Manal Corwin is national leader of the International Tax practice of KPMG LLP (U.S.) and principal in charge of International Tax Policy in the firm’s Washington National Tax practice. In addition, she leads KPMG’s Global BEPS network. Earlier in her career, Corwin served as deputy assistant secretary for International Tax Affairs in the Office of Tax Policy at the U.S. Department of the Treasury. While at Treasury, Corwin served as U.S. delegate and vice chair to the OECD’s Committee on Fiscal Affairs and was actively engaged in the early stages of the BEPS initiative.
Ms. Corwin answered the following questions for BEPS Global Currents on July 17, 2017 regarding the OECD BEPS Multilateral Instrument (MLI):
Q: The OECD BEPS MLI Ad Hoc group included an Explanatory Statement to the MLI, which does not appear to be binding, unlike Commentaries. Would Commentaries be more useful for taxpayers?
A: The explanatory statement to the MLI reflects the agreed understandings of the negotiators, and is intended to clarify the procedural aspects of the MLI that determine and reflect the choices made and agreements between the signatories. It does not attempt to explain or interpret the operative provisions of the OECD model treaty. In general, commentaries are non-binding guidance used to accompany and explain the operative provisions of a treaty. They are interpretive tools which are relevant to the extent adopted by the treaty partners adopting the operative provisions. The MLI incorporates the updated operative provisions of the OECD model treaty that were developed during the BEPS project. Accordingly, the OECD model commentary that accompanied those updated model provisions will serve as an interpretive tool for those provisions.
Q: The U.S. has decided not to sign the BEPS MLI for now. What impact may that have, if any, on U.S. tax treaties overall?
A: As the U.S. has not signed the MLI, U.S. treaties will not be impacted. The U.S. Model Treaty includes a number of provisions that are similar to or reflect the policy objectives of provisions in the MLI. In particular, the U.S. Model Treaty includes a detailed limitation on benefits provision to address treaty shopping and binding arbitration in the Mutual Agreement Procedure (MAP) article. The new U.S. model also has adopted a contract-splitting rule to address avoidance of permanent establishment status, similar to the option incorporated in the MLI.
Q: Will the PPT provisions in the MLI adopted by all signatories lead to additional tax disputes?
A: There is a significant risk that the widespread adoption of the principal purpose test provision could lead to an increase in the number of disputes. The standard is subjective in nature and the guidelines for its application are limited. Accordingly, it is susceptible to different interpretations that will be the source of treaty disputes going forward.
Q: The MLI will not directly amend the text of Covered Tax Agreements, but instead will be applied alongside existing tax treaties, modifying their application. Do you think this approach complicates the interpretation of these treaties?
A: As a practical matter, the absence of a consolidated text incorporating the provisions of the MLI into existing treaties will make it more difficult to navigate changes to existing bilateral treaties resulting from the MLI. The OECD has indicated that some jurisdictions plan to prepare consolidated texts solely to facilitate understanding of the impact of the MLI. It is not intended, however, that these consolidated texts would be official ratified agreements upon which companies could rely in the context of a dispute. Accordingly, it is important that companies reference the original text of the MLI provisions alongside their existing treaties to evaluate and defend their treaty positions.
Q: The purpose of the MLI is to swiftly implement the tax treaty-related BEPS measures. Do you believe that implementation will be “swift” as each treaty partner must ratify, accept or approve the MLI based on its domestic requirements?
A: Absent the MLI, implementation of the treaty-based recommendations of the BEPS Action Plan would require bilateral negotiations of thousands of individual treaties. Because the MLI obviates the need for separate bilateral negotiations in most cases, implementation of treaty-based positions through the MLI will almost always be swifter than implementation through bilateral negotiations (except perhaps in circumstances where such negotiations are already under way). The timing of ratification of the MLI will vary based on the domestic requirements of the various signatories. Many of the jurisdictions that signed the MLI have indicated that they are poised to ratify the instrument within the next 12 months.
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These comments represent the views of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the independent U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s independent member firms have 189,000 people, including more than 9,000 partners, in 152 countries.