Beneficial Ownership in Tax Law and Tax Treaties

Pablo A Hernández González-Barreda

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509923083
• Edition: 1
• Topic: Jura
• Subtopic: Steuerrecht

This book explores the concept of beneficial ownership in equity law, the domestic tax laws of the United Kingdom, Canada and the United States, as well as its varied and increasing uses in international tax law. By analysing the evolution of beneficiary rights in equity and the use of beneficial ownership wording in tax law, the book draws a roadmap for dealing with beneficial ownership in both national and international tax law. This approach highlights those common misconceptions that can be avoided by understanding the origins of the concept and its engagement with equity, as well as the differences with tax law. However, the book does not limit itself to dealing with theoretical discussion, but also offers an instructive and detailed practical case study. Offering both academic commentary and a practitioner focus, the book will be of the utmost interest to scholars and practitioners from common and civil law countries dealing with tax and estate law, particularly given beneficial ownership's increasing relevance.

1

Introduction

It is said that the Governor of the Bank of England stated in 1987 that beneficial owners ‘are like elephants; you know them when you see them’.¹ The statement has its roots in the famous Jacobellis v Ohio test, but beneficial ownership has little to do with obscenity.²

The phrase reminds the author of somebody speaking about a myth. Myths have been seen by few or many, they claim they can recognise one when they see it, but still the description of what happened or the animal they saw varies significantly from one witness to the other. In fact, the comparison with elephants is probably wrong. It is easy to describe an elephant because of the exaggerated proportions of the animal and their different body parts, but to describe beneficial ownership is very difficult.³ Myths derived from literature are just that: literature. Beneficial ownership is a sort of mythological animal seen by few and extensively written about in the literature. As in the case of the seahorse on the cover of this book, some claim it is a fish with the head of a horse. Others claim it is a horse with the tail of a fish. And probably both are true to some extent.

The myth or tale of beneficial ownership is a long one that covers a significant period of history and different fields of law, and is continually expanding. Much literature has surrounded the myth throughout its history. As the seahorse can swim and run, some claim the same, or similar, can be said of beneficial ownership in equity law, tax law and international tax law, and it can be applied in the same way as an allocation or income, or an anti-avoidance rule.

To some extent, beneficial ownership is a shadow overlying all the economic law of legal systems. It departs from the philosophy of law, going on to influence ownership rights, affect tax law and enter international tax law. The issue departs from how rights on property and ownership are considered from a political and economic perspective. It is a label defining certain property or ownership rights that have worth in society, so that only once such concepts are defined may one look at beneficial ownership. And then tax law must be taken into account, the purpose of which is to raise revenue by taxing a subject’s ability to pay. Because ability to pay depends on ownership, tax law has to consider it in determining whether a subject should be taxed. Finally, there is international tax law, where different tax systems, which all aim to collect revenue from a subject’s ability to pay, have to coordinate with each other. Beneficial ownership again comes into play. Because at each level beneficial ownership is a sort of myth, and one is related to the other, so the myth becomes even greater.

These beneficial ownership myths are probably the result of the evolution of the term through its history. From a kings’ and queens’ jurisdiction based in conscience, beneficiary rights developed a stable case law, albeit still based on the prerogative of judges. The term appeared in the nineteenth century only as a colloquial term, but once revolutions had strengthened ownership rights, it entered into law, at which point it developed significantly to achieve the more or less consistent lines of definition it has today. From there, it was taken into tax law, as with the development of contemporary tax law in the early twentieth century, as tax law wanted to catch such wealth. Tax law developed a new line of reasoning, connected to equity law, but not always attached to it.

As can be seen here, beneficial ownership is a matter of history. This is the reason why this book is largely based on historical reasoning, and its structure is based on the historical timeline. Consequently, the chapters are structured to delve into the myths on beneficial ownership, analysing case law and academic discussion to answer the questions surrounding it and giving a significant importance to the historical perspective.

