Preventing Treaty Abuse

I. S. 442Introduction

The current international context requires countries to seek for further justifications to support the decision to negotiate a tax convention with a country that, although attractive for investment, offers low or no taxation at all over certain types of income, which in the end results in the erosion of its taxable base and subsequent ease in shifting profits that would otherwise be subject to taxation. This may also influence the decision to abstain from entering into negotiations if such a low-tax or no-tax tax system results in a disadvantage for the other country.

The need of assistance is related to the growing awareness in global economic transactions that, if income is not subject to taxation in the country where it originates, it may not be subject to taxation at all. In fact, there is also the feeling that Multinational Enterprises (MNEs) are not contributing enough or in other words their tax burden is not in accord with the extent of their assets and operations (which in turn creates a feeling of unfairness within the tax system). To a large extent, this is due to their tax planning strategies, which in most of the cases have been designed to make use of sp...