Welcome back to ADITextra – the theme for this week’s blog for ADIT International Tax candidates is belonging.
Why belonging? Because understanding where a person or income ‘belongs’ is essential in international tax. Also, it fits with our aim to build a global ADIT community, bringing together international tax professionals from across the world.
Read on to learn how the topics covered in this week’s online ADIT International Tax classes come under the umbrella of belonging – from source taxation, residence and domicile through to functional analysis for transfer pricing. The spotlight for this edition of ADITextra is the OECD Model Tax Convention and its role in international tax.
1. Transfer Pricing
Following on from last Tuesday’s session, James (Jimmy) Ryan looked further at transfer pricing methods. Jimmy reminded the students that, since the 2017 update to the OECD Transfer Pricing Guidelines (TPG), there is no longer a hierarchy of methods. Above all, what matters now is finding the method which offers the best fit.
Next Jimmy discussed functional analysis – a critical part of establishing the arm’s length price. Jimmy referred the participants to the guidance in Section D of Chapter I of the OECD TPG. Remember that you will have the TPG available in your exam, but success in the exam is about applying the guidance.
Returning to the theme of belonging, you effectively determine what profit belongs where by doing a functional analysis. A good functional analysis draws out the FAR:
After explaining the purpose of the functional analysis, Jimmy discussed the practical approach to undertaking a functional analysis. How to conduct a functional analysis is listed in the ADIT syllabus as a specific item and comes up as an exam question.
Each week, the students complete a weekly assignment to apply the knowledge gathered from the classes and self-study. This week’s assignment focuses on selecting and evaluating transfer pricing methods for two consumer products. Jimmy marks the assignments and gives individual feedback to each student. This allows us to check that everyone understands the material, and is invaluable to the students in improving their exam technique.
There’s still time for you to join the Transfer Pricing course – we’re accepting bookings until 8 March. You can catch up on the classes by watching the recordings and you’ll have one-to-one access to Jimmy and the team to get you fully up to speed.
2. Principles of International Tax
Wednesday’s Principles of International Tax class considered three model tax conventions:
US Model Tax Convention
The US uses the United States Model Income Tax Convention when negotiating double tax treaties with other states.
UN Model Tax Convention
The United Nations Model Tax Convention is designed for use by developing countries.
OECD Model Tax Convention
The OECD Model Tax Convention is used by, and referred to, in all other treaty negotiations by OECD member states and non-members.
After discussing each of the model conventions, Jimmy focused on the OECD Model Tax Convention. You can read more about this topic, and watch part of the class, below.
New to ADITextra International Tax
It was great to see two new students join the Principles of International Tax course this week, extending our ADITextra international tax community to Germany and Canada. While the participants are diverse in their backgrounds and experience, they come together to expand their tax expertise and share their journey to ADIT success.
It’s not too late for you to join the Principles of International Tax course and become part of our ADIT community – you can book online until 8 March. And don’t worry, you can catch up on the classes by watching the recordings. Plus you’ll have one-to-one access to Jimmy and the team to get you fully up to speed.
3. UK Tax
Belonging was a key element in Thursday’s UK Tax class. Extratax Training’s founder Catriona Loughran recapped on the residence of individuals before moving on to discuss domicile and deemed domicile. If you missed it, check out last week’s ADITextra to watch Catriona explaining the UK’s Statutory Residence Test.
To understand when and how an individual is subject to UK tax, you must understand the person’s residence and domicile status. Unlike residence, domicile is not defined in UK legislation. It is a common law concept, meaning that it has been developed through the courts.
However, the Income Tax Act 2007 and the Inheritance Tax Act 1984 contain definitions of ‘deemed domicile’. The definitions are similar, but not identical. It is important for you to know the differences between when someone will be deemed domiciled for Income Tax & Capital Gains Tax versus Inheritance Tax.
Past Paper Questions
After successfully completing a past exam question on residence last week, this week’s assignment is a past paper question on domicile. For 10 marks, the students have to discuss an individual’s domicile based on the facts in the scenario – covering domicile of origin, dependency and choice.
In the exam, you’ll have 18 minutes to answer a question worth 10 marks. It is critical to stick to timings in the exam. However, for now, Catriona advises the students not to worry about answering within the time allotted. At the minute, it is more important to make sure you understand the key concepts and practice writing out full answers to the questions.
You can still choose to join the UK class – the deadline to book is 8 March. You can catch up on the classes by watching the recordings. Plus you’ll have one-to-one access to Catriona and the team to get you fully up to speed.
4. US Tax
Next for an update on US Tax, as we continue the preparations for the US course to start on Thursday 11 March. Look out for an announcement early next week about the lead tutor! We’re thrilled that she’s joining our ADIT community and can’t wait to introduce her to you.
In addition, Catriona’s been working to secure an exciting guest lecturer for US Transfer Pricing and Cross-Border Mergers & Acquisitions. We hope to have good news for you soon!
If you’re interested in joining us for the US Tax option, we’re offering you the opportunity to book for June 2021 at a special introductory rate to celebrate adding Module 2.10 to our portfolio.
5. Spotlight on the OECD Model Tax Convention
Each week, we’ll put the spotlight on a topic covered in one of our classes. This time, let’s look at the OECD Model Tax Convention. Jimmy covered it in this week’s Principles of International Tax class. However, it is an area which cuts across all of the ADIT modules.
It’s critical to remember that a double tax treaty gives a jurisdiction permission to tax income or a gain – it does not create taxation where none exists in the state’s domestic law. For instance, for many years the UK did not tax non-residents on gains arising on the sale of UK land. It had the right to tax such gains in its double tax treaties. But, until quite recently, the UK chose not to exercise its right to tax gains from UK land.
Articles in the OECD Model Tax Convention
The OECD Model Tax Convention is split into seven chapters:
I – Scope of the Convention
II – Definitions
III – Taxation of Income
IV – Taxation of Capital
V – Methods of Elimination of Double Taxation
VI – Special Provisions
VII – Final Provisions
After giving an overview of this structure of the OECD Model Tax Convention, Jimmy started to walk the class through key articles. Clearly, some articles form a major part of the syllabus (for example, Article 5 on Permanent Establishment) and will be the subject of future classes.
Thinking about the theme of belonging, Article 4 on Residence is another key article. The tie-breaker clause in Article 4(2) is used to decide to which of the two states an individual ‘belongs’. Similarly, Article 4(3) is the tie-breaker clause for corporate residence.
Watch & Learn
Watch part of this week’s Principles of International Tax class to learn about the OECD Model Tax Convention.
There’s still time to join our Principles of International Taxation course – book today and let us guide you to ADIT success.
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