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Corporate mobility and treaty abuse

This article examines the trend of states adopting unilateral measures to combat treaty abuse in the context of taxpayer mobility. It explores case studies from the US and the Netherlands and discusses the fragmentation of the concept of treaty abuse and the need for coordination at the international level. The article also highlights proposed amendments to the OECD's Commentary on Art. 1 and the potential prevalence of treaty provisions in conflicts with domestic anti-abuse rules.

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Corporate mobility and treaty abuse

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  1. Corporate mobility and treaty abuse Carla De Pietro

  2. Unilateral approach The analysis of the national measures concerning taxpayer’s mobility shows a significant tendency of States towards unilateralism when fighting against treaty abuse (= granting treaty benefits in inappropriate circumstances).

  3. US inversion rules: new treaty override In 2004 the United States introduced anti-inversions rules and effected a new instance of legislative treaty override. Section 7874 (f) of the Internal Revenue Code establishes that in any case of conflict with treaty provisions US domestic tax law shall prevail. In the 2016 US Model Tax Convention Art. 10, 11 and 12 have been amended: no limitation to withholding taxes in case of abusive group restructuring.

  4. The Netherlands: new possible treaty overrides Also in the Netherlands there is an important debate on the possible occurence of new instances of treaty override effected through the amendments to the exit tax regime.

  5. The Netherlands: new possible treaty overrides • Collection of the preserving assessment triggered by taxation on dividends. • Extension of fictitious residence in the Netherlands.

  6. Fragmentation of treaty abuse: consequences for taxpayers The US and Dutch examples actually show that each State targets differently the abusive situations in which treaty benefits must not be granted. This attitude has determined a high fragmentation of the concept of treaty abuse. Even under the same tax treaty, taxpayers may receive different treatments depending on the Contracting State which is actually applying the treaty.

  7. Towards coordination How to reconcile the fragmentation of the concept of treaty abuse with the coordination needed at international level? The OECD final report on treaty abuse proposes important amendments to the Commentary on Art. 1. The OECD opens again the issue concerning the relationship between domestic anti-abuse rules and treaty provisions.

  8. Present Commentary on Art. 1 Par. 22. 1 excludes conflicts between domestic anti-abuse rules and treaty provisions on the basis of the argument according to which only domestic anti-abuse rules determine which facts give rise to tax liability. Therefore, domestic anti-abuse rules are not affected by treaty provisions.

  9. New proposed Commentary: prevalence of treaty provisions A conflict between domestic anti-abuse rules is possible. When such a conflict occurs treaty provisions must prevail over domestic rules by virtue of Articles 26 and 27 of the Vienna Convention on the Law of Treaties.

  10. Important step towards coordination It is too early for States that consider treaty override constitutionally legitimate to accept this position. However, the acknowledgement of the OECD is a fundamental step towards a (desirable) higher level of coordination.

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