General Comments. Action 6 on Treaty Abuse reads as follows:

OECD Centre on Tax Policy and Administration Tax Treaties Transfer Pricing and Financial Transactions Division 2, rue André Pascal 75775 Paris France The Confederation of Swedish Enterprise: Comments on the OECD Public Discussion Draft entitled BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 14 March 2014 9 April 2014 The Confederation of Swedish Enterprise is pleased to provide comments on the OECD Discussion Draft entitled BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 14 March 2014 9 April 2014 (hereinafter referred to as the Draft). General Comments Action 6 on Treaty Abuse reads as follows: Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids. The following three areas are identified in Action 6: A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. B. Clarify that tax treaties are not intended to be used to generate double nontaxation. C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The Confederation of Swedish Enterprise supports the OECD s work to clarify the purpose of tax treaties. The initial and prime objective with tax treaties is and should continue to be to facilitate cross-border trade through the allocation of taxing rights Confederation of Swedish Enterprise Address: SE-114 82 Stockholm Visitors: Storgatan 19 Phone: +46 (0)8 553 430 00 www.swedishenterprise.se

2 (13) between countries and to provide for mechanisms to eliminate double-taxation. By doing so, tax treaties provide certainty and eliminate major obstacles to cross border trade. The introduction to the commentary recognizes the harm of international juridical double taxation: its harmful effects on the exchange of goods and series and movements of capital, technology and persons are so well known 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. In light of what is stated in Action 6 however, we believe that the importance of certainty and the harm of double taxation need to be stressed. The proposal at hand aims at preventing the granting of treaty benefits in inappropriate circumstances. Misuse of treaty provisions undermines the integrity of a tax convention and should of course be addressed. However, preventing tax avoidance and evasion in general, or treaty abuse in particular, should not be a main objective for entering into a tax treaty. When negotiating a treaty, countries should naturally aim at designing the treaty in a way that does not open up for unintended non-taxation. However, the need to prevent tax avoidance and evasion does not by itself trigger countries to negotiate a tax treaty. Although the prevention of tax evasion and avoidance may be important purposes of a tax treaty, they do not constitute a prime objective, equal to the prevention of double taxation. Before initiating tax treaty negotiations, it is important that countries carefully analyse and study relevant provisions etc. in the other country, in order to identify potential areas that could open up for treaty abuse. Consequently, the Confederation of Swedish Enterprise fully supports the policy consideration proposed in Section C of The Draft. We believe that, if these policy considerations were to be adopted by countries, there would be fewer loopholes to exploit and thus less need for Anti-Abuse rules. This approach would minimize the impact on genuine business activities. Although the Draft essentially aim at preventing abuse of treaty provisions we believe that further clarification is needed with respect to what is to be considered abuse of treaty benefits. It is important to make a clear distinction between intended and un-intended nontaxation. In the Action Plan on Base Erosion and Profit Shifting, it is stated that no or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. The distinction between intended and unintended non-taxation provides meaning to differences between tax efficiency and aggressive tax planning

