WebJournal on International Taxation in Sweden no 1/2012 (February 2012)
by Peter Sundgren
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This is not an article on international taxation in Sweden. As indicated in the title it's an article on how not to write an article on international taxation in Sweden. For publication that is in Skattenytt and/or Svensk Skattetidning, two leading and serious tax publications in Sweden.
Ever since the early 1980s I have written a very large number of reports and articles on international (income) tax matters. During my career at the Institute of Foreign Law in the 1980s and 90s all articles I submitted for publication to these journals were accepted but since then my publication record is very poor. Thus over the last decade practically everything I have written has been denied publication.
The scope, variations and indeed also the procedures for rejecting my papers have been so numerous and of such a character that, in my opinion, these rejections have not been based on impartial or objective reasons.
An example hereof was the very extensive, not to say incensed, debate that took place a couple of years ago regarding on the compliance of our domestic CFC rules with European Union obligations on the free movement of investments. Despite having provided very comprehensive arguments in its tax bill, something which incidentally is quite unique, describing and defending the Swedish legislation on this point the Swedish government were severely criticized herefor by a number of highly respected authors to articles in Skattenytt (e.g. Gunnar Rabe, Skattenytt 1-2/2004, professor Nils Mattsson Skattenytt no 4/2004). Moreover, at an open seminar arranged by the Swedish IFA Branch regarding Mr Mattssons draft article, Professor Emeritus Leif Mutén, Sweden's certainly most influential post-war authority on tax matters, even went so far as spurning the government's reasoning as representing ”pure pettifoggery” (brännvinsadvokatyr)! Subsequently, in my article on CFC rules versus EU law, which indeed represented the only support of the government's standpoint, Svensk Skattetidning demanded that my reference to Mr Mutén's remark at the IFA branch meeting be deleted. I underlined that Mr Mutén's statement had been made in public and as I disagreed with his opinion (and disapproved of his rhetoric) my reference hereto was important and appropriate. The article was then denied publication. (It should also be mentioned that Mr Mutén at the time was a member of the editorial board of Svensk Skattetidning).
In another article the editors of Svensk Skattetidning again demanded a deletion of a reference I had made to a public statement by an individual. This was on an issue that had created a contentious tax debate in Sweden namely the introduction of special tax priviledges for foreign experts and key personnel employed for work in Sweden. The individual in question was none other than Mr Lars Ramqvist, the then C.E.O of the Ericsson Corporation and President of the Federation of Swedish Industries and thus one of Sweden's most powerful and influential business leaders and creator of public opinion, who in various medias had vigorously pressed for legislation in this field (even foreboding that he would otherwise move the head office of Ericsson to London.) My main objection to his standpoint was that he had failed to consider the very generous tax breaks resulting from the widespread exploitation of so called tax rollover schemes for foreigners working in Sweden and that therefore he was exaggerating the problem. The editors, Ms Cecilia Gunne, Partner, Burenstam & Partners and Mr Anders Köhlmark, Partner, KPMG Stockholm, were uncomfortable with my mentioning of Mr Ramqvist's name and insisted that it be replaced by the more nebulous term ”the directors”. A further reason for my subsequent withdrawal of my article from publication was that the editors also insisted on issuing a separate and differring opinion on a point of law which I had debated in my article. I should of course point out that I certainly have no objections to differring views of my opinions beeing raised but, if so, they should be submitted as the personal views of the author(s) and not, as was the case, as editors of and under the aegis of Svensk Skattetidning and its scientific board.
Another reference I made to an individual came into focus again in an article I wrote in 2007. It concerned a matter that had made prolonged and intense headline news in all the medias in Sweden shortly after the the new center/moderate government alliance took office after the general election in 2006. It was then revealed by the press that the new minister of (foreign) trade Maria Borelius had been involved in concealed payouts to private nannies and, which finally forced Ms Borelius out of office after only a week on the job, for having exploited the use of holding companies in Jersey alledgedly for tax purposes. Not surprisingly, the tax authorities subsequently subjected Ms Borelius' tax returns to a thorough investigation and finally presented a bill for back taxes of about 800 000 SEK (mainly referring to non-declared income from the renting out of her private home in Sweden after she had moved to the UK.) I carefully analysed the tax authority's decision (which was not appealed by Ms Borelius), especially the international tax aspects of her foreign holding companies (of which there was no reason to have any specific tax complaints). Upon submitting my report for publication in Svensk Skattetidning I received a curt note from Ms Gunne informing me that no ”serious” tax publication would ever publish an article referring to the taxation of an identified private individual and upbraided me for violating Ms Borelius' integrity. I responded that Ms Borelius under the circumstances was nothing of a private individual but, on the contrary, a notable public figure, whose tax case had already been widely reported in the medias and who's identity anyway would be impossible to conceal in my article. Noteworthy too and somewhat troubling in my opinion was that Ms Gunne had acted as legal counsel to Ms Borelius in her tax case and in that capacity had let herself be interviewed by the press. (My article about Ms Borelius was subsequently published in the Law Review of The Institute of Foreign Law at the Jönköping International Business School and in this WebJournal - also serious tax publications!)
