Base Erosion and Profit Shifting (BEPS)

I. S. 248Introduction

The OECD project on base erosion and profit shifting (BEPS) intends to make major changes to the international tax regime. In this regard, one of the main issues identified by the OECD under BEPS Action 6 is the prevention of treaty abuse and, in particular, treaty shopping.In order to combat such undesirable actions of taxpayers, after referring to the previous work of the OECD on the issue, a three-pronged approach is recommended in Action 6 of the BEPS Action Plan. The second step of this approach recommends the introduction of a limitation on benefits article. According to the OECD, such an article aims “at preventing persons who are not residents of either Contracting State from accessing the benefits of a Convention through the use of an entity that would otherwise qualify as a resident of one of these States”, and thus counters treaty shopping.

Generally, limitation on benefits provisions restrict the entitlement to treaty benefits for entities that show an insufficient nexus to the relevant contracting state. The underlying rationale is to deny treaty entitlement if granting treaty benefits would lead to an outcome where third-state residents could benefit fro...