Preventing Treaty Abuse

I. S. 536Introduction

For many years now, states have entered into bilateral double taxation agreements (“DTAs” or “tax treaties”) that provide for the allocation of taxing rights in order to prevent double taxation. However, as time progressed, double non-taxation and tax avoidance started becoming more and more significant. Broad residence rules in tax treaties allowed for abusive structures leading to tax avoidance. Further, domestic tax legislation in various countries also contained loopholes which provided undue tax advantages. Since tax treaties did not provide adequate protection in such situations, states started adding anti-avoidance rules in their tax legislation to protect their sovereignty.

Domestic anti-avoidance rules pose a special challenge because in several situations, they have to be given precedence over tax treaties in order to effectively prevent abuse. Therefore, the need arose for a consonant interpretation of tax treaties with these rules in order to prevent constitutional issues or violations of international law obligations. Although the Organisation for Economic Co-operation and Development (“OECD”) was initially of the view that such rules should be incorporat...