handbook-tb

Peter A. Harristo a certain percentage of the value of assets used in an earning activity.128 Particularly, such a rule might be considered by source States thathave already given up substantial taxing rights under tax treaties. 1294.4 Residence-State steps: do not discourage domesticinvestmentDeferred or non-taxation in the residence State of foreign income thathas been lowly or not taxed overseas encourages foreign over domesticinvestment by residents. The only solution to this problem is a foreigntax credit system with anti-deferral rules, for example, CFC rules. Theproblem is that these rules need to be carefully crafted or they maydiscourage foreign investment into a country, at least where that foreigninvestment may bring with it a need or potential for derivingthird-country income. In this context, it is natural for countries thatare or wish to be financial centres to resist the adoption of (or erodeexisting) CFC rules. As noted in section 4.1 above, if the ultimateinvestor is a non-resident or tax exempt then CFC rules are distorting(in terms of location and form of investment). If the ultimate investoris a local wealthy individual, then the lack of CFC rules is distorting.This suggests a need for investigating the better targeting of CFC rulesat this latter category. 130128For an example of such a rule, see Peter A. Harris, “The SymmetricaIncome Tax Act 20** and Commentary,” supra note 118, section 27. This isa general rule which for administrative reasons is not restricted to relatedpartyarrangements. See OECD, Part 2 of a Report to G20 Development WorkingGroup on the Impact of BEPS in Low Income Countries, supra note 121,section 3.129Again, for the reasons discussed in OECD Public Discussion Draft onBEPS Action 2 — Domestic Issues, supra note 2, paragraph 24, and OECDAction 2 — 2014 Deliverable, supra note 2, paragraph 144, the better view isthat such a rule does not breach Article 24 (4) of tax treaties.130Guglielmo Maisto, “Controlled Foreign Company Legislation, CorporateResidence and Anti-Hybrid Arrangement Rules,” (2014) Vol. 68, No. 6/7Bulletin for International Taxation, 327-31, at 328, suggests that a “key elementto be addressed in the design of effective CFC legislation is how shouldstates frame such legislation to take account of whether or not the ultimateindividual investors are domestic or foreign.”250