!
In! previous! sections! of! this! work! the! ordinary! meaning! of! the! term! ‘liable! to! tax’! has! been! explored!in!its!context,!and!in!light!of!the!object!and!purpose!of!the!OECD!MC.!In!broad!terms,!the! idea!has!been!proposed!that!the!term!‘liable!to!tax’!describes!no!more!than!a!connection!between! the! claimant! and! the! State! in! which! the! treaty! claim! is! raised! that! is! ultimately! based! on! those! laws,!and!the!essence!of!which!is!more!political!than!economic.!
!
The! use! of! tax! treaties! in! cases! of! profit! shifting,! however,! begs! for! the! question! of! whether! an! effective!economic!nexus!may!be!required!from!the!perspective!of!the!Model!itself,!regardless!of! the! opinion! one! may! have! in! relation! to! the!ugliness! of! treaty! abuse.! As! has! been! suggested! repeatedly!across!this!study,!the!fundamental!flaw!behind!the!OECD’s!approach!in!this!field!seems! to!lie!in!the!assumption!that!there!is!something!obvious!about!the!meaning!of!‘abuse’!for!treaty! purposes,!namely!the!need!for!economic!substance.!The!reality!of!the!Model!is!nonetheless!other.! Nothing!seems!to!be!obvious!in!relation!to!treaty!abuse,!particularly!if!one!analyses!its!existence! by!taking!into!consideration!the!definition!of!residence!in!the!OECD!MC.! ! In!fact,!after!decades!of!studying!this!issue!the!OECD!has!come!to!the!conclusion!that!some!rules! need! to! be! added! to! the! Model! in! order! to! fortify! its! structure! against! cases! of! abuse:! A! new! limitationPonPbenefits!(LOB)!provision!and!a!general!antiPabuse!rule!(GAAR).!Bearing!in!mind!that! these!clauses!aim!at!restricting!tax!treaty!entitlement,!one!cannot!but!wonder!whether!they!may! have! an! influence! on! the! process! of! attributing! its! ordinary! meaning! to! the! term! ‘liable! to! tax’.! After!all,!it!is!this!notion,!at!the!core!of!the!definition!of!residence,!which!defines!the!kind!of!nexus! a!person!must!have!with!a!certain!State!in!order!to!successfully!claim!treaty!benefits.!!
!
Accordingly,!this!section!will!explore!the!addition!of!a!general!antiPabuse!rule!and!a!limitationPonP benefits! provision! to! the! OECD! MC.! The! purpose! of! this! analysis! is! not! to! define! ‘abuse’! as! an! abstract! notion,! but! to! discuss! whether! these! new! rules! will! rePdefine! abusive! tax! treaty! entitlement! by! influencing! the! attribution! of! its! ordinary! meaning! to! the! term! ‘liable! to! tax’.! In! other! words,! this! part! will! discuss! whether! the! proposed! additions! will! have! an! effect! on! the! meaning! of! residence! and,! in! that! particular! manner,! on! the! interpretation! of! tax! treaties! in! general.! ! 11.2. BEPS!and!a!new!OECD’s!approach!on!artificial!treaty!entitlement! ! 11.2.1. Introduction! ! The!renewed!interest!in!the!issue!of!tax!avoidance!at!the!international!level!has!resulted!in!the! necessity! to! coordinate! every! attempt! to! deal! with! it.! According! to! the! OECD,! any! unilateral! actions! by! the! States! must! be! avoided! because! they! pose! a! threat! of! double! or! even! multiple! taxation891.!There!is!clarity!on!the!fact!that!something!needs!to!be!done!to!confront!the!issue!of!
treaty! abuse,! and! yet! it! appears! that! the! final! goal! of! the! BEPS! project! is! rather! unclear.! The! initiative! was! triggered! by! the! public! outrage! provoked! by! the! case! of! many! multinational! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
! 166! companies! which,! despite! their! huge! profits,! managed! to! pay! little! or! no! tax! in! their! respective! jurisdictions.!In!that!context,!one!may!expect!that!the!measures!proposed!will!be!of!a!magnitude! capable!of!shaking!the!foundations!of!tax!treaties.!More!specifically,!one!cannot!but!hope!that!the! threshold! for! tax! liability! would! be! raised! in! order! to! grant! treaty! benefits! in! fewer! cases.! However,! whether! these! measures! actually! have! an! effect! on! the! ordinary! meaning! of! the! term! ‘liable!to!tax’!is!not!an!easy!question.!On!the!one!hand,!the!answer!to!this!question!is!given!by!the! scope!of!the!BEPS!project!and,!on!the!other!hand,!by!the!nature!of!the!rules!proposed!in!order!to! achieve!its!purpose.! ! 11.2.2. Base!erosion,!profit!shifting!and!restrictions!to!tax!treaty!entitlement!! ! 11.2.2.1.The!true!scope!of!BEPS! !
By! way! of! introduction! to! this! section,! some! observations! may! be! made! in! relation! to! certain! myths!and!realities!behind!the!BEPS!initiative.!Firstly,!the!OECD!has!tried!to!present!profit!shifting! as! a! current! international! concern,! while! this! is! actually! not! true.! The! issue! of! tax! avoidance! through!profit!shifting!has!been!discussed!for!over!fifty!years892!and!so!far!none!of!the!solutions!
proposed!by!the!OECD!has!been!effective!enough!to!solve!it.!Secondly,!the!OECD!has!maintained! an!ambiguous!speech!in!relation!to!the!purpose!behind!the!initiative.!On!the!one!hand,!it!declares! that!it!seeks!to!restore!the!balance!between!domestic!and!international!investment893!and,!on!the!
other!hand,!it!implies!that!one!of!the!main!goals!behind!it!is!to!solve!the!problem!of!double!nonP taxation894.! However,! a! detailed! analysis! of! the! project! demonstrates! that! both! statements,!
although!sincere!in!a!general!manner,!are!nonetheless!far!from!being!accurate895.!!
!
There!are!two!types!of!profit!shifting:!one!that!is!‘good’,!namely!one!that!responds!to!at!least!a! certain!degree!of!economic!reality,!and!one!that!is!‘bad’,!characterised!by!the!complete!absence!of! any! economic! substance896.! In! the! specific! area! of! tax! treaty! entitlement! the! project! deals! only!
with!the!latter897.!Any!double!nonPtaxation!caused!by!‘good!BEPS’,!along!with!any!distortions!in! the!balance!between!domestic!and!international!investment!caused!by!it,!are!outside!the!scope!of! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 892!!It!was!raised!for!the!first!time!in!1962,!see!TFD/FC/136.! 893!!OECD,!Addressing!BEPS,!supra!note!27,!at!p.50.! 894!!OECD,!Addressing!BEPS,!supra!note!27,!at!p.10.! 895!!By!way!of!illustration,!the!scope!of!the!problem!of!nonPtaxation!is!in!fact!quite!restricted:!“[n]o!or!low!taxation!is!not! per$se!a!cause!of!concern,!but!it!becomes!so!when!it!is!associated!with!practices!that!artificially!segregate!taxable! income!from!the!activities!that!generate!it”,!see!OECD,!Action!Plan,!supra!note!27,!at!p.10.! 896!!For!a!distinction!between!good!BEPS!and!bad!BEPS,!see!the!Action!Plan,!supra!note!27,!at!pp.13P26.!Although!one! may!argue!that!the!project!is!also!meant!to!confront!situations!that!are!not!necessarily!artificial!(as!in!the!case!of! hybrid!mismatch!arrangements,!see!OECD,!Action!Plan,!supra!note!27,!at!pp.15P16),!it!is!somewhat!clear!that!the! heart!of!the!BEPS!initiative,!at!least!in!the!matter!of!access!to!tax!treaties,!lies!in!the!distinction!between!those!cases! in!which!the!absence!of!an!economic!nexus!is!manifest,!and!those!situations!in!which!some!relevant!substance!can! be!said!to!exist.!The!distinction!between!‘good!BEPS’!and!‘bad!BEPS’!is!therefore!relevant!inasmuch!as!it!suggests! that!the!problem,!as!defined!by!the!OECD,!lies!in!the!artificial!nature!of!the!arrangements!entered!into!with!the!view! of!obtaining!treaty!benefits,!and!not!necessarily!in!the!reduced!taxation!achieved!by!those!means.!It!also!suggests! that! the! OECD’s! intention! to! restore! the! balance! between! domestic! and! international! investment! is! not! as! comprehensive!as!one!would!have!expected.!In!spite!of!the!broad!terms!that!launched!the!subject!of!BEPS!straight!to! the! top! of! the! list! of! international! concerns,! its! scope! is! primarily! restricted! to! cases! of! ‘bad! BEPS’.! Generally! speaking,!any!asymmetries!or!comparative!advantages!derived!from!a!crossPborder!setting!are!not!covered!by!the! BEPS!initiative!if!they!do!not!entail!a!wholly!artificial!segregation!of!income!from!its!source.!Those!asymmetries,!if! they!are!not!artificial,!have!been!accepted!as!a!factor!of!competiveness,!see!OECD,!Addressing!BEPS,!supra!note!27,! at!p.28.! 897!!Except!perhaps!in!the!field!of!hybrid!mismatch!arrangements,!where!the!OECD!has!stated!that!the!purpose!of!the! measures!proposed!should!aim!at!solving!disparities!between!domestic!legislations,!which!facilitate!the!erosion!of! the!tax!base.!Some!of!the!scenarios!described,!such!as!double!deductions!and!longPterm!deferrals,!for!instance,!do! not!exclusively!refer!to!artificial!structures,!see!OECD,!Public!Discussion!Draft,!supra!note!500,!at!pp.15P16.!
