After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time. Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.
The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.
EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”
Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world. It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means. Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.
Click to access 2016G_04025-161Gbl_OECD%20releases%20MI%20to%20modify%20bilateral%20tax%20treaties%20under%20BEPS%20Action%2015.pdf
Click to access explanatory-statement-multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf
The Dec. 2016 completion date for BEPS Action 15, Multilateral Instrument (refer to 11 Feb. post) and the completion of the remaining 15 Actions by the end of 2015 is a clear mismatch between issuance of guidelines and an efficient process for implementation.
The multilateral instrument is not projected to be available until the end of 2016, with subsequent enactment by countries in 2017, 2018 or later years. As a result, countries will need infinite patience to wait for final guidelines, and the corresponding multilateral instrument, without enacting unilateral legislation that may be non-conforming and subject to different interpretations. Therefore, the result will be increased complexity with more diversity in transfer pricing practices, different interpretations of the arm’s length principle and additional risks of double taxation.
As the pace of BEPS enactment and increased interest by all parties accelerates, it is hopeful that countries will be coordinated in this game of patience to address a new era of transfer pricing interpretation and documentation. MNE’s should therefore prepare for maximum flexibility to anticipate this divergence.
The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015). Links are provided for the OECD’s statement of intent addressing these three actions in particular.
Click to access beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf
Click to access beps-action-15-mandate-for-development-of-multilateral-instrument.pdf
Summary – Action 5 (Intangibles):
- The Modified Nexus Approach is generally accepted.
- 30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
- Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
- Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
- Methodology of tracking / tracing R&D expenditures will be developed.
- Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.
Summary – Action 15 (Multilateral Instrument):
- The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
- The instrument will be designed to implement treaty-related measures of the BEPS Project.
- Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution). Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
- Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
- The instrument is not compulsory and is open to all jurisdictions.
- Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
- Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.
The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date. It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.