Treaty Abuse: BEPS Action 6 - Global Tax Update

Action 6 (Treaty Abuse) is a key element of the OECD's BEPS Project. Action 6 targets, in summary, "treaty shopping", i.e., where a person in country A, which is not, in principle, eligible to benefit from a given tax treaty with country B, invests through an entity in country C to benefit from the treaty. More generally, Action 6 intends to prevent the granting of treaty benefits in inappropriate circumstances.

The Original Action 6 Proposals

The original Action 6 proposal (published in September 2014) contained two approaches to the treaty shopping issue (either or both approaches could have been included in the treaties).

One approach was based on the so-called "principal purpose test" ("PPT") where the treaty benefit would be denied if it was viewed as one of the principal purposes of the relevant transaction; the second approach was a "limitation on benefits" rule ("LOB"), following essentially the typical clause included in treaties signed by the US, i.e.,