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OECD BEPS Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

Action 6 of the OECD BEPS Action Plans deals with the prevention of double tax treaty (hereinafter: treaty) abuse. OECD finds that one of the most pressing BEPS issues is treaty abuse and especially the so-called treaty shopping (which basically means the use of tax benefits deriving from residence related and other differences between treaties) and for this reason, a separate action plan was dedicated to this matter.

We have to point out, as presented in my previous post, that certain elements of this action plan have already been integrated in current EU regulation with the latest amendment of the Parent-Subsidiary Directive of 27 January 2015.

The action plan identified three principles to focus their work on:

  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 so-called double non-taxation (which arises when an income is not taxable in either of the countries concerned due to the simultaneous application of domestic tax regulations and the relevant treaty).
  3. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

The main purpose is the amendment of the OECD Model Tax Convention, establishing a proper foundation for the prevention of treaty abuse, also taking into account the unique tax law situation of individual countries due to which it may not be possible to apply a single standard text for all cases. For this reason, the survey proposes a de minimis protection against treaty abuse.

Develop model treaty provisions and recommendations

The first section of the survey includes recommendations intended to prevent the granting of treaty benefits in inappropriate circumstances. For that purpose, the action plan makes a distinction between two types of cases:

  1. Cases where a person tries to circumvent provisions/limitations provided by the treaty itself;
  2. Cases where a person tries to circumvent the provisions/limitations of domestic tax law using treaty benefits.

Since the first category involves situations where a person seeks to circumvent rules that are specific to tax treaties, it is recommended to address these cases through anti-abuse rules to be included in treaties. In the case of the second category an amendment of the domestic tax regulations concerned by treaties would be necessary, which may lead to possible conflicts between domestic rules and the provisions of tax treaties in these cases.

The survey divides the recommendations for case 1) further into two parts: recommendations for the prevention of treaty shopping and for other cases. For the former, the recommendations are as follows:

  • It is recommended 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.
  • Second, it is recommended to include in tax treaties a so-called limitation-on-benefit (LOB) clause applied in treaties by the United States and a few other countries. (The LOB-clause includes strict additional rules for the use of benefits even if the person intending to use the benefits can in fact be regarded as resident in the given country.)
  • Finally, in order to address cases which cannot be prevented by the integration of a LOB clause (such as certain conduit financing arrangements),it is recommended to add to tax treaties a more general anti-abuse rule based on the principal purpose of transactions or arrangements (the principal purpose test or “PPT” rule).

The PPT rule is based on the principles of the Model Convention which provide that a treaty benefit shall not be granted in respect of an arrangement/transaction the principle purpose of which was merely to obtain eligibility for such benefit. This rule is basically identical with a principle already applied in Hungarian taxation, that of the application of law according to its intended purpose.

The recommendations addressing strategies other than treaty shopping include targeted measures for transactions such as, for example, dividend transfer transactions, transactions that circumvent the application of the treaty rule that allows source taxation of shares of companies that derive their value primarily from immovable property, situations where an entity is resident of two contracting states and situations where the state of residences exempts the income of permanent establishments situated in third states.

In case 2),the survey acknowledges that the integration of anti-abuse rules in the treaties is not sufficient to prevent intentions to circumvent domestic tax regulations for which domestic regulation needs to be amended.

The report addresses two specific issues related to the interaction between treaties and specific domestic anti-abuse rules. The first issue relates to the application of tax treaties to restrict a contracting state’s right to tax its own residents. The second issue deals with cases in which the income of a resident is not taxed because he ceases to be a resident (so-called exit taxation).

The report also emphasises that further work is necessary taking into account the relevant parts of other action plans, in particular Actions 2-4 and 8-10.

The purpose of applying treaties is not to achieve double non-taxation

In chapter two, the survey discusses that it has to be made clear regarding treaties that they are not intended to promote double non-taxation. The survey suggests that this “declaration of intent” should be included in the title and preamble of the treaties.

It should also be stated that the express purpose of the treaties is to help avoid double taxation without giving an opportunity for tax evasion and circumvention.

According to the survey such clear statements could be relevant (according to international public law principles) for the interpretation and application of the treaties.

Identification of tax policy considerations

The last chapter of the survey summarises the tax policy considerations that countries should consider before deciding to enter into a tax treaty with another country. The identification and detailed analysis of these considerations help countries in the assessment of the impact of specific decisions and in the elaboration of the conditions of the treaties.

The identification of tax policy considerations is not only critical during the preparation and elaboration of new treaties but countries may also re-think existing treaties along these considerations and can take the necessary steps if a treaty needs to be amended.


Overall, we can say that Action 6 addresses the issue of treaty abuse rather generally at the level of principles, which, in itself, does not promote the prevention of specific tax evasion techniques. However, taking into account the goals and amendment proposals formulated in the other BEPS action plans, it can establish a very strong framework of principles for future legislation and may lay the foundation for authority findings and court decisions condemning tax evasion based on these principles.

This application of law is, of course, not possible until specific rules are created or amended and no exact date in this regard is known at the moment. The survey itself also emphasises that further work is necessary for the finalization of the material and details may change until the finalized version scheduled for September 2015 is published. However, it can be stated clearly based on this survey that the room for manoeuvring may be narrowed down substantially in a few years’ time for tax evasion techniques.

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