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'.


Read our response to the latest discussion draft

5 May 2016

Our response to the OECD’s discussion draft on treaty entitle of non-CIV funds - those which are not collective investment vehicles...

is one of 41 now published in a consolidated document on the OECD’s website.


7 April 2016

Our response to the OECD's discussion draft on treaty residence of pension funds and their ability therefore to access benefits such as withholding tax reliefs...

is one of 28 now published in a consolidated document on the OECD's website.


29 February 2016

On 17 February 2016, a new US Model Income Tax Convention was issued with a number of new provisions intended to...

more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The LOB recommendations of BEPS Action 6 are to be revisited in light of this update.

The 2016 Model includes several novel provisions, including a new article denying treaty benefits for income subject to ’special’ (i.e., preferential) tax regimes; a rule eliminating benefits for income allocable to so-called ’exempt permanent establishments;’ a mechanism for partial termination of treaties where a treaty partner reduces its corporate income tax rate below a certain threshold; and new restrictions in the treaty’s Limitation on Benefits article.

See further our Tax Insights from International Tax Services of 29 February 2016.


6 February 2016

Instead of the options involving a limitation of benefits (LoB) clause the European Commission has published an EU Recommendation for Member States to...

 adopt what it calls “a general anti-abuse rule based on a ‘principal purpose test’ (PPT) of transactions or arrangements”

The OECD final report on BEPS Action 6 noted that an LoB could give rise to EU law concerns, which would need to be addressed and which were also reflected in the EC infringement action against the Netherlands in relation to its double tax treaty with Japan.

The rule is proposed in the following form:

“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital 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.”

The exclusion of arrangements reflecting genuine commercial activity is presumably intended to ensure compliance with EU law.

See further our Tax Policy Bulletin of 5 February 2016.


5 October 2015

The final recommendations on countering perceived treaty abuse amount to a minimum standard to counter treaty shopping but…

with some flexibility in the implementation of that standard to allow adaptation to each country’s specific circumstances and negotiated bilateral tax treaties.

In addition to an express statement to be added to treaties, the range and combination of options – for a LOB plus anti-conduit rule, PPT or both – remains the same as in the latest revised discussion draft of 5 May 2015. So too, in most respects do the specific rules on various dividend transfers, shares taking their value from immovable property, dual residence and third country PE exempt income situations.

The other issues, including changes to the Model Tax Convention (the preamble and Commentary on interaction with domestic anti-abuse rules) and the tax policy considerations to consider before entering into a bilateral treaty, round off this Action item as before.

Examination of the treaty entitlement of investment funds and US work on amending its current LOB position are reasons this report will be revisited in the first part of 2016.

All the required treaty changes will then be incorporated into the work on Action 15.


18 June 2015

Our response to the most recent discussion draft was one 66 comment letters on Treaty Abuse now published by the OECD in a consolidated document on its website.


17 June 2015

We told the OECD in our written response to the 22 May discussion draft that the LOB and the PPT should...

not be welded together - they are directed at distinct treaty shopping issues, i.e. eligibility of treaty residents for treaty benefits in the case of the LOB and combatting abusive use of treaties by eligible treaty residents in the case of the PPT.

We urged the OECD to opt for the simplified version, leaving it to bilateral negotiation to tailor a treaty LOB to the needs to the treaty partners.

We welcomed the confirmation that the LOB should apply to CIV funds and non-CIV funds.

We recommended that the final report on Action 6 should not attempt to formulate new rules on special tax regimes and partial treaty termination at this late stage but set forth general principles for further consideration.


22 May 2015

The OECD has issued a Revised Discussion Draft on BEPS Action 6: Prevention of Treaty Abuse (the RDD) which...

includes a simplified Limitation on Benefits (LOB) Article for inclusion in the OECD Model Income Tax Convention and provides ‘conclusions and proposals’ on 20 targeted issues.

Most of the proposals are in response to public comment but the RDD also contains new proposals. Some proposals aim to restrict access to treaty benefits with respect to income that may be subject to preferential tax treatment.

The revised draft and public comments will be considered at a Working Party meeting on 22 – 26 June 2015. Comments must be submitted by 17 June 2015.

