Treaty Shopping Research Articles

Bilateral tax treaties network and global value chain position

This study investigates the effect of bilateral tax treaty (BTT) network centrality on countries’ global value chain (GVC) positions using a panel dataset of 62 economies from 2007 to 2021. Employing an instrumental variable approach, we find that higher BTT network centrality reduces a country's overall GVC position, with heterogeneous effects across sectors and participation types (forward and backward). The results suggest that increased BTT network centrality may facilitate production fragmentation and enable tax planning strategies (treaty shopping), leading to a distortion in the distribution of value-added across countries in GVCs.

Multilateral Tax Treaty Revision to Combat Tax Avoidance: On the Merits and Limits of BEPS’s Multilateral Instrument

Abstract Since 2015, more than 140 countries have cooperated in the OECD’s “Base Erosion and Profit Shifting” (BEPS) project to combat multinational tax avoidance. Several of the key actions, most importantly measures against tax-treaty shopping, require changes to double taxation treaties. The OECD designed a special instrument—the ‘multilateral instrument’ (MLI) - to allow for a swift implementation of BEPS-related tax treaty changes. In this paper, we show that MLI take-up is incomplete, we present (partly surprising) correlates of the take-up decision and develop a simple theoretical model to rationalize the observed take-up behavior. A key insight is that conduit countries, which are the beneficiaries of tax treaty shopping, can benefit from anti-treaty shopping laws as firms have incentives to scale-up real activity in conduit nations in order to be exempted from the new anti-treaty shopping rules. Empirical findings are consistent with these considerations: MLI adoption rates of conduit countries are high. Treaty shopping has, to date, not significantly dropped. And there is indeed indication that firms have scaled up their real economic activity in conduit nations. Overall, our findings reject that treaty shopping has been “killed” as envisaged by the OECD. JEL classification: F21, F23, F53, H25, H26, H32, H87, K34

Penghindaran Pajak Dan Pencegahannya

Tax avoidance has become a global issue that is widely discussed in various countries in the world. Every year there is an estimated state loss of around Rp 69 trillion due to tax avoidance schemes in Indonesia. This research method uses a qualitative method, while the data collection technique is done by searching from various sources, be it through print or electronic mass media coverage. The results show that there are obstacles in the formulation of anti-tax avoidance rules in Indonesia, where the government is faced with taxpayers who are able to take advantage of existing tax provisions. In this regard, the government has attempted to prevent tax avoidance through the implementation of policies such as anti thin capitalization, CFC rule, transfer pricing, and anti treaty shopping. However, policies that fall into the SAAR category are considered not optimal. Therefore, the government can also consider GAAR instruments that are currently applied in various countries.

Optimized profit repatriation in multinational enterprises through cross-border change of legal form and international tax management

This article shows for the first time that the cross-border change of legal form can be used for tax-optimized profit repatriation. By means of a cross-border change of legal form of the foreign EU corporation prior to distribution into another foreign EU corporation with subsequent dividend distribution after the cross-border change of legal form has taken place, the taxation of dividends with withholding tax can be avoided. This study develops and discusses this strategy for the first time and transfers it specifically to U.S. shareholders of European corporations. Moreover, this strategy is relevant in general for all shareholders of European corporations, irrespective of their residence, to get tax-optimized profit repatriation of dividends (retained earnings) and to avoid the problem of treaty shopping, which has been significantly strengthened by the introduction of the ATAD/BEPS principal purpose test (PPT) in all EU Member States. The study extends the state of knowledge in the area of international taxation, international mergers, finance and strategy.

The Multilateral Instrument in Africa: A Strategic Analysis

The Multilateral Instrument (MLI) was launched under Action 15 of the Base Erosion and Profit Shifting (BEPS) Project in November 2016 under the joint collaboration of the Organization for Economic Cooperation and Development (OECD) and the G20 in order to update existing bilateral tax treaty provisions to counter BEPS more effectively. Despite the benefits that the MLI presents for updating the African treaty network, the analysis in this contribution reveals that its provisions addressing certain high priority BEPS issues such as the artifical avoidance of permanent establishment (PE) status under Action 7 and even the minimum standard provisions under Action 14 for improving the mutual agreement procedure (MAP) were implemented rather poorly in less than 40% of the eligible African treaties. The exception to this are the minimum standard provisions under Action 6 that modified more than 75% of the treaties to counter treaty shopping. This paper elaborates on the resulting policy implications and offers a number of normative recommendations for maximizing the benefits of the MLI implementation in the African context which could also be relevant in light of the proposed Pillar Two reform. Multilateral Instrument (MLI) implementation, BEPS in Africa, policy implications, developing countries, capacity building, Pillar Two, STTR

