Strengthening tax treaties to fight tax avoidance

by | January 31, 2018 12:09 am

Barley two year ago, the Organisation for Economic Co-operation and Development (OECD) finalized the project on Base Erosion and Profit Shifting (BEPS) aimed at fixing international tax loopholes that collectively cost countries up to $240billion of forgone revenue which is about 10 percent of the global corporate tax revenue.

Base Erosion and Profit Shifting refers to tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.

While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy.

For many countries, renegotiating tax treaties has always been a significant hurdle because it is time consuming, resource intensive, and cumbersome. With the growing rate at which countries stroke pens to support efforts at strengthening tax treaties to fight tax avoidance it heralds amending more than 1,100 tax treaties which normally would have taken decades.

This growing co-operation will enable governments to introduce BEPS recommendations in flexible ways, introduce anti-abuse measures in tax treaties, enhance dispute resolution mechanisms to improve certainty for taxpayers, and save governments time by making lengthy bilateral negotiations unnecessary.

On June 7, 2017, over 70 ministers and other high-level representatives participated in the signing ceremony of the Multilateral Convention to Implement (MLI) Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

Nigeria signed on August 17, 2017 and other signatories include jurisdictions from all continents and all levels of development. A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards signature.

The signing of the multilateral convention is another major step towards updating the international tax rules through the swift implementation of the BEPS package, said OECD Secretary-General Angel Gurría.

“Beyond saving signatories from the burden of re-negotiating thousands of tax treaties bilaterally, the convention results in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens,” he noted.

Just recently, ministers and high-level officials from Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention bringing the total number of signatories to 78. This Convention updates the existing network of bilateral tax treaties and reduces opportunities for tax avoidance by multinational enterprises.

In addition to those signing, Algeria, Kazakhstan, Oman and Swaziland have expressed their intent to sign the Convention, and a number of other jurisdictions are actively working towards signature by June 2018. So far, four jurisdictions – Austria, the Isle of Man, Jersey and Poland – have ratified the Convention, which will enter into force three months after a fifth jurisdiction deposits its instrument of ratification.

Iheanyi Nwachukwu