The Multilateral Convention on BEPS

The BMG has now published its Explanation and Analysis of the Mulitlateral Convention to implement the tax treaty related provisions of the BEPS project.


This multilateral convention aims to implement the tax treaty related changes recommended by the G20/OECD project on base erosion and profit shifting (BEPS), by modifying existing tax treaties as rapidly as possible. It is open for all countries to join, even if they are not otherwise participants in the BEPS project. It is formulated so that it can apply to all tax treaties, whether based on the OECD or the UN model, or indeed another.

It is understandable that some countries may feel resistance to accepting provisions which they had little or no involvement in formulating. We also have been critical of the BEPS project outcomes, which fell short of providing a comprehensive and cohesive approach to reform of international tax rules. Nevertheless, it is important to evaluate the provisions in this convention in relation to existing tax treaty provisions. This report aims to provide an explanation and analysis of the convention, including most importantly also our recommendations for individual country implementation of the convention. We hope this will help to inform those in government as well as the wider public about its effects.

Overall, we consider that most of the provisions would be improvements on existing tax treaty rules. Tax treaties generally restrict rights to tax income at source, in favour of the residence countries of taxpayers. By restricting abusive techniques which erode the tax base, these provisions help to restore some source country taxation powers. The provisions against tax treaty abuse, including treaty shopping, will also strengthen the general powers of tax authorities to control tax avoidance.

Although we endorse some of the improvements to the mutual agreement procedures for amicable resolution between tax authorities of conflicts over interpretation of legal provisions and factual situations, we do not support those which entail a shift towards legalized dispute resolution, especially arbitration. International tax rules, especially on allocation of MNE profits, are subjective and discretionary, so it is inappropriate for states to assume a binding obligation to accept the decisions of arbitrators. Public opinion will not accept the legitimacy of decisions involving substantial government revenue being taken in complete secrecy by a small community of specialists likely to remain dominated by corporate tax advisers and officials mostly from rich countries.

UK Implementation of the Multilateral Convention on BEPS

The BMG made a submission to the UK government  in February 2017 on the UK’s implementation of the Multilateral Convention to Implement the Treaty-Related Provisions of the BEPS project.


This multilateral instrument (MLI) aims to enable rapid implementation of the tax-treaty related proposals resulting from the G20/OECD project on base erosion and profit shifting (BEPS), by amending the bilateral tax treaties of participating jurisdictions. Although we have advocated a more coherent and comprehensive approach to the problem, we support the overarching aim of the provisions in the MLI to reduce the exploitation of gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate taxation being paid. The MLI provides the easiest method of ensuring that this occurs quickly and coherently. If countries cherry-pick among the provisions of the MLI, its effectiveness would be greatly reduced, and instead of moving towards a simpler and more uniform structure of anti-abuse provisions in tax treaties, the MLI would add a new layer of complexity and potential confusion.

We would expect the UK, having been in the forefront in initiating the BEPS project and having played a major part in formulation of the proposals, to be in the lead in implementation of the outcomes. We are therefore surprised and concerned that it is proposed that the UK should adopt a selective approach to implementation. The intention apparently is to rely on general anti-abuse principles and unilateral measures, notably the Diverted Profits Tax, instead of implementing the more targeted provisions which have been agreed in the BEPS project and incorporated in the MLI.

We are especially concerned at the proposal not to adopt the provisions aiming at abuse of the taxable presence criteria provided by the permanent establishment (PE) concept. This seems based on a policy to reject attributing significant taxable profits if a MNE has an entity within the jurisdiction significantly involved in sales, even when it also has other affiliates engaged in related activities which constitute complementary functions that are part of a cohesive business operation. The approach proposed by Treasury and HMRC seems out of line with public opinion on how tax should be aligned with real economic activity, as expressed quite forcefully in several reports of the Public Accounts Committee. Treasury and HMRC policy seems to be that this should be dealt with by the diverted profits tax, which is both a unilateral and a blunt weapon. The UK rejection of the changes to the PE definition would deny them to its treaty partners, apparently aiming to offer an attractive country of residence for MNEs to carry on business outside the UK, by minimising taxation of their foreign income. However, other countries might also seek to defend their tax base with their own unilateral measures. Hence, the UK would effectively be engaging in tax competition, a beggar-thy-neighbour approach, which runs counter to the aims of the BEPS project and, we believe, to the long-term interests of the UK.

Such a partial adoption of MLI provisions, and reliance on unilateral measures and broad anti-abuse principles, would inevitably generate a higher number of conflicts. Indeed, this seems to be anticipated, by the inclusion in the MLI of a special chapter providing for mandatory binding arbitration. In our view this is putting the cart before the horse. Priority should be given to preventing disputes, by agreeing clear rules for allocation of profit which are easy to administer. We oppose the proposal that the UK should adopt mandatory binding arbitration, since this involves giving up UK sovereignty, which should be unacceptable in the key area of direct taxation.

For these reasons we have major concerns about the approach towards the MLI outlined so far by the UK Treasury and HMRC, which we explain further below, and hope that it can be reconsidered.

Branch Mismatch Structures

The BEPS Monitoring Group in September 2016 submitted its Comments on the OECD proposals on branch mismatch structures.

These responded to some specific questions in the OECD discussion paper. Howver, we also recalled that In our comments on the Action 2 proposals over two years ago, we commended the OECD for having produced a technically sophisticated analysis and solutions which were carefully and elegantly designed, but also pointed to their complexity and stressed the need to begin with an overview of the causes of the problems. Rules regarding hybrids are necessary purely because of the insistence on applying the ‘separate entity’ principle to entities which are under common control, instead of basing the taxation of multinational enterprises (MNEs) on the economic reality that they operate as unitary firms. The separate entity fiction is especially inappropriate when applied to branches, which even legally are not regarded as independent. This creates a strong incentive for MNE tax advisers to devise techniques such as the use of hybrids to exploit this basic flaw. While the sophisticated and complex counter-measures being proposed may patch up the system to some extent, the rules will be ineffective while the basic flaw remains.

