The Improper Use of Tax Treaties by Contracting States

This book examines the methods used by states to modify the outcome of tax treaties and presents ways to better address this phenomenon.

Why This Book?

While an increasingly large space in tax literature has been dedicated to the different methods of tax avoidance used by taxpayers to reduce their tax liability, not much has been said on how contracting states may make use of comparable tactics to increase tax revenue or extend economic advantages for their own benefit. As much as taxpayers may design legal arrangements that work through legal loopholes with the view of avoiding taxes, contracting states too may circumvent obstacles or artificially stretch advantages in a way that complies with the wording of tax treaties but ultimately impacts the allocation of taxing rights and the tax burden borne by taxpayers. These states may unilaterally broaden the scope of circumstances in which they are allowed to tax by creating new scenarios that either fall outside the scope of tax treaties or require the application of treaty articles that are more favourable to these states. Conversely, contracting states may also attract foreign investment by allowing the application of tax treaty benefits to taxpayers in situations where these benefits would normally be denied. Despite not violating the literal wording of tax treaties, this state practice may be considered illegitimate based on rules in public international law rules that spell out the correct standards and good usage of treaties.

This book presents new insights on the way contracting states interfere in the interpretation and application of tax treaties by identifying, categorizing and assessing the different methods used by states to modify the outcome of tax treaties. It investigates the tools offered by public international law to affected taxpayers and treaty partners and recommends ways to better address this phenomenon.