3 (13) from a business point of view, and normal tax policy and harmful tax practices from a government point of view. Businesses should be allowed to respond to legislative tax initiatives without being accused of aggressive tax planning and Governments need to agree on acceptable forms of tax competition. The Draft proposes various Anti-Abuse provisions to be inserted into the OECD Model Convention; namely a Limitation-on-Benefits provision (LOB), a Main Purpose Test (MPT) and a number of Specific Anti-Abuse provisions. While both the LOB provision and the MPT are more general in nature and aim at addressing treaty shopping in particular, they take different approaches. Whereas the LOB provision is extremely complex, it is at least based on objective criteria, thus leaving little room for arbitrary assessment. The MPT on the other hand is very unclear and subjective and opens for arbitrary assessment. In general, we believe that perceived inappropriate behaviour is best addressed with specific and targeted Anti-Abuse provisions. This way, abusive practices can be prevented with a minimum impact on bona fide business. It is of utmost importance that Anti-Abuse rules are designed so that they have a minimum impact on genuine business operations. We believe that both the proposed LOB provision and the MPT fail in this respect, since they are too general in nature and not limited to abusive situations. In particular, Anti-Abuse provisions should recognize that holding, financing and investment activities are normal and legitimate business activities that should not suffer blanket exclusions from Treaty protection. Consequently, The Confederation of Swedish Enterprise opposes both the LOB provision and the MPT as they are currently drafted. Anyhow, it does not seem to be a proportionate response to insert two very different provisions that aim at addressing the same issue. It is neither reasonable, nor desirable that taxpayers should have to struggle through a very complex LOB provision, only to be confronted with a very subjective MPT, providing little predictability as to the outcome. Such a scenario would definitely have a negative impact on businesses and would discourage investments and employment. Consequently, it should be made clear in The Draft that at most one of these two provisions for preventing treaty shopping shall be inserted in the OECD Model Convention. From a business perspective, and as an overriding principle, the choice between an objective and targeted (LOB) provision is naturally preferable to a subjective and vague (MPT) provision. The MPT would definitely cause most concern for bona fide businesses. If such a vague provision is inserted in the OECD Model Convention, the clarity and certainty of a tax treaty would be undermined. It would be extremely difficult for businesses to be certain whether treaty benefits will be granted. Likewise, it would be difficult for governments to fully understand the scope of the

4 (13) tax treaty that is being negotiated. Such uncertainty would undermine the very purpose of tax treaties and is likely to result in an increasing number of double taxation cases. Specific comments A. TREATY PROVISIONS AND/OR DOMESTIC RULES TO PREVENT THE GRANTING OF TREATY BENEFITS IN INAPPROPRIATE CIRCUMSTANCES 1. Cases where a person tries to circumvent limitations provided by the treaty itself Treaty Shopping The Draft recommends a three-pronged approach to address treaty shopping situations: Clarify in the title and the preamble of tax treaties that the Contracting States intend to avoid creating opportunities for treaty shopping Include in tax treaties a limitation-on-benefits provisions based on the one found in the US model Include in tax treaties a more general Anti-Abuse rule (main purpose provision) Limitation-on-Benefits provision The purpose of the proposed LOB provision is to prevent treaty shopping. If appropriately designed, a LOB provision can be an effective tool to target abuse. However, in order to prevent treaty abuse without causing uncertainty, it is important that the LOB provision only targets the abusive cases. It is mentioned in The Draft that a number of countries already include LOB provisions in their tax treaties. The proposed LOB provision is based on the LOB provision found in treaties concluded by the United States. The fact that a number of countries choose to include a LOB provision in their treaties does not by itself justify a LOB provision to be inserted in the OECD Model Convention. Countries have different needs and priorities when negotiating tax treaties. Although a country may accept a certain LOB provision in relation to another country does not necessarily mean that it would be willing to have such an LOB in all of its treaties. As previously stated, The Confederation of Swedish Enterprise opposes the proposed LOB provision. It is, to say the least, very complex. However, our main concern with the proposed LOB provision is not the complexity. A detailed and potentially complex provision leaves less room for arbitrary assessments, which is important for a Model Convention that is used on a global basis. Our concern is that

