beps 6.michael lang

BEPS Action 6: Introducing an Antiabuse Rule in TaxTreatiesby Michael Lang

The OECDs action plan on base erosion and profitshifting provides for the following measures asaction 6, under the heading Prevent treaty abuse:

Develop model treaty provisions and recommen-dations regarding the design of domestic rules toprevent the granting of treaty benefits in inappro-priate circumstances. Work will also be done toclarify that tax treaties are not intended to beused to generate double non-taxation and to iden-tify the tax policy considerations that, in general,countries should consider before deciding to enterinto a tax treaty with another country. The workwill be co-ordinated with the work on hybrids.

The OECD has proposed a series of rules to be in-troduced into income tax treaties in a public discussiondraft titled BEPS Action 6: Preventing the Granting

of Treaty Benefits in Inappropriate Circumstances1(hereinafter Action 6 discussion draft). This is, how-ever, merely a consultation draft, and the over-whelmingly critical statements already submitted toand published by the OECD may still prompt it toamend or even withdraw the proposals.2 Nevertheless,the formulations chosen in this public discussion draftindicate that the OECD will be focusing its efforts oncommenting on the rules under discussion in more de-tail instead of reviewing the rules on their merits. TheOECD is explicitly asking for proposals on how to de-sign the OECD commentary on these rules.3

The public discussion draft contains the draft forArticle X, Entitlement to Benefits, the first five para-graphs of which are described therein as specific anti-abuse rule aimed at treaty shopping and again, ac-cording to the OECD, are based on rules alreadycontained in several income tax treaties.4 The U.S. trea-ties are mentioned first, followed by those of Japanand India.5 These first five paragraphs of Article X aremeant to establish a limitation on benefits provision.

Action 6 discussion draft also contains a proposalfor Article X(6),6 Rules aimed at arrangements one ofthe main purposes of which is to obtain treaty ben-efits:

1OECD, Action 6 discussion draft, at 5.2See the numerous and partly detailed statements in OECD,

Comments Received on Public Discussion Draft BEPS Action6: Preventing the Granting of Treaty Benefits in InappropriateCircumstances (2014).

3OECD, Action 6 discussion draft, at 10.4OECD, Action 6 discussion draft, at 5.5See id.6See OECD, Action 6 discussion draft, at 10.

Michael Lang is head ofthe Institute for Austrianand International Tax Lawat WU (Vienna Universityof Economics and Busi-ness) and director of thepostgraduate LLM Pro-gram in International TaxLaw and of the DoctoralProgram in International

Business Taxation at that university.

The author would like to thank Draga Turic forher discussion of the manuscript and her sup-port in the creation of annotations and inproofreading. A German-language version ofthis article will be published later this year in abook edited in memory of Franz Helbich.

TAX NOTES INTERNATIONAL MAY 19, 2014 655

(C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

Notwithstanding the other provisions of this Con-vention, a benefit under this Convention shall notbe granted in respect of an item of income if it isreasonable to conclude, having regard to all rel-evant facts and circumstances, that obtaining thatbenefit was one of the main purposes of any ar-rangement or transaction that resulted directly orindirectly in that benefit, unless it is establishedthat granting that benefit in these circumstanceswould be in accordance with the object and pur-pose of the relevant provisions of this Conven-tion.

The OECD proposal definitely reflects the currenttrend many countries have recently introduced gen-eral antiavoidance rules or have seriously consideredtheir introduction. The European Commission has ex-plicitly recommended the creation of those clauses toits member states, yet it proposed a wording that hasso far been met with little positive response.7 Draft di-rectives, such as those on the introduction of a com-mon consolidated corporate tax base (CCCTB)8 or afinancial transaction tax,9 and proposals for the amend-ment of existing directives (such as that on the parent-subsidiary directive10) also contain formulations forthose clauses. These proposals, however, vary not justin detail. Little international consensus exists on howthese rules must be designed and whether they are use-ful at all.

Changes to existing income tax treaties always carrythe risk of the reverse conclusion.11 If, therefore, a rulelike the proposed Article X(6) is introduced in newincome tax treaties and in existing treaties with futureeffect and is not simultaneously included in all treaties,the question will inevitably arise as to what relevancethe principles enshrined in this rule have beyond theirscope of application. The absence of such a rule inseveral treaties will lead some interpreters to believethat precisely these principles are not binding therein.Although such an argumentum a contrario is methodi-cally very problematic, particularly regarding treaties,12

experience has shown that some courts will unavoid-ably draw exactly that conclusion. This will not changeeven if the OECD commentaries repeatedly and em-phatically point out that those rules are only for clarifi-cation purposes. In the past, rules that brought aboutchanges in substance have all too often been falselydeclared as clarifications so as to provide tax adminis-trations with better arguments in favor of their applica-tion with retroactive effect.13 Meanwhile, explicit refer-ences to the clarifying character of some rules are evenfurther fueling the suspicion that their actual intentionis to bring about substantive change. It is difficult tounderstand why a rule should prescribe something thatis not even necessary. For all these reasons, the OECDshould be cautious in proposing new rules because ofthe obvious risk that the substance of various treatieswill begin drifting apart. New rules only make sense iftheir benefits clearly outweigh the misgivings aboutthem. We will now examine in more detail whetherthere are more reasons in favor of the introduction ofan Article X(6) into the OECD model treaty.