The introduction to the RDD stresses that it does not reflect a consensus view of the Committee on Fiscal Affairs; rather, it is intended to provide stakeholders with substantive proposals on how to address the issues for analysis and public comment.


13 January 2015

Our response to the OECD on the Discussion Draft on the follow-up to treaty abuse, as part of a consolidated document comprising the 79 comment letters provided, is...

published on its website:

Published responses to the discussion draft on follow-up work on treaty abuse (Action 6) BEPS (PDF, 9MB)

The input will be discussed during a public consultation at the OECD Conference Centre on 22 January 2015, at which PwC will be represented. This meeting will be broadcast live on the internet - no advanced registration is required for this internet access.


25 November 2014

The OECD’s Action 6 follow-up Discussion Draft of 21 November identifies twenty issues where the Working Group is considering further refinements and...

while it provides a helpful roadmap to the Working Group's thinking, it is also a clear invitation to stakeholders to provide input, often asking for specific examples on fact patterns that should not be adversely impacted. Stakeholders are invited in particular to suggest:

  • additional examples to add clarity to when application of the Principal Purpose Test (PPT) is appropriate
  • examples of how the anti-conduit rule potentially applicable instead of a PPT could be made less subjective – e.g. the rule's application when substantially all the potentially treated benefited income is paid on to another party could be improved by a specific threshold as opposed to the vague ‘substantially all’ standard
  • cases where an intermediate holding companies is "used for valid commercial reasons" to be included within the scope of the derivative benefits provision allowing treaty benefits to a company where its owners would be so entitled (if relevant criteria are met)
  • factors and examples for inclusion in guidance as to when a tax authority may give a discretionary grant of treaty benefits when the other tests in the limitation of benefits (LoB) article are not met
  • comments on the interpretation and application of the active business provision and on how to apply the publicly traded test in a year in which a company becomes, or ceases to become, publicly traded (and on whether the test is too restrictive) – though in light of the likely limited use of the LoB article in treaties other than those with the US, the best course of action may be to drop the detailed formulation altogether
  • whether it is practical to develop a single preferred approach for the application of the LoB article to collective investment vehicles (CIVs) – doubtful in light of the varying formats of CIVs (but there is a proposal to review the more general question of treaty entitlement for CIVs, a welcome broadening of scope for those countries who choose not to include an LoB article)
  • comments on the coverage of Real Estate Investment Trusts (REITs), sovereign wealth funds (SWFs), pension funds, and alternative funds, including private equity funds (as in the case of CIVs, recognising the need to address the impact of the PPT, in addition to the treatment of these entities in the LoB article)
  • comments on three ’other’ issues (relating to the residency tie-breaker rule, an anti-abuse rule relating to income exempted from resident country taxation by virtue of being attributable to a permanent establishment in a third country, and the interaction between tax treaties and domestic anti-abuse rules).


24 September 2014

The OECD Action 6 report agreed by the G20 now recommends that in accordance with proposed changes to the Model Treaty…

States adopt a "minimum level of protection" to prevent treaty abuse. However, the report recognizes the need for further refinements in the objective tests, particularly in view of constitutional or EU law restrictions that prevent some States from adopting the exact wording of the model provisions recommended in the Action 6 report. Rather than a one-size fits all solution, the report concludes that any of the following would suffice:

  • Limitation of benefits (LoB) plus Principal Purpose Test (PPT), or
  • PPT alone, or
  • LoB plus a restricted PPT rule applicable to conduit financing arrangements or domestic anti-abuse rules or judicial doctrines that would achieve a similar result.

The LoB now includes a "derivative benefits" provision allowing certain entities owned by residents of other States to obtain treaty benefits that these residents would have obtained if they had invested directly.

The PPT is identical to the previous March 2014 version except with the substitution of "principal" purpose for "main" purpose regarding obtaining a treaty benefit, unless granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty in question.

The report continues to recommend that treaties include in their title and preamble a clear statement that the Contracting States, when entering into a treaty, intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

The report also includes recommendations to deal with certain specific situations.


3 June 2014

The OECD’s Annual Conference in Washington DC provided insight into an additional point being actively considered...

the inclusion of a savings clause, which would reserve the right for a state to deny tax treaty benefits to its own residents.


26 May 2014

The OECD’s webcast today suggested that Working Party WP6 dealing with perceived treaty abuse will recommend...

that no 'one-size fits all' and that flexibility will be required to ensure the right solution for each territory (but with no effective opt-out).

