Treaty Abuse Research Articles

Countering Harmful Tax Competition and Treaty Abuse Under BEPS: Nigerian Perspective

G20/OECD BEPS Project Final report recommended certain minimum standards in Actions 5 ( Harmful tax practice) and 6 (Treaty Abuse). OECD recently released Multilateral Instruments (Action 15) signed by over 100 countries including Nigeria which focuses on the foregoing minimum standards. The MLI would modify the provisions of over 3,5000 extant DTAs to implement the BEPS measures.

Tax Seminar III on Double Tax Treaty Abuse, BEPS Developments (Action 6) and Selected Aspects on Article 7 OECD MC (Authorised OECD Approach)

A tax seminar for students following the LL.M courses in International Taxation of Business Income and International Tax Planning and Transfer Pricing was held at the Faculty of Arts and Social Sciences of Maastricht University on 15 May, 2014. The objective of this seminar was to provide the students with additional information and insights on Double Tax Treaty Abuse and Article 7 OECD Model Tax Convention on Income and Capital (OECD MC) in preparation for their upcoming exam and, at the same time, give them a deeper understanding of the current Base Erosion and Profit Shifting (BEPS) developments. Dr Marcel Schaper, assistant professor of law at Maastricht University, welcomed the speakers as well as the participating students and gave a brief introduction to the subject of the seminar. The seminar featured two presentations given by Mr Carlos Gutierrez and Mr Luis Nouel, both IBFD principal research associates.

Some Reflections on the ‘Saving Clause’

Action 6 of the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project deals with tax treaty abuse and proposes inter alia, the inclusion of a seemingly innocuous ‘saving clause’ as new Article 1(3) OECD Model Tax Convention (OECD MC). This clause is aimed at preserving the taxing rights of the residence State. While it changes little with regard to the basic set-up of the OECD MC in one-taxpayer situations, it opens the doors for both Contracting States to tax their residents specifically in two-taxpayer situations which may arise, for example, in cases involving hybrid entities, Controlled Foreign Companies regimes, and transfer pricing adjustments. This article reviews the background of this new OECD MC provision, its longstanding use in US treaty policy, as well as some aspects of its breadth, impact and – intended and arguably unintended – consequences.

OECD’s Action Plan on Tax Base Erosion and Profit Shifting: Part 2 – A Critique of Some Priority OECD Actions from an African Perspective – Addressing Excessive Interest Deductions, Treaty Abuse and the Avoidance of the Status of a Permanent Establishment

The author, in Part 2 of this article, continues her examination of the implications of the OECD’s Action Plan on Base Erosion and Profit Shifting from an African perspective, with particular emphasis on excessive interest deductions, treaty abuse and the avoidance of the status of a permanent establishment.

Tax Treaty Policy of Developing Countries Post-BEPS

This paper examines the treaty practices currently adopted by several countries in Asia to see how those treaty practices might need to change if the countries were inclined to follow the OECD’s recommendations. In other words, this paper asks how robust are the countries’ current treaty practices against abuse, and actions what might they want to consider in order to make their treaty networks more robust? How might current treaty practices need to change in order to make treaty networks more resistant to abuse and avoid the need to have to terminate treaties? The paper is constructed in two main sections: the first part of the paper outlines the current state of the OECD proposals with respect to curbing treaty abuse and the second part examines practices currently seen in the treaties of several countries in Asia and the extent to which they include specific anti-abuse provisions. It will become apparent that the tax treaties of the countries examined are not especially robust against abuse, and significant changes to treaty practice are probably called for if countries wish to enhance the integrity of their treaty networks.

