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More than 100 countries conclude the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS

More than 100 countries conclude the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS

More than 100 countries conclude the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS


Last November, more than 100 countries (including the Netherlands) concluded the negotiations for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "Convention").

The Convention is the outcome of OECD Base Erosion and Profit Shifting ('BEPS') Action 15 (a mandate for the development of a multilateral instrument on tax treaty measures to tackle BEPS) and is essential in implementing the outcome of certain OECD BEPS Actions in the more than 3,000 bilateral tax treaties currently in force in a (time) efficient and consistent manner.

The BEPS Actions that are covered in the Convention are Actions 2 (hybrid mismatches), 6 (treaty abuse), 7 (avoidance of permanent establishment status) and 14 (dispute resolution).

The Convention will in principle enter into force three calendar months after the ratification, acceptance or approval by at least 5 countries that have concluded it. Countries can confirm their ratification, acceptance or approval of the Convention as from 31 December 2016 at the earliest.

Below, we will first address the key characteristics of the Convention and subsequently will outline the main provisions of the Convention and how these could implement BEPS Actions 2, 6, 7 and 14 in bilateral tax treaties of countries that will become a party to the Convention. After that we will address the Dutch approach on the Convention, as laid-down in a recent letter of the Dutch Secretary of Finance to Dutch Parliament issued on 28 October 2016 (the "Letter"), and the impact thereof on the bilateral tax treaties concluded by the Netherlands.

The Convention 

In July 2013 the OECD presented the Action Plan on BEPS. The Action Plan identified 15 Actions to address BEPS issues in a coordinated and comprehensive manner. Action 15 entailed the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend their bilateral tax treaties. The goal of the Convention therefore is to streamline the implementation of tax treaty-related BEPS-measures.

This has led to forming an Ad Hoc Group. The members of the Ad Hoc Group adopted the text of the Convention and the text of the Explanatory Statement on 24 November 2016.

Key characteristics of the Convention

The Convention operates to modify existing bilateral tax treaties. It will in principle not function as an amending protocol to an existing bilateral tax treaty, which would directly amend the text of such bilateral tax treaty; instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. However this is not a prerequisite and some parties may develop a consolidated version of updated bilateral tax treaties.

The participants to the BEPS-project did not reach the same level of consensus on each of the 15 different Actions. The level of consensus can be divided into (1) minimum standards (highest level), (2) common approach and (3) guidance on best practices (lowest level). With this range of consensus in mind, the Convention needed to be flexible. Therefore the Convention allows parties to (1) choose which bilateral tax treaties are brought within the scope of the Convention (so-called "Covered Tax Agreements"), (2) be flexible with respect to provisions that relate to a minimum standard, (3) opt out of - part of - provisions with respect to all Covered Tax Agreements, (4) choose to apply optional provisions and alternative provisions.

The text of the explanatory statement that accompanies the Convention was prepared by the participants, to provide clarification of the approach taken in the Convention and how each provision is intended to affect Covered Tax Agreements. It reflects the agreed understanding of the negotiators with respect to the Convention. It was adopted on 24 November 2016 together with the text of the Convention.

Substantive clauses

In this section we will provide you with a concise overview of the main provisions of the Convention and how these could implement BEPS Actions 2, 6, 7 and 14 in bilateral tax treaties.

Articles 3 through 5 address hybrid mismatches, that are optional clauses for parties to include in Covered Tax Agreements. Article 3 includes a measure to counter hybrid mismatches through entities and arrangements and states for example that no exemption or credit will be provided by a resident state for income derived from hybrid entities or hybrid loans, to the extent the income is treated as income in the other contracting state.

Article 4 addresses dual resident companies and determines that in case of a dual resident company, the competent authorities of both states shall endeavour to determine by mutual agreement the state of which the company is a resident.

Articles 6 through 11 address various forms of treaty abuse.

Article 6 obliges a party to add to the Covered Tax Agreements a preamble that clarifies that double tax treaties should not provide opportunities for non-taxation or reduced taxation due to tax evasion or tax avoidance.

Article 7 obliges parties to include in the Covered Tax Agreements a so-called principle purpose test that denies the benefits of a tax treaty if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction, unless granting such benefit in the given circumstances is in accordance with the object and purposes of the relevant provisions of the Covered Tax Agreement. In addition to that parties can opt to introduce a so-called simplified limitation of benefits provision next to the principal purpose clause. Such provision essentially aims at countering treaty shopping by denying the treaty benefits if a resident cannot be considered a qualifying person. A qualifying person essentially is amongst others a resident that is a company (1) whose shares are regularly traded at a recognized stock exchange or (2) of which at least 50% of the shareholders are residents of the resident state of the company or (3) that is engaged in the active conduct of a business.

