This lesson focuses specifically on BEPS Action 6, examining the problem of treaty abuse, the concept of treaty shopping, and the anti-abuse provisions designed to prevent it.

• That is Treaty Shopping? Treaty shopping involves using a conduit entity in a third jurisdiction to access treaty benefits that would not be available if income flowed directly between the source and the ultimate recipient jurisdictions. For example, a payment between two countries with no tax treaty might be routed through an intermediary in a treaty jurisdiction to obtain reduced withholding tax rates. Treaty shopping is considered abusive when there is a premeditated effort to take advantage of the international tax treaty network through a conduit vehicle with minimal substance or economic activity to achieve no or reduced taxation.

• The Principal Purpose Test (PPT): The PPT is the key anti-abuse rule developed under BEPS Action 6. Under the PPT, a benefit under a double tax treaty shall not be granted if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction. However, this denial does not apply if it is established that granting the benefit would be in accordance with the object and purpose of the relevant treaty provisions. The PPT gives tax authorities substantial discretion to challenge structures they consider commercially artificial or insufficiently substantive.

• Limitation on Benefits (LOB): Some treaties, particularly those involving the United States, use LOB provisions instead of or alongside the PPT. LOB provisions impose objective qualification tests designed to restrict treaty access to entities meeting specified ownership, activity, or listing requirements. For instance, an entity may need to demonstrate sufficient ownership by residents of the treaty jurisdiction, meaningful commercial operations, or compliance with public listing requirements. While LOB provisions can appear more predictable than the PPT, many structures must now satisfy both tests simultaneously.