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Have you ever went into a Shopping Mall before? Did you notice that every shop you're free to walk-in...

Perhaps, some retails offer you good prices, discounts, gifts or a SUPER sale that capture your buying/purchase interest where you'll pay "less" or get a "refund" on your next visit.

Who don't like free items or discounts! In fact, human beings tendency strive for no/less cash outflow and high cash inflow (not everyone? Maybe I'm mistaken).

That being said, did you know that there is a similar type of "Shopping" act that businesses (companies and other bodies) may do in cross-border trade? Yes, it exist and can be very rewarding. "Treaty-Shopping" exists where a business can walk within certain tax sidewalks (let's call it by name Double Tax Agreement 'DTA'), and enjoy unlimited access to benefits.

A one major difference between the two above examples (Mall vs Treaty) is, the term "Treaty Shopping" in cross-border trade and tax regulations is meant to be showing the negative/dark side of 'shopping', while we at the shopping mall(s) not that bad, I hope so - better prices are great for everyone.

Anyway, let's talk some business now.

• Every business would need that type of 'shopping' right? e.g. free gifts, offers or cash which can lead to better prices, higher margins and shareholder returns
• Who don't want a better P&L shape either a privately held or a publicly traded investment, end of day companies strive for cash & profits.
• How about a $38M cash flows back into your wallet? Well, a business can claim back/benefit as much as it can be.

Let's now look at one business case - which is not over yet as we write this article. It can show us the power of a DTA and the benefit you can get or could be denied access to - it depends on facts and circumstances.

This case for illustrative purpose only.

Our example here is referring to Starr International Co. one of AIG major shareholders (insurance industry), who have been restructuring its HQ during the period from 1943 till 2006 as a final destination to Switzerland.

I quote:

"Starr Int'l Co. v. United States, 910 F.3d 527, 531 (D.C. Cir. 2018)"

Starr, a parent company to a number of international financial and insurance businesses, was once the largest shareholder of American International Group, Inc. ("AIG"). Starr continued to hold significant investments in AIG common stock, its principal asset, at all times relevant to this case. In 2004, Starr relocated to Ireland from Bermuda, where it had long resided. In Ireland, Starr paid a reduced rate of withholding tax on dividends under a bilateral income tax treaty between the United States and Ireland. In 2006, Starr established itself in Switzerland and subsequently sought to reduce its dividend tax rate by obtaining benefits under the U.S.-Swiss Treaty. Because Starr did not automatically qualify for benefits under the mechanical tests of Article 22, it requested discretionary relief under paragraph 6."

It is also worth to mention that Starr Int'l Co, was owned by Charitable Swiss foundation and other U.S individuals and before Bermuda it was based in Panama - just for your information.

In the above case, the company "Starr" filed a claim requesting $38M refund for a reduced tax rate according to the Double Tax Agreement "DTA" between the U.S and the Swiss counterparty where they should/would enjoy less taxes on cross-border dividends paid out during tax year 2007.

The U.S Internal Revenue Service "IRS" took some action towards that claim coming to conclusions below stated, on the other front, Starr company moved it to the court in order to recover those cash/extra taxes that it alleges were wrongly withheld.

Two major Starr arguments before the court were;

• First, the U.S IRS did abuse its 'power' against the right of the Starr company to enjoy DTA benefits [discretionary relief] and
• Second, IRS didn't "talk" (or consult) with its counterparty Switzerland competent authority before attempting to "deny" the treaty benefits [there is a channel of administrative procedures before an authority deny a treaty benefit among treaty partners for a DTA].

One key highlight from IRS arguments was:-

• IRS was trying to bring on the table that it was not feeling ok towards the multiple restructuring of the Starr company backlog, and directed the rationale/reasons of such restructurings to the point where the primary reason for doing so, is to get a treaty-benefit [treaty-shopping], and therefore, IRS wish to 'deny' that treaty benefit ($38M refund from 2007 tax year!).

Big amount of money on the edge due to suspicious about treaty-shopping issues? Yes. Now, let's look at the court text to get a flavour.

I quote:

After a prolonged review process from 2007 to 2010, the U.S. Competent Authority issued a final determination letter denying Starr's request. The Competent Authority found it "impossible ... to conclude that obtaining treaty benefits was not at least one of the principal purposes for moving [Starr's] management, and therefore its residency, to Switzerland." Joint Appendix ("J.A.") 256. The letter pointed to "facts and circumstances regarding [Starr's] original structure and subsequent restructurings" that the Competent Authority found "troubling," including Starr's (1) legal organization and initial incorporation in Panama, (2) relocation to Ireland and enjoyment of tax treaty benefits shortly before the payment of AIG dividends, (3) brief residence in Ireland before moving to Switzerland, and (4) control by predominately U.S. individuals. J.A. 255–56.

Starr Int'l Co. v. United States, 910 F.3d 527, 531-32 (D.C. Cir. 2018)

Court case not finalized yet there is still ongoing arguments with other legal considerations within court doors.

What's the take here?

1. Get an idea about DTA possible benefits (+/- $38M) for cross-border businesses
2. Consider Treaty-Shopping is not identical to a Mall-shopping but close match
3. Aggressive tax planning (Conduit/Base arrangements) is being ring-fenced by OECD BEPS Project, under Action 6, it has brought a major change in international tax arena to limit granting treaty benefits for 'qualified' persons only [US DTA Article 22 and OECD DTA Article 29] - these articles lay Limitation on Benefits rules and Principal Purpose Test (subjective analysis) in order to grant treaty benefits for eligible business/individuals.

Comments are much welcomed!

This article was not written by Artificial Intelligence "AI", thus it would be full of human-mistakes.

AA

Note: Intention of this court case was to capture a relevant interesting tax case area regardless other legal concerns enclosed in the full court text.

Disclaimer: Citation included of the court case. No intention to show/demonstrate that the Starr arrangement is a mere fact of an act of treaty shopping, decision is up to the courts, obviously. All facts and relevant information were based on publicly available information. There is no intention to promote for treaty-shopping or conduit arrangements.

#doubletaxtreaty #treaty #shopping #restructuring #crossbordertrade #MNE #beps #BEPS_Action6