Treaty abuse - OECD BEPS project

The OECD has this week released its revised discussion draft on preventing the granting of treaty benefits in inappropriate circumstances (Action 6 of the BEPS project).

This document reiterates that countries would ideally incorporate into their treaties both a Limitations on Benefits (LOB) clause and a Principal Purpose Test (PPT) which would prevent the benefits of the treaty being accessed where this access is a principal purpose of the arrangements in question.

An alternative "simplified" LOB clause has now also been suggested, which would address the most obvious cases of treaty shopping, with other cases being dealt with under the PPT. However, where countries choose to proceed with a minimum standard of an LOB clause together with a mechanism dealing with conduit arrangements, the OECD recommends that the more extensive LOB clause be used.

The document sets out proposals to deal with the issues identified in earlier discussion drafts, including the application of a LOB and treaty entitlement for collective investment vehicles and non-CIV funds, particularly to counter the concern that non-CIVs may be used to provide treaty benefits to investors that are not themselves entitled to treaty benefits and that investors may defer recognition of income on which treaty benefits have been granted. Possibilities include adding a specific provision on non-CIVs in the LOB rule and adding one or more examples on non-CIVs to the Commentary on the PPT rule.

New proposals have also been put forward for treaty rules intended to address concerns related to special tax regimes and to changes to domestic law made after the conclusion of a treaty.

We will be publishing an in-depth briefing on the discussion draft shortly but, in the meantime, please do not hesitate to get in touch with any of the contacts listed on this newsletter if you wish to discuss any aspect of it.

Please click on the links below for the other articles in the May 2015 tax newsletter:

• Diverted Profits Tax - update
• Larentia + Minerva: VAT groups and holding companies
• Samarkand: film partnership scheme
• Southern Cross: compromise agreements with HMRC
• Price, Myers & Lucas: loss scheme using CGT options