1. Unless otherwise stated, a bi-lateral tax treaty that is identical to the OECD Model Tax Treaty that is in the course materials book is in force between all countries in this examination except that The United States is party to bilateral tax treaties in force based on the 2016 United States Model Tax Treaty rather than the OECD Model Tax Treaty.
2. The Multi-Lateral Instrument is not in effect between any country.
3. Universal Export GmbH is a corporation subject to taxation in Switzerland on its worldwide income under Swiss Federal tax law.
4. Spin d.o.o. is a corporation subject to taxation in Slovenia on its worldwide income under Slovenian tax law.
5. You should assume that the domestic laws of each jurisdiction utilize a test of 183 days of physical presence in the jurisdiction as the test of whether an individual is considered to be a tax resident of the jurisdiction.
You have just left the home of your clients, Serena and Abu, in McLean, Virginia. It is a beautiful home, and Serena and Abu have just finished re-decorating it after having lived there for twenty years. It is their only home.
Serena is Greek. You have a copy of her Greek passport in your file. When you first looked at her passport, you saw that she was born in Los Angeles, California. You asked if her parents had lived in Los Angeles. She told you the most amazing story. Her parents had been travelling from Athens, Greece to Melbourne, Australia, stopping off in New York to visit relatives. She explained that the third largest Greek population in the world is in Melbourne, Australia a fact of which you had been unaware, and that she had cousins there. While her parents weretravelling from New York to Melbourne, changing planes in Los Angeles, her mother went into unexpected labor and a few hours later, Serena was born.
Serena later moved to the United States, attended the University of California at Berkeley, where she majored in rhetoric, and then attended Georgetown University Law Center. She is admitted to the bar in the District of Columbia. She practiced as a lawyer in Washington before deciding to become fully involved in Abu’s business and be a full time mother.
Abu was born in the slums of Alexandria, Egypt. As he was growing up, he spent much of his time working for various Greek shopkeepers in Alexandria and learned the value of education.
He obtained a first degree in chemical engineering in Germany. After working in Germany, he came to the United States to attend the McDonough School of Business at Georgetown University and obtain a Master of Business Administration degree.
While attending Georgetown, Abu and Serena met while protesting the immigration policies of the United States that prevented Abu from living in the United States after he graduated. They fell in love and with the blessings of Serena’s family, were married at the Acropoli s in Athens after the payment of an appropriate permit fee.
After Serena and Abu were married, Abu obtained his United States permanent residence visa. Abu and Serena have three children. Their oldest son is a first year law student at Georgetownwho now is present when you meet with Serena and Abu.
Abu describes his business as “import-export”. His business is conducted through a corporation incorporated under the laws of the Canton of Zug, Switzerland, Universal Export GmbH.
Universal Export has two managing directors, Abu and Serena. The corporation has a mailing address in the city of Zug, Switzerland at the offices of Abu’s Swiss lawyers, Meyer & Co. One of the Meyer & Co. office staff forwards mail received at the office to Abu in the United States.
Universal Export does not have a telephone number in Switzerland. Universal Export had substantial bank accounts and a number of safe deposit boxes with Debit Swiss, a major Swiss bank. The signatories on the accounts are Abu and Serena.
For a number of years, Universal Export was engaged in the business of purchasing phosphates in Egypt and shipping them to Slovenia. The phosphates were used by a factory engaged in Slovenia in the manufacture of soap. Serena excited ly interjected at this point in your discussions to show you a picture of the products of the factory being demonstrated by a beautiful female Slovenian model. She tells you that the model is her cousin. Serena reminds you that her cousin now lives in Washington after a successful modeling career and subsequent marriage to an American tycoon. Serena hints that political assistance from the American husband might be available if required in Slovenia under the philosophy of “family first”.
As part of the soap manufacturing process, there are leftover by-products called tailings. These tailings had been piled up in huge mounds near the soap factory in Slovenia. The soap factory had been heavily subsidized by the Slovenian government to provide employment for workers prior to the accession of Slovenia to the European Union. Once Slovenia joined the European
Union, the subsidies stopped. The factory went bankrupt. After priority creditors had been paid, the only asset remaining was the tailings. Universal Export now owns the mounds of tailings. After agreeing to accept the tailings, Universal Export learned that it had also acquired the substantial environmental remediation of risks associated with the tailings.
