One of the relevant BEPS Action Plans that were released last year was Action 6, labelled Prevent Treaty Abuse. According to the OECD, treaty abuse is one of the most important sources of BEPS concerns. The focus is on treaty-shopping situations as well as other cases of treaty abuse, which may give rise to double non-taxation. Tight treaty anti-abuse clauses coupled with the exercise of taxing rights under domestic laws will contribute to restore source taxation in a number of cases, according to the OECD. In September 2013 the OECD called for the development of model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work would also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.
A stroll down memory lane
The attention given to treaty shopping is not entirely new. For example, the issue was already addressed in a two volume study International Tax Avoidance by the Rotterdam Institute for Fiscal Studies published in 1978 and 1979. It was also on top of the agenda during the 34th IFA Congress in Paris in 1980 (Recourse to Tax Havens, Use and Abuse, IFA Congress Seminar Series no. 5). This booklet contained the following powerful statement by MJ Langer: "Despite many thousands of transactions involving various types of treaty shopping, there are still no clear guidelines as to what is permissible and what is not." Another quote which shows that really not much has changed over the past 30 or so years is by PT Kaplan: "Treaty shoppers present many differences, but always have one thing in common: by definition, they are trying to stay within the law. The treaty shopper's wish is to observe the letter of the law." (Tax Management International Journal, June 1982). A study which really set things in motion was the study published in 1981 called Tax havens and their Use by United States Taxpayers, An overview, written by Richard A. Gordon, Special Council for International Taxation. This study can be considered to be the source of the US limitation on benefits clauses in US tax treaties. The LOB clause basically solves the questions raised by Langer and tightens the letter of the law referred to by Kaplan. The question is whether an LOB clause will now become the new OECD standard.
The discussion draft
In March 2014 a discussion draft on BEPS Action Plan 6 was released.
The discussion draft contained a number of proposals, the most important of which are:
1. Tax treaties should contain a specific anti-abuse rule similar to the limitation on benefits provision found in US treaties.
2. Tax treaties should also contain a general anti-abuse rule, the main purpose test, which is already can be found in some recent tax treaties.
3. A minimum shareholding period should be included in treaty dividend articles in order to benefit from the lower rate of withholding tax.
I personally believe that a combination of a general anti-abuse clause and an LOB-type of clause is simply too much and that from a perspective of certainty for everyone involved the 'solution' for treaty shopping should be found in an LOB type of clause. This preference is based on my experience as an international tax lawyer when dealing with US LOB clauses. So hopefully the final recommendations by the OECD on Action Plan 6 which are set to be published on September 16, will no longer contain a combination of an LOB clause and a general anti-abuse clause, but only an LOB clause.
The impact of non-discrimination clauses on the effect of LOB-clauses
However, this general preference for an LOB-clause is not the end of the story as far as I am concerned. What is absent in all discussions on treaty shopping is the interaction between the proposed anti-treaty shopping actions and the non-discrimination clauses in tax treaties. Let's assume there is a tax treaty between countries A and B with a standard OECD non-discrimination clause. Let's assume that Countries B and C conclude a tax treaty with an LOB clause as proposed by the discussion draft. A company from Country A sets up a subsidiary in Country B which will also invest in Country C. And let's assume Country B sub is denied treaty benefits under the treaty B /C as a result of the LOB clause. And that Country B sub would have gotten treaty protection if its parent would have been a resident of B. The question then is, whether this denial of treaty access can be considered a discrimination based on the residence of B sub's shareholder, which is not allowed under the non discrimination clause of the A/B treaty. I personally believe this indeed is a forbidden discrimination under the current version of the non-discrimination clause in the OECD Model for which a fitting solution should be found in the final report on Action Plan 6.