! 167! the!initiative.!While!the!discussion!regarding!BEPS!suggests!the!need!of!some!important!changes! to! the! determination! of! the! subject! entitled! to! tax! treaties,! its! effects! in! the! area! of! tax! treaty! interpretation!in!general!should!be,!as!a!matter!of!fact,!somewhat!restricted.! ! 11.2.2.2.The!problem!of!BEPS!is!one!of!means!and!not!of!results! ! Another!thing!that!is!relevant!about!the!issue!of!profit!shifting!as!defined!by!the!OECD!is!that!this! is!a!problem!of!means!and!not!of!results.!As!was!stated!earlier!in!previous!sections!of!this!work,!it! appears!that!when!the!meaning!of!treaty!abuse!was!first!described,!the!fact!that!a!person!was!able! to! escape! taxation! was! relevant.! Yet! this! was! clearly! not! the! core! of! the! issue.! In! the! context! of! BEPS!the!erosion!of!the!tax!base!is!not!in!itself!a!problem,!unless!the!means!used!to!do!so!are!fully! artificial898.!
!
If! profit! shifting! results! in! double! nonPtaxation! this! is! not! really! a! problem,! provided! that! the! relevant! business! structure! responds! to! at! least! some! degree! of! economic! substance899.! These!
strategies!only!become!questionable!if!there!is!not!even!a!hint!of!economic!reality!behind!them,! something!that!was!defined!previously!as!‘bad!BEPS’.!One!needs!to!realise!that!if!any!restrictions! to!tax!treaty!entitlement!are!proposed!in!the!context!of!the!BEPS!initiative,!they!will!be!restricted! to!this!problem!and!this!problem!alone900.!They!will!not!aim!to!change!the!essence!of!the!OECD!
MC,!but!only!to!regulate!the!case!of!certain!taxpayers!who,!in!the!absence!of!an!economic!nexus! with! a! certain! State,! are! nonetheless! authorised! to! make! use! of! its! tax! treaties.! In! a! Model! Convention! where! the! levels! of! taxation! bear! no! influence! for! the! purposes! of! tax! treaty! entitlement,!the!situation!could!not!have!been!different.!All!these!aspects!are!fundamental!if!the! effect!of!adding!a!general!antiPabuse!rule!and!a!limitationPonPbenefits!provision!on!the!ordinary! meaning!of!‘liable!to!tax’!is!to!be!analysed.! ! 11.2.3. A!general!antiPabuse!rule!in!the!OECD!MC! ! 11.2.3.1.Introduction! !
The! March! 2014! Public! Discussion! Draft! on! “BEPS! Action! 6:! Preventing! the! granting! of! treaty! benefits! in! inappropriate! circumstances”901!introduced! a! proposal! for! a! new! general! antiPabuse!
rule.! This! draft! rule! was! perfected! by! the! September! 2014! Deliverable,! and! was! published! in! October!2015!as!the!final!version!of!the!new!GAAR!to!be!added!to!the!Model:!!
!
“Notwithstanding!the!other!provisions!of!this!Convention,!a$benefit$under!this!Convention!shall!not!be!granted! in!respect!of!an!item!of!income!or!capital!if!it!is!reasonable!to!conclude,!having!regard!to!all!relevant!facts!and! circumstances,!that!obtaining!that!benefit!was!one!of!the!principal!purposes!of!any!arrangement!or!transaction! that! resulted! directly! or! indirectly! in! that! benefit,! unless! it! is!established! that! granting! that! benefit! in! these! circumstances! would! be! in! accordance! with! the! object! and! purpose! of! the! relevant! provisions! of! this! Convention”902.!
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !
898!!OECD,!Addressing!BEPS,!supra!note!27,!at!p.28.!
