Tax treaties play a very important role in the international framework by encouraging cross-border trade and investment. They allocate taxing rights between the Contracting States and thereby eliminate, or at least alleviate, double taxation. The objective of tax treaties is not however to open avenues for aggressive tax planning or to create opportunities for tax avoidance. Without adequate safeguards they can be exposed and vulnerable to treaty shopping and other abusive strategies. The objective of tax treaties is frustrated (at the expense of public finances) if taxpayers are allowed to claim treaty benefits in situations where those benefits were not intended to be accessible to them. This is also the case if no measures were taken to counter strategies to artificially avoid the permanent establishment status which is an essential concept for allocation taxing rights.
The OECD/G20 examined these issues under Actions 6 and 7. The final report on Action 6 proposes an approach based on different types of safeguards against treaty shopping; the two principal options being (a) a specific "limitation-on-benefits" (LOB) rule and (b) a more general "principal purpose test" (PPT) based anti-abuse rule. While the two may in principle be used simultaneously, in practice they are considered as mutually exclusive alternatives to each other.
It is vital for the good functioning of the Single Market that Member States can operate efficient tax systems and prevent their tax bases from being unduly eroded because of inadvertent non-taxation and abuse. At the same time, it is equally important to strike a proper balance between the public interest of combating abuse and the need to ensure that the solutions to protect tax bases create no undue mismatches and market distortions.
In this regard, the Commission considers LOB clauses 86 to be detrimental to the Single Market and, in particular, Capital Markets Union. The more general anti-avoidance rules based on the PPT, if adopted by Member States, should be adapted to meet the requirements of a Single Market in order for them to be EU law compliant. The principle of equal treatment requires that companies owned by shareholders resident elsewhere in the EU/EEA can benefit from the same advantages derived from the Treaty as those available to companies owned by domestic shareholders.
The final report on BEPS Action 7 aims at making the definition of PE more resilient against the construction of artificial structures to circumvent their application. This definition needs to keep up with developments in an increasingly globalised and digitalised economy.
The conclusion of tax treaties falls within the competence of Member States despite the fact that in the exercise of those competencies, for instance when implementing the minimum standards agreed in the framework of the BEPS Project, they must observe their obligations under EU law. These matters do not lend themselves easily to be addressed in a legally binding instrument such as a Directive, which is why they are included in a Recommendation.
