Multilateral Instrument

Preamble effectively overrides Union of India approach (p. 891)

[I]t is necessary to consider not only the primary arm of the CTA to encourage cross-border economic activity by allocating taxing rights in a fair and reasonable manner in order to reduce or eliminate double taxation, but also the intention of the contracting jurisdictions that the CTA not create opportunities for non-taxation or reduced taxation through tax treaty shopping and other forms of tax avoidance. For this reason, when interpreting the object and purpose of a CTA that is modified by this preamble language, it is no longer possible to conclude, as the Supreme Court of India did in the context of the India-Mauritius tax treaty, that treaty shopping is necessarily consistent with the object and purpose of tax treaties because it encourages capital and technology inflows. [fn 224: Union of India v. Azadi Bacbao Andolan (2003), 6 ITLR 233 (India SC)…]

No Canadian domestic definition of the phrase “arrangement or transaction” (p.3)

While Canada’s ITA uses the words “arrangement” and “transaction” individually, it does not combine them in the expression “arrangement or transaction” and it does not provide any exhaustive definitions for them other than to clarify for certain specific purposes that a transaction includes an arrangement or event. [fn 11: See ITA subsections 233.1(1), 237.3(1), 245(1), 247(1).] Hence, the ITA does not provide a meaning of these words that could be expected to conflict with their ordinary meaning.

Ordinary meaning of “arrangement or transaction” (p. 3)

Accordingly, in interpreting the term “arrangement or transaction” in the MLI, a proper analysis should seek to determine the ordinary meaning of the expression and its component words in light of their context and the purpose of the PPT and the MLI in general. …

[T]he ordinary meaning of “arrangement or transaction” would seem to refer to:

(i) a single act or instance of conducting business, or any activity involving two or more persons, or multiple acts, instances, or activities that are part of a pre-ordained series (i.e., a “transaction”); or

(ii) a disposition of measures planned, drawn up, or ordered to accomplish a particular purpose (i.e., an “arrangement”).

OECD Commentary (p. 4)

Regarding the intended scope of the expression “arrangement or transaction”, the OECD commentary [para. 177 of Commentarh on Art. 29(9)] reads as follows:

The terms “arrangement or transaction” should be interpreted broadly and include any agreement, understanding, scheme, transaction or series of transactions whether or not they are legally enforceable….

An example of an “arrangement” would be where steps are taken to ensure that meetings of the board of directors of a company are held in a different country in order to claim that the company has changed its residence. One transaction alone may result in a benefit, or it may operate in conjunction with a more elaborate series of transactions that together result in the benefit.

The above OECD commentary seems to support the following points:

(i) an “arrangement” seems to contemplate measures or steps that, while not legally enforceable and not “transactions” in a strict sense, are planned, drawn up, or ordered to lead to a particular result; and

(ii) although the expression of “series of transactions” is not expressly used in the PPT, the overall meaning of “arrangement or transaction” should be read to include a series.

Implicit series of transactions concept unlikely to be informed by broad Canadian domestic concept (p. 5)

[T]he SCC [in Copthorne] confirmed its prior holding in Canada Trustco that it is sufficient for a later transaction to have been completed “because of” or “in relation to” an earlier transaction in order to be considered part of the same series, regardless of whether the later transaction was ever even contemplated at the time of the earlier transaction. …

[I]n light of the MLI’s stated harmonization purpose, it would be unreasonable, in our view, to read into the meaning of an “arrangement or transaction” for the PPT the extended domestic meaning of a series of transactions that will likely be inconsistent with the meaning of that expression in other MLI participating jurisdictions. Doing so would mean that the MLI would be applied inconsistently across jurisdictions, which would defeat the very purpose of the MLI.

Examples of application (p. 5)

[B]ack-to-back royalty payments made pursuant to contracts established in an alleged treaty shopping scenario, such as the ones in Velcro, would normally be seen to be part of a series that is within the scope of the PPT. Conversely, if the holding structure for a Canadian oil and gas company, such as in the recent Alta Energy case, is migrated to Luxembourg at a time when there is neither an agreement nor a specific genuine intention to sell the shares of the Canadian company, no series should exist for the purposes of the application of the PPT. In such context, when it comes to the determination of the impugned series of arrangements or transactions, the scope of application of the GAAR may very well be broader than that of the PPT.

Conclusion (p. 6)

[W]hile the expression “arrangement or transaction” as used in the PPT is broad enough to include a series of transactions, for this purpose a “series” must be given its ordinary and natural meaning (i.e., pre-ordained or pre-ordered transactions that can be construed as a single composite transaction)…[and] the extended meaning of series under the ITA, as set out by the SCC …should not be relevant … .