In 2009 I wrote an article for Svensk Skattetidning that displeased its new editors Jan Bjuvberg, Assistant professor of Fiscal Law at Uppsala University and Jari Burmeister, Partner Skeppsbron Skatt AB, Stockholm. My article addressed the very disputatious subject of migrating share gains which under our domestic 10 year rule are 'quarantined' for tax purposes in Sweden for a period of ten years upon emigration of the shareholder. I have written extensively on this tax matter never concealing my opinion that Sweden, like several other EU member states, should impose an exit tax on these gains in order to put a lid on the enormous Swedish tax base erosion that has taken place in these cases over many years. At first Messrs Bjuvberg and Burmeister rejected my article outright but upon further insistence on my part agreed to publish it. But not without what finally became a complete overhaul of what I had written. Thus setting to work, Mr Burmeister presented what can be described as an almost new version of my article completely altering its main thrust and totally taking the sting out the objections and arguments I had raised against the suggestion presented in a report from a government commission (SOU 2009:33) not to take action against the tax planning measures that had been engineered to circumvent the ten year rule. And again the issue of the identity of the author of the report came up. Mr Bjuvberg thus demanded that the name of the chairman of the Commission and author of the report, Mr Leif Gäwerth, a high ranking tax judge formally appointed by the Swedish government, should be kept secret and that reference should be made only to ”the report”. In order to allow publication I grudgingly accepted Mr Bjuvberg's demand. And then, ten days later, he unblushingly informed me that publication of my article, by a unanimous decision of the scientific board of Svensk Skattetidning, had nevertheless been denied. And no explanation for the refusal was given.It should be noted that the unanimous decision also included the vote of Mr Bjuvberg!
In my view the quite obsessive attitude held by Svensk Skattetidning regarding references to publicly declared statements by other individuals and open sources is quite puzzling. Personally I would be quite disturbed if reference were made to my publications and opinions without revealing their origin.
My efforts to have my articles published in Skattenytt have been fraught with equal dissension. In the mid 1990s, after I had had quite a long (and stimulating) discussion with Professor Mathias Dahlberg presently at the University of Uppsala, generating several articles in Skattenytt regarding the question whether the domestic Swedish law, giving effect to the tax treaty with Malaysia, by declaring that Labuan Island companies were not eligible for treaty benefits, had indeed overridden the treaty. I insisted that it had. Mr Dahlberg and supported by Mr Mutén, both at the time, representing the Fiscal Law Faculty of the Stockholm Business School were equally convinced that no override had taken place. They maintained that the Swedish law merely represented a unilateral interpretation of the bilateral treaty. Several years later the discussion was renewed when Maria Nelson and Eva Fransberg, both doctoral students and collegues of Mr Dahlberg and Mr Mutén at the said business school, also rejected my views on the Labuan override matter. So now I had the whole fiscal law faculty of the same business school lined up against me! I wrote a response hereto to be published in Skattenytt. Considering that Mr Dahlberg at this point had become editor of this periodical I imagined that publication of my article was a forgone conclusion. But, to my great exasperation publication was denied by Mr Dahlberg.
In 2008 the international tax debate in Sweden went into overdrive when the Supreme Administrative Court (SAC) declared that our domestic CFC-regulation should take precedence over our tax treaties, concluding that the treaty in question need not even be consulted or analysed! The uproar from the whole Swedish international tax community over this treaty override measure was of a dimension that has never been experienced in the past giving rise to something like 15 angry articles. One of the leading critics was Mr Dahlberg himself. But in my view he had seriously misunderstood the ruling maintaining repetetively that the Court had not interpreted the treaty correctly and had thus detracted from its former principles reflected in several cases to respect the international law principles on treaty interpretations embodied in the Vienna Convention on the Law of Treaties. In a fifteen page rebuttal of Mr Dahlberg's opinion I declared that the SAC ruling had nothing to do whatsoever with treaty interpretation. Treaty interpretation, I insisted, is a process where an investigation is undertaken to reach a conclusion about the meaning of the treaty text as such. But as mentioned, the Court had reached its decision by completely ignoring the treaty. It had not applied the treaty. And if one has not applied nor analysed the treaty how can one then have interpreted it! I sent my manuscript by e-mail to Mr Dahlberg who obviously was sitting at his computer at that point. Because it took him only 18 minutes to deny publication, declaring that my article did not add anything of relevance to the discussion.
In late 2009 I submitted what I considered an important paper to Skattenytt on tax treaty interpretation reporting dissenting views with an earlier article by the then Supreme Administrative Court Justice Stefan Ersson. The main thrust of my article was my disappointment with Mr Ersson's suggestions that treaties should be interpreted in line with principles of interpreting domestic Swedish tax laws. My article was framed according to a carefully structured list of six basic reservations reminding my readers in particular of the landmark decision in Rå 1987 ref. 162 which – reflecting the brilliance and eloquence of Anders Swartling, a towering figure on the Supreme Administrative Court in the post war era - remains the beacon for tax treaty interpretation. My article was quite favourably received by Mr Dahlberg but his decision to publish it was overruled by his editorial board who considered it too ”person-oriented” (personorienterad).
