OECD gets cracking on Multilateral Instrument - BEPS consensus a step closer?


24 months back, when OECD embarked on the ambitious & grandiose BEPS project, skeptics were a plenty. While the OECD has answered many of its critics with a robust pace of work that seems on track to meet the September 2015 deadline for several Action Plans, a billion dollar question still keeps popping up - How will 100 odd countries implement BEPS in the wake of their double tax treaty obligations?

From Day 1, OECD has cited the Multilateral Instrument as the tool to get developed and developing countries with diverse interest, but with a common objective of putting an end to international tax avoidance, to sit across the table and hammer out a consensus, that would in one stoke, amend 3000 bilateral tax treaties. Towards this end, the first meeting of the ad-hoc group for development of Multilateral Instrument, was held on May 27, 2015 wherein procedural issues were agreed upon so that the substantive work can begin when the countries re-convene in November.

Does this signal the countdown to the inevitability of BEPS becoming a legislative reality by the time we say good-bye to 2015? Could there still be that slight distance between the cup & the lip that may spoil the BEPS party? What are the key roadblocks/conflicting interests that could be an hurdle to the signing of a potentially historic Multilateral Instrument signing convention? 

Pascal Saint-Amans
Director of OECD's Centre for Tax Policy and Administration

International tax avoidance has been a headline issue for several years now – the OECD/G20 BEPS Project is to put an end to the blatant use of aggressive tax planning arrangements by multinational enterprises to shift their profits into locations different from where their business activity takes place so as to avoid paying their fair share of taxes. Fundamental changes to the existing rules both on a domestic front and in bilateral tax treaties are needed to effectively tackle BEPS. There are over 3000 bilateral tax treaties and tax treaty negotiators are well aware of the lengthy process involved in the renegotiation of a single tax treaty, let alone an entire network of treaties which could well take years to renegotiate. For this reason, one of the action items, Action 15, is to develop a multilateral instrument to help countries amend their bilateral treaties swiftly and efficiently in order to give effect to tax treaty-related BEPS measures. Over 80 countries have joined the ad hoc Group to develop the multilateral instrument to amend bilateral tax treaties and this demonstrates the interest of countries to come together to find a cost efficient and yet effective way of addressing their tax treaty-related...

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Akhilesh Ranjan
Joint Secretary (FT & TR) and Competent Authority India

The Multilateral Instrument is not only a cost effective way of implementing the treaty measures agreed to in the G20 /OECD BEPS project; it signifies movement from bilateralism to multilateralism in the area of international tax. It gives an opportunity to developing countries to participate fully in global initiatives and contribute towards building a new world order. 

Philip Baker
Queen's Counsel, UK

The development of a multilateral instrument to modify large numbers of tax treaties may prove to be one of the lasting consequences of the BEPS project. As the number of bilateral treaties has grown, the time involved in updating them has increased exponentially. A streamlined method to amend treaties has been needed for some time. If this works, then we can predict an almost continuous process of amending treaties on an on-going and multilateral basis. Gradually, common provisions in a multilateral instrument will replace bilateral treaties. A meeting of 80 or more countries will replace the work of the OECD in updating the model. The changes that the BEPS instrument will make will also have a huge impact: inserting anti-treaty abuse provisions; update the definition of PE; insert provisions for arbitration; insert provisions for hybrid entities; insert provisions for a common interpretation. This could fundamentally change the shape of international taxation.

Jeffrey Owens
Former Director of tax policy at OECD
  • The political momentum behind BEPS is unprecedented in the tax world .In just over 4 Months the OECD will present its 15 action points to the G20 Heads of Government. Whilst it is unlikely that all 15 action points will contain consensus and concrete recommendations and that some will require a follow -up, it is already clear that there will be a number of changes to be made to tax treaties: whether on some basic concepts such as PE or in the treatment of financial transactions such as hybrids. The challenge that the OECD will then face is how to get these agreed changes into the 3000 plus bilateral tax treaties. If we follow the traditional route of bilateral renegotiations it will be 10-15 years before this network of bilateral treaties is updated: a very long time to implement agreed changes .During this period there will be a mismatch between treaties that have been updated and those which have not .This will create uncertainty and is likely to lead to more disputes between governments.
  • Action 15 is one of the key to the successful implementation of the BEPS recommendations.The idea of a multilateral instrument (note: a convention) is not that new:...
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    Porus Kaka
    IFA President and Senior Advocate

    One of the main objectives of OECD BEPS project is to ensure globally coordinated changes to the Tax Treaty network and prevent unilateral actions by individual countries.As the marathon work undertaken by OECD draws close to its two-year deadline the pendulum will now swing towards implementation. To achieve the above objective a multilateral instrument will be critical to ensure the project succeeds. It will be equally critical for the BEPS project that the multilateral instrument is entered into by the global community with the minimum number of carve outs, protocols, reservations, etc. which otherwise can only harm globally coordinated actions.This implementation phase will perhaps be as important, if not more, than the design phase. Too many reservations by too many countries may put the project at grave peril. 