Meaning of transaction (p. 972)

[W]hile the official French version of the ITA translates “transaction” as “operation,” which is defined to include "une convention, un mecanisme ou un evenement," the official French version of the MLI refers to "une transaction" and "un montage"— the latter of which is also broad and clearly contemplates a series of transactions. As well, since contracting jurisdictions presumably intended the PPT to have a consistent application in all CTAs, it seems reasonable that the words "arrangement or transaction" should he given a meaning independent of domestic law.

Examples in OECD commentary re little or real economic substance (pp. 993-997)

Beginning with tax treaty shopping, it is notable that examples in the OECD commentary consistently suggest that the PPT would not apply to arrangements or transactions that involve genuine cross-border economic activities.

…[W]here arrangements or transactions have little or no real economic substance, the commentary concludes that the PPT or anti-conduit provisions should apply to deny treaty benefits. In one example, based on the Royal Dutch Oil Company case, [fn 233: … (June 6, 1994) RNR 1994/217 (Netherlands Supreme Court)] a company (TCO) resident in state T, which owns shares of a company (SCO) resident in state S, with which state T does not have a tax treaty, assigns the right to dividends that have been declared but not yet paid by SCO to RCO, an independent financial institution resident in state R, which has a tax treaty with state S that exempts dividends from withholding tax.

…In another example, based on the Bank of Scotland case [fn 233: … Ministre de l’Econimie v. Bank of Scotland (2006), 9 ITLR 683 (Counseil d’Etat)] company (TCO), resident in state T, has a wholly owned subsidiary (SCO) that is resident in state S, with which state T does not have a tax treaty, and enters into an agreement with a financial institution (RCO) in state R, with which state S has a tax treaty that provides a reduced withholding tax rate on dividends of 5 percent (instead of the domestic rate of 25 percent). Under this agreement, RCO acquires the usufruct of newly issued preferred shares of SCO for a period of three years in exchange for the present value of the dividends to be paid on the preferred shares over three years, discounted at the rate at which TCO could borrow from RCO.

…Yet another example, based on Aiken Industries, [fn 237: Aiken Industries, Inc. v. Commissioner, 56 TC 925 (1971)….] involves a company (TCO) resident in state T, which loans funds at a rate of 7 percent to a wholly owned subsidiary (SCO) in state S, which does not have a tax treaty with state T, and then assigns the debt to another wholly owned subsidiary (RCO) in state R, with which state S has a tax treaty, in exchange for a note paving interest at a rate of 6 percent.

…[T]he analysis in the commentary appears to suggest that the PPT could also apply to transactions or arrangements like those in Del Commercial Properties [fn 239: C Memo 1999-411 • aff'd 251 F.3d 210 (DC Cir. 2001), denying treaty benefits on the basis of a domestic substance-over-form doctrine….] A Holdings ApS [fn 240 A Holdings ApS v. Federal Tax Administration (2005), 8 ITLR 536 (Swiss FC), denying treaty benefits on the basis of an implicit anti-abuse principle.] the VSA case, [fn 241: (February*28^*2001), 4 ILTS~2b02, 191 (Swiss Commission of Appeals in Tax Matters), denying treaty benefits on the grounds that the recipient of dividends was not their beneficial owner.] and the HHU and Cook case [fn 242: SKM 2011.57 LSR, and SKM 2011.485 LSR (Danish Tax Tribunal), denying treaty benefits on the ground that the recipients of interest payments were not their beneficial owners…] in which companies with little or no economic substance were established in order to obtain treaty benefits that would otherwise have been unavailable. The analysis in the commentary also seems to suggest that the PPT could apply to transactions or arrangements like those in Northern Indiana Public Service Corp. [fn 243: Northern Indiana Public Service Corp. v. Commissioner, 115 F.3d 506 (7th CIR. 1997), alIowing treaty benefits on the basis that a wholly owned finance subsidiary incorporated by the taxpayer had conducted "recognizable" though "concededly minimal" business activity, earning a profit from the spread between interest paid on euronotes and interest charged to the taxpayer, as well as reinvested profits.] Prévost Car, Velcro, and the Spanish cases involving payments by the Real Madrid football team to Hungarian companies for the image rights of various team members [fn 246: (July 18, 2006), JUR\2006\204307, JUR\2007\8915, and JUR\2007\6549; (November 10, 2006), JUR\2006\284679; (July 20,2006), JUR\2007\6526; (November 13, 2006), JUR\2006\284618; and (March 26, 2007), JUR\2007\101877, denying treaty benefits on the basis that the recipients of the royalty payments were not their beneficial owners.] in which companies to which interest, dividends, or royalties were paid appear to have earned some profits on the spread between amounts received and amounts paid as well as reinvested profits, but otherwise conducted little or no business activity. In contrast, it seems less likely that the PPT should apply to payments such as those in the Swiss swap case, [fn 247: May 5, 2015), BGE 141 II 447, no. 2C_364/2012 (Swiss Federal Supreme Court) … concluding that the recipient of payments from investments designed to hedge against swap payments was not the beneficial owner of the payments.] which are designed to hedge against swap payments—at least where these arrangements represent genuine business activities carried out by a financial institution.

