There are many factors a business might consider when deciding where to locate its offices, including proximity to certain pools of labor, suppliers, and customers, regulatory conditions, and the historic roots of the company. But when a company\u2019s operations are spread across multiple jurisdictions\u2014both inside and outside the United States\u2014where is the company actually located for the purpose of receiving specific tax or regulatory treatment? The answer to this important question continues to evolve in both domestic and international contexts, as lawmakers attempt to incentivize economic activity while preventing excessive tax avoidance. This note will present two examples of legal regimes, one domestic and one international, that consider what a company needs to do in order to qualify for a geography-based tax benefit.<\/p>\n
The Tax Cuts and Jobs Act of 2017 included generous tax benefits in the form of capital gains tax deferral and elimination for certain investments in designated \u201copportunity zones\u201d throughout the United States. Qualifying investments held for more than ten years can receive, among other benefits, complete exclusion of capital gains. The proposed regulations explain that a geographically-dispersed business would qualify as a Qualified Opportunity Zone Business if: (a) at least half of the hours that employees and independent contractors (and employees of independent contractors) spend working on the business are performed within an opportunity zone;1<\/a><\/sup>I.R.C. Prop. Reg. \u00a7 1.1400Z2(d)-1(d)(5)(i)(A)<\/span> (b) at least half of the amount paid by the business to employees and independent contractors (and employees of independent contractors) is for services performed in an opportunity zone;2<\/a><\/sup>I.R.C. Prop. Reg. \u00a7 1.1400Z2(d)-1(d)(5)(i)(B)<\/span> or (c) both the tangible property of the business that is in an opportunity zone and the management or operations functions of the business that work in an opportunity zone are each necessary to generate at least half of the business\u2019s gross income.3<\/a><\/sup>I.R.C. Prop. Reg. \u00a7 1.1400Z2(d)-1(d)(5)(i)(C)<\/span> Thus a software company that sells to customers around the world could qualify as a Qualified Opportunity Zone Business and enjoy the tax benefits as long as it locates a significant percentage of employees, independent contractors, or management and assets in opportunity zones.<\/p>\n In recent years, the Organization for Economic Cooperation and Development (OECD) has stepped up its efforts to reduce base erosion and profit shifting (BEPS), \u201ctax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.\u201d4<\/a><\/sup>OECD, OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Information Brochure, https:\/\/www.oecd.org\/tax\/treaties\/multilateral-instrument-BEPS-tax-treaty-information-brochure.pdf<\/span> The OECD\u2019s major initiative to deal with this issue, the (MLI), is an effort to standardize rules that preclude many BEPS activities by taxpayers.5<\/a><\/sup>Id.<\/span> This effort to coordinate measures by various countries has been successful and as of June 1, 2019, 88 jurisdictions have signed the MLI.6<\/a><\/sup>Deloitte, OECD Multilateral Instrument status tracker: Current as of 1 June 2019, https:\/\/www2.deloitte.com\/content\/dam\/Deloitte\/global\/Documents\/Tax\/dttl-global-tax-implementation-of-mli-status-tracker.pdf.<\/span> A required element in the MLI is the Principal Purposes Test (PPT) provision, which provides that \u201ca benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit\u2026\u201d7<\/a><\/sup>OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), https:\/\/www.oecd.org\/tax\/treaties\/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf<\/span> In short, a company needs to have real, substantial reasons for locating in a jurisdiction, and cannot have its location decisions driven by tax considerations only.<\/p>\n In 2017, the OECD provided preliminary examples of situations in which \u201cit would not be reasonable to deny the benefit\u201d8<\/a><\/sup>OECD, BEPS Action 6 Discussion Draft on non-CIV examples, http:\/\/www.oecd.org\/tax\/treaties\/Discussion-draft-non-CIV-examples.pdf<\/span> of tax treaties enjoyed by resident investment companies, the kinds of firms that often exploit the benefits of tax treaties when structuring their partnerships and transactions. Factors considered in determining that the PPT is satisfied include whether the company\u2019s location decision was \u201cmainly driven by the availability of directors with knowledge of regional business practices and regulations,\u201d whether the company employs an experienced local management team, whether a majority of its directors are residents of the country and have expertise in investment management, and the legislative landscape for specific types of business in that country (e.g., a real estate investment entity or a securitization company).9<\/a><\/sup>Id.<\/span><\/p>\n As tax authorities become more sophisticated in their attempts to preempt tax planning which reduces their tax receipts, companies need to substantiate their location decisions with better \u201cfacts on the ground.