More than 60 countries sign OECD multilateral convention to counter base erosion and profit shifting

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Global Tax Alert


This week's signing ceremony for the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS marks a new and important milestone in the international tax agenda to tackle perceived abusive techniques used by multinational enterprises to lower their global effective tax rate. 

The Convention is the first multilateral treaty of its kind that allows jurisdictions to transpose results from the OECD/G20 BEPS Action Plan into their existing networks of bilateral tax treaties. This means that countries are able to implement a number of anti-avoidance rules into their network of tax treaties without having to renegotiate them one by one. Thanks to this, the impact of the Convention is likely to be far reaching. 


The Convention was initiated under Action 15 of the OECD/G20 BEPS Action Plan to provide countries with an option to amend all their tax treaties in a multilateral context, rather than bilaterally.  The work recognised that many of the anti-avoidance measures adopted under the OECD/G20 BEPS Action Plan will require changes to the OECD Model Tax Convention, as well as to the bilateral tax treaties concluded by countries. The sheer number of bilateral treaties (more than 3,000) would make bilateral updates to the treaty network burdensome and time-consuming, thereby delaying the adoption and effectiveness of measures agreed in the OECD/G20 BEPS Action Plan. 

The Convention was negotiated by more than 100 countries and agreed to in November 2016. However, not all of the countries that have participated in the negotiation of the Convention have chosen to sign the Convention at this time.  

On June 7, 2017, 67 countries and jurisdictions signed the Convention, and many more have indicated their commitment to sign.  

Key features 

For the countries that have signed, the Convention will come into effect generally, with respect to an existing treaty that is covered by the Convention, three months after both parties to the treaty have deposited their instrument of ratification, acceptance or approval. 

Importantly, although the Convention operates to modify tax treaties between two or more parties to the Convention, it will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, the Convention will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 

The Convention contains two types of tax treaty measures: those reflecting minimum standards agreed to by countries as part of the OECD/G20 work on BEPS and those reflecting optional anti-avoidance provisions.  

Signatories to the Convention have to sign up to the provisions reflecting minimum standards - namely, the provisions on the prevention of treaty abuse in Articles 6 and 7 of the Convention and the provisions on improving dispute resolution in Articles 16 and 17 of the Convention. The Convention does, however, provide flexibility in relation to the options that countries are able to choose within the minimum standards - for example, in deciding whether to adopt provisions on "limitation on benefits" or the "principal purpose test".  

Outside of the minimum standards, the Convention also allows governments to strengthen their tax treaties by adopting other anti-abuse measures and applying them in their own tax treaty networks.  In this regard, the Convention contains specific anti-avoidance rules on transparent entities (Article 3), dual resident entities (Article 4) methods for elimination of double taxation (Article 5), dividend transfer transactions (Article 8), capital gains from the alienation of shares or interests of entities deriving their value principally from immovable property (Article 9), permanent establishment situation in third states (Article 10) and artificial avoidance of permanent establishment status (Articles 12 to  15). 

For each signatory country, a number of decisions have been made with respect to the adoption of the Convention as follows: 

  • Specifying the tax treaties to which the Convention applies (known as the Covered Tax Agreements):  the Convention will apply only to an existing bilateral tax treaty specifically listed by both parties to that agreement.
  • Deciding which provisions that relate to a minimum standard to adopt: countries may, subject to  reaching a mutually satisfactory solution, adopt different approaches to meeting a minimum standard; they may also opt out of a provision that reflects a BEPS minimum standard if the existing treaty already meets the minimum standard.  Whether a tax treaty meets this standard will be subject to review by the Inclusive Framework on BEPS, which brings together a large number of countries and jurisdictions in a peer review process.
  • Opting out of provisions or parts of provisions with respect to all tax treaties - countries may, through the mechanism of reservations, opt out of a provision where it does not reflect a minimum standard.  This opt out will apply even if the other party to an existing bilateral tax treaty did not opt out.
  • Opting out of provisions or parts of provisions with respect to existing tax treaties that contain existing provisions with specific, objectively defined characteristics: the Convention permits a country to reserve the right to opt out of applying a provision. When this option is exercised by one of the countries in a bilateral tax treaty, the other party to the treaty is obliged to observe this reservation.
  • Choosing to apply optional provisions and alternative provisions: the Convention incorporates a number of alternatives or optional provisions that generally will apply only if all parties to an existing bilateral treaty choose to apply them.

Details of the approaches that each of the signatory country has adopted are summed up in a public document on the OECD website

Takeaways: what this convention means for companies 

With respect to the minimum standards on preventing treaty abuse, signatories to the Convention have set a higher standard on granting access to their tax treaty network.  This higher standard is likely to create issues for typical intermediate holding,  financing and IP companies that seek to benefit from lower withholding tax rates or exemptions under tax treaties.  It would also be advisable for banks and financial institutions to review whether the Convention has any adverse effects on the ability of their investment entities to access treaty benefits. 

The Convention offers an opportunity for countries to adopt a new permanent establishment definition that tackles artificial avoidance of PE status.  The new PE definition is likely to affect the supply chain for certain multinational enterprise - for example, under the new definition distribution arrangements involving agents and commissionaires are expected to create PEs in the country in which they operate.  It may be advisable for multinationals to adopt a buy-sell distribution model and/or to rationalise their operating model in order to manage the PE risks that are associated with the new definition. 

A multinational group that has multiple presences in a country via separate foreign and local subsidiaries is also more likely to become taxable under the new PE definition.  As a result, the new PE definition could mean more administrative and compliance burdens for multinationals, as well as more tax liabilities and a higher risk of double taxation.  

Countries have the option to sign up to some specific anti-abuse rules in the Convention.  In particular, the Convention allows countries to tackle a common real estate structure where immovable property is held by a company or other entities.  An existing treaty may allow the sale of interest in such a real estate company or entity to be exempt from tax in the country where the real estate is located. In contrast, the new rules in the Convention, if adopted, would allow the countries where the real estate is located to tax any capital gains arising from such sales. 

The Convention does contain some good news for companies. Signatory countries have committed to improve the effectiveness of the mutual agreement procedure under their tax treaties.  The anticipated improvements in access to and effectiveness of mutual agreement procedures offer multinational enterprises a viable alternative dispute resolution mechanism that, until now, has been largely underused because of its inherent legal and practical obstacles. As the BEPS rules take hold globally, bringing with them increasing transparency and regulatory scrutiny, such an alternative dispute resolution mechanism will become increasingly important for multinational enterprises.

Mandatory arbitration offered by the Convention is, in itself, another alternative dispute resolution mechanism that multinationals may find useful.  Twenty-five countries have signed up to this provision following the signing ceremony in Paris this week. This commitment is expected to put further pressure on countries to resolve their disputes under the mutual agreement procedure: countries that cannot resolve their disputes will be forced to accept the results of binding arbitration by third parties.  

Find out more about the implications of the Convention for your business by contacting either of the authors.