Blog

OECD Proposal For Multilateral Anti-Avoidance Tax Treaty

Leon Harris

 

Background

 

The OECD is spearheading a concerted effort to help governments around the world collect more taxes. The OECD is doing so by issuing a series of recommendations for tightening up corporate and personal tax measures. Individual governments are then likely to enact and/or implement such measures. Israel joined OECD joined the OECD in 2010.

 

On the corporate side, the OECD has begun publishing an action plan against so called “Base Erosion Profit Shifting” (BEPS). In simple English, these recommendations should help onshore countries tax profits shifted offshore by multinational companies.

 

In particular, the BEPS recommendations take aim at tax planning techniques relating to financial instruments, treaty shopping and transfer pricing, amongst others. Some recommendation have been published, more are due by September 2015.

 

The BEPS recommendations are very detailed. But a big question arose about how to implement them rapidly.  Often, cooperation is needed between the tax authorities of different countries.

 

Legally speaking, this would necessitate amending all the 3,000 or so bilateral tax treaties between different countries which have taken nearly 100 years to build up. So any amendments could be a legal and bureaucratic nightmare.

 

But the OECD found a solution to the nightmare.

 

In order to short-cut the treaty amendment process in one fell swoop the OECD proposes to develop a super treaty which governments can sign up to in one go. On February 6, 2015, the OECD published aspects of these proposals, which is calls “A Mandate For The Development of a Multilateral Instrument on Tax Treaty Measures to Tackle BEPS”. This Mandate constitutes Action 15 of the BEPS Action Plan.

 

Aspects of the Planned Multilateral Instrument

 

The OECD derives its authority to act from  the Report “Developing a Multilateral Instrument to Modify BilateralTax Treaties”, which was approved within the OECD and endorsed by the Leaders of the G20.

 

The objective is to develop a multilateral instrument to modify existing bilateral

tax treaties solely in order to swiftly implement the tax treaty measures developed in the course of the OECD-G20 BEPS Project. Countries participating in the OECD-G20 BEPS project now propose to establish an ad hoc Group (“the Group”) which will take on the Mandate.

 

Membership of the Group is open to all interested countries. Relevant international and regional intergovernmental organisations can be invited by the Group to participate as Observers.

 

The Group will start its work no later than July 2015 and will aim to conclude its work and open the multilateral instrument for signature by 31 December 2016.

 

The Group is convened under the aegis of the OECD and G20 and is served by

the OECD Secretariat.

 

The functioning of the Group and its sub-groups will be governed by the OECD

Rules of Procedure and the provisions of international law related to the

development and conclusion of treaties.

 

Comments:

 

In Israel, a bill has been sent to the Knesset to enable the Israeli government to sign up to multilateral tax treaties, such as this OECD multilateral instrument. The bill will presumably be passed by the Knesset after a new post-election government is formed in Israel.

 

All this may affect Israeli companies operating abroad as well as foreign groups operating in Israel

 

The OECD Mandate proposals don’t yet spell out the terms of the Multilateral Treaty nor how it will be introduced. Presumably all that will follow. For example, what will happen if one country has signed up, but another has not?

 

The status of the Group is unusual – basically an autonomous committee which will be disbanded at the end of 2016. Then it will be important for individual countries to commit to the resulting multilateral treaty for it to have effect.

 

 

To sum up, the OECD multilateral instrument is a bold proposal. If adopted, it may help give governments to improve the collection of tax revenues from multinational business from 2017. All concerned should monitor the progress of BEPS and the multilateral instrument

 

As always, consult experienced tax advisors in each country at an early stage in specific cases.