BEPS Action 6: Preventing the Misuse of Tax Treaty Benefits

BEPS Action 6, titled Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, is one of the four minimum standards of the BEPS (Base Erosion and Profit Shifting) initiative. This means that all BEPS member countries are required to implement this action plan, underscoring its importance and universality.

The primary goal of BEPS Action 6 is to prevent businesses from abusing tax treaty benefits by incorporating various anti-abuse measures into tax treaties, including:

• Adding a declaration in tax treaties to clarify that one of their purposes is to prevent tax evasion or avoidance by creating opportunities for non-taxation or reduced taxation.
• Introducing specific anti-abuse rules such as the Limitation on Benefits (LOB) rule, which clearly defines the conditions under which an entity qualifies for treaty benefits, thereby curbing tax avoidance practices.
• Introducing a general anti-abuse rule known as the Principal Purpose Test (PPT), which denies treaty benefits if one of the main purposes of a transaction or arrangement is tax avoidance.
• Adding other specific anti-abuse rules, such as minimum holding periods for shares, fixed asset thresholds, and rules for dual tax residents.
• Ensuring that bilateral tax treaties do not override domestic tax rules and anti-avoidance measures, including provisions to allow countries to tax their residents or impose exit taxes on individuals or companies leaving the jurisdiction.
• Providing policy considerations for tax authorities when negotiating bilateral tax treaties, such as avoiding treaties with tax havens or low-tax jurisdictions and proposing amendments to unfair treaties.

Since some aspects of Action 6 are either irrelevant to taxpayers or rarely encountered, this article focuses on the key elements for interpretation.