Countries can legally use a multilateral instrument to amend existing bilateral tax treaties to implement the OECD’s base erosion and profit shifting (BEPS) initiative, Pascal Saint-Amans, Director, OECD Center for Tax Policy and Administration, said on May 26, during an update of OECD progress on the BEPS action plan.
Saint-Amans said that a team of international lawyers have found legal precedent in areas other than tax for the use of a multilateral instrument to amend treaties. A multilateral instrument mechanism is not only feasible to implement BEPS, it is desirable, said Saint-Amans, as it would dramatically streamline the process for implementing the BEPS action plan recommendations.
Saint-Amans said that negotiation of the multilateral instrument would take place at an international conference. All possible parties would be invited to the conference, including developing nations, so those nations will have more of a voice in the BEPS project, he said.
To ensure the success of the BEPS project on transfer pricing documentation and country-by-country reporting, OECD Working Party 6 (WP6) has decided it will need more time to consider how to implement that guidance, said Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing, and Financial Transactions at the OECD.
Implementation issues that must be addressed include how to guarantee that governments will use consistent approaches, that all governments will receive relevant information on timely basis, that commercially sensitive information will be kept confidential, that costs for taxpayers and government are balanced, and that country-by-country information is used only as it is intended, namely, for risk assessment, said de Ruiter. “We will [provide] a full analysis on those issues — only on the implementation and filing system — in January 2015,” she said. Other issues have been resolved and will be sent to the Committee on Fiscal Affairs for review, she said.
De Ruiter said WP6 has agreed on revised text for its draft on the transfer pricing aspects of intangibles. “The answers in this draft may not necessarily be the end conclusions,” though, said de Ruiter, because there is “strong interaction” between the work in Section B of the intangibles guidance and OECD BEPS work on risk, recharacterization, capital, and special measures.
The OECD will tackle the BEPS transfer pricing work in a separate project, which will be given highest priority, said de Ruiter. The project will address “the most challenging transfer pricing BEPS issues, including excessive capitalization, low functionality, and mere contractual assumption of risk . . . and it will develop approaches to hard-to-value-intangibles . . . either within the arms-length principle or outside, and either by special measures or not by special measures,” she said. A discussion draft is planned for release in December 2014, she said.
De Ruiter said that commentators at a public consultation on an OECD draft on preventing tax treaty abuse raised concerns that use of a combined approach, namely, using both a limitation on benefits (LOB) provision and a main purpose test, would be burdensome for taxpayers. Under such an approach, the certainty created by an LOB would be lost by the addition of a main purpose test, and the reduction in administrative burden from a main purpose test would be lost because of the addition of an LOB provision, she said.
Working Party 1 (WP1) has concluded that there probably is no “one-size-fits-all approach,” that will work for all countries in combating treaty abuse, said de Ruiter. The current thinking is that all countries should be able to adopt standards that are good for them as long as those standards are effective so that treaty abuse will stop, she said.
WP1 is also considering adding a derivative benefits rule to the guidance, she said. Countries are concerned that a derivatives benefits rule could lead to BEPS from hybrid instruments and preferential regimens. If the work coming out of other OECD workstreams addresses those issues, a derivative benefits rule may be possible, she said.
De Ruiter also said that WP1 agrees with arguments made by collective investment vehicles (CIVs) that the approach of 2010 OECD report should continue to be the approach for CIVs.
Raffaele Russo, Head of BEPS Project, said more details will be forthcoming on how other BEPS action items should tackle BEPS issues arising from the digital economy. The next draft of digital economy guidance will also reconcile a statement made in the existing draft that describes one key feature of the digital economy as a tendency toward monopoly or oligopoly, and another feature as volatility, he said.
