International Business Advisor: OECD Moves to Limit Treaty Shopping

The Organisation for Economic Co-operation and Development (OECD) released the key document that forms the basis of the peer review of the base erosion and profit shifting (BEPS) minimum standard on preventing inappropriate treaty shopping.

Treaty shopping is the practice of structuring a multinational business to take advantage of more favorable tax treaties available in certain jurisdictions. A business that resides in a home country that doesn’t have a tax treaty with the source country from which it receives income establishes an operation in a second source country that has a favorable tax treaty in order to minimize its tax liability with the home country.

Four Minimum Standards

BEPS Action 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances –

Peer Review Documents is one of four BEPS minimum standards. Each standard is subject to peer review to ensure timely and accurate implementation and to safeguard the level playing field.

The 99 members of the Inclusive Framework on BEPS have committed to participating in the peer reviews and implementing the minimum standards. (The Inclusive Framework is a group of countries that have pledged to implement BEPS measures designed by the OECD and G20 countries.)

The Action 6 minimum standard requires that countries’ tax treaties include a statement clarifying that the treaty isn’t intended to allow nontaxation or reduced taxation through avoidance or evasion. The document is aimed at providing an effective way to quickly put into effect the minimum standard on treaty shopping. It includes terms of reference setting out the criteria for assessing the implementation of the minimum standard. It also outlines the methodology, which sets out the procedural mechanism for conducting the review.

The Road Ahead

The OECD says the review of the implementation of the minimum standard on treaty shopping won’t begin until 2018 because:

  • The first signatures of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) won’t take place until the second half of 2017, and
  • It’s unlikely that many jurisdictions will ratify the MLI or bilateral treaties implementing the minimum standard before 2018.

Starting in 2019, at the January meeting of the Inclusive Framework on BEPS, an annual report on the implementation of the minimum standard on treaty shopping will be presented. The report will deal with compliance with the minimum standard by each of the 99 jurisdiction members of the Inclusive Framework. It will reflect whether and how the minimum standard has been incorporated in all the existing bilateral treaties of each jurisdiction of the Inclusive Framework.