The convention designed to enable swift modifications of double tax agreements, drawn up with 103 jurisdictions, may affect taxable periods beginning in 2018, depending on international and domestic ratification processes.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, published in November, is the latest outcome of the OECD’s BEPS project, which began in 2013 with the aim of reforming the international tax system to counter tax-avoidance strategies.
The terms of the convention predominantly cover four BEPS actions, and contain a mix of mandatory minimum standards that would apply to double taxation agreements covered by the convention, and optional provisions: hybrid mismatch arrangements (which principally arise where jurisdictions tax an entity differently due to its form, or characterize the nature of a payment differently), including changes to the treatment of transparent entities, dual-resident entities and methods to eliminate double taxation; treaty-shopping and other abuse of DTAs, denying benefits in specified circumstances; the definition of permanent establishment, to catch commissionaire arrangements, the fragmenting of activities amongst group companies and to limit exempt activities to those that are preparatory/auxiliary to the overall business; and dispute resolution, implementing minimum standards when resolving disputes over the application of a DTA.
The convention will only apply, broadly, where and to the extent that both jurisdictions under a DTA have notified the OECD that they wish for the DTA to be covered and, other than automatic minimum standards, have notified compatible options.
From a practical perspective, the international tax system will become even more complex than before and compliance costs will likely increase. It will become much harder for practitioners and businesses to determine the treaty position in respect of individual structures and transactions as it will be necessary to determine whether the DTA is covered by the convention, whether the convention is in force for the relevant parties, and what options and reservations they have exercised. This flexible approach is intended to ensure maximum compatibility with existing DTAs and encourage participation, but in many respects, it is a double-edged sword. ?