As aforementioned both Svensk Skattetidning and Skattenytt enjoy a high reputation for the quality and reliability of their articles. This no doubt is maintained by the high-profiled members of their scientific committees. In order to safeguard this reputation Skattenytt for some of its articles has recently also introduced a special peer review procedure.
Some time ago, however, I had reason to doubt the correctness of an article in Skattenytt. I had noticed that the author of an essay relating to our ten year rule and its interaction with the pertinent tax treaty had, in my view, erroneously reached the conclusion that the share gain in question should be taxed in the other contracting state and not in Sweden. And if so the error was quite serious because it affected an important general aspect of the relationship between domestic law and tax treaties. I contacted Mr Dahlberg about my misgivings to inquire if he shared my opinion. In his reply Mr Dahlberg declined to address the legal points I had raised saying only that he took no responsibility for the legal content of the materials published in his journal and that he had found the article fully acceptable considering that it had addressed an interesting and important tax issue raised by a young tax scholar. He had forwarded the article to the author who had declared that he had no further comments to what he had written. Later on, however, he wrote an explanation to his article which in the end nevertheless failed to point out that the gain should be taxed in Sweden.
In 2008 I wrote two articles both in English. One of them titled ”Controlled Foreign Corporation (CFC) Taxation in Sweden and the new ”business purpose” test.” The other article was about the draft Swedish national report to be submitted to the 2008 IFA congress on the subject ”New Tendencies in Tax Treatment of Crossborder Interest of Corporations” by Professor Peter Melz of the Stockholm University and Lars Jonsson, Partner, Linklaters, Stockholm. My main complaint about their report was that it had failed to point out the (quite phenomenal) combined effect for foreign investors in Sweden of a) full deduction of interest expense, b) total absence of thin capitalisation restrictions c) no interest withholding taxes and d) the existence of Sweden's wide treaty network, all of which makes Sweden into a very favourable stepping-stone and treaty shopping jurisdiction for tax purposes also for investors in countries that do not have a treaty with Sweden. The reason for rejection this time of these two articles was that they were considered of little interest and that they were written in English. I thought this latter reason for rejecting my article on the crossborder interest issue was quite bizarre considering that the national report that I was commenting was also in English! I then suggested to the Swedish IFA branch that they put my article on their website. But after a meeting of the board of the branch this request was also denied. (Incidentally, a number of the board members of the Swedish IFA branch are also on the editorial committees of Svensk Skattetidning and Skattenytt.) I sent my paper to the discussion leader at the congress, Professor Brian Arnold (Canada) and it was reported that the Swedish tax situation did indeed attract quite some interest at the congress proceedings. The first mentioned CFC/business purpose article was later granted publication in the US in Tax Notes International (April 14, 2008).
As gleaned from the above it is difficult to determine on what grounds publication is given by the two magazines. One article I wrote for Svensk Skattetidning (in response to Ms Ann Sophie Sallander's paper on treaty override, see below) was rejected by Mr Bjuvberg simply because he didn't like the rhetoric in it. Another he dismissed due to a dispute that I had previously had with the editor of Skattenytt. Since recently publication decisions regarding my papers are made jointly by the two tax journals.
I have asked both Mr Bjuvberg and Mr Roger Persson Österman, the present editor of Skattenytt and Senior Tax Manager at Ernst & Young, Stockholm, what are the actual criterias for publication of articles in their magazines. Mr Bjuvberg has responded that as far as Svensk Skattetidning is concerned such rules are ”unofficial” and consequently not disclosed and Mr Persson Österman says that Skattenytt does not have any guidelines for determining publication decisions. My request for an interview with the two gentlemen for this article has been turned down on the grounds that the affairs of their publications are not of a public concern (publik angelägenhet). Mr Persson Österman has also announced that in the future he will leave no reasons at all when denying publication on submitted materials, citing that, because Skattenytt is a private company, he is not obliged to do so.
As I have mentioned above the number of articles I have written is very large. Also, the scope of topics covered is very wide. Many of them have addressed tax treaty issues such as treaty interpretation, residence matters, treaty override (and general problems regarding the relationship between domestic law and tax treaties), partnership taxation, beneficial ownership restrictions, competent authority procedures, exchange of information etc. My articles have also covered a number of domestic international tax matters such as our ten year rule, our tax rollover and foreign expert taxation, our CFC-rules, our new participation exemption regulations, ”interest spinners” etc. and I have authored several articles regarding the taxation of foreign trusts.
