BEPS and the new International Tax Order by Alliston Christians

Ravi Arora

53 LLB 13

What is Base Erosion and Profit Sharing?

Before I delve into Alliston Christians article BEPS and the new International Tax order, the
concept of BEPS needs elaboration.

The concept is simple. Multinational National Enterprises (MNEs) make their profits in one
country and then slyly shift the same across borders exploiting loopholes and gaps in tax laws
between countries, to take advantage of lower tax rates and thus evading tax from the country
where the profit originated.

Christian provides a critical analysis of the contemporary international tax law as influenced
by the Organisation of Economic Cooperation and Development (OECD). OECD serves, in
its own image, as the bulwark against these nefarious practices of MNEs and in equipping the
governments of various countries with necessary policy devices.

In the first part of her article she critically evaluates the role and standing of OECD as a
consensus-building measure on a global tax policy wherein she evaluates the authority of
OECD as a policy-developer and the complication that may arise given the fact that OECD
cannot regulate using hard law but only soft law.

Christians article consistently puts forth the argument questioning the legitimacy of OECDs
measures to control BEPS in light of the fact that its membership is limited to its 35
members. Even these members are the worlds developed economies so applicability of these
measures on developing economies seems dubious as it is.

One of the major points undercutting the effectiveness of OECDs action to contain BEPS is
its non-inclusive working model. To counter this impediment, OECD has come up with an ad
hoc arrangement where non-members states are accorded the position of BEPS associates.
Christian lauds this measure as one aiming for global comprehensive. However detractors of
OECD claim that this step is an eye-wash and only meant to the serve the interests of the
developed countries in fulfilling their BEPS objectives and the non-inclusion of developing
countries into the OECD fold seems like a foregone conclusion.

Whether Soft Law or Hard Law for OECD?

One of the most fundamental problem plaguing international legal system, which even a
layman can understand, is that there is no way for international law to be enforced on a
country without addressing the elephant in the room i.e. sovereignty. A countrys sovereignty
and enforcement of International Law lie on opposite end of the spectrum and the only way
they can be reconciled is with compromise and adjustment between the countries. Christians
focuses on the success of soft law in enforcing laws between the countries to achieve the
objectives of OECD.

From the perspective of international law, the OECD Guidelines are mainly connected to
double tax treaties, but they may also influence customary norms and the general principles
of law. From the point of view of domestic legal systems, references to the OECD
Guidelines can be found in the tax legislation of some countries and, especially, in the
interpretative circulars of the Tax Administrations. Furthermore, in some states the courts
have also taken the OECD Guidelines into account in their judgements, which shows that the
soft law can so often be treated almost as hard law. However the practical relevance and
authority of these Guidelines can be augmented if only the consultation process was more
open to different stakeholders and more transparent.

Allison Christian has written a similar paper in the past titled, Hard Law & Soft Law in
International Taxation in 2007 wherein she came to the conclusion that it seems very likely
that in the end international tax law will be increasingly influenced by Soft law more than
Hard Law. She wrote that:

If by soft law we really mean the selective supranationalization of particular

tax norms by key players working within transnational networks, the description
is an important signal about expectations for participation, inclusiveness, and
compliance in the development and diffusion of international tax law.

Further, Christian focuses on a Peer Review and Monitoring Mechanism in her article.
There is no standardised peer review mechanism but all peer reviews share certain structural
elements:

1. a basis for proceeding;

2. an agreed set of principles,
3. standards and criteria against which the countrys performance will be reviewed;
4. designated actors to carry out the review; and
5. a set of procedures leading to the final result.
The OECDs executive body, the Council, made up of representatives of all member
countries, controls the development of peer review programmes through its examination of
the organisations programme of work and budget. Peer reviews can also be built into
international treaties, agreements or other legally binding instruments. One example is the
OECD Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions. It calls on signatories to "co-operate in carrying out a programme of
systematic follow-up to monitor and promote the full implementation of this Convention".
This has been the basis for a rigorous process of multilateral surveillance, centred on peer
review.1

In the next part of her article she identifies 4 major BEPS tax policy priorities for which
OCED has articulated minimum standards:

1. Country-by-country reporting
2. Reducing in harmful tax competition
3. Remedies for tax treaty abuse
4. Treaty-based dispute resolution

Christians further elaborates on the foregoing tax policy priorities and puts forth the
developments that have occurred in each.

Country-by-Country reporting: The CbC template introduced in the OECD guidance is an

entirely new reporting requirement. The CbC Report covers not just legal entities or
subsidiaries of the MNE group; but also branches/ permanent establishments located in other
countries through which it carries on business. OECD CbCR regime, has moved the focus
firmly towards holding companies to account and to enquire whether a business is paying
tax in the right place and in the right amounts. Many people however have serious
reservations as to whether it is possible to use and interpret CbCR data in this way,
potentially leading to more confusion than clarity in many cases. As it continues to evolve
there will inevitably be issues of policy to debate and resolve, and complying with the
regimes will present practical challenges for many companies for several years to come.
These challenges could however be reduced if the different regimes were to be made as
consistent as possible, reducing cost and confusion.

Harmful Tax Competition: Christians duly notes that another major problem is the ensuing
competition between member nations. She says that this is due to the inconsistent consensus

1 BEPS Action 14 peer review and monitoring, OECD http://www.oecd.org/tax/beps/1beps-action-14-peer-

review-and-monitoring.htm
among countries regarding what constitutes acceptable vs non-acceptable tax competition.
While some countries use transparent mechanism some other use more sophisticated. Article
5 of the OECD expresses the commitment by member-states to counter harmful tax practices,
but as with anything, this commitment cant be extended to non-member states. Christian
here notes the minimal yet significant efficacy of the nexus rule 2 to combat harmful tax
practices.

Tax-Treaty Abuse: OCED has here too articulated minimum standards to address the
problem of abuses of the bilateral tax treaty system. The minimum standard proposed by
OECD here is in the form of on optional menu but Christian here critically notes that it is
unknown how a multilateral treaty would work with a vast array of options and if countries
continue to take inconsistent positions in their bilateral treaties. The OECDs agenda for
countering tax treaty abuse is thus rather more expansive than typical discussions of treaty
shopping which focus just on the issue of inappropriately accessing treaty benefits. The
potential for treaties to thwart anti-abuse rules, the exploitation of treaties to generate double
non-taxation and the policy drivers for selecting appropriate treaty partners, are examined far
less often.

Cross-Border Dispute Resolution: The last category of OECD minimum standards involves
treaty-based dispute resolution. Christian claims that OECDs priority has now moved on to
focus on solving cross border tax disputes where they arise and to broaden the scope to all
treaty disputes and not just transfer pricing. The mutual agreement procedure ("MAP")
provided for in tax treaties, which follow the OECD Model Convention has been the
traditional mechanism to solve these disputes. The MAP allows tax authorities to meet
together to attempt to resolve differences in a manner that ensures that double taxation will be
avoided and that there will be an appropriate application of the convention. The MAP has
worked reasonably well in the past, but both the number of cross border disputes as well as
the complexity of the cases involved has increased. Improving the effectiveness of the
operation of the MAP and, equally important, assuring that the cases involved in the MAP
process will come to a satisfactory conclusion is the focus of an important new project at the
OECD.

Christian suggests this treaty-based dispute resolution to be submitted to peer monitoring

to increase the likelihood of exerting pressure on countries that do not use arbitration and

2 The nexus rule is, simply stated, the OECDs compromise position on the so-called patent box incentive
regimes, which are an increasingly popular form of tax competition across OECD member states.
whose mutual agreement procedures may therefore appear to lag behind or be more
cumbersome than others.

In the final part of her article, Christian lauds the Multilateral Instrument for its potential to
permanently alter the architecture of international tax relations.

Conclusion: Multilateral Instrument OECDs masterstroke?

Nearly 70 countries have signed the OECDs multilateral instrument and only two OECD
countries chose to abstain from the MLI: Estonia and the United States. The MLI treaty
contains 39 articles addressing issues common in tax treaties as well as specifying the rules of
the treaty convention. The articles are split into seven major sections: hybrid mismatches,
treaty abuse, avoidance of permanent establishment, improved dispute resolution, arbitration
and two administrative sections. These sections represent common disputes between
countries over tax policy.

The MLI is a master treaty that will allow the OECD to serve as a clearinghouse for changes
to countries treaties with one another. The MLI does not replace the expansive network of
existing bilateral tax treaties, but once it is ratified by individual countries lawmaking bodies,
it will allow countries to quickly adopt recommendations from the OECDs BEPS. The
OECD has said the MLI will change more than 1,000 bilateral tax treaties over the course of
a couple of years as opposed to a couple of decades, which would have been the case under
traditional negotiation processes.

Unfortunately, most signatory countries have chosen to reject at least one article within the
MLI. In some cases, several articles from each section were rejected. For example, India
rejected seven of the 39 articles. This has created a patchwork of default rules, which is likely
to negate the intended benefits of the MLI. With so many countries deciding to opt out over
many of the MLIs articles, it is uncertain whether the MLI can deliver the promised benefits
of a streamlined tax treaty process. In fact, the patchwork of agreed-upon articles is likely to
frustrate the process of negotiating future treaties. There also remains the question of how the
MLI will affect existing tax treaties and to what extent it will affect non-signatory countries.
Overall, it remains to be seen whether the OECDs efforts will have the intended impact on
the international tax system.