Scope of ApplicationThe scope of application of a rule corresponding to

Article X(6) to be introduced into a treaty is limited tothe respective treaty. The rule refers to the benefit un-der this Convention. Although that rule cannot leadto the conclusion that something else definitely appliesbeyond its scope of application, tax benefits granted onthe basis of domestic tax law could not be denied byinvoking that rule. It is equally inconceivable that thatrule could resonate with other treaties and provide alegal basis for denying benefits under other treaties con-cluded by one of the contracting states or even bycompletely different states. A rule in a bilateral treatycorresponding to Article X(6) cannot even cover otherinternational law treaties concluded between the samecontracting states even if they have the same orsimilar personal or substantive scope of application.

Interestingly, the scope of application of the pro-posed rule in Article X(6) does not even extend to theentire treaty. According to that rule, the benefit will notbe granted in respect of an item of income. There-fore, it does not cover, for instance, the taxes on capitalcovered by the substantive scope of application of theOECD model.

A benefit under this Convention must refer to abenefit resulting from the treaty. Definitions such asthose provisions based on article 3 of the OECDmodel alone will not suffice, since no legal conse-quences result. This also applies to the definition ofresidence in article 4 of the OECD model. Even the

7See Michael Lang, Direkte Steuern und EU-Steuerpolitik Wo bleiben die Visionen? IStR 2013, 365 (367f).

8Proposal for a Council Directive on a Common Consoli-dated Corporate Tax Base (CCCTB) COM(2011) 121/4, at 48.

9Proposal for a Council Directive implementing enhancedcooperation in the area of financial transaction tax COM(2013)71, at 30.

10Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the caseof parent companies and subsidiaries of different Member States,COM(2013) 0814, at 10.

11Regarding the problem of the reverse conclusion afteramendment of article 3(2) of the OECD model, see Lang, Ten-denzen in der Rechtsprechung des sterreichischen Verwaltungs-gerichtshofs zu den Doppelbesteuerungsabkommen, IFF 2012,26 (32).

12See Lang, IFF 2012, 26 (32 et seq.).

13See Lang, Her Majesty the Queen v. Peter Sommerer: Abkom-mensrechtliche Fragen der Zurechnung von Einknften, in:Fitz, Kalss, Kautz, Kucsko, Lukas, and Torggler (publisher), Fest-schrift fr Hellwig Torggler (2013) 713 (722f).

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656 MAY 19, 2014 TAX NOTES INTERNATIONAL


rules on the personal and substantive scope of applica-tion of the income tax treaty in those provisions basedon articles 1 and 2 of the OECD model do not inthemselves convey a benefit. In the end, such a benefitmust result either from the distribution rules (articles 6to 8, and 10 to 21) and usually in the source state, orfrom the methods article in the state of residence. Itappears odd when the protection from discriminationderived from article 24 of the OECD model is seen asa benefit that can be obtained abusively. This is obvi-ously how the authors of the draft see it.14 On theother hand, the proposed rule of Article X(6) canhardly affect article 28 of the OECD model, whichrefers to the fiscal privileges of members of diplomaticmissions or consular posts. This rule merely makes itclear that the treaties based on the OECD model arenot applicable. The privileges result from the generalrules of international law or under the provisions ofspecial agreements and not from a treaty.15

It is questionable whether the authorization to initi-ate a mutual agreement procedure and subsequently anarbitration procedure according to article 25 of theOECD model could also be denied by invoking theproposed rule of Article X(6). These procedural rules,however, will not in themselves contain a benefit un-der this Convention, since this procedure primarilyserves to help the administrative authorities of the twostates to exchange views on whether there is a risk of ataxpayer obtaining a benefit he is not entitled to.

The question whether the application of the rules oninformation exchange and mutual enforcement assis-tance can also qualify as a benefit under this Conven-tion may prima facie appear ironic. In most cases, theimplementation of mutual assistance does not bring abenefit to the affected taxpayers; it is often detrimentalto them. On the other hand, it also gives administrativeauthorities the opportunity to obtain a better picture ofthe facts and can thus help taxpayers enforce theirclaims under the treaty. In this case, however, whenconsidered in isolation no benefit results from thetreaty anyway, but these procedural provisions servethe enforcement of other treaty provisions. When itcomes to information that allows the application ofdomestic law, one can for this reason alone not speakof a benefit under this Convention. This also appliesto the assistance in the collection of taxes referred to inarticle 27 of the OECD model. Occasionally, however,domestic rules (especially in EU member states) attachbenefits to the condition that comprehensive mutualadministrative and enforcement assistance applies to aspecific state. In this case, however, a benefit resultingfrom domestic law is under consideration and not a

treaty benefit, so that for this reason the proposed ruleof Article X(6) cannot be effective.

The benefit under this Convention, stipulated as arequirement for the application of Article X(6), alsoraises other interpretation issues. Obviously, what ismeant is that the tax situation would have to improvefor the taxpayer as a result of the application of one orseveral treaty provisions as compared with the domes-tic legislation so that one can speak of a benefit. Butdoes this refer to taxation in one of the contractingstates, or is an overall consideration of the tax burdensin both contracting states required? If the arrangementchosen by the taxpayer is geared toward the applicationof a withholding tax reduction under the treaty, thiswould reduce the tax burden for the taxpayer in thesource state but not necessarily the overall tax burden.This is because the lower withholding tax burden onlyhas an impact on the distribution of the taxation rightsbetween the two states if merely the state of residencebenefits, which is obliged to credit a lower foreignwithholding tax, thus reducing its forgone tax revenue.It is difficult to assume a benefit for the taxpayer inthat situation. Although the higher tax remaining inthe state of residence can increase the possibility ofcrediting other foreign taxes there, this benefit can bethen at most attributed to the same treaty if the foreigntax originates from the same contracting state. When itcomes to crediting taxes of other states, one cannottalk of a benefit under this Convention. But even ifthe obligation to credit taxes also results from unilat-eral rules in the absence of a treaty application, it ishighly questionable whether there is a benefit at all asa result of the treaty.

