Changing The World’s Tax Treaty Network In One Stroke Of A Pen
By Team Legistify / 2017-06-14

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Nobody anticipated that the Base Erosion and Profit Shifting (BEPS) project initiated by the Organisation for Economic Co-operation and Development (OECD) in 2013 could have such a significant impact on bilateral treaties around the world. Skepticism prevailed in the minds of all international tax bodies, regarding the effectiveness of OECD’s BEPS project, in implementing the proposed measures into the existing tax treaty network. ‘Implementation is the key to any legislation’ and BEPS action plans got a swift implementation tool in the form of a unique step to counter aggressive tax planning – the Multilateral Instrument (MLI), which shall change the face of tax treaties worldwide.

The MLI provides for minimum standards that the signatory states have to meet, which relate to rules on the prevention of treaty abuse and rules on dispute resolution. The signing of the MLI is a great achievement, but its real impact on tax avoidance structures devised by corporates worldwide is strongly dependent on the options chosen, and reservations made by each country.

Going forward, corporates, as well as professional experts, will have to ensure that the treaty provisions are not read on a standalone basis but with the corresponding provisions of the MLI along with related country options and reservations.

How Will Treaties Be Interpreted Now?

The signing of the MLI brings into picture another set of rules to be referred to while studying the tax implications of each cross-border transaction, since in addition to the tax treaty and domestic law of each of the country involved, one has to also consider the MLI along with the options selected and reservations made to the MLI by each such country. This may make things complex and subjective in the initial stage, which may even lead to more disputes. Eventually one can only hope that this big project of the OECD to curb base erosion and profit shifting will effectively reduce the double non-taxation enjoyed by the mischievous corporates worldwide by using the gaps in tax treaties and domestic law.

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