СООТНОШЕНИЕ ПРОЕКТА BEPS И ПРАВА ЕС: ОГРАНИЧЕНИЕ ПРИМЕНЕНИЯ ПРЕИМУЩЕСТВ ПО НАЛОГОВОМУ ДОГОВОРУ

This article is devoted to legal relations arising from application of international tax treaties. The subject matter of this article is the norms of international and European Law and also soft law designed for preventing treaty abuse. The author considers Article 22 of the Model US Tax Convention. According to the current recommendations of OECD in the framework of BEPS Project regarding preventing the granting of treaty benefits in inappropriate circumstances, this provision should be considered as legal base for including in the Model OECD Tax Convention. The author focuses on the issue whether the provision regarding limitation of treaty benefits is consistent with EU law and the established practice of the European Court of Justice. The methodological foundation of this article includes general and specific approaches of scientific knowledge. During preparation of this article the author used methods of legal, structural, comparative and linguistic analysis. Moreover, the author applied the technical method for analysis of texts and wordings of model international conventions and international tax treaties. The author analyzed the provision of the Model US Convention regarding limitation of treaty benefits, because it is expected to be included in all international treaties, including in treaties of EU member states in the framework of BEPS Project, elaborated by the OECD.

Final Report on Action 6 of the OECD/G20 Base Erosion and Profit Shifting Initiative: Prevention of Treaty Abuse

The author, in this article, analyses the Final Report on Action 6 on “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” of the OECD/G20 Base Erosion and Profit Shifting initiative, especially with regard to the recommended inclusion of a principal purpose test and a new preamble in future tax treaties.

The Prevention of Tax Treaty Abuse in the BEPS Action 6: A Brazilian Perspective

In the context of the OECD BEPS project, Action 6 (‘Prevent treaty abuse’) is considered to be a key element in the reform of the current international tax regime, calling for an immediate reaction by all countries. The OECD studies and reports on this subject regard treaty shopping and rule shopping as abusive practices that must be tackled in order to prevent international base erosion. It is clear that this subject requires more in-depth consideration by tax policymakers. It is mandatory to seek a point of convergence under this subject that reconciles the interests of tax administrations of OECD member countries, which are conducting and implementing the BEPS Action Plan, and the interests of taxpayers, who assert their need for legal certainty in the structuring of their business activities. This article analyses the OECD proposal to prevent ‘treaty abuse’; investigates the feasibility and consequences of the inclusion of a limitation-on-benefits provision or a principal-purpose test in income tax treaties and, in particular, whether such specific anti-avoidance rules are consistent with the Brazilian tax system.

How Can the Multilateral Tax Treaty Help Overcoming the Treaty Shopping Issue

One of the currently main challenges of International Tax Law is addressing the treaty abuse deployed by various multinationals. These, by taking advantage of their freedom of movement and establishment, have the chance to refine and enlighten their tax burdens by involving third countries and their tax relationship, therefore gaining arguable and controversial profits.This phenomenon has steadily grown, reaching nowadays the extent where many countries around the world are concerned given the fewer tax revenues. Amongst the most infamous business, newspapers reported Apple, Google, Ikea, Pepsi, Amazon and P&G, whose strategies proved being effective.What is now left to the countries is finding a strategy to curb abuses of law. At this regard, seen the inefficiency of Bilateral Tax Treaties, various legal devices were tested along the years but none of them led to a proper solution. Moreover, constraints arising from European Law may look like inflicting the coup de grace on the residual hope.Although it would look consequent that Tax Law cannot offer a proper antidote, the countermeasure planned by the OECD may finally help resolving these issues: a Multilateral Tax Treaty.With it, it would be possible to involve several countries in a single lawsuit, thus facilitating exchange of information and sharing of opinions.Yet, a Multilateral Treaty in this field, although wished for since almost two decades, still needs a proper tailoring to the current panorama with the right legal measures and this is why an International Conference was announced for 2015.Therefore, what is a Multilateral Tax Treaty and can it face this challenge? How should it be drafted and which provisions should it contain? Are there alternatives to it?With this thesis, I will try to provide an answer to these questions above and explaining how a possible failure could lead to an utterly grim scenario. Moreover, based on both current knowledge and personal prompts, I will try to hypothesise which provisions should this contain, by taking into account past successes and failures of similar treaties and legal principles of International law.

Follow Up Work on BEPS Action 6: Preventing Treaty Abuse – The Position of CIVs and Non-CIV Funds Further Considered

Follow Up Work on BEPS Action 6: Preventing Treaty Abuse – The Position of CIVs and Non-CIV Funds Further Considered

Eye Share: Is FATCA a Permissible Treaty Override for Withholding Rates?

