68 Countries Sign Super Treaty Against Corporate Tax Evasion

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

By Rick Mitchell

Representatives from 68 countries and jurisdictions signed a groundbreaking tax treaty that aims to swiftly change as many as 1,200 bilateral conventions to make them more effective in battling corporate tax evasion.

The multilateral instrument they signed June 7 in Paris, a kind of super tax treaty, is designed to allow countries to quickly adopt recommendations from treaty initiatives from the OECD’s international base erosion and profit shifting project, which the organization conducted on a mandate from the world’s biggest economies.

Pascal Saint-Amans, who heads the Organization for Economic Cooperation and Development’s tax unit, told reporters ahead of the signing ceremony that the most important impact of the multilateral instrument (MLI) is that it will help stamp out a corporate tax avoidance technique called “treaty shopping,” in which companies route profits through low- or zero tax jurisdictions to avoid paying taxes in a third jurisdiction.

“This signing means treaty shopping is dead,” he said.

Will Morris, tax committee chairman of the Business and Industry Advisory Committee—a business group devoted to advising policy makers at the OECD—told Bloomberg BNA in a June 7 email that the MLI “opens the door to changes in the tax treaty process, and to a number of key international tax rules, that are significant.”

But he said businesses still have concerns about key parts of it.

26 Countries Opt for Binding Arbitration

The Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting implements tax treaty measures from the OECD’s 15-item BEPS action plan, developed at the prodding of the Group of 20 countries.

They include:

  •  Action 2 on neutralizing the effects of hybrid mismatch arrangements;
  •  Action 6 on preventing the granting of treaty benefits in inappropriate circumstances;
  •  Action 7 on preventing the artificial avoidance of permanent establishment status; and
  •  Action 14 on making dispute resolution mechanisms more effective, which contains an optional provision on the mandatory binding arbitration of disputes.
The OECD said the treaty itself covers countries’ adherence to minimum BEPS standards, while a flexible approach allows countries to select options for some individual provisions of the treaty, such as mandatory binding arbitration.

Saint-Amans said “a coalition of the willing” of 26 countries has opted for arbitration.

The organization June 7 published a list of the signatories, and documents setting out treaty provisions to which they are committing, as well as ones for which they have “reservations.”

OECD adviser Maikel Evers told Bloomberg BNA the organization is developing a software tool that will allow matching parties on the basis of their positions and reservations. The tool could be available by October, he said.

‘90 Signatories by Year’s End’

Saint-Amans said the MLI gets over a “big hurdle” faced by the BEPS project, changing thousands of tax treaties in a short time.

The signing marks the “first time in history that we’ll have a multilateral convention modifying bilateral treaties,” he said.

More than 100 countries formally adopted the treaty in November. The OECD listed 68 countries and jurisdictions that signed the MLI June 7. Hong Kong, a special administrative jurisdiction under China, is subject to the MLI through China’s signature.

Ten more countries signed “letters of intent,” including major “treaty shopping hub” Mauritius, and are expected to sign the treaty within weeks, and a total of about 90 signatories are expected by year’s end, Saint-Amans told reporters before the briefing.

The first changes to tax treaties through the MLI will take effect by 2018 and impact multinationals’ existing tax structures, “without any grandfathering,” said Saint Amans.

Signatory countries must submit the signed treaty to their legislatures for ratification.

U.S. Doesn’t Sign

The U.S., which participated in the work of the ad hoc group that developed the instrument, didn’t sign June 7. But since it already has tough anti-abuse measures in its treaties, it’s not a serious problem for the success of the MLI, Saint-Amans said.

Morris, who is also PwC’s deputy global tax policy leader, said the U.S. has made clear that it intends to incorporate binding arbitration procedures into future tax treaties.

“So while the U.S. did not agree to adopt the multilateral instrument, the inclusion of mandatory binding arbitration in the MLI is positive and shows a very clear trend—one which the U.S. was instrumental in advancing,” he said.

Business Concerns

Morris called the OECD’s achievement with the MLI “truly noteworthy,” and said “many of us in the business community doubted the OECD would get the consensus necessary for a document of this scope and substance.“

Morris said business has “concerns around the provisions regarding permanent establishments and the “principal purpose” test in the MLI that will play out over time. But he added that he hopes the improvements to mutual agreement procedures and, even more, the group of core countries entering into mandatory binding arbitration will be a huge plus for business.

The MLI’s principal purpose test to satisfy the minimum standard under BEPS Action 6 allows a tax authority to disregard transactions whose main purpose is tax avoidance.

Companies generally oppose the test, which is subjective, and U.S. treaties contain a “limitation on benefits” provision, based on a more quantitative analysis, instead of a PPT.

To contact the reporter on this story: Rick Mitchell in Paris at correspondents@bna.com

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

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