68 Countries Agree to OECD Anti-Treaty-Shopping Provision

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

All of the 68 countries that signed the OECD’s multilateral tax treaty to combat multinational companies’ tax avoidance embraced one of its main provisions, which allows a government to disregard transactions based on a company’s motivation for executing them, an organization official confirmed today.

The countries agreed to the so-called principal purpose test (PPT) under Article 7 of the treaty, which states that a company won’t be able to take advantage of a treaty benefit if a conclusion can be drawn that obtaining the benefit was one of the principal purposes of the transaction in question. “All of the signatories” to the treaty will apply the test, said OECD adviser Maikel Evers, speaking in an Organization for Economic Cooperation and Development web seminar broadcast from Paris.

A key objective of the OECD’s multilateral instrument (MLI) is to stamp out “treaty shopping,” in which multinational companies route profits through low– or zero–tax jurisdictions to avoid paying taxes in a third jurisdiction. The treaty is groundbreaking because it will allow countries signing it to swiftly adopt many of the recommendations from the OECD’s project to combat tax base erosion in their network of bilateral treaties. Once it is ratified by individual countries, the MLI would amend a significant portion of the worldwide tax treaty network.

Some treaties already have a PPT, Jesse Eggert, a former OECD official, said. But “they represent a significant change to other treaties, and companies will need to be prepared to adjust to that change,” said Eggert, now a principal in the international tax group of KPMG LLP’s Washington National Tax practice. While with the OECD, Eggert led the negotiations with more than 100 jurisdictions to develop the MLI.

China, France, Germany, Japan, the Netherlands, Singapore, Switzerland, and the U.K are among the 68 countries that have signed the MLI and adopted the principal purpose test.

1,100 Bilateral Tax Treaties

In order for the MLI to have an impact on bilateral treaties, there must be a “match” of country positions, Evers said. There are 1,100 bilateral tax treaty matches for the MLI’s principal purpose test, representing “nearly a third” of the world’s 3,500 bilateral tax treaties, he said.

“The number will go up quickly as further signatories join, and there will be more joining soon,” the official said.


Twelve jurisdictions decided to supplement the PPT with a simplified limitation-on-benefits (LOB) provision, Evers said.

Article 7 of the MLI would allow governments to deny treaty benefits to companies under a detailed LOB provision as well as under a PPT.

An LOB provision would allow or deny benefits based on a list of qualifying factors, such as the entity’s legal nature and ownership, and the general activities of residents in a jurisdiction.

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

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