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Tax Avoidance Revisited: Exploring the Boundaries of AntiAvoidance Rules in the EU BEPS Context
Report for the United States
Yariv Brauner
I. The Meaning of Avoidance and Aggressive Tax Planning and
the BEPS Initiative
a. The Meaning of Tax Avoidance in National Legal Systems
Tax avoidance has not been developed as an independent
legal concept in the United States as much as it has in
most European countries. The general philosophy of the
Internal Revenue Code ("IRC") is to prefer rules to
standards, and to avoid general concepts that may lead to a
vast array of interpretations and reduce certainty of the
law. Complementarily, the United States does not employ
General Anti Abuse Rules ("GAAR"), a policy stance further
explored below.
The IRC mentions the term "avoidance" in quite a few
provisions yet in none of them is it defined. Similarly,
the use of the term "evasion" is not defined, and is often
used together (with no specific distinction) with the term
avoidance, albeit with some lower frequency. To the best of
my knowledge Congress has never bothered to define the
term, consistent with its general policy regarding the
drafting of tax laws.
The most common use of the terms avoidance and evasion is
in code sections explicitly permitting the promulgation of
Treasury Regulations (hereinafter referred to as the
"regulations") to combat more or less specific anticipated
circumventions of the rules that contain such permissions.1
The delegation is sometimes general (See, e.g., IRC secs.
42(n)(3) (regarding the low income housing credit),
72(e)(12)(B) (Annuities; certain proceeds of endowment and
life insurance contracts ), 163(i)(5)(B), 163(j)(9)(A),
163(l)(7) (regarding interest deduction), 170(f)(10)(I)
(regarding non deductibility of certain payments in the
charitable contribution context), 172(g)(5)(B) (regarding
certain net operating losses), 197(g) (regarding the
amortization of intangibles), 280G(e)(2)(C)(ii)(III)
(regarding golden parachute payments), 367(b)(1) (regarding
certain transfers from foreign corporations), 409(p)(7)(B)
(reagrding tax credit employee stock ownership plans),
411(b)(5)(B)(v)(III) (regarding minimum vesting standards),
414(o) (regarding employee benefits), 444(g) (regarding
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Such circumvention is often referred to as tax avoidance,
yet
again
only
in
the
specific,
limited
context.
Regulations promulgated pursuant to these code provisions
similarly follow the pattern of specific targeting and
describing
of
undesirable
actions
or
consequences,
special tax year elections), 504(b) (regarding loss of
charity status), 512(b)(13)(F) (regarding unrelated
business income of exempt organizations), 643(a)(7)
(regarding the taxation of trusts and estates), 731(c)(7)
(regarding non-recognition of partnership distributions),
860G(b) (RIC and REIT rules), 864(d)(8) (regarding related
person factoring income), 871(h)(4)(A)(ii) (regarding
denial of the portfolio interest exemption for certain
contingent interest), 877(d)(4)(D), 877(f) &
877(g)(2)(A)(ii) (regarding expatriations to avoid tax),
953(c)(8) (insurance income as Subpart F income), 956(e)
(regarding investment of CFC earnings in U.S. property),
904(i) (regarding the use of consolidation to avoid FTC
limitations), 1474(f) (regarding avoidance of rules on
foreign accounts), 1502 (general authority to regulate the
taxation of affiliated corporations), 4261(e)(3)(C)
(regarding an air transportation excise tax), 7701(f)&(l)
provide authority to prescribe anti avoidance regulations
for abusive uses of related party transactions, pass-thru
entities and conduit arrangements without defining
avoidance or abuse, albeit in the "definitions" section of
the code, 7874(g) (regarding inversions)
, and
sometimes more specific about the potential abuse
anticipated (see, e.g., secs. 45R(i) (regarding employee
health insurance expenses of small employers), 149(g)(5)
(regarding the treatment of hedge bonds), 167(e)(6)
(regarding the non depreciation of certain term
interests), 361(b)(3) (regarding transfers to creditors and
reorganizations), 382(m)(3) (regarding limitations on net
operating loss carryforwards and certain built-in losses
following ownership change), 469(g)(1)(C) (regarding
passive activity losses), 706(b)(4)(B) (regarding
partnerships' tax years), 846(e)(4)(B) (regarding cherry
picking by insurance companies), 897(e)(2) (regarding
coordination of FIRPTA with non-recognition provisions),
936(a)(4)(B)(iii)(III) (regarding the Puerto Rico and
Possessions tax credit election in the context of
affiliated groups), 965(b)(3) (regarding the temporary
dividend received deduction rules), 1022(g)(2)(D)
(regrading denial of benefits on property acquired from a
decedent), 1092(c)(4)(H) (regarding straddles), 1274A(e)(2)
(regarding an election to elect the cash method of
accounting for certain low value transactions), 1503(d)(4)
(regarding contribution of property to dual consolidated
loss corporations),
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avoiding
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and
relevant
In other code sections power is otherwise, i.e., not in the
form of an authority to prescribe regulations, given to the
Secretary (the executive branch, or the Internal revenue
Service ("IRS")) to counter abuse.2 Sec. 1274(b)(3)
includes a unique construct where the IRC denies a tax
benefit (in the context of debt exchanged for property) to
"potentially abusive situations," goes on to define them,
and to permit the Secretary to prescribe regulations
determining the types of situations falling into this
category.
The IRC does include a few provisions that are somewhat
wider in scope. Most notably, sec. 269 in its entirety
grants power to the Secretary to combat acquisitions made
to avoid or evade income taxes.3 Note that the IRC does not
distinguish between tax avoidance and tax evasion as is
common in many jurisdictions even in this case. Similarly
sec. 269A was enacted to counter abuse by personal service
corporations formed or availed of to avoid or evade income
taxes,4 and sec. 269B for stapled entities, although in
this case the detailed rules are left for regulations.5
Sec. 845 regulates the taxation of reinsurance contracts
involving tax avoidance or evasion, again without defining
such terms.
Conversely, Sec. 306 specifies an exception if the
Secretary is convinced that a disposition of 306 stock was
not "in pursuance of a plan having as one of its principal
For example, in the context of annuities not held by
natural persons the code permits fair market value to be
used in the calculation of income rather than the usual net
surrender value if the Secretary suspects abuse. Sec.
