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Jim Fuller |
David Forst |
Starr International Co, a Swiss company, sought a refund of taxes paid on dividends it received from American International Group (AIG), a US company, on the grounds that the US competent authority had abused its discretion in denying US–Swiss treaty benefits.
The US-Swiss tax treaty entitles Swiss-resident entities to a treaty-reduced withholding tax rate on dividends from US sources if one of the Article 22 limitation on benefits (LoB) provisions is satisfied. Starr did not meet any of the objective technical requirements and requested discretionary relief from the US competent authority under treaty Article 22(6). The competent authority denied Starr's request for discretionary relief.
Starr argued that treaty discretionary relief was meant to provide relief to anyone not treaty shopping and that treaty shopping always involves a third country resident. Since Starr was domiciled in Switzerland and its beneficial and voting ownership was largely either Swiss or American, it argued there could not have been a US-Swiss treaty shopper and that therefore it should have received relief under the treaty.
The court stated that the most conspicuous obstacle to the viability of Starr's proposed third country resident test is that it appears nowhere in Article 22. The court said that Starr's test would result in a cramped conception of treaty shopping and that such a reading would do violence to the structure and spirit of the Article. The court rejected Starr's third country resident test.
Starr also argued that the competent authority's determination was arbitrary and capricious even assuming that it correctly framed the Article 22(6) standard. Starr contended that tax savings were not one of its principal purposes in relocating from Ireland to Switzerland since it was entitled to the same withholding tax rate under the US-Irish treaty. The court said the question was not simply why Starr chose Switzerland over Ireland, but rather why Starr chose Switzerland over any other jurisdiction. The court said the competent authority should engage in an historical, totality-of-the-circumstances inquiry in evaluating a company's reasons for choosing a jurisdiction, including a consideration of Starr's history of moves (Bermuda to Ireland and later to Switzerland), not just the company's most recent relocation.
Starr also argued that the competent authority overlooked essential information and considered irrelevant facts resulting in an unreasonable denial of discretionary relief. Starr argued that the US competent authority failed to definitively conclude that the text of the US-Swiss treaty should be overridden by the text in other bilateral tax treaties, and because there is no treaty history to the contrary. The court held that this argument was a nonstarter. It was not unreasonable for the competent authority to decline to read into the treaty a provision that was not there.
The court held Article 22(6) bestows significant discretion on the competent authority to distinguish treaty shoppers from non-treaty shoppers, and that includes permission to take stock of current legal standards and policies. Therefore, the case reasonably can be interpreted as the court deferring to the judgment of the competent authority rather than making a definitive determination on whether the taxpayer was engaged in treaty shopping.
Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)
Fenwick & West
Website: www.fenwick.com
