Anti-Avoidance Measures against Treaty Shopping and the Employment of Base Companies

Abstract

The globalisation process and, within the European framework, the implementation of the EU Single Market have led numerous corporations to overstep the national boundaries either to conduct phases of their economic process where it is more convenient or to expand their business abroad. Hence, the involvement of the diverse tax regulations of the countries, whose territories host such businesses, cannot be avoided. Thus, the lack of neutrality of taxation has brought the managers of big corporations to take more and more into consideration tax issues in their decision-making process, especially during crisis periods.

Therefore, multinationals can pursue the aim of optimizing their fiscal burden by exploiting the legal options that the countries involved have given to their taxpayers, which constitute, de facto, the tax competition among the governments. Such planning of the cross-border activities of a business, taking into consideration the different tax laws of the concerned states, is known as tax planning.

This phenomenon is becoming more and more concrete even within the European borders, as companies located in one of the Member States of the European Union are entitled to take advantage of the numerous European directives issued in order to guarantee the European freedoms.

Academic writings about tax planning encompass a great variety of legal matters concerning those operations that may be implemented by corporations to reduce their tax burden. Conversely, the aim of this research is pointing out the most common tax planning schemes, highlighting what are the limitation on benefits (LOB) provisions that are used in the Model Tax Convention on Income and on Capital by the OECD and in the U.S. Model Income Tax Convention and describing how they work with reference to the treaty shopping practice and to the employment of the so-called base companies. In addition, the work by the OECD in BEPS 2015 Final Report is taken into account with reference to the above-mentioned fields and the relevant innovations provided by the document are presented and inspected: those supplementary anti-avoidance provisions are critically analysed in order to provide solutions to their weaknesses and to develop other solutions that enable tax administrations to achieve the same goal.

Furthermore, attention is paid to Action 12 of BEPS 2015 Final Report, whose mandatory disclosure regime can be seen as a means to bypass the need of the anti-avoidance provisions exposed in the research, since the disclosure of the relevant information is set as a legal obligation in such system. Under this perspective, the most suitable implementation of the mandatory disclosure regime is presented by making reference to the main characteristics that distinguish each tax jurisdiction.