The improper use of tax treaties by contracting states Tax treaty dodging

In the same way taxpayers may make use of business arrangements that work through the loopholes of legal provisions, contracting states too may exercise sovereign rights within tax treaty gaps to modify the outcome of these agreements to their own benefit. Contracting states may circumvent obstacles or artificially stretch advantages in a way to comply with the wording of tax treaties but to impact the allocation of taxing rights. These actions unilaterally broaden the scope of circumstances in which contracting states are allowed to tax by creating new scenarios that either fall outside the scope of tax treaties or require the application of more favourable treaty articles. Conversely, contracting states may also attract foreign investment by allowing the application of tax treaty benefits to taxpayers in scenarios when these benefits would be denied. Despite its conformity with the wording of tax treaties, this practice may be considered illegitimate on the basis of international law rules and would amount to an improper use of tax treaties by contracting states or “tax treaty dodging” as defined by the author. The elements derived from these legal bases assessed offer guidance for the assessment of how far contracting states may exercise their sovereign rights under international law. Affected contracting states and taxpayers should make better use of the tools currently available under international law, varying from preventive measures to reparation in the form of compensation. To assist them, the current study submits a clearer definition of tax treaty dodging and recommends ways to better address the phenomenon.