72(u)(A). See also, e.g., sec. 404(k)(5)(A) (regarding
denial of deductions for contributions of an employer to an
employees' trust or annuity plan and compensation under a
deferred-payment plan), 672(f)(4) (in the taxation of
trusts and estates context), 897(h)(5)(B)(ii)(II)
(applicability of the FIRPTA wash sale rules), 2107(d)
(shift of burden of proof that one of the principal
purposes of an expatriation had not been tax avoidance if
the Secretary reasonably concludes that the expatriation
would result in certain tax reductions), 6113(b)(2)(B)
(regarding disclosure of nondeductibility of certain
contributions),
3 See, secs. 269(a) (in general), 269(b)(1)(D) (regarding
certain liquidations), 269(c) (explains the extent of the
powers of the Secretary).
4 See, sec. 269A(a).
5 See, sec. 269B(b).
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purposes the avoidance of Federal income tax."6 Similarly,
certain adjustments to earnings and profits are negated
when
avoidance
purpose
is
lacking,7
non-recognition
treatment of certain distributions in corporate divisions
is permitted if not in pursuance of a plan having as one of
its principal purposes the avoidance of Federal income
tax.8 Other, similar reversals of consequences exist in the
IRC when tax avoidance purpose is lacking.9
In yet other cases, abuse changes the consequences of
certain transactions, for example, in the context of
constructive ownership of stock for the purposes of the
determination of the character of stock redemptions.10 Sec.
357(b) also reverses the favorable treatment of an
assumption of liability in a non-recognition transaction
when the principal purpose of the assumption is the
avoidance of tax. Other examples exist, especially in the
part of the IRC that administers the tax system and its
procedures.11
Finally, the IRC includes several specific "anti avoidance"
rules,12 using this term, and other "anti abuse" rules,
again without specifically defining these terms. These
rules also appear often at the procedural part of the IRC.
Sec. 306(b)(4).
Sec. 312(m).
8 Sec. 355(a)(1)(D)(ii).
9 See, e.g., 453(e)(7) & 453(g)(2) (installment method
rules), 614(e)(1) (regarding certain aggregation rules in
the natural resources context), 871(m)(3)(B) (regarding the
treatment of notional principle contracts as dividend
equivalent), 1031(f)(2)(C) (regarding and exception for
denial of benefits in the context of like kind exchanges),
1256(e)(3)(C)(v) (regarding marked to market contracts),
10 Sec. 302(c)(2)(B). See also secs. 467(b) (accrual of
rental payments), 542(c)(8) (abuse affects the definition
of personal holding companies)
11 Other examples include: secs. 1272(a)(2)(E)(ii)
(reversal of an exception to the requirement to include
original issue discount in current income when tax
avoidance is one of the principal purposes of the
transactions, 6662(d)(2)(C)(ii) (enterprise with a
significant tax avoidance or evasion purpose included in
the definition of tax shelter for the accuracy-related
penalties purposes), 6662A (imposition of accuracy-related
penalty on understatements with respect to "reportable
transactions"), 6707A (Penalty for failure to include
reportable transaction information with return),
7872(c)(1)(D) (treatment of below-market loans one of the
principal purposes of which is tax avoidance)
12 See, e.g., Sec. 338
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For example, a transfer of an asset among taxpayers filing
joint returns may be disqualified if done with a principal
purpose of tax avoidance.13
b. The Meaning of Tax Planning, Abusive Tax Planning and
Aggressive Tax Planning in National Legal Systems
United States does not refer to tax planning, abusive tax
planning or aggressive tax planning as legal notions. The
right of every taxpayer to arrange her affairs in a manner
that would minimize her taxpaying is well established, and
may even be viewed as the baseline for United States tax
practice. The concept of abuse or inappropriate taxpaying
behavior more generally is addressed mainly through the
norms themselves. The examples mentioned in the above
section include also a few references to abuse, yet none of
them define abuse as an independent concept. United States
law prefers to describe what is abusive in specific
circumstances, and avoids generalizations on the matter.
The closest concept to abusive or aggressive tax planning
would be the reference to "tax shelters," a general name to
transactions that are somehow inappropriate even if they
comply or may be viewed as complying with the letter of the
law.
The term "tax shelter" was popularized in the 1970s to
describe an individual tax favored investment, usually
investment popular among high-income taxpayers following
expert tax advice. Such investment typically involved
assets subject to favorable cost recovery rules, and often
involved partnership arrangements. Most of this "industry"
was eliminated by the Tax Reform Act of 1986.
In the 1990s however the term surfaced again in the context
of corporate investment. This is the corporate tax shelters
era. Again, tax favored investments are marketed to
taxpayers, yet this time the tax planning schemes are more
sophisticated and the stakes are higher. The tax planning
is clearly much more aggressive. The key components of
these instruments are both tax favored assets and financial
instruments. They main strategy in this industry is
secrecy, to make sure the scheme is not discovered in audit
taxpayers prefer, and are willing to pay, exclusive
instruments or similar circumstances. At the present many
of these tax shelters have been discovered14 and even
Sec. 6015(c)(4)(B)(i).
See the IRS website listing these transactions,
available at:
https://www.irs.gov/Businesses/Corporations/ListedTransactions, and that listing notices about transactions
13
14
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successfully struck down in the courts.15 In some, more
wide-spread cases, such as the so-called "Son of Boss" tax
shelters the IRS also used other techniques, such as
settlement opportunities (mini-amnesty).16 Yet, little has
been done in terms of tax reform to address the challenges
of tax shelters beyond SAARs and new procedural rules to
try and combat tax shelters including disclosure rules for
aggressive
positions,17
themselves
defined
very
of interest, available at:
https://www.irs.gov/Businesses/Corporations/Transactionsof-Interest---Not-LMSB-Tier-I-Issues.
15 See, e.g., Superior Trading LLC vs. Commissioner, Nos.
12–3367, 12–3370, 12–3368, 12–3371, 12–3369 (7th Cir., Aug.
26, 2013).
16 https://www.irs.gov/uac/Strong-Response-to-“Son-ofBoss”-Settlement-Initiative.
17 The American Jobs Creation Act of 2004 (P.L. 108-357).
Technically, the IRC requires the disclosure of reportable
transactions. Each taxpayer that has participated in a
"reportable transaction" must disclose information for each
reportable transaction in which she participated, using
Form 8886. Form 8886 must be attached to the tax return for
each tax year of participation. Even if a transaction is
identified as a "listed transaction" or "transaction of
interest" after the filing of a tax return, the transaction
must be disclosed within a certain period of time. Treas.
Reg. 1.6011-4.
Material advisors with respect to any reportable
transaction must also disclose information about the
transaction on Form 8918.