The impact of thin capitalization rule on tax avoidance in Indonesia

Research aims: This study aims to investigate the impact of the thin capitalization rule on tax avoidance in Indonesia.Design/Methodology/Approach: The analysis used event study regression to overcome the problem of committed variable bias. Research findings: The examination found that, over the entire period, the thin capitalization rule could reduce tax avoidance. However, this study also uncovered that even though tax avoidance was reduced, the company did not pay the tax in the current year but postponed it to the following years. In addition, this study revealed that the thin capitalization rule could only reduce tax avoidance for a sub-sample of non-manufacturing companies. As for manufacturing companies, the thin capitalization rule had no impact on tax avoidance.Theoretical contribution/Originality: This research is the first to examine the impact of the thin capitalization rule on tax avoidance using a suitable method, i.e., event study regression with a staggered setup.Practitioner/Policy implication: This study can show that the thin capitalization rule works well for non-manufacturing companies. However, for manufacturing companies, the Indonesian tax authorities need to consider other ways to reduce their tax avoidance, for example, by creating or updating other specific anti-tax avoidance rules, such as transfer pricing or treaty shopping.

Calculating the country risk embedded in treaty-shopping networks

This paper constructed a tax treaty network to measure the country risk embedded in treaty-shopping networks. The results showed that when moving dividends directly without treaty shopping, MNEs were taxed at 11.2 %, but with treaty shopping, a tax rate of 5.3 % was imposed. When detouring around risk countries, MNEs paid taxes at a rate of 4.5 %. Clearly, MNEs can minimize their tax burdens by detouring around risk countries. In the case of dividends, intermediate routes included the UK, Sweden, Kuwait, Spain, and Denmark. These countries except the UK were not previously known as conduit countries. We also looked at network changes in individual countries. When moving funds outward from China, Iran, and Venezuela, MNEs detouring around risk countries incurred reduced tax-saving benefits on interest income and royalty income. However, when moving funds from the US to China, Saudi Arabia, Japan, Russia, Ireland, and the UK, treaty-shopping benefits remained unchanged even if risk countries were bypassed. Among risk countries, those with less risk applied higher tax rates. In the case of dividends, the riskier the country, the lower the dividend income tax rate. This situation results from a desire to attract FDI. We reflected the country risk in our treaty-shopping model.

New Investment Rulemaking in Asia: Between Regionalism and Domestication

AbstractThe article analyses investment rulemaking in new Asian regionalism in the context of evolving national legislation and regional trade strategies. It argues that the Association of Southeast Asian Nations (ASEAN) and the Regional Comprehensive Economic Partnership (RCEP) represent Asia's pragmatic incrementalism in reforming the investment regime. The process reinforces the relationship between international economic law and domestic investment laws. In tandem with transforming international investment agreements, ASEAN expedited investment and services trade, and established the modern investor–state dispute settlement (ISDS) mechanism. The RCEP further buttresses the ASEAN centrality in regional frameworks by consolidating ASEAN Plus One agreements. Yet, the RCEP's omission of ISDS reflects a distinct approach that may confront challenges to state-to-state proceedings and treaty shopping under overlapping pacts. Finally, the research sheds light on Asian countries' recent investment agreements and domestic dispute settlement that complement the liberal international order. These developments provide valuable models for developing countries and contribute to the understanding of global investment reforms from an Asian perspective.

Tax Treaty Abuse and Treaty Shopping: An Analysis of Countermeasures and Best Practices

Tax Treaty Abuse and Treaty Shopping: An Analysis of Countermeasures and Best Practices

Заобикалянето на закона в международния инвестиционен арбитраж – въпрос на компетентност на арбитража ли е, или допустимост на иска?

The subject of this article is treaty shopping in international investment law. The paper outlines the concept of whether treaty shopping in international investment law is a matter of jurisdiction or an admissibility issue.

Is There an International Minimum Standard on Tax Treaty Shopping after BEPS Action 6? Some Recent Divergent Trends

BEPS Action 6 established a “minimum international standard” to fight against tax treaty shopping, in particular by proposing to add article 29(9) of the OECD Model (2017) (the so-called principal purpose test, PPT) to tax treaties. This article explains why the PPT is susceptible to be interpreted differently across the world and, especially, shows that this outcome is very likely to materialize in view of some administrative and judicial decisions in different countries in 2021 in very relevant tax treaty shopping cases. Further tensions are added by the recent proposal for a directive by the European Commission against the use of shell companies since it is not in line with the BEPS Action 6 minimum standard. In essence, it is argued that the BEPS Action 6 minimum standard needs to be complemented with some further actions if the goal is to have a real and homogeneous anti-tax treaty shopping international standard and more legal certainty.