Combining tests for limitation of benefits (LoB) and main purpose could in some cases lose the benefits of each individually - LoB provides greater certainty, main purpose provides administrative simplicity.

The OECD need to see what comes out of the other BEPS work before reconsidering a derivative benefits clause.


15 April 2014

It was very hard to determine from the public meeting to discuss representations made to the OECD on treaty abuse how...

a consensus is to be achieved within the timeframe. There are a number of complex concerns, some conceptual and some practical.

Overall, there is a very wide support for a limitation of benefits clause (LoB) in principle. This is US driven with multi-lateral support from most of the governments and business representatives in attendance. It would provide a basis of relating treaty benefits to entities with a nexus in the resident country. It was noted though that this nexus has in practice been of limited benefit to smaller countries with less well established and capitalised stock exchanges. There were issues with some of the detailed provisions including their compatibility with EU law.

The case for a main purpose test was less well made, and challenged as undermining the entire LoB approach. The discussion did not resolve the view that the two tests do not sit well together. The type and form of the appropriate LoB is a complex debate. The US generally have much greater first-hand knowledge. It is accepted that once LoB was proposed early in the process, the US "off the shelf" product became the default model.

One of the main concerns is the absence of a derivative benefits clause. A number of representatives made a strong case that this creates a disproportionate restriction to accessing treaty benefits in order to counter abuse that would be better prevented by other measures. This was possibly the hottest single topic. The mood was that the Working Party would seriously consider including a derivative benefits clause in the final paper, if not as a recommendation then as an option. The experience of the Japan/ US treaty that has no derivative benefits clause has resulted in substantial issues and delays.

The issue of third country/ branches was flagged by Jacque Sasseville (OECD Secretariat) as an area easy to understand but much harder to solve. Where income is paid to a treaty country A via a third country branch, the country A treaty would still apply. It was described as a "downstream" issue comparable to the "upstream" risks dealt with by the LoB. The US style effective tax rate test was described in some detail. The response to why a credit system was not being proposed was that OECD didn't want to impose such a system onto individual States.


11 April 2014

Our detailed comments have been published together with comments received from other respondents to the Discussion Draft...

in a consolidated paper available from a dedicated page on the OECD’s website.


9 April 2014

In our submission to the OECD on the Discussion Draft, we suggest the proposals are a starting point for preventing the granting of treaty benefits in inappropriate circumstances but...

that they have the potential to create uncertainty for both taxpayers and governments and narrow which business enterprises would have access to income tax treaties to mitigate excessive taxation and double taxation.

In summary we:

  • recommend specific modifications to the proposed Entitlement to Benefits article to eliminate overly restrictive standards and to add clarity and predictability;
  • recommend that the final paper clarify that the Working Party has not addressed the application of income tax treaties to collective investment vehicles and pooled funds, which is being addressed independently of the BEPS project;
  • urge that the main purpose test be eliminated from the article as it would undermine a basic benefit of the article of providing objectivity and predictability and the concerns it is aimed at addressing should be dealt with in other ways as we explain below; and
  • offer c0mments on the dual residency test and additional anti-abuse rules considered in the Discussion Draft.

We also noted that, on the 4 April 2014, the United States Council for International Business (USCIB) suggested additional clarifying language which we agree would be in order to present a balanced presentation of the object and purpose of the treaty and avoid having courts give undue weight to the clarification that treaties are not to be interpreted to create opportunities for inappropriate use.

We concluded that for the goals of Action 6 to be effectively achieved the appropriate tools for combatting inappropriate use of tax treaties must be developed with sensitivity so as not to undermine the basic purpose of tax treaties – that is, to remove tax barriers to cross-border trade and investment. If the final formulation of the rules disrupts the normal course of international business or establishes barriers to access to tax treaties for the majority of residents of treaty countries that are not making inappropriate use of the treaty, the solution will be far worse than the problem.


7 April 2014

Click here for a replay of our "BEPS webcast series: A focus on treaty benefits" webcast held today, Monday 7 April 2014.


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

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.

Contact us

Stef van Weeghel
Leader, Global Tax Policy & Administration Network
Tel: +31 (0) 88 792 6763

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