The Organization for Economic Cooperation and Development (OECD) has published the new edition of the Model Convention with respect to taxes on income and on capital – the document used as a basis for development and signing of bilateral agreements for avoidance of double taxation between states. The comprehensive Commentaries with which the Convention is supplied exert significant impact on national administration of the tax law.
The main purpose of the Convention is to remove or minimize unjustified tax barriers for cross-border trade and investment (specifically double taxation) with the simultaneous prevention of tax evasion and tax avoidance.
The latest amendments reflect the approaches developed by the OECD and G20 and are aimed at countering tax base erosion and profit shifting (known as BEPS action plan). The modernized provisions of the Convention highlight the following BEPS actions:
- Neutralizing the effects of hybrid mismatch arrangements (Action 2);
- Preventing the granting of treaty benefits in inappropriate circumstances (Action 6);
- Preventing the artificial avoidance of permanent establishment status (Action 7); and
- Making dispute resolution mechanisms more effective (Action 14).
Most of amendments are designed to prevent opportunities for treaty abuse and, in particular, for ‘treaty shopping’ – the indirect use of treaty benefits by persons who actually are not entitled to them.
It is expected that newly negotiated double tax treaties will be based on the new edition of the Model Convention, while the existing network of double tax treaties will be modified by means of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting dated 24 November 2016.
Although the OECD Model Convention is not a legally binding document, taxpayers should timely analyze the current editions of the bilateral double tax treaties, the provisions of which they use in their international transactions, and be aware of the modern approaches to their interpretation and enforcement.