BEPS

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On June 7, 2017, ministers and high-level officials of 68 jurisdictions convened to formally sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), originally published on November 24, 2016 (the “Multilateral Instrument,” or “MLI”). The Multilateral Instrument is the product of ongoing efforts by the Organisation for Economic Co-operation and Development (“OECD”) to prevent perceived abuse by certain taxpayers and improve coordination between taxing authorities, including through enhanced dispute resolution. The Multilateral Instrument was designed as a mechanism for implementing widespread treaty reform and coordination within the existing network of bilateral double tax treaties – without requiring separate bilateral negotiations between each pair of contracting jurisdictions. (For more background, please see our prior blog post on the MLI here.) The June 7 event was an important intermediate step towards the effectiveness of the MLI, and is a major step forward in providing multinational coordination to the historically bespoke bilateral tax treaty network.

In our previous post published on 6 December 2016 we described the OECD’s BEPS Project in the context of the publishing of the draft Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”).

One area that the OECD has itself acknowledged requires further consideration is in relation to BEPS Action 6, the final report on which was published in October 2015, which seeks to prevent access to treaty benefits in inappropriate circumstances (“treaty shopping”).

The final report on Action 6 included various proposals designed to prevent treaty shopping, including the proposed introduction into double tax treaties of:

  • a limitation on benefits (LOB) rule that limits the availability of treaty benefits to entities that meet certain conditions
  • a general anti-abuse rule which looks at the principal purpose of the transactions or arrangements in question (the principal purpose test, or PPT),

with the OECD recommending that as a minimum standard either (i) a PPT, or (ii) a PPT with either a “simplified” or “detailed” LOB provision should be adopted.

The European Commission has expressed a general preference for the PPT rather than the LOB provisions. HMRC have indicated that the UK will not adopt the LOB.

Robert Gaut, the head of our UK tax practice and a partner in the London office of Proskauer, spoke on 20th September on a panel at the International Bar Association’s annual conference in Washington, D.C. The panel was entitled “Practical Issues in Entity Classification and Claiming Tax Treaty Benefits…

Country-by-country reporting (“CBCR”) is one of the OECD BEPS deliverables (under Action 13). It is expected to be a significant tool used by tax authorities’ auditors in evaluating a multinational group’s transfer pricing policies. CBCR will present significant challenges to multinationals groups’ internal tax departments, as the tax departments must reconcile public financial reports to their legal entities’ books and accounts and to local tax returns and country-by-country template reports. CBCR is also expected to be used by journalists and politicians to challenge the tax positions of multinational groups, where information can be accessed publicly.