Today’s reflection…. Action 6 of BEPS introduced the principal purpose test (PPT). It is one of the minimum international tax standards applicable by countries members of the BEPS Inclusive Framework
The PPT aims to tackle treaty abuse including treaty shopping
1. Subjective element: Tax administrations need to reasonably conclude, having taken into account all relevant facts and circumstances, that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
2. Objective element: The taxpayer needs to establish that granting that benefit in these circumstances would be in accordance with the object and purpose of the provisions of the treaty.
16 November 2021, the Court of Appeal of Trinidad and Tobago (T&T) held that a Trinidad subsidiary’s dividend payment to a withholding company in Barbados were liable to withholding tax on the basis that, in substance, the dividends were paid to the ultimate parent company in Canada.
In Methanex Titan (Trinidad) Unlimited v. The Board of Inland Revenue (Civ. App. No. P197 of 2019), Methanex Trinidad had paid four dividends totaling USD85.4 million to Methanex Trinidad Holdings Limited in Barbados in 2007. Dividends in the same amounts were then paid from Methanex Barbados to Methanex International Holdings Limited in the Cayman Island (Methanex Cayman), and from thence to the Canadian parent, Methanex Corporation (Methanex Canada), the world’s largest producer and supplier of methanol.
Methanex Canada, through its wholly-owned subsidiaries in the Cayman Islands and Barbados, had indirect ownership of all the shares of Methanex Trinidad. The dividend payments from Trinidad to Barbados were governed by the CARICOM (Caribbean Community) double tax treaty, through which dividends paid by a company resident in one member state to a resident of another member state are exempt from withholding tax.
Methanex Barbados was a company incorporated in Barbados under the International Business Companies (IBC) Act of Barbados, so there was no withholding tax on dividends Barbados paid to Methanex Cayman, nor was there tax on dividends from the Cayman Island to Canada.
The tax on the dividend was assessed by T&T’s Board of Inland Revenue (BIR) at the rate of 5%, which was the rate of withholding tax applicable under the Double Taxation Relief (Canada) Order 1996 on dividends paid by a Trinidad resident to a Canadian resident, rather than 0% rate that would have been payable on dividends paid simpliciter to a Barbados resident company.
The T&T Tax Appeal Board (TAB)upheld the decision of the BIR to assess withholding tax on those dividends at the rate of 5% because dividends paid to Barbados were for the benefit of the ultimate Canadian parent company and were therefore “artificial and fictitious” under the ITA.
The taxpayer appealed against the assessment, and BIR filed a counter-notice. In a unanimous decision, the T&T Court of Appeal agreed that 5% withholding tax applied.
The only bank accounts of Methanex Barbados and Methanex Cayman were in Canada and under the control of the Canadian parent. The funds resided in the bank of the bank account of Methanex Barbados for less than 48 hours, the Court said, and were then “transmitted onwards, with extraordinary rapidity, in the exact amounts to Methanex Canada who received them.”
The Court, therefore, concluded that the dividend payment from Methanex Trinidad to Barbados were artificial and fictitious because the dividends were intended to be, and were in fact, payments to the ultimate parent company.
It found that Methanex Canada was the beneficial owner of the dividends, not Methanex Barbados. The directors of the Barbados company exercised no independent consideration or judgement with respect to the dividends. Methanex Barbados was no more than a conduit, and the dividends were artificially routed through in a preconceived plan to avoid withholding tax.
The Court stated that, while one of the stated purposes of the CARICOM tax treaty was to encourage trade and investment between CARICOM member states, this did not mean that any retransmission of dividends outside the CARICOM region would, in and of itself, be artificial. However, the payment of the four dividends in dispute was a thinly disguised attempt to use as a conduit.