Assessing the Shortcomings of BEPS Action 6 and FET Standard as an Interpretive Tool: Why International Taxation still struggles to address tax avoidance

General Anti-Avoidance Rules (GAARs) and Double Tax Conventions (DTCs) were introduced and designed to counteract tax avoidance schemes that do not have a business or commercial purpose and are solely intended to reduce tax liability. Both play an important role in preventing tax avoidance and are used in conjunction with each other to ensure that taxpayers pay their fair share of taxes. However, those instruments often fail to determine the commercial purpose of a transaction or arrangement. Taxpayers may argue that a transaction has a commercial purpose, even if its main aim is to obtain a tax benefit. This can make it difficult for tax authorities to apply GAAR and DTC in a consistent and effective manner.

The problem gets compounded when International Investment Agreements (IIAs) are involved as both get into conflict due to their different objectives: where the IIAs aim to promote foreign investments and protect them, GAAR and DTCs aim to prevent tax abuse. The friction between domestic law and IIAs is as old as the problem of DTCs themselves. However, an attempt was made in Base Erosion and Profit Shifting (BEPS) Action 6 report (BEPS), a part of the OECD/G20 BEPS project, aiming to address the issue of multinational enterprises (MNEs) using tax planning strategies to shift profits to low-tax jurisdiction. Comprehensive changes were introduced to resolve the friction and bring compatibility between domestic GAARs and DTC. The Report was believed to resolve the significant problem of interpretation of the wide provisions of domestic GAARs.

Nevertheless, the recommendations of the Report failed to check aggressive tax planning by States where nation-states issue tax incentives and tax breaks to attract investments. Such aggressive taxation and exploitation of the open-ended provisions of GAARs lead to the abuse of tax treaties.[1] Such abuses of tax treaties lead in turn to increased inequality and revenue loss to the government. This problem gets multiplied due to the lack of clarity on the definition of- “aggressive tax planning” by BEPS Action 6 report that allows countries to use it as a justification to increase tax scrutiny and audits of MNEs. To that end, this piece argues for the use of Fair and Equitable Treatment (FET) standard as an interpretive tool to fill up the lacunae left by the BEPS Action 6 Report to prevent tax treaty abuse by Multinational Companies (MNCs) to avoid taxation.

The need for BEPS Action 6 Report and its inadequacies in solving the issue

The OECD Model Tax Convention 2003 was introduced to prevent double taxation and allocate taxing rights to countries. However, its fact-based approach, which involves domestic tax authorities looking at the end result of the whole transaction and then applying the treaty to the existing facts, leads to inconsistencies between tax laws and IIAs.[2] For instance, the determination of a person’s center of economic interests can be challenging as it requires an analysis of the nature and extent of business activities at a specified geographical area. This may lead to different conclusions based on varied interpretations of the facts. This can result in loss of tax revenues and an unfair advantage for Multinational Corporations (MNCs) to artificially reduce tax liabilities.[3] The underlying assumption under the old approach was that there is no inconsistency between domestic GAARs and DTCs as violation of domestic GAARs would by default be considered an abuse of the tax treaty. The assumption of the fact-based approach in abusive transactions allowed companies to avoid taxes on capital gains. Hence, tax authorities are sometimes suspected of fabricating the existence of certain facts that could be considered as excessive from a reasonable perspective.[4] This was starkly brought forth in the case Canada v Alta Energy Luxenbourg, where the Court stretched the treaty to the breaking point to hold that the rights under the DTC are not conditioned for the Luxembourg entity on the residency of the shareholders of Alta Energy Luxembourg, escaping Canadian taxation measures while reaping a vast profit of $382 million Canadian dollars. This dealt a great blow to the domestic GAAR of Canada.