Loss transactions must always be disclosed (Form 8886). If
an advisor provides material aid, assistance, or advice on
a transaction that results in a taxpayer claiming a loss of
at least one of the following amounts and meets other
filing requirements, then the advisor is a material advisor
and must file Form 8918.
1. For individuals, at least $2 million in a single tax
year or $4 million in any combination of tax years.
2. For corporations (excluding S corporations), at least
$10 million in any single tax year or $20 million in any
combination of tax years.
3. For partnerships with only corporations (excluding S
corporations) as partners (looking through any partners
that are also partnerships), at least $10 million in any
single tax year or $20 million in any combination of tax
years, whether or not any losses flow through to one or
more partners.
4. For all other partnerships and S corporations, at least
$2 million in any single tax year or $4 million in any
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specifically, yet it does not seem to have resolved much of
the issue beyond the typical "cat and mouse" game between
the government and taxpayers. Nonetheless, it should be
noted that the most egregious cases the government has
forcefully pursued the tax advisors behind some of the
shelters,
including
criminal
charges
resulting
in
significant jail time served by some of them.
The effect of BEPS on tax shelter matters is likely to be
very small if not non existent. First, BEPS is unlikely to
affect much substantive tax law. Second, the United States
already
utilizes
the
other
anti-shelter
mechanisms
suggested by the BEPS project. The one exception may be the
PPT in tax treaties that is likely not to be even discussed
in the United States due to the consistent aversion to
GAARs and similar measures.
II. The Reaction to Avoidance and Aggressive Tax Planning
in the BEPS Context
a. Domestic General Anti-Avoidance Rules (GAARs)
The United States is of course not an EU Member State.
Therefore, EC Recommendations do not have any status or
effect on United States law. In any event, United States
tax law traditionally has avoided ordinary GAARs, or
generally applicable norms that give the IRS power to
reclassify
or
otherwise
characterize
transactions
differently from the taxpayer’s characterization. In
particular, United States law avoids subjective, intentbased wide-scoped anti abuse rules.
United States law does not employ an all-encompassing
intent based norm of the kind. One should probably seek the
roots of the resistance to GAARs in the United States legal
combination of tax years, whether or not any losses flow
through to one or more partners or shareholders.
5. For trusts, at least $2 million in any single tax year
or $4 million in any combination of tax years, whether of
not any losses flow through to one or more beneficiaries.
6. A loss from a foreign currency transaction under IRC
sec. 988 is a loss transaction if the gross amount of the
loss is at least $50,000 in a single tax year for
individuals or trusts, whether or not the loss flows
through from an S corporation or partnership.
Some losses do not have to be reported as such: losses from
casualties, thefts, and condemnations, losses from Ponzi
Schemes, losses from the sale or exchange of an asset with
a qualifying basis, losses arising from any mark-to-market
treatment of an item, certain Swap losses (Notice 2006-16).
See also Rev. Proc. 2004-66 & Rev. Rul. 2009-9.
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culture seeking to limit the power of the government vis-àvis the citizenry. This is particularly true with respect
to the Federal government’s taxing powers. For the same
reasons, United States law outside tax law also does not
include a relevant, overarching anti abuse norm of the GAAR
variety. The practical necessity for anti-abuse tools has
been filled by judicially developed doctrines.
Despite the general predisposition against GAARs, two sets
of norms may nonetheless be considered in this context.
The first of these is section 482,18 which functions as the
United States’ statutory transfer pricing regime. Section
482 operates as a GAAR-like rule in that it provides the
IRS with significant discretion to intervene in the
characterization of income from related-party transactions.
This power is translated into a complex arm’s-length based
regime through detailed regulations.19 While the transfer
pricing rules target some of the same abuses as various
specific anti-abuse rules (“SAARs”), these two sets of
rules apply separately and concurrently, and within the
United States tax system are not specifically coordinated.
Although the transfer pricing rules provide the IRS with
significant
power
to
intervene
in
the
pricing
of
intercompany transactions, the United States government has
struggled to enforce the transfer pricing rules. Both the
government itself and the courts have clearly interpreted
Section 482 as a limited transfer pricing provision.
Therefore, it would be difficult to discuss Section 482 in
the same category as traditional GAARs.
The second statutory provision that may be relevant for
this discussion is the relatively new section 7701(o) that
codified the economic substance doctrine that had formerly
been used by United States courts.20 This doctrine was
developed by the courts, yet has always been controversial
and hence not uniformly applied. The codification is the
result of a long debate over the scope of this doctrine
that had been applied inconsistently by various courts. A
key impact of section 7701(o) is that it clarified that a
transaction has economic substance only if (I) the
transaction changes the taxpayer’s economic position in a
meaningful way apart from federal income tax effects and
(II) the taxpayer has a substantial business purpose for
All references are to the United States Internal Revenue
Code and Treasury Regulations unless otherwise provided.
19 Treas. Reg. 1.482-1 to -9.
20 Section 7701(o) was codified as part of the enactment of
the Health Care and Education Reconciliation Act of 2010.
See, also Martin J. McMahon Jr., Living with the Codified
Economic Substance Doctrine, 128 Tax Notes 731 (Aug. 16,
2010).
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engaging in the transaction, apart from federal income tax
effects. This does not mean that every transaction must
have a non-tax business purpose in order to escape section
7701(o), since the decision whether the economic substance
doctrine is “relevant” to a transaction is preliminary to
the above test and should be made regardless of its
content.21 It is unclear how the courts and the IRS would
interpret this provision. Finally, the legislative history
for
section
7701(o)
specifically
excludes
certain
transactions and business decisions that are considered
“normal” from its application, including, but not limited
to: the capitalization choice between debt and equity, the
choice to use a foreign or a domestic corporation for a
foreign investment, restructuring for a (“tax-free”)
reorganization, leasing transactions (that are subject to
separate, facts and circumstances, scrutiny), and the
choice to enter into a related party transaction.22 The
breadth of this exclusion is unclear at this point.23
The eventual impact of this rule as codified is still
uncertain, primarily because it applies to transactions
entered into after March 30, 2010, and so it is difficult
to assess its eventual impact beyond noting additional risk
to taxpayers, and additional power given to the IRS, as a
result of such enactment. Commentators have emphasized
primarily the impact of the codification on the penalties
regime
applicable
to
underpayments
attributable
to
transactions lacking economic substance that now includes
strict liability elements.24 Moreover, section 7701(o) does
not truly codify the economic substance doctrine since it
does not establish a statutory norm as to when should the
doctrine be applied; it merely provides the infrastructure
and the legal instruments for its application. Note also
that it does not affect other judicial doctrines.
