Nearly 100 Countries Poised to Adopt Multilateral Treaty

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

Nov. 3 — Ninety-eight countries are poised to formally adopt the OECD’s innovative multilateral tax treaty, which will place recommendations from the BEPS project into more than 3,000 bilateral accords, when the ad-hoc group meets later this month.

The “Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting” is designed to allow countries to quickly adopt recommendations from the BEPS treaty initiatives, most of which are aimed at curbing tax avoidance by large multinational companies. Practitioners told Bloomberg BNA that putting provisions from the so-called multilateral instrument (MLI) into effect will be a complex task.

The MLI will implement the following tax treaty measures from the Organization for Economic Cooperation and Development’s 15-point Action Plan on Base Erosion and Profit Shifting:

  •  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 mandatory binding arbitration of those disputes.
Along with adopting the MLI, the ad-hoc group of countries will approve an explanatory statement.

After the 98 countries approve the MLI, each country will have the option of signing up to individual provisions of the treaty. The signing ceremony is likely to take place in the first half of 2017. Countries then must submit the signed treaty to their legislatures for ratification.

Wide Adoption

Actions 6 and 14 are BEPS minimum standards and therefore “must be agreed to by the members of the inclusive framework,” Steve Towers of Deloitte LLP’s Singapore office told Bloomberg BNA Nov. 2, referring to the framework launched in June to encourage more non-OECD countries to adopt the BEPS recommendations. Within Action 6, he noted, “choice is available in regard to the principal purpose test (PPT) and limitations on benefits test (LOB).”

Towers said the minimum standards in Action 14 “involve relatively few treaty changes” and are likely to be widely adopted. Specifically, he said, the changes would mean adopting “the existing paragraphs 1 to 3 in Article 25 of the Organization for Economic Cooperation and Development model tax treaty, and a small amendment to paragraph 1.”

David Chamberlain of Ernst & Young (China) Advisory Ltd. in Shanghai said in an e-mail to Bloomberg BNA that compliance with Action 6 can be achieved with a simple PPT because a more complicated LOB test isn’t required.

Towers predicted that “PPT alone will be commonly adopted” but said “I think we will see that very few countries will agree to the LOB provision.”

Mary Bennett, a partner with Baker & McKenzie LLP in Washington and a former head of the OECD’s tax treaty, transfer pricing and financial transactions division, said the recommendations under Actions 6 and 7 “would probably be the most likely to be broadly adopted.” She also told Bloomberg BNA that while “I suspect that the MLI will speed up the implementation of the BEPS treaty recommendations,” getting it widely into effect “may be fairly complicated.”

Inclusive Framework

Eighty-seven countries—Andorra and Panama most recently—have signed on to the OECD’s inclusive framework for tackling BEPS, designed to bring in countries outside the OECD and Group of 20 nations.

Towers said many of the members of the MLI ad-hoc group are also members of the inclusive framework. Membership of the inclusive framework is dependent on a commitment to implement the BEPS minimum standards. “Thus, for many countries in the MLI ad-hoc group, the minimum standards in Actions 6 and 14 are already mandatory.”

For those 98 members of the ad-hoc group that aren’t yet members of the inclusive framework, there are no commitments, Towers said. “And that’s the way it should be. Such countries are participating in the ad-hoc group by choice, and establishing mandatory requirements might cause them to not sign the MLI.”

Complicated Provisions

Towers predicted many countries will adopt the BEPS Action 2 hybrid treaty provision and the Action 7 PE changes, but “it won’t be universal. For example, the U.S. and possibly the U.K. might not adopt the PE changes.”

Chamberlain said BEPS Actions 2 and 7 “are much more complicated and controversial, so I am very interested in seeing what they come up with on those.”

Bill Dodwell, a London-based tax partner at Deloitte and leader of its U.K. tax policy group, said Action 7 is a revision of an existing standard, “which I think means in practice that countries will take different positions in solving the underlying issues.”

Dodwell told Bloomberg BNA some countries “will want the new wording in full. Some just part of it. And others will get to the desired outcome by using new transfer pricing approaches and the PPT test.”

MAP Arbitration

The MLI will include an optional provision on mandatory binding arbitration of double-tax disputes, or mutual agreement procedure (MAP) cases.

Towers said that provision should recommend the last-best-offer approach to resolving MAP disputes.

Last-best-offer “has worked very well in the US-Canada context,” Chamberlain said. “Knowing that they will have to offer a reasonable position in order to possibly be selected by the arbitrator has made both countries less aggressive, and ultimately more able to reach agreement even without going to arbitration.”

Bennett said the MLI arbitration provision, like the existing OECD model provision, should make it possible for treaty partners to use the last-best-offer approach, “but it should not make that the exclusive approach. Countries currently take different views of the desirability of using that approach, and countries’ preferences may also change over time.”

Paul Morton, head of group tax at RELX Group in London, told Bloomberg BNA it might be best to allow contracting states “to employ whichever mechanism they prefer. Perhaps this would remove one of the many reasons why some states are not currently supportive of mandatory binding arbitration.”

Treaty-by-Treaty Basis

Practitioners said the MLI should give a country the option of applying an MLI provision on a treaty-by-treaty basis, rather than applying the MLI provision to all of a country’s bilateral tax treaties.

“There can be a number of reasons why a country would be willing, or want, to make a particular change with some treaty partners and not others, and that flexibility should be allowed” said Bennett.

Morton said the option of applying an MLI provision on a treaty-by-treaty basis “might facilitate a greater degree of reciprocity.”

“I believe that level of optionality will be available,” Towers said. “It will be interesting to see how the MLI deals with the issue of asymmetrical treaty obligations.”

Dodwell said “I think that countries signing the MLI will list their technical reservations which means the positions they are prepared to accept.” Thus, only if other signatories agree on the same approach will the bilateral tax treaty be overridden.

“I don’t know whether it will be possible to have asynchronous positions but I think it would be quite unlikely,” Dodwell said. “I also don’t know whether countries can say they choose this provision with countries A-G and a different position with other countries. The last time I had a discussion on these points, both were still up in the air.”

To contact the reporter on this story: Kevin A. Bell in Washington at

To contact the editor responsible for this story: Molly Moses at

Copyright © 2016 Tax Management Inc. All Rights Reserved.

Request Transfer Pricing Report