Tax treaty history: the day an MLI defeated BEPS

Tax avoidance clampdown: today’s multilaterial agreement was signed by 67 countries. Credit OECD

A ‘tax shopping’ industry worth between $100 billion and $240 billion a year was enthusiastically consigned to history at the Organisation for Economic Co-operation and Development (OECD) in Paris today, John Egan reports.

International tax arrangements are as notable for their complexity as for their acronyms. Base Erosion and Profit Shifting (BEPS) is one such mechanism around which a veritable global industry has grown to exploit a tax loophole.

The case can best be demonstrated by example.

If a European company were to license a technology in India, for instance, royalties earned would first incur about 15 per cent tax in India, and the company would declare the income for domestic tax purposes from which the overseas tax should be deducted. Bilateral tax treaties exist to avoid the penalty of double taxation in the two counties.

However, certain countries have more exploitable bilateral treaties. Mauritius, for example, would see no tax being applied either in India or Europe if the above royalty remuneration were to be diverted through its jurisdiction. The tax payable in Mauritius would equally be zero.

Tax shopping is an avoidance measure through which a series of bilateral tax agreements can be linked so that tax payable can be significantly reduced if not eliminated.

Bilateral tax treaties originally established to avoid double taxation have been deployed to achieve double non-taxation, Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, said at a news conference today.

Similar arrangements are available in Europe. In the Netherlands there are thought to be about 10,000 tax lawyers employed on tax shopping – seeking the re-routing of revenues to follow bilateral treaties that diminish their tax obligations through BEPS.

Today, a single multilateral agreement signed by 67 countries should restore the original purpose of no less than 1,100 bilateral tax treaties, retaining their aim to avoid double taxation while prohibiting their use for tax avoidance purposes. The signatories include most global centres associated with BEPS, and others have signalled their intention to sign as soon as practicable.

It was in 2013 that the OECD Committee on Fiscal Affairs (CFA) submitted a 15-point action plan to the G20 to address BEPS. Over the next four years a multilateral instrument (MLI) was developed, endorsed by G20 finance ministers and finally prepared for signing today at the OECD.

The MLI will need to be implemented through the national legislation of each of the signatories, but will come into force three months after gaining its fifth ratification, and will begin to determine taxes levied six months after that. It is expected to be applied to taxes declared in 2018.

This schedule is not expected to delay its implementation, which Mr Saint-Amans described as a “dynamic process”, at the end of which well over 100 countries are expected to be involved. Botswana – the 99th on this list – formally registered its expression of interest to participate today.

Importantly, the MLI includes provisions for independent arbitration to solve disputes between governments. This should avoid the potential for double taxation on company transactions in cases that exceed a two-year limit for a negotiated resolution.

The fight against tax avoidance is a priority for the G20, and the MLI is seen as a minimum standard that countries should follow. It is also seen as a signal to countries how to be good citizens in an international community – and avoid the consequences if they choose not to be.