On 21 March 2022 the OECD released the fourth peer review report on tax treaty abuse under Action 6 of the action plan on base erosion and profit shifting (BEPS).
The report looks at the measures that member countries of the OECD’s Inclusive Framework on BEPS have introduced on the prevention of tax treaty shopping and other treaty abuse. The results of the review demonstrate that there is progress on the prevention of treaty shopping as countries implement international tax avoidance measures.
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, including through treaty shopping arrangements.
The implementation of the minimum standard also requires other relevant treaty provisions. Countries could include in new tax treaties or protocols 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 include the PPT on its own; or include the detailed version of the LOB rule combined with a mechanism to deal with conduit arrangements not already covered by the treaties.
The member countries of the Inclusive Framework are committed to reaching the minimum standard in relation to addressing the issue of treaty abuse. As part of this process they are given an annual peer review to assess the measures they have implemented on treaty shopping. The current peer review report, relating to 2021, summarises the results of the fourth annual peer reviews, setting out in detail the actions taken by each member country to implement the minimum standard.
The fourth peer review report shows that most member countries of the Inclusive Framework are keeping their commitment to implement the minimum standard. The report shows the importance of the multilateral instrument (MLI) to include treaty related BEPS measures into bilateral tax treaties, as this is the main tool used to implement the minimum standard. The MLI continues to have a significant effect and is being used to strengthen the tax treaty network of the countries that have ratified it.
The peer review report shows that the minimum standard under BEPS Action 6 is being implemented unevenly, and jurisdictions that have ratified the MLI have made significantly more progress than other jurisdictions. Countries that have not signed or ratified the MLI have generally made little progress in implementing the standard. However, the impact of the MLI is expected to increase as more jurisdictions join and ratify the agreement.