5 (13) the proposed LOB provision is not limited to the abusive situations. The proposed LOB provision denies treaty benefits by default. Only where explicitly stated would a resident enjoy the benefits under the treaty in question. Such language seems to suggest that taxpayers, as a general rule, evade tax and engage in aggressive tax planning. This is clearly not true. Most businesses allocate substantial resources in order to comply with existing tax rules and struggle to overcome obstacles to cross border trade and investment. The OECD Model Tax Convention must reflect the fact that most businesses are engaged in bona fine operations and not tax evasion and circumvention of tax provisions. We support the risk based approach, where listed entities and entities controlled by listed entities are deemed entitled to treaty benefits. Entities that conduct active trade or business are also deemed low risk for the purpose of the LOB provision, and, if qualified, granted treaty benefit. The current language in the proposed LOB provision is however not limited to treaty shopping, since it will also have an impact on genuine business activities. We question, e.g. whether it is reasonable to exclude all holding companies from treaty benefits. The structure of a holding company may vary significantly and there may be a number of reasons as to why a holding company is being used. The LOB provision should take into account substance and purpose of the holding company, existence of substantive activities such as premises, employees in the holding state etc. Political stability and geographical location are further factors that may warrant a regional holding company, rather than any intent to engage in abusive behaviour. Another example of bona fide situations that may fall within the scope of the LOB provision is the Swedish group contribution system. In Sweden consolidated balance sheets for groups (consolidated tax returns) are not recognized for tax purposes. However, in order to obtain a tax situation for the group equal to that of a single company, the law allows shifting of income through group contributions between entities in the group. In the case of a qualifying group contribution, the company paying such contribution is entitled to deduct the amount from its taxable income and the recipient company must include such contribution in its taxable income. This means, inter alia, that losses of one company may be set off against profits of another company in the same group. In accordance with EU law, the deduction is granted as long as the receiver is subject to corporate income tax in Sweden. Thus, the group contribution provisions in Sweden also allow contributions from a Swedish company to a Swedish PE of a foreign group company. According to the base erosion test in subparagraph 2.e) II of article X, treaty benefits would only be granted where less than 50 % of a person s gross income is paid to a person that does not qualify for benefits under the treaty in the form of payments that are deductible (other than some arm s length s payments). Since the foreign company of the Swedish PE would not qualify for benefits under the treaty, the Swedish company making the payment to the PE

6 (13) would be disqualified for treaty benefits despite the fact that such a payment would not be part of a tax treaty abuse scheme. It would of course not be possible to cover all genuine business situations in a LOB provision. Neither would it be possible to cover all inappropriate circumstances in Specific Anti-Abuse provisions. The answer however is not to deem all situations abusive unless otherwise stated. Instead of allowing treaty benefit only where explicitly stated, the LOB provision should be reverse so that treaty benefit is granted by default, and that benefits only are denied in case of treaty abuse. This could be achieved by opening the LOB provision with a paragraph that states the following. Treaty benefit shall be granted unless the competent authority establishes that the establishment, acquisition or maintenance of such person and the conduct of its operations did have as its principle purpose the obtaining of benefits under the convention. Treaty benefits shall however always be granted in the situations mentions in subparagraphs 2 and 3 of article X. Such language would certainly be more reasonable, provide more clarity, maintain the integrity and purpose of the convention, be more fair and at the same time target cases of treaty shopping. It would also limit the scope of the LOB provision to cases of treaty shopping, which is the aim of action 6 of the BEPS Action Plan. Another issue that needs a thorough analysis is the question whether the proposed LOB could be in violation of EU law. In particular, our concern is with the prohibition of non-resident intermediaries in the ownership test, the local stock exchange requirement in the publicly traded test and the absence of a derivative benefit provision. All these aspects require analysis in light of EU law. Should the conclusion be that such provisions are in violation of EU law, a significant number of OECD members would not be able to adopt the LOB provision as it stands. Derivative benefits provision As stated above, we support the risk based approach where listed entities and entities controlled by listed entities are deemed qualified for benefits under the treaty. Entities that conduct active trade or business are also deemed low risk for the purpose of the LOB provision, and, if qualified, granted treaty benefit. In the Discussion Draft, a Derivative Benefits provision is also considered in the LOB provision. The Derivate Benefits provision would extend the granting of treaty benefits to entities that are controlled by entities that are resident of a third country and that would enjoy the same treaty benefits with the contracting state in question. In such situations, there is no incentive for treaty shopping. Consequently, if an LOB were to be included in the OECD Model Convention, the Confederation of Swedish Enterprise requests that also the Derivative Benefits

