Prevention of Tax Treaty Abuse – Third Peer Review Report on Treaty Shopping

Executive Summary

1. Action 6 of the BEPS Project identified treaty abuse, and in particular treaty shopping, as one of the principal sources of BEPS concerns. Owing to the seriousness of treaty shopping, jurisdictions have agreed to adopt, as a minimum standard, measures to address it, and to subject their efforts to an annual peer review. This 2020 peer review report contains the results of the third yearly peer review, background information on treaty shopping, and the “jurisdictional sections” which provide detailed information on the implementation of the minimum standard for each member of the Inclusive Framework.

2. The efforts made by most Inclusive Framework members in tackling treaty shopping started to come to light in the 2020 peer review, in particular for those that ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Although very few of the reported agreements met the minimum standard at the time of the first two peer reviews conducted in 2018 and 2019,1 the MLI, which has been the main tool used to implement the minimum standard, has started to have a significant effect and is now strengthening the bilateral tax treaty network of jurisdictions that ratified it. The MLI did not offer a way for jurisdictions to implement the minimum standard through a detailed limitation on benefits provision instead of the principal purpose test (PPT).

3. Thus, because of the ratification of the MLI by those jurisdictions, the number of compliant agreements2 covered by the MLI has increased by nearly 500% since the last peer review. This year’s peer review, however, reveals an important difference in the progress made on the implementation of the minimum standard between the jurisdictions that have ratified the MLI and other jurisdictions that have not.

4. In fact, the jurisdictions that had not signed or ratified the MLI have still generally made no or very little progress in implementing the minimum standard. This report acknowledges, though, that the starting point for a jurisdiction’s exposure to treaty abuse may be different based on whether its existing agreements or domestic law already contain anti-treaty shopping tools.

5. A new feature of this year’s peer review is to provide additional information on some jurisdictions’ progress towards the implementation of the minimum standard and to encourage signatories to the MLI to ratify it as soon as possible. This information does not give rise to formal recommendations. The additional information on jurisdictions’ progress can be found in the section “Implementation Issues” of each of the jurisdictional sections in Chapter 5.

6. The key objectives of this year’s peer review and the additional information provided in the section “Implementation issues” of the jurisdictional sections are to encourage signatories to the MLI to ratify it, close the gaps in the MLI’s coverage and provide support to other jurisdictions to strengthen their tax treaty network.

Ratification of the MLI

7. The treaty networks of jurisdictions that ratified the MLI and for which the MLI started to take effect in January 20203 were on average about 30% compliant with the minimum standard in 2020. In comparison, those that had not signed or ratified the MLI before that time had generally made no or very little progress in implementing the minimum standard (their treaty networks were on average about 1.5% compliant with the minimum standard).

8. The 2020 peer review thus shows that ratification of the MLI is important for the effective implementation of the minimum standard, and all signatories to the MLI that have not yet ratified it are encouraged to do so.

Gaps in the MLI coverage

9. The 2020 peer review also identifies gaps in the coverage of the MLI and agreements of signatories or parties to the MLI that are neither covered under the MLI nor subject to bilateral renegotiations.4 While the MLI did not offer a way for jurisdictions to implement the minimum standard through a detailed limitation on benefits provision, it now covers 94 jurisdictions5 and will implement the minimum standard in over 1,700 agreements once it is fully in effect (i.e. after a period once it has been ratified by all signatories). However, about 200 agreements, concluded between pairs of MLI signatories that are members of the Inclusive Framework, would still not be modified by the MLI because, at this stage, at least one treaty partner has not listed the agreement under the MLI. An additional 325 agreements have been concluded between pairs of jurisdictions where only one of them has signed the MLI; none of these agreements would, at this stage, be modified by the MLI.

10. As part of the additional information provided on jurisdictions’ progress, the jurisdictional sections identify these “non-covered agreements” concluded between pairs of the signatories to the MLI that are members of the Inclusive Framework and are not subject to bilateral negotiations.

11. Listing the agreements under the MLI6 or entering into bilateral renegotiations to implement the minimum standard would ensure that the minimum standard could be implemented in those non-covered agreements.

Support to jurisdictions to strengthen their network of agreements

12. The OECD Secretariat stands ready to discuss with all jurisdictions that are members of the Inclusive Framework and that have not signed the MLI nor implemented compliant anti-treaty-shopping measures in their agreements to see how support could be provided to bring those agreements into compliance with the minimum standard.

13. The section “Implementation issues” in the jurisdictional sections in Chapter 5 of this report provides additional information on jurisdictions’ progress towards the implementation of the minimum standard and identifies those jurisdictions with which the Secretariat would want to discuss a plan for the implementation of the minimum standard. Those discussions could provide useful insights for the ongoing review of the peer review methodology.

14. As noted at paragraph 14 of the Peer Review Documents,7 the methodology for the review of the implementation of the minimum standard would be reviewed in light of the experience in conducting the first three peer reviews in 2018, 2019 and 2020.

15. The Inclusive Framework on BEPS, together with Working Party No. 1, will carry out the 2020 review and the implementation of the minimum standard will continue to be monitored. The next peer review exercise will be launched in the first half of 2021.

Notes

← 1.  The MLI had not started to show its effect at the time where the 2018 and 2019 peer reviews were conducted.

← 2.  For the purpose of this report, a compliant agreement contains provisions that meet the Action 6 minimum standard. As indicated in paragraph 23 of the final Report on Action 6, it is understood that jurisdictions only need to implement those provisions if requested to do so by another jurisdiction member of the Inclusive Framework.

← 3.  The MLI generally started to take effect with respect to agreements concluded by jurisdictions that ratified it before the end of September 2019.

← 4.  The MLI allows its signatories and parties to list the agreements they want to modify via the MLI. There could be reasons why a jurisdiction would not sign or list a specific agreement under the MLI (e.g. because a jurisdiction wishes to implement the minimum standard through detailed LOBs, because the treaty partners have agreed that an agreement is going to be renegotiated bilaterally, or because the agreement is too old and contains too much non-standard language to be easily modified by the MLI). Parties to those agreements, although not listed under the MLI, are still under the obligation to implement the minimum standard if both parties to the agreement are members of the Inclusive Framework, but it is expected that they would do so through bilateral renegotiations.

← 5.  Ninety-one of those jurisdictions are currently members of the Inclusive Framework.

← 6.  This way, should the other treaty partner sign the MLI and list that agreement to be covered under the MLI, it would become a covered tax agreement.

← 7.  Paragraph 14, OECD (2017), BEPS Action 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances – Peer Review Documents, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-6-preventing-the-granting-of-treaty-benefits-in-inappropriate-circumstance-peer-review-documents.pdf.