BEPS Action 1

The Base Erosion and Profit Shifting (BEPS) Action 1 addresses the issue of treaty shopping, which is the practice of choosing a jurisdiction with a favorable tax treaty to reduce the tax liability of a multinational enterprise (MNE). Action 1 aims to address treaty shopping by introducing the concept of "minimum standard" rules that must be included in all tax treaties, in order to ensure that the benefits of tax treaties are available only to those taxpayers that have a sufficient economic connection to the jurisdiction.

One of the main minimum standard rules introduced by Action 1 is the requirement for a "limitation on benefits" (LOB) provision in all tax treaties. The LOB provision sets out the conditions under which a taxpayer can claim the benefits of a tax treaty, and is intended to prevent treaty shopping by limiting the availability of treaty benefits to taxpayers that have a genuine business presence in the treaty jurisdiction.

The LOB provision typically includes a list of entities and individuals that are eligible to claim the benefits of the treaty, as well as a set of tests that must be satisfied in order to qualify for treaty benefits. These tests may include requirements relating to the ownership and control of the taxpayer, the nature of its business activities, and the extent of its economic presence in the treaty jurisdiction.

In addition to the LOB provision, Action 1 also introduces a number of other minimum standard rules to address treaty shopping, including rules on the abuse of tax treaties, the prevention of artificial avoidance of permanent establishment (PE) status, and the prevention of treaty abuse through the use of conduit entities.

The abuse of tax treaties refers to the use of tax treaties in a manner that is not consistent with the intention of the treaty. This can include the use of treaty provisions to obtain a reduction in tax that is not intended by the treaty, or the use of treaty provisions to obtain a double tax benefit that is not available under domestic law.

The prevention of artificial avoidance of PE status is aimed at preventing MNEs from avoiding the establishment of a taxable presence in a jurisdiction by engaging in activities that do not create a PE under the terms of a tax treaty. This can be achieved through the introduction of a "principal purpose test" (PPT), which requires that a treaty benefit will be denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction.

The prevention of treaty abuse through the use of conduit entities is aimed at preventing MNEs from using interposed entities to obtain treaty benefits that would not be available if the MNE itself were the recipient of the income. This can be achieved through the introduction of a "transparency provision," which requires that information be exchanged between treaty jurisdictions in order to identify and eliminate abusive arrangements.

Overall, the BEPS Action 1 minimum standard rules are intended to ensure that the benefits of tax treaties are available only to those taxpayers that have a sufficient economic connection to the treaty jurisdiction, and to prevent the abuse of tax treaties through the use of artificial or abusive structures. These measures are designed to promote the proper functioning of the international tax system and to ensure that MNEs pay their fair share of tax in the jurisdictions where they do business.