OECD releases a multilateral instrument to modify double taxation treaties
Late in November, more than 100 states concluded negotiations on the wording of a new multilateral convention, which is an important part of the OECD’s action plan against base erosion and profit shifting (BEPS). This multilateral instrument will facilitate the swift and efficient implementation of selected BEPS measures into individual double taxation treaties, without the need for renegotiation on an individual basis. The primary objective of the measures is to prevent shifting of profits by multinational groups to reduce their tax bases. The OECD estimates that approximately 2 000 existing tax treaties will be modified this way. Understandably, this also affects tax treaties concluded by the Czech Republic.
The multilateral instrument contains measures in the following areas:
- treaty abuse (BEPS Action 6)
- mechanism of treaty-related dispute resolution (BEPS Action 14)
- neutralising the effects of hybrid mismatch arrangements (BEPS Action 2)
- avoidance of permanent establishment status (BEPS Action 7)
The multilateral instrument gives states a certain amount of discretion as to how they will apply the measures to their tax treaties. For the first two areas, states will be obliged to adopt a minimum standard of measures; for the remaining two areas, the states may decide not to apply the measures at all. Further application flexibility will let each state define in advance which of its tax treaties will be covered by the multilateral instrument.
The multilateral convention will only be binding upon the states that join it. Its provisions will enter into effect with respect to a specific double taxation treaty once both parties have ratified the multilateral convention and a time allowance for the clarification of any possible disputes has elapsed. It is expected that countries taking part in negotiating the multilateral convention (approximately 100 states, including the Czech Republic) will join.
Individual states are now preparing a list of their tax treaties to be covered by the multilateral convention and considering in what manner to apply the proposed measures. A large number of states are expected to join the convention already in 2017.
The multilateral convention and an explanatory statement on individual measures are available on the OECD’s website.