The Resource The lesser of two evils : double tax treaty override or treaty abuse?

The lesser of two evils : double tax treaty override or treaty abuse?

The lesser of two evils : double tax treaty override or treaty abuse?
The lesser of two evils : double tax treaty override or treaty abuse?
On a co-ordinated basis the OECD and G20 are focusing on a far-reaching action plan to combat base erosion and profit shifting (BEPS). Their plans are designed to prevent treaty abuse, foil hybrid mismatches, prevent unusual and aggressive transfer pricing, and encourage much more timely and comprehensive information sharing. This group are also continuing to work on the broader tax challenges of the digital economy and are considering issues of nexus, data, and characterisation with a view to designing a fair and viable system in order to tax profits in the jurisdiction where economic activities occur and where value is created. There is great uncertainty about what income arises from the digital economy and also how it could be assessed and paid. How should a government respond when it believes that a multinational (such as Google) operating in its country uses the substantive provisions of a double tax agreement to pay virtually no tax in its jurisdiction? While the world awaits an integrated solution, a second level of governmental response to BEPS is emerging and involves purely domestic taxation legislation introduced on a unilateral basis. This is not co-ordinated and it is controversial because, arguably, it is designed in some circumstances to override existing treaty obligations. This article considers the relationship between treaties and domestic law before using a traditional international law categorisation to identify those countries that can legislate to override their treaties. International lawyers broadly classify legal systems around the world into a monist and dualist dichotomy. As will be explained countries with a dualist legal system, such as the UK and Australia, can deliberately override their international tax treaty obligations. The question is whether such dualist countries should be able to do so at all, or whether they should only be able to do so in certain circumstances. The 1989 OECD Report on treaty override categorised various situations of treaty override as acceptable and unacceptable behaviour for governments. In that Report the OECD discussed a case of treaty abuse involving the alienation of immovable property. The OECD concluded that even though the new overriding legislation was designed to put an end to an improper use of the tax treaty it was an impermissible contravention of a tax treaty obligation. This article argues that in such circumstances, now, a domestic law treaty override is both a justified and acceptable course of action. There are three key arguments offered in support of this proposition. The first is that the purposes of tax treaties have changed since the Report was written so that it is now clear that a main purpose of the treaty is to prevent tax avoidance and evasion. Secondly, domestic law already overrides treaties in situations of abuse. It has emerged since 1989 that domestic general anti-avoidance rules influence and affect double tax agreements in the vast majority of countries. Thirdly, as a matter of international law it can be argued that a taxpayer should not be able to take advantage of a treaty in an abusive way if their own state could not take such advantage. The state is required to apply the treaty in good faith and so should the taxpayer. Seen in this light recent developments involving new tax rules made by the UK and Australia, which of course are examples of dualist countries, appear reasonable rather than unreasonable even if they are examples of unilateral legislative treaty override (which the UK and Australia would likely contest). The approach taken in these jurisdictions, being grounded in preventing abusive structure and transactions, is consistent with one of the purposes of double tax treaties and therefore justified
Citation source
In: British tax review. - London. - (2016),
Elliffe, C
Geographic coverage
Language note
  • treaty override
  • treaty abuse
  • anti-avoidance
  • BEPS Project (OECD)
  • domestic tax law
  • GAAR
The lesser of two evils : double tax treaty override or treaty abuse?
The lesser of two evils : double tax treaty override or treaty abuse?

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