- to transpose a series of tax treaty measures from the OECD/ G20 BEPS Package into existing bilateral and multilateral tax agreements and
- to set a new standard for mandatory binding arbitration in relation to resolving double tax disputes.
Implementation of the October 2015 Final BEPS Package requires changes to the OECD and United Nations (UN) model tax conventions, as well as to the bilateral tax treaties based on those model conventions. The OECD has determined that there are more than 3,000 bilateral treaties, making separate updates burdensome and time consuming, and thus limiting the effectiveness of multilateral efforts to restrain BEPS. The Action 15 Report ‘Developing a Multilateral Instrument to Modify Bilateral Tax Treaties’ concluded that an MLI to enable countries to swiftly modify their bilateral tax treaties was desirable and feasible, and that negotiations for such an instrument should be convened quickly. The Action 15 Report was developed with the assistance of specialists in public international law and international tax law. The procedural questions to address, given that the substantive content was already addressed in Action Steps (and ‘model outcomes’), relate to:
- Action 2 on hybrid transactions
- Action 6 on treaty abuse
- Action 7 on permanent establishments (PEs), and
- Action 14 on dispute resolution and the mutual agreement procedure (MAP).
An ad hoc group of interested states quickly formed. The OECD states that, in a period spanning little more than 12 months, 99 countries participated as members (plus, as observers, four non-State jurisdictions that are covered by another jurisdiction’s bilateral treaty that extends to the non-State jurisdiction, and seven international or regional organisations). The OECD’s aspiration was that having over 100 states, territories and jurisdictions indicating their interest in the work of the ad hoc group negotiating the MLI would facilitate the process of implementing the treaty-based aspects of the October 2015 BEPS report recommendations. These aspects include the ‘minimum standards’ (treaty abuse and basic dispute resolution/ compensating adjustment rules) which are mandatory (albeit with some optionality), and all other changes (including arbitration) which are essentially optional. One could reasonably expect that the 27 countries that have apparently been involved in developing the arbitration standard will generally adopt it. This, in turn, may bring swifter relief for many cross-border business tax disputes. The MLI could enable the signatory parties to make many changes to their existing treaties, whether based on the OECD or UN model convention. However, the flexibility included in the MLI suggests that some of the parties do not intend to implement, or fully implement, some of those recommendations. While the recommendations included some options and the MLI needs to reflect them, part of the flexibility is designed to enable parties to opt out of recommendations altogether, or to misapply them for individual treaties (‘to accommodate specific tax treaty policies’ per the OECD press release). Unfortunately, the OECD could not ensure a greater level of application, thus giving rise to greater uncertainty. The parties’ provisional notifications of their intentions to sign the MLI this year will better indicate the level of consistency in applying the BEPS measures and whether the MLI will effectively achieve its goals.
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