47 – 49 Pearse Street, Dublin 2, IRELAND

Ms Marlies de Ruiter

Head, Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA

Organisation for Economic Cooperation and Development

2 rue André-Pascal

75775, Paris Cedex 16

France

by email to taxtreaties@oecd.org

17 June 2015

Dear Ms de Ruiter

Re: New discussion draft on BEPS Action 6 (Prevent Treaty Abuse)

The revised discussion draft sets out an alternative simplified LOB rule for use in conjunction with a principle purpose test. This simplified LOB rule bases qualification for treaty benefits on a series of alternative tests focused on “qualifying persons” status or ownership by qualified persons, active conduct of a trade and discretionary relief. We acknowledge that the simplified LOB provision may be more practical for the purposes of dealing with the BEPS challenge of treaty abuse; however the primary problem with LOB continues to be a serious concern for us. To restate our position, LOB provisions are fundamentally biased in favour of larger countries and economies. In contrast, for companies resident in jurisdictions with a small economy which are more reliant on an international investor base, it will be disproportionately more difficult to be a qualifying person under the LOB provision. Countries like Ireland which depend on foreign investment will face much more restrictive conditions compared to larger economies because LOB by its very nature, grants treaty access based on where the majority of investors are resident.

In the following, we take a number of key issues from the revised discussion draft for further consideration by the OECD.

Issues relating to the LOB provision

3. Commentary on the discretionary relief provision of the Limitation on Benefits (LOB) rule

In response to concerns raised on the approach to the management of LOB, the redrafted discussion document proposes to provide more guidance on the factors that a competent authority should take into account when considering a discretionary relief request and that authorities should process discretionary relief requests as quickly as possible. However, these measures fail to address the core problems we identified in our submission of 8 January 2015. To restate the difficulties as identified by our members, the suggested approach places considerable discretion on Revenue Authorities to act as gatekeepers for access to treaty benefits and will hamper cross-border commercial projects by virtue of the uncertainty created by a discretionary LOB.

4. Alternative LOB provisions for EU countries

The Revised Discussion Draft acknowledges that serious concerns were raised that the proposed LOB provision, as presented in the September 2014 Report, needed to be adapted to reflect European Union (EU) law requirements. However, the Working Party has decided not to make changes to the LOB provision, and instead allow the inclusion of alternatives in the Commentary or changes to the model provision to deal with EU law issues.

This is a disappointing development. It is untenable to restructure the Treaty framework fundamentals without reference to the binding agreements entered into by the 28 EU Member States which guarantee freedom of establishment, along with free movement of capital, persons and services. The Introduction to the Model Tax Convention states (at page 12, 8th edition 2010) that “it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries”. Alternative LOB provisions for EU countries should be introduced to remove the obstacle of double taxation.

8. Timing issues related to the various provisions of the LOB rule

The Revised Discussion Draft acknowledges that timing issues are dealt with differently under the various provisions of the LOB rule proposed in the September 2014 Report. Therefore it is unsatisfactory that the Working party has decided not to modify the LOB rule for the purposes of addressing potential conflicts or inconsistencies and instead further promotes use of discretion by the competent authorities involved to settle issues arising.

10. Clarification of the “active business” provision

The Revised Discussion Draft agrees that the Commentary on the “active business” provision of the LOB rule needs to explain further the meaning of a “business” to deal with situations where for example a company may carry out two trades. Again we call for Commentary on the matter to clearly state that business support activities can qualify as an active business. This would help mitigate the difficulties encountered by taxpayers in smaller markets whose workforce is engaged in substantial managerial and operational activities in connection with support services, but where there are limited sales of the group’s actual products and services by virtue of the small market size.

Issues related to the Principle Purpose Test rule

11. Application of the PPT rule where benefits are obtained under different treaties

The Revised Discussion Draft includes additional examples F, G, H and I for insertion of paragraph 14 of the proposed commentary on the PPT rule. While these are helpful in providing more specific examples of the factors that would be relevant in evaluating whether the PPT would be satisfied or not, we remain concerned that the PPT rule will give rise to a greater incidence of cross-border treaty disputes. Currently treaty disputes are typically resolved in accordance with the domestic procedures applicable in the country seeking to apply the charge to tax. Resolution in these instances is not straightforward, and the complexity of the current Action 6 proposals will not help.

Given some of the challenges that we foresee in the application of the PPT to the diverse scale and types of economies and business entities that will seek to apply these examples, we suggest that it is made clear in the commentary in paragraph 14 that it is not necessary that a particular transaction or commercial arrangement precisely fit within one of the examples in order for it to be considered to pass the PPT. Instead, it should be clearly stated that the examples provide illustrations of the determining factors which should be considered relevant in evaluating whether the test is satisfied or not.

For example the ownership of the company should not be relevant to the analysis of the business activities. In this regard, perhaps it could be expressly stated that, for example, if a privately held company were to carry on activities outlined in examples G and H that this should not preclude the application or relevance of the examples cited in the commentary.

Moreover, it should be made clear that if some of the background facts listed in either of those examples, e.g. in example G there is a reference to the country being a member of a regional grouping which may not be the case for businesses head quartered in smaller economies, did not exist, but that a significant number of the determining factors mentioned in either or both of examples G and H to locate in a particular State existed, that the PPT would equally be satisfied in such circumstances.

You may wish to note that this response is from a representative body. The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.

Yours sincerely

Paul Dillon, Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie