Action Item 15: Developing a Multilateral Instrument to Modify Tax Treaties

October 2015

Organisation For Economic Co-Operation and Development (OECD) Issues Final Report on Action Item 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties


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The Organisation for Economic Co-operation and Development (OECD), a non-governmental forum established to promote economic growth, has developed a 15-point action plan to shape “fair, effective and efficient tax systems.” The OECD’s project regarding base erosion and profit shifting (BEPS) has addressed issues arising from tax planning strategies that exploit gaps or mismatches in member countries’ tax rules.


Summary

This tax alert is one installment in a series of alerts on the release of the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting Project (the BEPS Project).
On October 5, 2015, the OECD released the final report (the “Report”) of the BEPS Project.  This alert discusses the report on Action Item 15: Developing a Multilateral Instrument to Modify Tax Treaties.
 

Background and Details

In an effort to address BEPS issues in a coordinated and comprehensive manner, the G20 finance ministers called on the OECD to develop an action plan to equip countries with instruments that will better align tax with economic activity.  The OECD recognizes that the global economy is rapidly evolving and the need to adapt to this evolution.  The report on Action Item 15 provides for the development of a multilateral instrument designed to provide an innovative approach to international tax matters.  The goal of the report on Action Item 15 is to “streamline the implementation of the tax treaty-related BEPS measures.”

In an ever-changing global economy, the report on Developing a Multilateral Instrument to Modify Bilateral Tax Treaties recognizes the need to analyze the tax and public international law issues related to the development of a multilateral instrument.  Among the challenges of globalization is the exacerbation of the impact of gaps and frictions among different countries’ tax systems.  The current tax treaty system is based upon a set of common principles designed to eliminate double taxation, which occurs in the case of cross-border trade and investments.  However, some of the features of this system facilitate BEPS and need to be addressed.  The proposed analysis would enable those jurisdictions, which wish to do so, to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

As a result of the report on Action Item 15, a mandate has been released for an ad-hoc group (the “Group”) to develop the multilateral instrument.  The Group is open to participation by all countries on an equal footing, and thus far, about 90 countries are participating in this endeavor.  Having commenced in May 2015, the Group aims to conclude its work and open the multilateral instrument for signature by December 31, 2016.

The key elements of the mandate are:
  • Objective - To develop a multilateral instrument to modify existing bilateral tax treaties in order to swiftly implement the tax treaty measures developed in the course of the BEPS project.
  • Participation in Developing Multinational Instrument - Open to all interested countries on an equal footing.  Participation is voluntary and does not entail any commitments to sign the instrument once it has been finalized.
  • The duration of the work - The goal is to conclude work and open the multilateral instrument by December 31, 2016.

In order to achieve the underlying goal of the BEPS Project, to develop and implement new common rules to tackle BEPS among all interested parties, the multilateral instrument would not terminate the pre-existing network of bilateral treaties. Rather, the bilateral treaties will remain in force with an aim to achieve a concurrent and integrated application of the provisions of the multilateral instrument and the bilateral treaties as they relate to BEPS.

It is anticipated that some of the potential provisions which would be introduced in the multilateral instrument include provisions addressing:  multilateral mutual agreement procedures (“MAP”); dual-residence structures; transparent entities in the context of hybrid mismatch arrangements; “triangular” cases involving permanent establishments in third states; and treaty abuse.


BDO Insights

Multinational companies will need to carefully monitor the progress of the multilateral instrument and the impact it will have on existing provisions of current bilateral tax treaties.  
 

For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner


 

Bob Brown
Partner

 

Jerry Seade
Principal


 
Scott Hendon
Partner
 

Joe Calianno
Partner and International Technical
Tax Practice Leader


 
Monika Loving
Partner
 

Michiko Hamada
Senior Director


 
Brad Rode
Partner
  Chip Morgan
Partner