The BEPS Monitoring Group (BMG) has criticised some of the draft contents relating to the 2017 update to the OECD Model Tax Convention.
The OECD on July 11, 2017 released the draft contents of the 2017 update to the OECD Model Tax Convention and invited interested parties to provide comments with respect to parts of the Model Tax Convention.
The BMG is among interested parties that sent in their comments. Others include the Business and Industry Advisory Committee on tax at OECD; the International Chamber of Commerce (ICC) commission on taxation; and Taxation Committee of the United States Council for International Business (USCIB), among others.
The 2017 revised version of the OECD Model Convention constitutes the most extensive revision since the model convention was first formulated.
“Many of the changes have been subject to public consultation, some of them as part of the G20/OECD project on Base Erosion and Profit Shifting (BEPS). However some, although resulting from that process, have not previously been issued as drafts for consultation”, BMG noted.
The BEPS Monitoring Group (BMG) is a network of experts on various aspects of international tax, set up by a number of civil society organizations which research and campaign for tax justice including the Global Alliance for Tax Justice, Red de Justicia Fiscal de America Latina y el Caribe, Tax Justice Network, Christian Aid, Action Aid, Oxfam, and Tax Research UK.
According to the BEPS Monitoring Group, “Changes to paragraph 2 of Article 3 and related changes to the Commentaries on Articles 3 and 25. These changes provide that if the competent authorities agree on an interpretation of a treaty provision, that interpretation should override domestic law.”
“This proposal was not included in the report on Action 14 of the BEPS project, but is presented here as part of the follow-up work to ‘clarify the legal status of a competent authority mutual agreement’. In our view, it is much more than a mere clarification. The relationship of an ‘interpretive mutual agreement’ between the competent authorities with provisions of domestic law is a sensitive one,” the group noted.
It also noted that tax treaties are generally incorporated directly into domestic law, in various ways, and hence their provisions are subject to interpretation in the usual way by the courts.
“Courts generally are willing to give considerable weight to the views of administrative authorities responsible for applying such provisions about their meaning. However, courts have been much more reluctant to accept that such interpretations can override their jurisdiction to interpret their domestic law. Inclusion of this new provision in a treaty may of course produce that very effect. However, this could be challenged, as an excessive delegation of power to administrative authorities.
“Hence, instead of clarification, this provision could introduce confusion. Its inclusion is not merely a matter of ‘removal of doubt’, but raises important policy questions. These are related to the agenda of creating supranational resolution of tax treaty disputes. As our previous comments have pointed out, this shift will prove unacceptable to public opinion, especially if the administrative competent authority procedures continue in their current form of being conducted in total secrecy.”
“We ourselves are generally supportive of increased use of interpretive mutual agreements between competent authorities, which could do much to clarify interpretation of tax treaties, and hence reduce conflicts. This depends however on their being established on a proper basis, with adequate provision for their publication in a systematic manner. The way in which these changes are being introduced, with no opportunity for public discussion, does not inspire confidence. We regret the inclusion of this provision without adequate consultation, and advise countries not to include it in their treaties,” BMG stated.
It said that “The addition of new paragraph 1.1[5] to the Commentary on Article 5 indicates that registration for the purposes of a value added tax (VAT) or goods and services tax is, by itself, irrelevant for the purposes of the application and interpretation of the permanent establishment definition.”
“We agree that with the differing bases for application of VAT/GST and income-based tax, the addition of this clarifying paragraph is appropriate. We also believe, though, that as a practical matter, the voluntary or required registration for VAT/GST will continue to be a helpful signpost for local country tax authorities to be alerted to the potential of a permanent establishment.”
BMG also made their remark on the addition of a new Article 29 (Entitlement to Benefits) and related Commentary, which includes in the OECD Model Tax Convention a limitation-on-benefits (LOB) rule (simplified and detailed versions), an anti-abuse rule for permanent establishments situated in third States, and a principal purposes test (PPT) rule.
The BMG believes the inclusion of an effective anti-abuse provision in all tax treaties is a central element of the BEPS project. “Regrettably, the countries involved in the negotiations failed to reach agreement on the form that this should take. The large majority opted for a broad principal purpose test (PPT), although some consider that it could be combined with a simplified limitation of benefits provision (SLoB). However, the USA in particular held out against this, insisting on a detailed LoB article.
“This has been accepted as complying with the minimum commitments for the BEPS project, provided it is combined either with a PPT, or with suitable anti-conduit rules. The result is a complex menu of options, as we warned in our comments on the BEPS discussion drafts in 2015. Despite the complexity, we commend the efforts made by the drafters to present the several options as clearly as possible. Most states are likely to opt for the simple solution of a general PPT provision, which allows them to apply the domestic anti-abuse solutions they consider appropriate,” the group stated.
Iheanyi Nwachukwu
