Executive summary

On 21 March 2023, the Organisation for Economic Co-operation and Development (OECD) released the fifth annual peer review report (the Report) on the implementation of the Action 6 minimum standard relating to the prevention of treaty abuse under the Base Erosion and Profit Shifting (BEPS) project.

The peer reviews included in the Report were carried out under the revised peer review methodology published in April 2021. The Report reflects detailed information on the implementation of the minimum standard by the 141 jurisdictions that were members of the Inclusive Framework on 31 May 2022.¹ As required by the revised methodology, jurisdictions were asked to provide plans for introducing the Action 6 minimum standard into agreements that on 31 May 2021 were not either compliant with the minimum standard or subject to a complying instrument.

As of 31 May 2022, more than 975 bilateral agreements between members of the Inclusive Framework complied with the minimum standard. An additional 76 agreements not subject to review (i.e., agreements between Inclusive Framework members and nonmembers) also complied with the minimum standard, bringing the total number of compliant agreements concluded by members of the Inclusive Framework to more than 1,050 agreements, which represents a significant increase from 2021.

The Report also shows that more than 850 agreements concluded between members of the Inclusive Framework are covered by the BEPS Multilateral Instrument (MLI). More than 870 additional agreements will become compliant under the BEPS MLI once all relevant signatories have ratified it.

The Report also provides updates on the progress jurisdictions made to give effect to their plans developed in 2021 and shows that many jurisdictions have followed the recommendations made in the prior peer review, either by formulating a plan for the implementation of the minimum standard or by completing the steps for the entry into effect of the provisions of the BEPS MLI, as applicable.

Detailed discussion

Background

Action 6, relating to the prevention of treaty abuse, includes one of the minimum standards resulting from the BEPS project. The final BEPS reports were released in October 2015, including the announcement that all minimum standards would be subject to a peer review process. The mechanics of the peer review process were not included as part of the final reports on the BEPS Actions. Instead, the OECD indicated when it released the BEPS reports that it would, at a later stage, issue peer review documents for the Actions that include minimum standards, providing the terms of reference and the methodology by which the peer reviews would be conducted.

In 2017, the OECD released the peer review documents for BEPS Action 6. The terms of reference reiterated that to be in compliance with the minimum standard on treaty shopping, jurisdictions are required to include in their tax treaties: (i) an express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements; and (ii) an anti-abuse provision in the terms specified in the Action 6 final report. Jurisdictions can meet the minimum standard either by renegotiating their bilateral tax treaties and protocols or through the BEPS MLI.² Partially compliant agreements — those containing only one element of the minimum standard — are shown as noncompliant.

In April 2021, the OECD released an updated version of the peer review documents on Action 6.³ The updated peer review documents include the agreed terms of reference containing the evaluation criteria for the minimum standard and the assessment methodology for the peer review process. While the terms of reference have remained largely unchanged, the updated peer review documents establish a framework through which, in certain situations, assistance would be given to an Inclusive Framework member that has noncompliant agreements. Moreover, the revised methodology explicitly provides that where both partners have signed the BEPS MLI but only one party has listed the agreement, the listing would be interpreted as a request to implement the minimum standard.

The first peer review was conducted in 2018 and covered the 116 jurisdictions that were members of the Inclusive Framework on 30 June 2018.⁴ The second peer review was conducted in 2019 and covered the 129 jurisdictions that were members of the Inclusive Framework on 30 June 2019.⁵ The third peer review was conducted in 2021 and covered the 137 jurisdictions that were members of the Inclusive Framework on 30 June 2020.⁶ The fourth peer review took place in 2022 and covered the 139 jurisdictions that were members of the Inclusive Framework on 31 May 2021.⁷

Fifth Action 6 peer review report

On 21 March 2023, the OECD released the fifth Action 6 peer review report and an accompanying press release. The Report was approved by the Inclusive Framework on 10 February 2023 and prepared for publication by the OECD Secretariat. The peer review reflects information available as of 31 May 2022 (the cut-off date) and was carried out using the revised peer review documents published in April 2021.

The Report on the implementation of the minimum standard follows the same structure as the fourth peer review report and is divided into eight chapters. The first chapter, "Implementation of the minimum standard: Aggregate data and key figures," provides an overview of the key statistics related to the minimum standard. The second chapter focuses on the "Key role of the BEPS MLI" in implementing the minimum standard. The third chapter describes the "Plans for the implementation of the minimum standard and support provided to jurisdictions." The fourth chapter presents "Recommendations" based on the findings of the review. The fifth chapter addresses the "Difficulties in implementing the minimum standard" that jurisdictions have encountered. The sixth chapter includes the "Conclusion and next steps" for future improvements. The seventh chapter provides some "Background on the Action 6 minimum standard and peer review." Finally, the eighth chapter contains the "Jurisdictional sections," with detailed information on the implementation of the minimum standard for each member of the Inclusive Framework.

According to the Report, the 141 jurisdictions that were members of the Inclusive Framework on 31 May 2022 reported a total of 2,426 agreements in force on that date involving Inclusive Framework members, including six multilateral agreements and 890 agreements between Inclusive Framework members and nonmembers. Eight member jurisdictions⁸ reported they had no comprehensive tax agreements in force. Moreover, 118 Inclusive Framework members had at least some agreements that already complied with the minimum standard or that were subject to a complying instrument and would therefore become compliant soon.

As of 31 May 2022, more than 975 bilateral agreements between members of the Inclusive Framework complied with the minimum standard. An additional 76 agreements not subject to review (i.e., agreements between Inclusive Framework members and nonmembers) also complied with the minimum standard, bringing the total number of compliant agreements concluded by members of the Inclusive Framework to more than 1,050 agreements, which represents a significant increase compared to 2021.

