The OECD aims to prevent BEPS through improper use of international treaties. For this reason, the OECD is currently revamping the Model Treaty Convention (MTC) so that it includes:
- A clear statement in bold letters that the treaties are executed by the Contracting States with the intention to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.
- Specific anti-abuse rule in the form of a limitation of benefits (LOB) clause that limits the availability of treaty benefits to entities with certain conditions (among others; legal nature, ownership in and general activities carried out by the entity). This also seeks to ensure that there is sufficient link between the entity applying for treaty benefits and its country of residence.
- Provisions aiming to target transactions that escape from treaty shopping situations but which still create treaty abuse, the OECD recommends to establish a general anti-abuse rule (GAAR) based on the ‘principal purpose test’ (PPT) which analyses the main purpose of the transactions or arrangements. This kind of provisions will be incorporated in the MTC. Under this GAAR, if one of the principal interests is to obtain the treaty benefits, these benefits will be denied, unless proven otherwise. Burden of proof will rely in the taxpayers’ side.
Specifically, on fighting treaty shopping, the OECD insists in revisit the definition of ‘beneficial owner’ introduced in the MTC of 1977 and the concept of ‘improper use of the convention’, among others, to address cases of ‘conduit company transactions’.
The OECD proposes a text for a new Article of the MTC, which will comprise the scope of ‘Entitlement to Benefits’. This new Article will define in detail who is and who is not entitled to the benefits of the treaty. This seeks to deny treaty benefits in the case of structures that may result in the incorrect granting of treaty benefits.
Among the concepts that this new Article will define is the concept of ‘qualified person’, which includes:
- Governments and governmental agencies
- Charitable organisations
- Certain publicly traded companies
- Individuals resident in the particular jurisdiction or Contracting State
Regarding corporations, it will be harder to be recognised as a qualified person since it will be necessary to demonstrate that its equity is owned, in at least 50% by an individual resident in that Contracting State. This aims to evidence the sufficient link of the corporation with that jurisdiction in which it resides.
