- 20 Marks
Question
Non discrimination
A. Article 24 of the MTC deals with the elimination of tax discrimination in certain precise circumstances. It deals with discrimination on the basis of nationality, statelessness, the permanent establishment of an enterprise, non-residence specifically in relation to the deductibility of certain payments (e.g. interest and royalties), and non-resident direct investors ( share capital) B. Bearer Shares and Bearer Banks
Answer
A)
- Nationality
i. In Article 24(1) and in accordance with the principle of reciprocity, provides that the nationals of the other Contracting State (CS) cannot be treated less favorably in the other Contracting State (CS) than the nationals of that state.
ii. This further provides that nationals of the other CS must be afforded the same treatment for purpose of taxation in the other states as may be meted to the resident of the that state.
- Statelessness
i. In relation to stateless persons, the purpose of paragraph 2 of Article 24 is to limit the scope of the clause concerning equality of treatment with nationals of a CS solely to stateless persons who are residents of that or of the other CS.
ii. This gives privilege to stateless person in one State to be compared with nationals of the other State.
- Permanent Establishment
i. Paragraph 3 is designed to end discrimination based on PE of an enterprise.
ii. The taxation of a PE cannot be less favorably levied in the CS concerned than the taxation levied on enterprises of that CS carrying on the same activities.
iii. The purpose is to end all discrimination in the treatment of PEs versus ‘same sector’ resident enterprises.
- Deductions
i. Paragraph 4 is designed to end discrimination resulting from the fact that in some countries the deduction of interest, royalties and other such payments are allowed without restriction when the recipient is resident, but they are prohibited when they are a non-resident.
ii. It does not prohibit the country of the borrower from applying its domestic rules on thin capitalisation insofar as these are compatible with Articles 9(1) or 11(6), unless the rules themselves are incompatible with these articles and only apply to non-resident creditors (to the exclusion of resident creditors).
- Ownership of Capital
i. Paragraph 5 prevents the discrimination of a resident enterprise that is solely based on who owns or controls the capital of that enterprise.
ii. Its object is to ensure equal treatment for taxpayers residing in the same State, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment that applied to domestic capital.
Conclusion
i. The scope and operation of Art 24 is significance to end discrimination against resident of other contracting states. It seeks to eliminate tax discrimination based on nationality, statelessness, PE, and certain non-resident passive income. B)
i. Bearer shares are shares which ownership belongs to the holder of the share certificate.
ii. All the rights of a shareholder are given to the holder (the bearer).
iii. The name and details of the shareholder are not recorded in the company’s books.
iv. Any person who is in the possession of the share certificate is the shareholder.
v. Likewise bearer bank accounts are bank accounts whose owners are identified by bank deposit certificates or numbers.
vi. The names and details of the bank accounts holders are not recorded in the bank records.
vii. Because of their characteristics, bearer shares and bearer bank accounts do not satisfy the standard for exchange of information for tax purposes.
viii. Because information on the owner of bearer shares and bearer bank accounts is difficult to access by tax jurisdictions. This poses an enormous challenge to tax administrations to exchange information for tax purposes.
b. Advantages of Bearer Shares to a person
Bearer shares have some advantages to users. These include
i. Asset protection is the most common reason to use bearer shares and bearer bank accounts because of the privacy they provide.
ii. For example, individuals who do not want the risk of their assets being seized as part of a legal proceeding such as a divorce or a liability suit may resort to the use of bearer shares and bearer bank accounts.
iii. Simplicity of transferring certificates of shares to another person
iv. Confidentiality of the holder of bearer shares and bearer bank accounts
Bearer Shares and Bearer Bank Accounts Analysis
Features of Bearer Shares and Bearer Bank Accounts
- Ownership of bearer shares belongs to the holder of the share certificate.
- All shareholder rights are granted to the bearer of the certificate.
- Shareholder names and details are not recorded in the company’s books.
- Possession of the share certificate determines shareholder status.
- Bearer bank accounts identify owners by deposit certificates or numbers.
- Bank account holder details are not recorded in bank records.
- Bearer instruments fail to meet tax information exchange standards.
- Lack of owner information poses challenges for tax authorities in exchanging data.
Advantages of Bearer Shares
- Asset Protection: Provides privacy, protecting assets from seizure in legal proceedings like divorce or liability suits.
- Simplicity and Confidentiality: Easy transfer of share certificates and confidentiality of the holder’s identity.
- Uploader: Salamat Hamid