More than 60 countries sign OECD multilateral convention to counter base erosion and profit shifting

by DLA Piper
Contact

DLA Piper

This week's signing ceremony for the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS marks a new and important milestone in the international tax agenda to tackle perceived abusive techniques used by multinational enterprises to lower their global effective tax rate. 

The Convention is the first multilateral treaty of its kind that allows jurisdictions to transpose results from the OECD/G20 BEPS Action Plan into their existing networks of bilateral tax treaties. This means that countries are able to implement a number of anti-avoidance rules into their network of tax treaties without having to renegotiate them one by one. Thanks to this, the impact of the Convention is likely to be far reaching. 

Background

The Convention was initiated under Action 15 of the OECD/G20 BEPS Action Plan to provide countries with an option to amend all their tax treaties in a multilateral context, rather than bilaterally.  The work recognised that many of the anti-avoidance measures adopted under the OECD/G20 BEPS Action Plan will require changes to the OECD Model Tax Convention, as well as to the bilateral tax treaties concluded by countries. The sheer number of bilateral treaties (more than 3,000) would make bilateral updates to the treaty network burdensome and time-consuming, thereby delaying the adoption and effectiveness of measures agreed in the OECD/G20 BEPS Action Plan. 

The Convention was negotiated by more than 100 countries and agreed to in November 2016. However, not all of the countries that have participated in the negotiation of the Convention have chosen to sign the Convention at this time.

On June 7, 2017, 67 countries and jurisdictions signed the Convention, and many more have indicated their commitment to sign.  

Key features

For the countries that have signed, the Convention will come into effect generally, with respect to an existing treaty that is covered by the Convention, three months after both parties to the treaty have deposited their instrument of ratification, acceptance or approval. 

Importantly, although the Convention operates to modify tax treaties between two or more parties to the Convention, it will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, the Convention will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 

The Convention contains two types of tax treaty measures: those reflecting minimum standards agreed to by countries as part of the OECD/G20 work on BEPS and those reflecting optional anti-avoidance provisions.  

Signatories to the Convention have to sign up to the provisions reflecting minimum standards - namely, the provisions on the prevention of treaty abuse in Articles 6 and 7 of the Convention and the provisions on improving dispute resolution in Articles 16 and 17 of the Convention. The Convention does, however, provide flexibility in relation to the options that countries are able to choose within the minimum standards - for example, in deciding whether to adopt provisions on "limitation on benefits" or the "principal purpose test".  

Outside of the minimum standards, the Convention also allows governments to strengthen their tax treaties by adopting other anti-abuse measures and applying them in their own tax treaty networks.  In this regard, the Convention contains specific anti-avoidance rules on transparent entities (Article 3), dual resident entities (Article 4) methods for elimination of double taxation (Article 5), dividend transfer transactions (Article 8), capital gains from the alienation of shares or interests of entities deriving their value principally from immovable property (Article 9), permanent establishment situation in third states (Article 10) and artificial avoidance of permanent establishment status (Articles 12 to  15). 

For each signatory country, a number of decisions have been made with respect to the adoption of the Convention as follows: 

  • Specifying the tax treaties to which the Convention applies (known as the Covered Tax Agreements):  the Convention will apply only to an existing bilateral tax treaty specifically listed by both parties to that agreement.
  • Deciding which provisions that relate to a minimum standard to adopt: countries may, subject to  reaching a mutually satisfactory solution, adopt different approaches to meeting a minimum standard; they may also opt out of a provision that reflects a BEPS minimum standard if the existing treaty already meets the minimum standard.  Whether a tax treaty meets this standard will be subject to review by the Inclusive Framework on BEPS, which brings together a large number of countries and jurisdictions in a peer review process.
  • Opting out of provisions or parts of provisions with respect to all tax treaties - countries may, through the mechanism of reservations, opt out of a provision where it does not reflect a minimum standard.  This opt out will apply even if the other party to an existing bilateral tax treaty did not opt out.
  • Opting out of provisions or parts of provisions with respect to existing tax treaties that contain existing provisions with specific, objectively defined characteristics: the Convention permits a country to reserve the right to opt out of applying a provision. When this option is exercised by one of the countries in a bilateral tax treaty, the other party to the treaty is obliged to observe this reservation.
  • Choosing to apply optional provisions and alternative provisions: the Convention incorporates a number of alternatives or optional provisions that generally will apply only if all parties to an existing bilateral treaty choose to apply them.

Details of the approaches that each of the signatory country has adopted are summed up in a public document on the OECD website

Takeaways: what this convention means for companies

With respect to the minimum standards on preventing treaty abuse, signatories to the Convention have set a higher standard on granting access to their tax treaty network.  This higher standard is likely to create issues for typical intermediate holding,  financing and IP companies that seek to benefit from lower withholding tax rates or exemptions under tax treaties.  It would also be advisable for banks and financial institutions to review whether the Convention has any adverse effects on the ability of their investment entities to access treaty benefits. 

The Convention offers an opportunity for countries to adopt a new permanent establishment definition that tackles artificial avoidance of PE status.  The new PE definition is likely to affect the supply chain for certain multinational enterprise - for example, under the new definition distribution arrangements involving agents and commissionaires are expected to create PEs in the country in which they operate.  It may be advisable for multinationals to adopt a buy-sell distribution model and/or to rationalise their operating model in order to manage the PE risks that are associated with the new definition. 

A multinational group that has multiple presences in a country via separate foreign and local subsidiaries is also more likely to become taxable under the new PE definition.  As a result, the new PE definition could mean more administrative and compliance burdens for multinationals, as well as more tax liabilities and a higher risk of double taxation.  

Countries have the option to sign up to some specific anti-abuse rules in the Convention.  In particular, the Convention allows countries to tackle a common real estate structure where immovable property is held by a company or other entities.  An existing treaty may allow the sale of interest in such a real estate company or entity to be exempt from tax in the country where the real estate is located. In contrast, the new rules in the Convention, if adopted, would allow the countries where the real estate is located to tax any capital gains arising from such sales. 

The Convention does contain some good news for companies. Signatory countries have committed to improve the effectiveness of the mutual agreement procedure under their tax treaties.  The anticipated improvements in access to and effectiveness of mutual agreement procedures offer multinational enterprises a viable alternative dispute resolution mechanism that, until now, has been largely underused because of its inherent legal and practical obstacles. As the BEPS rules take hold globally, bringing with them increasing transparency and regulatory scrutiny, such an alternative dispute resolution mechanism will become increasingly important for multinational enterprises.

Mandatory arbitration offered by the Convention is, in itself, another alternative dispute resolution mechanism that multinationals may find useful.  Twenty-five countries have signed up to this provision following the signing ceremony in Paris this week. This commitment is expected to put further pressure on countries to resolve their disputes under the mutual agreement procedure: countries that cannot resolve their disputes will be forced to accept the results of binding arbitration by third parties. 

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper
Contact
more
less

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.