Tag: Round robin
A round robin type arrangements involve cross-border funding of an foreign entity or operations by an local entity, where the funds are subsequently provided back to the local entity or a local associate in a manner which purportedly generates tax deductions while not generating corresponding income.
The arrangements essentially involve a movement of funds where a local entity claims income tax deductions for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an foreign related party. The loan or other financial benefit provided by the foreign party is in substance funded, directly or indirectly, by an investment by the local entity claiming the deductions or a local associate party. The return on the local investment, reflecting the financing costs payable to the related foreign party, comes back in a non-taxable form, for example, as a distribution from an foreign subsidiary.
A round robin arrangement may display some or all of the following features: The local entity claiming the tax deductions is related to the foreign party providing the loan or other financial benefit. The foreign party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country. Use of hybrid entities or instruments such that the financing costs payable to the overseas party which are deducted in the local jurisdiction are not taxable in the relevant foreign jurisdiction, or the financing costs are deducted twice, i.e. once in the local entity and once by the hybrid entity or the hybrid entity’s owners in the foreign jurisdiction. The financing costs payable to the foreign party is not income taxable in local jurisdiction due to controlled foreign company (CFC) provisions. The non-assessable foreign sourced income distributed to the local entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its local profits to its foreign shareholders free of dividend withholding tax. There is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries. The arrangement achieves an overall advantage to the MNE group only because of the tax benefits.