Strategizing Multinational Tax Risks

OECD: BEPS Treaty Abuse proposal released for comment

The OECD invites public comments with respect to Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan.

A summary of the OECD press release, the OECD proposal and Best Practice comments are included herein for reference:

Click to access treaty-abuse-discussion-draft-march-2014.pdf

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.

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.

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.

These comments should be sent on 9 April 2014 at the latest (no extension will be granted). The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.

Public Consultation:

Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, and  by 3 April at the latest, 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 14-15 April 2014. Persons selected as speakers will be informed by email by 4 April at the latest.

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.

General observations of proposal:

The OECD proposal provides a three-pronged approach:

• Treaty statement re: anti-avoidance rule and treaty shopping opportunities
• Specific anti-abuse rule based on Limitation of Benefit (LOB) provisions
• General anti-abuse rule

Other OECD recommendations include comments re: Permanent Establishment (PE), tax policy, and broad General Anti-Avoidance Rule (GAAR) interpretation (including allowance of domestic GAAR provisions notwithstanding the relevant double tax treaty).  The GAAR proposal provides that obtaining a treaty benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.  Note this GAAR proposal supplements the LOB provisions.

Proposals are also introduced to address tax avoidance risks via changes to domestic laws.  Such risks include thin capitalization, dual residence, arbitrage transactions (including timing differences), and transfer mispricing.  Intentions of the UN Model Convention are also introduced for analogous interpretation.  

The proposal notes that treaties should not prevent application of domestic law provisions that would prevent transactions re: CFC rules and thin capitalization.

Finally, the OECD proposal indicates that the treaty should clearly state that prevention of tax evasion and tax avoidance is a purpose of the tax treaties.

The proposal, in alignment with the overall OECD BEPS proposals, is targeted at avoidance of double non-taxation, without a balanced commentary and measures addressing the risk of double taxation.  Additionally, the terms “tax evasion” and “tax avoidance” are used in tandem within the proposal, although such terms are literally construed as having significantly two separate meanings and relative intent.  Finally, the allowance of domestic GAAR provisions in addition to, or in lieu of, treaty provisions and EU Parent-Subsidiary guidelines will promote additional uncertainty re: subjective interpretations of broad proposals that will ultimately lead to increased tax disputes, double taxation and the loss of multilateral symmetry.

This proposal has tremendous significance in the transfer pricing arena that must be seriously considered and reviewed in its entirety, including the possibility for early comment to ensure OECD consideration.