Probably the first myth is that beneficial ownership is a term of art;⁴ almost every lawyer in common law countries tend to think of it as such. However, if you ask them to define it, they answer with vague, ambiguous and, especially, with variable definitions. If the large majority cannot provide and answer, and even courts fail to define it, it can hardly be said to be a term of art. Conversely, there are some authors who claim beneficial ownership is defined on a case-by-case basis. It is true that beneficial ownership adapts itself to different cases, especially if one takes into account its origin as derived from pure equity law case-by-case jurisdiction. Today, however, there is a consistent corpus that enables provision of a definition of beneficial ownership to serve as guidance, although obviously, as with any other rule, this is subject to its application, context and functions in the diverse rules in which it is included.

The second chapter deals with those issues on beneficial ownership that arise in equity law, and how the evolution in the concept of ownership in the UK has impacted its meaning. From an imprecise and case-by case meaning, the term is nowadays closer to continental law ownership than ever.⁵ This does not mean it is the same as continental ownership, and it depends on the case, although, at its greatest intensity, the approximation of beneficial ownership to full legal ownership is surprising. The French revolution, and reforms to ownership that took place in England at the nineteenth century probably had something to do with such approximations.

Another myth, this time in tax law, is that beneficial ownership is the person to whom income or assets have to be allocated in tax law. As previously stated, beneficial ownership of course follows ability to pay, and if property is defined by the beneficial owner in equity, income has to be allocated to him or her. But there are several cases where equity does not provide the answer as to who is the owner of the income or assets at large.⁶ And there are some cases in which taxpayers arrange their contracts to try to take advantage of allocation rules. The question is how do tax law allocation rules apply to such cases and how do they relate to beneficial ownership in equity?

The third chapter deals with those cases in the tax law of the UK, the USA and Canada, countries which have developed allocation of income principles that try to overcome the issues of beneficial ownership being suspended or being uncertain. The result is a corpus of beneficial ownership tax principles. However, this chapter does not aim to analyse all the tax rules in relation to equity cases. Instead; the objective is to analyse the main rationales behind the tax rules in those cases in order to shed light on the principles applicable to allocation of income in equity cases.

The next myth is the meaning of beneficial ownership in international tax law.⁷ The issue is actually a clash of legal traditions and the consequence of a legal transplant. When the USA and the UK started to discuss their first tax treaties, beneficial ownership was a key – but non-explicit – concept in their tax law systems, relating to the important matter of taxing according to ability to pay. On the other side, civil law countries did not know what such a concept was. There was also an increasing concern in countries from both legal systems about tax avoidance. The interposition of subjects, to which beneficial ownership relates, was a key issue for avoidance purposes. In the end, beneficial ownership in equity law was a matter of the interposition of subjects. The issue is, how was beneficial ownership transplanted to international tax law? Has it carried its meaning over from common law countries?

The fourth chapter is the bridge connecting beneficial ownership in the domestic law of common law countries and in international tax law. The chapter explains how the concept departed from those countries and was then reshaped to serve international tax law. This helps in understanding the different conceptions of the term in those countries and in international matters.

The fifth chapter deals with the meaning of beneficial ownership in tax treaties. Because the term departed from common law countries and was adapted to serve the ownership and tax systems of civil law countries, and was aimed at intermediaries, its meaning achieved a new dimension.

In the European Union, the myth deals with how beneficial ownership contained in the Interest and Royalties Directive relates to the concept as defined in the OECD Model Tax Convention and its Commentary, and how the interpretation of the Directive may influence the interpretation of tax treaties. The sixth chapter deals with this issue.

Also in international law, beneficial ownership has been used for some decades in instruments for obtaining and exchanging information in the prevention of crimes such as drug trafficking, terrorism, proliferation and money laundering.⁸ From there it has entered into exchange of information for tax matters. The myth questions how beneficial ownership as a concept linked to some extent to ownership/ability to pay is related to identification in the prevention of crime.

Finally, the seventh and last chapter considers such an issue. Because the concept definitions are taken from such instruments for prevention of crimes, it is doubtful they can serve their purpose. In addition, because the terms are not properly serving their purpose, proportionality concerns regarding the right to privacy arise.

The last myth, connecting all the previous ones, is beneficial ownership as a single concept. Analysis of the previous ones may allow us to answer this one.

