On 16 September 2014 the OECD issued its paper, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties (Paper).
The Paper is about Action Point 15 of the OECD's wider 15 point Base Erosion and Profit Shifting (BEPS) Action Plan. The BEPS Action Plan is discussed in more detail in our earlier Alert, OECD releases BEPS Action Plan.
In this Alert we consider the main issues and options for taxation reform raised in the Paper.
Development of a multilateral instrument
Action on BEPS will require both domestic and international action. The Paper discusses the development of a multilateral instrument (Treaty) which will effectively amend, but not replace, the bilateral tax treaties.
What will the treaty cover?
The Paper suggests that the Treaty may cover the following issues, some of which are discussed in our other Alerts:
- Multilateral mutual agreement procedure
- Addressing dual residence structures
- Addressing hybrid mismatches
- Treaty abuse
- Interest expense allocation
What practical issues have been considered?
The Paper considers the following issues, amongst others:
- The Treaty will have to coexist with existing treaty networks. It will modify a limited number of provisions which are common to most agreements.
- The Treaty would not operate in relation to parties who do not already have a bilateral treaty. As a result, it will not expand Australia's existing treaty network to include signatories with whom Australia does not have already have a bilateral treaty.
- Compatibility issues – the Treaty will require primacy clauses to determine which provisions takes precedence in what circumstances.
- Variations in wording must be taken into account. The Treaty cannot explicitly amend bilateral treaties line by line, as there are apparently about 3,000 bilateral treaties in place.
- The Treaty may have different dates of entry into force for different provisions and for different countries.
- The Treaty may be tailored for different parties, and some countries may not adopt all aspects of the Treaty.
What other issues should be considered?
Other issues to be considered in giving effects to the recommendations in the Paper include:
- Australia will have to enact domestic legislation to give the force of law to the multilateral treaty, which may occur by amending the existing International Tax Agreements Act. The treaty may take effect at different times in relation to different bilateral treaties, as each bilateral treaty partner adopts the multilateral treaty.
- Australian courts will have to consider to what extent they take account of decisions of foreign courts on the interpretation of the treaty, particularly where those interpretations do not involve Australian parties.
- In the same way that the multilateral treaty will not amend bilateral treaties line by line, Australia's existing treaties do not amend Australia's tax law line by line. When the multilateral treaty is introduced, there will be two layers of provisions above the Australian domestic law which must be taken into account in interpreting the domestic law. This may cause some interpretational difficulties, particularly where the multilateral treaty, bilateral treaty and domestic law each use different terms to describe concepts which may be similar, but subtly different.
What happens next?
An international conference is to be convened in early 2015 to begin work on the framework agreement. It is considered important to work quickly, and to that end, it is intended that the multilateral treaty will initially be narrowly targeted with capacity to expand its scope subsequently.