On 14 March 2014, the OECD issued a public discussion draft on tax treaty abuse with suggested amendments to the OECD Model Treaty and the Commentary, as part of its base erosion and profit-shifting action plan (BEPS project) announced last July. The proposals are primarily aimed at preventing treaty benefits being granted in inappropriate circumstances, in particular through treaty shopping, see http://bit.ly/1lI36lU. The OECD’s main proposals are outlined below.
- Tax treaties should contain a specific anti-abuse rule similar to the limitation on benefits provision found in U.S. treaties.
- Tax treaties should also contain a general anti-abuse rule stating that a treaty benefit could be denied if, under the facts and circumstances, it is reasonable to conclude that obtaining that benefit was one of the main purposes of entering into the transaction or arrangement (main purpose test). The taxpayer would be allowed to demonstrate that granting the benefit would be consistent with the purposes of the treaty.
- A minimum shareholding period should be included in treaty dividend articles in order to benefit from the lower rate of withholding tax.
- The current ‘tie-breaker’ rule for dual resident companies should be replaced by the alternative currently found in the Commentary which allows a case-by-case solution.
- A specific anti-abuse provision should be introduced for certain triangular situations involving low-taxed permanent establishments situated in third states.
- Tax treaties should not in general affect the taxation by a contracting state of its own residents. This proposal is based on the “savings clause” found in U.S. treaties.
The discussion draft notes that a number of additional provisions related to the abuse of tax treaties are being dealt with under other BEPS actions. These include measures to ensure treaties do not prevent the application of domestic anti-abuse provisions such as thin capitalization and provisions against hybrid transactions. The discussion draft also proposes changes to the title and preamble of the Model Treaty to make clear that treaties are not intended to generate double non-taxation and to emphasize that they include the prevention of tax evasion and avoidance.
The final part of the discussion draft outlines a number of policy considerations which a country should consider before entering into a treaty with another country. This reflects similar considerations expressed by the European Commission in its recommendation on good governance in relation to tax havens on December 6, 2012. The OECD invites interested parties to send comments on this discussion draft by 9 April 2014 at the latest.