| ||The Unresolved Tax Status of Multinational Service Partnerships and Their Partners |
Kimberly S. Blanchard*
*Partner, Weil, Gotshal & Manges, LLP, New York, New York. Dartmouth College, B.A. 1976; New York Univ. School of Law, J.D. 1981. Earlier versions of this paper Were presented to the Tax Forum and to the Tax Review in October 2002. The author is indebted to the members of both organizations for their insights and comments on those versions.
I. INTRODUCTION AND SCOPE
Multinational partnerships ("MNPs"), still a relative rarity, present many unresolved tax issues. For purposes of this article, the term MNP refers to an entity generally recognized as a partnership in two or more countries, having offices in two or more countries and partners who are residents of two or more countries. True MNPs are almost always comprised of individuals; corporate-owned partnerships usually confine their activities to pure outbound or pure inbound investment. Moreover, MNPs comprised of individuals are almost always engaged in service businesses, most often the provision of the professional services of lawyers, accountants, engineers, architects and consultants.
One reason that true MNPs, as opposed to alliances of independent firms, are still rare is that many countries restrict the practice of professions to individuals or groups of individuals licensed or qualified, and resident in, those countries. For example, Canada does not recognize as a Canadian partnership any partnership that has non-Canadian partners. France, England and other countries impose various bar restrictions on the practice of law by non-nationals and on profit-splitting with non-nationals.
Despite these and other restrictions, true MNPs do exist. If recent interest in the topic is any indication, the number of MNPs operating worldwide is growing and will likely continue to grow. Meanwhile, many of the unresolved tax issues affecting MNPs are of broader significance, bearing on the international taxation of many types of partnerships and their partners. This article focuses only on the few key tax issues presented by MNPs comprised of individuals and engaged in the provision of services (professional or other).
This article deals in large part with the treatment of partnerships under income tax treaties, and in doing so assumes that each country that is a party to the treaty extends benefits to individual partners resident in the other country. While this was once a perilous assumption, significant progress has been made in this area in recent years. When this paper discusses treaties, the focus is not on treaty benefits such as reduced withholding rates, but on the manner in which tax treaties assign the right to tax the income of cross-border partnerships and their partners.