Consequentially, the Principle Purpose Test (PPT) is introduced to address such inconsistencies, the PPT was envisioned and introduced through BEPS Action 6 report. The PPT operates in a manner to prevent multinational corporations from abusing tax treaties in order to reduce their overall tax liabilities. It may deny tax treaty benefit if it is reasonable to conclude that obtaining the benefits was one of the main purposes of the transaction. The PPT was brought in to cure the unethical abuse of DTC, which the domestic GAARs failed to do. While the PPT has improved the lack of clarity in the fact-based approach, there are still some inherent inconsistencies in the anti-abuse standard within the PPT model. One such inconsistency is about the tax purpose. The determination of the tax purpose is important in order to obtain the benefits from the IIAs. However, the Final Report of BEPS Action 6 left it completely open as to whether a subjective perspective, where the motive of the taxpayer is being looked at, or an objective perspective, where the ultimate purpose of the whole arrangement is being studied, should be applied. Some authors have taken the stance that the intention of the taxpayer should be totally alien to the consequences of the taxable transaction.[5]

 Hence, it might seem logical to adopt an objective perspective to the issue to deny benefits if such is contrary to the strict interpretation of the object of the relevant DTC based on the concept of resident of the taxed entity.[6] Such an interpretation is consistent with interpretation of Article 1 in the OECD Commentaries as it aimed at preventing tax evasion or avoidance if the tax authorities believe that taxpayer is attempting to use the treaty to avoid or evade taxes. For instance, a taxpayer may try to use a tax treaty to shift profits to a jurisdiction with a lower tax rate than their home country. If tax authorities determine that the taxpayer’s actions are solely motivated by tax avoidance, they may deny the taxpayer treaty benefits. However, such an interpretation allows for a blind remission of taxes when one considers Article 4(1) of the OECD Model which talks about material economic attachment to the territory of the Contracting party.[7] Therefore, using an objective perspective if one grants remission in accordance to the object and purpose of the IIAs and DTC, it allows for shell or letterbox companies in the territory of the Contracting party to reap benefit of the DTC thus allowing for abuse of the IIA.

One can argue that to prevent such abuse, one can define the attachment threshold according to the PPT , but such an argument, if taken to its logical end, would bring back the subjective aspect of interpretation of the PPT, effectively depriving objective elements of any real content. This has also been discussed in CJEU judgement in SIAT and Itelcar. Also, in cases like Apple and Google taxation, the ruling highlighted the challenges of BEPS Action 6 recommendations and questioned their effectiveness in addressing the tax abuse problems.

 As a result, the final report of the BEPS Action 6 has failed to provide a concrete interpretative tool for anti-abuse standards and to properly distinguish between lawful tax planning and abuse of tax treaty. Moreover, in the Biehl case, the CJEU was of the opinion that the usage of the PPT test offers a one-size-fits-all solution to all problems, which in turn allows for covert or indirect discrimination based on nationality. Hence, it is argued that the PPT lacks legal certainty to resolve the problem of tax treaty abuse.

Closing the gap: Role of FET standard as an interpretive tool

In context of tax abuse and BEPS, the FET standard can be a useful tool in preventing and addressing such artificial practice of reducing tax liabilities. The FET standard has already taken a central role in Investment Arbitration which prevented States from using less intrusive measures to violate the provisions of the IIAs.[8] The FET standard that should be applied in these cases have to be the international minimum standard as described in the Neer claims case. The FET standard as the international minimum standard is espoused because it lays down universally applicable standards which can prevent conflicting and inconsistent tax treaty interpretation in light of evolving economic and social conditions, which in turn can promote transparency and predictability. The espoused FET standard has proved its mettle in the landmark cases like Mondev, Waste Management and Loewen.

The FET standard can be used to interpret the open-ended and loose provisions of GAARs which would provide stability and predictability for foreign investors. One such way to use FET standard would be to allow sharing of information of the taxpayers to prevent abusive practices and treaty shopping and promote tax transparency. By using FET standard, it can modulate the element of subjectivity of rules in GAARs providing a clear and consistent guidance on how those rules should be applied. One can raise a counterargument that countries can use the FET standard differently, which can lead to potential discrimination. However, such counterarguments can be addressed by increased transparency and greater cooperation between countries. Such standards have been adopted on an ad-hoc basis by countries like the United States, Canada and Australia to prevent treaty abuse.[9] Such instances have been highlighted in the Amazon and Google cases where the profits are being shifted to a lower tax jurisdiction to avoid paying taxes. The FET standard also clears the air around a legitimate expectation for investment and forces the host State to act in a consistent manner which is free from ambiguity, as reflected in the case of Tecmed SA.

