handbook-tb

Protecting the tax base of developing countriestax administrations to deal with. The LOB rules are complex and areintended to cover a number of sophisticated financing transactionsthat typically would not be an issue in the case of a developing country.Nonetheless, some kind of simplified LOB focusing on a limitednumber of objective criteria to ensure that the taxpayer, in additionto technically being a resident, also had substantial contacts to thejurisdiction might be a possibility. Whether or not specific treatyanti-avoidance rules are necessary would depend on a variety of factors,including the general approach of the courts to avoidance transactions.A GAAR along the lines of the one proposed in the UnitedNations Model Convention could also be considered. In that connection,it would be important to keep in mind the guidance given in theCommentary on Article 1 of the United Nations Model Conventionthat the application of such a rule should be based on objective factsand circumstances. 288. Preserving the taxation of capital gains by sourcecountries8.1 GeneralForeign direct investment in developing countries can be structuredas a locally organized subsidiary or as a branch of a foreign corporation.In both cases the shares of the corporation may be held by anoffshore holding company. If the operating assets in the country aresold, whether they are owned by the foreign corporation or a localsubsidiary, the country will typically have the right to tax any capitalgain on the assets, both under its domestic law and under a tax treaty.Similarly, if dividends are paid by a domestic corporation, withholdingtax would generally be applicable to the dividends. However, if insteadof selling the assets directly, the foreign investor sells the shares of thedomestic subsidiary or the shares of the foreign subsidiary with thebranch operation in the country, source-country tax may be avoided.A similar result would apply if the shares of the domestic corporationwere held by a holding company and the shares of the holding28Paragraph 27 of the Commentary on Article 1 of the United NationsModel Convention.33