    Dinesh Kanabar
    Founding Partner, Dhruva Tax Advisors

    The rapid pace of work being undertaken by the OECD in relation to the BEPS initiative is indeed commendable. The use of a multilateral instrument to implement treaty-based measures developed under the BEPS action plan is a brilliant, practical and efficient way to ensure that bilateral negotiations (often driven by political and other non-tax considerations) do not end up delaying the implementation of the BEPS agenda.The establishment of the ad hoc group to develop the multilateral instrument and the agreement on procedural issues relating to the group’s functioning point suggest that this initiative is being accorded high priority. However, it may be pertinent to note that the work under this action item, while undoubtedly important, depends to a large extent on the ongoing work under other Action Items, particularly those relating to hybrid mismatch arrangements, treaty abuse, permanent establishments and dispute resolution. The evolution of a consensus as a part of those action items will smoothen the way and help facilitate the drafting of this multi-lateral instrument.However, as work on the substantive issues under various action plans continues, this group is expected to focus on important foundational issues such as the interplay of the multilateral instrument with individual treaties. If...

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    Rajendra Nayak
    Partner, International Tax Services, Ernst & Young LLP

    The outcome of the BEPS Action Plan work streams will result in a wide range of recommendations. Some will most likely ultimately lead to changes to domestic law provisions as well as the Commentary to the OECD Model Convention and the Transfer Pricing guidelines. Others will result in changes to the OECD Model Convention. The Action Plan recognizes that this could lead to a very lengthy process which would undermine the objective of addressing BEPS in a timely and comprehensive manner. In addition, it may also increase the risk of unilateral action undertaken and thereby lead to further uncertainty and disputes. Without a mechanism for swift implementation, changes to model tax conventions only widen the gap between the content of these models and the content of actual tax treaties. Developing such a mechanism is necessary not only to tackle BEPS, but also to ensure the sustainability of the consensual framework to eliminate double taxation.

    To address this issue, Action 15 proposes the introduction of a multilateral instrument to enable jurisdictions to implement measures developed under the BEPS project and, to avoid lengthy renegotiations in the amendment of bilateral treaties. In September 2014, the OECD released a report on the feasibility of...

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    Mukesh Butani
    Partner, BMR Legal

    The multilateral instrument envisaged under BEPS action point is central to implementing most action points. It envisages creating a framework which would guide treaty Partners to act in accordance with a broad set of principles. Thereafter, I anticipate, it would be left to countries to negotiate or re negotiate treaties based on such guidance and adhering to the spirit of various action points under BEPS. Whereas, the endeavor would be to create a set of treaty principles to deal with base erosion aspects, difference of views are bound to arise due to a variety of reasons. The first and foremost would be conflict with domestic law provisions. Take a case in point, domestic legislations by way of GAAR, CFC etc would have to align with the treaty provisions, arising out of the Multilateral framework. There are bound to be conflicts between the developed nations, who have historically believed in resident based taxation and the emerging Markets who have strict source based rules. Emerging markets who form a part of the G20 group would assert itself in taxing economic activities and this may possibly give rise to economic double taxation. One of the important objectives of BEPS had been avoidance of...

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    K.R. Sekar
    Partner, Deloitte Haskins & Sells

    It is good to note that OECD has taken the initial steps on concluding Multilateral Convention. Though the conclusion on Multilateral Convention by 100 odd countries is most desirable step but it is equally important for BEPS Action plan to be effective the other action points ( eg. Action Point no 6 Treaty Abuse or Action point no 7 Artificial Avoidance of PE) should also be finalized.  There is need for an urgent action from OECD aiming at following steps if this action plan is to become effective.

  • Methodology to Modify existing treaties in a “synchronized” manner:
  • Methodology to Prevents unilateral measures that may violate existing treaties
  • OECD should also finalise the methodology of interaction of Multilateral Instrument with Bilateral treaties and while finalizing action plan to interact with Bilateral treaties, OECD should address the following issues:

  • How to “modify” certain BEPS-related provisions of existing / future bilateral treaties
  • How Bilateral treaties remain in force for non-BEPS issues
  • “Compatibility” for pre-existing bilateral treaties and future bilateral treaties
  • Entry into force of future/Multilateral Convention.
  • Enforceability on States that are parties to the MI
  • The Multilateral Instrument should aim to prevent the countries taking unilateral position on treaties. The countries while concluding on the conclusion of Multilateral Convention should not only to commit...

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