The benefit cannot only result from the taxpayerattempting to be covered by a withholding tax reduc-tion under the treaty, but by a more favorable one thanhe would otherwise be entitled to. He could thereforeaim at being treated subject to the often more favorablerule of article 11 of the OECD model on interest thanthat of article 10 of the OECD model, or even subjectto the dividend rule for parent-subsidiary situationsthan the portfolio investment dividend rule within ar-ticle 10(2) of the OECD model. According to the pub-lic discussion draft, a benefit under this Conventioncan also exist when the benefit does not only result incomparison to the application of domestic law but alsoin comparison to another otherwise undisputedly appli-cable treaty provision.

It is more difficult to answer the question whetherthe proposed rule of Article X(6) will come into effect,even if the taxpayer wants to use creative measures tohave its income fall under a different distribution rulewith the intention of reducing his withholding tax be-cause a higher calculated from the gross amount withholding tax would exceed the maximum tax creditin the state of residence and double taxation wouldtherefore not be eliminated. In that case, the taxpayeris attempting to bring about the effect intended by thetreaty (that is, avoiding double taxation). It would be

14See remarks in OECD, Action 6 discussion draft, at 11.15See Daniel S. Smit, General Report, in: Lang, Pistone,

Schuch, Staringer, and Storck (eds.), Tax Rules in Non-Tax Agree-ments (2012), 1(7).

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odd if the tax administration of the source state deniedthis to him by invoking the antiabuse rule. The envis-aged benefit would then probably be in accordancewith the object and purpose of the relevant provisionsof this Convention.

The overall tax situation, however, is not always thedefining factor. Within the scope of application of theexemption method, a benefit may in itself result simplywhen the taxpayer is aiming to benefit from the legalconsequences of a distribution rule more favorable tohim in the source state. Similarly, the efforts of the tax-payer to fall under the exemption method instead ofthe credit method and thus completely rule out taxa-tion in this country may be covered by Article X(6) inthe state of residence.

Obviously, the introductory phrase Notwithstandingthe other provisions of this Convention is meant to ex-press that more specific antiabuse rules should not ex-clude the application of Article X(6). This is by nomeans self-evident, if one considers the opposite case lawof the German Federal Tax Court on the relationshipbetween the general antiabuse rule of section 42 of theTax Code (Abgabenordnung) and the more specificantiabuse rules in German tax law.16 It is questionablewhether it makes sense to precisely describe situationssusceptible to creative setups in the treaty, only to extendthe legal consequences provided therein to other situa-tions beyond the scope of application of these specificrules through the general antiabuse rule. When, for in-stance, the immovable property clause of article 13(4) ofthe OECD model covers the alienation of shares deriv-ing more than 50 per cent of their value directly or indi-rectly from immovable property, it is hard to understandwhy the general antiabuse rule should in some cases re-duce the percentage to 50 percent or less.

The same applies to the application requirements ofan LOB rule defined in detail in the draft of ArticleX(1)-(5). The specific antiabuse rules are thus runningthe risk of becoming irrelevant. By the same token,however, the opposite opinion may prevail in case law.The in accordance with the object and purpose of therelevant provisions requirement (discussed below)could in those cases deprive the general antiabuse ruleof its scope of application. After all, the object andpurpose of specific antiabuse rules is to clearly definethe dividing line between those arrangements that con-vey the envisaged benefit and those that no longer do.In any event, the coexistence of general and specificantiabuse rules leads to additional ambiguities. Theattempt to vest tax administrations with both generaland specific antiabuse rules, thus providing them withparticularly potent weapons, may have the reverse ef-fect: In many years time, courts will perhaps establishthat these antiabuse rules are largely irrelevant.

Main PurposeThe essential application requirement for the pro-

posed rule is the subjective criterion obtaining abenefit must be one of the main purposes in orderto trigger the legal consequences of Article X(6). Thedifficulty of that criterion is obvious because it is im-possible to prove an intention. Although the Action 6discussion draft euphemistically speaks of the need tocarry out an objective analysis of the aims and objectsof all persons involved,17 the declared objective is todraw conclusions on the intention of the acting indi-viduals on the basis of that objective analysis. Sub-jective criteria can always be deduced on the basis ofexternal facts, yet the truth remains that those motivesare impossible to prove. Therefore, legislators abstain,when possible, from attaching fiscal consequences tothe existence of such an intention. One of the rare andno less problematic exceptions in treaty law is article19(1)(b)(ii) of the OECD model, according to whichthe state of residence has the taxation right for incomefrom government when the services are rendered inthat state of residence and the individual did not be-come a resident of that State solely for the purpose ofrendering the services.