Abuse of double taxation avoidance agreement between India and Mauritius

Double taxation Avoidance agreements are entered between two countries so that the income earned by the residents of both the countries is not taxed twice by the countries. It provides relief to the residents in form of either deduction of tax already paid or by giving credit regarding the tax paid. The objective of this paper is to find the ways in which India-Mauritius Treaty was misused by individuals by doing treaty shopping. The DTAA between India and Mauritius gives specific tax exemptions for individuals who are residents of India and Mauritius. The treaty provides that if a resident of Mauritius invests in shares of an Indian company the capital gains of that resident will not be taxed by the Indian government and would be taxed by the Mauritius government. But because of this treaty it has been seen that individuals from all around the world try to route their investments from Mauritius to India. In this paper the researcher will look into how the treaty was abused and what steps have been taken by Indian authorities in their domestic laws to ensure that individuals who are non-residents of the contracting state cannot avail benefits arising out of the DTAA.

HOW TO IDENTIFY INSIDERS AND INTRUDERS DISGUISING AS INVESTORS IN THE ASSIGNMENT OF INVESTMENTS

AbstractThe constant exchange of investment assets poses a risk of ‘commoditisation’ of investment treaty claims. Nevertheless, both traditional and modern investment treaties contain sufficient safeguards against attempts by host State ‘insiders’ and third State ‘intruders’ to create artificial access to arbitration. First, the definition of ‘investment’ can filter genuine investments from bare acquisition of assets (ratione materiae). Second, the textual linkage between ‘investor’ and ‘investment’ strongly implies that ‘active contribution’ in the investment is required from assignees to qualify for protection (ratione personae). Third, the doctrine of abuse of rights prevents treaty shopping and internationalisation of domestic disputes (ratione temporis).

Treaty Shopping in Canada after Alta Energy Luxembourg (2021): A Closed Door without a Lock

In this article, the authors consider the implications of the recent Supreme Court of Canada decision in Alta Energy Luxembourg (2021), which dealt with perceived treaty shopping in the context of the Canada-Luxembourg Income and Capital Tax Treaty (1999).

The Possible Regulation Model To Optimize The Automatic Exchange Of Information (Aeoi) In Indonesia Through Directorate General Of Taxation, Ministry Of Finance And Financial Services Authority

Tax Treaty is a bilateral(two-party) agreement made by two or more than two countries to resolve some issues involving double taxation, transfer pricing, and treaty shopping. Several governments and organizations use model treaties generally as starting points, such as OECD Model Convention and US Model Convention. As a member of G20, Indonesia has participated in The Automatic Exchange of Information (AEoI) provides for the automatic exchange of predefined set of financial accounts information between tax authorities, based on The Common Reporting Standard (CRS), as also mentioned in Tax Information Exchange Agreement (TIEA) implemented in 2018. In order to implement AEoI the Indonesian regulator needs to review the Banking Law and the Tax Provisions and Procedures, There is an urgent need to regulate a regulation as a standard that will be used in CSR, support the tax reform and to enhance the capacity and the authority of Directorate General of Taxation, Ministry of Finance and Financial Services Authority, while still considering the protection for the Bank Secrecy. This research will formulate a model regulation that can facilitate the implementation of the AEoI, by carrying out a study in 3 countries, which is Indonesia, Malaysia and Singapore

Legal Formulation to Overcome Base-Erosion and Profit-Shifting Practices of Digital-Economy Multinational Enterprise in Indonesia

This study discusses Indonesian legal strategies and formulations to handle tax avoidance originating from Base Erosion Profit Shifting (BEPS) carried out by the digital-economy multinational enterprise. It is a normative (doctrinal) study supported by non-doctrinal methods to reveal the truth based on the logic of legal scholarship. It also compared the practices to the tax provisions, legislation, and cases in India, the United Kingdom, Australia, and Malaysia. At least two theories underlie the study. The first is the legal theory of justice, certainty, and expediency from Gustav Radbruch. The second is the theory of international cooperation. The study found several points. First, multinational enterprise strategies avoid tax by means of Permanent Establishment techniques in low-tax jurisdictions, transfer pricing, and tax treaty shopping. Second, to tackle the multinational enterprise that conducts BEPS in the field of the digital economy, (1) all countries have developed and amended laws and regulations related to e-commerce taxation and the digital economy; and (2) all countries carry out international cooperation, both bilaterally and multilaterally through tax treaties, MLI, and CbC reporting.

