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Most jurisdictions now acting to prevent treaty shopping

Thursday, 2 April, 2020

Over 90 jurisdictions have amended their double taxation agreements to comply with the OECD's treaty-shopping-prevention rules under the base erosion and profit shifting (BEPS) project.

An OECD assessment concludes that by June 2019, the majority of the 129 members of the Inclusive Framework on BEPS had already begun to translate their commitment to prevent treaty shopping into actions by modifying their treaty networks.

By far the most commonly used tool used by jurisdictions to modify their double taxation agreements (DTAs) was the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS . Once a jurisdiction brings this convention into force, all the relevant tax agreements come into compliance with the minimum BEPS standard on treaty shopping. It does not have to renegotiate all its bilateral tax agreements separately, except to agree with the other jurisdiction that the MLI will take effect.

This minimum standard requires jurisdictions to include two components in their DTAs. First is an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Second, the jurisdiction has to choose one of three alternative anti-abuse provisions to prevent businesses or investors from structuring their arrangements principally to benefit under a tax treaty.

The method chosen by the vast majority of jurisdictions is the principal purpose test. The US is unusual in that its anti-abuse provision is supplemented by a ‘limitation on benefits’ clause. It did not sign the convention, but is instead implementing the minimum standard via bilateral agreements.