BEPS- Action 6 (Prevent Treaty Abuse): To be or not to be, that is the question.....*

BEPS- Action 6 (Prevent Treaty Abuse): To be or not to be, that is the question…..*

Tue 26 May 2015

The OECD published its revised discussion draft on Action 6 (Prevent the granting of treaty benefits in inappropriate circumstances) of the Action Plan on Base Erosion and Profit Shifting (BEPS) on 22 May 2015. Public comments are invited on the revised discussion draft which includes proposals on how to deal with the follow-up work on Action 6.  This new discussion draft reflects the conclusions and proposals that resulted from that meeting and on which the Committee on Fiscal affairs is now inviting comments. The discussion draft and the comments received on it will be discussed at the Working Party 1 meeting of 22-26 June 2015, when the Working Party will be asked to produce a final version of the Report on Action 6 that will take into account the conclusions of the follow-up work done on the issues identified in the November 2014 discussion draft. Comments should be sent by 17 June 2015 at the latest by email to taxtreaties@oecd.org.

Background

On 21 November 2014, the OECD released a discussion draft that identified 20 different issues to be addressed as part of the follow-up work mandated by the September 2014 Report on Action 6. At its March 2015 meetings, Working Party 1 on Tax Conventions and Related Questions continued its work on these issues in the light of the comments received, agreed on how to address the majority of these issues and discussed new proposals related to some issues.

Revised Discussion Draft

This new discussion draft reflects the conclusions and proposals that resulted from that meeting and on which the Committee on Fiscal Affairs is now inviting comments. Part 1 reflects the outcome of the discussion of a new proposal for an alternative “simplified” limitation-on-benefits (LOB) rule and on how the LOB rule should be presented in the OECD Model Tax Convention. Part 2 presents the outcome of the discussion of each of the 20 issues for follow-up work that were identified in the discussion draft of 21 November 2014, including new proposals for treaty rules intended to address concerns related to special tax regimes and to changes to domestic law made after the conclusion of a treaty (these proposals are included in Section 6 of Part 2).

ALTERNATIVE “SIMPLIFIED” LOB RULE AND PRESENTATION OF THE LOB RULE IN THE OECD MODEL

At its March 2015 meetings, Working Party 1 discussed extensively how the LOB rule should be structured and presented in the OECD Model Tax Convention and also looked at the various features of that rule, which was referred to as a “simplified LOB”, as well as issues and concerns that the proposal may raise.

That discussion was triggered by the presentation of an alternative version of the LOB rule which is intended to be used in combination with the PPT rule; it also took into account the suggestions by a few commentators that the Report on Action 6 should not focus on developing a model LOB provision but should focus instead on the elaboration of guidance on underlying principles and the general elements that an LOB provision should contain.

A number of delegates considered that this alternative version of the LOB rule would address different concerns raised by the LOB rule included in the Report on Action 6 and would provide a simpler way to address the most obvious cases of treaty-shopping, other cases being dealt with under the PPT. It was agreed that this approach was consistent with the minimum standard described in paragraph 14 of the Report on Action 6, which may be satisfied by the inclusion of any form of LOB combined with the PPT, whereas the LOB rule that was included in the Report was considered more appropriate for countries that would prefer to meet the minimum standard through the combination of an LOB rule and a mechanism dealing with conduit arrangements.

It was agreed, however, that it would be important to ensure that the non-application of the simplified LOB in a given case should not be interpreted in any way as suggesting that the PPT would not be applicable to that case. This led the Working Party to discuss how the simplified LOB could be incorporated into the Model Tax Convention. It was proposed that this could be done by describing the main features of the LOB in the Articles of the Model and presenting the alternative formulations of each paragraph in the Commentary. The Annex includes an example illustrating how that approach would work in the case of the publicly-listed entity provision that is part of the LOB rule.

ISSUES IDENTIFIED IN THE NOVEMBER 2014 DISCUSSION DRAFT

Part 2 presents the outcome of the discussion of each of the 20 issues for follow-up work that were identified in the discussion draft of 21 November 2014, including new proposals for treaty rules intended to address concerns related to special tax regimes and to changes to domestic law made after the conclusion of a treaty. The 20 issues are:

A. Issues related to the LOB rule

  1. Collective investment vehicles: application of the LOB and treaty entitlement
  2. Non-CIV funds: application of the LOB and treaty entitlement
  3. Commentary on the discretionary relief provision of the LOB rule
  4. Alternative LOB provisions for EU countries
  5. Requirement that each intermediate owner be a resident of either Contracting State
  6. Issues related to the derivative benefits provision
  7. Provisions dealing with “dual-listed company arrangements”
  8. Timing issues related to the various provisions of the LOB rule
  9. Conditions for the application of the provision on publicly-listed entities
  10. Clarification of the “active business” provision

B. Issues related to the PPT rule

  1. Application of the PPT rule where benefits are obtained under different treaties
  2. Inclusion in the Commentary of the suggestion that countries consider some form of administrative process ensuring that the PPT is only applied after senior approval
  3. Whether the application of the PPT rule should be excluded from the issueswith respect to which the arbitration provision of paragraph 5 of Article 25 is applicable
  4. Aligning the parts of the Commentary on the PPT rule and of the Commentaryon the LOB discretionary relief provision that deal with the principal purposes test
  5. Whether some form of discretionary relief should be provided under the PPT rule
  6. Drafting of the alternative “conduit-PPT rule”
  7. List of examples in the Commentary on the PPT rule

C. Other issues

  1. Application of the new treaty tie-breaker rule
  2. The design and drafting of the rule applicable to PEs located in third States
  3. Proposed Commentary on the interaction between tax treaties and domestic anti-abuse rules

Source: OECD’s website http://www.oecd.org/tax/treaties/revised-discussion-draft-action-6-prevent-treaty-abuse.htm

*Shakespeare

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