The multilateral convention to implement tax treaty related measures aimed at preventing Base Erosion and Profit Shifting (BEPS) will enter into force on July 1, 2018. This development marks a significant step in international efforts to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises.
Base erosion and profit shifting refers to tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.
Revenue losses from BEPS are conservatively estimated at $100billion to $240 billion annually, or the equivalent of 4percent to 10percent of global corporate income tax revenues. Over 110 countries and jurisdictions are currently working in the inclusive framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties.
The entry into force of the Convention, just one year after the first signature, underlines the strong political commitment to a multilateral approach to fighting base erosion and profit shifting (BEPS) by multinational enterprises.
The entry into force of the Convention on 1 July 2018 will bring it into legal existence in these five jurisdictions. In accordance with the rules of the Convention, its contents will start to have effect for existing tax treaties as from 2019.
The Convention, negotiated by more than 100 countries and jurisdictions under a mandate from G20 Finance Ministers and Central Bank Governors, will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project.
The entry into force follows from the deposit of the fifth instrument of ratification by Slovenia on March 22, 2018. Earlier, the Republic of Austria (September 22, 2017), the Isle of Man (October 19, 2017), Jersey (December 15, 2017), and Poland (January 23, 2018) deposited their instruments with the Organisation for Economic Co-operation and Development (OECD).
“The entry into force of this Multilateral Convention marks a turning point in the implementation of OECD/G20 efforts to adapt international tax rules to the 21st Century,” said OECD Secretary-General Angel Gurría.
“We are translating commitments into concrete legal provisions in more than 1,200 tax treaties worldwide. Thanks to this drive by the international community, we are ensuring that multinational companies pay their fair share when it comes to fulfilling tax obligations, like citizens do,” Gurría said.
The Convention is the first multilateral treaty of its kind, allowing jurisdictions to transpose results from the OECD/G20 BEPS Project into their existing bilateral tax treaties, transforming the way tax treaties are modified. The Convention has been designed to strengthen existing tax treaties concluded among its parties without the need for burdensome and time-consuming bilateral renegotiations.
The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to (disappear) or be artificially shifted to low or no tax environments, where companies have little or no economic activity.
Treaty measures that are included in the Convention include those on hybrid mismatch arrangements, treaty abuse and permanent establishment. The Convention also strengthens provisions to resolve treaty disputes, including through mandatory binding arbitration, which has been taken up by 28 signatories.
The OECD is the depositary of the Convention and is supporting governments in the process of signature, ratification and implementation. The positions that each signatory and party under the Convention has adopted are available on the OECD website, together with an interactive database that provides insight into the likely impact on covered tax treaties.
Iheanyi Nwachukwu