7 (13) provision be inserted in the OECD Model Convention itself and not as part of the Commentary. Main purpose test In addition to the LOB provision, the discussion draft also contains a MPT. The provision reads as follows: 6. Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention. Both the LOB provision and the MPT are aimed at addressing treaty shopping. Whilst both provisions aim at addressing the same issue, they do have significantly different approaches to doing so. As stated above, the proposed LOB provision is technically complex, but leaves less room for subjective and arbitrary assessments. This makes the provision very difficult, but at the same time it is at least somewhat predictable. The MPT on the other hand takes the opposite approach. It does not provide much guidance with respect to when the treaty benefits will be granted. Instead, it opens a door for tax administrations to disqualify taxpayers from treaty benefits where that tax administration finds it appropriate. The problem with the MPT is not its complexity. Rather, our concern lies with the fact that it is very subjective and leaves significant room for arbitrary assessments. As previously stated, The Confederation of Swedish Enterprise strongly opposes the proposed MPT. The language is much too vague and subjective. It is difficult for a company to predict whether the provision is applicable in a particular situation. It is stated in the Draft that the MPT would merely incorporate principles already recognized in the Commentary on Article 1 of the Model Convention. Here, the Discussion Draft seems to be referring to paragraph 9.5 of the commentary on Article 1, which states the following: A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.

8 (13) The commentary on Article 1 contains a number of solutions to address improper use of the convention. The MPT is one of many potential solutions. The fact that an MPT is included in the commentary is not in itself a justification to include one in the OECD Model Convention. Such a test may be suitable between some treaty countries, but not necessarily between all. Furthermore, the proposal in The Draft differs significantly from the language in paragraph 9.5 of the commentary to Article 1. In The Draft, the MPT would be applicable if it is reasonable to conclude that a tax benefit has occurred, if one of the main purposes of the arrangement would be to obtain a tax benefit and the tax benefit is achieved directly or indirectly. Compared to para 9.5 of the commentary to article 1 the threshold has been lowered considerably. With respect to the one of the main purposes criterion, the Draft indicates that there could be more than one main purpose. In our view, there could only be one main purpose. Since The Draft seems to suggest otherwise, it should be clarified how many main purposes there can be without any of them falling below the threshold of being considered a main purpose. Similarly to the proposed LOB provision, the MPT imposes a significant burden on the taxpayer. The onus on the tax administration is set low ( reasonable to conclude, one of the main purposes, directly or indirectly ) while the onus on the taxpayer is significant ( establish that the granting of tax benefit would be in accordance with the object and purpose of provisions in the convention ). Such a vague, unclear and wide scoped provision in itself is not acceptable. The provision is extremely unpredictable and would likely have a very negative effect for genuine business activities. In particular, holding, financing and investment activities are all normal and genuine business activities that may fall within the scope. Adding the fact that a LOB provision and a number of SAAR provisions are proposed as well, the OECD Model Convention s function as a tool to facilitate cross-border trade could be undermined. As the proposal stands, it would mean that taxpayers would first have to struggle through the paragraphs in the very complex proposed LOB provision. In addition, if benefit is granted under that provision, the taxpayers can still not rely on being granted treaty benefits. Instead, they will have to assess whether they may fall within the scope of the proposed MPT. Bona fide business would be negatively affected due to the imposition of a very complex and significant threshold to qualify for the reliefs provided in the convention. As a general standpoint, if having to choose between an LOB and a MPT, the Confederation of Swedish Enterprise would recommend the former. As previously mentioned a more limited LOB clause than the one proposed, targeted only on abusive situations could be an effective tool. Under any circumstance, we strongly

