Brooklyn Journal of International Law


Omri Marian


In recent years, there has been a dramatic increase in the attention given to abusive tax schemes that take advantage of bilateral tax treaties. The ensuing discourse tends to view potential responses to treaty abuses as a hierarchical set of options, gradually escalating, in which treaty termination is a last resort option. This article argues that the hierarchical view of unilateral responses to treaty abuse is misguided. Unilateral responses to treaty-based abuse are not hierarchically ordered. Rather, the approach to treaty abuse is (and should be) functional, adopting specific types of unilateral responses based on the type of treaty abuse at issue.

This article develops a taxonomy of tax-treaty abuses based on two factors: a geographical breadth of abuse and a substantive breadth of abuse. The geographical breadth of abuse refers to whether there is only one or a few treaties being abused, or whether there are many treaties that are consistently abused. The second factor—namely, the substantive breath of abuse—considers whether there are only one or two provisions consistently being abused, or whether the treaty as a whole is used as an instrument of abuse. Based on the geographical and substantive breadth of abuse, different unilateral responses are called for. For example, treaty termination should not be viewed as a “last resort” measure. Sometimes it is simply a first-best (if not the only) solution. Specifically, if the abuse is geographically narrow (meaning, only one treaty is abused), but substantively broad (meaning, the treaty as a whole is primarily used for abusive purposes), a treaty should be terminated. In such context, termination is the most cost-effective way to solve the abuse problem. On the other hand, termination might be an irrelevant response in other instances, for example, when multiple treaties are narrowly abused. In such cases, a treaty override is the correct policy response.