Therefore, again, it would be difficult to closely compare
section 7701(o) with traditional GAARs.
The lack of Congressionally enacted GAARs has resulted in
the courts being forced to face transactions that were not
explicitly covered by SAARs, yet perceived as abusive or
contrary to Congress’ intent. The courts have responded by
This is explicitly asserted by section 7701(o)(5)(C).
staff of the joint committee on taxation, technical
explanation of the revenue provisions of the
“reconciliation act of 2010,” as amended, in combination
with the “patient protection and affordable care act,” 152153 (jcx-18-10, march 31 2010).
23 See, e.g., Monte A. Jackel, Dawn of a New Era: Congress
Codifies Economic Substance, 127 TAX
NOTES 297 (April 19, 2010).
24 See, e.g., McMahon, Id.
21
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developing judicial doctrines based on general anti-abuse
principles and standards. These doctrines have then become
available for the IRS to use in challenging transactions
not covered by SAARs. They equally apply to domestic and
cross-border transactions. Note that within the United
States’ discourse these judicial doctrines are never
referred to as GAARs.
The seminal case in the development of these doctrines is
Gregory v. Helvering,25 in which the taxpayer attempted to
convert ordinary income dividends into capital gains via a
chain of transactions, the sole purpose of which was the
reduction of tax. The Supreme Court disregarded these
transactions based on their lack of "business purpose." The
requirement of a business purpose other than the reduction
of tax is sometime mentioned as a separate requirement or
doctrine, although it usually is discussed together with
other doctrines, such as the economic substance doctrine
mentioned above. The most GAAR-like and oft-mentioned
judicial doctrine developed after Gregory is really a
principle known as “substance over form.” This principle
has developed to include a variety of derivative judicial
doctrines and techniques with a similar purpose.26
The “substance over form” principle has been used in
various circumstances. Most notably, in the international
context it was employed in several cases to disregard
intermediate entities as mere "conduits" or "shams" used to
obtain tax treaty benefits. Such tax planning schemes
(sometimes known as “treaty shopping”) take advantage of
the relative mobility and flexibility of certain (often
“passive”) income earned by corporate groups. The seminal
case in this area is Aiken Industries v. Commissioner,27 a
case
in
which
a
United
States
parent
corporation
restructured a loan, originally made to it by a Bahamas
subsidiary, into a back-to-back loan directed through
another subsidiary resident in Honduras. The benefit of the
restructuring was the application of the United States
Honduras
double
tax
treaty,
which
eliminated
the
withholding tax on the interest payments made by the United
States parent to the Honduran entity. The Tax Court in this
case sided with the IRS, disregarding the Honduran
intermediary as a mere conduit, and relying on the fact
that the arrangement between the United States entity and
293 U.S. 465 (1935) (hereinafter, “Gregory”).
For a more comprehensive review, see Philip West &
Amanda Varma, United States Report, in Stef van Weeghel et
al., Tax treaties and tax avoidance: application of antiavoidance provisions, 2010 IFA cahiers de droit fiscal
international.
27 Aiken Ind. v. Comm’r, 56 T.C. 925 (1971).
25
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the Honduran entity simply replicated the former direct
arrangement. Nevertheless, the government’s victory in
Aiken has proven bittersweet, as the case had provided a
roadmap for arrangements in which the intermediary entity
is assigned a minimal risk or function, that the government
has not been able to challenge successfully.28
The sham doctrine is another articulation of the substance
over form doctrine. It could be divided into “sham entity”
and “sham transaction” applications. The "sham entity"
application may be tracked to the United States Supreme
Court decision in Higgins v. Smith,29 where the taxpayer
simply sold, at a loss, securities to a wholly owned
corporation (prior to the enactment of a code provision
preventing it). The Court disregarded the corporation,
drawing an analogy to Gregory, and noting that the
transaction did “not vary control or change the flow of
economic benefits.” Yet, the Court has over the years been
very careful in the application of this doctrine, strictly
adhering as a general rule to the corporate personhood
fiction, and applying the sham doctrine only when no valid
business purpose for forming the entity existed.30 The
Court clarified that the corporate form may be disregarded
only where it is singularly a sham.31
See Yariv Brauner, Beneficial Ownership – the U.S.
report, in Michael Lang et al., ed., Beneficial Ownership
(Forthcoming, Linde, 2013).
29 Higgins v. Smith, 308 US 473 (1940).
30 See, e.g., Moline Properties, Inc. v. Comm'r, 319 US 436
(1936), where a lender had requested that an individual
form a corporation to hold the mortgage and title to
certain property. The corporation carried out some
activity, including refinancing and leasing portions of the
property.
31 The Supreme Court has affirmed the Moline Properties
principle in subsequent cases, holding that a corporation
may act as an agent of its owner in certain narrow
circumstances. Commissioner v. Bollinger, 485 US 340
(1988). In Bollinger, the Supreme Court cited a previous
decision, National Carbide Corp. v. Commissioner, 336 US
422 (1949), for factors to be used in determining whether a
corporation could be deemed an agent for its shareholders
and concluded that the corporation was an agent where “the
fact that the corporation is acting as its shareholders'
agent with respect to a particular asset is set forth in a
written agreement at the time the asset is acquired, the
corporation functions as agent and not principal with
respect to the asset for all purposes, and the corporation
is held out as the agent and not the principal in all
dealings with third parties relating to the asset”.
28
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A similar narrow attitude may be found in the treaty
context. The Aiken Industries32 case mentioned above is the
seminal case establishing the doctrine in this context that
later evolved into the United States version of the
beneficial ownership requirement in tax treaties. It
applied the traditional United States common law principle
that required “dominion and control” over income for
economic ownership. Yet, it eventually had limited success
as an anti-treaty shopping rule due to its focus on the
matching cash flow element in the facts of the specific
case. Following Aiken Industries, the United States began
to include the "beneficial ownership" language in its tax
treaties. The 1977 United States Model included such
language, in part as an initial attempt to develop anti
treaty shopping rules.
