Taxpayer wins UK Privy Council CARICOM Tax Treaty case (Methanex Trinidad v Board of Inland Revenue)
Private Client analysis: In Methanex, the Privy Council considered two main issues. First, were dividends paid by Methanex Trinidad to its sole shareholder in Barbados ‘artificial or fictitious’? The tax authority argued that the dividends were artificial and fictitious because subsequent dividends were paid up the corporate chain to the ultimate parent in Canada. Overturning the lower courts, the Privy Council held that the dividends were neither artificial (abnormal) nor fictitious (a sham), as the dividends were the only legal means to distribute profits up the corporate chain, and it was commercially commonplace for national and international groups to distribute profits precisely as was done in this case. The second issue was whether the Barbados shareholder, an International Business Company (IBC), was ‘liable to tax’ in Barbados and therefore properly resident in Barbados for purposes of the CARICOM Tax Treaty. The tax authority argued that the Barbados shareholder was not ‘liable to tax’ in Barbados for various reasons revolving mainly around the company’s status as an IBC, which afforded it a lower rate of tax. The Privy Council held that the Barbados shareholder was ‘liable to tax’ because, as a resident of Barbados, it was liable to pay tax on its worldwide income in Barbados. The fact that Barbados chose to impose a preferential tax rate was irrelevant. Written by David Wilson, partner at Osler, Hoskin & Harcourt LLP (Montreal, Canada).