On 4 June 2020 the Platform for Collaboration on Tax issued a final version of the Toolkit on the Taxation of Offshore Indirect Transfers.

The Toolkit provides guidance in relation to designing measures to enable a country to tax gains arising when a non-resident entity sells shares or other interests in an entity that owns assets in that country. This is an issue for developing countries and especially for resource-rich countries where assets such as mineral rights or licensing rights held in an entity may be transferred without being subject to tax by the country where the assets are located.

The Toolkit suggests that the countries may wish to ensure that transfers of immovable assets located in their territory are subject to tax, and may also wish to extend the taxing powers to other types of asset that are producing location specific rents.

Treaty Provisions

The OECD’s Multilateral Instrument (MLI) to Implement Tax Treaty Related BEPS Measures into bilateral double tax treaties includes a provision based upon the OECD and UN model tax conventions that can increase the scope of an existing tax treaty to include taxing rights on such offshore transfers the country where the relevant assets are located, if the contracting states elect to include this in a treaty.

Taxing the gain

The Toolkit sets out two main approaches to enable taxation of the transfer by the jurisdiction where it is located.

One approach treats the offshore indirect transfer as a deemed disposal of the underlying asset. A tax liability would arise in the case of a change of control over the asset whether onshore or offshore. Where there is a change of control the local entity would be treated as if the assets were disposed of at their market value, and then re-acquired.

The other approach treats the gain on the transfer as being sourced within the jurisdiction where the assets are located, thereby allowing that jurisdiction to tax it under its own law. As a non-resident is normally only taxed on income arising in the source country this approach modifies the source rules to allow taxation of the gain.

Platform for Collaboration on Tax

The Platform for Collaboration on Tax was set up by the OECD, IMF, World Bank and UN to intensify cooperation between them and facilitate consultations on the design and implementation of international tax standards. The Platform also aims to strengthen capacity building support; develop joint guidance on tax; and facilitate information sharing on operational and knowledge activities. The Platform aims to help formulate tax technical advice to developing countries to assist them in pursuing the Sustainable Development Goals.