Justice, Equality and Tax Law

S. 941. Tax Avoidance & Treaty Abuse

The OECD in BEPS Action 6 has broadly identified two types of tax treaty abuse situations that can be addressed through treaty GAAR i.e. treaty shopping and rule shopping. Treaty shopping is where the taxpayers use residence in a jurisdiction which has a favourable tax treaty with the investment jurisdiction, benefits of which are not available to the taxpayer directly. Rule shopping involves the application of the most favourable provisions of a treaty, to benefit from domestic law. The OECD has also acknowledged that domestic tax abuse situations, and situations where application of domestic GAARs is avoided in favour of application of tax treaties should be addressed through domestic tax measures.

The OECD considers treaty abuse a problem due to (i) breach of principle of reciprocity and (ii) disturbance of the balance of tax treaties. However, given that not each country is at the same economic or social level, there may be specific reasons for a country to tolerate or even encourage treaty shopping. For instance, in India, investments into the country have been historically made through Mauritius owing to the favourable capital gains clause in the...