‘At Least’ 60 Nations Likely to Sign OECD Super-Treaty: Official

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

At least 60 countries are expected to sign the OECD’s ground-breaking “multilateral instrument,” a kind of super-treaty that will enable multiple changes to the global tax system to be made at once, in Paris on June 7.

“I cannot give you a precise number because it keeps changing but we expect at least 60 countries to sign on June 7 in Paris, with more to follow,” Grace Perez-Navarro, deputy director for taxes at the Organization for Economic Cooperation and Development, told Bloomberg BNA June 2.

“You can expect to see most OECD countries, G-20 countries and a number of developing countries” sign the multilateral instrument (MLI), Perez-Navarro said in an email.

The U.S. is seen as unlikely to sign on to the agreement for two reasons: officials have limited interest in the provisions, and they expect it will be difficult to get Senate ratification.

The MLI will adopt several items from the OECD’s Action Plan on Base Erosion and Profit Shifting—its comprehensive rewrite of the global tax rules—by changing aspects of existing double tax treaties. Those changes include new language for preventing abuse of treaties and a new definition of “permanent establishment,” the taxable presence of a foreign entity not registered in a jurisdiction.

Second Signing Ceremony

The MLI will enable a much faster and more consistent implementation of changes to the vast network of existing bilateral tax treaties than would have been possible through bilateral negotiations, Perez-Navarro said.

The OECD expects to hold a second signing ceremony later in the year, the OECD official said. “There are a number of countries that were not able to finalize all of their internal procedures in time to be ready to sign on the 7th but expect to be ready shortly thereafter.”


Each country signing the treaty June 7 will state which MLI provisions it is agreeing to, as well those it is “reserving” on, or not agreeing to. Perez-Navarro said the OECD hopes to release that information at the time of the signing ceremony, scheduled for 6 p.m.

A former OECD official said he understands that on the day of the signing, the OECD plans to release a PDF file containing the “MLI position” of each signatory. That position includes the income tax treaties a country is choosing to update through the MLI as well as which provisions it plans to adopt or reserve on.

Jesse Eggert, now a principal in the international tax group of KPMG LLP’s Washington National Tax practice, told Bloomberg BNA June 2 that the provisions a country signs up to on June 7 may not be the final provisions for the country. Under the MLI, the positions provided at signature are subject to change upon ratification—unless a signatory specifically elects to provide a final position in advance. Eggert led the OECD’s negotiations among more than 100 jurisdictions to develop the MLI.

Matching Process

The OECD will supplement the MLI positions with supporting materials, such as flowcharts to help match the MLI positions of two different countries in order to determine the changes the MLI makes to any given bilateral tax treaty, Eggert said. The matching process will be a matter of comparing country positions and applying the rules in the MLI for addressing mismatches, he said.

“It will take some time to fully understand the outcome of that matching process, given that it will need to be performed manually at first,” he said.

The OECD said earlier that it would produce software to automate the matching process between country pairs, Eggert noted. “They have developed an internal version of that tool, but have indicated that the public version of that tool would not be ready at the time of signature, but would be released later in 2017.”

Significant Changes

Perez-Navarro said the provision in the MLI designed to curb “treaty shopping"—essentially, involving a third country in a transaction that mainly involves two countries in order to gain a tax benefit provided by the third country—is one of the most significant. This provision “will stop a major source of abuse that the BEPS project was designed to address,” she said.

The provisions on mechanisms for resolving cross-border disputes resolution mechanisms, including arbitration, are also important, she said. “Arbitration is optional but it is significant that we will already have around 25 countries opting into this provision.” The treaty’s arbitration provision requires governments to turn over disputes that are unresolved after two years to an independent panel, which must choose between the countries’ positions.

Eggert said the progress of the MLI is something companies should watch closely. The extent and speed of changes to countries’ individual treaties will depend on how the positions of the countries that join the MLI align with each other, and how quickly the countries ratify the MLI, he said. “But in any case, it is something that multinational enterprises will need to pay close attention to, as it may have significant tax consequences for their existing operations.”

Permanent Establishments

Eggert said the changes to the standard for triggering a permanent establishment have the potential to significantly impact the way multinational enterprises distribute products and services across borders, as the tax consequences of some existing distribution models could change significantly. “After next week, we will have a better sense of how many countries sign up for those new rules,” he said.

“As between two countries that do sign up, significant questions still remain about how profit will be attributed to the PEs created under the new rules,” he said.

Principal Purpose Test

The MLI includes a principal purpose test (PPT) to satisfy the minimum standard under BEPS Action 6, the action on preventing treaty abuse. A PPT 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.

Eggert said the inclusion of a PPT, like the PE standard, is significant. Countries can opt out of a PPT only in limited circumstances—and will be subject to peer review for their compliance with the minimum standard beginning in 2018, which means they have limited time for bilateral negotiations to update their treaties before they begin to be evaluated. “Those factors should cause the vast majority of countries signing up to the MLI to opt to apply the PPT,” he said.

While some countries have experience applying a purpose-based anti-abuse rule, the PPT uses broader language than many existing rules, and it is not yet clear whether countries will therefore apply the new rule more aggressively than they applied existing rules, Eggert said.

Other countries have limited experience applying PPT-type provisions, and it is not yet known how broadly they will apply such a rule to challenge transactions and structures, he said.

To contact the reporter on this story: Kevn A. Bell in Washington at kbell@bna.comTo contact the editor responsible for this story: Molly Moses at mmoses@bna.com

For More Information

The text of the MLI is at http://src.bna.com/ptP.

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Transfer Pricing Report