Treaty shopping

Abstract: The expression treaty shopping is of American origin and it is closely related to the term forum shopping, a term used in U.S. civil procedure. Forum shopping describes a behaviour by which a party in a court case tries to ''shop'' into a jurisdiction or circuit where he expects a more favourable decision to be given. When treaty shopping, one uses double taxation treaties (and/or domestic tax law) to gain advantages otherwise not applicable. A double taxation convention is a treaty of international law and can only limit - not extend - the right to tax according to the state´s domestic tax law. Treaties are binding for the parties and the obligations in the treaties should be fulfilled by the parties of the agreements in good faith. Double taxation conventions are a necessary way for states to deal with the avoidance of multiple taxation claims, since double taxation has harmful effects on the expansion of trade in goods and services and of movement of capital and persons. Double taxation treaties are also used to make a cohesive net of tax law and to fight international tax evasion. When treaty shopping, at least three states are included: The residence state, the base/conduit/holding company state and the source state. Treaty shopping can be done i various ways, the most comon are through direct conduit and stepping stone conduit. The essential difference between the direct conduit method and the stepping stone method is that the direct conduit method makes use of an exemption from tax in the intermediary country, while the stepping stone method reduces a tax liability in that country by a counterbalancing expense. A stepping stone conduit could also mean that a second holding company is included. A third form of treaty shopping is conducted through a base company scheme, where the benefits appears in the residence state. The success of these kind of arrangements comes down to an effective and skilful use of a judicious combination of favourable provisions in tax treaties with favourable provisions in the domestic law of one or other of the countries involved. One important part when doing treaty shopping is to see to that the ''right'' countries is at the right place in the scheme. Sweden is generally indifferent when it comes to being the source country when treaty shopping. In most cases the beneficial tax treatment is already applicable when investing and conducting business with or within Sweden. The holding company state should have a widely ramified network of double taxation treaties and low taxes. Tax havens are quite commonly used as holding company states. Treaty shopping is a typical example of tax avoidance or tax planning, it is a way of structuring commercial transactions in a manner designed to minimize the tax burden. However, a tax planning technique, for example treaty shopping, could be illegal anyway because the tax legislation in a country involved in the transaction does not allow the suggested transaction. Treaty shopping is sometimes seen as abusive. This is made quite clear through the numerous legislative and political ways of hindering treaty abuse. Limits may be reached where transactions are entered, in other states, solely for the purpose of enjoying the benefit of particular treaty rules existing between the state involved and a third state which otherwise would not be applicable, e.g. because the person claiming the benefit is not a resident of one of the contracting states. The ways to hinder treaty shopping are many. It could be done through legislative or political matters. One way is to bring into conformity different countries double taxation conventions, thereby trying to plug the loopholes that arises when countries have different tax legislation. One purpose with the OECD Model Convention is to create unitary tax legislation. Treaty shopping is prevented through treaty rules. The limitation on benefits provision, the associated enterprises article, the exclusion of tax-favoured enteties and the bona fide approach are some examples of treaty rules made to combat treaty shopping. Treaty shopping is also combated through domestic law, through general anti-tax avoidance or anti-abusive provisions. Domestic anti-avoidance rules may only be applied to double taxation conventions if justified by both domestic and international law. In Sweden, the general anti-avoidance legislation has never been tested against treaty shopping. The question if treaty shopping should be prevented is a political question. It is not easy to answer, since there is a conflict of interest. The conflict is, at least, twofold. First we have the conflict between the company attempting to avoid tax through treaty shopping and the revenue losing country. Secondly, there is a conflict between states as well. There are winners and losers in a treaty shopping scheme. Generally the source country is the loser, since this is where the reduction or elimination of the taxes are executed. The answer to the question in the end comes down to the advantages of treaty abuse compared to the disadvantages of it. In the end it is difficult to weigh up to everyone´s satisfaction the relative merits of various considerations. It may be desirable in some circumstances for tax treaties to be, where appropriate, more precise in the way they define those persons who are intended to be the beneficiaries of the treaties - or, perhaps even more important, those persons not intended to be beneficiaries of the treaty. The problem is to achieve this result without in fact penalizing taxpayers whose use of the relevant tax treaties are bona fide. Whether anti-abusive provisions are necessary in any particular tax treaty in the end has to be decided on a case-by-case basis. The conclusion is that it is not possible to say that anti-abusive provisions should be a standard feature of tax treaties. It is desirable that such provisions should be incorporated in particular treaties to deal with particular situations.