BEPS Action Plan: Action 6 – Treaty abuse

According to the OECD, it is inefficiencies in tax treaties that have triggered double non-taxation in a number of situations. We comment here on how the OECD plans to develop model treaty provisions and recommendations for domestic law measures to counter the granting of treaty benefits in what it refers to as 'inappropriate circumstances'.




17 March 2014

The 14 March OECD discussion draft calls for a very significant rewrite of both the OECD Model Tax Convention and the Commentary, including: a US-style Limitation of Benefits (LoB) article as well as a main purpose anti-abuse rule. A variety of other anti-abuse measures are also proposed.

If the recommendations are widely adopted, they will undoubtedly reduce treaty abuse, but also create significant uncertainty for international business. Given that tax treaties play such a critical role in removing barriers to cross-border trade and investment the primary concern with these OECD proposals is that their focus on combating treaty shopping will have a disproportionate impact on cross-border commercial activity.

In principle, we support the use of more objective tests to police treaty abuse on the basis that this will deliver a greater level of certainty. However, we have concerns that what seems to be the wholesale adoption of the US approach will lead to an inappropriately restrictive outcome.

The main concern relating to the proposed introduction of a new main purpose/ anti-abuse rule is the potential for it to lead to a high degree of uncertainty. The apparent breadth of its scope and the fact that it may be applied independently of the LoB clause add to these concerns.

In addition to the need for a general anti-abuse rule, as set out above, the OECD sees the need for various targeted anti-abuse measures. The range of specific provisions clearly raises a wide variety of points. Further, as the discussion draft notes, some of these issues require more consideration or are to be addressed under another BEPS Action Plan item.

To counter certain abuse, the discussion draft suggests it may be necessary to change domestic law in some territories. The discussion draft proposals for the Model Convention will allow contracting states to invoke their domestic anti-abuse provisions, irrespective of the specific treaty otherwise applying, except for a limited number of cases. This would be a significant change given that articles 26 and 27 of the Vienna Convention on the Law of Treaties typically require in such a situation that the treaty should prevail over domestic law.

The proposal expressly to broaden the purpose of treaties by the inclusion of references to the prevention of tax avoidance and evasion in the title of treaties (as well as adding wording to this end in the Preamble and Introduction) reinforces the overall messages from the discussion draft. Although presumably not intended, it is possible this might encourage some states to the view that even after the application of the various anti-avoidance tests there remains a further residual anti-abuse principle based on this new wording. There is additional comment in our Tax Policy Bulletin of 17 March 2014.


14 March 2014

The OECD has published today a discussion draft on the proposals for counteracting perceived abuse of tax treaties. In brief, the proposals have three objectives:

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

Written responses are requested by 9 April. A public consultation is scheduled for 14/15 April but those attending and those wishing to speak will have to be invited to do so, following an application to be received by the OECD by 3 April.


21 February 2014

There has been very little said about the discussions which have been taking place at the OECD with tax administrations about Action 6 but dates …

have now been announced provisionally by the OECD for publication of the draft (17 March), the deadline for comments to be made to the OECD (11 April) and a public consultation meeting at the OECD (14-15 April).


10 September 2013

The OECD’s intention to clarify tax policy considerations to be taken into account prior to the signing of a treaty may help to stop the process of termination …

of tax treaties as we’ve seen as a response to abuse of particular treaty articles. The basis on which agreement has been reached by the states in the first place may have been at least partly to blame.


2 September 2013

As a result of the Action Plan, we expect to see a greater reliance on ‘break’ provisions – GAARs, SAARs/ TAARs, domestic criteria or LoB clauses …

General anti-abuse rules or general anti-avoidance rules (GAARs) are increasingly being applied in a treaty context. The introduction into treaties of a treaty specific/ targeted anti-abuse rule (SAAR or TAAR) is also a consideration. Certain countries (e.g. China and Indonesia) have already introduced additional domestic criteria that need to be satisfied. But the more popular route to date has been to write limitation of benefits (LoB) provisions directly into treaties to deal with things like ‘triangular’ situations, base erosion payments and conduit arrangements, as has been particularly the case with recent US treaties.

It will be important for agreement to be reached on an optimal approach to avoid the complexities of dealing with a variety of different (and complex) methodologies. The practical difficulties of agreeing on and adopting alternative ways of dealing with existing treaty provisions (including a multilateral instrument as discussed in Action 15) suggest that action will likely be via new and updated treaties. While there are differing views about what would be preferable, it’s quite likely that in future treaties will increasingly include anti-abuse/anti-treaty-shopping clauses in specific articles, including the business profits and capital gains articles.


7 August 2013

We consider that, as a matter of principle, taxpayers should be able to rely on the text of a treaty, even if this arguably leads to ‘unintended benefits’. It’s up to governments …

to agree which measures — and constraints — are required and to provide appropriate wording to deliver them.

On the other hand, we recognise there shouldn’t be an over-reliance on legal form alone.

Treaty abuse archive

19 July 2013

The Plan identifies a series of measures to ensure that taxpayers cannot inappropriately use bilateral treaties to achieve a position of double non-taxation …

in relation to any particular activity.

At a high level, it seeks to identify whether two jurisdictions should be prepared to enter into a treaty agreement at all, in the light of the increasing number of treaties being rescinded following perceived abuse.

The action is primarily to develop within a year best practice anti-abuse clauses for use within treaties and best practice anti-avoidance rules which jurisdictions can implement via their domestic tax systems.

Explore additional BEPS action plans: