Developing a Multilateral Instrument to Modify Bilateral Tax Treaties: BEPS Action 15, <i>Global Tax Update</i>

Developing a Multilateral Instrument to Modify Bilateral Tax Treaties: BEPS Action 15, Global Tax Update

The Report on Action 15 of the BEPS action plan (the "Report") was released in September 2014. The goal of Action 15 is to streamline and simplify the implementation of the other BEPS-related measures. The Report explores the technical and political issues which are to be considered under public international law and international tax law. The OECD Report concludes that a multilateral instrument is feasible and desirable. It proposes a mandate to hold a conference aiming to develop such multilateral instrument.

Proposals on Multilateral Instruments

The Report recognised that more than 3,000 bilateral tax treaties exist which vary widely in their details. Updating them requires substantial resources and time since every single tax treaty would need to be renegotiated. The Report concludes that a multilateral instrument simplifies this updating process. It describes the benefits of a multilateral instrument, which are:

  • addressing treaty-based BEPS issues while respecting sovereign autonomy;
  • providing flexibility, respecting bilateral relations, and a targeted scope; and
  • facilitating speedy action and innovation.

Purpose of a Multilateral Instrument

A multilateral instrument will modify a limited number of provisions common in most bilateral tax treaties. Tax treaties which do not have such provisions would be amended by the provisions designed to counter BEPS. It is not intended to draft a new complete tax treaty like the existing model tax convention or to replace it. Only the provisions related to the other BEPS actions are intended to be addressed, such as:

  • Dual residence structures
  • Hybrid mismatch arrangements
  • Triangular cases involving permanent establishments in third states
  • Treaty abuse
  • Transfer pricing

Only time will tell whether the multilateral instrument has an effect on future amendments to the OECD model tax convention. Currently, this is not intended.

The Report further suggests that the multilateral instrument be accompanied by an explanatory report. Such explanatory report is intended to achieve a common understanding and interpretation of the new provisions of the multilateral instrument. It will further create a level of clarity and predictability of the tax treatment of cross-border activities.

The multilateral instrument will be binding only between the parties which have ratified it. This will have the result that a state may amend some of its tax treaties by the multilateral instrument but other tax treaties will not be affected and remain in force as they were negotiated earlier. The Report discusses the possibility that a multilateral instrument would allow states to make reservations as to individual provisions in line with practice on other international conventions. This clearly shows that international taxation will not become easier since the particular treaty position of the relevant state will need to be verified. 

Technical Issues

The Report acknowledges that technical hurdles need to be resolved. Since a multilateral instrument will coexist with many bilateral treaties, potential conflicts may result. Such conflicts may be variations:

  • in scope between similar provisions of existing tax treaties; or
  • in wording of similar provisions of existing tax treaties

The first relates to the interaction between the new multilateral provision and an existing bilateral provision which both cover the same subject matter. Such cases raise the question as to whether the existing provisions should remain fully or partly in force in parallel to the multilateral provision. The Report suggests to address this issue by "compatibility" or "primacy" clause. The second potential conflict relates to a situation where an existing treaty uses the same terminology as the multilateral instrument but incorporates a different concept. However, the Report believes that this may be resolved by using own defined terms when necessary.


Like existing tax treaties a multilateral instrument would be governed by international law and would be legally binding on the parties which have ratified it. The implementation will follow established international procedures of negotiation and ratification, thereby respecting domestic procedures pursuant to national law. The relationship between parties to a bilateral tax treaty which are not parties to a multilateral instrument are not affected.

Annex A to the Report describes how the multilateral instrument can resolve the technical issues like the compatibility of bilateral tax treaties concluded after the entry into force the multilateral instrument; the relationship between parties to the multilateral instrument and third parties; the entry into force of the multilateral instrument; the consistency of the interpretation and implementation and the level of commitment of a given state. All these issues have been dealt with in other international agreements the relevant provisions of which are listed as examples of how to resolve such technical issues. It further lists examples of opt-in or opt-out clauses and choice of alternative provisions.

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