¹M Reinhard-DeRoo, Beneficial Ownership (Springer, 2014) 3.

²Jacobellis v Ohio (1964) 378 US 184 (US) 197 (Stewart J, concurring).

³Reinhard-DeRoo (n 1) 5.

⁴Considering is not a term of art: C Brown, ‘Tax, Trusts and Beneficial Ownership: Perils for the Unwary Practitioner’ (2003) 23 Estates, Trusts and Pensions Journal 9, 51; R Speed, ‘Beneficial Ownership’ (1997) 26 Australian Tax Review 34, 50.

⁵See Baker (Inspector of Taxes) v Archer Shee [1927] AC 844 (HL); Saunders v Vautier (1841) 42 ER 282 (Ct of Chancery); FHR European Ventures LLP and others v Mankarious and others [2014] Ch 1 (CA); Shell UK Ltd and others v Total UK Ltd and others Total UK Ltd v Chevron Ltd (2010) 180 EWCA Civ (CA). See the discussion on whether some principles, especially those in Saunders v Vautier or Baker v Archer-Shee, deviated beneficiary rights in equity towards strong rights close to common law rights, in Kam Fam Sin, The Legal Nature of the Unit Trust (Oxford University Press, 1997) 114 et seq and 264 et seq. See also J Getzler, ‘Transplantation and Mutation in Anglo-American Trust Law’ (2009) 10 Theoretical Inquiries in Law 355, 369.

⁶Apparently following equity, though subject to criticism and controversy for a long time, Baker (Inspector of Taxes) v Archer Shee (n 5); following an anti-avoidance principle in the USA, Moline Properties Inc v Commissioner of Internal Revenue (1943) 319 US 436.

⁷For a good picture of the discussion, see D Oliver et al, ‘Beneficial Ownership’ (2000) 54 Bulletin for International Taxation 310.

⁸See Global Forum on Transparency and Exchange of Information for Tax Purposes, Exchange of Information on Request: Handbook for Peer Reviews 2016–2020, 3rd edn (OECD Publishing, 2016) 19 et seq. See also ss 1.1(e) and 2.2(a) of the Multilateral Competent Authority Agreement for the Common Reporting Standard, signed in Berlin on 29 October 2014. OECD, Standard for Automatic Exchange of Financial Account Information in Tax Matters, 2nd edn (OECD Publishing, 2017) 57.

2

Beneficial Ownership: From Conscience to Liberalism and Law

I.The Historical Evolution of Beneficial Ownership and Relation to Other Concepts

A.From Conscience to Law: Thirteenth to Eighteenth Centuries

It is widely accepted that current beneficial ownership principles are derived from equitable ownership in trusts and the cestui que use in uses, as were developed by the Court of Chancery between the fourteenth and nineteenth centuries.¹ What is less clear is its primary origin.

Some authors consider beneficial ownership to be based on the fiduciary rights in Roman law, as was widely accepted until the end of the nineteenth century; others consider it to be derived from German Treuhand.² More doubtful origins or relationships considered by some authors are Roman law usufruct, Islamic waqf, term of years, lease and other similar rights on estate or chattels.³ A final group of scholars consider it to be the evolution of different institutions to serve the same social need.⁴ In the author’s view, most of these relationships are dubious, as the historical analysis is simply based on the common structure and wording, which may well be founded on historical mistakes or deviations.⁵ Moreover, most studies on the origin of the trust were done in the nineteenth century, following a significant increase in its use for estate planning. Thus, it is highly likely that such studies are biased by the liberal trends and Romanistic inclinations of that century, triggered in continental Europe by the Historical School of Jurisprudence.

Beneficial ownership as it stands today is probably related to some extent to all of the above-mentioned concepts in that it is derived from common legal ideas to answer a common social need, but not directly comparable to any of them.⁶ It is only in relation to trusts and uses that it seems there is a strong direct relationship shown by primary sources. This connection can be traced as far back as the thirteenth or fourteenth century but no further, and even with uses and trusts, the concept has gone through so many social, economic and political changes since the thirteenth century that it ma...