Compatibility Of Domestic General Anti-avoidance Rules With Tax Treaties

Several multinational corporations have eroded the national tax base through the aggressive tax planning and arrangements,resulting in the loss of the world's tax revenue in recent years,the phenomenon of which national tax authorities have generally faced.Therefore,countries are committed to the development and reform of anti-avoidance rules to protect their tax base and maintain tax fairness.The general anti-avoidance rules are regarded as the general and basic provisions of the domestic anti-avoidance rules,and the countries have gradually formed their own general anti-avoidance rules system through legislation and judicial practice.However,the application of the general anti-avoidance rules may result in a different outcome from the direct application of tax treaties,as well as the general anti-avoidance rules was deemed as a violation of international law because of the result that applying domestic law denied the interests of bilateral tax treaties.At the beginning of the twenty-first century,the OECD guidelines were given in the relationship between the general anti-avoidance rules and tax treaties.The guidelines show that the general anti-avoidance rules in the domestic law including the "substantive over form" and "economic substance" and other similar factors,are consistent with the fundamental purpose of tax treaties and does not conflict with the tax treaty.However,in recent years,the development of the general anti-avoidance rules challenged the conclusions.There are no clear guidelines on the application and development of general anti-avoidance rules in theory and practice,such as the impact of the diverted profits tax,as well as the applicable relationship between the anti-abuse clause in the treaty and the general anti-avoidance rule in domestic law.The relationship between general anti-avoidance rules and tax treaties continues to be an important issue,which was again raised on the agenda of the "base erosion and profit shifting" jointly proposed by the OECD and G20.Based on the above-mentioned background,this article will start from the following aspects of the compatibility between the general anti-avoidance rules and tax treaties:The first part is the connotation of the general anti-avoidance rules and the basic relationship with the tax treaty.The general anti-avoidance rule is an important part of the anti-tax avoidance rules established by many countries that have been established by legislation or judicial practice.It complements special anti-avoidance rules such as thin capitalization rules and controlled foreign company rules,while there is still a theory that two anti-avoidance rules are parallel to apply.The application of general anti-avoidance rules result in the re-characterization of a type of income and determination whether an enterprise entity is recognized by the tax law.Since the general anti-avoidance rule is a domestic law and the tax treaty is an international treaty,it is possible to generate a dispute over whether the domestic anti-avoidance rules negate the interests of the treaties.On the basis of the discussion of the issue in the academic and judicial practice,the OECD and the UN Model have explained and applied the application of the general anti-avoidance rules.The second part is the domestic perspective of conflict and coordination between general anti-avoidance rules and the tax treaties,containing diverted profits tax as an example.Although the OECD has given guidelines on the relationship between general anti-avoidance rules and tax treaties,the application of anti-avoidance rules are constantly evolving.The recent diverted profits tax in Britain and Australia is the most representative proof.The diverted profit tax is to prevent artificial erosion through permanent establishment,which is considered to be a new tax different from the general income tax in the United Kingdom and is recognized as an extension of the general anti-avoidance rules in Australia.Whether the diverted profits tax is governed by the tax treaty and whether it is violation of the tax treaty is a highly controversial topic.The third part is the international perspective of conflict and coordination between general anti-avoidance rules and the tax treaties,containing the relationship between the general anti-avoidance rule and the anti-abuse clause of the tax treaty.The anti-abuse clauses have been accepted by an increasing number of countries and absorbed into bilateral tax treaties signed by these countries.The BEPS Action Plan suggested limitation on benefit clause represented by the United States and the principal purpose test clause advocated by the EU countries as anti-abuse provisions for bilateral tax treaties.The limitation on benefit clause is referred to as the special anti-abuse clause of the treaties,and the principal purpose test clause is deemed as the general anti-abuse clause.Due to the similarity between the scope of application and purpose of these clauses,the dispute on the relationship between the anti-abuse clause of the tax treaty and the anti-avoidance clause of the domestic law cannot be ignored.