TEI comments on OECD BEPS action 6: prevent treaty abuse.

• Position: Tax Executives Institute, Organisation for Economic Co-operation and Development, Base Erosion and Profit Shifting

On April 8, 2014, TEI submitted comments to the OECD regarding its Public Discussion Draft on BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. The Institute's comments generally focused on the need for objective rules if the OECD is to combat inappropriate "treaty shopping." TEI recommended that such rules should be in the form of clearly defined "limitation-on-benefits" provisions in the OECD's Model Tax Convention, and not in the form of a general anti-abuse rule. TEI's comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Nick Hasenoehrl of Herbalife. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's comments.

On 19 July 2013, the OECD published an Action Plan on Base Erosion and Profit Shifting (hereinafter the Action Plan or the Plan) setting forth 15 actions the OECD will undertake to address a series of issues that contribute to the perception that individual countries' tax bases are being eroded or profits shifted improperly. Pursuant to Action 6 of the Plan, "Prevent treaty abuse," the OECD issued a public discussion draft on 14 March 2014 on BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (hereinafter the Discussion Draft or Draft). The Discussion Draft sets forth several recommendations to modify the provisions of the OECD's Model Tax Convention on Income and Capital (Model Treaty) to address whether treaty benefits were granted in inappropriate cases.

The OECD requested comments on the Discussion Draft no later than 9 April 2014. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the OECD's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has 55 chapters in Europe, North America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent over 3,000 of the largest companies in Europe, the United States, Canada, and Asia.

TEI Comments

BEPS Action 6 was envisioned to address perceived tax treaty abuse. Thus, it is perhaps unsurprising that the Discussion Draft seems imbued with the perspective that accessing treaty benefits is abusive, or, at a minimum, fraught with a great risk of inappropriate tax avoidance. This view is reflected in the proposed changes to the title of the Model Treaty and its preamble to include a reference to the prevention of "tax avoidance" and avoiding "creating opportunities for non-taxation or reduced taxation." (1)

TEI believes that a more balanced approach would be conveyed in the Draft if the OECD were to acknowledge explicitly that the vast majority of taxpayer claims to treaty benefits are bona fide, rather than treating any claim to treaty benefits as automatically suspect. This approach would be in accord with the general (and original) purposes of bilateral treaties to promote crossborder trade and investments by eliminating double-taxation and to prevent illegal fiscal evasion. Combatting legal (but disfavored) tax avoidance or eliminating double non-taxation are objectives that seem to be outside these primary purposes. Treaties accomplish these purposes by, in part, allocating taxing jurisdiction between the Contracting Parties. The perspective evidenced by the Draft, however, would move treaties from a general position of granting taxpayers certain rights to curbing such rights and potentially subjecting income to tax under a treaty where it may have been untaxed in the absence of the treaty. TEI appreciates the statement that tax treaties are not intended to give rise to double non-taxation. However, if tax treaties lead, or contribute, to double non-taxation, the provisions of the treaties themselves should be changed without resorting to the potential paradigm shift in the focus of the Model Treaty that the Discussion Draft portends.

Specific Provisions of the Discussion Draft

"Treaty Provisions and/or Domestic Rules to Prevent the Granting of Treaty Benefits in Inappropriate Circumstances" (2)

TEI commends the OECD for recommending changes to the language of its Model Treaty to address concerns with respect to tax treaty abuse under BEPS Action 6. Too often changes to the official OECD commentary to the Model Treaty (Official Commentary) have been made that could be interpreted in a manner that effectively amends the language of the Model, and thus greatly influence the interpretation of the various bilateral treaties that use the Model as their base. By recommending changes to language of the Model Treaty itself, countries that use the Model as a base will need to renegotiate their treaties and come to an agreement with the other contracting state (or states if the mechanism developed under BEPS Action 15 is utilised) on the meaning and interpretation of the new language. This will provide the certainty for taxpayers and tax authorities that is lacking when the OECD changes only the Official Commentary, which is more likely to lead to differing interpretations between taxpayers and tax authorities and between the competent authorities of the parties to a bilateral treaty.

With respect to the recommended changes to prevent granting treaty benefits inappropriately, the Discussion Draft...