#JUNE 2017 – Tax Newsflash – Signature of the OECD Multilateral Tax Convention
On 7 June 2017 at the OECD headquarters in Paris, the first signatures were added to the multilateral convention which was developed by 99 states, including France, under the OECD framework. The purpose of the convention is to implement a number of measures adopted as part of the Base Erosion and Profits Shifting (BEPS) project. BIGNON LEBRAY’s tax team explains how this new important international instrument will be implemented and the changes it will bring.
The Start of the Project
The OECD’s BEPS initiative produced measures that had to introduced into current national legislation. The current system involves 3,000 bilateral agreements between states, and modifying each and every one of them would be a very onerous task. It was therefore decided that all these agreements would be synchronised by means of a multilateral instrument.
Application of the Multilateral Convention
The convention will apply in parallel with the existing bilateral agreements, and the parties will have the option to publish consolidated versions.
The convention relates to hybrid mechanisms (Action II), tax treaty abuse (Action III), measures to avoid being qualified as a permanent establishment (Action IV), improving dispute resolution mechanisms (Action V) and arbitration (Action VI).
The convention will be implemented in a flexible manner that takes into account the specific nature of the parties and of the bilateral agreements. Parties will thus be able to choose the bilateral agreements that will be covered by the multilateral convention, and will therefore be modified by the multilateral instrument.
An opt out mechanism has also been included in the convention. Parties will therefore have the right not to apply some of the provisions contained in articles of the convention. However, parties will only be entitled to opt out of BEPS minimum standards in cases that are specifically defined, for example if the provisions contained in the existing bilateral agreements already govern the matter in a satisfactory manner.
Lastly, given that some of the provisions contained in the convention are not included in national law, French mechanisms will have to be modified under the subsidiarity principle in order to allow the convention to be applied. This is because when an international tax agreement, even one that has been ratified, comes into force, it does not automatically result in the introduction of new taxation if the principle of this taxation is not part of national law.
Increased Complexity for Taxpayers
The signature of this multilateral convention marks the beginning of a new international tax order where global negotiation between states is likely to take precedence over bilateral negotiations.
The objectives of the convention are commendable and reflect the need to modernise the international tax legislative process. What remains true, however, is that for a number of years from now on, taxpayers will have to adopt a new framework for interpreting international tax standards. This will no doubt be a complex process and a source of potential disputes.