Changing residence (p. 998)

In contrast, where a corporation changes its residence by continuing from one jurisdiction to another or by changing its place of effective management, it is less certain that this transaction or arrangement would have sufficient economic substance for one to conclude that obtaining treaty benefits would be in accordance with the object and purpose of the relevant provisions of a treaty—particularly if the change of residence results in non-taxation or reduced taxation, and treaty benefits are indirectly obtained by shareholders who are residents of third jurisdictions. For this reason, the PPT could be expected to apply to transactions such as those in MIL Investments, in which the taxpayer continued from the Cayman Islands to Luxembourg shortly before selling shares the gain from which would otherwise have been subject to tax in Canada, and Yanko-Weiss Holdings, in which the taxpayer moved its place of effective management from Israel to Belgium before receiving dividends from an Israeli subsidiary. [fn 253: … Yanko-Weiss v. Holon Assessing Office (2007), 10 TLR 524 (Tel Aviv-Yafo DC) denying treaty benefits on the basis of an implicit anti-abuse principle.]

Burden on taxpayer to establish that a benefit should be allowed (p. 1001)

Canadian courts have generally held that the GAAR should apply only where the object and purpose of the relevant provisions is "clear and unambiguous”. [fn 267: See, for example, OSFC, at paragraph 69; Canada Trustco, at paragraph 50; and Copthorne Holdings, at paragraph 68. …]

In the PPT, on the other hand, the object and purpose test is an exception that Allows a benefit that would otherwise be denied under the provision on the ground that one of the principal purposes of an arrangement or transaction was to obtain the benefit. As a result, the PPT shifts the onus to the taxpayer to establish that a benefit that would otherwise be denied should be allowed because it is in accordance with the object and purpose of the relevant provisions of the CTA….

Complete denial of benefit can be punitive (p. 1003)

[B]ecause the PPT states that a benefit under the CTA "shall not be granted” when the provision applies, the application of this provision could make taxpayers worse off than they would have been under an alternative arrangement or transaction that might reasonably have been carried out but for the existence of the treaty benefit that is denied. For example, where an individual assigns the right to receive dividends that have been declared but not paid to a company owning more than the specified shareholding threshold to qualify for the lower rate of withholding tax on dividend payments from a subsidiary to a parent, the PPT could deny the benefit of any withholding tax reduction under the CTM rather than the benefit of the lower withholding rate….

Threshold for PPT is lower than in most domestic general anti-avoidance rules (pp. 1008-9)

Unlike the Canadian GAAR, for which the concept of a tax benefit may be interpreted by reference to a benchmark transaction that might reasonably have been carried out but for the existence of the tax benefit, the most reasonable interpretation of a benefit under a CTA relates to the tax consequences that would have resulted under the domestic law of the relevant contracting jurisdiction absent the CTA.

The purpose test requires an objective assessment of the principal purposes of the arrangement or transaction in order to determine whether one of those purposes was to obtain a benefit under the CTA. Interpreting similar language in the context of domestic tax provisions, UK courts have held that a principal purpose "has a connotation of importance” [fn 298 Travel Document Services] and that a principal purpose of a transaction may be to obtain a tax advantage even if the transaction had a commercial objective at least as important as the tax advantage. [fn 299: Lloyds TSB Equipment Leasing] As a result, the threshold for this purpose test is lower than the threshold in most domestic general anti-avoidance rules.

…Since the purpose test in the PPT applies where it is "reasonable to conclude" that one of the principal purposes of an arrangement or transaction was to obtain a benefit under the CTA, it also imposes a relatively low burden on the tax authority, effectively requiring taxpayers to argue that it would be unreasonable to conclude that obtaining the benefit was a principal purpose of the arrangement or transaction….

Limited adoption and poor drafting of remedial benefits rule

[T]he MLI contains a remedial benefits rule … [fn 277 Article 7(4) … .]