On the whole - maybe a 7 on a 1-10 scale- I would suggest that my papers/articles have favoured opinions and come to conclusions that would be considered ”anti tax payer friendly”. Thus as discussed above I supported the Swedish government's view on the compatibility of our CFC regime with EU law. I have strongly advocated an introduction of exit tax legislation on migrating share gains under the ten year rule and criticized the government's quiescence in this regard. (But on the other hand I think the scope of the tax liability of the gains should be limited to closely held companies only.) In order to prevent sham emigrations abroad I have also advised that claw-back rules should be adopted for such gains if the seller returns to Sweden within five years upon emigration. I strongly suggest that tax roll over mechanisms should be abolished for foreigners working in Sweden. Withholding tax on interest payments should be imposed together possibly with thin capitalisation rules (something which incidentally is presently being explored by a government tax commission). Royalties derived in Sweden by non-residents should however be tax exempt with the exception of payments to tax havens. Double non-taxation opportunities must be counteracted in our treaties calling for instance for more stringent reporting requierments on non-remitted income. Dual resident individuals should not be allowed a deduction for full interest expense under domestic tax law and simultaneously enjoy exemption from tax for interest income under a treaty. Bilateral agreements allowing automatic information exchange should be negotiated. Strong measures should be taken to discourage tax haven exploitation. Taxation of foreign trusts and regulations on disclosure of such income needs a lot of consideration.
All of this, if carried out, would of course be bad news for tax payers. And sometimes I have speculated whether this has been a reason for my materials having been so often rejected. Are Svensk Skattetidning and Skattenytt – I have wispered to myself - in any way prejudiced or biased with regard to tax matters and tax policies? In the cases reported above regarding my articles on exit taxes on migrating share gains and tax rollovers, both of which give rise to enormous tax base erosion by taxpayers and employ armies of tax consultants, (some of which have asked me not to speak so "loudly" on these matters), I would suggest that such bias is quite noticeable.
Therefore, for a tax publication (of whatever eminence) claiming to be impartial and objective, it is imperative to strike a balance of allowing all participants in a tax debate or commentators otherwise pursuing their opinions on tax matters to have their voices heard. Therefore, with all respect, in order not to invite fault-finding in this regard, the editors of such publications - and irrespective of their professional qualifications - should be chosen from other ranks than taxpayer representatives and instead be selected within academic circles and tax courts. This indeed has always been the case in the past. Thus, the list of editors since the 1980s has been: Skattenytt: Hans Bylin, Gothenburg Tax Appeals Court judge, Sigvard Bergöf, Supreme Administrative Court Justice, Peter Melz, professor Stockholm University, Robert Påhlsson, professor Gothenburg University. Svensk Skattetidning: Rolf Engblom, Supreme Administrative Court Justice and Arne Baekkevold, Supreme Administrative Court Justice. Lately, however the editors of Svensk Skattetidning and Skattenytt do not fit the ”editorial standards” just mentioned. Almost all of them have been tax consultants. And, which would no doubt stir up quite some emotions, these publications have never had an editor from the fiscal authorities. Moreover, considering its influence on editorial matters, the ”taxpayer-fisc equilibrum” should also be reflected in the composition of the scientific committees or editorial boards of Svensk Skattetidning and Skattenytt. This today is not the case. Out of ten members on the editorial board of Skattenytt (Anita Saldén-Enerus, Björne Sjökvist, Ingrid Melbi, Jan Kleerup, Karin Attorps, Lars Samuelsson, Per Classon, Richard Hellenius Ulf Tivéus and Lena Lindström-Ihre) there is only one (Björne Sjökvist) that represents the tax administration. The corresponding council at Svensk Skattetidning has nine members (Anders Köhlmark, Anne Rutberg, Cécile Brokelind, Cecilia Gunne, Ingela Willfors, Krister Andersson, Kristina Ståhl, Thomas Andersson and Håkan Söderberg) of which none represents the tax authorities.
However, since the advent of the dot.com era and other social medias the effects of my limited access to Svensk Skattetidning and Skattenytt has been blunted. Because now you have at your service this WebJournal on International Taxation in Sweden, the one you are just reading.
For anyone who is not on the mailing list (comprising about 1700 international tax experts worldwide) who will be notified whenever new stuff is published, or for anyone that has forgotten my blog address petersundgren.blogspot.com you can just google ”webjournal taxation” and the webjournal will come up in first, second and third place. Or just google ”international taxation” and you will find it eighth place. (January 10). I have suggested to Svensk Skattetidning and Skattenytt, but without result, that they too create their own websites to be used for various materials (and with a link to this website journal).
With some disappointment I have, however, noted that the materials on this webjournal have been neglected in Swedish academic circles. Thus, recently when Ms Catja Cejie at Uppsala university published her doctoral dissertation on ”Emigration taxes ” (on capital gains) there was not a single reference to the quite comprehensive materials I have written hereon in this webjournal. I wrote a paper for Skattenytt on Ms Cejies book but it was denied publication by Mr Persson Österman because Professor Mats Tjernberg, who had served as opposer to the dissertation would be writing an article hereon and that was expected to be sufficient by Mr Persson Österman. Today, fourteen months later, no such article has appeared.
In early 2010, when Ann-Sohie Sallander, a scholar at the Jönköping International Business School, wrote an article on treaty override she had also disregarded all my publications on this subject – there were three of them - in my webjournal. When asked hereabout she declared that she had ignored what I had written because beeing published on the internet it did not have the same scientific quality as materials published by ordinary tax publications. My subsequent article on treaty override and comments to Ms Sallander's article were – yes, you guessed correctly – denied publication by Svensk Skattetidning and Skattenytt.
