Treaty shopping and benefit limitation clauses in agreements to avoid double taxation: impact of the OECD BEPS project and the United States model agreement. –

By Félix Alberto Vega Borrego

Some of the vital advantages of double taxation agreements (CDI) is to cut back the taxation borne by taxpayers in nations the place they don’t seem to be residents however get hold of earnings (Supply State). This explains that the worldwide organizations which have promoted the celebration of CDI (OECD and UN) and the States (basically the USA of America) have been involved with combating the conduct of treaty procuring.

The treaty procuring consists of utilizing an entity resident in a rustic that has entered right into a CDI with the State of supply by topics resident in States that haven’t entered right into a CDI with the State of supply with a purpose to get hold of the discount or elimination of the taxation on the supply established within the settlement.

The measures towards treaty procuring they’ve been pushed primarily by the US. They’ve consisted, amongst different elements, in introducing within the completely different variations of their mannequin settlement (1976, 1996 and 2006), and of their CDI, the so-called limitation on advantages clauses (LOB clauses). The aim of those clauses is to extend the necessities to be entitled to CDI advantages. With the LOB clauses, along with having the standing of resident in one of many States get together to the CDI, the taxpayer has to show, Both the existence of a enough factual hyperlink with the State of residence, or legitimate financial causes for acquiring from it the earnings generated within the different State get together to the settlement. The foregoing is specified by establishing a sequence of clauses, compliance with which ensures the concurrence of any of those circumstances (itemizing clause, property clause and base erosion and exercise clause). Taxpayers who don’t adjust to any of those clauses won’t be entitled to CDI advantages except they request it from the State of supply and show that residence within the different State get together to the CDI shouldn’t be for the primary purpose to entry CDI advantages ( good religion clause).

The OECD, in its completely different conference fashions (1963, 1977, 1992, 2000, 2003, 2005, 2008, 2010 and 2014), has not likely opted for the LOB clauses as a technique to fight the treaty procuring till the start-up of the BEPS mission (Base Erosion and Revenue Shifting) in 2013. Exactly certainly one of its actions is particularly directed towards conducts the place there’s an abuse of the settlement, being the treaty procuring one of the crucial importants. Motion 6 (entitled: Forestall the abusive use of the settlement) closed in October 2015, proposes to incorporate within the CDI a set of LOB clauses just like these offered within the US mannequin and CDI. Proof of that is, amongst different elements, that the LOB clauses proposed within the closing report of motion 6 should not closing. Certainly, a part of its closing wording is topic to the modifications proposed by the US in its mannequin, which was authorised in February 2016. Particularly, after the approval of the 2017 model of the OECD Mannequin, it may be noticed that the clauses LOBs entered faithfully comply with these contained within the US Mannequin 2016.

The LOB clauses have had a particular improvement within the CDIs signed by the US, amongst that are the CDIs signed by this nation with nations of the European Union (EU), amongst which is Spain. In reality, with respect to the 1990 Spain-US CDI, there’s a proposed modification – pending ratification by the US Senate – that basically impacts the LOB clauses of the settlement.

The place adopted by the OECD within the BEPS mission will, most likely, trigger the extension of the LOB clauses to nearly all of CDIs entered into by the nations, not solely by way of the bilateral treaties which are signed, but in addition as a result of the motion 15 of the BEPS Plan contemplates the potential of projecting the LOB clauses of Motion 6 to all CDIs by together with them in a multilateral treaty that will likely be utilized collectively with present bilateral agreements. Nonetheless, the conference or multilateral treaty to use measures associated to tax treaties to forestall the erosion of tax bases and the switch of earnings authorised by the OECD on November 24, 2016, doesn’t ponder the introduction of LOB clauses as a essential measure, since though a provision on this matter is foreseen (article 7 of the conference), the signatory states can exclude its utility.

The above questions have been studied throughout a six-month analysis keep (July-December 2016) on the Georgetown College Faculty of Regulation, a keep financed with a grant from the Salvador de Madariaga program. The results of this analysis has materialized within the publication in August 2017 of a monograph printed by Kluwer Regulation Worldwide with the title “Limitation on Advantages Clauses in Double Taxation Conventions”.

The target of my analysis has been to investigate the content material and scope of the LOB clauses, taking as a reference the completely different variations of the US Mannequin Settlement, which is the place they’ve arisen. The significance of those clauses, on account of the BEPS mission, has prolonged past the CDIs signed by the US. On this context, this matter is of particular curiosity to EU nations, because the configuration of the LOB clauses raises issues of compatibility with European freedoms. Though there’s nonetheless no ruling on these LOB clauses from the EU Courtroom of Justice, it ought to be famous that on November 19, 2015 the Fee initiated an infringement process towards the Netherlands on account of the LOB clauses included in its CDI with Japan. The LOB clauses of this CDI are just like these contemplated by the American CDIs and the BEPS mission, since Japan is without doubt one of the few nations that, to some extent, has adopted the US strategy to fight treaty procuring.

Accordingly, I’ve studied in depth the LOB clauses in mild of the BEPS mission and the US mannequin settlement, drawing conclusions about their suitability as a technique to fight treaty procuring. On this sense, proposals are made each to facilitate its utility in apply and to resolve issues of compatibility with European regulation. Likewise, an evaluation is fabricated from the advisability of Spain following this proposal from the OECD and the USA, and on how the strategy consisting of together with LOB clauses matches with the strategy adopted to date by Spain in its CDIs.

Printed simultaneously on the MJI-UAM blog

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