The Tax Times: New Int'l Tax Rules May Affect US Company's Foreign Subsidiary's Treaty Benefits

Tuesday, June 13, 2017

New Int'l Tax Rules May Affect US Company's Foreign Subsidiary's Treaty Benefits

On June 6, 2017 we posted More than 100 countries conclude the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS where we discussed that more than 100 jurisdictions have concluded negotiations on a multilateral instrument that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises.

The new instrument will transpose results from the OECD/G20 Base Erosion and Profit Shifting Project (BEPS) into more than 2,000 Tax Treaties Worldwide. A signing ceremony will be held in June 2017 in Paris.

Now according to Law360, during an annual OECD forum in Paris, 68 countries officially signed the multilateral instrument, or MLI, which will allow them to close gaps in existing international tax rules that can give rise to treaty abuse and tax avoidance strategies. Another 8 countries also formally acknowledged on Wednesday that they will adopt the MLI.

The MLI does not replace the vast network of hundreds of existing bilateral tax treaties, but once ratified by individual countries' lawmaking bodies, it will enable a swift and efficient way for countries to amend the interpretation of these treaties, a negotiation process that could otherwise take a decade or more, so as to make clear that strategies to avoid paying taxes in multiple jurisdictions are not an intended use of these treaties.

Even though the U.S. participated in the negotiations over the MLI, it ultimately chose not to adopt the convention, which means that treaties the U.S. has with other countries won't be modified by the MLI.

However, the tax situations of multinational U.S. corporations could still be affected because anti-abuse rules are likely to automatically kick in in jurisdictions where these companies' foreign subsidiaries are making cross-border transactions outside the U.S., experts said.

Willem Bongaerts, a tax attorney and partner at Bird & Bird LLP in the Netherlands, said that these corporations should still review and possibly reform their current organizational structures if they want to continue receiving treaty protections they currently enjoy in the foreign countries.

"It could lead to an increase in overall effective tax rate, but very likely, what will happen is that multinationals will anticipate this and will do a reorganization and try to find the most tax optimal structure again," Bongaerts said.

"The Bottom Line Is Basically That with This Entire BEPS Project and with MLI More Specifically, We Can Come to the Conclusion That Tax Structuring without a Nexus

to a Certain Country Will Basically Disappear."

Now, U.S. companies will have to ensure their offshore operations have a valid business purpose beyond a tax benefit or risk being denied treaty benefits under the MLI's Principal Purpose Test, Bongaerts said.

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