THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION

June 2018

MODULE 1

PRINCIPLES OF INTERNATIONAL TAXATION

TIME ALLOWED – 3¼ HOURS

This exam paper has two parts: Part A and Part B.

You need to answer four questions in total.

You must answer:

 At least two questions in Part A (25 marks each)
 At least one question from Part B (25 marks each)

Further instructions
 All workings should be made to the nearest month and you must use the appropriate
monetary currency, unless otherwise stated.
 Start each answer on a new page and clearly indicate which question you are answering.
If you are using the on-screen method to complete your exam, you must provide
appropriate line breaks between each question, and clearly indicate the start of each new
question using the formatting tools available.
 Marks may be allocated for presentation.
 The first 15 minutes of the exam consists of reading time. You will be allowed to annotate
the question paper during this time; however, you will not be permitted to start writing or
typing your answer. The Presiding Officer will inform you when you can start answering
the questions.
 Module 1 – Principles of International Taxation (June 2018)

PART A

You are required to answer AT LEAST TWO questions from this Part.

1. “Tax sharing is a typical compromise to settle a clash between the state of source and
the state of residence”.

E. Kemmeren, “Preface to Articles 10 to 12” in Reimer and Rust (eds), Klaus Vogel on
Double Taxation Conventions, 4th ed. (Wolters Kluwer, 2015)

Discuss the above quotation in the context of Articles 10, 11 and 12 of the OECD
and UN Model Tax Conventions. (25)

2. Discuss the formation of legal norms in relation to tax competition. (25)

3. Is the notion of tax sovereignty still relevant in the current era of multilateralism?
(25)

4. What does Gordon J mean in Bywater Investments Limited & Ors v. Commissioner
of Taxation [2016] HCA 45 at paragraph 139, when he states that “‘central
management and control’ and ‘place of effective management’ are different
concepts in different instruments”?

In your opinion, how relevant might this statement prove to be in the future? (25)

5. “Taxpayers are justified in being concerned that the relevant tax authorities may misuse
information obtained as a consequence of their governments’ implementation of BEPS
Action 13.”

Discuss this statement. (25)

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 Module 1 – Principles of International Taxation (June 2018)

PART B

You are required to answer AT LEAST ONE question from this Part.

6. Pine Ltd, a company incorporated and resident in the country of Evergreenia, was
assessed for the 2016/17 tax year and paid taxes on its global income in Evergreenia.
The income was derived from the provision of IT services.

Pine Ltd is a 100% holding company of Oak Ltd, which is tax resident in the country of
Deciduousa. Oak Ltd undertakes some software development activities on behalf of the
group, and also runs a call centre. It has been accepted by all concerned that the dealings
between Pine Ltd and Oak Ltd raise no issues from a transfer pricing perspective. Pine
Ltd has no clients in Deciduousa.

The following facts have been established in relation to the corporate group:

 40% of the group’s employees are based in Deciduousa.

 All of the group’s call centres and software development centres are situated in
Deciduousa.

 Pine Ltd is essentially performing marketing work only, and its contracts with clients
are assigned or sub-contracted to Oak Ltd.

 The master services agreement between Oak Ltd and Pine Ltd gives complete
control to Pine Ltd in regard to personnel employed by Oak Ltd.

 It is only through the proprietary database and software of Pine Ltd that Oak Ltd
carries out its functions for the group. The software and data is provided free of cost
to Oak Ltd.

The Deciduousa Revenue Authority (DRA) contends that some of Pine Ltd’s profits are
attributable to and taxable in Deciduousa, because Pine Ltd had a permanent
establishment (PE) in Deciduousa at all material times. The DRA argues that the income
earned and taxed in the hands of Oak Ltd is materially different from the income
attributable to the PE of Pine Ltd, as the latter includes some of Pine Ltd’s tax base.

Advise Pine Ltd whether, in accordance with the OECD Model Tax Convention, it
might have a taxable presence in Deciduousa. (25)

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 Module 1 – Principles of International Taxation (June 2018)

7. D Bank is resident in Delphinia. It has entered into an interest-based equity swap

agreement with counterparty banks resident in Countries M, N, O and P. D Bank sells
return swaps on baskets of shares in companies (i.e. total return swaps) listed in another
country, Suritana, to the counterparty banks, and purchases shares of companies listed
in Suritana in order to hedge the swaps.

Under the terms of the arrangement, D Bank is the short total return swap party (i.e. it has
to pay the dividends and any increase in share value but is not exposed to any decrease
in share value) and the counterparty banks M, N, O and P are the long total return swap
parties (meaning that they are required to make periodic payments to D Bank based on
interest rates, and must pay D Bank where the shares decrease in value over the term of
the agreement).

Under the arrangement, D bank is to:

 pay any appreciation in the value of the shares to the counterparty banks;
 be compensated for any depreciation in value of the shares;
 pay any dividends to the counterparty banks; and
 receive a market interest rate plus a margin.

The minimum holding period is three months, with the average holding period being six
months. The shares subject to the swaps agreement were held in various companies
listed on Suritana’s stock exchange.

D Bank received dividends from Suritana shares and then paid these on to the
counterparty banks via the swaps. The purchase and sale of the shares were conducted
using an international broker and were ‘over the counter’ (i.e. tailor-made). D Bank was
issued with a certificate on file, stating that the seller and the parties subject to the swap
agreement are not the same person.

Suritana and Delphinia entered into a Double Taxation Agreement (DTA) soon after the
first draft OECD Model Tax Convention was published in 1963 and have not agreed upon
any amending protocols. Article 10 of the Suritana-Delphinia DTA provides that dividends
are only subject to tax in the contracting state of which the recipient of the dividends is
resident. However, Suritana levied 30% withholding tax on the dividends received by D
Bank under its domestic law. D Bank claimed a refund of the withholding tax levied from
Suritana on the basis that Article 10 of the Suritana-Delphinia DTA only permits taxation
in the resident state of the recipient (i.e. Delphinia). Suritana has denied the refund on the
basis of its own domestic anti-abuse rules.

You are required to write a memo to D Bank, setting out what you consider to be
the major challenges in successfully arguing that Suritana has wrongly denied the
refund of withholding tax levied on the dividends. Your answer should address the
potential weaknesses in any claim that D Bank may bring against Suritana for
reliance on their domestic anti-abuse provisions.

Your answer should be placed within the context of the recent work of the OECD
and G20, with specific regard to the improper use of DTAs and the interaction of
domestic anti-abuse rules and DTAs. (25)

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