In Square D Company and Subsidiaries v Commissioner of the Internal Revenue Service, the 7th Circuit of the United States Court of Appeal had occasion to deal, inter alia, with the Non-Discrimination Clause in the US-France Tax Treaty of July 28, 1967.
Facts
2. Square D Company, a US Corporation with a French parent, claimed to deduct certain amounts of interest payable by Square D to its French parent, in the years in which such amounts accrued, i.e., in 1991 and 1992, in the face of Treasury Regulation § 1.267(a)-3, which provides for the cash method of accounting for deductions for payments to foreign related persons.
3. Square D rested its claim on two grounds :
(i) Treas. Reg. § 1.267(a)-3 constituted a flawed interpretation of the statutory mandate contained in Internal Revenue Code ("IRC") § 267(a)(3) and was invalid. [ IRC § 267(a)(3) provides that the "Secretary shall by regulations apply the matching principle of [§ 267(a)(2)] in cases in which the person to whom the payment is to me is not a United States person.". ]
(ii) Alternatively, Treas. Reg. § 1.267(a)-3 violated the Non-Discrimination Clause of the US-France Tax Treaty of July 28, 1967.
[ The Non-Discrimination Clause ran thus :
"A corporation of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation which is other or more burdensome than the taxation and connected requirements to which a corporation of that first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned by one or more residents of the first-mentioned State, is or may be subjected.".
]
Reasoning and Decision
4. Upholding the decision of the Court below (viz., the Tax Court), the 7th Circuit held that the Commissioner properly concluded that Square D had to take deductions for payments to a foreign related party on the cash method, rather than on the accrual method. The 7th Circuit's rulings on the 2 grounds aforesaid raised by Square D are as follows :
(i) On the validity of Treas. Reg. § 1.267(a)-3 :
Treas. Reg. § 1.267(a)-3, on which the Commissioner relied, was a reasonable interpretation of ambiguous statutory provisions and was hence a valid provision.
(ii) On whether Treas. Reg. § 1.267(a)-3 was violative of the Non-Discrimination Clause in the US-France Tax Treaty of 1967 :
"..... In order to violate a nondiscrimination clause in a treaty, the additional burden must be directed at nationality. See Klaus Vogel, Klaus Vogel on Double Taxation Conventions 1290 (3d ed. 1997). Put differently, "discrimination against foreign-owned subsidiaries is all that the nondiscrimination clause at issue protected against." See Union BanCal Corp., 305 F.3d at 986. Such discrimination is absent here. The regulation requires that all interest payments to a foreign related party must use the cash method of accounting without regard to the nationality of the owner. The regulation does not impose the cash method simply because of foreign ownership, which would be prohibited, but rather for payments to a foreign related party. Even if a corporation were owned by a United States parent, it still appears all interest payments to one of these foreign related parties would lead to the use of the cash method. The requirement, therefore, hinges on the nationality of the related party to whom the payment goes and does not fluctuate based on nationality of the ultimate owner. It is merely fortuitous that, in this case, the foreign related party to which the payment was made also happened to be the owner. The regulation does not discriminate based on foreign ownership, and thus, does not violate the nondiscrimination clause.".
(All emphases in the original, except that of the portion commencing with the words "Even if" and ending with the words "ultimate owner".)
Comment : In an opinion which is otherwise extremely carefully crafted, what is intriguing in the portion emphasised by me above, is the employment of the expression "it still appears" and, more particularly, the word "appears". One would have thought that the conclusion from the relevant statutory provisions is clear, i.e., that even a US corporation with a US parent can deduct interest payable to a foreign related party only on the cash basis. However, the employment of the said expression (and in it the word "appears") would indicate that the Court is in some doubt as to the correctness of this conclusion. If, therefore, by employing that expression, the Court is saying that it is possible that a US corporation with a US parent can deduct interest payable to a foreign related party when such interest accrues, then, surely, no clearer case of discrimination between such a corporation and a US corporation with a foreign parent such as Square D can cogently be made out !!
Technorati Tags : non discrimination non discrimination clause tax treaties us-france tax treaty of 1967 square d company us court of appeals 7th circuit raj raj kapadia international taxation
