by Julie Martin
The OECD is working on a project designed to encourage tax administrations to act reasonably when interpreting and applying the “principal purpose test,” a tax treaty provision developed by nations in the OECD/G20 base erosion profit shifting (BEPS) project aimed at stopping tax treaty abuse by taxpayers.
Speaking at the 2018 OECD International Tax Conference, held June 4–5 in Washington, Sophie Chatel, Head of Tax Treaty Unit at the OECD Centre for Tax Policy and Administration, said that international discussion and agreement on the application of the principal purpose test would promote tax certainty.
Businesses have expressed concern that tax administrations may not apply the test consistently and have sought clarity on the process that countries will use to make a tax assessment based on the test, she said.
“All that discussion led us to believe there’s some other work to be done in trying to work with tax administrations, either domestically or in a more international forum, [to encourage use of] a committee of senior officials that will ensure that there is a reasonableness by tax administrations in applying the PPT in a consensus way and where countries will put together their thoughts and views on specific scenarios,” Chatel said.
Chatel said that country delegates to Working Party No. 1 of the OECD Committee on Fiscal Affairs have already put significant effort into the project and will meet in September to discuss it further.
Mike Williams, Director, Business and International Tax, at the UK’s HM Treasury, said that one of the great successes of the BEPS project is the number of countries that signed up to add a principal purpose test to their tax treaties. Because of these numbers, there is an urgent need for special guidance on how the test is to be applied, he said.
“We can’t do this work in 5 or 10 years; we need to do this work with some speed,” he stressed.
Canada’s Brian Ernewein, General Director (Legislation), Tax Policy Branch, at the Department Finance, said that there was a great deal of taxpayer angst when Canada introduced its general anti-avoidance rule in 1988. That led to the creation of a centralized review committee to consider all GAAR cases. Canada Revenue is considering the same type of model for the principal purpose test for many of the same reasons, Ernewein said.
US LOB provisions
Chatel commented that some US tax treaties do not appear to meet the BEPS minimum standards for tax treaty shopping. She said the US limitation on benefits provisions do not meet the minimum standard. While the US has anti-conduit rules in its domestic law, if its treaty partner does not have such domestic laws and anti-conduit rules are not included in the treaty, the treaty fails the minimum standard, she said.
A twist to this conclusion, though, Chatel said, is that BEPS Action 6 provides that if the two parties to a tax treaty are not concerned about tax treaty shopping, they can agree to not meet the minimum standard. If one country is concerned about treaty shopping, the other country must agree to add these provisions, she said.
Synthesized text
Chatel said that the OECD is also developing “synthesized” text to show the impact of signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) on bilateral tax treaties. The OECD will recommend that countries and publishers produce this synthesized text on their website, she said.
The effort to provide synthesized text seeks to provide some clarity while respecting the legal nature of the MLI, she said. As an example, synthesized text would discuss how a tax treaty’s provisions on dual residence are changed by the MLI, Chatel said.
MLI
Williams, who chairs the ad hoc group of countries that created the MLI, reported that so far, five countries have ratified the MLI: Austria, Isle of Man, Jersey, Poland, and Slovenia.
This has led to the MLI operating on three bilateral tax treaties, namely, treaties between Austria and Slovenia, Poland and Austria, and Poland and Slovenia, he said. Altogether 78 countries have signed the MLI. This covers more than 1200 treaties, Williams said.
Chatel said she expected many more countries to ratify the MLI next year.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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