The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
May 31 — The OECD is asking for comments on how to address the technical challenges of writing a multilateral instrument that will implement treaty-related changes in the organization's final reports on combating base erosion and profit shifting.
Treaty-related BEPS changes include implementing provisions on hybrid mismatch arrangements, preventing the granting of treaty benefits in inappropriate circumstances, preventing the artificial avoidance of permanent establishment status and making dispute resolution methods more effective.
In a May 31 discussion draft on BEPS Action 15, the Organization for Economic Cooperation and Development said it is also seeking comments on issues related to the development of a mutual agreement procedure arbitration provision, a measure universally championed by multinational companies. “An optional provision on mandatory binding MAP arbitration is being developed as part of the negotiation of the multilateral instrument.”
An important technical issue facing the OECD and the ad hoc group of 96 countries that are currently drafting the multilateral instrument is the relationship between the provisions of the multilateral instrument and the existing tax treaty network, the draft said. “Existing tax treaties vary widely from both model tax treaties and from each other.”
As a result of this divergence, the multilateral instrument must be able to effectively modify existing tax treaties, either by adding a new provision where no provision exists, or by modifying or superseding existing provisions, the OECD said. “This can be done by including ‘compatibility clauses' that describe in detail under what circumstances the new provision is intended to be added to or replace the provisions of an existing tax treaty.”
The deadline for comments on the technical issues involved in drafting the multilateral instrument is June 30, and the OECD will hold a public consultation in Paris on July 7.
An OECD official said March 4 that there are tremendous technical challenges in designing an instrument “that is workable and meets the needs of flexibility that we will need to have in order to satisfy the different interests and options that countries want to choose” (24 Transfer Pricing Report 1431, 3/17/16).
The tax treaty-related BEPS outputs include agreed Commentary to facilitate their interpretation, the OECD said. “Ensuring that this Commentary will be used to interpret the provision of the multilateral instrument will be important.”
In addition, because the multilateral instrument must modify a large network of existing treaties, it cannot provide the level of detail that a bilateral protocol can. “The multilateral instrument may therefore need to be accompanied by tools, such as an explanatory statement or commentary, to ensure consistent application of its provisions to diverse bilateral tax treaties.”
The OECD is also considering “the production of consolidated versions of the underlying bilateral tax treaties.”
The multilateral instrument is being negotiated in English and French, and is expected to be concluded in only those two “authentic” languages, but will modify bilateral tax treaties concluded in many authentic languages. The OECD said it will be important to ensure consistent application to those bilateral treaties despite differences of language.
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