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Dividend withholding tax (DWT) rate 

Subject to the possible application of Art. 29(9) and/or GAAR (see below), the DWT rate should be 5% under Art. 10(2)(a), provided ACo holds the 25% shareholding throughout the required 365 day period. 

Note that Art. 10(2)(a) does not require the 365 day period to be satisfied before the dividend is paid. However, the provision does not prevent B from requiring that either 15% (Art. 10(2)(b)) or 20% (domestic law) DWT is withheld by BCo, and allowing ACo to seek a refund of the difference after it has satisfied the 365 day period. 

PPT (Art. 29(9))

These facts are drawn from Example E in para. 182 of the 2017 OECD Comm. on Art. 29. 

According to that example, the "first limb" of Art. 29(9) (i.e., "one of the principal purposes of any arrangement or transaction") would be satisfied by ACo’s purchase of the additional 1% of the shares in BCo; however, the exception in the “second limb” (i.e., "granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention") would also be satisfied. 

Therefore, based on that example, the result is that the 5% DWT would not be denied by Art. 29(9). 

GAAR 

The question suggests that B's GAAR would be applicable in this situation – e.g., because it is based on the taxpayer's principal purpose, and it does not include an exception similar to the "second limb" of Art. 29(9). 

It would therefore lead to a different outcome than Art. 29(9). 

The issue is how that conflict between GAAR and Art. 29(9) should be resolved. 

There is support for the view that the conflict should be decided in favour of ACo – i.e., that the B tax authorities cannot apply GAAR to deny a treaty benefit, if Art. 29(9) does not do so: (1) see paras. 68 to 77 of the 2017 OECD Comm. on Art. 1; and (2) the A/B treaty does not include a provision which expressly allows the 2 parties to apply domestic law anti-avoidance rules (despite the fact that B's GAAR was in existence for many years before the treaty was signed). If the A/B treaty has superior status under B domestic law (vs. domestic legislation), then, IMHO, GAAR should not apply. 

However, the legal status of treaties in the B domestic law might be such that they do not have automatic superior status over domestic legislation. It is possible that the B legal position is that the GAAR has paramount force over the A/B treaty – in which case, GAAR would apply. 

MAP

 

If the B tax authorities apply GAAR, but not Art. 29(9), to deny the 5% rate to ACo, is ACo entitled to request MAP discussions? 

The answer is "yes": ACo's taxation would not be "in accordance with the provisions of this Convention" (Art. 25(1)). Thus, ACO would be entitled to present its case to the competent authority (CA) of either A or B. 

Under Art. 25(2), the obligation on the 2 CAs is to "endeavour … to resolve the case by mutual agreement". This is an obligation to negotiate, not an obligation to reach an agreement. That being the case, although the CA for A might be supportive of ACo’s position that the GAAR should not deny ACo the 5% rate, the CA for B might not agree. 

In that case, ACo might (after 2 years) initiate the arbitration process (Art. 25(5)). However, if the arbitration decision is in favour of A and ACo (i.e., GAAR should not be applied), it is still conceivable that, due to its domestic legal position in regard to GAAR's paramount force, the B tax authorities might still insist on applying GAAR – although this would suggest that the B CA entered into the arbitration process in bad faith. 

Note that the 2017 OECD Comm. on Art. 25 indicates that some States deny the taxpayer the ability to initiate MAP in cases where the transactions are regarded as abusive. Also, Australia has made a reservation that it reserves the right to exclude from Art. 25(5) cases involving the application of Australia's GAAR.