The OECD Multilateral Convention Is Signed — So Why Aren’t These Guys Smiling?
By John Bostwick, Managing Editor, Radius
Officials from 76 countries met in Paris this month to sign or promise to sign a multilateral convention that Bloomberg BNA describes as “a kind of super tax treaty.” The document is formally known as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, and its development and signing was facilitated by the Organization for Economic Cooperation and Development.
The OECD press release about the signing ceremony explains that the multilateral convention “will swiftly implement a series of tax treaty measures to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises.” Basically, the multilateral convention will allow participating countries to incorporate BEPS-approved tax-treaty provisions into their existing bilateral treaties without having to go through lengthy renegotiations. It will also facilitate the resolution of treaty disputes to reduce double taxation and (because it promotes legislative consistency across borders) increase tax certainty and predictability for the global business community.
(I’ll pause here to include a droll excerpt of signatory photos from an OECD Flickr album dedicated to the ceremony. The photographer must have caught this trio during a few bad moments, because virtually all other officials photographed are clearly happy to be signing what one OECD leader calls a “turning point in tax treaty history”. Business leaders, on the other hand, must be experiencing very definite mixed emotions in the wake of the ceremony. I'll get to that.)
To return to the subject: The multilateral convention — sometimes referred to as the multilateral instrument, or MLI — sprang from the OECD’s final draft of BEPS recommendations, which were released in 2015 and consist of 15 "Actions" to fight tax avoidance. Specifically, the MLI’s measures address hybrid mismatch arrangements and treaty abuse (BEPS Actions 2 and 6 respectively), strengthening the definition of permanent establishment (Action 7) and the facilitation of mutual agreement procedures (Action 14). The final draft of the MLI was agreed to in November of 2016, by representatives from more than 100 tax jurisdictions. This month’s signing ceremony, then, is effectively the next step towards individual countries ratifying and implementing the MLI.
The OECD will (in the language of the June OECD press release) “support” governments through the signing, ratification and implementation processes. In remarks made after the 2016 agreement, Secretary-General Gurría clarifies that the ratification process that follows this month’s signing “requires a lot of work … at the national level to ensure that all legal requirements are met. As usual, the OECD Secretariat stands ready to support you.”
A useful OECD brochure published about the multilateral convention explains that the MLI is a flexible document, meaning that governments with existing bilateral tax agreements can choose which treaties they want to be covered by the MLI, and they may make future changes to those treaties if they wish through bilateral negotiations. And while bilateral agreements covered by the MLI must meet BEPS minimum standards on treaty abuse and dispute resolution, there is leeway given as to how jurisdictions go about meeting those standards. Moreover, countries may opt out of MLI provisions that exceed the BEPS minimum standards, with the option to adopt those provisions later.
The OECD will act as the depository of the MLI and track and make public the various ratified agreements covered by the MLI. The brochure notes that “it is likely that the first modifications to covered treaties will become effective in the course of 2018.” A list of covered treaties will be available on the OECD website.
The blank expressions in the photos above notwithstanding, tax collectors and citizens in most jurisdictions will welcome the news of the MLI signing since it targets perceived tax avoidance by corporations. The Bloomberg BNA article I mentioned earlier says that OECD representative Pascal Saint-Amans told reporters on the eve of this month’s signing that “the most important impact of the multilateral instrument is that it will help stamp out a corporate tax avoidance technique called ‘treaty shopping,’ in which companies route profits through low- or zero-tax jurisdictions to avoid paying taxes in a third jurisdiction.”
As noted, business leaders will have a more mixed reaction to the MLI. A post on the International Chamber of Commerce website notes that the ICC “has been extensively involved in the OECD BEPS process from its onset.” It quotes the chairman of the ICC Commission on Taxation as saying, “The signing of the multilateral convention represents an important step towards harmonizing the international tax landscape.” But the post ends by cautioning that “there is still some work to be done to achieve practical and workable dispute resolution methods.”
Will Morris, chairman of another commerce group, told Bloomberg BNA in a June 7 email that businesses have “concerns around the provisions regarding permanent establishments and the ‘principal purpose’ test in the MLI that will play out over time."
Business leaders will have other concerns. For example, they’ll want to know how their current tax structures will be affected if they’re operating under existing treaties that are destined to be changed by means of the multilateral convention. Others will wonder if the MLI’s expanded definition of permanent establishment might mean they’ll trigger taxable presences in areas where they’re already operating with little or no PE risk under current laws.
What’s certain is that this month’s signing of the OECD multilateral convention should be a wake-up call to multinationals. They should review their current tax structures and international activities in light of existing tax treaties, and try to determine how their respective situations will change as a result of countries that are likely to adopt the MLI’s provisions. Given the inherent flexibility of the MLI, and the high potential numbers of countries and treaties involved — there’s now a network of over 3,000 bilateral tax treaties — businesses will need to review their situations frequently and over a long period.