Platform for Collaboration on Tax Releases Toolkit on Taxation of Offshore Indirect Transfers

The Platform for Collaboration on Tax (PCT) released a Toolkit on the Taxation of Offshore Indirect Transfers (OIT) providing guidance on the design and implementation issues when one country seeks to tax gains on the sale of interests in an entity owning assets located in that country by an entity which is a tax resident in another country.

This toolkit addresses a concern of particular significance to developing countries, mostly but not exclusively natural resource rich countries—primarily from the perspective of the country where the underlying assets are located. Taxation of the indirect transfer of assets such as mineral rights, and other assets generating location specific rents such as licensing rights for telecommunications, has been the subject of protracted public interest. This topic is a concern in many developing countries, magnified by the revenue challenges that governments around the world face as a consequence of the COVID-19 crisis.

The significance of this issue was recognized in the development of the OECD led Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the “MLI”). The MLI includes a provision based upon the OECD and UN model tax conventions, for purposes of extending the reach of existing tax treaties to allocate rights to tax such indirect transfers to location countries, should treaty partners so choose.

The toolkit assesses the economic rationale for such an allocation of taxing rights on such transfers to the country where the underlying assets are located. The toolkit proposes that location countries may wish to tax offshore indirect transfers of at least those assets which are immovable—within the meaning of current UN and OECD model treaties—and perhaps additional assets that also generate location specific rents. If location countries do wish to extend taxing rights to such transfers the toolkit suggests two models for domestic legislation which such countries may adopt.

The first model seeks to tax the resident asset owner under the deemed disposal model- treating it as having realized the gain on the assets in question immediately before the transfer and reacquired the asset immediately after the transfer. The second model seeks to tax instead the non-resident seller of the asset. The toolkit also suggests a model definition of immovable property for the purposes of such domestic legislation and provides further guidance to support enforcement and collection.

The PCT is a joint initiative of the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the United Nations (UN) and the World Bank Group (WBG).