Country Note: Abolition Of Ddt In India: A Treat For Foreign Investors?

The Indian government eliminated the much maligned dividend distribution tax (DDT) through Finance Act 2020. The abolishing of the DDT marks a return to the shareholder regime of dividend taxation (hereinafter ‘shareholder regime’). Foreign enterprises (generally multinational corporations) aiming to do business in India through subsidiaries or enterprises that already have subsidiaries in India can benefit from this change. This article analyses the tax impact of this change when an Indian subsidiary distributes its profits to its parent or holding company. Thus, the paper presents a tabular representation of taxation in the DDT regime and the shareholder regime and compares them. To present the complete scenario, the paper also analyses different profit distributing mechanisms other than dividends that are used by companies – specifically, the buyback of shares and share capital reduction. Finally, limited liability partnership (LLP) firms offer another vehicle for companies to conduct business in India. Thus, the paper also analyses the taxation aspects of an LLP distributing profits to its partner company. The return to the shareholder regime will allow non-residents to avail beneficial tax rates provided for dividend taxation in double taxation avoidance agreements (DTAAs) signed by India with other countries. Thus, the final section of this article discusses the mechanisms that are in force to prevent treaty shopping. The principal purpose test (PPT) brought in by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (Multilateral Instrument or MLI), the threshold of beneficial owners found in most DTAAs, and India’s domestic general anti-avoidance rule (GAAR) are analysed to determine the essential requirements of these mechanisms. CFC, Individuals, BEPS, Action 3, Brazil.

Tax Policy and Planning: Lessons From Developed Countries

Abstract One of the fundamental issues in developing countries is how to evolve tax policies that can generate sufficient revenue for government activities. Consequent upon the above, this study examined tax policies and planning in developing sub-Saharan African countries. It adopted table content analysis and descriptive statistics in its methodology. The study observed that aggressive tax planning which the Multi-National Corporations execute through royalty payment, interest payment, strategic transfer pricing and treaty shopping, among others, has caused countries around the globe huge revenue losses annually and has become a matter of serious concern to both the developed and developing economies. The implication of this is that achievement of objectives of tax policies and their reforms will remain a mirage in sub-Saharan African countries. The study concluded that the prevalence of illicit financial outflows in the form of tax evasion and avoidance in the guise of aggressive tax planning by multinational corporations, however, makes Africa’s tax policies worse. It was recommended that the Organization for Economic Corporation and Development, and the G-20 should involve developing countries in the Base Erosion and Profit Shifting project as they are the worst victims of these activities. Keywords: Tax Policy, Aggressive Tax Planning, Developing countries, Africa.

Networked capital: indirect investment and BIT formation

AbstractWhy do states participate in bilateral investment treaties (BITs)? In this article, I examine the role of indirect investment on BIT formation. Indirect investment flows are an important aspect of the global investment regime that are underexamined by research focused on direct flows only. Indirect flows play an important role in affecting incentives for BIT participation because firms channel investment through intermediary destinations to take advantage of existing BITs. I argue that governments are more likely to participate in BITs when states expect to access groups of capital exporting states through second order links. When selecting BIT partners, states evaluate expected indirect foreign direct investment (FDI) flows by considering characteristics of a potential partner's second order FDI partners. States are thus more likely to participate in BITs when expectations for indirect flows are high. I use a variety of analyses to demonstrate evidence in favor of my hypotheses. I find evidence that indirect flows affect the likelihood of BIT formation and increase dyadic FDI flows. This research provides a novel explanation for BIT formation and contributes to research on indirect capital flows, treaty shopping and BIT formation.

Recent Efforts to Curb Investment Treaty Shopping: How Effective Are They?

In recent years it can be observed that states increasingly introduce explicit limitations to the practice of treaty shopping in their investment agreements. Accordingly, substantive ratione personae requirements, denial of benefits clauses, and anti-circumvention clauses are often included in newly signed investment treaties. In addition to these new drafting trends, arbitral tribunals have developed an implicit limitation in the form of the abuse of process doctrine to sanction the most egregious forms of treaty shopping. While these drafting trends as well as arbitral practice can curb undesired treaty shopping to a certain extent, this article argues that only a multilateral reform effort is able to truly prevent this practice from occurring. Treaty Shopping, Nationality Planning, Corporate Structuring, ISDS Reform, UNCITRAL, Ratione Personae Requirements, Denial of Benefits Clauses, Abuse of Process