On 16 July 2018 the Platform for Collaboration on Tax (PCT) published a new draft of its toolkit on the taxation of offshore indirect transfers of assets. The PCT was set up by the IMF, OECD, UN and World Bank at the request of the G20 of countries to recommend mechanisms to ensure effective implementation of technical assistance programs. The latest draft report is part of a series of “toolkit” reports being prepared to help guide developing countries in the implementation of policy options for international tax issues relevant to them.

An offshore indirect transfer is essentially the sale of an entity owning an asset located in one country by a resident of another country. Although the subject of offshore indirect transfers of assets is addressed in the OECD and UN model double taxation treaties many countries currently follow different approaches in their domestic law. Many of the bilateral double tax treaties signed to date do not include the relevant model treaty provisions.

The country where the underlying asset is located may want to tax the gain on the transfer in the same way that a gain on a direct transfer of immovable assets is taxed. This treatment could extend more widely to assets generating location specific rents. However gains on offshore indirect transfers may be partly attributable to the value added by owners and managers of the assets rather than gains on the assets themselves and for this reason some countries may choose not to tax the gains.

There appears to be wide acceptance that taxation can be imposed on gains on offshore indirect transfers by the location country and the provisions of the OECD and UN Model treaties reflect this. However this taxing right in a tax treaty cannot be supported unless there is a suitable definition in the domestic law of the country. The report considers that the countries choosing to tax offshore indirect transfers need to adopt a more uniform approach.

The PCT report sets out two main approaches to taxation of offshore indirect transfers by the country where the underlying asset is located and sample simplified legislative language is suggested for the domestic law in the country where the asset is located. One of the approaches treats the offshore indirect transfer as a deemed disposal of the underlying asset while the other approach treats the transfer as being made by the actual seller offshore but sources the gain within the location country which can therefore tax it. The report does not express a preference for either of these approaches but leaves the choice to the country depending on its circumstances and preferences.

Interested parties are invited to consider if this draft better clarifies the economic rationale for taxing such transfers by offshore indirect owners, and makes it clear that there is no general preference for either of the two approaches outlined. The latest draft is intended to reduce any perceived emphasis on such offshore transfers as constituting tax avoidance, so they are not taxed as an anti-avoidance device, and commentators are invited to comment on whether this is done adequately.

The PCT in 2017 invited feedback on a previous draft of this report and the latest version of the toolkit has been drafted after taking into account the comments received. The PCT has summarised the comments received on the previous draft and has explained how the new draft responds to those comments. Most of the comments received in relation to the previous draft have been addressed by the PCT and the new version of the toolkit attempts to clarify issues that were the subject of concern.

Comments on the latest draft are invited by 24 September 2018.