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Client Alert: O.E.C.D. Public Discussion Draft on Preventing Treaty Abuse

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To:Clients & Friends of the Firm
From:Robert G. Rinninsland & A. Fanny Karaman
Re:O.E.C.D. Public Discussion Draft on Preventing Treaty Abuse
Date:March 18, 2014

On March 14, 2014, the O.E.C.D. added another chapter in its fight against tax evasion by releasing a public discussion draft addressing the disallowance of treaty benefits in inappropriate circumstances. Through this draft, the O.E.C.D. follows up on its 2013 report “Addressing Base Erosion and Profit Shifting” (the “B.E.P.S. Report”) and a 2013 “Action Plan on Base Erosion and Profit Shifting” (the “2013 Action Plan”). The 2013 Action Plan contained 15 actions addressing B.E.P.S. and came with a timeline. The public discussion draft released on March 14 focuses on Action 6 (Prevent Treaty Abuse).

The released draft divides the content of Action 6 into three parts, each constituting a different section of the draft.

  1. Develop Model Treaty Provisions and Recommendations Regarding the Design of Domestic Rules to Prevent the Granting of Treaty Benefits in Inappropriate Circumstances

This part of the draft addresses several anti-abuse rules, including a limitation-on-benefits provision, a “derivative benefits” provision, and a general “main purpose” provision. It contains several more specifically targeted anti-abuse rules including a replacement of the “effective place of management” test by a case-by-case analysis. The proposal also suggests changes to domestic law as a way to prevent treaties from being used to avoid provisions of domestic law.