The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse. Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.
Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”
This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State. Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed. This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.
Questions that may be asked re: this statement:
- Who is concluding on the reasonableness? What facts are used for such determination?
- Which facts and circumstances are relevant?
- What are all of the principal purposes of the arrangement or transaction?
- How is a benefit measured, directly or indirectly?
- What is a genuine, vs. non-genuine, economic activity?
- How do you determine if such arrangement is in accordance with the object and purpose of the “relevant provisions” of the Convention?
The phrase is purposefully vague, and thereby subject to inconsistent interpretation.
It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax. This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.
The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.
Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives. It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.
- Anti Tax Avoidance Package
- Proposal for a Council Directive re: tax avoidance practices
- Proposal for a Council Directive re: automatic exchange of information
- Annex to automatic exchange of information proposal
- Communication on an External Strategy for Effective Taxation
- Annexes to the external strategy communication
- Communication re: Tax Avoidance Package
- Study on Structures of Aggressive Tax Planning & Indicators
- Recommendation on implementation of measures against tax treaty abuse
The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future. We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”
Click to access swd_2016_6_en.pdf
Click to access taxation_paper_61.pdf
Click to access c_2016_271_en.pdf
The UN organized its second workshop on “Tax Base Protection for Developing Countries” on 23 Sept. 2014. The background materials for the workshop provide valuable insights into the roles that developing countries will continue to play, directly or indirectly, as a part of the OECD BEPS Action Plan. The final outcome of the project will be a UN handbook. The topics for the workshop were in parallel with the background materials, focusing on the following topics: (1) Preventing the artificial avoidance of PE status; (2) Neutralizing effects of hybrid mismatch arrangements; (3) Limiting interest deductions; (4) Taxation of capital gains; (5) Preventing tax treaty abuse; and (6) Transparency and disclosure. Additional information, including the background materials, are referenced at the following link:
This workshop, and its continuing developments, are significant in assessing whether the OECD Actions will be followed by developing and non-OECD countries in their recommended form and/or if a simpler, more direct application of international tax rules will be pursued. All interested parties should be aware of these materials and the forthcoming UN handbook.