BEPS Action Plan 15: Developing a multilateral instrument to modify bilateral tax treaties

Action Plan 15 of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion Profit Shifting (BEPS) Project discusses the desirability and technical feasibility of a multilateral instrument to implement the treaty-related measures in the other BEPS Action Plans (discussed in previous articles in this column).

Action Plan 15 proposes that the multilateral instrument initially will include provisions on (1) multilateral mutual agreement procedures; (2) dual residence structures; (3) hybrid mismatch arrangements; (4) triangular cases involving Permanent Establishments (PEs) in third states; and, (5) treaty abuse.

DESIRABILITY OF A MULTILATERAL INSTRUMENT
The report determined that a multilateral instrument is desirable primarily because it would reduce the need to individually negotiate and amend the more than 3,000 existing bilateral tax treaties to reflect the other treaty-related measures discussed in the other Action Plans. It anticipates that developing economies will benefit the most from this exercise since they find it more difficult to conclude tax treaties and it would also interest other countries in renegotiating existing tax treaties. With a multilateral instrument, developing countries can work together and pool their expertise in order to be effective during the negotiations. Certain issues such as developing a Multilateral Mutual Agreement Procedure (MAP) to resolve multi-country tax disputes are much easier to address multilaterally than in bilateral instruments, mainly because of legal constraints (e.g., some countries need a hard law instrument authorizing a multilateral MAP while others require an international law instrument to effect a multilateral MAP).

Finally, the existence of a multilateral instrument would strengthen the reliability of the international treaty network as businesses will have additional assurances that the provisions included in the multilateral instrument will be consistently interpreted across different jurisdictions.

FEASIBILITY OF A MULTILATERAL INSTRUMENT
Action Plan 15 concludes that a multilateral instrument is also feasible because the inevitable obstacles from both political and technical (public international law and international tax law) perspectives can be effectively addressed with the use of available established legal mechanisms. Notwithstanding the fact of its being multilateral, the instrument is expected to co-exist with the bilateral tax treaties because it will only modify the existing BEPS-related provisions or supplement those bilateral tax treaties which do not contain any.

Negotiating a multilateral instrument should prove less tedious in terms of time, than entering into a bundle of negotiations over “amending protocols” where the only purpose is to implement provisions specifically targeting BEPS-related issues. As such, the execution of a multilateral instrument is seen as a quick response to address BEPS-related issues. Notwithstanding the above, negotiations for the multilateral instrument will still follow traditional negotiating processes and its ratification by the signatory countries would take place in accordance with their respective national laws.

Finally, with regard to technical obstacles, it is observed that same can be easily resolved. Variations between the multilateral instrument and existing bilateral treaties such as scope, wording and the numbering of provisions can easily be addressed through the use of superseding language and careful drafting. Nonetheless, the report acknowledges that to make the multilateral instrument successful, it should be flexible enough to maintain consistency and transparency in its application of the rights and obligations established by the treaty vis-a-vis that of the contracting parties.

STATUS OF THE MULTILATERAL INSTRUMENT
When the deliverables for Action 15 were issued last September 2014, a mandate (approved by the OECD Committee on Fiscal Affairs and endorsed by the G20 Finance Ministers and Central Bank Governors) was issued in February 2015 to form an ad hoc Group to develop the proposed multilateral instrument. The Group was made available to all interested countries, including non-OECD or G20 members, all of which participate on an equal basis.

The Group began its work last May 2015 and targets the completion of the multilateral instrument by 31 December 2016 for signing by the participating countries. While the discussion for the development of the multilateral instrument was made