Strategizing Multinational Tax Risks

The OECD recently published its peer review report on treaty shopping re: prevention of treaty abuse under the inclusive framework on BEPS Action 6.  A link to the document is included for reference.

Article 6 targeted treaty abuse; Action 15 introduced the multilateral instrument (MLI) to implement BEPS actions.  The MLI is the mechanism whereby countries are implementing the treaty-shopping minimum standard.

The first Peer Review shows the effectiveness of implementing the minimum standard for treaty abuse.  The intent of Action 6 is to stop treaty shopping in its entirety.

The treaty shopping minimum standard requires countries to include two components in their tax agreements; an express statement on non-taxation and one of three ways to address treaty-shopping.  The provisions require bilateral agreement.  The 2017 OECD Model Tax Convention includes the following express statement: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”

The three methods of addressing treaty shopping include;

1. Principal Purpose Test (PPT) alone, or
2. PPT with a simplified or detailed version of the Limitation on Benefits (LOB) rule, or
3. Detailed LOB rule with a mechanism to deal with conduit arrangements.

As the MLI’s are agreed, it is important to understand the three methods above, and the express statement which includes reference to the elimination of double taxation, a concept which is sometimes ignored in the pursuit of perceived treaty / tax abuse.

https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page1