BEPS Action Plan 15: Multilateral instrument for bilateral tax treaties

SUITS THE C-SUITE By Ma. Fides A. Balili and Sabrina Gretchen D. Salgado-Go

Business World (03/30/2015 – p.S1/4)

This article continues our series on the Base Erosion and Profit Shifting (BEPS) project, and the Action Plans that have so far been submitted, by the Organisation for Economic Co-operation and Development (OECD). We now look at Action Plan 15 on Developing a Multilateral Instrument to Modify Bilateral Tax Treaties.

Countries generally follow either the “worldwide tax system” or the “territorial tax system” In taxing income. A “worldwide tax system” generally subjects to tax its residents on their worldwide income and non-residents on the income derived from its territory. On the other hand, a “territorial tax system” generally subjects to tax both residents and non-residents only on the income derived from sources in its territory. In practice, however, no country has a purely “worldwide tax system” nor a “territorial tax system” and no two tax systems are exactly the same.

For example, the Philippines applies worldwide taxation to its resident citizens and territorial taxation to foreigners, while the United States predominantly applies worldwide taxation. As such, the interaction of domestic tax systems sometimes leads to overlaps and gaps. Overlaps occur when income can be taxed by more than one jurisdiction resulting in double taxation, while gaps occur when income may not be taxed by any jurisdiction resulting in double non-taxation.

To address double taxation, the League of Nations developed the Model Tax Convention in the 1920s. The Model Tax Convention has been used by the OECD and the United Nations (UN) as the basis to negotiate, apply, and interpret over 3,000 bilateral tax treaties in force around the world. However, the same bilateral tax treaties have revealed weaknesses that create opportunities for double non-taxation or BEPS that result from interactions among more than two countries.

BEPS Action Plan 15 revolves around recommendations regarding domestic law provisions and changes in the Commentaries to the OECD Model Tax Convention and the Transfer Pricing Guidelines. However, changes to the OECD Model Tax Convention will require amendments to more than 3,000 bilateral tax treaties. Recognizing the practical limitations of a one-by-one negotiation of 3,000 bilateral tax treaties, Action Plan 15 recommends the development of a multilateral instrument to streamline the adoption of agreed measures and to ensure consistent adoption in participating jurisdictions.

Specifically, Action Plan 15 explores the technical (public international law and international tax law) and political issues that a multilateral instrument raises. It concludes that a multilateral instrument is desirable and feasible, and would be negotiated through an International Conference open to G20 countries, OECD members, and other interested countries, and convened under the aegis of the OECD and G20. Furthermore, the mandate of the conference would be limited in scope (implementing the BEPS Action Plan 15) and in time (no more than two years).


A multilateral instrument is desirable for the following reasons:

· It facilitates the swift implementation of the treaty-related BEPS output given the decades-long process for bilateral treaty negotiations;

· It would allow developing countries that otherwise have difficulties in concluding or renegotiating treaties to fully benefit from the BEPS Action Plan 15;

· It is an easier way to address multilateral issues compared to bilateral treaties;

· Treaty negotiators will be focused on a single document instead of thousands of similar but slightly varying texts, therefore increasing consistency and continuing the reliability of the international tax treaty network; and

· It provides assurance that all countries are simultaneously determined to tackle BEPS.

However, the Report recognizes that implementing Action Plan 15 requires broad participation, flexibility and respect for bilateral relations. Allowing counties to tailor their commitments under the multilateral instrument can help address these concerns. Countries can commit to a core set of provisions but have the possibility to opt-out, opt-in or choose between the alternative and clearly delineated provisions with respect to other issues covered by the multilateral instrument.


A multilateral instrument is also feasible for the following reasons:

· It can co-exist with the existing bilateral tax treaty network because it will also be governed by international law and would be legally binding on the parties;

· It will follow established negotiating processes and ratification would require conventional domestic procedures, pursuant to national laws;

· The relationship between parties to a multilateral instrument that are not parties to a bilateral tax treaty between themselves generally would not be affected; and

· It is highly targeted and efficient versus a “self-standing document” which would wholly supersede bilateral tax treaties and “amending protocols” which are too cumbersome and time-consuming.

Despite the obvious advantages of a multilateral instrument, the Report recognizes that technical challenges may arise from the interaction between a multilateral instrument and bilateral tax treaties. These include variations in scope, wording, numbering of provisions, different dates of signature and entry into force, as well as language and translation issues.

The Report notes that these challenges may be resolved by the application of current best practices in treaty-making. These best practices are annexed to the Report as a toolbox, and draws on concrete examples that have been successfully implemented in relation to other areas of international law.


While the precise content of the multilateral instrument is yet to be developed, the sense of direction is clear. The Report lists some of the treaty-related measures to be developed that are multilateral in nature and would be more effective if implemented by a multilateral instrument.

These measures include addressing multilateral mutual agreement procedures, dual-residence structures, transparent entities in the context of hybrid mismatch arrangements, triangular cases involving permanent establishments in third states and treaty abuse.

The multilateral instrument could also be used for a wider range of BEPS-related issues such as providing rules regarding the confidentiality of the information obtained by taxing authorities, the implementation of country-by-country reporting of transfer pricing information, multilateral interest expense allocation and new dispute resolution mechanisms that will ensure that double taxation does not result from unilateral and uncoordinated responses to BEPS.


The Report recommends convening an International Conference to develop the multilateral instrument in 2015.

In addition to implementing BEPS-related treaty measures, the International Conference would reflect on whether further protocols or similar multilateral instrument could be used in the future to foster a more effective international tax environment.

In sum, the development of a multilateral instrument is a novel approach to international taxation that can potentially accelerate the implementation of a number of BEPS treaty measures. But as with the development of any new instrument, the success or failure of Action Plan 15 will depend largely on the number of signatory countries that will participate in the development of the multilateral instrument, as well as on intergovernmental and inter-institutional coordination on taxation.

Ma. Fides A. Balili and Sabrina Gretchen D. Salgado-Go are a Partner and a Tax Director, respectively, of SGV & Co.