Anti-Abuse Rules in International Tax Law and their Interactions

1. Introduction

When multinationals follow aggressive tax strategies (such as eroding tax bases through deductible payments like interest or royalties), it costs countries an estimated $ 100-240 billion in lost tax revenue annually. This amount represents 4 %-10 % of global corporate income tax revenue. It was recognized by policy makers on global scale that the significant increase in the integration of national economies and markets in the latest years has put considerable pressure on international tax rules that were established over a century ago. About a decade ago, relevant measures dealing with these issues, among others, have been summarized in the OECD’s Base Erosion and Profit Shifting Project.

However, the topic of base erosion, especially by making use of interest or royalty payments, is not a recent one. The so-called Special Relationship Rule in tax treaties has its roots in the middle of the last century. This rule addresses abusive behavior regarding such payments by limiting the application of treaty provisions in cases where cross-border payments between parties are inflated due to the parties’ relationship. The League of Nations recognized the issue early in the Lo...