\u201d \u201cSubstance\u201d considerations are nothing new, but in a changing legislative landscape affected by geopolitics (trade wars, the spectre of Brexit, and legislative attempts to match their tax policies with a increasingly-digital world), companies need to make sure their \u201csubstance\u201d is sufficient. Whether that means demonstrating that most of the company\u2019s revenues are earned through the efforts of employees working in the jurisdiction, as under the opportunity zone laws in the United States, or whether that means that experienced directors running the company\u2019s operations live in the jurisdiction as in the OECD MLI guidance, there may be little room for error with significant tax dollars on the line.<\/p>\n","protected":false},"excerpt":{"rendered":" There are many factors a business might consider when deciding where to locate its offices, including proximity to certain pools […]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[22],"tags":[],"ppma_author":[383],"class_list":["post-4819","post","type-post","status-publish","format-standard","hentry","category-home"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/pgKEUK-1fJ","jetpack-related-posts":[{"id":567,"url":"https:\/\/journals.law.harvard.edu\/hblr\/is-the-tax-poison-pill-the-last-stand-for-protecting-nols-after-health-care-reform\/","url_meta":{"origin":4819,"position":0},"title":"Is the \u201cTax Poison Pill\u201d the Last Stand for Protecting NOLs After Health Care Reform?","author":"wpengine","date":"November 29, 2010","format":false,"excerpt":"Michael R. 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Carlisle, Daniel A. Hagan and Jane E. Rueger: This Article explores combining the traditional oil and gas pipeline structure with solar electric generation to: (1) increase the return on pipeline investments by making the income from a solar electric generation business available to pipeline operators; and (2) lower\u2026","rel":"","context":"In "Energy"","block_context":{"text":"Energy","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/us-business-law\/energy\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":3134,"url":"https:\/\/journals.law.harvard.edu\/hblr\/toward-an-economic-model-for-the-taxation-of-derivatives-and-other-financial-instruments\/","url_meta":{"origin":4819,"position":2},"title":"Toward an Economic Model for the Taxation of Derivatives and Other Financial Instruments","author":"wpengine","date":"March 14, 2013","format":false,"excerpt":"David S. Miller: On January 24, the Chairman of the House Ways and Means Committee, released the discussion draft of a bill that would tax derivatives under a mark-to-market system of taxation. This proposal would replace our entire federal system of taxing derivatives with a radically different but infinitely simpler\u2026","rel":"","context":"In "Derivatives Regulation"","block_context":{"text":"Derivatives Regulation","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/us-business-law\/derivatives-regulation\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4372,"url":"https:\/\/journals.law.harvard.edu\/hblr\/when-the-irs-prefers-not-to-why-disparate-regulatory-approaches-to-similar-derivative-transactions-hurts-tax-law\/","url_meta":{"origin":4819,"position":3},"title":"When the IRS Prefers Not to: Why Disparate Regulatory Approaches to Similar Derivative Transactions Hurts Tax Law","author":"ehansen","date":"June 3, 2017","format":false,"excerpt":"Download PDF Leon Dalezman and Philip Lenertz\u2020 This Article examines decisions made by the Internal Revenue Service on whether to promulgate regulations pursuant to three different but related provisions of the Internal Revenue Code: sections 1259, 1260, and 871(m). 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The law, codified in Internal Revenue Code Sections 1400Z-1 and 1400Z-2, incentivizes new investment in businesses and real estate in designated low-income\u2026","rel":"","context":"In "Home"","block_context":{"text":"Home","link":"https:\/\/journals.law.harvard.edu\/hblr\/category\/home\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"jetpack_sharing_enabled":true,"authors":[{"term_id":383,"user_id":0,"is_guest":1,"slug":"daniel-pessar","display_name":"Daniel Pessar","avatar_url":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=blank&r=g","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts\/4819","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/comments?post=4819"}],"version-history":[{"count":0,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/posts\/4819\/revisions"}],"wp:attachment":[{"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/media?parent=4819"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/categories?post=4819"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/tags?post=4819"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/hblr\/wp-json\/wp\/v2\/ppma_author?post=4819"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Locating a business in a jurisdiction with advantageous tax treaties while satisfying the Principal Purposes Test (PPT) of the Multilateral Instrument (MLI)<\/h6>\n
Broader lessons for tax-sensitive location planning<\/h6>\n