At a ceremony in Paris, 68 countries including the UK signed the OECD’s multilateral convention to implement tax treaty related measures to prevent base erosion and profits shifting, known as the multilateral instrument, while another eight jurisdictions have expressed their intent to sign shortly.

The multilateral instrument is the first of its kind and is designed to offer ways for governments to close the gaps in existing international tax rules by transposing results from the OECD’s BEPS project into bilateral tax treaties worldwide.

The multilateral instrument modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

Other treaty measures that are included in the new multilateral convention include those on hybrid mismatch arrangements, permanent establishment and mutual agreement procedures including an optional provision on mandatory binding arbitration, which has been taken up by 25 signatories.

The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.

Angel Gurría, OECD secretary-general, said: ‘The signing of this multilateral convention marks a turning point in tax treaty history.

‘We are moving towards rapid implementation of the far-reaching reforms agreed under the BEPS project in more than 1,100 tax treaties worldwide, and radically transforming the way that tax treaties are modified.

‘Beyond saving signatories from the burden of re-negotiating these treaties bilaterally, the new convention will result in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens.’

Reaction

The multilateral instrument has received a largely positive welcome from UK tax professionals, with CIOT commenting that it was an example ‘that international co-operation of this kind is far better than unilateral action by individual states’.

Marlies de Ruiter, EY global ITS tax policy leader, said: ‘The multilateral instrument is an important part of BEPS implementation through changes to the around 3000 existing bilateral tax treaties. Traditionally, such bilateral renegotiations of tax treaties would take much more time and be less efficient.

‘This is an innovative mechanism through which countries can change all, or at least a big part, of their existing tax treaties by just signing and ratifying one multilateral instrument.’

Glyn Fullelove, chair of CIOT’s technical committee, said: ‘As far as UK companies are concerned, many of the BEPS prevention measures have already been implemented into domestic law, or are expected to be implemented in the near future, and these domestic measures are likely to have a more significant impact than the multilateral convention.

‘The UK has also indicated that it will not implement the convention where existing treaty provisions or domestic law already provides suitable protection against BEPS.

‘UK companies should be aware that they will need to check that treaty provisions previously relied on are still in effect, and particular sectors, such as fund management, may be more impacted than others.’

Malcolm Joy, an international tax partner at BDO, was in agreement that the multilateral instrument ‘could save decades of negotiation, and increase global tax take while limiting tax avoidance strategies’, but sounded a note of caution.

‘There are many parts of the tax treaties that may be changed by the multilateral instrument; some of the changes are agreed minimum standards but many are optional.

‘As different countries are choosing different options, it could be complex for multinational groups to establish precisely how all the treaties have been amended and how they will be affected. It will be interesting to see how this information is made available to taxpayers and their advisers,’ he said.

Joy also pointed out that much of the focus has been on the inclusion of a motive test within the treaties to ensure the tax treaties are not being used for tax avoidance purposes.

‘Our expectation is that this motive test will be effective in discouraging “treaty shopping” by multinationals.

‘However, there will inevitably be an element of judgement in how the motive test is applied and this could create some uncertainty for taxpayers.  Many common holding company structures for overseas investment into countries will need to be reviewed and potentially restructured,’ he said.

The OECD estimates revenue losses from BEPS at $100bn/£77bn - $240bn/£185bn annually, or the equivalent of 4% to 10% cent of global corporate income tax revenues.

The OECD’s multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting is here.