Attribution of Profits to Permanent Establishments

The BMG has made a Submission to the OECD on its consultation on revisions to the guidance on Attribution of Profits to Permanent Establishments.


This discussion draft (DD) deals with attribution of profits to a host country resulting from changes to the taxable presence requirement in the definition of a permanent establishment (PE) in BEPS project’s Action 7. Although generally clear and well reasoned, it is of limited usefulness in our view, for two main reasons. These comments explain these shortcomings and suggest how they could be corrected.

First, it applies only to the 2010 version of the OECD model convention, which introduced the ‘authorised OECD approach’ (the AOA) for attribution of profits to a PE. The AOA attempts to extend to PEs as far as possible the independent entity principle as applied to associated enterprises within a multinational enterprise (MNE). A number of OECD countries have not accepted the AOA, and it has also been generally rejected by developing countries. One reason for this is that the independent entity principle is especially inappropriate for a PE, which by definition is part of the same legal entity. Hence, few actual treaties are based on the AOA, and this is also true for most national tax law rules which would apply to entities resident in non-treaty countries. States, especially developing countries (whether or not they decide to join the Inclusive Framework for BEPS), should not be pressurised into adopting the AOA. Instead, the UN Committee of Tax Experts, in liaison with the OECD, should develop its own revisions to the commentary to the UN treaty model consequent on the changes to the PE definition introduced by Action 7. Further work is clearly necessary, by a wider range of countries, and adopting a broader approach, to produce guidance that would be of use to tax payers and tax authorities, especially in the bulk of cases where the AOA is not applicable.

Secondly, the examples provided in the DD adopt a very restricted approach, which assumes that all or most significant people functions take place in the non-resident entity, and hence attribute only limited profits to the PE. They include some illustrations of when aspects of inventory and credit risk management may take place in a PE, but significantly the examples include no discussion of other sales-related functions such as marketing and advertising, which are instead assumed to be controlled by the non-resident entity, with no relevant local input. Similarly, the examples are silent regarding core business functions conducted in host countries that are often found in modern MNE business models. These simple examples may be relevant to relatively small firms based almost entirely in their home countries, which employ a foreign sales agent.  But they are entirely unrealistic in relation to most large MNEs and their modern business models, which aim to be both global and local. No MNE can operate effectively by centralising virtually all its significant people functions and all its core business functions at a distance from its customers and suppliers, as is assumed in the examples provided here. Indeed, there are many well known examples of MNEs which employ significant staff in host countries engaged in both customer-facing and many core business functions. The failure of this DD to discuss such situations suggests a lack of consensus on how to deal with them, which may regrettably exacerbate the likelihood of conflicts even between OECD countries.

As the DD is now drafted with its focus on the AOA and its unrealistically simple examples, its effect is to strengthen the BEPS mechanisms used by many MNEs. This contradicts the mandate for the BEPS project, which is to align taxation and value creation.

Revised Guidance on Profit Splits

The BMG has made a Submission to the OECD Consultation on its draft revisions to the Transfer Pricing Guidelines concern the Profit Split Method.

General Remarks and Summary

We applaud the continued interest of the OECD and Working Party 6 in its work to make the profit-split approach a more viable and important tool in intercompany pricing.

In this submission we propose the development and use of defined allocation keys and weights to apply the profit-split method to actual profits of common business models (see Appendix). In our comments to the specific questions we point out that the examples in the discussion draft assume, without explicitly saying it, that the various business units of a multinational enterprise (MNE) are normally independently managed, albeit with common ownership and some top-level management over policy and direction. In contrast to this assumption, we believe that most MNEs operate as centrally-managed unitary businesses performing core functions and using intangible property in multiple countries. We therefore suggest that it is appropriate to apply the profit-split method to actual profits in these cases. Nevertheless, if Working Party 6 takes a different view, due to their belief that some level of integrated risk sharing is required for application to actual profits, the profit-split method with defined allocation keys and weights could be applied to anticipated gross profits or other measure appropriate for the specific business model. Whether our recommended approach or this alternative is chosen and inserted into the Guidelines, it would greatly simplify things for taxpayers and tax authorities alike.

Submission on Amendments to Chapter IX: Business Restructurings

The BMG has made a Submission to the OECD Consultation on its proposed revisions to Chapter IX of its Transfer Pricing Guidelines, on Business Restructurings.


Chapter IX was introduced into the OECD Transfer Pricing Guidelines (TPGs) in 2010 to help deal with the consequences of the spread since the 1990s of corporate restructurings by multinational enterprises (MNEs) essentially aimed at tax avoidance, typically involving transfers of rights to intangibles, redesignation of the responsibilities or functions of affiliates, and notional reassignments of risk-bearing. This draft rewrites the chapter to bring it into line with the other changes to the TPGs resulting from the BEPS project.

Our comments suggest ways in which the draft should be revised to make its purpose clearer, with additional coverage of restructurings that are only contractual in nature or that involve insubstantial movements of assets, people, and risks. It should state that the burden of proof is on the taxpayer to establish the validity and substantive nature of any stated business reasons behind any business restructuring, and should bring out more clearly the applicability of the profit split method.

Presentation to the Enlarged Framework on BEPS of the OECD Committee on Fiscal Affairs

A presentation was made on behalf of the BEPS Monitoring Group by Professor Kerrie Sadiq, to the first meeting of the Enlarged Framework of the OECD Committee on Fiscal Affairs, in Kyoto (Japan) on 29 June 2016. The outline of this presentation is here.