On 1 April 2021 the OECD released the latest annual peer review report on adoption of measures against treaty shopping.

The report on Action 6 of the OECD project on base erosion and profit shifting (BEPS) noted that abuse of double tax treaties, including in particular treaty shopping, was a concern in relation to profit shifting.

Compliance with the minimum standard on treaty shopping requires countries to include in their tax treaties a statement that the parties to the treaty intend to eliminate double taxation without giving rise to opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The standard would also require the inclusion of treaty provisions to implement that intention. This could be done by including the Principal Purposes Test (PPT) rule recommended in the BEPS Action 6 report, combined with either the simplified or the detailed version of the Limitation-on-benefits (LOB) rule; or by including the PPT on its own; or including the detailed version of the LOB rule set out in the Action 6 report combined with a mechanism to deal with conduit arrangements that are not already dealt with in the treaties.

The member countries of the Inclusive Framework are committed to reaching a minimum standard in relation to addressing the issue, and they are subject to an annual peer review to assess their actions to combat treaty shopping. The peer review report for 2020 sets out the findings of the third annual peer review, with details on how each member country has implemented the minimum standard.

MLI

The 2020 peer review report notes that the tax treaty networks of the reviewed countries are being strengthened when they have ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

Generally, the jurisdictions that have not signed or ratified the MLI have made very little progress in implementing the minimum standard. Consequently the peer reviews have aimed to encourage signatories of the MLI to ratify the Convention, to ensure adequate coverage of their treaties by the MLI provisions and to provide support to other countries that are strengthening their treaty networks.

Countries that have ratified the MLI, where the MLI took effect from 1 January 2020, were around 30% compliant with the minimum standard, on average, in 2020. The countries that had not ratified the MLI by that date had generally made very little progress in implementing the minimum standard.

Gaps in MLI coverage

The peer reviews found that there were gaps in the MLI coverage, because some bilateral treaties of MLI signatories were not covered by the agreement and there was also no move to update those treaties through bilateral renegotiation. A treaty is not covered if at least one of the two contracting states has not signed and ratified the MLI; or if it has signed and ratified the MLI but has not listed that particular bilateral treaty as a covered agreement for purposes of the MLI. The minimum standard could therefore be better implemented if more agreements were listed as covered by the MLI or if renegotiation was commenced to improve the treaty.

Support

The OECD is ready to support member countries of the Inclusive Framework that have not yet signed the MLI or included anti-treaty-shopping measures in their agreements, to assist in amending the treaties to comply with the minimum standard.