE the political and media spectrum which deal with Puerto Rico's issues, are seeing the light.
Nelson Denis is right on target when he goes back to the beginning of the 20th century regarding Puerto Rico's use as a Tax Haven for Corporations, who over a century later are to blame for Puerto Rico's desperate economic situation  and our constitutional and status limbo. 
Puerto Rico does not have self government... Puerto Rico is ruled by the CFC Regime who "rule and own" our peoples' lives,  order and select our political leaders and rule our political parties. 
We are now at a crucial moment. The US Congress is revising the Tax Reform Act and the CFC REGIME are using their enormous resources and lobbyists to sustain their use of Puerto Rico as an Offshore Tax Haven in detriment of Puerto Rico, Puerto Ricans and the US Tax Payers.
The message is : Puerto Rico must not be Coded in Section 933 of  the IRS as a Foreign Country. It is used for the US Trillion Dollar IRS tax evasion scam by the CFC's.(Controlled Foreign Corporations)
How the United States Economically and Politically Strangled Puerto Rico
Sunday, 24 May 2015 By Mark KarlinTruthout | Interview
The following is an interview with Nelson A. Denis, the author of War Against All Puerto Ricans: Revolution and Terror in America's Colony.
(Photo: Mike Fitelson)
Nelson Denis by Mike Fitelson
Nelson A. Denis: In 1897, Spain granted Puerto Rico a Carta de Autonomia (Charter of Autonomy), which gave the island the right to its own legislature, constitution, tariffs, monetary system, treasury, judiciary, shipping industry, international trading rights and coastal control. All of this was rescinded when the US assumed "ownership" of Puerto Rico as an unincorporated territory (ie, a possession) of the US, pursuant to the Treaty of Paris.
Since then, and continuing to this day, the US has denied all of the sovereign elements of the 1897 Carta de Autonomia. It lied to Puerto Ricans with respect to their de facto membership in American society: declaring them US citizens in 1917, then ruling that the US Constitution "did not apply" to Puerto Rico (Balzac v. Porto Rico, 1922) and, as such, the privileges and immunities of the US Constitution "did not exist" on the island, as an unincorporated territory.In the middle of page 58 of War Against All Puerto Ricans (Chapter 8) I identify Charles Herbert Allen, the very first US civilian governor of Puerto Rico, as the Green Pope. .......... more
If you read [John] Perkins' Confessions of an Economic Hit Man, you will recognize the type. Charles Herbert Allen was the first US economic hit man to run amok in Puerto Rico. His first and only "Governor's Report to the US President" was a naked, undisguised plan for economic exploitation of the entire island of Puerto Rico. 
Pages 57-58 contain Allen's specific language in this report: 
"Porto Rico is really the 'rich gate' to future wealth ... the yield of sugar per acre is greater than in any other country in the world ... the cost of sugar production is $10 per ton cheaper than in Java, $11 cheaper than in Hawaii, $12 cheaper than in Cuba, $17 cheaper than in Egypt, $19 cheaper than in the British West Indies, and $47 cheaper than in Louisiana and Texas."
(Additional racist and abusive language by Allen appears on pages 57-58.)
Within weeks of handing in this report Allen resigned his governorship, scurried up to Wall Street, and became a vice president of Morgan Guaranty Trust. He built the largest sugar syndicate in the world, and his hundreds of political appointees in Puerto Rico provided him with land grants, tax subsidies, water rights, railroad easements, foreclosure sales and favorable tariffs.
By 1907 Allen's syndicate, the American Sugar Refining Company, owned or controlled 98 percent of the sugar-processing capacity in the US and was known as the sugar trust. By 1910, Allen was treasurer of the American Sugar Refining Company, by 1913 he was its president and by 1915 he sat on its board of directors. Today his company is known as Domino Sugar.
By 1934, every sugar cane farm in Puerto Rico belonged to 1 of 41 syndicates, 80 percent of which were US owned. The four largest syndicates were entirely US owned and covered over half the island's arable land. These banks also owned the insular postal system, the entire coastal railroad, and San Juan's international seaport. As of 1950, the Pentagon controlled another 13 percent of the island. 
KARLIN: In your epilogue, you describe the economic conditions in Puerto Rico in 2015 as wretched in comparison to states on the mainland.  Yet, it is only infrequently that you read about conditions on the island in the US corporate mainstream press. Why do you think that is the case?
DENIS: I disagree. There are many recent articles in US corporate mainstream press about the Puerto Rican economy. Predictably, and often explicitly, they offer a common theme: that Puerto Ricans are incapable of managing their own affairs, and a US "intervention" will be required to straighten the mess out.
Most recently this "intervention" has taken the form of Act 22, which provides high-net-worth US investors with a 20-year tax exemption on all capital gains, interest and dividend income derived from their investments in the island. The prime beneficiaries of this tax giveaway are US billionaires such as John Paulson, who made $15 billion for his hedge fund by betting against the American economy and against the American homeowner, during the 2007 mortgage crisis.
Paulson is now leading the charge into Puerto Rico, buying up "distressed assets" all over the island, and leading a $500 million resort and condominium development in Dorado Beach.
Puerto Ricans are being subjected to gasoline tax hikes (two in the past year), skyrocketing water and electrical costs, a looming 11.5 percent sales tax (aka IVU), pension rollbacks, worker layoffs, water rationing, student tuition hikes, and small business tax hikes - in order to meet the interest payments (not even the capital payments - just the interest) on the $73 billion of public debt.
But Paulson and friends are receiving corporate welfare and tax havens of the highest order. The US business press are the carnival barkers for this economic freak show that is developing in Puerto Rico. They are extremely bullish on Puerto Rico tax-sheltered investments.
Given the corporate ownership of 90 percent of all US media, I would not be surprised if there were a high level of cross-ownership, undisclosed investments, and advertiser involvement behind many of these "authoritative" and "objective" pieces on Puerto Rico tax shelter opportunities for the superrich.
Here is an article I wrote on the subject, which contains multiple references (and links) to some of that business press - particularly near the end of the article: The History of Taxes in Puerto Rico
You may read the full article here: How the United States Economically and Politically Strangled Puerto Rico

