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William Byrnes (Texas A&M) tax & compliance articles

OECD Publishes Proposals to Prevent Treaty Shopping

Posted by William Byrnes on March 18, 2014


On Friday (March 3) the OECD released its discussion draft of > proposals produced with respect to Action 6 < (Prevent Treaty Abuse) of the BEPS Action Plan.  The OECD stated that the draft proposals set out do not represent the consensus views of either the Committee on Fiscal Affairs or its subsidiary bodies but rather are intended to provide stakeholders with substantive proposals for analysis and comment.  The proposals follow upon the July 2013 OECD > Action Plan on Base Erosion and Profit Shifting <. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.

Prevent Treaty Abuse

The Action Plan identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Action 6 (Prevent Treaty Abuse) reads as follows:

Action 6 Prevent treaty abuse

Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.

US Limitation of Benefits Approach 

The OECD’s primary recommendation is the inclusion of a Limitation of Benefits (LOB) provision in tax treaties.  The detailed OECD proposal refers to the US’ LOB articles and follows a US approach to combatting treaty shopping.

Public Consultation

As part of that consultation process, interested parties are invited to send comments on this discussion draft, which includes the preliminary results of the work carried out in the three different areas identified in Action 6:

A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.

B. Clarify that tax treaties are not intended to be used to generate double non-taxation.

C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.  The comments must be received by April 9, 2014.  The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.  Comments on this discussion draft should be sent electronically (in Word format) by email to taxtreaties@oecd.org and should be addressed to: “Tax Treaties, Transfer Pricing and Financial Transactions Division OECD/CTPA”.  It is the policy of the OECD to publish all responses (including the names of responders) on the OECD website.

Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, by April 3rd, whether they wish to speak in support of their comments at a public consultation meeting on Action 6 (Prevent Treaty Abuse), which is scheduled to be held in Paris at the OECD Conference Centre on April 14-15, 2014.

This consultation meeting will be open to the public and the press.  Persons wishing to attend this public consultation meeting should fill out their request for registration on line as soon as possible, with a deadline of April 3, 2014.  This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.

OECD Proposal Topics

A. Treaty provisions and/or domestic rules to prevent the granting of treaty benefits in inappropriate circumstances

1. Cases where a person tries to circumvent limitations provided by the treaty itself 

a) Treaty shopping

i) Limitation-on-benefits provision
ii) Rules aimed at arrangements one of the main purposes of which is to obtain treaty benefits

b) Other situations where a person seeks to circumvent treaty limitations

i) Splitting-up of contracts
ii) Hiring-out of labour cases
iii) Transactions intended to avoid dividend characterisation
iv) Dividend transfer transactions
v) Transactions that circumvent the application of Art. 13(4)
vi) Tie-breaker rule for determining the treaty residence of dual-resident persons
vii) Anti-abuse rule for permanent establishments situated in third States

2. Cases where a person tries to abuse the provisions of domestic tax law using treaties

B. Clarification that tax treaties are not intended to be used to generate double non-taxation

C. Tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

Book Binder

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