INTERNATIONAL TAXATION OF TRUST INCOME

Abstract

The trust is a socially and economically important institution of the common law world and of other countries into which it has been imported. It has also long served as a tool of domestic and international tax planning and avoidance. The trust is commonly regarded as fiscally transparent in many countries, but this description is inadequate. Unless subjected to corporate taxation, the trust behaves in some respects like a transparent partnership and in others like an opaque company, making it differentially transparent; its income may also be taxable to or by reference to a person (the grantor) who has voluntarily capitalised it with value. Differences of tax treatment, particularly in the attribution of trust income, recognition of trust residence and treatment of distributions, contribute to international outcomes of non-taxation or double taxation. The thesis has three aims: first, to identify the principles by which countries tax trust-related income, taking as the basis for this inquiry the tax laws of Australia, the United States, the United Kingdom and New Zealand; secondly, to identify unintended international non-taxation and double taxation associated with the use of a trust in treaty and non-treaty situations; and thirdly, to propose principles of tax and treaty design that can be incorporated into the existing international tax order in response to the problems so identified. Tax treaty analysis is undertaken by reference to the OECD Model and, where it has been found useful, the treaty practice of particular countries. Relevant work of the OECD/G20 BEPS project is also considered, particularly relating to hybrid entities and treaties. This is the first systematic structural study of international trust taxation that takes account of differential transparency and the role of the grantor. It is also the first study to address the transparent entity clause of the OECD Model and other recommendations of the BEPS project in relation to trusts.