In early 2011 Mr Dahlberg wrote an additional article for Skattenytt on treaty override. When citing – exhaustively it appeared - all materials that had been published on this matter he too failed to mention my articles published hereon in WebJournal on International Taxation in Sweden.
Both Ms Cejie, Ms Sallander and Mr Dahlberg are subscribers to the webjournal in question. I have requested permission to have Ms Sallander's and Mr Dahlberg's articles published in my WebJournal. Both they and Messrs Bjuvberg et Persson Österman, all four of them, have, however, refused giving such permission. (Mr Bjuvberg has even declared that he will never give permission to publish anything of Svensk Skattetidning's material in the WebJournal on International Taxation in Sweden.)
I have sometimes felt like a Don Quixote tilting at windmills in my endeavours to have my ideas and opinions on international tax matters published in Sweden. Perhaps – and mimicking professor Gustaf Lindencrona's frustration over the Supreme Administrative Court Justices' understanding of treaty override in the OMX case – I will just have to set my hopes to the next generation of editors at Svensk Skattetidning and Skattenytt.
Stockholm 21 February 2012.
peter@sundgren.net
P.S. This paper has not been submitted to Svensk Skattetidning or Skattenytt for publication. It has, however, been sent to Mr Bjuvberg and Mr Persson Österman for comments but there have been none.
tisdag 21 februari 2012
Letter to the board of the Swedish IFA Branch
WebJournal on International Taxation in Sweden no 1/2012 (February 21 2012)
Stockholm January 17 2012
To the Board of the Swedish IFA branch
For quite some time I have been contemplating an idea where I believe IFA/Sweden with its expertise, integrity and experience could play an important role in the field of international taxation namely the function and structure of our tax treaties and the policies that should be adopted regarding these treaties.
As we are all aware, both the National Audit Office (Riksrevisionen) and the Federation of Swedish Enterprise (Svenskt Näringsliv) have recently submitted quite critical reports to government and parliament for their long lasting neglect of our tax treaty network. This, it is suggested, has had negative effects for the competitiveness of our industry and international commerce. The National Audit Office has also complained that our information exchange has not been updated with important secrecy jurisdictions and that old treaties are still being abused for unwarranted tax avoidance purposes.
It can now be expected that the government will step up its treaty making activities but one should not be content herewith. Now should therefore be a good point in time also to take more interest in how our treaties are structured and to make proposals to this effect. International developments both in Sweden and abroad require that we take a closer look att our treaty policies. And this should be a concern not only for the government and the finance department but should become an issue for debate in wider circles. This also, as noted below, should also lead to considerations for changes of parts of our domestic international tax regime.
Today the negotiation of tax treaties takes place behind closed doors where the tax payer community is presented with the a final and signed treaty as a faite accomplie. Only the Tax Administration and the Tax Appeals Court in Stockholm are invited to express their views on technical matters of the initialled text. Only once, as far as I recall, was an initialled text regarding the treaty with Germany made public which also gave rise to widespread interest and requests for changes. Sometimes in the past the negotiators would inquire at the Federation of Swedish Industries and the Institute of Foreign Law about requests and ideas when a new treaty was being contemplated. The aforementioned report by the Federation of Swedish Enterprize indicates that this custom has been discontinued.
As mentioned IFA/Sweden would be a very suitable institution for taking the lead in a promotion of a new approach to the making of our tax treaties. I suggest that one put together a working party comprising a select group of IFA members representing tax payer, government ant tax administration interests to work out a report which could then be distributed to all members and discussed at a seminar.
A starting point for considerations of our treaty policy should be an examination of our own domestic, albeit unofficial, model tax treaty (which long ago I commented in IUR-INFO.) This in itself would no doubt give rise to plenty of ideas.
But I also have a number of ideas that could be brought up in a discussion of this kind. This discussion should be as broad as possible and as already mentioned cover also suggestions for changes of domestic tax law and various methods for the application of tax treaties:
1. First of all it could be questioned whether we should really have so many treaties as today and thus suggest that some of them be terminated. For instance, do we really, with all respect, need treaties with such countries as e.g. Mauritius, Zambia and Trinidad and Tobago? Instead of treaties one could consider having domestic rules for specific and less ”important” countries where Swedish investors – and they are probably quite few – could be given tax reliefs corresponding to those in our treaties. For instance full credit for the foreign tax or a credit for taxes above a certain level imposed in the other country. Investments in Sweden by companies in the pertinent country
could also be given the same treatment as in a treaty e.g a reduced withholding tax on dividends. These investments can also be expected to be very few. How many companies in for instance Trinidad and Tobago are doing business in Sweden where they can have any benefits of the treaty? Moreover, our domestic tax regime for foreign residents already dovetails the OECD model in many respects which also reduces the importance of a treaty. This applies for instance to our SINK-regime for foreign residents deriving employment and pension income in Sweden and our definition of permanent establishments. The advantage of settling these matters in domestic law is that one gains complete control of the legislation, that one avoids problems of treaty interpretation etc. If undesired situations appear it is easier to correct them ad hoc. Rules on exchange of information, however, would of course always have to be drawn up in bilateral treaties.
