Treaty shopping and BEPS action 6

Action 6 (Treaty Abuse) is a key element of the OECD's BEPS Project. Action 6 handles treaty abuse, and in particular, Treaty Shopping, which allegedly is one of the most important BEPS Action plan concerns.

What is the OECD trying to achieve?

Double taxation treaties are agreements between two countries that aim to eliminate the double taxation of income which would otherwise be taxable in both countries under their domestic tax rules. The OECD is concerned that multinational groups may be structuring transactions to take advantage of more favourable treaties (treaty shopping) and/or engaging in tax planning arrangements using treaties in such a way they may result in double non-taxation.

Treaty shopping, i.e., where a person in country A, which is not, in principle, eligible to benefit from a given tax treaty with country B, invests through an entity in country C to benefit from the treaty. More generally, Action 6 intends to prevent the granting of treaty benefits in inappropriate circumstances.

 

Launch of the Anti-Tax Avoidance Package

On 28 January 2016, the European Commission (EC) presented its Anti-Tax Avoidance Package (ATAP) that contains proposed measures to planning, boost tax transparency and create a level playing field for all businesses in the European Union.

 

ATAP consists of seven parts:

• legislative proposals for an Anti-Tax Avoidance Directive (draft ATA Directive);
• legislative proposals for an amendment to Directive 2011/16/EU to coordinate implementation of G20/OECD BEPS country-by-country reporting (CBCR) requirements;
• a proposed 'EC Recommendation' to Member States on the implementation of G20/OECD BEPS recommendations on tax treaty abuse and on permanent establishments;
• a general policy 'Communication' on the ATAP and the proposed way forward;
• a general policy 'Communication' on an EU external strategy for effective taxation;
• an EC Staff Working Document; and
• a study on Aggressive Tax Planning.

Comments:

1. The EC's new proposals to crack down on multinational companies avoiding paying tax in countries they earn their profits won't be enough to fight tax havens, according to NGOs. http://www.euractiv.com/section/euro-finance/news/eu-s-anti-tax-avoidance-package-likely-to-fail-say-ngos/
2. Recommendations on amending tax treaties:
   ° ensure implementation of new PE definition
   ° advice on how to revise tax treaties against abuse
   ° focus on how to do it in EU law compliant way
3. The proposal for an ATA Directive could be seen as a first step toward harmonization in the context of the fight against base erosion and profit shifting. The EC continues to favour the adoption of the CCCTB, despite its rejection by many member states.

31 Countries Signed MCAA To Boost Transparency In International Tax Matters

On 27 January 2016, 31 countries signed the Multilateral Competent Authority Agreement (MCAA), which will bring greater sharing of information in international tax matters. The MCCA provides for the automatic exchange of Country-by-Country reports, enabling tax administrations to obtain a complete understanding of how multinational enterprise operations are structured across the value chain, while ensuring the confidentiality of such information.

‘Country-by-Country reporting will have an immediate impact in boosting international co-operation on tax issues, by enhancing the transparency of multinational enterprises’ operations,’ said OECD Secretary-General Angel Gurría. ‘Under this multilateral agreement, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. This is a much-needed tool towards the goal of ensuring that companies pay their fair share of tax, and would not have been possible without the BEPS Project.’

This agreement, which covers BEPS Action 13 (Transfer Pricing Documentation & Country-by-Country Reporting), requires large companies operating in multiple jurisdictions to “report to their country of residence specified information regarding each jurisdiction in which the group operates,” including “revenues, profits, income tax paid, stated capital, accumulated earnings, number of employees, and tangible assets.”

First exchanges will start in 2017-2018 on 2016 information, depending on local implementation of CbC reporting requirements. In case information fails to be exchanged, the Action 13 report provides for alternative filing so that the playing field is levelled – although again this will depend on how the OECD recommendations are implemented in each territory.