Executive summary

On 31 May 2016, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft (the Discussion Draft) requesting input on the multilateral instrument to be developed under OECD BEPS Action 15. The multilateral instrument's main objective is to implement the tax treaty-related BEPS measures by modifying existing bilateral tax treaties in a consistent and efficient manner. The instrument will include OECD BEPS recommendations on hybrids, treaty abuse, permanent establishments and dispute resolution. Comments are invited on certain technical issues and questions related to the implementation of the treaty-related BEPS measures (though not on the scope or substance of the BEPS outputs), as well as on the development of a provision on mandatory binding arbitration within the mutual agreement procedure (MAP) and should be submitted by 30 June 2016. A public consultation is scheduled for 7 July 2016.

Background

On 5 October 2015, the Action 15 report, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties (the Multilateral Instrument Report or Final Report), was released providing an overview of the multilateral instrument, which aims to swiftly and consistently implement the tax treaty-based measures developed during the course of the BEPS project. This Final Report provided an update with respect to the establishment of an ad hoc group of countries to conduct further work on the multilateral instrument. The group began its work in May 2015 with the aim of finalizing the multilateral instrument and to open it for signature by 31 December 2016. The Final Report indicated that participation in the development of the multilateral instrument is voluntary and does not entail any commitments to sign such instrument once it has been finalized.

At the time of publishing of the Discussion draft the ad hoc group included 96 countries, participating on equal footing, as well as non-state jurisdictions and international tax organizations, participating as observers.

Detailed discussion

According to the Discussion Draft, the multilateral instrument has the benefit of allowing incorporation of the agreed treaty measures within a reasonably short period of time, while at the same time preserving the bilateral nature of the more than 3,000 existing tax treaties. The provisions to be implemented into the tax treaties of the countries that subscribe to the multilateral instrument include treaty provisions developed under:

— OECD BEPS Action 2, including (1) the revision of Article 1 (Persons Covered) of the OECD Model Tax Convention (OECD Model) to address fiscally transparent entities, and (2) the measures to address issues with the application of the exemption method to relieve double taxation

— OECD BEPS Action 6, including the minimum standard on treaty abuse, the introduction of a "saving clause" to make explicit that treaties do not restrict a State's right to tax its own residents, and the specific anti-abuse rules related to (1) certain dividend transfer transactions; (2) transactions involving immovable property holding companies; (3) situations of dual-resident entities; and (4) treaty shopping using third-country PEs

— OECD BEPS Action 7, including (1) measures to address commissionaire arrangements and similar strategies; (2) modifications to the specific activity exemptions under Article 5(4) of the OECD Model and the addition of an anti-fragmentation rule; and (3) measures to address the splitting-up of contracts to abuse the exception in Article 5(3) of the OECD Model

— OECD BEPS Action 14, incorporating the minimum standards and best practices including the changes to paragraphs 1 through 3 of Article 25 of the OECD Model regulating MAP, as well as the inclusion of paragraph 2 of Article 9 of the OECD Model implementing secondary transfer pricing adjustments

The Discussion Draft requests input on technical issues that may arise in the process of modifying the wide variety of existing tax treaty provisions with a single multilateral instrument, taking into account that provisions will need to be added to treaties where no provision exists, but also that existing provisions may need to be replaced or retained depending on their content. The Discussion Draft notes that so called "compatibility clauses" that describe under what circumstances the provision is intended to be added or replace the existing provisions could be used.

The Discussion Draft also notes that a number of countries declared their commitment to provide for mandatory binding MAP arbitration as a mechanism to resolve treaty-related disputes. Thus, comments are also invited on the approach to be taken in developing the optional provision on mandatory binding MAP arbitration, taking into account that it would need to serve the needs of the countries that have already committed to implement mandatory binding arbitration, as well as countries that are considering committing in the future.

Since the multilateral instrument will have to modify a large network of tax treaties, it will not be in position to provide the level of detail that a bilateral protocol can provide. Therefore, the OECD is requesting comments on the types of guidance and practical tools that would be most useful to taxpayers in understanding the application of the multilateral instrument to existing tax treaties. To address this, the OECD suggests that the instrument is accompanied by tools such as an explanatory statement or a commentary.

Finally, comments are requested on the mechanisms that could be used to ensure consistent application and interpretation of the provisions of the multilateral instrument.

Implications

The multilateral instrument pursuant to Action 15 is a key part of the OECD's effort toward implementation of the recommended BEPS measures as quickly and consistently as possible. The success of Action 15 will depend on the outcome of the negotiations between the participating countries and the appetite of such countries to sign the multilateral instrument. Further, the instrument must advance through a country's normal domestic ratification procedures applicable to tax treaties before entering into force and becoming effective. The provisions to be implemented would introduce significant changes to bilateral tax treaties, including new limitations on access to treaty benefits, lower thresholds for permanent establishment status and, in some cases, new arbitration mechanisms for dispute resolution. Global businesses therefore should monitor the developments with respect to Action 15, with a particular focus on the participation of the countries where they operate.

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