9 (13) urge the OECD at least not to include both types of provisions in the Model Convention. Should the OECD choose to insert a MPT in the Model Convention, it is of utmost importance that it is designed to be applicable only where a structure has been wholly artificially set up solely to secure a treaty benefit. Tax administration must establish (instead of make it reasonable to conclude) that the main purpose (instead of one of the main purposes) of an arrangement was to obtain the tax benefit. Furthermore, the provision should only be applicable if it is established that granting the benefit would be contrary to the objective of the provisions if the Convention. Although such redrafting of the provision would not make the provision clear, since a MPT by its very nature is unclear and unpredictable. It would, however, at least increase the threshold for when an arrangement or transaction is considered abusive. Additionally, the MPT requires analysis in the light of EU law. Given the fact that the language of the MPT in the Draft is so wide in scope, it could be argued that EU Member States would not be able to adopt such a provision. Furthermore, if the MPT were to be adopted, the interaction between that provision and GAARs and SAARs in the domestic tax laws would need to be clarified. It is established in the commentary on Article 1 of the Model Convention that the domestic Anti-Abuse rules may be applied to address abuse of tax treaties. Domestic tax law may contain Anti-Abuse rules that do not correspond with the proposed MPT. Allowing domestic Anti-Abuse rules in addition to the proposed LOB, MPT and SAARs would definitely cause more uncertainty. Other situations where a person seeks to circumvent treaty limitations Our view is that specific rules for specific issues are preferable to GAARs, since a GAAR is more likely to also affect genuine businesses. We would like to make some remarks to the specific rules proposed in the Discussion Draft. Dividend transfer transactions As previously stated, we believe that Anti-Abuse provisions should be targeted towards situations that are likely to be abusive. That would not be the case where a treaty provides for source country taxation. To introduce a minimum shareholding period in Article 10.2 of Model, while at the same time retaining the right for source country taxation is not proportionate and would have a negative impact for genuine businesses. Country practices vary on this issue and some countries provide in their domestic legislation for a minimum shareholding period. We believe that this is an issue to be

10 (13) decided on a bilateral basis for those countries that consider these transactions a problem. We recommend that an alternative provision is included in the Commentary, for those countries that wish to address this issue, with a minimum shareholding period not exceeding 12-month and the possibility to meet the holding requirement after the payment. Tie-breaker rule for determining the treaty residence of dual-resident persons other than individuals We support the change from place of effective management to settlement by the competent authorities. However, we propose to delete the last sentence in the new paragraph 4.3 since we believe this does not facilitate agreement between the competent authorities. Anti-Abuse rule for PEs situated in third States With respect to the proposed Article 1 paragraph 4, we question the necessity of a provision like this in the Model Treaty. It may be of interest in relation to some countries but those situations could be solved bilaterally. Furthermore, we are concerned that the provision may be in incompatible with EU Law. The potential incompatibility with EU law can be illustrated by the following example. CS1 is an EU member and enters into a tax treaty with CS2 that could be either a non-eu or a EU member. The tax treaty prevents CS2 to levy withholding tax on income to a company that is a resident of CS1. However, the treaty would not prevent CS2 to levy withholding tax on income to the same company in CS1 if that income is attributable to a PE in a third country. If that third country is an EU member, the tax treaty would allow a better treatment if the income stays in CS1 compared to if it is attributed to a PE in another EU member state. In our opinion, it should be analysed whether this may constitute an infringement on the free movement of capital or the freedom of establishment. Should there be an infringement of EU law, it would mean that a large number of OECDs members would not be able to use the provision. In order to avoid such issues with EU law, we recommend that the provision is included as an alternative provision in the Commentary on Article 1 of the Model Convention instead of including it in the Model Convention itself. That way, the provision could be used by contracting states that are not members of the EU and that find the use of such a provision appropriate.

