Bloomberg Law Quotes Peter Barnes: OECD Super Treaty Enters Into Force July 1

The ambitious super-tax treaty known as the multilateral instrument (MLI) will go into force July 1 for the first five countries that deposited their instruments of ratification with the OECD. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting is a major milestone in the OECD's quest to combat base erosion and profit shifting. But what does that really mean for multinational companies?

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How Is It Different?

Previously, tax treaties were the result of two countries sending teams of negotiators to work, often for years, on a treaty that would then have to be ratified through domestic legislative procedure.

The MLI takes an entirely different approach. It modifies networks of tax treaties in one fell swoop, and applies a more common set of standards and provisions across all those treaties.

“The MLI is a great development. It will clearly have long-term benefits for countries, taxpayers and for tax authorities,” said Peter Barnes, a tax law professor at Duke University and of counsel at Caplin & Drysdale.

But the biggest impact of the MLI likely will be the way it changes the procedure of negotiating treaties, rather than any of its provisions, Barnes said. “It simply aligns countries’ treaties more rapidly than sitting down and renegotiating, which is a long and slow process that takes an enormous amount of manpower,” he said.

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What About the U.S.?

The U.S. didn't sign the MLI, and isn't expected to. That's partly because U.S. officials thought the U.S. treaty network met OECD standards in some aspects, and didn't want to be tied to some of the other provisions.

Additionally, if the U.S. Treasury wants to amend any treaty, it must first get approval from the State Department, a Treasury official told Bloomberg Tax in June 2017.

Although the U.S. didn't sign the treaty, U.S. multinationals still will feel its impact, because the MLI will affect treaties in many of the jurisdictions where they have operations.

“The fact that the U.S. did not sign is absolutely not a reason for U.S. practitioners to be casual about this,” Barnes said. “A lot of the U.S. taxpayer issues don't touch on the U.S.” because disputes involving a U.S. multinational might occur in two other jurisdictions where the company has subsidiaries.

“U.S. international tax practitioners spend as much time or more time looking at treaties between two non-U.S. companies to figure out the impact on transactions and for tax planning purposes,” which means paying careful attention to how the MLI is changing bilateral treaties between other jurisdictions, Barnes said.

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Excerpt taken from the article “OECD Super Treaty Enters Into Force July 1: A Primer” by Isabel Gottlieb for Bloomberg Law, Daily Tax Report: International.