In those cases, the rules on the burden of proofusually determine the result. If, as part of its officialduty of investigation, the tax authority must furnishproof that one of the main objectives of the taxpayerwas to obtain the benefit, it is already fighting a losingbattle. Alternatively, the taxpayer has no chance offending off the accusation of abuse if it is up to him tofurnish evidence that benefiting from one or severaltreaty provisions was not one of his primary motives.Against this background, Article X(6) does not leavethis procedural question up to the domestic law of thecontracting state but regulates it itself. If it is reason-able to conclude that one of the main objectives ofthe taxpayer was to obtain the benefits of the taxtreaty, Article X(6) comes into effect. On the one hand,this rule puts the ball in the tax authoritys court,which must draw this conclusion and justify it as well.On the other hand, the requirements are not too de-manding it must be merely reasonable but not,for instance, compelling. Therefore, the tax authoritydoes not need to produce full evidence thereof.18 Therule thus attempts to establish a balance between theinterests of the authority and those of the taxpayer.The bias in favor of the tax authority, however, is fairlyobvious, a fact that was also critically commented inseveral statements submitted to the OECD.19 In prac-tice, furnishing evidence of the motives will thereforenot be relevant, but tax authorities will be tempted topresume intention simply because of the presence of a

16See Federal Fiscal Court, Dec. 15, 1999, I R 29/97; Jan. 19,2000, I R 94/97; Mar. 20, 2002, I R 63/99; May 31, 2005, I R74/04.

17OECD, Action 6 discussion draft, at 12.18Similarly, id.19See supra note 2.

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benefit. For this reason alone, the subjective criterionruns the risk of not gaining any significance in itself.

The explanations provided in the public discussiondraft clearly indicate that the required subjective crite-rion must not necessarily lie with the taxpayer whowould actually claim the benefit. This is implied by thewords directly or indirectly.20 If, therefore, a groupcompany transfers an income source to a company ofthe group resident in another state, and this other com-pany can benefit from a more favorable treaty, itshould be possible to apply Article X(6), although thedriving force behind the arrangement is the transferringcompany, which from the groups overall perspective isprobably targeting a tax benefit. This benefit, however,has an effect on the receiving company. Yet it could bedisputed even in this case, because without an incomesource, this company would probably not have a taxburden to bear. Therefore, it would not require the ap-plication of the treaty at all. If one considers this caseto be covered under Article X(6), then (even if this isnot expressly dealt with in the public discussion draft)that rule would also apply within a family if themother bestows her daughter resident in another statewith income-generating assets, thus achieving a morefavorable tax treatment of this income due to treaties.The fact that the transfer is legally effective under civillaw and thus triggers consequences under corporateand inheritance law, as well as other consequences,seems to be immaterial. As a result, the scope of appli-cation of the rule can be stretched to such an extentthat the actual or alleged intention of an individual (inthis case, the mother) can trigger the denial of fiscalbenefits to another individual (in this case, the daugh-ter). Denying a taxpayer benefits that he would other-wise be entitled to because of the allegedly detrimentalmotive of another taxpayer is problematic.

An examination of legal developments in the Euro-pean Union will reveal that there are different manifes-tations of the subjective criterion. In its judgment inthe Halifax case, the European Court of Justice de-manded that the essential aim of the transactionsconcerned must be to obtain a tax advantage for anabusive practice to be found to exist.21 This definitionwas seized upon by the European Commission when itproposed the introduction of a general antiabuse rulein its recommendation for the fight against aggressivetax planning.22 Subsequently, it used the same defini-tion in its proposals for the adoption of a directive onthe financial transaction tax, and for the amendment tothe parent-subsidiary directive.23 The ECJ, however, did

not remain consistent in its terminology and spoke of aprincipal aim in its judgment in the Part Servicecase.24 Even the European Commission changed itsterminology; in article 80 of its proposal for a directiveon the CCCTB, the commission demanded that trans-actions must be carried out for the sole purpose ofavoiding taxation.25 The European Parliament votedin favor of withdrawing these requirements and replac-ing the sole purpose with the main purpose.26

The OECD proposals make it easier for tax admin-istrations to assume an abuse. It is by no means re-quired that the sole purpose of the arrangementmust consist in obtaining a tax benefit. It does not evenhave to be an essential, principal, or even themain purpose. Instead, it suffices if one of the mainpurposes of a transaction is to obtain a benefit. There-fore, the rule assumes that not merely one main pur-pose but two or even several main purposes can exist.So even if the taxpayer succeeds in providing proofthat the arrangement he chose is also motivated by rea-sons other than fiscal ones, the tax authority can retortthat, for the antiabuse rule to apply, it suffices if he alsotargeted the tax benefit. Even if the taxpayer can suc-cessfully present his nonfiscal motive as the main pur-pose, it may still not be enough since according to therule, several main purposes can exist for an arrange-ment. The accusation of abuse applies even if the tax-payer, apart from one or even several nonfiscal mainpurposes, also targeted the main purpose of obtaininga treaty benefit. It remains unclear what criteria mustapply in distinguishing between main purposes andsecondary purposes on the one hand, and between dif-ferent main purposes on the other. This distinction,however, is paramount for the application of ArticleX(6) and thus for the foreseen legal consequences.

The criteria discussed in the EU not only are morebalanced and comparatively easier to handle, but alsohave an additional advantage that should not be underes-timated. Their interpretation, should they be imple-mented, is determined in a binding manner by the ECJ, acourt that is vested with the monopoly on the interpreta-tion of EU legislation and is decoupled from the fiscalinterests of the individual member states. In the longrun, this at least guarantees a common understanding ofthe subjective criterion. Treaty practice, on the otherhand, can drift apart. National courts may reach com-pletely different judgments, and they are often unable tofree themselves from the fiscal interests of their state. Indubio pro patria (when in doubt, for his country) seems tobe a principle that often determines the case law on trea-ties. Even awards of bilateral arbitration boards do not

20See OECD, Action 6 discussion draft, at 6.21Halifax (C-255/02), Feb. 21, 2006, I-1609, para. 75.22Critical comments on this by Lang, Aggressive Steuerpla-

nung eine Analyse der Empfehlung der Europischen Kom-mission, SWI 2013, 62 (62ff).

23See supra notes 9 and 10.