Of the 84 jurisdictions that had signed the MLI as of September 18, 2018, however, only 28 (not including Canada) indicated that they would adopt this provision. …

Although this provision allows for the possibility of remedial benefits, it is poorly drafted since it limits these benefits to those that would have been granted to the same person ("that person") in the absence of the transaction or arrangement. As the above example indicates, however, the alternative treaty benefits might have been granted to a different person than the person whose treaty benefits are denied under the PPT.

…Finally, it is unfortunate that neither the MLI nor the OECD model convention or commentary addresses the consequences in the other contracting jurisdiction where one contracting jurisdiction applies the PPT to deny benefits that would otherwise have been available under the CTA.

Arbitration reservations are subject to other CTA party’s acceptance (p. 611)

Article 28(2)(a) permits the parties to the MLI to formulate one or more reservations with regard to the scope of cases that should be eligible for arbitration under Part VI. Such reservations are, under article 28(2)(b) of the MLI, subject to acceptance by the other contracting state to the CTA in question….

18 states with reservations re anti-abuse (p. 612)

[O]f the 26 states that have signed up for mandatory arbitration, only eight states have not made any reservations with regard to the scope of the arbitration. [fn 33: That is, Belgium, Fiji, Liechtenstein, Luxembourg, the Netherlands, Malta, Switzerland and the United Kingdom.]…

Eighteen states have made reservations to the scope of the arbitration provisions in Part VI. The most common reservation involves the exclusion of cases concerning the application or interpretation of anti-abuse provisions from arbitration. [fn 34: That is, Australia, Austria, Finland, Germany, Ireland, Italy, Mauritius, New Zealand, Portugal, Singapore, Slovenia and Spain.] Most states only exclude disputes over the interpretation or application of domestic anti-abuse provisions from the scope of arbitration, but some of these jurisdictions also exclude disputes over the interpretation or application of tax treaty based anti-abuse provisions from the scope of arbitration.

Reservations re no double taxation, dual residence or both authorities’ agreement (p. 612)

Certain states exclude cases that do not involve double taxation from the scope of arbitration. [fn 36: That is, Finland, France, Germany, Italy, Portugal, Slovenia and Spain….] It is unfortunate that these reservations have been made, as cases of double non-taxation or low taxation may be entirely legitimate under a tax treaty and not be the result of aggressive tax planning. For instance, many tax treaties apply a 0% withholding tax rate on dividends paid to jurisdictions that apply a participation exemption….

Certain states also exclude from arbitration cases involving dual resident persons, i.e. individuals and entities while others limit the scope to dual resident entities only. [fn 37: Italy and Slovenia exclude cases involving dual resident persons from the scope, while Japan and Sweden only exclude cases involving dual resident entities…]…

Some states exclude cases from arbitration where both competent authorities agree that the case is not suitable for arbitration. [fn 39: That is, France, Spain and Sweden.]…

Cdn and Portuguese limitation to factual disputes (p. 612)

Certain states do not exclude certain cases from arbitration, but, instead, list the types of cases that can be submitted to arbitration. Canada, for example, indicates that only those issues arising from a provision similar to article 4 of the OECD Model (Residence, but only with respect to individuals), article 5 (Permanent establishment), article 7 (Business profits), article 9 (Associated enterprises), article 12 (Royalties, but only insofar as between related parties to which a provision similar to article 9 applies) and any other provisions subsequently agreed by the contracting parties through an exchange of diplomatic notes, can be submitted to arbitration. Portugal adopts a similar approach…

Both of these states, therefore, limit arbitration to more factual transfer pricing cases and the question of the existence of a permanent establishment (PE).

Vagueness of some free-form reservations to MLI Art. 28 (p. 416)

While the provision applies by default to existing MAP inventories (subject to mutual agreement about the start date for such cases for purposes of the two-year time limit), 12 of the countries that signed up opted to exclude existing cases from arbitration. In addition, unlike with other MLI provisions, parties are permitted to craft their own reservations with respect to the scope of cases that will be subject to arbitration. Those reservations will then control the scope of arbitration as between the reserving parties and other parties to the arbitration provision. [f.n. 126: … art, 28(2)(a).] Such "free form" reservations are subject to objection by other parties, and if a party objects, Part VI will not apply at all between the reserving party and the objecting party. Of the 26 countries that chose to adopt Part VI, 16 made such "free form" reservations. While a full analysis of those reservations is beyond the scope of this article, many of the reservations involve carving out broad, and often vague, categories of cases, including, for example, all cases involving the application of domestic anti-avoidance rules, or all cases involving serious penalties. [f.n. 1 128: See, e.g., MLI positions of Australia, Canada, Finland, France, Ireland, Italy and Singapore... .]