2. And why not completely abolish the so called golden rule declaring that preference to the treaty should only occur when it reduces tax liability? There is no specific reason why this rule shall be considered carved in stone. And it need not be a general rule. Depending on the circumstances one could ordain that preference be given to the treaty in one respect and vice versa in another respect. For instance, one could prescribe that a treaty rule allowing the imposition of a source tax on interest should apply, despite that not being possible under domestic law, and at the same time, if desired, disallow the application of the ”effective management” rule (in OECD article 4.3) which represents an extension of the residence test under Swedish law.
3. When negotiating treaties Sweden should employ local tax expertise in the other contracting state to safeguard our interests. The purpose thereof would be to gain information about the finer points of the other country´s international tax regime and treaty policies. It is difficult for our negotiators to fully grasp such matters or to rely on the information provided by the treaty partner representatives. It could also be a good idea (in some cases) to retain this private tax expertise mentioned to provide current information of changes made in the domestic law of the other country or of important tax cases that could affect the application of the treaty.
4.Our treaties should be construed not to allow unwarranted tax avoidance for instance double tax exemptions. Subject-to-tax rules should therefore be considered both where Sweden is the state of residence of the tax payer and where it is the source state. In the commentaries to article 1 of the OECD model there are also a number of anti- tax avoidance recommendations that should be given consideration.
5. Anti- treaty shopping rules should also be studied, the reason being that treaties are bilateral and that the tax sacrifices provided therein should benefit only the tax payers of the contracting states. One should thus take advantage of limitation-of-benefit rules to a larger extent. One could also impose special taxes or restrictions for payments made to blacklisted tax haven recipients or tax priviledged companies in the other contracting state such as is the case in some of our treaties already. Malta and Switzerland e.g.are treaty partners where such rules already exist.
6. Our new domestic participation exemption rules have made such rules in our treaties unnecessary and could thus be abolished.
7. Due to new directives imposed by the EU e.g on withholding taxes such rules in our treaties can also be abandoned. On the whole our treaties should be adapted more carefully to the prevailing circumstances in each and every treaty.
8. More efforts should be given to negotiating bilateral information exchange rules working out the application of automatic exchange of information. Considering that bank secrecy in the wake of the finacial global meltdown has now virtually been given up as far as communicating the information to tax administrations is concerned such rules should more easily be possible to negotiate. The mere knowledge that a bilateral information agreement is being worked out should have a very positive preventive effect regarding tax payers harbouring ideas to hide their income or capital in such countries.
9. In the past, during a couple of years, we had a domestic law on the application of tax treaties. (It was introduced due to the panic that arose after the ”Kenya 1 ruling” by the Supreme Administraive Court.) One should consider if such a law could have posirive effects today. For instance, it could be used for a general rule establishing the relationship between domestic law and treaties discussed above. It could also contain the rule, which is now repeated in every law of intrduction of treaties, that the exemption with progression rule in our treaties shall not apply. Even better is of course to abolish that rule alltogether in our treaties. The new law could also be used for providing more detailed information to be provided by tax payers benefitting from a treaty.
10. More structured efforts should be made to prevent tax avoidance by the use of tax treaties. A well known and widespread abuse of our treaties is the tax planning regarding migrating capital gains and our ten year rule. This indeed is the specific area of taxation brought up by the National Audit Office. In that context one should consider if there is reason to restrict the ten year rule. In my opinion quoted shares should be exempted from the ten year quarantine and apply only to closely held shares. It is a well known fact that the negotiation of these rules in our treaties give rise to problems especially as regards the agreement of the quarantine period. In the French treaty it has been reduced to only two years. A possible solution would be to offer the other state a reversed credit mechanism in these cases so that this state is relieved of the obligation to give tax relief for the Swedish tax. Considering that the tax planning in these cases always is directed to low- or no-tax jurisdictions regarding capital gains, the loss of revenue to the Swedish treasury by such a credit will be quite negligible. Reversed credits could maybe also be considered in other situations.
11. One should renew the discussions on source taxation of royalties and impose a source tax on gross payments. Considering our general treaty policy of a zero source tax on royalties one could even consider abolishing such taxes alltogether in domestic law. Possibly with reservations visavi payments to tax haven recipients.
12. One should definetely discontinue the right of dual resident tax payers to deduct interest expense under domestic law when, at the same time no tax is imposed on interest receipts under a treaty. This is a senseless and pure corruption of our international tax regime. (For a long time such deductions have been stopped for corporate tax payers.)
13. In order to avoid conflicts of interpretation of treaties one should specifically spell out that they do not prevent the application of domestic anti avoidance and CFC rules of the contracting states. And why does our general anti avoidance rule not apply to our dividend withholding tax?