24Part Service (C-425/06), Feb. 21, 2008, I-897, para. 45.25See supra note 8.26European Parliament legislative resolution of Apr. 19, 2012,

on the proposal for a Council directive on a Common Consoli-dated Corporate Tax Base (CCCTB) COM(2011) 0121, C7-0092/2011, 2011/0058(CNS).

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have a binding effect going beyond the specific case. It isnot even guaranteed that they will be taken into accountin the interpretation of identical rules in another treaty.The result can be double taxation. The vaguer a rule is,the greater the risk that national courts will reach differ-ent results in their interpretation.

Therefore, it remains to be seen whether a rule likeArticle X(6), when understood as a separate elementwith an independent normative significance, can sur-vive in constitutional legal systems characterized by therule of law.27 It does not come as a surprise that theconfiguration of the subjective criterion was severelycriticized in many of the statements submitted to theOECD.28 It is hard to ignore the conflict with the legal-ity principle, which usually requires that rules are clearand their application is predictable and not left to thediscretion of the tax authorities and the courts. Simi-larly, in many states constitutional provisions requirethe equal treatment of comparable cases. It remains tobe seen whether the unequal treatment of identical ar-rangements, which differ from each other only in thatthe taxpayer has in some cases managed to present theenvisaged benefit only as a secondary purpose, willsuffice to meet these requirements, and it will have tobe separately debated in each state and will probablyhave to be answered in a different manner against thebackdrop of different constitutional frameworks.

The OECD draft is attempting to defuse the criti-cism by repeatedly pointing out in its explanations howmeticulously the tax administrations will have to con-sider the facts and circumstances in the application ofthese rules. These explanations also attempt to relaxthese criteria and literally relativize their significance.This is also reflected by the fact that the OECD invitesinterested parties to submit further proposals for thecommentary on this rule. Some of the authors of thesestatements emphasize the need for clarifying explana-tions and examples in the OECD commentary.29 Theyobviously nourish hope that the rule can be mitigatedby the OECD commentary. Yet these experts seem tooverlook that, at the end of the day, the tax administra-tions and the courts will be applying the rule, not theOECD commentary. Regardless of whether one at-taches only secondary relevance to the OECD com-mentary in the interpretation of treaty rules accordingto article 32 of the Vienna Convention on the Law ofTreaties (VCLT), or even sees it covered under article31(2) or (4) of the VCLT,30 its importance will nevermatch that of a treaty provision. An opinion in the

OECD commentary that relativizes, and thus contra-dicts, the rule itself is most likely to be ignored alto-gether, and rightly so. Those who regard the subjectivecriterion stipulated in Article X(6) as unsuitable mustoppose the rule itself.

Object and PurposeArticle X(6) also stipulates another requirement, for-

mulated as an exception: If the subjective requirementapplies, the envisaged benefit will not be granted un-less it is established that granting that benefit in thesecircumstances would be in accordance with the objectand purpose of the relevant provisions of this Conven-tion. Different procedural standards become obvioushere. While for the subjective criterion it suffices if it isreasonable to conclude, an exception can only applyif the requirements for it are established. Here, thebias in favor of the tax authorities is downright pal-pable. Many of the statements submitted to the OECDeven expressed the concern that the burden of proofwould rest exclusively with the taxpayer.31

The fact that this criterion was formulated as an ex-ception is irrelevant. Although literature and unfortu-nately sometimes even the ECJ case law states thatexception rules are to be narrowly interpreted,32 todaythis position is evidently obsolete and methodically un-tenable.33 Article X(6) underscores that the question ofwhether a requirement is formulated as an exceptiondepends on legal drafting and thus on coincidences inthe legislative procedure. There are no reasons to as-cribe a different tenor to the rule if it were formulatedso that its application would also require, in additionto the taxpayers motive, that the granting of a benefitmust oppose the object and purpose of the relevanttreaty provisions. Besides, Article X(6) is designed asan exception to the otherwise granted treaty benefits;therefore, the reference to the object and purpose ofthe rule would be an exception from the exception and,as a result, not an exception at all but a confirmationof the basic rule. Those who take the view that excep-tion rules should be narrowly interpreted would haveto interpret this requirement even more widely. All ofthis demonstrates how ill-founded the theory of thenarrow interpretation of exception rules is.

I find the fear expressed in some statements that theemphasis on an interpretation in accordance with the

27On the debate in Austria, see Christoph Ritz, BAO-Kommentar 5 (2014), section 22 Rz 5.

28See supra note 2.29Id.30See Lang and Florian Brugger, The Role of the OECD

Commentary in Tax Treaty Interpretation (2008), 23 Austl. TaxF. 95 (95ff).

31See supra note 2.32See Oude Luttikhuis (C-399/93), Dec. 12, 1995, I-4515,

para. 23; Commission v. France (C-384/01), May 8, 2003, I-4395,para. 28; Commission v. France (C-94/09), May 6, 2010, I-4261,para. 29; Commission v. France (C-492/08), June 17, 2010, I-5471,para. 35.

33See Hans Georg Ruppe, Die Ausnahmebestimmung des Einkom-mensteuergesetzes (1971), at 28; Gerold Stoll, Das Steuerschuldver-hltnis in seiner grundlegenden Bedeutung fr die steuerliche Rechtsfind-ung (1972), at 104; Lang, Doppelbesteuerungsabkommen undinnerstaatliches Recht (1992), at 75f.