Nonetheless, Aiken Industries has also presented taxpayers
with a roadmap for circumventing its rule. The other facet
of the old dominion and control rule was the disapproval of
a
complete
matching
of
cash
flow
in
back-to-back
transactions. Slight diversion from such matching was
viewed as sufficient, and potentially as a small enough
price to pay for the preservation of the opportunity to
treaty shop. In response, the United States attempted to
challenge some of these arrangements and expand the scope
of the Aiken Industries decision, yet with little success,
and hence chose to take a legislative approach, by
implementing some specific domestic anti abuse rules and a
more aggressive general countermeasure – the limitation on
benefits clause that was gradually introduced into all new
United States tax treaties. At the same time, certain
jurisdiction with strong economic ties to the United
States, and favorable tax treaties had accommodated such
planning by allowing taxpayers to leave (and consequently
be taxed on) only small margins in their jurisdictions in
exchange for diversion of such back to back arrangements to
them, as demonstrated inter alia by the Northern Indiana
case,33 where an exclusive tax reduction motive could not
disqualify a transaction. Regardless of one’s opinion of
the sense of litigating this case, this had been a
devastating loss to the United States government. It
affirmed the general position among tax planners about the
narrow scope of Aiken Industries and the sufficiency of
rather minimal “substance” to sustain the form of multistep tax minimizing arrangements. Interestingly, this
Aiken Industries, Inc. v. Commissioner of Internal
Revenue, 56 T.C. 925 (1971)
33 Northern Indiana Public Service Company v Commissioner
of Internal Revenue, 105 T.C. 341 (1995).
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decision included no mention, not even implicit, of the
beneficial ownership concept. The government chose not to
pursue this avenue of argumentation even in the appeal,
after losing in the Tax Court.
Similar
tax
planning,
based
on
treaty
shopping
methodologies, had been used also for other types of income
(other than interest), as demonstrated, for instance, by
the SDI Netherlands case concerning royalties.34
The only other win for the government in the United States
was in Del Commercial,35 yet one should be aware, first,
that in this case the taxpayer loss was primarily due to
its own actions inconsistent with its tax planning scheme
and contracts. Second, the case demonstrates, similarly to
SDI Netherlands, the declining importance of the concept of
beneficial ownership: in SDI Netherlands the government
failed to use it, leaving the court wandering about this
failure, while in Del Commercial the court itself refrains
from a beneficial ownership analysis. The court focused on
another common doctrine, following the substance over form
charge is known as the step transaction doctrine.
According to this doctrine, formally separate steps of a
transaction may be treated as a single transaction for tax
purposes. The step transaction doctrine may be viewed as
another variation of the "substance over form" principle.
In determining whether steps should be integrated under the
step transaction doctrine, courts and the IRS typically
have applied three alternative tests. In the strictest
test,
the
"binding
commitment"
test,
a
series
of
transactions will be "stepped together" only if, at the
time the first step occurs, there is a binding commitment
to undertake the subsequent steps. In the "mutual
interdependence" test, a series of transactions will be
stepped together if the steps were "so interdependent that
the legal relations created by one transaction would have
been fruitless without a completion of the series". Under
the "end result" test, a series of transactions will be
stepped together if the parties' intent at the commencement
of the transactions was to achieve the particular result
and the steps were all entered into to achieve that result.
The step transaction doctrine has been used by courts to
prevent a taxpayer from structuring a transaction in a
certain way to gain inter alia treaty benefits.
SDI Netherlands B.V. v. Commissioner 107 T.C. 161
(1996).
35 Del Commercial Properties Inc. v Commissioner of
Internal Revenue T.C. Memo 411 (1999)
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b. EC Recommendation C-(2012) 8806 of 6 December 2012 and
subject-to-tax rule
As already mentioned, the United States is not a member of
the EC. In addition, the United States has a long standing
commitment to the use of foreign tax credits for the
elimination of double taxation rather than exemption
mechanisms. Therefore, the issue of subject-to-tax clauses
has not been part of the agenda of United States tax treaty
policymaking. Consequently, the United States has not
introduced, and is not expected to introduce a subject-totax rule, as proposed by the EC or otherwise.
III. Transfer Pricing Rules, GAARs, Specific Anti-Avoidance
Rules (SAARs) and Linking Rules
a. Transfer Pricing
The United States transfer pricing regime arose from an
anti abuse rule enacted to prevent tax avoidance in
circumstances that are irrelevant to transfer pricing
(fragmentation of income among related entities to minimize
taxation under a progressive corporate tax rates regime
that has since seized to exist). The language of the
provision – section 482 mentioned above – was sufficiently
wide to encompass other abuses related to actions of
related corporation. Section 482 changed course therefore
and has started to be so utilized as the original target
became irrelevant with the flattening of corporate tax
rates. Nonetheless, it is clear that the rule had anti
abuse origins, and despite its very general language the
IRS was limited to using it only in abusive situations and
only to ensure clear reflection of income in related party
circumstances.
The implementation of the rule was organized around a new
standard, now known as arm's length, chosen by the Treasury
and the IRS to be the most appropriate for income
allocation among related parties. The well-known choice was
for reliance on markets to extrapolate price proxies for
non-market transactions. The United States transfer pricing
regulations responded to the charge in section 482 and
poured arm's length content into the provision.
Alas, the evolution of the transfer pricing regime in the
United States resulted in the near abandonment of the
original
purpose
of
the
rules
in
favor
of
the
implementation and instrumentality of the mechanism chosen
for its application. First the government and then the
courts have limited the regime to a literal application of
the arm's length standard in complete disregard of the
object and purpose of the regime. It was all about
comparability of market and non-market transactions in the
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most straightforward and literal manner. This approach
eventually resulted in disturbing conflicts with the
ignored object and purpose of the rules. Yet, when the
government attempted to revise the rules, and adjust the
arm's length instruments to stop certain perceived abuses
it consistently failed, either in attempts to finalize
regulations or in the courts, attempting to defend
purposive interpretation that allegedly deviated from the
practiced literal arm's length. Most pointedly, in a
recent, controversial case the court explicitly stated that
the purpose of transfer pricing is to treat related party
transactions in the same manner as non-related party
transactions, completely ignoring the anti abuse roots of
the regime. Of course, the application of the detailed
arm's length rules in the regulations combats much of tax
avoidance attempted by related parties, yet it does so
indirectly and only through the prism of the literal arm's
length and the prescribed regulations. There is no direct
targeting of abuse or tax avoidance. The failure of the
regime proves this point, and the transactions put under
scrutiny by BEPS are the most salient examples for this
outcome.
Assessing the efficacy of transfer pricing rules in
combating tax avoidance, one should note the impact of the
instrumentality of the arm's length rules on the practice.
