Global tax avoidance convention set to be signed by over 60 jurisdictions

The multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting (BEPS) is due to be signed today by more than 60 jurisdictions worldwide.

The convention is designed to implement a minimum standard to prevent against treaty abuse and strengthen mechanisms for dispute resolution. It was proposed under the Organisation for Economic Cooperation and Development’s BEPS project, in which Action 15 called for the introduction of a multilateral instrument to enable countries to amend their bilateral tax treaties in accordance with the tax treaty related BEPS recommendations

The multilateral instrument has since been developed and was adopted on 24-25 November 2016. It will transpose BEPS recommendations into existing bilateral treaties – more than 2,000 – eliminating the need for jurisdictions to renegotiate each tax treaty. Provisions in the multilateral instrument relate to hybrid mismatches, elimination of double taxation, prevention of treaty abuse and divided transfer transactions, among others.

The multilateral instrument will enter into force following ratification by five countries. Each signatory to the instrument will ratify the instrument through their domestic processes.

Heather Self, partner at law firm Pinsent Masons, said: “This signing is a huge achievement and will put another nail in the coffin of complex tax avoidance structures exploited by some big businesses.

“Those multinational corporations relying on tax treaties to funnel royalties via brass-plate companies to a tax haven should, by now, have recognised that the game is up and that they need to restructure their tax affairs.”

She added: “However, compromises had to be made. The final document allows for different options on implementation and it will be interesting to see how different interpretations align.

“We expect an increase in international tax disputes as a result of the implementation of the measures recommended by the OECD, as countries will be implementing the recommendations in slightly different ways and at different speeds. This is a particular issue for UK groups as the UK has been keen to be an early adopter of many recommendations.

“A key part of the pact is to use arbitration as way to resolve international tax disputes. We welcome this, but some will have concerns that not every country in the agreement has signed up for this part.

“The OECD will keep pushing. It’s crucial that it continues its work on dispute resolution as more could be done at earlier stages to prevent disputes and seek to resolve them more efficiently.”

The OECD BEPS Project aims to tackle tax avoidance by multinational companies by strengthening international tax rules. The Action Plan was published in 2013, with the final reports released in October 2015.

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