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object and purpose of the relevant provisions in Ar-ticle X(6) would give tax administrations the opportu-nity to apply the law as they please to be unjustified.For an experienced lawyer, it is evident that the objectand purpose of legal provisions must always be takeninto account in their interpretation. Any interpretationthat contents itself with the mere wording of a rulewould indeed not correspond to the state of the art oflegal method. Even those holding the view that thewording of a rule is not just the beginning of the inter-pretation but also defines its limits will have to realizethat the wording alone is most rarely so unambiguousso as to allow for the interpretation of a rule whileignoring its object and purpose. Therefore, the interpre-tation of all rules, both favorable and unfavorable, mustalways consider their object and purpose, not onlywhen it is assumed that one of the main motives ofthe taxpayer was to obtain any benefit. For interna-tional law treaties, article 31 of the VCLT confirms theuniversal significance of focusing on the object andpurpose of a rule in its interpretation.

Especially against this background, however, thequestion arises regarding why a separate rule is re-quired that expressly underscores the relevance of theobjective in the interpretation of treaty provisions whileit also seems to attach this to the requirement that thetaxpayer is attempting to obtain a benefit from the cho-sen arrangement. A conceivable interpretation wouldbe to draw the reverse conclusion from it and assumefor other cases not explicitly covered by Article X(6) that the object and purpose of the rules must beignored in their interpretation, and that the interpretermust restrict himself to the mere wording, consideringhistoric developments and context at most. Article X(6)would then have to be understood as a positivist inter-pretation rule, sending us back to the stone age of legalmethod, and as a deviation from the interpretation ruleof article 31 of the VCLT, in which object and purposeof the rules are particularly emphasized for the inter-pretation of international treaties. For several reasons,however, that understanding of Article X(6) is anythingbut evident.

First, the explanations in the public discussion draftdo not contain any clues indicating that the mainmeaning of this rule is to be found beyond its actual scopeof application and that the interpretation of treaty law asa whole should change dramatically. Second, ignoringthe object and purpose in its interpretation is hardlypossible, since the individual aspects of the interpreta-tion process, which aims at establishing the meaning asa whole, are inextricably linked with each other andcannot be split and divided at will. Third, one canbarely assume that the intention of Article X(6) is toprovide the benefit to the taxpayer when the authoritiesare unable to reasonably conclude that one of themain purposes of a transaction was for a benefit undera tax treaty to be obtained, even if this is not consis-tent with the object and purpose of the rule that gov-erns the benefit.

Therefore, a different interpretation of this rule ismore evident, which can a priori eliminate otherwisetangible concerns against it. Article X(6) stresses that abenefit under the model can only be granted if it is inaccordance with the object and purpose of the model.Even if Article X(6) particularly emphasizes the case inwhich one of the main purposes of the taxpayer isgeared toward obtaining this benefit, this rule does notexclude that in all other cases, too, benefits are onlygranted if this is in accordance with the object andpurpose of these rules. Therefore, the interpretation ofa treaty always depends on the object and purpose ofthe rule. Against this background, however, the motiveof the taxpayer, which was also mentioned as a re-quirement in Article X(6), is rendered insignificant which motives are behind the taxpayers actions is irrel-evant. Article X(6) does not have an independent legalsignificance but merely underlines the already evidentneed for interpretation to be based on the object andpurpose of the rules. Therefore, the rule is a mere hintfor the interpretation and totally expendable. It is neverpossible to interpret rules while ignoring their objectand purpose.

Legal Consequences

Those who disagree with the above opinion and re-gard Article X(6) as a separate exception that justifiesthe denial of benefits under a treaty must also addressthe legal consequences of this rule. The wording of therule is concise: The benefit shall not be granted. Theconsequence that the envisaged benefit should not begranted, however, does not yet suffice to get us out ofthe woods. The question here is which treaty provisionshould be applied instead: none or a different one, and,if so, which one?

If, for instance, a shareholder capitalizes his com-pany resident in the other contracting state with debtinstead of equity so that the consideration falls underthe treaty provision based on article 11 (and not article10) of the OECD model and so as not to pay anytaxes instead of the 15 percent withholding tax pro-vided for in article 10 of the OECD model becausethe specific treaty allocates the right to tax interest ex-clusively to the state of residence the application ofArticle X(6) will result in the non-application of thearticle on interest. Does this, however, mean that noneof the distribution rules of the treaty apply, and thatthe source state collects the withholding tax providedunder its domestic law, so that the treaty is no longerrelevant? Or is the rule based on article 11 of theOECD model to be ignored and the catch-all provisionof article 21 of the OECD model to be applied in-stead? As a rule, however, this would not alter the re-sult, since under this provision the source state doesnot have a taxation right either. Or is the legal conse-quence of the provision based on article 10 of theOECD model relevant instead, and the taxation right

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should, for instance, be reduced to 15 percent? Accord-ing to the meaning of the rule, the option last men-tioned is the more obvious. Yet Article X(6) only refersto the rule that should not be applied, without deter-mining the application of the suitable rule. The re-duction to 15 percent is only justifiable if one onlyconsiders the envisaged reduction of the withholdingtax from 15 percent to 0 percent as the benefit to bedenied, but not the application of the article on inter-est.