Rules with strong anti-abuse flavor shift power to the tax
authorities and eventually to the courts to shape the
contours of avoidance. Procedural rules with less anti
abuse flavor, such as the United States transfer pricing
rules, end up with the practice adjusting and eventually
reaching a stable status quo that is very difficult to
change regardless of its desirability or of changing
circumstances. This is exactly what happened with the
practice of transfer pricing in the United States. Changes
in market circumstances, such as the rise of intangibles,
resulted in surges in litigation, yet the conservative
approaches of the government and the courts resulted ins
only a few outlier cases in support of the government
position and almost universal fortification of the literal
arm's length as established by the tax practice.
Two lines of cases are notable in this context. The first,
surging in the 1980s involved the valuation of intangibles.
These cases established a norm of reliance on business
valuation techniques and on markets. This is ironic since
the actual cases were not decided based on the valuations
themselves but almost universally based on rough justice
proxies that appealed to the courts that found the
evaluation of business valuations very challenging. Such
outcomes had been concerning for both the government and
taxpayers, ending up with both strongly refraining from
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litigation
on
such
matters,
compromises and such to it.
November 2015
preferring
practical
The second, more recent cases involved the specific cost
sharing rule included in Treas. Reg. 1.482-7. Despite its
safe harbor character the courts chose to emphasize the
dominance of literal arm's length even in this case of an
explicit exception from arm's length, resulting in a series
of bitter losses for the government.
These outcomes point again to the poor efficacy of transfer
pricing as practiced in the United States as an anti-tax
avoidance mechanism.
b. Limitation on Benefits ("LOB")
All but two (soon to be only one) of the United States tax
treaties currently in force contain LOB articles. LOB
articles intend to ensure that an entity allegedly resident
in one state has a sufficient nexus with that state to
justify the application of the treaty. In general, an LOB
article provides that only "qualified residents" are
entitled to benefits under the treaty if such benefits are
restricted to residents of the contracting states under the
treaty. Under the 2006 United States model convention,
individuals,
the
contracting
states,
or
political
subdivisions thereof, and certain tax-exempt organizations
are
qualified
residents.
A
company
resident
in
a
contracting state is a qualified resident if it meets the
requirements of one of a few tests included in different
versions and combinations in different actual tax treaties.
The first test is known as the public company test. It is
generally met if a company, the principal class of its
shares, and any disproportionate class of shares, is
regularly traded on one or more recognized stock exchanges.
Subsidiaries of publicly traded companies are qualified
residents if five or fewer publicly traded companies that
would be entitled to benefits are the direct or indirect
owners of at least 50% of the aggregate vote and value of
the
company's
shares
(and
at
least
50%
of
any
disproportionate class of shares).
The second ("ownership") and third ("base erosion") tests
are often combined. Companies qualify under an "ownership
and base erosion test" if (a) 50% of the aggregate voting
power and value of the company is owned, directly or
indirectly, by certain qualified residents and (b) less
than 50% of the entity's gross income is paid or accrued to
certain persons not entitled to benefits under the treaty.
A company not otherwise eligible for treaty benefits
generally under the tests described above may nevertheless
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qualify for treaty benefits with respect to certain items
of income if the company meets the fourth test, known as
the "active trade or business" test.36 In general, an
entity may meet the active trade or business test if: (a)
the entity is engaged in "the active conduct of a trade or
business" in its residence state; (b) the income derived
from the source state is "derived in connection with, or is
incidental to" that trade or business; and (c) the item is
derived from a trade or business conducted in the source
state or from a related person, the trade or business
activity in the residence state is "substantial" compared
to the trade or business activity in the source state.
Several of the US tax treaties, but not the 2006 U.S. model
convention, have triangular provisions that add additional
requirements to the LOB article. Under a triangular
provision, when an enterprise of a contracting state
derives income from the other contracting state, and that
income is attributable to a permanent establishment in a
third jurisdiction, treaty benefits will be limited unless
the combined tax that is paid with respect to such income
in the residence state and the third jurisdiction is more
than a specified percentage of the tax that would have been
payable in the residence state if the income were earned in
that state by the enterprise and were not attributable to
the permanent establishment in the third jurisdiction.
The "main purpose" language of the OECD model commentary
was specifically rejected by the U.S. Senate in its
consideration of proposed treaties with Italy and Slovenia.
The Senate placed reservations on those treaties when it
approved them in 2000, which were based on concerns about a
main purpose anti-abuse rule. The Slovenians promptly
agreed to the treaty with the reservation but the Italian
treaty entered into force only in late 2009, after almost
10 years of consideration by the Italians. It is likely
that the BEPS PPT, using the "one of the principal
purposes" language, will be similarly rejected.
c. CFC Rules
An important part of the United States' anti-abuse rules
has been devoted to curtailing what Congress considered to
be inappropriate deferral of United States taxation of
income
earned
by
foreign
subsidiaries
of
domestic
corporations.
Since
1937,
the
IRS'
response
to
Some treaties include "derivative benefits" provisions
that may be used by non qualified residents to benefit from
treaty benefits, albeit not the tested treaty benefits,
but, for instance, their own country's treaty benefits, if
any.
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inappropriate deferral had been to identify and limit it
with specific legislation. This resulted in several antideferral regimes, each of which attempting to stop
different such tax planning schemes. This ad-hoc approach
increased the complexity of the law. Congress responded in
2004, essentially reducing anti deferral to one regime
primarily targeting corporations (subpart F), and one
primarily, yet not exclusively, targeting individual
investors
(passive
foreign
investment
company
rules
(“PFIC”). This section describes them in order.
1. Subpart F
The controlled foreign corporation (“CFC”) laws were first
proposed by the Kennedy Administration in 1961, partly as a
means to prevent the outflow of United States corporate
investment
overseas.37
The
Kennedy
Administration’s
original recommendation to completely eliminate the ability
of companies to defer their United States tax on offshore
earnings met with Congressional resistance; 38 there was
concern primarily about the global competitiveness of
United States corporations.
The Subpart F rules, which
significantly reduced the ability of taxpayers to defer tax
on mobile income which was perceived as lending itself to
potential abuse of the deferral system, represented a
narrowing of the original proposal, intended to allow
businesses to maintain their competitiveness in the world
economy.39
The CFC rules that were subsequently codified in 1962 as
the “Subpart F” regime, require a U.S. shareholder (a
defined term) of a CFC (also a defined term) to currently
include in gross income its pro rata share of (1) the
Subpart F income (another defined term) of the CFC, (2)
previously excluded Subpart F income withdrawn from
See Hearings on the President’s 1961 Tax Recommendations
before House Committee on Ways and Means, Doc. No. 140,
87th Cong., 1st Sess. 8-10 (1961).