Abu was recently contacted by two gentlemen, Mr. Stiltskin (“Stiltskin”) and Dr. Rumple (“Rumple”). Stiltskin is a Hungarian businessman resident in Monaco. Rumple is an American scientist who has published a number of scientific papers concerning the location and extraction of rare earth minerals. Stiltskin asked permission from Abu to test the piles of tailings to see if a process invented by Rumple can be used to extract rhodium, a rare earth element essential in automobile catalytic converters and other applications from the piles of tailings. Abu agreed.
After testing the tailings, Stiltskin told Abu that the “Rumple Process” of extracting rare earths using a rotating cylinder with hypersonic technology could be successfully used to extractrhodium from the tailings. Stiltskin told Abu that Rumple did not want to patent the Rumple Process because Rumple is afraid that competitors would design around any patent that he could obtain. Stiltskin said that the process is novel and patentable. Based on his chemical engineering background, Abu thinks that the process might actually work.
Stiltskin has proposed a method of doing business with Universal Export. Stiltskin’s idea is that he and Rumple form a “družba z omejeno odgovornostjo”, or limited liability company in Slovenia to be called Spin d.o.o. (“Spindoo”). Technically, Spindoo will be owned by Rumple’s company, Dross Inc. (“Dross”), a Delaware corporation. Both Spindoo and Dross will be licensed to use the Rumple Process.
Spindoo will process the tailings for Universal Export into ingots of rhodium using the Rumple Process. In exchange for these services, Mr. Stiltskin wants to be compensated in two ways:
1. A royalty for the use of the Rumple Process equal to ten percent (10%) of the value of the rhodium ingots produced by the Rumple Process.
2. An exclusive distribution contract to sell the rhodium ingots with a distribution royalty of five percent (5%) of the value of the rhodium ingots.
Stiltskin explained that he owns a brokerage firm with a seat on the London Metals Exchange,
so that the ingots will immediately be sold to his brokerage firm when produced at the mid-day market price for rhodium ingots as posted at the London Metals Exchange.
Stiltskin explains that for tax reasons, he and Rumple would like half of the royalties to be paid to Spindoo, and half of the royalties to be paid to Dross. He explains that Rumple will leave his half of the royalties in Dross, while Dross will pay Stiltskin’s half out to him in deductible management fees. This will result in Rumple getting the benefit of the new low corporate tax rate in the United States, while Stiltskin gets his share tax-free under the tax arrangements he has in place in Monaco.
In order to process the tailings, Spindoo will be required to build a factory in Slovenia near the tailing mounds. Stiltskin asked Universal Export to finance the construction of the factory by lending one million euros to Spindoo. Stiltskin explains that the loan will bear interest at a market rate of eight percent (8%), will be secured by the factory (but not the intellectual property comprising the process developed by Mr. Rumple) and will be repaid by Spindoo from one half of the amounts payable to Spindoo for royalties. Stiltskin agreed that Universal Export could withhold half of the amount of royalty payments and apply it to the interest and principal of the loan until the loan was fully repaid.
Serena explains that she and Abu have carefully reviewed the profit potential of the business proposal. If the Rumple Process works, Universal Export can convert a potentially substantial environmental liability into approximately fifty million euros of profit.
You have delicately asked Serena and Abu whether the alchemy of the Rumple Process really works and whether they really want to invest one million euros into a venture such as this. They say that they are willing to do so.
Your initial thought as you listened to Serena and Abu was whether Universal Export had registered to do business in Slovenia. Serena and Abu had looked at you in surprise and toldyou that since Universal Export just had ownership of the piles of tailings and had not done anything with them, they had not investigated whether or not Universal Export had to registerin Slovenia. Universal Export was not registered for income tax purposes in Slovakia.
Question 1 (2 points):
One possibility that you consider is whether Universal Export should just sell t he piles of tailings to Spindoo. If Universal Export were to sell the tailings to Spindoo, which country, if any, would have the right to tax any gain resulting from the sale? Why?
Question 2 (1 points):
During the past twelve months, Serena had travelled to Slovakia a number of times to deal with legal matters relating to environmental liabilities associated with the tailings. She ended up spending a total of one hundred and sixteen (116) days in Slovakia working directly on these problems. On one trip, she stopped off in Zug to attend the annual, pro-forma directors
meeting of Universal Export at which she had actually not provided any services, but merely registered her attendance before going shopping. Abu had attended the meeting by giving Serena his proxy.
1. Universal Export had paid Serena a salary of USD 200,000 during the past twelve month period and a director’s fee of CHF 20,000.