This also raises the question regarding what thismeans for the state of residence. Article X(6) does notexplicitly address only one of the two contractingstates, so that the provision could be applied in bothstates. It does, however, refer to the benefit that thetaxpayer, based on the chosen arrangement, only envis-aged in the source state, at least in the underlying ex-ample, and which only there was denied to him. If,however, the consequence thereof is that the state ofresidence continues to apply the interest article of thetreaty and, as a result, considers itself as being exclu-sively entitled to tax the income (without crediting atax collected in the other contracting state) this willlead to double taxation. It is questionable whether sucha result is conclusive. It may seem fair at first thatthose who are intent upon exploiting the benefits undera treaty should accept that they may not obtain theenvisaged benefit but also not become exposed todouble taxation. The wording of Article X(6), however,contains no indication that those penalizing conse-quences are to be drawn from this rule. Income taxtreaties do not contain criminal law provisions. Thosewho, like the OECD Committee on Fiscal Affairs in itspartnership report and subsequently in the commentaryon the OECD model, solve qualification conflicts be-tween the source state and the state of residence bystipulating that the residence state must avoid doubletaxation34 should also plead this case here. When with-holding tax is collected in the source state under thisConvention, this could prompt the state of residenceto credit this withholding tax or to exempt the income.The only objection against this would be that thisqualification conflict is based not on diverging nationalregulations but on the application of different treatyprovisions in the two states.35 The wording of article23A and B does not, however, make a distinction ac-cording to whether the other state regards itself as en-

titled to taxation under this Convention because ofthis, since this qualification conflict originates in do-mestic law.36

Those who consider the legal consequences providedfor dividends appropriate and therefore advocate awithholding tax not exceeding 15 percent in the sourcestate by invoking Article X(6) could also be in favor ofthe application of the same statutory provision in thestate of residence and demand the crediting of thewithholding tax there under the treaty provisions basedon articles 10 and 23 of the OECD model. This wouldeliminate the otherwise imminent risk of double taxa-tion. From the point of view of the state of residence,however, this would raise the question as to why thisstate must waive tax revenue because the taxpayeraimed at a tax benefit not intended for him and there-fore fell under the scope of Article X(6). One couldargue that if the arrangement had been appropriatebeforehand, the shareholder would have financed hiscompany with equity in the first place and would havereceived dividends accordingly. In this case, the state ofresidence would have to credit a withholding tax notexceeding 15 percent in accordance with the treaty pro-visions based on articles 10 and 23 of the OECDmodel.

The problem is even more complicated in situationsinvolving three states. The following case could illus-trate this: A taxpayer resident in state A holds sharesin a company resident in state C and transfers hismostly debt-financed participation in the company to asubsidiary resident in state B, due to the lower with-holding tax rates admissible in the state B treaty. Theallegation is that this main purpose will cause therule otherwise provided for in the treaty between Cand B not to be applied, according to which the with-holding tax must be reduced to 10 percent. If thetreaty between A and C provides for a maximum of 15percent withholding tax for dividends, does this meanthat the denial of the envisaged benefit under the treatybetween B and C will result in state C having to applythe article on dividends from the treaty between A andC instead, or that at least the legal consequence stipu-lated therein becomes relevant and the withholding taxis limited to 15 percent?

The underlying and more far-reaching question iswhether Article X(6) ultimately feigns that the divi-dends from the company resident in state C are paiddirectly to the partner resident in state A, and whichconsequences this will possibly have for the other statesand taxpayers involved. Must state A therefore creditthe withholding tax of state C admissibly collected ac-cording to the treaty between A and C to the income34See OECD, The Application of the OECD Model Tax

Convention to Partnerships, in: OECD, Issues in InternationalTaxation No. 6 (1999), para. 25; critical comments by Lang, TheApplication of the OECD Model Tax Convention to Partnerships (2000),37ff.

35See Helmut Loukota, Der Einfluss des Ertragsteuerrechtesauf die Auslegung von Doppelbesteuerungsabkommen, in:Beiser, Kirchmayr, Mayr, and Zorn (publisher), Ertragsteuern inWissenschaft und Praxis (2007), 263 (280f).

36Critical comments by Lang, Personengesellschaften undDoppelbesteuerungsabkommen, in: Bertl, Eberhartinger, Egger,Kalss, Lang, Nowotny, Riegler, Schuch, and Staringer (publisher)Personengesellschaften im Unternehmens- und Steuerrecht (2013), 225(239ff).

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tax collected on the level of the partner, although thedividends originate from the company in state B andthus not from state C at all? Under which treaty isstate A obliged to do so? Or does the obligation ofstate B to credit the withholding tax paid in state Caccording to the treaty between B and C also remain ineffect? And if this obligation remains in effect, mustthe amount to be credited remain unlimited (that is,must the tax be credited regardless of the amount col-lected in state C according to its domestic law)? Ormust the tax be credited in accordance with the divi-dend article of the treaty between B and C, which,however, is not applicable to state C due to ArticleX(6)? Or must state B credit the highest withholdingtax admissible in state C according to the treaty be-tween A and C?

These questions are only touched upon here. Buteven if they were addressed in greater detail, the an-swers would not be more gratifying. The dilemma re-mains the same if one understands Article X(6) as ataxation rule with its own requirements and legal con-sequences. If one regards this rule only as an order toabolish specific treaty benefits in one state, this ruleleads to double taxation and has penalizing effects.Whoever refuses to accept these consequences mustderive from Article X(6) a fiction that goes beyond thearrangement considered appropriate. One would thenbe facing similar difficulties to those often encounteredin the application of GAARs: Those who interpret alegal provision as an entitlement to the fiction of factsmust answer the question of how far this fictionreaches and when it will be replaced again by the realfacts.37 Reestablishing the actual facts of taxation willlead to seemingly arbitrary and thus unsatisfactory con-sequences.

