5th June 2017
Michelle De Maria & Wojtek Gadzala, Chetcuti Cauchi
With more than 100 jurisdictions on-board, the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS on 7th June will bring about one of the most notable international tax law developments in recent years. MSI's Maltese law member Chetcuti Cauchi takes this opportunity to recap its implications and highlight the challenges lying ahead of tax administrations and legal practitioners.
The need for a uniform instrument to counter BEPS
The introduction of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (hereinafter referred to as the “Convention”) is a part of the combined effort of OECD and G20 to tackle base erosion and profit shifting (“BEPS”). In a nutshell, BEPS denotes tax planning strategies that exploit gaps and mismatches in tax rules and enable artificial shifting of profits to low or no-tax jurisdictions.
In October 2015, the OECD published the BEPS Package, a series of 15 actions that aim at equipping governments with domestic and international instruments to address systemic weaknesses that create opportunities for BEPS. The actions cover various practices, such as hybrid instrument\entity misuse or treaty shopping and propose anti-abuse solutions, inter alia guidance on CFC regimes or effective transfer pricing rules.
BEPS, being a progeny of globalization, may occur through the legal application of a vast network of international tax treaties. In fact, many BEPS strategies are designed to utilize the gaps or mismatches between these treaties. Effective implementation of the BEPS Package, therefore requires modifying existing tax treaties in line with its recommendations. But with over 3 000 tax treaties in force worldwide, the bilateral negotiations could take years and that would significantly reduce the impact and effectiveness of the BEPS actions in this regard.
With this in mind, 2016 has seen more than 100 jurisdictions involved in developing the Convention – a multilateral, international agreement intended to impact a significant number of existing tax treaties in one move. With its final text published last November, the Convention aims to prevent treaty abuse, i.e. granting of treaty benefits in inappropriate circumstances, artificial avoidance ofpermanent establishment status, as well as eliminate negative effects of hybrid mismatches. Furthermore, the Convention should improve mechanisms of tax treaty dispute resolution between the countries.
Read the full article on OECD BEPS Project: Over 2,000 tax treaties to be amended by the Multilateral Convention
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