Ministers and high-level officials from 68 countries and jurisdictions have signed an innovative multilateral convention that will swiftly implement a series of tax treaty measures to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises.
The new convention will also strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.
The signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS took place during the annual OECD Week in Paris.
Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.
BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. Engaging developing countries in the international tax agenda is important to ensure that they receive support to address their specific needs.
Indian Finance Minister Arun Jaitley signed the multilateral convention, an outcome of the OECD/G20 Project to tackle base erosion and profit shifting. BEPS is resorted to by MNCs through tax planning strategies by exploiting gaps and mismatches in tax rules. The convention will modify India’s treaties in order to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
The new convention, which is the first multilateral treaty of its kind, allows jurisdictions to transpose results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties.
It was developed through inclusive negotiations involving more than 100 countries and jurisdictions, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting.
Following Nations have signed this Convention:
1 Andorra
2 Argentina
3 Armenia
4 Australia
5 Austria
6 Belgium
7 Bulgaria
8 Burkina Faso
9 Canada
10 Chile
11 China
12 Colombia
13 Costa Rica
14 Croatia
15 Cyprus
16 Czech Republic
17 Denmark
18 Egypt
19 Fiji
20 Finland
21 France
22 Gabon
23 Georgia
24 Germany
25 Greece
26 Guernsey
27 Hong Kong (China)
28 Hungary
29 Iceland
30 India
31 Indonesia
32 Ireland
33 Isle of Man
34 Israel
35 Italy
36 Japan
37 Jersey
38 Korea
39 Kuwait
40 Latvia
41 Liechtenstein
42 Lithuania
43 Luxembourg
44 Malta
45 Mexico
46 Monaco
47 Netherlands
48 New Zealand
49 Norway
50 Pakistan
51 Poland
52 Portugal
53 Romania
54 Russia
55 San Marino
56 Senegal
57 Serbia
58 Seychelles
59 Singapore
60 Slovak Republic
61 Slovenia
62 South Africa
63 Spain
64 Sweden
65 Switzerland
66 Turkey
67 United Kingdom
68 Uruguay
The following jurisdictions have expressed their intent to sign the Convention:
− Cameroon
− Côte d’Ivoire
− Estonia
− Jamaica
− Lebanon
− Mauritius
− Nigeria
− Panama
− Tunisia
Background:
The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low or no tax environments, where companies have little or no economic activity.
Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues.
Almost 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming.
The new multilateral convention will solve this problem. It will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project.
Treaty measures that are included in the new multilateral convention include those on hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures, including an optional provision on mandatory binding arbitration, which has been taken up by 25 signatories.
The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.
The OECD is the depositary of the multilateral convention and is supporting governments in the process of signature, ratification and implementation. The position of each signatory under the convention is now available on the OECD website. By the end of 2017, the OECD will provide a database and additional tools on its website, facilitating the application of the convention by taxpayers and tax administrations.