FINANCE & BANKING

68 Countries Sign Agreement to Close Loopholes in Tax Treaties, Requiring Adjustments By MNCs

Ministers and high-level officials from 68 jurisdictions signed on June 7 a multilateral convention that will implement a series of tax treaty measures. The agreement aims to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS -- base erosion and profit shifting -- will also strengthen provisions to resolve treaty disputes, said the Organization for Economic Cooperation and Development (OECD). The avenues include mandatory binding arbitration, which is hoped to reduce double taxation and increase tax certainty.

The 28 members of the European Union have signed on, including the UK, along with China, Hong Kong, Indonesia, India, Korea, Russia and Singapore. Eight more countries expressed the intention to sign the convention, bringing the number to 76.

One notable exception: the United States, which is the only major nation to stay away. The decision is of a piece with other moves by Donald Trump’s administration, including the US withdrawal from the Trans Pacific Partnership agreement and the Paris climate change pact.

‘More certainty’

Spearheaded by the OECD, the new convention is regarded as a key step towards the goal of preventing base erosion and profit shifting (BEPS) by multinational enterprises. It allows jurisdictions to transpose results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties.

“The signing of this multilateral convention marks a turning point in tax treaty history,” said OECD Secretary-General Angel Gurría. “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,” he added.

Impact on Companies

As the first modifications to tax treaties enter into force in 2018, CFOs and others in finance in MNCs should start looking at the implications. “The multilateral instrument takes away uncertainty, but also removes opportunities for creative tax planning that companies have used in the past,” Michael Graf, co-head of European tax at law firm Dentons Europe, told the Wall Street Journal.

While ratification by national legislatures can take some time and the absence of the US, the world’s largest economy, provides breathing room, MNCs will eventually need to redesign their tax structures.

The newspaper also spoke to Tim Wach, who is managing director at Taxand. The global tax advisory firm surveyed 136 finance and tax executives in MNCs in the Americas, Europe and Asia.

Close to 80% of the respondents said the new convention would benefit MNCs, Wach told the Journal. The executives were particularly positive on the improved dispute-resolution process.