On 31 May 2016 the OECD released a request for input inviting comments from interested parties on the multilateral instrument to implement the tax treaty related measures in the OECD/G20 action plan on base erosion and profit shifting (BEPS). Input is required on the technical issues involved in the development of the multilateral instrument.

Action 15 of BEPS

The report on Action 15 of the BEPS Action Plan (Developing a Multilateral Instrument to Modify Bilateral Tax Treaties) concluded that a multilateral instrument to modify bilateral tax treaties to implement the tax treaty-related BEPS measures is possible. An Ad Hoc Group was established on 27 May 2015 to develop a multilateral instrument to modify existing bilateral tax treaties and thereby implement the tax treaty measures recommended in the final reports issued following the BEPS Project.

The Ad Hoc Group currently consists of 96 countries and a number of non-State jurisdictions and international organizations that take part as observers. The group aims to open the multilateral instrument for signature by 31 December 2016.

The request for input sets out the purpose of the multilateral instrument and describes briefly the technical issues involved in developing the instrument, including the issues surrounding the optional provision on mutual agreement procedure (MAP) arbitration.

Provisions to be implemented by the multilateral instrument

The following provisions would be included in double tax treaties by the multilateral instrument:

• Provisions related to BEPS Action 2 on neutralizing the effects of hybrid mismatch arrangements. These would include amendments to Article 1 (persons covered) of the OECD Model to insert provisions relating to fiscally transparent entities; and amendments relating to issues arising from applying the exemption method for elimination of double taxation.
• Provisions relating to BEPS Action 6 on preventing the granting of treaty benefits in inappropriate circumstances. These include the minimum standard on treaty abuse; introduction of a clause to clarify that treaties do not restrict the right of a State to tax its own citizens; and some specific anti-abuse rules.
• Provisions relating to Action 7 on preventing the artificial avoidance of permanent establishment (PE) status. These include measures to deal with commissionaire and similar arrangements; changes to the exemptions from PE status in Article 5 (4) of the OECD Model and addition of an anti-fragmentation rule; and measures dealing with splitting contracts to abuse the exception in Article 5 (3) of the Model (building site or construction or installation project).
• Provisions relating to minimum standards and best practices developed under Action 14 on making dispute resolution mechanisms more effective.

Also some countries are committed to providing mandatory binding MAP arbitration to ensure that disputes under treaties will be resolved within a specified time. An optional provision is therefore being developed on this issue.

Technical issues

One technical issue concerns the relationship between existing bilateral tax treaties and the multilateral instrument. As existing bilateral tax treaties vary widely from the OECD Model in many cases the multilateral instrument should be able to modify them effectively either by adding a new provision or modifying existing provisions. The OECD suggests that “compatibility clauses” could describe in which circumstances the new provision could be added to or replace the provisions of the treaty.

The additions relating to BEPS include commentary on their interpretation. This commentary must be used to clarify the interpretation of the treaty but as the multilateral instrument is modifying a large network of existing treaties it cannot provide the same level of detail as a bilateral protocol. There may therefore need to be further tools such as an explanatory statement or commentary so the provisions are applied consistently across the bilateral treaties. Consolidated versions of the bilateral tax treaties may be produced.

The multilateral instrument is being negotiated only in English and French but will need to be applied consistently across bilateral treaties despite differences of language.

Request for input

Comments are invited from interested parties on specific questions included in the request for input and on other technical issues that may arise from implementing the treaty-related BEPS measures in existing bilateral tax treaties. The input is requested by 30 June 2016 and will be made publicly available. A public consultation will be held on 7 July 2016.