Tax treaties are legal agreements entered into by the states and is governed by the Vienna Convention on The Law of Treaties, 1980 (‘VCLT’). In a situation of conflict, principles of VCLT are referred to give a fair interpretation. The preamble and Article 26 of VCLT provides that the parties to the treaty must perform the obligations undertaken by them in a treaty in good faith i.e. the obligation of pacta sunt servanda. Article 27 of VCLT in extension to this provides that invoking of internal law is not a valid reason for non fulfillment of the treaty obligations. According to the general rules of interpretation mentioned in Article 31 of the VCLT, the interpretation of the tax treaties must be done in the light of the object of the treaties i.e. to avoid double taxation and to prevent treaty abuse. The interpretation intended can be arrived at by either a mutually agreed procedure or any other means mutually acceptable.The increasing use of favourable treaty network for abuse has forced the states to make amendments in its domestic tax laws so as to get its fair share of tax. However, the change in the domestic tax laws of any of the state in contravention to the treaty entered by it without the consent of the other parties amounts to breach of the treaty. Such amendments brought with a view to unilaterally override the tax treaty gives the other parties an opportunity to ask for specific performance/suspension or termination of the treaty. For example, on June 29, 1987 the US-Netherlands Antilles Tax Treaty was terminated by the United States.

BEPS Action 6: Tax Treaty Abuse

Action 6 of the BEPS Action Plan identified treaty abuse, and in particular Treaty Shopping, as one of the most important sources of BEPS concerns. In September 2014 the OECD has issued the deliverable for action 6 that consists of three parts: (1) development of model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances, (2) clarification that tax treaties are not intended to be used to generate double non-taxation, and (3) identification of tax policy considerations that countries should consider before entering into tax treaties. In this contribution the authors critically analyse the OECD's output on action 6.

The Agency Permanent Establishment in BEPS Action 7: Treaty Abuse or Business Abuse?

The author analysis the four proposals made by the BEPS Focus Group on action number 7: preventing the artificial avoidance of PE status. He demonstrates that some of the proposals are not workable and are not in line with the core of the Agency PE provision, namely the legal framework of agency. The proposal regarding the independent agency provision is analysed with reference to the wording of this provision. The article focusses on the possible impact of these proposals for multinational companies. Commissionaire structures and limited risk distributors (LRDs) are used by many companies and the possible impact of the recommended changes on these structures are discussed. The author concludes the article by proposing his recommended Agency PE provision aiming to support the objectives of the BEPS Focus Group but also to come up with a provision which would not disturb business too much.

The Concept of Treaty Abuse: On the Exercise of Legal Discretion

Although the usage of the concept of treaty abuse seems to be gradually increasing, especially in the spheres of international taxation and investment, it continues to puzzle international lawyers. This article suggests a workable general definition of the concept drawing on the idea of treaty abuse as an element of a conceptual field. As argued, treaty abuse refers to two kinds of situations. In the one case, the exercise of a discretion offered under a treaty renders its purpose ineffective. In the other, the exercise of a discretion offered under Articles 31-33 of the VCLT leads to a manifestly unfounded result.

Beneficial Ownership Provisions In Tax Treaties Between Developed And Developing Countries: The Canada/South Africa Example

In the years since the Organisation for Economic Cooperation and Development (OECD) adopted its first draft tax treaty in 1963, the world has experienced an astonishing surge in international trade and investment. The tax treatment of these cross-border transactions is affected by double tax agreements. As tax treaty networks will likely continue to expand, concerns about tax treaty abuse might be expected to grow. The extent to which a countrys tax treaty policy favours developing countries - or not - depends upon the extent to which the country is prepared to adopt provisions from the UN model tax convention as opposed to the OECD model. Developing countries, in particular, should carefully consider the design of their tax treaties so as to effectively combat tax avoidance without sacrificing foreign direct investment. To this end, the Canada/South Africa tax treaty is compared and contrasted with these two models. The concept of beneficial ownership is reviewed in this context. It is contended that a general definition in South Africa's Income Tax Act of 'beneficial ownership' would assist in the interpretation of the term for the purposes of South Africa's tax treaties. It is submitted that the scope for the source taxation of passive investment income (viz. dividends, interest and royalties) in the developing country could be magnified through treaty negotiations.

