The survey comes to the conclusion that such a multilateral instrument is not only desirable but also feasible from a legal perspective. It is desirable because currently there are about 3,000 bilateral treaties in force globally the one-by-one amendment of which would mean enormous work for individual countries and would most likely take long years to complete. By proposing the development of a multinational treaty, the main purpose of the survey is to ensure that internationally accepted BEPS related measures can be implemented quickly and efficiently without having to amend the thousands of double tax treaties in force globally one by one.
However, this is merely the first, although very significant, step to be followed by practical implementation, i.e. the development of the instrument, which OECD and G20 intend to start in the beginning of 2015 at an international conference. A 2-year deadline was set for the implementation of the action.
The significance of this matter is indicated by the fact that there has been no precedent of such a multilateral agreement in the field of international taxation (from a specific tax technical perspective). However, multilateral instruments modifying bilateral treaties do exist in other areas of international law and could serve as the basis for the implementation of Action 15. A success story, for example, is the signing of a multilateral convention on 3 July 2014 by 66 countries (including all G20 countries) on the exchange of information, which made the amendment of more than 1 800 bilateral treaties unnecessary.
It must be emphasized, however, that the multilateral instrument would apply parallel to bilateral treaties and Action 15 would not affect the bilateral nature of the treaties. The proposed instrument would only have a multilateral character regarding targeted BEPS related measures.
The report points out that the multilateral instrument serves, above all, the modification of double tax treaties but the text vaguely suggests that such an instrument could, in theory, be suitable to express undertakings for the modification of the domestic tax systems of participating countries. It is, however, unclear at the moment what this exactly means and how it could be implemented at all.
Despite the obvious advantages of a multilateral instrument, the survey points out certain practical difficulties to which special attention will have to be paid, such as the superseding of similar provisions of existing bilateral treaties, the language difficulties of the multilateral instrument, the date of singing and the date of entry into force of the instrument, the handling of overlaps/conflicts with other multilateral agreements etc. It is a question, for instance, how the multilateral instrument would apply (if it could apply at all) to two countries, which did not conclude a double tax treaty with each other. The survey contains specific proposals to address these practical issues.
The survey also lists some forms of regulation and abuse deriving from the bilateral nature of the treaties, which, elevated to a multilateral level, could potentially have a favourable impact on efficiency and the curbing of abuse:
- elevation of bilateral mutual agreement procedure (MAP) to multilateral level;
- addressing dual-residence structures;
- addressing transparent entities in the context of hybrid mismatch arrangements (however, this would require a certain level of standardisation of domestic tax systems);
- addressing “triangular” structures involving two treaty countries and a PE in a third country;
- addressing treaty abuse by eliminating the possibility of double non-taxation and preventing illegitimate use of benefits.
The survey suggests that the instrument (or group of instruments) addressing the above matters at multilateral level could co-exist with existing bilateral treaties.
On top of all potential practical challenges, the survey uses the suggestive wording: “On the basis of this analysis, interested countries will develop a multilateral instrument...”. It is obvious that a multilateral instrument can only be really successful if a large number of countries join it. For this reason, the success or failure of Action 15 may depend on the interests countries will show in this initiative.
Summarizing the above, we can say that political strength to fight BEPS has never been this strong as certain elements of the current bilateral double tax treaty system may support base erosion and profit shifting leading to double non-taxation. The BEPS survey finds treaty abuse to be the most serious problem which needs to be addressed quickly and efficiently. This task represents a huge challenge for participating countries but, at the same time, it is also a unique opportunity for a never before seen reform of international taxation.
OECD set a 2-year deadline from the beginning of 2015 for the completion of the multilateral instrument after which the instrument will have to be ratified by individual countries. It can therefore be declared that entry into force of the instrument (and the entire BEPS action plan) before 1 January 2018 is very unlikely. Before the text is finalized, all other BEPS actions will have to be completed first, which is expected in September 2015 according to current plans. At the moment it is difficult even to estimate when the draft instrument will be completed.
My previous blog entries on the BEPS subject can be viewed here »