Article 8 requires that a minimum shareholding period of 365 days is satisfied in order for a company to be entitled to a reduced withholding tax rate or exemption on dividends from a subsidiary.

Article 9 addresses improper use of the property company clause included in the capital gains provision (Article 13(4) of the OECD Model Tax Convention) by stating that (1) Article 13(4) is applicable if the relevant value threshold is met any time during the 365 days preceding the alienation and (2) Article 13(4) is also applicable to a comparable interest in a partnership or trust.

Articles 12 through 15 of the Convention include provisions to counter the artificial avoidance of permanent establishments ("PE"), that are optional for parties to include in Covered Tax Agreements. Article 12 includes rules to tackle the artificial avoidance of a PE through commissionaire and similar arrangements by essentially determining that a person which is acting on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, that enterprise is deemed to have a PE.

Article 13 provides parties with two alternative provisions that both aim at ensuring that a combination of activities that each on itself are of a preparatory or auxiliary nature, whilst at a combined level, they can no longer be considered of a preparatory or auxiliary nature, are recognized as a PE.

Article 14 and 15 include rules to avoid that due to splitting up a contract in several contracts, the time period threshold is not exceeded due to which no building, construction, installation, (or other specific project) PE would be recognized or no PE would be recognized in case of supervisory or consultancy activities. For this purpose, periods that in aggregate amount to at least 30 days, spent at a place by one or more enterprises closely related to the enterprise first present at this place and carrying out connected activities, should be added to the aggregate amount of days spent by the enterprise first present at that place to determine if the time period threshold is exceeded.

Article 18 through Article 26 (Part VI) of the Convention includes a binding arbitration procedure. Part VI is optional and only applies if both parties have made a notification. If a mutual agreement procedure has been started whilst the competent authorities are not able to reach an agreement on the dispute at hand within a period of two years, any unresolved issue, upon written request of the taxpayer, should be submitted to a binding arbitration.

Next steps and entry into force

As mentioned on 24 November an agreement has been reached by the Ad Hoc Group of negotiators on the text of the Convention and the text of the explanatory statement. The Convention is scheduled to be signed in June 2017. The Convention can be signed as of 31 December 2016 and enters into force after five countries have ratified it. The Convention enters into effect for a Covered Tax Agreement after all parties to that treaty have ratified the Convention.

After the Convention is signed by the Dutch Government, a ratification bill will be send to Dutch Parliament. As part of the ratification process, it will become clear which choices the Dutch government will finally make (i.e. which reservations the Dutch Government will make, etc.).

The Dutch approach on the Convention

In the Letter, the Dutch Secretary of Finance has presented the views of the Dutch Government on the preferences as to the implementation of the Convention. The Dutch Government intends to bring as many bilateral tax treaties as possible under the scope of the Convention. In the Letter it is also indicated the Netherlands intends to implement the measures included in the Convention as broadly as possible, thereby not merely adhering to the minimum standard provided for under the Convention. Below, we will briefly discuss the views of the Dutch Government with respect to three main topics covered by the Convention.

In order to counter certain bilateral tax treaty abuse in respect of reduced withholding tax rates, the Dutch government has a strong preference for a principle purpose test rather than a limitation on benefits provision, as such test meets the minimum standard against treaty abuse and, moreover, at the same time overkill created by the very detailed and extensive limitation on benefits provision may be avoided (see under the caption the Convention above for further background on these provisions).

The Dutch Government also indicated in the Letter that it supports the revision of the permanent establishment concept included in tax treaties. The aim of such revision is to combat the artificial avoidance of PE status through commissionaire arrangements, split-up of contractual arrangements in respect of activities in a certain country over separate legal entities and similar strategies (see under the caption the Convention above for further background on the PE concept).

According to the Letter the Dutch Government also embraces the measures improving the dispute resolution mechanisms included in the Convention. The Dutch Government strongly favors binding arbitration, but acknowledges that this will likely not be achieved under most bilateral tax treaties concluded by the Netherlands given the expected reluctance of its treaty partners.

We note that the 2011 Dutch tax treaty policy already contains some of the measures included in the Convention, most notably the strong preference for the principal purposes test over the limitation on benefits test. The recent bilateral tax treaties concluded by the Netherlands are therefore already in line with most measures proposed under the Convention.

Concluding remarks

Conceptually, in our view the Convention will cater for the implementation of the outcome of certain OECD BEPS Actions in bilateral tax treaties in a (time) efficient and consistent manner. However, due to the large number of options and alternatives provided for under the Convention and the requirement under the Convention that the options/alternatives pursued by a treaty party will have to be matched by its treaty counterparty, in practice it may prove difficult for the Netherlands and other countries to implement the Convention measures. This will obviously depend on whether and to what extent the options/alternatives pursued by the countries party to the Convention are aligned, which will likely only become clear in the course of next year.


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