On September 16, the Organisation of Economic Co-operation and Development (OECD) published a set of recommendations for a coordinated approach to fight tax avoidance by multinational enterprises under the Base Erosion and Profit Sharing (BEPS) project. The purpose behind these recommendations is to create a single set of international tax rules, or building blocks, which seek to end the practice of erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax. The first elements include:
- a report on the tax challenges of the digital economy (Action 1);
- draft rules intended to neutralize hybrid mismatch arrangements (Action 2);
- an interim report on harmful tax practices (Action 5);
- draft rules intended to prevent treaty abuse (Action 6);
- draft rules regarding transfer pricing (Action 8 and Action 13); and
- a final report on the feasibility of a multilateral instrument to amend bilateral tax treaties (Action 15).
Collective investment schemes and special purpose vehicles that currently utilize strategies relying on double tax treaty claims to receive dividend and interest income free from withholding tax will need to focus more closely on these proposed rules as they evolve. While the OECD has acknowledged that more work is required before the final model treaty to prevent abuse of tax treaties is published, managers should understand the potential impact of the draft rules on their business models.