2. Which country, if any, would have the right to tax the salary paid by Universal Export to Serena? Why? Which country, if any, would have the right to tax the director’s fee paid by Universal
Export to Serena? Why?
Question 3 (1 points):
In its first year, Spindoo either pays or is treated as paying the entire €1,000,000 loan plus €80,000 in interest to Universal Export.
Is Slovakia entitled to any tax on the interest that Spindoo is treated as paying to Universal Export on the loan? If so, at what rate should the interest be taxed by Slovakia?
Question 4 (2 points):
In its first year, Universal Export either pays, or is tr eated as paying, royalties of: a) €100,000euros to Spindoo for use of the Rumple Process; b) €50,000 to Spindoo under the exclusive distribution agreement; c) €100,000 to Dross for use of the Rumple Process; and d) €50,000 to Dross under the exclusive distribution agreement.
Which of the United States, Switzerland and Slovenia, if any, have the right to tax these payments, either directly or through withholding? Why?
Question 5 (1 points):
Thirteen months after the agreements are made, Stiltskin sends you a message and asks to meet with you. You contact Abu and Serena and tell them about the request, and receive their agreement for you to meet with Stiltskin. You then meet with Stiltskin. Stiltskin tells you that he has seen the fine job that Debit Swiss is doing for Serena and Abu, and would like for you to arrange an introductions to a banker at Debit Swiss. He would like to have his share of the funds being paid to Dross paid over into a Debit Swiss account, and hints that he may tr ansfer other substantial assets to Debit Swiss for them to manage as well.
You tell Stiltskin that you will discuss this with Serena and Abu. You discuss this with Serena and Abu and they tell you that they have no objection in your introducing Stiltskin to Debit Swiss. You then do so.
Two months later, you receive a nice letter from Stiltskin thanking you for arranging the introduction. Stiltskin says that the relationship is working well, and that he is benefitting from it significantly. Accompanying the letter is a bankers draft to your order for USD 10,000.
What do you do with the check?
Question 6 (1 points):
It turns out that the cost of operating the factory employing the Rumple Process is approximately twenty percent (20%) of the royalties generated from the Rumple Process and exclusive distribution agreement. Even after half of the revenues from the Rumple Process are paid to Dross, there is still a thirty percent (30%) profit remaining that appears on the audited and approved financial statements of Spindoo filed with the Slovakian corporate and tax authorities.
Rumple and Stiltskin decide to have Spindoo declare a dividend of €300,000 to Dross so that they can personally benefit from the success of their business arrangements with Universal Export.
Which of the United States, Switzerland, Slovenia or Monaco, if any, have the right to tax these payments, either directly or through withholding? Why?
Question 7 (1 points):
You receive a series of messages from Serena and the relationship manager at Debit Swiss responsible for the Universal Export account. Debit Swiss has received an information request from the Swiss Federal Tax Administration (“EStA”) asking for all banking information and documents in the possession of Debit Swiss that relates in any way to the agreement between Universal Export and Spindoo. Interestingly, the information request ask specifically for any documentation held by the bank that involves or relates to Rumple, Stiltskin, and Dross. The information request states that the request is made as a result of a request received by the
EStA from the Slovenian tax authorities. The relationship manager at Debit Swiss tells you that Debit Swiss has already provided the requested information to the EStA under an agreement that the EStA will wait ten business days before providing the documents and information to the Slovenian tax authorities to permit Universal Export to take any appropriate legal action.Serena poses the following questions to you. Is Switzerland legally obligated to provide the information and documents requested to Slovenia? Is there any way that legal action can be taken to stop the documents and information to be provided by the EStA to the Slovenian tax authorities?
What advice do you give her?
Question 8 (10 points):
Six months after the events described in Question 7, Universal Export receives notices of tax assessment from the Slovenian tax administration claiming that Universal Export is subject to tax on income and gains arising from or derived from the pile of tailings in Slovenia. You contact your colleague who practices law in Slovenia and learn that the Slovenian tax authorities have a new and expanded concept of jurisdiction to tax under domestic Slovenian law to include almost any business activity of any kind that is in any way connected, however tangentially, to Slovenia.
Serena is outraged and is railing about breaches of international law. She wants to talk with her cousin and get her cousin’s husband involved.
What advice and course of action do you recommend that Universal Export take? Please include any actions that you think would be advisable under any domestic law or any tax treaty.