The case of Cain Energy is a curious case where an artificial tax avoidance arrangement was overlooked by the tribunal, and it was held that such an arrangement is not per se abusive. A careful application of the FET standard would have revealed that such offshore transfer of share is artificial in nature and violate the principles of DTC. Nevertheless, in Lone Star, treaty access for accessing dividends was denied by the tribunal. This decision was based on the tribunal’s view that the substance of the entire transaction should be considered, rather than just the way in which it was carried out. Hence, the tribunal, in this case, analyzed the whole nature of the arrangement, which was not done in Cain Energy, to determine whether access to DTC should be given or not.

However, in some cases, like Starbucks, where the FET standard was applied in the context of transfer pricing, it was criticized for providing illegal tax benefits. However, in the recent case of Vodaphone, the Tribunal ruled that the issue of transfer pricing and imposing a retrospective taxation violates FET standard or international minimum standard of treatment. This case highlights the potential of using FET standard linked to international minimum standard in tax treaty abuse cases. Overall, FET standard can be an important tool in preventing and addressing tax abuse cases and can help close the gaps left by BEPS Action 6 Report.


The FET standard can serve as an efficient alternative to the PPT in addressing tax treaty abuse. Adoption of the FET standard would not only provide tax certainty but also create a level playing field for investors and government where abuse of treaty by the MNCs can be disposed. The linkage of the FET to the international minimum standard would curb over-expansive interpretation of the tax treaty, rein in the discretion of the arbitral tribunal, and espouse transparency and predictability. Therefore, using the FET standard to interpret the open-ended provisions of GAARs would not only ensure that taxpayers are not unfairly penalized but also reduce the risk of tax abuse. However, it is to be kept in mind that the FET standard is not a panacea for all tax issues, but it can serve as an important principle to guide the development and application of tax treaties around the world.



[1] The position of the OECD regarding this issue has been harshly criticized by scholars: B. J. Arnold, Tax Treaties and Tax Avoidance: The 2003 Raisions to the Commentary to the OECD Model, 58(6) Bull. Int’l Tax’n 244-247 (2004), Online Books IBFD, at 5.4. A. Martin Jiminez, The 2003 Rision of the OECD Commentaries on the Improper Use of Tax Treaties.

[2] Commentaries to the OECD Model Tax Convention (Art. 1, paras 9.1-9.6).

[3] A Case for the Declining Effect of the OECD Commentaries, 58(1) Bull. Int’l Fiscal Documentation 19 (2004). L. De Broe, International Tax Planning and Prevention of Abuse, 2008, Online Books IBFD, at 4.1.2. J. Prez & A. Biez, The 2003 Revisions to the Commentary to the OECD Model on Tax Treaties and GAARs: A Mistaken Starting Point in Tax Treaties: Building Bridges Between Law and Economics 132-138 (M. Lang et al. eds, IBFD 2010), Online Books IBFD.

[4] Ibid.

[5] B. J. Arnold & S. van Weeghel, Chapter 5 The Relationship Between Tax Treaties and Domestic Anti-Abuse Meaurcs in Tax Treaties and Domestic Law (G. Maisto ed., 2006, IBFD)

[6] Andres Baez Moreno, ‘GAARs and Treaties: From the Guiding Principle to the Principal Purpose Test: What Have We Gained from BEPS Action 6’ (2017) 45 Intertax 432.

[7] In this regard: K. Vogel, Klaus Vogel on Double Taxation Conventions 233 (3d ed., London-The Hague-Boston: Kluwer Law International 1997) (and literature quoted there). F. A. Vega Borrego, Articulo 4 MC OCDE (2000). Rcsidcncia in Comentarios a los Convenios para cwitar la Doble Imposicion y Precnir la Evasion Fiscal concluidos por EpadYa 225-227 U. R. Ruiz Garcia & J. M. Calder6n Carrero eds, Fundaci6n Pedro Barri6 de la Maza 2000). M. Widrig, The Expression ‘by Reason of his Domicile, Residence, Place of Management’ as Applied to Companies in Residence of Companies Under Tax Treaties and EC Law 281 (G. Maisto ed., 2009, IBFD).

[8] Jason Haynes, ‘The Evolving Nature of the Fair and Equitable Treatment (FET) Standard: Challenging Its Increasing Pervasiveness in Light of Developing Countries’ Concerns – The Case for Regulatory Rebalancing’ The Journal of World Investment & Trade 14 (2013) 114–146.

[9] Reuven S, Avi-Yonah, International Tax as International law (Cambridge University Press, 2007).

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