Nelson Denis' book may be bought at TRUTHOUT

Tuesday, May 26, 2015

Liquid Plutonium destined for your kid's Capt. Crunch, courtesy of NAFTA/TPP/ISDS?

Liquid Plutonium destined for your kid's Capt. Crunch, courtesy of NAFTA/TPP/ISDS?

By Jeanine Molloff (about the author)
May 23, 2015

"It wouldn't matter if a substance was liquid plutonium destined for a child's breakfast cereal. 
If the government bans a product and a US based company loses profits, the company can claim damages under NAFTA." 
(Source: n7287622.html )

This bone chilling response came from a corporate attorney working for the Ethyl Corporation, during a 1997 NAFTA challenge against the Canadian government. Canada had outlawed the gasoline additive MMT over possible health concerns. Ethyl was the U.S. corporation that produced the gasoline additive MMT which had been banned in Canada. Ethyl corporation brought its objections to the international arbitration panel under the Investor-State Dispute Settlement system, aka ISDS; to claim damages for lost profits, under NAFTA. Ethyl argued that the law banning this additive was ...'tantamount to expropriation.' 

Under NAFTA--Ethyl won and consumers lost. The Canadian government had to transfer 13 million from taxpayers-- to Ethyl. The Canadian people's right to self-govern was nullified by this corporate pseudo-legal theft. Concerns over possible health damage or even the right of self-governance were sacrificed to the gods of corporate profits. Subsequently the callous arrogance of the 'liquid plutonium in Junior's Captain Crunch' commentary, merely matched the arrogance of this new class of 'corporate royalists'--namely the arbitrators of the Investor-State Dispute Settlement industry, aka--ISDS.
ISDS--the core weapon of mass destruction in BIT's/MIT's/IIT's, including TPP/TTIP...

The Investor-State Dispute Settlement contrivance (or ISDS), is the political 'wet-dream' of the 'judicial-industrial complex.' A Goliath by legal standards; ISDS is the extra-judicial glue which holds together a new, more lethal form of corporate feudalism. Corporations and corporate legal firms win, and the rest of us lose, as armies of 'arbitration' attorneys and appointed arbitrators create 'get out of jail free' cards for corporate criminals--wholesale.

What is ISDS?
ISDS or international investor arbitration is an alleged mediation tool between party signatories of any IIT. It was created by the granddaddy of all IIT's--namely NAFTA, under Bill Clinton. Chapter 11 of NAFTA empowers ISDS as the instrument to provide foreign investors standing for ..."legal certainty." (Source : ) Foreign investors, (read foreign corporations), demanded an end-run around the legitimate 'rule of law', in what they perceived as unstable nations. Apparently, democracies are considered 'unstable.'

