The OECD has released a discussion draft concerning follow-up work on BEPS Action 6.
The discussion draft focuses on the interaction between the anti-treaty shopping provisions recommended in the BEPS Action 6 report and the treaty entitlement of non-collective investment vehicles (CIV) funds. The new five-page discussion draft includes three draft examples of common transactions involving non-CIV funds under consideration for inclusion in the commentary on the principal purposes test (PPT) rule. Comments on the discussion draft are due by February 3, 2017.
The OECD's discussion draft invites comments on the following draft examples:
The examples provide some additional guidance on how countries should apply the PPT rule to certain transactions involving non-CIVs. Each example illustrates circumstances where, in the absence of other facts, it would not be reasonable to deny the benefit of a tax treaty notwithstanding that such benefits were considered in deciding whether or not to establish the intermediary company in a particular State.
Action 6 of the BEPS Action Plan, "Preventing the Granting of Treaty Benefits", identified treaty abuse, and in particular treaty shopping, as one of the most important issues related to the BEPS project. Arrangements through which a person who is not a resident of a particular country may obtain benefits granted to a resident of that particular country is referred to as treaty shopping.
The final report on BEPS Action 15 recommends that countries amend their bilateral tax treaties via a "multilateral instrument" to implement tax treaty related BEPS measures, including anti-treaty shopping provisions. The OECD announced that it had completed negotiations on the Multilateral Instrument, with more than 100 jurisdictions participating, on November 24, 2016.
The OECD's multilateral instrument sets out the minimum standard of protection against treaty shopping that countries should agree to include in their treaties through a limitations on benefits provision (LOB rule) combined with a PPT rule, a PPT rule alone, or an LOB rule supplemented by a mechanism to deal with conduit financing arrangements. For the purposes of these standards, the LOB rule specifically limits the availability of treaty benefits to entities that meet certain conditions (based on its legal nature, ownership of the entity and its activities) to ensure a sufficient nexus between the entity and its state of residence. The PPT, a more general anti-abuse rule, addresses treaty shopping situations not covered by the LOB. The PPT operates to deny treaty benefits where one of the principal purposes of certain transactions or arrangements is to obtain treaty benefits (except where the granting of such benefits would be consistent with the object and purpose of the treaty).
The final version of the Action 6 report indicated that the OECD would continue to examine issues related to the treaty entitlement of non-CIV funds to ensure that the new treaty provisions to combat treaty shopping adequately address the treaty entitlement of these funds.
For more information, contact your KPMG adviser.
Information is current to January 31, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500