Preventing Treaty Abuse

I. S. 208Introductory Remarks

The BEPS project aims at achieving a consensus on how international and domestic rules should be created in order to protect the countries’ tax bases, while offering as much certainty and predictability to taxpayers as possible. The Final Report on BEPS Action 6, called “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” (“Report”) targets in particular treaty shopping involving multinational enterprises, which try to benefit from favorable tax treaties by creating structures or schemes that may not have enough substance in reality.

In order to achieve this objective, the Report, inter alia, suggests that the Organisation for Economic Co-operation and Development (“OECD”) Model Convention (“MC”) should be amended to include a minimum level of protection against treaty abuse, through a “Limitation-on-Benefits” (“LoB”) clause, modelled after the US Model Convention and/or a “Principal Purpose Test” (“PPT”) rule.

Originally found in treaties entered by the US, LoB clauses have as a main goal to prevent the contracting states or even a third state that could benefit from a specific tax treaty from entering into an arrangement that could lead...