Domestic and treaty based anti-abuse provisions to combat tax treaty abuse : an analysis

Abstract

Tax treaty law is the main source of International Tax Law. The primary aim of double tax treaties is to prevent international double taxation, while being imperative in combating international tax avoidance. In order to achieve more uniform rules on international taxation and to encourage treaty negotiations, both the Organisation for Economic Co-operation and Development (OECD) and the United Nations (U.N.) have issued model double tax conventions on income and capital. The model conventions are not legally binding but have had a great impact on treaty negotiations. Treaty abuse purports then, an "incorrect" use of a treaty without however necessarily involving an illegal act or a formal breach of the treaty. The improper use of tax treaties implies the use of a treaty that is contrary to its spirit, object and purpose. The phenomenon of tax treaty abuse will be evaluated at length from two aspects. Primarily, a treaty can be abused by the state concerned. Nonetheless, a treaty can be abused by the tax payer. Generally, treaty shopping is equated with treaty abuse and it refers to the "improper" use of the treaty by a person (whether or not a resident of a contracting state) acting through a legal entity created in a State with the main or sole purpose of obtaining treaty benefits which would not be available directly to such person. Treaty shopping, especially using a 'conduit', is perceived as improper use of tax treaties by both the OECD and the U.N. Anti-avoidance provisions are the crux of the thesis. A scrupulous examination will be held in this ambit, analyzing tax treaty abuse both within the context of tax treaties and within the context of how domestic legislation caters to prevent such abuse. The study, from a domestic ambit, will not limit itself to Maltese Law but it will also incorporate domestic law pertinent to other jurisdictions. Different tax treaties contain different anti abuse provisions and what behaviour constitutes unwanted treaty shopping in one country may not do so in another. Even so, most countries agree that without including some form of anti abuse provision, a tax treaty with one state can easily become a treaty with the world. Article 293 of the EC Treaty expressly states that Member States have the competence to conclude tax treaties with each other for the purpose of eliminating double taxation. It also recognizes that the abolition of double taxation is one of the objectives of the EC Treaty. The Court has determined that Article 293 does not have direct effect, however it obliges Member States to enter into negotiations with each other "so far as is necessary" with the objective of abolishing double taxation within the Community. The nature and scope of 'Limitation on Benefits Clauses' (LOBs) enshrined in tax treaties and serving as anti-abuse provisions will be examined. To do this in an effective manner, several treaties need to be analysed within the proper jurisdictional context. An analysis in the ambit of tax treaties concluded by Malta, and whether or not such treaties contain such anti-abuse provisions, shall be carried out. In the purview of LOB clauses one must necessarily analyse their compatibility with the tax treaty itself and, on a completely different dimension, their compatibility with EC Law.