Tax Treaty News

The author, in this "Tax Treaty News", comments on a Belgian ruling regarding the taxation of hybrid entities, an Indian beneficial ownership tax case together with a Spanish case on the use of the OECD Commentaries, and proposed UK legislation (subsequently withdrawn) dealing with treaty abuse.

Are LOB Provisions in Double Tax Conventions Contrary to EC Treaty Freedoms?

Double tax conventions (DTCs) generally include clauses that refuse to residents of a contracting state the right to claim treaty benefits with respect to income derived from the other contracting state if they are not ‘beneficial owners’ of the income. ‘Limitation-on-Benefits’ (LOB) clauses in DTCs, particularly where the United States is a contracting state, provide objective criteria for limiting taxpayer rights under DTCs. LOB clauses, which are designed to prevent treaty abuse, may, however, be in violation of the Treaty Establishing the European Community (EC Treaty) freedoms. This article explores the issue of the compatibility of LOB with EC freedoms of establishment and movement of capital.

Tax Treaty Abuse: Is Canada Responding Effectively?

It hardly needs repeating that the existing income tax treaty system struggles under the weight of global economic integration. Liberalization of state economies and transnational integration of businesses disturb the foundations upon which the tax treaty system is based. These phenomena also create opportunities for the unintended use or 'abuse' of tax treaties.This paper explores the means by which tax authorities worldwide seek to strengthen their tax treaties, through safeguards of varying nature and scope, in order to identify and prevent what they consider to be abuse of such treaties. These means of challenge may be grouped under two headings: purposive approaches to treaty interpretation, particularly with respect to the terms 'person', 'resident' and 'beneficial ownership'; and broader responses to unacceptable tax avoidance, specifically reliance on treaty anti-abuse principles and domestic anti-avoidance rules. The Canadian response is evinced by two recent cases in which the government unsuccessfully challenged 'treaty shopping' arrangements, MIL (Investments) SA v Canada and Prevost Car Inc v Canada. Building on the existing literature regarding treaty shopping and other forms of treaty abuse, this work seeks not only to describe and explain the responses to treaty abuse but to make a critical inquiry into the essence of such abuse, particularly as it appears to be viewed by the Canadian revenue authorities. It is argued that the Canadian response to tax treaty abuse is inadequate, largely because it conflates multiple approaches and fails to address a key concern: the existence or lack of genuine economic establishment in the treaty state. The paper concludes with some suggestions for fashioning a more coherent and intellectually honest response to tax treaty abuse.

Tax Treaty Overrides: A Qualified Defense of US Practice

The ability of some countries to unilaterally change, or override, their tax treaties through domestic legislation has frequently been identified as a serious threat to the bilateral tax treaty network. In most countries, treaties (including tax treaties) have a status superior to that of ordinary domestic laws. However, in some countries (primarily the U.S., but also to some extent the U.K. and Australia) treaties can be changed unilaterally by subsequent domestic legislation. This result clearly violates international law. However, since in the same countries courts are likely to follow domestic law even if it violates international law, both taxpayers and the other treaty partner have little practical recourse in the case of a treaty override beyond terminating the treaty, which is an extreme and rarely taken step. Therefore, the OECD in 1989 issued a report urging member countries to refrain from treaty overrides. This paper argues that the seriousness of the treaty override issue has been exaggerated. In practice, most countries, including the U.S. (which was clearly the target of the OECD Report) rarely override treaties, and when they do, in most cases the override can be justified as consistent with the underlying purposes of the relevant treaty. Moreover, treaty overrides can sometimes be an important tool in combating tax treaty abuse. Thus, I believe that if used correctly, treaty overrides can be a helpful feature of the international tax regime, albeit one that should be used sparingly and with caution.