Tax Treaty Series

ITQ T-

095

July 23, 2021

Question

XCo, a company incorporated and resident in X, owns some land in Y.

XCo sells the land to YCo, a related company incorporated and resident in Y, for a price of $Z. XCo does not own any shares in YCo.

Under the corporate income tax laws of both X and Y, a company is resident only if its central management and control is located in X or Y, respectively.

In accordance with Y stamp duty law, XCo pays 5% "seller's stamp duty" on the price of $Z, and then transfers the balance of the sale price to its bank account in X. Under Y law, seller's stamp duty is imposed only on sellers which are foreign-incorporated companies.

Some months later, the Y tax authorities claim that the price of $Z was less than the arm's length price (ALP) of the land. They therefore claim that XCo owes additional stamp duty on the excess of the ALP over $Z.

XCo currently owns no assets in Y.

The X/Y treaty is identical to the 2017 OECD model treaty.

Will XCo be required to pay the additional stamp duty?

Answer

(1) Art. 24:

The non-discrimination rules in Art. 24 apply to all taxes, regardless of whether or not they are "taxes covered" under Art. 2: Art. 24(6). Thus, Art. 24 is applicable to stamp duty.

XCo is a "national" of X, based on incorporation: Art. 3(1) definition of "national".

Thus, Art. 24(1) potentially applies to XCo. The comparator in Art. 24(1) is "nationals of [Y] in the same circumstances, in particular with respect to residence". The concept of "residence" probably refers to the definitions in Art. 4. If so, then the comparator would be a company which is incorporated in Y (and is therefore a "national" of Y), but which has its central management and control in X (and is therefore, like XCo, not resident in Y, under Art. 4). Such a comparator would not be liable for the Y seller's stamp duty (because it is incorporated in Y), and therefore Art. 24(1) is breached in regard to XCo.

Thus, subject to the "force of law" issue (see below), XCo would have a right to avoid paying the Y seller's stamp duty on the excess of the ALP over $Z; it would also have a right to obtain a refund of the seller's stamp duty it had already paid on the $Z, subject to time limits under Y law.

(2) Art. 27:

If the conclusion on Art. 24 is incorrect, Y would be able to obtain the assistance of the X tax authorities to collect the outstanding amount of Y seller's stamp duty from XCo. Note that Art. 27 is not limited to the "taxes covered" under Art. 2: Art. 27(1).

(3) Force of law:

Some countries give the force of law to tax treaties for only limited purposes – e.g., for the purposes of the "taxes covered" in Art. 2.

If Y is such a country, that limited force of law for the X/Y treaty might mean that XCo could not claim the benefit of Art. 24 to defend against the Y seller's stamp duty.

In that case, an interesting question would be whether the Y tax authorities could obtain the assistance of the X tax authorities to collect the stamp duty under Art. 27. A threshold issue would be whether the Art. 27 right given to the Y tax authorities is dependent on X giving the force of law to Art. 27 – arguably, it is not so dependent, because Art. 27 is a "country-to-country" obligation under international law. The substantive issue is whether the X tax authorities would (or legally could) refuse to provide the assistance, due to Y's breach of Art. 24.

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