The IMF, OECD, UN, and World Bank Group, through a joint initiative known as the “Platform for Collaboration on Tax,” has released a draft toolkit discussing proposed approaches for countries to adopt to address tax avoidance through offshore indirect transfers of assets.
An offshore indirect transfer of assets occurs when there is a sale of a corporation or other entity that owns an asset located in one country to a resident of another country. Since the sale is structured as the sale of stock or other rights in an entity, not of the asset itself, the owner of the asset can avoid tax on capital gains inherent in the asset at the time of the sale.
The new draft document, titled “The Taxation of Offshore Indirect Transfers – A Toolkit,” concludes that when there is an indirect transfer of immovable assets there strong case for allocating taxing rights with respect to capital gains associated with the transfer to the country in which the asset is located regardless of whether the transferor is resident there or has a taxable presence there.
Moreover, the document suggests that countries should consider adopting a broad category of immovable property subject to taxation, including gains arising in relation to location specific rents clearly linked to national assets, such as from licenses to exploit public goods.
Examples of such property would include electric, gas, or other utilities and telecommunications and broadcast spectrum and networks, the toolkit asserts.
Moreover, document suggests countries consider going even further, extending the definition of immovable property subject to taxation to rights to receive variable or fixed payments in relation to extractive industry rights or government issued rights with an exclusive quality.
The toolkit also presents countries with two different options for a domestic tax law framework to tax indirect transfers along with suggested enforcement and collection mechanisms.
One method involves taxing the local resident asset-owning entity under a deemed disposal model where gain is triggered when there is a sufficient change in the ownership of the entity.
The second method seeks to tax the non-resident seller on the grounds that the transfer gives rise to gain with a local source in the country where the asset is located. Such rules may be augmented with a taxable asset rule, the toolkit says.
Tax planning using indirect transfers has been identified as a cause for concern by many countries, particularly developing nations where extraction industries operate. This issue was not addressed in the 2015 OECD/G20 base erosion profit shifting (BEPS) plan.
The Platform for Collaboration on Tax seeks comments on the draft by September 25. Answers to the following questions are specifically requested:
- Does this draft toolkit effectively address the rationale(s) for taxing offshore indirect transfers of assets?
- Does it lay out a clear principle for taxing offshore indirect transfers of assets?
- Is the definition of an offshore indirect transfer of assets satisfactory?
- Is the discussion regarding source and residence taxation in this context balanced and robustly argued?
- Is the suggested possible expansion of the definition of immovable property for the purposes of the taxation of offshore indirect transfers reasonable?
- Is the concept of location-specific rents helpful in addressing these issues? If so, how is it best formulated in practical terms?
- Are there other implementation approaches that should be considered?
- Is the draft toolkit’s preference for the ‘deemed disposal’ method appropriate?
- Are the complexities in the taxation of these international transactions adequately represented?
Comments other issues are also welcome.