14. We have subject-to-remittance-rules with a number of treaty partners. How are they monitored? Probably not at all. Regulations hereon could be drawn up in the afore mentiond law on application of tax treatiers.
15. Treaties should also include rules of mutual collection of taxes.
16. Rules on taxation of foreign trust must be put in place. After the abolition of our gift tax such trusts have become very interesting tax planning instruments. And allways in such situations a lot of money is involved.
17. One should draw up a sheet for providing information by tax payers benefitting from tax treaties. A simple thing would be to oblige the tax payer to provide a copy of the tax return submitted in the other country.
The afore mentioned suggestions are merely the result of a spontaneous and unstructured brainstorming of ideas to be considered in order to improve our tax treaties and their application.
More important is to get started! And, as already emphasized, I believe that IFA/Sweden is a perfect institution for taking a lead in these matters and for inspiring a project of this kind.
Best regards
Peter
peter@sundgren.net
Stockholm January 17 2012
To the Board of the Swedish IFA branch
For quite some time I have been contemplating an idea where I believe IFA/Sweden with its expertise, integrity and experience could play an important role in the field of international taxation namely the function and structure of our tax treaties and the policies that should be adopted regarding these treaties.
As we are all aware, both the National Audit Office (Riksrevisionen) and the Federation of Swedish Enterprise (Svenskt Näringsliv) have recently submitted quite critical reports to government and parliament for their long lasting neglect of our tax treaty network. This, it is suggested, has had negative effects for the competitiveness of our industry and international commerce. The National Audit Office has also complained that our information exchange has not been updated with important secrecy jurisdictions and that old treaties are still being abused for unwarranted tax avoidance purposes.
It can now be expected that the government will step up its treaty making activities but one should not be content herewith. Now should therefore be a good point in time also to take more interest in how our treaties are structured and to make proposals to this effect. International developments both in Sweden and abroad require that we take a closer look att our treaty policies. And this should be a concern not only for the government and the finance department but should become an issue for debate in wider circles. This also, as noted below, should also lead to considerations for changes of parts of our domestic international tax regime.
Today the negotiation of tax treaties takes place behind closed doors where the tax payer community is presented with the a final and signed treaty as a faite accomplie. Only the Tax Administration and the Tax Appeals Court in Stockholm are invited to express their views on technical matters of the initialled text. Only once, as far as I recall, was an initialled text regarding the treaty with Germany made public which also gave rise to widespread interest and requests for changes. Sometimes in the past the negotiators would inquire at the Federation of Swedish Industries and the Institute of Foreign Law about requests and ideas when a new treaty was being contemplated. The aforementioned report by the Federation of Swedish Enterprize indicates that this custom has been discontinued.
As mentioned IFA/Sweden would be a very suitable institution for taking the lead in a promotion of a new approach to the making of our tax treaties. I suggest that one put together a working party comprising a select group of IFA members representing tax payer, government ant tax administration interests to work out a report which could then be distributed to all members and discussed at a seminar.
A starting point for considerations of our treaty policy should be an examination of our own domestic, albeit unofficial, model tax treaty (which long ago I commented in IUR-INFO.) This in itself would no doubt give rise to plenty of ideas.
But I also have a number of ideas that could be brought up in a discussion of this kind. This discussion should be as broad as possible and as already mentioned cover also suggestions for changes of domestic tax law and various methods for the application of tax treaties:
1. First of all it could be questioned whether we should really have so many treaties as today and thus suggest that some of them be terminated. For instance, do we really, with all respect, need treaties with such countries as e.g. Mauritius, Zambia and Trinidad and Tobago? Instead of treaties one could consider having domestic rules for specific and less ”important” countries where Swedish investors – and they are probably quite few – could be given tax reliefs corresponding to those in our treaties. For instance full credit for the foreign tax or a credit for taxes above a certain level imposed in the other country. Investments in Sweden by companies in the pertinent country
could also be given the same treatment as in a treaty e.g a reduced withholding tax on dividends. These investments can also be expected to be very few. How many companies in for instance Trinidad and Tobago are doing business in Sweden where they can have any benefits of the treaty? Moreover, our domestic tax regime for foreign residents already dovetails the OECD model in many respects which also reduces the importance of a treaty. This applies for instance to our SINK-regime for foreign residents deriving employment and pension income in Sweden and our definition of permanent establishments. The advantage of settling these matters in domestic law is that one gains complete control of the legislation, that one avoids problems of treaty interpretation etc. If undesired situations appear it is easier to correct them ad hoc. Rules on exchange of information, however, would of course always have to be drawn up in bilateral treaties.
2. And why not completely abolish the so called golden rule declaring that preference to the treaty should only occur when it reduces tax liability? There is no specific reason why this rule shall be considered carved in stone. And it need not be a general rule. Depending on the circumstances one could ordain that preference be given to the treaty in one respect and vice versa in another respect. For instance, one could prescribe that a treaty rule allowing the imposition of a source tax on interest should apply, despite that not being possible under domestic law, and at the same time, if desired, disallow the application of the ”effective management” rule (in OECD article 4.3) which represents an extension of the residence test under Swedish law.