These foreign corporations weren't satisfied with the gamble involved in any business investment--they demanded a 'stacked deck.' Thus, the semantic device dubbed 'legal certainty' was born, and with it--the international arbitration tribunal. No rights exist in these arbitrations tribunals, unless the tribunal says so--period. ISDS was devised to provide legal cover for massive corporate theft via the use of secretive arbitration tribunals--aka the 'legal mafia.' 

ISDS thus became--the bastard child of NAFTA.
How ISDS works...
Three corporate attorneys are appointed to serve as de facto, judge, jury and executioner, in a one-sided lawsuit, of any unfortunate nation daring to challenge corporate rule, through actual self-government as an independent state. Under ISDS, international corporations have been granted unlimited rights to sue any government over alleged profits loss, whether real or imagined. Corporations may also sue for any argued future profits loss. Corporations have the power to claim unlimited monetary damages, and taxpayers foot the bill.

The arbitrators themselves are unelected and unknown to the general public. All proceedings of the 'arbitration' are secret. No right of appeal exists for any nation-state. Payment arrangements to the arbitrators are also withheld from the public.

Any area of law is subject to the ISDS panel. The most recent IIT, namely the US Trans-Pacific Pact or TPP has been the subject of intense fighting between President Obama and his corporate allies and the political far left over the surrender of national sovereignty to the arbitration lawyers.

Leaked draft texts of the TPP describe 'investor protections' which further incentivize increased offshoring of jobs with undisclosed 'benefits.' Regulation of finance capital, such as banning derivatives, currency manipulation and other .."financial weapons of mass destruction" would be prohibited. U.S. Property rights to public natural resources are struck down in favor of vaguely worded 'international standards,' which would be determined by the unelected international tribunal in secret deliberations, never meant to see the light of day.

Monday, May 25, 2015



Aggressive Transfer Pricing. Microsoft Corporation has used aggressive transfer pricing transactions to shift its intellectual property, a mobile asset, to subsidiaries in Puerto Rico, Ireland, and Singapore, which are low or no tax jurisdictions, in part to avoid or reduce its U.S. taxes on the profits generated by assets sold by its offshore entities.

Offshoring Profits. From 2009 to 2011, by transferring certain rights to its intellectual property to a Puerto Rican subsidiary, Microsoft was able to shift offshore nearly $21 billion, or almost half of its U.S. retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the United States, or just over $4 million in U.S. taxes each day.

Beginning in the 1990s, Microsoft began establishing a complex web of interrelated
foreign entities to facilitate international sales and reduce U.S. and foreign tax. Microsoft established three regional operating centers in low tax jurisdictions, first in Ireland, then Singapore and Puerto Rico.

Most of Microsoft’s revenues are attributable to its high-value intellectual
property, including patents and copyrights related to Microsoft Windows and Microsoft Office.

In order to transfer intellectual property rights from the U.S. group to foreign subsidiaries, Microsoft and the regional operating centers engage in a worldwide cost sharing agreement.

As part of this cost sharing agreement, Microsoft pools its worldwide research and
development expenses, which totaled $9.1 billion in FY2011. The participating entities each pay a portion of the research and development cost based on the entity’s portion of global revenues.

Microsoft’s Puerto Rico operating center contributes 25% of the research and development costs,In exchange for its contributions, Microsoft Puerto Rico obtains the right to sell retail products in the United States and the rest of North and South America. 

Microsoft PR makes digital and physical copies of the Microsoft products and sells them back to several Microsoft subsidiaries located in the United States, and those subsidiaries then sell the products to American consumers.

Through this process, Microsoft is able to greatly reduce its U.S. tax bill. Microsoft shifts about 47% of the gross revenues from U.S. sales to its operations in Puerto Rico, which is not subject to U.S. tax laws and the PR government instead levies a tax of just 1-2% on Microsoft.
In 2011, Microsoft PR paid Microsoft U.S. $1.9 billion as part of MOPR’s cost sharing obligations. MOPR then reported $4 billion in profits in 2011, which was taxed at 1.02%.

The 177 employees of the Puerto Rico entity, therefore, earned MOPR about $22.5 million per person. At the same time, MOPR employees made an average salary of $44,000 a year, commensurate with the skills they contributed rather than with the accumulated profits being stockpiled in what served as a low tax jurisdiction for Microsoft.

By routing its manufacturing through a tiny factory in Puerto Rico, Microsoft saved over $4.5 billion in taxes on goods sold in the United States during the three years surveyed by the Subcommittee.