The game is up for tax treaty shopping

Multinationals that exploit tax treaties must 'recognise that the game is up' after a new cross-border agreement designed to crack down on tax dodging was signed this week.

More than 70 countries have concluded negotiations on a multilateral instrument that will implement changes to thousands of tax treaties to halt abuse by companies and improve dispute resolution.

The agreement is intended to end a practice known as 'treaty shopping', whereby a corporation's income is directed to countries with attractive tax treaties via 'brass plate' companies with little presence within the jurisdiction.

The accord was overseen by the Paris-based Organisation for Economic Co-operation and Development (OECD), which has forecast that international tax avoidance results in a loss of up to 10 per cent of the worldwide corporate tax take.

'The signing of this multilateral convention marks a turning point in tax treaty history,' said the OECD's secretary-general, Angel Gurría. 'We are moving towards rapid implementation of the far-reaching reforms agreed under the BEPS Project in more than 1,100 tax treaties worldwide, and radically transforming the way that tax treaties are modified.

'Beyond saving signatories from the burden of renegotiating these treaties bilaterally, the new convention will result in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens.'

The signing of the treaty took place on 7 June in Paris and was attended by more than 60 finance ministers from around the world, including those from the EU's 28 member states, India, and China. The United States is not a signatory to the agreement.

Heather Self, a partner at Pinsent Masons, said the signing was a 'huge achievement' and will put 'another nail in the coffin' of the complex tax avoidance structures exploited by some big businesses.

'Those multinational corporations relying on tax treaties to funnel royalties via brass plate companies to a tax haven should, by now, have recognised that the game is up and that they need to restructure their tax affairs.'

Self explained that the treaty is part of the OECD's wider work on tackling tax avoidance strategies and that governments have 'lost patience' with global companies.

However, she recognised that compromises had been made as 'the final document allows for different options on implementation', adding that it will be 'interesting to see how different interpretations align'.

'We expect an increase in international tax disputes as a result of the implementation of the measures recommended by the OECD, as countries will be implementing the recommendations in slightly different ways and at different speeds,' she continued. 'This is a particular issue for UK groups as the UK has been keen to be an early adopter of many recommendations.

'A key part of the pact is to use arbitration as way to resolve international tax disputes. We welcome this, but some will have concerns that not every country in the agreement has signed up for this part.

'The OECD will keep pushing. It's crucial that it continues its work on dispute resolution as more could be done at earlier stages to prevent disputes and seek to resolve them more efficiently.'

John van der Luit-Drummond is deputy editor of Solicitors Journal

john.vanderluit@solicitorsjournal.co.uk | @JvdLD