BEPS Action 6: How the World Is Closing the Treaty Shopping Loophole
If you have ever wondered how large multinationals manage to reduce withholding taxes and, in combination with other structures, significantly lower their overall tax burden, part of the answer lies in something called treaty shopping. And part of the global effort to stop it lives in OECD BEPS Action 6.
This article explains what Action 6 is, why it was needed, and how far the world has actually come in implementing it.
Tax Treaties Being Gamed
Tax treaties exist for a legitimate reason. When two countries agree to a bilateral tax treaty, they are essentially deciding how to share taxing rights over cross-border income. The idea is to prevent the same income being taxed twice and to encourage investment between the two countries.
The problem is that these treaties created opportunities for abuse. A company could structure itself through a shell entity or holding company to appear to be a resident of a country it had no real connection to, purely to access the treaty benefits that country had negotiated with another jurisdiction. This is treaty shopping, whereby a company tries to access a tax agreement it is not the intended beneficiary of, by routing through a jurisdiction that is.
The consequences are significant. Income may be taxed at rates far below what was intended and, in some cases when combined with other structures, may escape taxation altogether. Countries that are the true source of the income lose revenue. Jurisdictions with strong treaty networks become attractive not because of genuine economic activity, but because of the loopholes in their agreements.
What Action 6 Does
Action 6 is one of four minimum standards established under the OECD/G20 Base Erosion and Profit Shifting (BEPS) project. This means it is not optional guidance. Every member of the BEPS Inclusive Framework has committed to implementing it. The minimum standard requires both an anti-abuse rule and treaty preamble language clarifying that the treaty is not intended to facilitate tax avoidance or treaty shopping.
At its core, Action 6 requires countries to include anti-abuse provisions in their tax treaties to prevent treaty shopping. It does not prescribe a single method. Jurisdictions can choose between a Principal Purpose Test (PPT), a Limitation on Benefits (LOB) clause, or a combination of both. What they cannot do is leave their treaty network without any protection at all.
The Principal Purpose Test is the simpler of the two approaches. It denies treaty benefits where one of the principal purposes of an arrangement was to obtain those benefits. It is essentially a purpose-based anti-avoidance rule. The Limitation on Benefits clause is more structural: it restricts treaty benefits to entities that meet specific tests related to their ownership, nature, and level of genuine economic activity in the treaty country.
The MLI: The Mechanism That Made It Scalable
Renegotiating hundreds of bilateral tax treaties one by one would have taken decades. The solution was the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. This is known as the MLI.
The MLI allows jurisdictions to modify multiple existing treaties simultaneously, without the need for individual renegotiation. A jurisdiction signs the MLI, specifies which of its treaties it wants to bring within scope. Where both treaty partners have listed an agreement and the relevant MLI provisions apply, the MLI modifies that treaty without requiring a full renegotiation.
The results have been significant. As of the third peer review report on Action 6, 94 jurisdictions had joined the MLI and 54 had ratified it. Once fully in effect, the minimum standard was set to be implemented across approximately 1,700 bilateral agreements. Between 2020 and 2021 alone, compliant agreements between Inclusive Framework members covered by the MLI increased by nearly 50%, from around 350 to over 650.
Where the Gaps Remain
Progress has been real, but it has not been uniform. One persistent problem identified in peer reviews is what are called one-way arrangements. These are treaties where only one party has listed the agreement under the MLI, or where renegotiation was planned but has not materialised. Where no bilateral renegotiation is underway and a treaty has not been listed under the MLI, it remains non-compliant with the Action 6 minimum standard. These agreements continue to present treaty shopping risk, and the peer review process has been the primary mechanism for identifying and flagging them.
The peer reviews also highlight a practical limitation: where MLI coverage remains incomplete, the framework leaves considerable discretion to jurisdictions regarding how and when they will bring treaties into compliance. As a result, the quality and speed of implementation can vary across the treaty network, even among jurisdictions committed to the minimum standard.
Why This Matters Beyond Tax
Action 6 is not just a technical tax story. It is an example of how international law adapts slowly, through multilateral consensus to close gaps that market actors have exploited faster than regulators could respond.
The MLI model is particularly interesting from a legal design perspective. Rather than creating a new treaty regime from scratch, it retrofits protections into thousands of existing agreements through a single instrument. The approach of layering new obligations onto existing frameworks is increasingly how international regulatory coordination works, and it has lessons for other areas where cross-border rule gaps are being exploited, from digital services taxation to AI governance.
For now, the trajectory on Action 6 is positive. Most Inclusive Framework members are implementing the minimum standard. The peer review process is catching non-compliance. And the MLI continues to bring more agreements into scope. The opportunities for treaty shopping that persisted for decades are gradually being narrowed, even if gaps remain in parts of the global treaty network.
Disclaimer: This publication is for educational and informational purposes only and does not constitute formal legal advice or create an attorney-client relationship.