Unilateral, Bilateral, Multilateral: Winds of change to watch for post-BEPS

With the adoption of the BEPS package, OECD and G20 countries, as well as all developing countries that have participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occurs. Focus will now shift to the upcoming challenges, which include supporting the implementation of the recommended changes in a consistent and coherent manner, monitoring the impact on double non-taxation and on double taxation, and designing a more inclusive framework to support implementation and carry out monitoring.

Some of the revisions may be immediately applicable such as the revisions to the Transfer Pricing Guidelines, while others require changes that can be implemented via tax treaties, including through the multilateral instrument. Some require domestic law changes, such as the outputs of the work on hybrid mismatches, CFC rules, interest deductibility, Country-by-Country Reporting, and mandatory disclosure rules, as well as to align, where necessary, domestic rules on preferential IP regimes with the harmful tax practices criteria. Countries are sovereign. It is therefore up to them to implement these changes, and measures may be implemented in different manners, as long as they do not conflict with their international legal commitments. However, BEPS by its nature requires coordinated responses, particularly in the area of domestic law measures; it is therefore expected that they will implement their commitments, and that they will seek consistency and convergence when deciding upon the implementation of the measures. Challenges have arisen in the course of the development of the measures: some countries have enacted unilateral measures, some tax administrations have been more aggressive, and increasing uncertainty has been denounced by some practitioners as a result of both the changes in the world economy and the heightened awareness of BEPS.

Action 15 of the BEPS Action Plan provides for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable countries that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested countries will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution. The goal of Action 15 is to streamline the implementation of the tax treaty-related BEPS measures. This is an innovative approach with no exact precedent in the tax world, but precedents for modifying bilateral treaties with a multilateral instrument exist in various other areas of public international law. Drawing on the expertise of public international law and tax experts, the Action 15 report, explores the technical feasibility of a multilateral hard law approach and its consequences on the current tax treaty system. It identifies the issues arising from the development of such an instrument and provides an analysis of the international tax, public international law, and political issues that arise from such an approach. The Report concludes that a multilateral instrument is desirable and feasible, and that negotiations for such an instrument should be convened quickly. Based on this analysis, a mandate for the formation of an ad hoc Group to develop a multilateral instrument on tax treaty measures to tackle BEPS was approved by the OECD and endorsed by the G20 Finance Ministers and Central Bank Governors in February 2015. The Group is open to participation from all interested countries on an equal footing and is served by the OECD Secretariat. The Group begun its work in May 2015 with the aim to conclude its work and open the multilateral instrument for signature by 31 December 2016. Participation in the development of the multilateral instrument is voluntary and does not entail any commitments to sign such instrument once it has been finalised. So far, about 90 countries are participating in the work.

The prime benefits of the multilateral treaty route would be speed and unity of interpretation. It would also facilitate inclusion in BEPS of developing countries. To a certain extent, globalization makes the bilateral approach obsolete: the mobility of factors and the existence of global value chains are likely to generate multi-country disputes and require multilateral MAP, which could better be addressed in a multilateral treaty. The multilateral treaty would not supersede existing bilateral agreements but would complement them by addressing anti-BEPS measures and securing their compatibility with existing or future treaties. It would be negotiated at an International Conference, as was the case, for instance, with several multilateral treaties in the field of private international law, civil procedure, arbitration, and criminal extradition procedures and mutual assistance. In the OECD’s view, the multilateral treaty would only apply to signatories that had signed a bilateral treaty among themselves, the only potential exception being a multilateral dispute resolution mechanism. Conflicts with existing provisions in bilateral treaties would be resolved by a primacy clause in the multilateral instrument. Definitions in the multilateral text would also prevail over existing definitions in bilateral agreements.

As may be discerned from the above implementation of BEPS would require in unilateral domestic tax law changes in several countries. While tax treaty changes may be addressed under the multilateral instrument, given that the it may be atleast a couple of year before the instrument is operational, countries may still look at re-negotiating bilateral tax treaties.