38 See e.g., The Dissenting Views of Senators Frank
Carlson, Wallace F. Bennett, John Marshall Butler, Carl T.
Curtis and Thruston B. Morton in Section 11 – Foreign
Source Income, H.R. 10650, as amended by the Sen. Fin.
Comm., 1962-3 C.B. 1059; Additional Views of Senator Eugene
J. McCarthy on H.R. 10650, 1962-3 C.B. 1054; and the
Supplemental and Minority Views of Senators Paul Douglas
and Albert Gore, 1962-3 C.B. 1092.
39 See P.L. 87-834, 76 Stat. 960 (1962). H.R. Rep. No.
1447, 87th Cong., 2d Sess. (1962); S. Rep. No. 1881, 87th
Cong., 2d Sess. (1962); H.R. Conf. Rep. No. 2508, 87th
Cong., 2d Sess. (1962).
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investment in less developed countries and (3) the increase
in earnings of the CFC invested in certain U.S. property.40
Included within the 1962 legislation were (1) rules
providing that U.S. shareholders would be taxed on the gain
on the sale or disposition of CFC stock at ordinary income
rates instead of capital gain rates to the extent of a
CFC’s earnings and profits that had not been previously
taxed under Subpart F and (2) rules preventing sales or
exchanges of certain intellectual property by a United
States corporation to a foreign affiliate from escaping
ordinary income tax rates.41 The government’s CFC policy
has zigzagged over the years between legislation which
limits the impact of the Subpart F rules, and attempt to
expand these rules.42 The future trend regarding Subpart F
is currently unclear. If fundamental tax reform occurs in
the United States, significant modification of the Subpart
F regime likely will be part of the agenda.
The United States applies a combination of transactional
and jurisdictional approaches to CFC anti-avoidance. On the
one hand, the Subpart F regime taxes the (mainly) passive
income of a CFC, however, the location of a CFC is also
vitally important to the application of Subpart F. As
defined in the Code and expanded upon further below, the
definition of “Subpart F income” includes a number of
different categories of income. The most significant
category of Subpart F income is foreign base company income
(“FBCI”), which includes foreign personal holding company
income, foreign base company sales income, foreign base
company services income and foreign base company oil
related income.43 Each of these categories of income is
primarily
transaction
based,
but
also
includes
a
jurisdictional component. For example, foreign personal
holding
company
income
(“FPHCI”)
generally
includes
See P.L. 87-834, 76 Stat. 960 (1962).
Id.
42 Cf. Section 954(c)(6) CFC look-through rule, enacted in
2004, which generally provided an exclusion for certain
dividends, interest, rents and royalties received or
accrued by one CFC from a related CFC from Subpart F
income, with more recent proposed legislation which would
significantly extend the scope of current inclusions from
intangible property transferred outbound. Proposed Section
954(a)(4) would create a new category of Subpart F income
called “foreign base company excess intangible income.” See
“The President’s Plan for Economic Growth and Debt
Reduction” at page 50 (available at:
http://www.whitehouse.gov/sites/default/files/omb/budget/fy
2012/assets/jointcommitteereport.pdf (Sept. 18, 2012)).
43 See Internal Revenue Code (the “Code”) Sections
(“Section” or “Sections”) 952(a) and 954(a).
40
41
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dividends, interest, rents, royalties, along with other
types of passive income, including certain gains from the
sale of property.44 However, a “same country” exception to
the inclusion of certain items of FPHCI as Subpart F income
means that an item of passive income paid from one entity
to another can be entity in the same jurisdiction can be
excluded from Subpart F income provided the item of income
and the payor meet certain requirements. Similarly, while
foreign base company sales income generally consists of
income from transactions involving the purchase and sale
of personal property involving related parties, there is a
jurisdictional component to these set of rules as well;
sales income generally is only categorized as Subpart F
income in cases where the transactions do not have a
specified
connection
with
the
CFC's
country
of
45
organization.
It does not include income from services
provided to an unrelated person or income from services
provided
to
any
person
in
the
CFC’s
country
of
incorporation.46 Finally, a “high tax exception” applies to
all type of foreign base company income, under which a
CFC’s income that otherwise may be treated as Subpart F
income may be excluded if it is considered “high tax”
income.47 Also note that the United States' “check-the-box”
rules which effectively allow for elective or pass-through
status for many foreign entities have had a significant
impact on the Subpart F regime.48 Because United States
taxpayers may now elect to treat many foreign entities as
disregarded entities, payments running between foreign
affiliates which prior to the advent of the check-the-box
rules would have given rise to Subpart F income, are now
exempt from these rules.
2. PFIC
Enacted
in
1986,
PFIC
is
an
anti-deferral
regime
complementary
to
Subpart
F,
targeting
(portfolio)
investment by individuals that is perceived as structured
for the primary purpose of United States tax minimization.
The PFIC rules, like the Subpart F rules, are drafted as
objective, mathematical rules, rather than intent based
See Section 954(c).
See Section 954(d).
46 Id.
47 See Section 954(b)(4) and Treas. Reg. §1.954-1(d). This
exception, although it recognizes the potential for abuse
value related to different tax rates, does not reflect a
general U.S. policy that ties the potential for abuse to
the actual level of foreign tax.
48 See T.D. 8697, 61 Fed. Reg. 66584 (12/18/96). The
regulations were effective as of Jan. 1, 1997.
44
45
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rules. They apply regardless of control and with no de
minimis or threshold application; their effect is, first,
to identify shares held by United States residents in
certain circumstances, and, second, to tax the shareholders
in a manner that eliminates the benefit of deferral. PFIC
shares are identified as such if they are held by United
States taxpayers in a foreign corporation that meets one of
two tests in any given year: (i) 75 percent or more of the
company’s gross income is passive income; or (ii) 50
percent or more of the company’s assets are passive, i.e.,
de facto or potentially produce passive income (based on
average value or adjusted basis of the assets).49 Passive
income is generally income qualified as FPHCI, in
coordination with Subpart F. A minimal exception is
provided for start-up corporations or corporations changing
businesses for the single relevant year only.50 Once
applied, the PFIC “taint” cannot be purged with respect to
the particular shareholder until she is taxed under one of
three particular regimes. The default regime does not
imposes an interest charge upon a realization event,
thereby reversing the benefit of deferral. One may escape
the interest charge by voluntarily conceding the benefits
of deferral, and electing to be taxed as if the corporation
were transparent with respect to such shareholder’s shares
(Qualified Electing Fund or “QEF” election). 51 A mark-tomarket regime is also available to shareholders in publicly
traded PFICs.52 For non-publicly traded PFICs, the regime
is designed in such a way as to incentivize shareholders to
make the QEF election and avoid the punitive interest
charge. Taxation is triggered by distributions or stock
dispositions, which are defined broadly for this purpose.
