New international pact launched to end tax ‘treaty shopping’

Reuters: About 70 countries launched a new international tax convention on Wednesday to prevent multinational companies from “treaty shopping” for jurisdictions most favourable to their tax bills.

Ministers from major economies signed the new tax pact at the Organisation for Economic Cooperation and Development (OECD) in Paris, which said more countries were likely to join in the coming weeks.

The new agreement will replace more than 1,100 bilateral tax treaties, or about a third of the treaties signed by countries over the last century to avoid double taxation.

In the age of globalisation, multinational countries have increasingly sent cross-border transactions through third countries to take advantage of their low taxes in what has come to be called treaty shopping.

The new treaty sets minimum standards to avoid abuses and defines a company’s taxable presence in a country, while also lays out plans for settling double taxation disputes between governments.

“It’s going to kill treaty shopping,” OECD tax policy director Pascal Saint-Amans told journalists.

Under the new pact, countries have to state which provisions they sign up to and which they do not. In the coming weeks, governments will have to match their positions with others’.

“This is something that companies are going to need to pay close attention to because the decisions countries make when they sign up to the MLI (multilateral instrument) will have very significant tax consequences,” said Jesse Eggert, principal in the international tax group of KPMG’s Washington National Tax practice.

Signatories include most major economies and countries known as treaty shopping hubs - such as the Netherlands, Belgium, the Seychelles and Singapore.

Mauritius, which is often used to route transactions with India because of its low tax, has also signalled that it will sign in the coming months, Saint-Amans said.

One notable absence is the United States. Saint-Amans said that was not a concern because its bilateral treaties were already of high quality.

The new pact is part of a broader OECD-led drive to prevent companies from taking advantages of differences between tax systems to cut their tax bills without outright breaking the law.

The OECD estimates that governments are missing out on tax revenues worth as much as $ 250 billion annually, or 10% of global corporate tax revenue, as a result of what it calls base erosion and profit shifting.

Countries that sign the new treaty now have to ratify it, which means that it will probably not start to affect companies directly until next year.