3. When negotiating treaties Sweden should employ local tax expertise in the other contracting state to safeguard our interests. The purpose thereof would be to gain information about the finer points of the other country´s international tax regime and treaty policies. It is difficult for our negotiators to fully grasp such matters or to rely on the information provided by the treaty partner representatives. It could also be a good idea (in some cases) to retain this private tax expertise mentioned to provide current information of changes made in the domestic law of the other country or of important tax cases that could affect the application of the treaty.
4.Our treaties should be construed not to allow unwarranted tax avoidance for instance double tax exemptions. Subject-to-tax rules should therefore be considered both where Sweden is the state of residence of the tax payer and where it is the source state. In the commentaries to article 1 of the OECD model there are also a number of anti- tax avoidance recommendations that should be given consideration.
5. Anti- treaty shopping rules should also be studied, the reason being that treaties are bilateral and that the tax sacrifices provided therein should benefit only the tax payers of the contracting states. One should thus take advantage of limitation-of-benefit rules to a larger extent. One could also impose special taxes or restrictions for payments made to blacklisted tax haven recipients or tax priviledged companies in the other contracting state such as is the case in some of our treaties already. Malta and Switzerland e.g.are treaty partners where such rules already exist.
6. Our new domestic participation exemption rules have made such rules in our treaties unnecessary and could thus be abolished.
7. Due to new directives imposed by the EU e.g on withholding taxes such rules in our treaties can also be abandoned. On the whole our treaties should be adapted more carefully to the prevailing circumstances in each and every treaty.
8. More efforts should be given to negotiating bilateral information exchange rules working out the application of automatic exchange of information. Considering that bank secrecy in the wake of the finacial global meltdown has now virtually been given up as far as communicating the information to tax administrations is concerned such rules should more easily be possible to negotiate. The mere knowledge that a bilateral information agreement is being worked out should have a very positive preventive effect regarding tax payers harbouring ideas to hide their income or capital in such countries.
9. In the past, during a couple of years, we had a domestic law on the application of tax treaties. (It was introduced due to the panic that arose after the ”Kenya 1 ruling” by the Supreme Administraive Court.) One should consider if such a law could have posirive effects today. For instance, it could be used for a general rule establishing the relationship between domestic law and treaties discussed above. It could also contain the rule, which is now repeated in every law of intrduction of treaties, that the exemption with progression rule in our treaties shall not apply. Even better is of course to abolish that rule alltogether in our treaties. The new law could also be used for providing more detailed information to be provided by tax payers benefitting from a treaty.
10. More structured efforts should be made to prevent tax avoidance by the use of tax treaties. A well known and widespread abuse of our treaties is the tax planning regarding migrating capital gains and our ten year rule. This indeed is the specific area of taxation brought up by the National Audit Office. In that context one should consider if there is reason to restrict the ten year rule. In my opinion quoted shares should be exempted from the ten year quarantine and apply only to closely held shares. It is a well known fact that the negotiation of these rules in our treaties give rise to problems especially as regards the agreement of the quarantine period. In the French treaty it has been reduced to only two years. A possible solution would be to offer the other state a reversed credit mechanism in these cases so that this state is relieved of the obligation to give tax relief for the Swedish tax. Considering that the tax planning in these cases always is directed to low- or no-tax jurisdictions regarding capital gains, the loss of revenue to the Swedish treasury by such a credit will be quite negligible. Reversed credits could maybe also be considered in other situations.
11. One should renew the discussions on source taxation of royalties and impose a source tax on gross payments. Considering our general treaty policy of a zero source tax on royalties one could even consider abolishing such taxes alltogether in domestic law. Possibly with reservations visavi payments to tax haven recipients.
12. One should definetely discontinue the right of dual resident tax payers to deduct interest expense under domestic law when, at the same time no tax is imposed on interest receipts under a treaty. This is a senseless and pure corruption of our international tax regime. (For a long time such deductions have been stopped for corporate tax payers.)
13. In order to avoid conflicts of interpretation of treaties one should specifically spell out that they do not prevent the application of domestic anti avoidance and CFC rules of the contracting states. And why does our general anti avoidance rule not apply to our dividend withholding tax?
14. We have subject-to-remittance-rules with a number of treaty partners. How are they monitored? Probably not at all. Regulations hereon could be drawn up in the afore mentiond law on application of tax treatiers.
15. Treaties should also include rules of mutual collection of taxes.
16. Rules on taxation of foreign trust must be put in place. After the abolition of our gift tax such trusts have become very interesting tax planning instruments. And allways in such situations a lot of money is involved.
17. One should draw up a sheet for providing information by tax payers benefitting from tax treaties. A simple thing would be to oblige the tax payer to provide a copy of the tax return submitted in the other country.
The afore mentioned suggestions are merely the result of a spontaneous and unstructured brainstorming of ideas to be considered in order to improve our tax treaties and their application.
More important is to get started! And, as already emphasized, I believe that IFA/Sweden is a perfect institution for taking a lead in these matters and for inspiring a project of this kind.
Best regards
Peter
peter@sundgren.net
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