899!!“No! or! low! taxation! is! not!per$se! a! cause! of! concern,! but! it! becomes! so! when! it! is! associated! with! practices! that!
artificially!segregate!taxable!income!from!the!activities!that!generate!it”,!see!Action!Plan,!supra!note!27,!at!p.10.!
900!!OECD,!Public!Discussion!Draft,!supra!note!27,!at!p.27! 901!!OECD,!Public!Discussion!Draft,!supra!note!27.!
902!!Emphasis!added.!The!September!2014!Deliverable!added!the!mention!to!‘capital’!and!changed!the!word!‘main’!for!
‘principal’!when!referring!to!the!purpose!of!the!arrangements,!see!OECD,!Preventing$the$Granting$of$Treaty$Benefits$ in$ Inappropriate$ Circumstances.$ Action$ 6:$ 2014$ Deliverable,! (Paris:! loosePleaf,! September! 2014),! at! p.66;! and! the! previous! version! of! the! proposed! rule! in! OECD,! supra! note! 27,! at! p.10.! No! more! additions! or! changes! were! introduced!to!the!final!version!of!the!rule,!see!OECD,!Action!6:!2015!Final!Report,!supra!note!1,!at!p.55.!
! 168! There! are! several! aspects! of! this! new! rule! which! touch! upon! sensible! areas! of! the! definition! of! residence!in!Art.4!OECD!MC.! ! 11.2.3.2.A!benefit!shall!not!be!granted!in!respect!of!an!item!of!income! ! This!is!perhaps!the!most!relevant!part!of!the!proposed!provision!for!the!purposes!of!Art.4!OECD! MC.!As!an!effect!of!the!application!of!the!new!rule,!access!to!the!OECD!MC!will!be!denied!only!in! relation!to!the!item$of$income$in!respect!of!which!a!treaty!benefit$is!requested.!In!other!words,!this! means! that! the! proposed! rule! does! not! engage! directly! with! the! provisions! dealing! with! the! characterisation! of! a! person! as! a! ‘resident’! under! Art.4! OECD! MC,! or! at! least! not! in! terms! of! denying!that!status!under!the!rules!of!the!Model.!In!principle,!the!term!‘resident’!will!continue!to! be! defined! under! the! provisions! of! Art.4! OECD! MC! exclusively,! and! it! will! not! be! altered! by! the! existence! of! this! antiPabuse! regulation.! This! suggests! that! an! artificial! arrangement! which! gives! place!to!a!tax!liability,!capable!of!triggering!the!application!of!the!Model!(by!way!of!establishing! residence),! should! find! no! opposition! in! this! rule,! or! at! least! not! in! a! way! in! which! the! person! needs!not!to!be!considered!a!resident!for!treaty!purposes!permanently.!!
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This! limited! scope! of! the! rule! is! nonetheless! consistent! with! its! purpose,! which! is! restricted! to! oppose!certain!abusive!acts!beyond!the!boundaries!of!the!limitationPonPbenefits!rule,!specifically! in!the!case!of!conduit!financing!arrangements903.!Notwithstanding!the!need!to!verify!whether!the!
arrangements! or! transactions! giving! place! to! the! establishment! of! residence! are! artificial,! discussed! in! a! subsequent! part! of! this! section904,! the! new! rule! does! not! alter! the! core! of! the!
definition!of!residence!for!the!purposes!of!the!Model.! !