3. PFIC and CFC
Because the PFIC and Subpart F rules overlap, the IRC
provides a coordination rule that gives preference to the
latter; i.e., a company that is considered both a CFC and a
PFIC (with respect to a specific taxpayer) generally are
governed by the Subpart F rules.53
d. BEPS Action 2 Linking Rules
The United States does not presently employ linking rules
of the type recommended by the OECD in BEPS action 2.
49
50
51
52
53
See
See
See
See
See
Section
Section
Section
Section
Section
1297(e).
1297(b)(2)-(3).
1295(b).
1296.
1297(d).
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Moreover, the United states seems to be commited to its socalled check-the-box rules that permit "hybridization" of
entities by a simple election. Despite the prominent role
of this election in hybrid structures involving United
States MNE the rule itself was not discussed by the BEPS
reports.
The Obama administration has made a few proposal that are
intended to be consistent with BEPS action 2. One proposal
basically adopts the OECD proposal for interest and royalty
payments made to related parties. Another proposal would
reverse the taxpayer friendly look-thru rules to subpart F
in the case of hybrids. There is little likelihood that
these proposals will eventually be enacted.
e. Earning Stripping (section 163(j))
The United States has thin capitalization rules limiting
the deductibility of interest paid by a United States
person to a related party if the related party is not taxed
on the interest.54 Pursuant to section 163(j) an interest
deduction is denied, whole or part if the taxpayer
corporation has a debt-to-equity ratio of at least 1.5:1
and its net interest expense exceeds 50% of its adjusted
gross income.
f. Other SAARs
The importance of SAARs in the United States system makes
their comprehensive review beyond the scope of this report.
Yet, a few prominent and most relevant examples are
helpful. First, notably some SAARs specifically target
Passive Income Earned by Corporate Groups.
1. Anti Conduit Regulations55
The anti-conduit regulations permit the IRS to ignore, and
consequently, deny treaty benefits in certain back-to-back
loans and similar financing transactions. These rules have
been criticized on the ground that they override U.S.
treaty obligations, yet the U.S. has adopted the position
that these rules are a permissible domestic anti-abuse rule
and merely articulate the beneficial ownership concept,
operating as a supplement to the LOB articles in United
States tax treaties.
Similarly the rule applies when the debt is guaranteed
by the related person.
55 Treas. Reg. 1.881-3, issued pursuant to Section 7701(l).
54
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2. Section 894(c)
This statute and the attending regulations generally
provide that a foreign person is not entitled to reduced
treaty rates on income derived through a fiscally
transparent entity under certain conditions, namely: (i)
the foreign country does not treat such income as income of
such person; (ii) the relevant treaty does not specifically
address
income
derived
through
fiscally
transparent
entities; and (iii) the foreign country does not tax the
distribution of income from the relevant entity to the
foreign person.
3. U.S. Investment by Foreign Subsidiaries
Various other rules attempt to reduce the desirability of
investment in the United States by foreign subsidiaries of
United States
corporations. Some rules target such
investment in
cases in which
it is perceived as
circumventing Subpart F. Section 956 is an example of these
rules and is briefly described in the Subpart F discussion.
Other rules concern investment in United States real
estate, ensuring U.S. taxation of profits in cases of both
direct and indirect ownership.56
Others SAARs Indirectly Affect Passive Income Earned by
Corporate Groups
4. Section 267
Section 267 limits the deductibility of losses and interest
related to transactions between United States persons and
controlled foreign affiliates in certain circumstances.
5. Section 7874 and Regulations
In response to the migration of corporate groups originally
controlled by United States parent companies into foreigncontrolled groups (typically in low tax jurisdictions),
Congress enacted an “anti-inversion” regime that in certain
cases treats the inverted (i.e., now foreign) company as a
United States corporation for United States tax purposes,
or, alternatively limits the ability of the inverted
company and/or its shareholders from taking advantage of
certain tax attributes in connection with the transaction.
6. Transfers of Intangibles - Section 367(d)
56
See Section 897.
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Complementing the transfer pricing rules, this “superroyalty rule” taxes a United States person selling an
intangible to a foreign person as if the transfer was a
license and the income a royalty stream, ensuring a clear
reflection of income that is difficult to assess ex-ante.
The specific application of this rule and the regular
relevant transfer pricing rules applicable to intangibles
are currently relatively easily avoidable in appropriate
circumstances via the use of the cost sharing regime.57
IV. Application of GAARs, TP Rules and SAARs
The application of the anti abuse rules in the United
States is generally non-hierarchical. The lack of a regular
GAAR results in a system that uses many SAARs in parallel.
There is no effective legal status hierarchy among these
and hence they apply independent of each other, and
typically in an uncoordinated manner.
The transfer pricing rules may be viewed as anti abuse
rules or part of the anti abuse system in United States tax
law, yet, technically they operate in a traditional manner,
i.e., as tax accounting rules determining how much income
the relevant taxpayer (the domestic taxpayer among the
related parties involved in a transaction) has in any
particular year. As such, this determination is made prior
to the application of any other anti abuse laws, and its
consequences would establish the facts and circumstances,
the benchmark which the other SAARs would test. Of course,
it is possible that an application of any SAAR would result
in a tax position that is not at arm's length and would
require at least a reconsideration under the transfer
pricing rules, yet this is not the case typically.
A few rules include internal ordering provisions in either
the substantive or their procedural companion. For example,
when both the Subpart F and PFIC rules apply the former
generally prevails.58 These ordering rules should not be
viewed however as hierarchical in nature in most cases.
There are multiple procedural rules related to the
application of the transfer pricing and the specific anti
abuse rules. Yet, beyond the preliminary application of the
transfer pricing rules (for the reasons explained above)
and the strong preference for application of domestic
rather than treaty law first, they do not generally affect
the outcome in the United States. Note that many of the
procedural rules accompanying SAARs are rather specific,
See, e.g., Veritas Software Corp. v. Com’r 133 T.C. 297
(2009), nonacq AOD. 2010-005.
57
58
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providing conditions, terms and paperwork requirements. The
IRS is typically very strict in following these conditions.
25