Most countries are not fulfilling their commitment to amend their tax treaties to meet global standards aimed at preventing tax avoidance through tax treaty shopping, an April 1 OECD report shows.
Out of 2,295 tax treaties in force between “Inclusive Framework” countries on July 1, 2020, only about 350 treaties were compliant with the minimum standard on tax treaty shopping set out the OECD/G20 base erosion profit shifting (BEPS) plan Action 6 final report, the OECD said.
At the time of the OECD assessment, the Inclusive Framework was made up of 137 countries (its current membership is 139 countries) and all have pledged to adopt the global standard. All OECD and G20 countries made that pledge in 2015. On July 1, 2020, though, only 98 jurisdictions had some treaties that were compliant or would soon be compliant; 37 had no compliant agreements, the OECD reported.
The minimum standard on tax treaty shopping is a means to prevent tax avoidance by multinationals. It addresses attempts to indirectly exploit the benefits of a tax treaty entered into by two countries using a non-resident entity not located in either country.
The minimum standard requires countries to do two things to their tax treaties: add one of three types of provisions to address treaty shopping and include in each treaty an express statement that the treaty’s intent is to not permit tax avoidance, including through treaty shopping.
MLI versus no MLI
The BEPS multilateral instrument (MLI) was created to facilitate the implementation of treaty-related BEPS measures. However, the minimum standard on treaty shopping does not require adopting the MLI; countries may achieve the standard by negotiating bilateral tax treaties.
The OECD report concludes that among countries that haven’t ratified the MLI, few are meeting the minimum standard. Progress is being made among jurisdictions that have ratified the MLI, though, the OECD report concludes. To date, 65 countries have ratified the MLI.
The OECD said that the 2020 report is an improvement over earlier peer reviews covering 2018 and 2019. The latest report shows a nearly 500 percent increase in the number of compliant agreements covered by the MLI. Specifically, the number of bilateral tax treaties that became compliant using the MLI increased from 60 to over 350.
Nonetheless, the report notes that jurisdictions that have not signed or ratified the MLI have “made no or very little progress.”
Jurisdictions that ratified the MLI, and for which the MLI started to take effect in January 2020, had tax treaty networks that were on average 30% compliant with the minimum standard in 2020.
Among jurisdictions that had not signed or ratified the MLI, only about 1.5 percent of their treaty networks were compliant with the minimum standard.
CARICOM countries
The report identifies particular concerns about the lack of implementation of the treaty shopping standard among 11 jurisdictions that are parties to a 1994 Caribbean Community (CARICOM) tax agreement: Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Trinidad and Tobago.
The OECD said that the CARICOM tax agreement aims to encourage regional trade and investment but has “several unusual features” that “could lead to certain flows escaping tax altogether.”
The agreement provides for almost exclusive source-based taxation of income, gains, and profits, with some income, including dividends, entirely exempted from tax. While the provisions may have had a purpose in encouraging economic integration, the OECD said, they make countries under the CARICOM tax agreement “more vulnerable to treaty shopping and other forms of abuse.”
The OECD acknowledged that recent events, including hurricanes and the Covid-19 pandemic, have made it more difficult to launch negotiations to update the CARICOM tax agreement. However, the OECD encourages the members to update the agreement to address the treaty shopping concerns.
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