11 (13) 2. Cases where a person tries to circumvent the provisions of domestic tax law using treaty benefits The Confederation of Swedish Enterprise believes that these issues are sufficiently addressed already in the Commentary and that no further amendment is needed in the OECD Model Convention. B. CLARIFICATION THAT TAX TREATIES ARE NOT INTENDED TO BE USED TO GENERATE DOUBLE NON-TAXATION The initial and prime objective with tax treaties is and should continue to be to facilitate cross-border trade through the allocation of taxing right between countries and to provide for mechanisms to eliminate double-taxation. When negotiating a treaty, countries should naturally aim at designing the treaty in a way that it does not open up for unintended non-taxation. However, the need to prevent tax avoidance and evasion does not by itself trigger countries to negotiate a tax treaty. Although the prevention of tax evasion and avoidance may be important purposes of a tax treaty, they are not equally important to the purpose of avoiding double taxation. The Confederation of Swedish Enterprise is concerned about the proposal to insert tax avoidance in the title and also the proposed wording in the preamble without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.... In our view, this wording is contrary to the principle behind the BEPS project. In the Action Plan on Base Erosion and Profit Shifting, it is stated that no or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. As previously mentioned, we believe that it is of utmost importance to make a clear distinction between intended and un-intended non-taxation. Such a distinction provides meaning to differences between tax efficiency and aggressive tax planning from a business point of view, and normal tax policy and harmful tax practices from a government point of view. Businesses should be allowed to respond to legislative tax initiatives such as accelerated depreciation or patent box regimes without being accused of aggressive tax planning. Governments need to agree on acceptable forms of tax competition. In return, businesses should adhere to rules and principles agreed upon by and between countries.

12 (13) We believe that the proposal in the title and preamble could be used by tax authorities to compensate deficiencies in national legislation and lead to increased uncertainty for business. If, in a bilateral situation, a domestic rule in country A opens up for unintended non-taxation vis-à-vis country B, country A should amend its legislation. Alternatively, country B will have to request renegotiation of the treaty. It would be an improvement if the wording in the preamble would read without creating opportunities for unintended non-taxation through tax evasion or avoidance C. TAX POLICY CONSIDERATIONS THAT, IN GENERAL, COUNTRIES SHOULD CONSIDER BEFORE DECIDING TO ENTER INTO A TAX TREATY WITH ANOTHER COUNTRY The Confederation of Swedish Enterprise fully supports the policy consideration in the proposed new Section C in the Introduction to the OECD Model Convention. We believe that, if these policy considerations was adopted by countries, there would be fewer loopholes to exploit and thus less need for Anti-Abuse rules. This approach would minimise the impact on genuine business activities. Concluding remarks Introducing provisions like the proposed LOB and MPT would undoubtedly make treaty application extremely difficult. Although, a number of countries have an LOB in their treaty with the United States, similar to the one proposed in The Draft, it is an entirely different thing to insert such a provision into the OECD Model to be used on a global basis. To add, on top of the LOB, a subjective and highly unpredictable provision like the MPT would undoubtedly open up for divergence in interpretation. This would not only increase the number of double taxation cases but would also be an effective trade barrier and thus diminish the primary objective of a tax treaty. Due to the complexity and vagueness of the provisions, it is difficult to foresee the full consequences of the proposed amendments. Consequently, The Confederation of Swedish Enterprise opposes both the LOB provision and the MPT as currently drafted. The Confederation of Swedish Enterprise would recommend the OECD to consider a more targeted LOB that would be limited to truly abusive situations. Considering the fact that a large number of OECD countries are also members of the EU, the Draft needs to address the potential violation of EU law. Should these proposals be incorporated, as they currently stand, it is not difficult to foresee that the impact these changes would have on business would not be positive and would

13 (13) also lead to a dramatic increase of double taxation cases. The effect would be very negative on investments, jobs and growth. This in turn, would also risk undermining sustainable tax revenue collection. Consequently, we urge the OECD to reconsider its proposal in this respect. On behalf of the Confederation of Swedish Enterprise April 8, 2014 Krister Andersson Head of the Tax Policy Department