The Role of Tax Treaties in Preventing Double Taxation and Tax Evasion: An Analysis of Treaty Abuse and Countermeasures

Abstract

This research assesses the role of tax treaties in addressing double taxation and tax evasion, focusing on the challenges presented through treaty abuse and the measures implemented to counteract it. Tax treaties are fundamental to international taxation as they establish taxation rules, protect the rights of businesses operating across borders, and prevent income from being taxed twice. However, misuse often undermines their effectiveness, such as treaty shopping, where entities exploit favourable provisions to reduce tax liabilities. This abuse weakens the ability of countries to collect their rightful taxes, leads to significant revenue losses, and disrupts the fairness and efficiency of the global tax system. This research aims to shed light on these issues and deepen the understanding of tax treaties' role in the international tax field.

The study takes a unique approach by employing a comparative analysis of the anti-abuse measures in the United Kingdom, the United States, South Africa, and Singapore tax treaties. The research includes examining legal texts, statutes, case law, and secondary data sources to provide a thorough understanding. The analysis explores the objectives and evolution of tax treaties, highlighting the growing importance of anti-abuse provisions such as the Principal Purpose Test (PPT) and Limitation on Benefits (LOB) clauses. The research demonstrates that globalisation has intensified tax avoidance strategies, allowing multinational corporations and high-net-worth individuals to exploit gaps and inconsistencies in the international tax framework. As a result, countries encounter significant challenges in ensuring that tax treaties encourage legitimate cross-border economic activity while preventing abuse. Mate cross-border economic activity while preventing abuse.

The study further indicates that the UK uses LOB provisions, PPT, and domestic antiavoidance regulations, such as the General Anti-Abuse Rule (GAAR), to tackle and prevent treaty misuse. The UK’s comprehensive adoption of these measures reflects a well-coordinated approach that aligns with domestic and international standards. Integrating the GAAR with the PPT and LOB clauses forms a robust defense against treaty abuse, ensuring that the UK's tax treaties meet international obligations and are resilient to the increasing complexity and aggressive tactics of multinational corporations engaging in treaty shopping. The UK's proactive stance, including using the PPT, aligns with global initiatives led by the OECD to enhance the effectiveness of tax treaties in preventing abuse.

In contrast, the United States employs a stricter approach, incorporating rigorous LOB clauses and legal principles, further reinforced through the Foreign Account Tax Compliance Act (FATCA) and Global Intangible Low-Taxed Income (GILTI) rules. These provisions, integrated into tax treaties and domestic laws, ensure that tax benefits are only granted to entities with genuine economic activities. While these measures have effectively combat treaty abuse, the complexity of the U.S. tax code presents challenges for compliance, particularly for smaller businesses and individuals. Simplification of the tax system is therefore needed to improve enforcement and maintain competitiveness.

Conversely, Singapore balances maintaining a competitive tax environment and implementing solid anti-abuse measures. Such as other countries, its Double Taxation Avoidance Agreements (DTAAs) include anti-abuse measures, such as the PPT and beneficial ownership requirements, aligned with global standards, such as the OECD’s BEPS project. However, challenges remain in applying the GAAR to tax treaties, as the precedence of treaty provisions over domestic laws creates legal uncertainties in addressing treaty abuse. South Africa takes a unique approach by blending national laws with international treaty provisions to address the risks associated with treaty shopping. This diverse approach provides a balanced perspective on the effectiveness of anti-abuse measures.

The findings indicate that while anti-abuse provisions have proven effective, their success largely depends on the specific legal and administrative contexts. Furthermore, international initiatives such as the OECD's BEPS project have strengthened the global framework for preventing treaty abuse. However, they have also introduced new complexities that may impact international trade and investment.