On 13 January 2015 the OECD published on its website the comments received from interested parties on Action 6 of the action plan on base erosion and profit shifting (BEPS). This concerns the prevention of tax treaty abuse and involves developing recommendations on national tax rules that will prevent taxpayers being able to enjoy tax treaty benefits when this is not appropriate. The guidance would emphasize that treaties are concluded for the avoidance of double taxation but should not result in double non-taxation. Action 6 of BEPS also aims to identify tax policy issues to be considered by governments before they conclude a double tax treaty.

A consultation document was published on this issue early in 2014 and matters arising from interested parties were considered by the relevant Focus Group within the OECD’s Committee on Fiscal Affairs. A public consultation was held on the issues in April 2014 at which some of the relevant interested parties were invited to speak.

On 21 November 2014 the OECD published a discussion draft on the follow-up work in respect of the Model Treaty provisions and commentary, suggesting amendments to these for the new recommendations on Limitation of Benefits (LOB). The follow-up work also included the issue of collective investment vehicles (CIVs) and non-CIV funds.

The questions posed in the discussion document concerned issues such as the discretionary relief provision in the LOB rule; interpretation of the “active business” provision within the LOB; and modification of provisions in the LOB rule on listed companies to allay concerns of small countries that do not have significant stock exchanges. The discussion draft also asked for further input on the operation of the Principle Purpose Test (PPT); the anti-conduit rule in the PPT; and further situations where the anti-abuse provision could apply in addition to situations where the profits of the PE are exempt in the home country.

The OECD has published around 80 comments received from interested parties including industry associations, multinational enterprises, financial institutions and advisory firms. Concerns expressed by interested parties include the broad scope of the recommended changes that could lead to problems for legitimate businesses and have an effect on low-risk taxpayers. Some of the proposed provisions such as the PPT rule and anti-abuse provision are regarded by some interested parties as being potentially subject to differing interpretations and therefore liable to lead to more uncertainty and disputes.

These provisions would in the view of some commentators benefit from better targeting so they would be more specifically concerned with taxpayers trying to abuse treaty provisions. Any anti-abuse provision is liable to the criticism that it is potentially too wide-ranging and the commentators would therefore like more reassurance that any such provision can be accurately targeted at abusers. This could perhaps be helped by the provision of more examples of the operation of the anti-abuse provision to clarify that it is targeting clearly abusive entities or transactions.

The possible combination of a LOB provision, the PPT rule and specific anti-avoidance rules may be adding layers of rules that add to uncertainty and disputes and also add to administrative costs of compliance. It might therefore be better to use either the LOB provision or the PPT rule but not both.

There is concern in the funds industry reflected in the submissions of interested parties that many collective investment vehicles may not pass the threshold set by the LOB provision. The definition of a CIV proposed by the discussion paper may be too strict for alternative investment funds. Many funds would have difficulty in showing that the conditions are satisfied and any provision recommended by the OECD might therefore hit the funds industry and particularly the alternative investment funds. Some commentators have therefore suggested the use of other criteria in assessing the eligibility of funds for treaty benefits, for example a test based on genuine diversity of ownership; a test looking at the ultimate beneficial owners; a look-through approach or an approach based on substance.

The comments received from interested parties are to be discussed at a public meeting on 22 January 2015. This will be held at the OECD Conference Centre and will also be accessible live on the internet.