Better Process Sought for Commentary on OECD Model Treaty

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By Rick Mitchell

July 7 — The work to develop a multilateral treaty under which countries can quickly adopt recommendations from the OECD's international action plan to combat corporate tax avoidance should include an effort to modernize the way OECD commentary is developed, practitioners said.

The current arrangements don't take into account the “new world,” in which countries other than those in the OECD have a say in setting global tax policy, and therefore can contribute to lack of legal certainty for OECD commentary in that world, they said.

A few dozen practitioners from business, law and accounting firms and other groups gathered July 7 for a public consultation on developing a multilateral treaty to implement recommendations from the 15-item OECD plan, which Group of 20 country leaders adopted in November 2015.

The Organization for Economic Cooperation and Development has said such an instrument could speed implementation of its Action Plan on Base Erosion and Profit Shifting by making it possible to simultaneously change of thousands bilateral tax conventions based on the OECD Model Tax Convention rather than changing one treaty at a time.

The ad hoc group tasked with developing the multilateral treaty now numbers some 96 countries and jurisdictions, including the OECD's 35 members, the eight non-OECD countries that are G-20 members and several developing countries.

‘Inclusive Framework.'

The OECD, through its OECD Model Tax Convention, commentary and transfer pricing guidelines, has essentially set global tax policy for decades. But the old order showed some cracks during the two years of the BEPS project, as the organization, pressured by the G-20, gradually expanded the roster of participating countries and jurisdictions to reflect the increasing importance of emerging economies as well as developing countries.

The OECD recently launched an “inclusive framework” in Kyoto to get as many non-OECD and non-G-20 countries as possible to implement the BEPS recommendations (126 TMIN, 6/30/16).

But when it comes to changing commentary to the OECD model treaty, the old approach still applies, speakers at the consultation noted.

Mary Bennett, a partner with Baker & McKenzie LLP in Washington, said that under the current process, non-OECD members can give their positions regarding existing OECD commentary.

“That kind of transparent resource is critical to have here for the BEPS provisions and how the countries will be adopting these new provisions into their bilateral treaties through the multilateral instrument,” she said, adding that it is important for treaty partners to have that information early, before they have to make important decisions.

Bennett said a complication could arise in implementing the multilateral treaty because BEPS measures come with their own commentary—on top of a large volume of existing OECD commentary on, for example, how to attribute profits to a permanent establishment.

‘Obvious Tensions.'

“You won't really be able to understand a country's understanding of the implications of BEPS changes, until you know what their position on the entire commentary related to that article is,” the attorney said.

For example, Bennett said it will be difficult to know if non-OECD countries that “sign up to” 2016 guidance for new PEs established under the BEPS project are actually signing up to the whole authorized OECD approach, which integrates all that existing guidance. She said a mechanism is needed to fully understand a country's position.

As the OECD continues working on its own model, “you've got obvious tensions there about how you integrate development of that with development of an MLI or some other agreement that's going to need interpretation by a broader group of participating countries. I'm on the edge of my seat,” Bennett said.

Philip Baker, of London-based Field Court Tax Chambers, noted that under the current arrangement, of the 96 countries participating in the ad hoc committee for the multilateral treaty, only the 35 OECD countries have a say in developing the OECD commentary. The non-OECD countries can only give their positions after the fact.

‘Legal Uncertainty.'

“Apart from perpetuating the uncertainty of the legal status of the OECD commentary and legal status of petitions by countries, that is not recognizing the new world,” Baker said.

William Morris, tax committee chairman of the OECD's business and industry advisory committee, agreed thisis a problem. Similarly, he noted, complications arise about how countries will apply updated transfer pricing guidelines, which the OECD's governing council recently approved to take into account changes made by the BEPS project.

In some countries the changes are “self-executing”; in some they take the form of soft law; and in others they have hard-law implications. The differences, Morris said, can leave business wondering, “How the heck are we going to deal with this?”

He said the framework of the multilateral treaty itself has to provide the solution to the problem “because what you're talking about essentially is a commentary which is going to be—at least at some level—binding.”

No Consultation Draft

Mike Williams, chairman of the ad hoc group, opened the meeting by attempting to explain why the OECD didn't release a draft of the model before the consultations.

“Some countries would have liked a more open consultation and would have been up for releasing the document. But other countries that maybe have less of a tradition of open engagement on tax policy matters might well have preferred really to not do a public consultation at all,” said Williams, who is director of business and international tax at the U.K.'s H.M. Treasury.

The consultation ended hours early, possibly due to lack of a consultation draft to discuss.

To contact the reporter on this story: Rick Mitchell in Paris at

To contact the editor on this story: Molly Moses at

For More Information

Comments received on the multilateral instrument are at Video of the July 7 consultation is at

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