Global tax treaty 'another nail in the coffin' for avoidance schemes, says expert

More than 60 finance ministers from around the world including those from Germany, France, India and China will attend a signing ceremony for a multilateral instrument (MLI) (49-page / 276KB PDF) that will swiftly implement changes to thousands of tax treaties. The ceremony will take place later today, at the Paris headquarters of the Organisation for Economic Cooperation and Development (OECD).

The MLI is part of the OECD's wider base erosion and profit shifting (BEPS) project, through which it is cracking down on corporate tax avoidance strategies that involve the transfer of profits to low-tax jurisdictions. More than 100 jurisdictions have agreed to the text of the MLI, which will transpose the OECD's recommendations into more than 2,000 tax treaties agreed between OECD members and implement new dispute resolution measures.

"Those multi-national corporations relying on tax treaties to funnel royalties via brass-plate companies to a tax haven should, by now, have recognised that the game is up and that they need to restructure their tax affairs," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.

"Governments have lost patience with avoidance by global companies. However, compromises had to be made. The final document allows for different options on implementation, and it will be interesting to see how different interpretations align," she said.

The BEPS project aims to combat the ability of multinational corporate groups to artificially shift their profits to low or no tax environments where they have little or no economic activity, and the exploitation of mismatches between different tax systems so that little or no tax is paid. The practice costs national tax authorities the equivalent of between 4 and 10% of global corporate income tax revenues every year, according to the OECD.

The OECD published a 15-point 'action plan' setting out the areas where it considered reform to be necessary in July 2013, followed by its final recommendations in October 2015. OECD member states must now make changes to their own legislation and treaties to implement the changes. The MLI will enable them to do so in relation to treaties with other jurisdictions, minimising the need for individual negotiations.

The agreement also commits those jurisdictions which have signed to minimum standards on the resolution of international tax disputes, including the ability to use binding arbitration in some cases. Self said that these provisions were particularly important, due to the likelihood that international tax disputes would increase as a result of the implementation of the OECD's recommendations.

"Counties will be implementing the recommendations in slightly different ways and at different speeds," she said. "This is a particular issue for UK groups as the UK has been keen to be an early adopter of many recommendations."

"A key part of the pact is to use arbitration as a way to resolve international tax disputes. We welcome this, but some will have concerns that not every country in the agreement has signed up for this part. The OECD will keep pushing - it's crucial that it continues its work on dispute resolution as more could be done at earlier stages to prevent disputes and seek to resolve them more efficiently," she said.