As with previous years, this year's peer review shows that among the three alternative methods to implement the second component of the minimum standard (i.e., (1) the Principal Purpose Test (PPT), (2) the PPT supplemented by a detailed or simplified Limitation on Benefits (LOB), or (3) a detailed LOB together with an anti-conduit mechanism), the PPT alone remains the most widely used. For the agreements listed under the BEPS MLI, all 95 members of the Inclusive Framework that are parties and signatories to the BEPS MLI are implementing the preamble statement and the PPT. Fifteen jurisdictions have also opted to apply the simplified LOB through the BEPS MLI to supplement the PPT when possible. Six additional jurisdictions have agreed to accept a simplified LOB in agreements with partners that opted for it under the BEPS MLI.

Under the revised peer review methodology, an implementation plan must be developed for agreements concluded with other members of the Inclusive Framework (1) that are not compliant and not subject to a complying instrument or a general statement on the detailed LOB, (2) for which no steps have been taken to implement the minimum standard and (3) for which no reasons have been given on why the agreement does not give rise to material treaty shopping concerns. Once a plan is in place, a jurisdiction must provide an annual update if changes occur. Where no implementation plan has been developed in respect of such agreements, it will be recommended that the jurisdiction develop a plan for the implementation of the minimum standard.

In total, 31 jurisdictions have developed a plan for the implementation of the minimum standard, covering approximately 300 noncompliant agreements. A small number of jurisdictions have also stated that their plans, which were discussed with the OECD Secretariat, remain under internal deliberation and, therefore, the Report does not include detail on these plans. Most of the implementation plans reported this year were first developed in the context of the 2021 peer review, and the Report indicates that good progress has been made since.

Under the revised peer review methodology, recommendations are issued to members in two categories of cases. First, a member jurisdiction that is implementing the minimum standard by signing the BEPS MLI will receive a recommendation to complete the steps to have the MLI take effect with respect to its tax agreements. Second, a jurisdiction that has tax agreements for which a plan for implementing the minimum standard needs to be developed and that does not make such a plan (or provide an update on the plan) will receive a recommendation to provide a plan with respect to such tax agreements.

On the recommendations made in the 2021 peer review, nine jurisdictions have since completed the steps to have the BEPS MLI take effect with respect to their agreements listed to be covered, namely: Bahrain, Belize, Bulgaria, Cameroon, China, Hong Kong, Romania, Senegal and South Africa. In this Report, 19 jurisdictions⁹ have received recommendations to complete the steps to have the BEPS MLI take effect, and four jurisdictions¹⁰ have received recommendations to develop a plan or provide an update on the plan for the implementation of the minimum standard.

Next steps

The implementation of the minimum standard and, in particular, the actions taken to follow up on the recommendations made in the peer review process and to give effect to the implementation plans that have been developed, will continue to be monitored. The next peer review will be launched in the first half of 2024 and will include an update on the steps taken by each jurisdiction that has received a recommendation, as well as an update on the status of each implementation plan.

Implications

The Report indicates that, in line with last year's peer review, the 2022 peer review shows that generally most jurisdictions that are members of the Inclusive Framework are respecting their commitment to implement the minimum standard. The 2022 peer review also indicates that the BEPS MLI, which has been the main tool used to implement the minimum standard, has continued to have a significant effect on the bilateral tax treaty network.

As in previous years, this year's peer review shows that the PPT remains the most widely used option to implement the Action 6 minimum standard. For businesses, this may create some uncertainty, as the interpretation of the PPT by countries can be subjective and often unilateral, given the limited nature of the guidance that has been developed by the OECD. This could lead to multilateral controversy, and multilateral solutions such as Mutual Agreement Procedures and arbitration (if available) would likely be the most effective means of resolving any differences in interpretation between the source and residence country.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Netherlands

• Marlies de Ruiter | marlies.de.ruiter@nl.ey.com
• Maikel Evers | maikel.evers@nl.ey.com
• David Corredor-Velásquez | david.corredor.velasquez@nl.ey.com
• Andromachi Anastasiou | andromachi.anastasiou@nl.ey.com

Ernst & Young LLP, United States

• Barbara M. Angus | barbara.angus@ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ Azerbaijan joined the Inclusive Framework on BEPS after the cut-off date and therefore is not included in the Report. Azerbaijan will be included in the next peer review report on BEPS Action 6.

² See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016.

³ See EY Global Tax Alert, OECD releases third annual peer review report and revised peer review documents on BEPS Action 6 relating to prevention of treaty abuse, dated 16 April 2021.

⁴ See EY Global Tax Alert, OECD releases first annual peer review report on BEPS Action 6, dated 15 February 2019.

⁵ See EY Global Tax Alert, OECD releases second annual peer review report on BEPS Action 6 relating to prevention of treaty abuse, dated 27 March 2020.

⁶ See EY Global Tax Alert, OECD releases third annual peer review report and revised peer review documents on BEPS Action 6 relating to prevention of treaty abuse, dated 16 April 2021.

⁷ See EY Global Tax Alert, OECD releases fourth annual peer review report on BEPS Action 6 relating to prevention of treaty abuse, dated 4 April 2022.

⁸ Anguilla, the Bahamas, the Cayman Islands, the Cook Islands, Djibouti, Haiti, Honduras, and Turks and Caicos Islands.

⁹ Argentina, Armenia, Colombia, Cote d'Ivoire, Gabon, Germany, Italy, Jamaica, Kenya, Mexico, Morocco, Namibia, Nigeria, Republic of North Macedonia, Papua New Guinea, Peru, Sweden, Tunisia and Türkiye.

¹⁰ Congo, Democratic Republic of the Congo, Grenada and Sierra Leone.