11.2.3.3.The!benefit!was!one$of$the$principal$purposes!of!the!arrangements! ! There!is!really!nothing!original!in!this!statement,!except!for!the!fact!that!it!will!be!moved!from!the! Commentaries!to!the!Model905.!Under!the!current!version!of!the!Commentaries:! ! “[…]!the!benefits!of!a!double!taxation!convention!should!not!be!available!where!a!main!purpose!for!entering! into!certain!transactions!or!arrangements!was!to!secure!a!more!favourable!tax!position![…]”906! ! According!to!the!new!2015!final!version!of!the!Commentaries!to!the!rule:!! ! “The!provision!is!intended!to!ensure!that!tax!conventions!apply!in!accordance!with!the$purpose$for$which$they$ were$ entered$ into,! i.e.! to! provide! benefits! in! respect! of! bona! fide! exchanges! of! goods! and! services,! and! movements! of! capital! and! persons! as! opposed! to! arrangements! whose! main! objective! is! to! secure! a! more! favourable!tax!treatment.”907! ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ! 903!!OECD,!Action!6:!2014!Deliverable,!supra!note!902,!at!p.11!and!at!p.67;!OECD,!Action!6:!2015!Final!Report,!supra!note! 1,!at!p.19.! 904!!This!will!be!further!discussed!at!pp.171ff.! 905!!OECD,!Action!6:!2014!Deliverable,!supra!note!902,!at!p.66.!Russo!suggested!that!moving!certain!elements!from!the! Commentaries!to!the!Model!would!reduce!the!time!spent!in!these!discussions,!see!Russo,!supra!note!504,!at!p.565.! 906!!Sec.9.5!of!Comm.!to!Art.1!OECD!Model!Convention!(2014).!See!Engelen,!supra!note!600,!at!p.31;!van!Weeghel,!supra! note!600,!at!pp.322P323.!According!to!the!OECD,!‘[t]he!reference!to!“one!of!the!principal!purposes”!in!paragraph!7! means!that!obtaining!the!benefit!under!a!tax!convention!need!not!be!the!sole!or!dominant!purpose!of!a!particular! arrangement!or!transaction.!It!is!sufficient!that!at!least!one!of!the!principal!purposes!was!to!obtain!the!benefit’,!see! OECD,!Action!6:!2015!Final!Report,!supra!note!1,!at!p.58.! 907!!Emphasis!added.!OECD,!Public!Discussion!Draft,!supra!note!27,!at!p.11;!OECD,!Action!6:!2015!Final!Report,!supra! note!1,!at!p.56.!
! 169! From!the!drafting!of!the!provision,!it!is!clear!that!the!description!of!cases!of!abuse!will!be!strongly! determined!by!the!definition!of!the!object!and!purpose!behind!the!OECD!MC.!A!particularly!broad! mention!has!been!made!of!the!purpose!of!facilitating!crossPborder!trade!and!investment!through! bonaPfide! transactions,! which! is! one! of! the! many! goals! pursued! by! the! OECD! MC908.! Yet,! as! has!
been!stated!in!previous!parts!of!this!study,!the!determination!of!the!object!and!purpose!behind! the!Model!is!rather!unclear!precisely!because!the!OECD!MC!needs!to!act!as!a!model!treaty909!in!a!
variety! of! scenarios.! Instead! of! the! States! adapting! to! the! rules! of! the! OECD! MC,! as! if! they! constituted!a!secondPlevel!social!contract910,!it!is!the!rules!of!the!Model!that!need!to!adapt!to!any! tax!system,!and!to!the!wishes!of!States!implementing!different!and!sometimes!conflicting!policy! objectives,!such!as!capitalPimport!and!capitalPexport!neutrality.!To!submit!the!applicability!of!an! antiPabuse!clause!to!the!determination!of!this!object!and!purpose!evidently!threatens!the!efficacy! of!the!rule,!but!then!again,!what!the!States!define!as!relevant!from!a!policy!point!of!view!when! negotiating!a!treaty!is!their!own!responsibility.!! !
11.2.3.4.The!arrangements!resulted!directly$or$indirectly$in!an!advantage! !
The!broad!reference!to!arrangements!which!result!directly$or$indirectly!in!abusive!treaty!benefits! raises!the!question!of!whether!the!establishment!of!residence!may!be!considered!between!those! arrangements.!According!to!the!2014!Discussion!Draft:!
!
‘The!phrase!“that!resulted!directly!or!indirectly!in!that!benefit”!is!deliberately!broad!and!is!intended!to!include! situations! where! the! person! who! claims! the! application! of! the! benefits! under! a! tax! treaty! may! do! so! with! respect!to!a!transaction!that!is!not!the!one!that!was!undertaken!for!one!of!the!main!purposes!of!obtaining!that! treaty!benefit.![…]!
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The! terms! “arrangement! or! transaction”! should! be! interpreted! broadly! and! include! any! agreement,! understanding,!scheme,!transaction!or!series!of!transactions,!whether!or!not!they!are!legally!enforceable.![…]! These! terms! also! encompass! arrangements! concerning! the! establishment,! acquisition! or! maintenance! of! a! person!who!derives!the!income,!including$the$qualification$of$that$person$as$a$resident$of!one!of!the!Contracting! States,!and!include$steps$that$persons$may$take$themselves$in$order$to$establish$residence.’911!
!
It!is!rather!evident!that,!when!confronting!a!case!of!treaty!abuse,!the!means!used!to!obtain!treaty! protection!had!to!be!subject!to!scrutiny.!The!acts!of!a!taxpayer!which!are!of!significance!in!order!