OECD releases discussion draft for BEPS Action 6 (Prevent Treaty Abuse) 

March 14:  The Organisation for Economic Co-operation and Development (OECD) today released a discussion draft pursuant to Action 6 (Prevent Treaty Abuse), under the Base Erosion and Profit Shifting (BEPS) Action Plan.

Comments are requested on the discussion draft by April 9, 2014, with a public consultation meeting to be scheduled in Paris on April 14-15, 2014.


Read the 32-page OECD discussion draft [PDF 685 KB].

Overview

The discussion draft is divided into three sections corresponding to the specific areas identified in Action 6 to carry out its intended purpose:


  • Development of model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
  • Clarification that tax treaties are not intended to be used to generate double non-taxation.
  • Identification of the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

The recommendations in each of these areas are discussed below.

Section One

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


The discussion draft makes several recommendations to prevent treaty abuse, and in particular treaty shopping. These recommendations include:


  • Inclusion of an anti-abuse rule based on the limitation-on-benefits provision found in most U.S. income tax treaties
  • Inclusion of a more general anti-abuse rule designed to address other forms of treaty abuse that would not be covered by the specific limitation-on-benefits provision

The discussion draft also discusses specific situations when a person seeks to circumvent treaty limitations, e.g., through back-to-back financing transactions. While a general anti-abuse rule may be helpful in addressing such situations, the discussion draft suggests that “targeted specific anti-abuse rules would provide greater certainty for both taxpayers and tax administrators.” The discussion draft discusses several of these specific situations, including certain structures using permanent establishments situated in third States.

Section Two

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


To clarify that income tax treaties are not intended to be used to generate double non-taxation the discussion draft makes several recommendations, including:


  • The “title” of the OECD Model Convention is to be amended to state clearly that the prevention of tax evasion and avoidance is a purpose of tax treaties.
  • The OECD Model Convention “should recommend a preamble that provides expressly that States that enter into a tax treaty intend to eliminate double taxation without creating opportunities for tax evasion and avoidance,” including a specific reference that treaty shopping arrangements are an example of tax avoidance that should not result from tax treaties.

Section Three

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


The discussion draft states that a clearer articulation of the policy considerations that countries should consider prior to entering into a tax treaty may limit the number of tax treaties executed with low or no-tax jurisdictions. The discussion draft recommends amendment to the “introduction” to the OECD Model Convention to include new tax policy considerations relevant to the decision of whether to enter into a tax treaty (or amend an existing treaty).


Generally, these tax policy considerations concern the risk of double or excess taxation, the encouragement of economic ties, and the prevention of tax avoidance and evasion.




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