Concern over missing details as OECD targets tax base erosion and profit shifting

Concern over missing details as OECD targets tax base erosion and profit shifting

Graham Murray, Senior Associate and Mathew McKay, Partner | Friday 8 July 2016

​​​Submissions on a new multilateral instrument (the
MLI) to target tax base erosion and profit shifting (BEPS) call for further technical details to be released for public consultation and a relaxing of its tight implementation deadline.

​The Organisation for Economic Co-operation and Development (OECD) this week released submissions received on the proposed MLI. The submissions (which can be accessed
here) contain a strong sentiment that the detailed MLI text should be made public before it is signed. They also show stakeholders want the focus to be on “getting it right” through full consultation rather than on the current 31 December 2016 deadline for signing the MLI. 

Given the New Zealand Government’s stated commitment to the OECD’s BEPS initiative, it is reasonable to assume that New Zealand will be a signatory to the MLI and that it will impact cross-border investment into and out of New Zealand. It is unfortunate that wider interest groups in New Zealand have no visibility over its detail, and may not do so until the instrument is signed. The extent to which the concerns expressed by stakeholders will be taken into account remains to be seen.  

What is the MLI?

The MLI will be a multi-party international convention that seeks to address perceived BEPS related deficiencies in existing Double Tax Agreements (DTAs). The idea is that countries sign up to the MLI to modify their existing DTAs, rather than renegotiating each DTA on a one-by-one basis to address BEPS concerns.  

Broadly, the MLI is expected to: 

• Modify the purpose provisions of existing DTAs to include a purpose of eliminating non-taxation (many existing DTAs simply contemplate eliminating
  double taxation),
• Introduce anti-treaty shopping rules, including a new general anti-abuse rule and/or detailed limitation of benefits rules that tightly control access to DTA benefits. Treaty shopping includes the practice of investing through a country simply to obtain the benefit of that country’s DTA,
• Implement changes to the definition of “permanent establishment” in existing DTAs to overcome certain structuring practices that avoid a permanent establishment from arising, and
• Introduce specific rules for hybrid mismatches. Those rules could apply where, for example, a cross-border arrangement produced deductible expenditure in one country but no taxable income in the other.

The MLI is also expected to include a revised dispute resolution regime to promote an internationally coordinated approach to the resolution of disagreements between taxing authorities concerning taxing rights. This regime may include a (controversial) compulsory binding arbitration regime that would have DTA disputes between countries determined by an international arbitrator.  

How far has the MLI advanced? 

The OECD has signalled an intention to have the MLI ready for signature by 31 December 2016 – an ambitious timeframe. The effective date for the MLI remains uncertain, although given the tax base protection purpose of the BEPS measures it is reasonable to expect swift implementation after signing.  

To date the OECD has not published a copy of the draft MLI text – that is despite reports that the document is already in an “advanced” draft state. It did however call for comments from stakeholders on “technical issues” on 31 May 2016. 

Themes from the stakeholder submissions

The submissions contain a wide range of views on the MLI and the BEPS programme generally, and signpost a number of issues that taxpayers may need to deal with in the post-MLI world.

Some key themes to emerge include:  

• A strong sentiment that the detailed MLI text should be made public before being signed. Many submitters pointed out the oddity of the OECD seeking comments on “technical issues” without providing the technical detail and text of the current draft MLI.
• The 31 December 2016 timeframe for signing the MLI is ambitious and the focus should be on “getting it right” with full consultation.
• There needs to be clarity that the MLI will apply prospectively – some submitters believed that certain tax authorities were already taking positions applying the BEPS measures proposed in the MLI.
• The difficulty in drafting a single instrument that effectively modifies a diverse range of DTAs (UN model, OECD model and various country specific differences) should not be underestimated. Some submitters suggested that the MLI should be accompanied by country-by-country schedules which relay specifically how the MLI modifies each particular DTA.  
• The MLI should also strive to solve double taxation issues inherent in the current international tax system, rather than focusing only on non-taxation of income and avoidance issues.  

The submissions indicate that mandatory arbitration of DTA disputes remains a controversial topic:   ​

• Taxpayer/business groups expressed an overwhelming preference for mandatory arbitration to resolve the disagreements. Mandatory arbitration was seen as an important means of achieving certainty and consistency on issues across all participating countries, and will appropriately discourage tax authorities from advancing positions that result in double taxation.  
• The contrary view is that mandatory arbitration creates an unconstitutional supra-national dispute resolution regime that would result in “contentious interpretations of legal provisions [being] made by secret and unaccountable administrative procedures, rather than by courts or tribunals in an open legal process”.

The appropriateness of compulsory arbitration will clearly continue to be a thorny issue.  

Implementing the MLI remains a significant challenge for its promoters – achieving agreement on tax matters in the international community is a difficult task. However, the strong tailwind behind the BEPS initiative suggests that, in some shape or form, there will be a new international instrument that taxpayers will need to understand and navigate – most likely in the very near future.​

Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.