The Organisation for Economic Co-operation and Development (“OECD”)/G20 Base Erosion and Profit Shifting (“BEPS”) Project identified 15 actions based on the following three key themes, being:
- the introduction of coherence in the domestic rules that affect cross-border activities;
- the reinforcement of substance requirements in the existing international standards; and
- the improvement of transparency and certainty.
In particular, the final BEPS package, released on 5 October 2015, represents a substantial overhaul of the international tax rules and once the measures become applicable, it is expected that profits will need to be reported where the economic activities that generate them are carried out and where value is created.
Many of the BEPS outputs relate to tax treaties and will not be effective until the relevant bilateral tax treaties are amended. In particular, this includes measures under Action 2 (neutralising the effects of hybrid mismatch arrangements); measures under Action 6 (preventing the granting of treaty benefits in inappropriate circumstances); measures under Action 7 (preventing the artificial avoidance of PE status); measures included in the minimum standards and best practices produced under Action 14 (making dispute resolution mechanisms more effective); and the implementation of measures for mandatory binding mutual agreement procedure statistics (“MAP”) arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specified time frame.
It would, however, take years for countries to embark upon and conclude the renegotiation of their bilateral treaties. Even where changes to a bilateral treaty are consensual between two countries, it still takes a substantial amount of time and resources to introduce and finalise these changes. On this basis and following on the recommendations of Action 15, an ad hoc group was established by the OECD on 27 May 2015 with the objective of developing a multilateral instrument to modify the existing global network of more than 3500 bilateral tax treaties in order to swiftly implement the tax treaty measures developed as part of the BEPS Project. The multilateral instrument will therefore ensure that there is no need to bilaterally renegotiate each treaty separately.
The ad hoc group currently includes 96 countries, all participating on an equal footing, and the group remains open to participation from all interested countries. South Africa is an active member of the ad hoc group, and the group aims to conclude its work and open the multilateral instrument for signature by 31 December 2016.
Considering the sheer number of bilateral treaties and the vast number of variances from the model tax treaties, the development of the multilateral instrument is subject to an array of technical issues. On this basis, the OECD issued a request for input on 31 May 2016, specifically focused on certain identified technical issues of implementation relating to the multilateral instrument.
In particular, comments and input are requested with respect to the following technical issues:
- Technical issues that should be taken into account when adapting the BEPS measures to modify or supersede existing provisions of bilateral tax treaties that may vary from the OECD Model Tax Convention, including:
- existing provisions or types of provisions that service the same purpose as the BEPS measures and that would need to be replaced; and
- existing provisions or types of provisions that are similar to BEPS measures but that would need to be retained.
- Mechanisms that could be used to ensure consistent application and interpretation of the provisions of the multilateral instrument. In particular, ensuring that the agreed commentary that accompanies the BEPS outputs will be used to interpret the provisions of the multilateral instrument. In addition, the multilateral instrument is being negotiated in English and French, but will modify bilateral tax treaties concluded in various other languages and it will be important to ensure consistent application to those bilateral treaties despite differences in language.
- The types of guidance and practical tools that would be most useful to taxpayers in understanding the application of the multilateral instrument to existing tax treaties and to ensure the consistent application of the provisions of the multilateral instrument to different treaties.
- The approach to be taken in developing the optional provision on mandatory binding MAP arbitration, taking into account that it would need to serve the needs of the countries that have already committed to implement mandatory binding arbitration, as well as countries that are considering committing in the future.
Comments and input are invited on these technical issues, and are to be submitted by no later than 30 June 2016.