handbook-tb

Graeme S. Cooperthe tax administration of the treaty partner because the taxpayer lacksany real presence in the other contracting State.A State might, nevertheless, be tempted by the argument thatany new investment is to be welcomed, even if it comes as a result ofthird State investors shopping into the country’s treaty network. Afterall, the point of the treaty was to encourage greater inward investmentand this has been achieved, albeit from an investor resident in a thirdState. This position may be tempting, but it is short-sighted. 14Just how serious the threat of improperly accessing a country’stax treaties is depends to some extent on who is gaining access to thetreaty. It can be helpful to draw a distinction between two differentforms of inappropriate access to a treaty:‣ ¾ Shopping into a tax treaty — a taxpayer resident in State C (aState which does not have a treaty with the source country, StateA) puts in place a mechanism to get access to the treaty betweenState A and State B; and‣ ¾ Shopping between tax treaties — a taxpayer resident in State C(a State which has a treaty with the source country, State A) putsin place a mechanism to get access to the treaty between StateA and State B, instead of being subject to the terms of the treatybetween State A and State C.The second situation may, but need not, be problematic for StateA. As will be seen, the difference can matter when tax officials try todecide what situation should be taxed in lieu of the offending situation— that is to say, if the benefits of the treaty are to be denied, shouldother tax consequences follow instead?The principal factors which encourage shopping into tax treatiesand shopping between tax treaties are:14The considerations for capital exporting countries are slightly different.Their concern will likely be that third countries will see less need to negotiate atreaty if their residents can free-ride on the treaty of another country. The residentsof the capital exporting country will not enjoy reduced source-countrytaxation in those third countries. This will mean that the capital exportingcountry will reduce its revenue claims without the offsetting increase in revenueexpected to arise from a corresponding reduction in the source country.282