Concluding Summary

The analysis carried out here shows that upon closerexamination, the proposed antiabuse rule turns out tohave no legal relevance. Yet the mere existence of thisrule will cause uncertainty, and individual tax adminis-trations and courts will not be deterred from using it asa basis for the denial of treaty benefits. If such a ruleis actually introduced into income tax treaties, its inter-pretation and application will be dealt with intensivelyboth in practice and in theory. The criticism containedin the statements submitted to the OECD is directedagainst the design of the rule, unilaterally geared to-ward the interests of tax administrations, but notagainst such a rule altogether.38 The difficulties noted

herein, however, are not only attributable to the detailsof the rule. Similar and equally justified criticismwould also be directed against any other tax rule thatmakes combating tax avoidance subject to a combina-tion of objective and subjective requirements.

At first glance, the OECD proposal to introducesuch a general antiabuse rule in the treaty is a conve-nient solution for all sides. In this manner, the OECDwould have implemented part of its action plan andintroduced measures. That quick success can be sold inthe media as another tool in the fight against tax evad-ers. Tax administrations would receive an additionalinstrument to deny tax benefits that seem suspicious tothem. Understandably, companies reluctantly resistsuch a rule, which is often directed primarily against itsproposed design.39 Many obviously presume that acareful preparation will allow them to dispel the im-pression that an envisaged tax benefit had priority inthe planning of a transaction. The resulting additionaleffort required for tax planning considerations will, inturn, benefit consultants the most. If they succeed indispelling the suspicion that obtaining a benefit was amain purpose, companies and consultants can rely onthe mere wording of the treaty provisions for their taxplanning considerations and ignore the object and pur-pose of the rules that could pose an obstacle to theirenvisaged success.

It is precisely for this reason that such a rule is notmerely superfluous but also detrimental to legal cul-ture.40 When it is not certain whether an arrangementchosen by a taxpayer is covered by a treaty provision,practitioners will not ask for the object and purpose ofthe treaty provision but will apply a vague antiabuseprovision instead, and the facts will be assessed basedon the practitioners legal instinct and not from the law.Alternatively, tax administrations and courts will betempted to restrict themselves to the alleged clearwording and to ignore the object and purpose of thelegal provisions. The application of law, however, willeventually be impoverished if it limits itself to theprimitive positivism of the naked word.41 The lateGerman Supreme Court judge Ludwig Schmidtpointed out in section 42 of the German CompositionCode (Abgabenordnung) that a good lawyer does notrequire an antiabuse rule,42 since he will apply the te-leological interpretation. A weak lawyer, on the otherhand, will clutch at the straws that general antiabuserules seemingly offer and will hope to avoid the often

37For more on this problem, see Lang and Christian Mas-soner, Die Grenzen steuerlicher Gestaltung in der sterreichis-chen Rechtsprechung, in: Lang, Schuch, and Staringer (pub-lisher), Die Grenzen steuerlicher Gestaltung in der sterreichischenRechtsprechung (2009), 15 (32ff).

38See supra note 2.

39Id.40Already commented on by Lang, SWI 2013, 67 (on the

European Commissions recommendation for the introduction ofabuse rules in the EU member states).

41Walter Antoniolli, Gleichheit vor dem Gesetz, JZ 1956,646 (647).

42See Wolfgang Schn, Ludwig Schmidt (1928-2011), FR2011, 1125 (1125 f).

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painstaking and demanding analysis of the object andpurpose of the rule by resorting to a rule that allowshim to replace the interpretation of the law with hissubjective sense of justice. In his closing arguments inCartesio, former Advocate General Lus Miguel PoiaresMaduro described in reference to Gutteridge the abuseof rights principle as a drug which at first appears tobe innocuous, but may be followed by very disagree-able after effects.43 The OECD should keep its handsoff it!44

Hope can be found in the position of the UnitedStates, which has previously managed to ensure thatthe BEPS proposals do not run contrary to its interests.The LOB rule found in Article X(1)-(5) of the draft,which largely corresponds to the rule in U.S. treatiesand was intentionally not included in other treaties bymany countries, testifies to this. In this manner, theOECD model is adjusted to the U.S. model. In con-trast, rules similar to Article X(6) have so far been re-

jected by the United States. The U.S. Senate has evenmade the approval of the ratification of already negoti-ated treaties conditional on the deletion of a mainpurpose test contained in the treaty.45 The reserva-tions expressed at the time against such a rule wereclearly articulated by the Senate committee:

The new main purpose tests in the proposedtreaty are subjective, vague and add uncertaintyto the treaty. It is unclear how the provisions areto be applied. In addition, the provisions lackconformity with other U.S. tax treaties. This un-certainty could create difficulties for legitimatebusiness transactions, and can hinder a taxpayersability to rely on the treaty.46

These arguments are as convincing now as theywere at the time. If, however, the OECD cannot bedeterred from introducing a general antiabuse rulesimilar to Article X(6) into the model, it will not onlyimpair the quality of the OECD model but will alsocontribute to its loss of significance because not allstates will be able to accept such a rule in their trea-ties.

43Opinion of AG Maduro of May 22, 2008, Cartesio oktat sSzolgltat bt (C-210/06), [2008], I-9641, para. 55 with referenceto H.C. Gutteridge, Abuse of Rights, 5 Cambridge L.J., 22, 44,1933-1935.

44On the recommendation of the EU, see Lang, SWI 2013,68.

45Kristen A. Parillo, Italy-U.S. Tax Treaty Enters IntoForce, Tax Notes Intl, Jan. 4, 2010, p. 37.

46Senate Executive Report 106-8 (1999), 4.

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beps 6.michael lang

Documents

tax treaty

consultation draft

oecd commentary

granting of treaty benefits

treaty abuse

grantingof treaty benefits

treaty shopping

draft forarticle x