Action 6 addresses Treaty shopping and other Treaty abuse strategies whereby taxpayers seek to obtain the benefits of a Tax Treaty in situations where those benefits were not intended to be granted. Treaty shopping refers to arrangements through which a person who is not a resident of a Contracting State is able to access the benefits granted by a Treaty to a resident of that State.
Recommendations regarding treaty shopping situations, which form the bulk of the Final Report, are divided in three parts:
i) introduction of a clear statement that Tax Treaties seeks to eliminate double taxation without creating opportunities for tax evasion and avoidance ;
ii) adoption of a specific anti-abuse rule similar to the limitation-on-benefits (LOB). This rule targets treaty shopping cases that can be identified on the basis of pre-defined criteria, such as the legal nature of certain entities, the level of ownership or the general activities of these entities ;
iii) inclusion in Tax Treaties of a more general anti-abuse rule based on the principal purposes of transactions (the principal purposes test or "PPT" rule).
The Report however recognises that the combination of an LOB rule and a PPT test may not be appropriate or necessary for all jurisdictions and allows some flexibility in their application. Furthermore, the Report includes targeted rules to address other forms of treaty abuse.
The OECD/G20 Final Report also refers to the interaction between tax treaties and domestic anti-abuse rules, with some treaty abuse strategies that need to be dealt with through domestic anti-abuse provisions. The Report acknowledges for example that nothing prevents the application of exit taxes, but suggests ways to resolve possible double taxation issues.
