Your Taxes: OECD helping governments collect more taxes

Israel joined the OECD in 2010.

By LEON HARRIS

APRIL 15, 2015 01:00

US dollars and euros banknotes are seen in this illustration photo (photo credit: REUTERS) — US dollars and euros banknotes are seen in this illustration photo

(photo credit: REUTERS)

Background

The Organization for Economic Cooperation and Development is spearheading a concerted effort to help governments around the world collect more taxes. The OECD is doing so by issuing a series of recommendations for tightening up corporate and personal tax measures. Individual governments are then likely to enact and/or implement such measures.

Israel joined the OECD in 2010.

On the corporate side, the OECD has begun publishing an action plan against so called “Base Erosion Profit Shifting” (BEPS). In simple English, these recommendations should help onshore countries tax profits shifted offshore by multinational companies.

In particular, the BEPS recommendations take aim at tax planning techniques relating to financial instruments, treaty shopping and transfer pricing, among others. Some recommendation have been published, more are due by September 2015.

The BEPS recommendations are very detailed. But a big question arose about how to implement them rapidly. Often, cooperation is needed between the tax authorities of different countries.

Legally speaking, this would necessitate amending all the 3,000 or so bilateral tax treaties between different countries which have taken nearly 100 years to build up. So any amendments could be a legal and bureaucratic nightmare.

But the OECD found a solution to the nightmare.

In order to short-cut the treaty amendment process in one fell swoop the OECD proposes to develop a super treaty that governments can sign up to in one go. On February 6 the OECD published aspects of these proposals, which is calls “A Mandate for the Development of a Multilateral Instrument on Tax Treaty Measures to Tackle BEPS.” This Mandate constitutes Action 15 of the BEPS Action Plan.

Aspects of the planned multilateral instrument

The OECD derives its authority to act from the Report “Developing a Multilateral Instrument to Modify Bilateral Tax Treaties,” which was approved within the OECD and endorsed by the leaders of the G20.

The objective is to develop a multilateral instrument to modify existing bilateral tax treaties solely in order to swiftly implement the tax treaty measures developed in the course of the OECD-G20 BEPS Project. Countries participating in the OECD-G20 BEPS project propose to establish an ad hoc Group (“the Group”) that will take on the Mandate.

Membership of the Group is open to all interested countries.

Relevant international and regional intergovernmental organizations can be invited by the Group to participate as observers.

The Group will start its work no later than July 2015 and will aim to conclude its work and open the multilateral instrument for signature by December 31, 2016.

The Group is convened under the aegis of the OECD and G20 and is served by the OECD secretariat.

The functioning of the Group and its sub-groups will be governed by the OECD Rules of Procedure and the provisions of international law related to the development and conclusion of treaties.

Comments

In Israel, a bill has been sent to the Knesset to enable the government to sign up to multilateral tax treaties, such as this OECD multilateral instrument. The bill will presumably be passed by the Knesset after a new post-election government is formed.

All this may affect Israeli companies operating abroad as well as foreign groups operating in Israel.

The OECD Mandate proposals don’t yet spell out the terms of the Multilateral Treaty nor how it will be introduced. Presumably all that will follow. For example, what will happen if one country has signed up, but another has not? The status of the Group is unusual – basically an autonomous committee that will be disbanded at the end of 2016. Then it will be important for individual countries to commit to the resulting multilateral treaty for it to have effect.

To sum up, the OECD multilateral instrument is a bold proposal.

If adopted, it may help give governments to improve the collection of tax revenues from multinational business from 2017. All concerned should monitor the progress of BEPS and the multilateral instrument.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.