Backgrounder: Impact of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
Base erosion and profit shifting (BEPS) refers to aggressive tax planning arrangements undertaken by multinational enterprises which, though legal, exploit the interaction between domestic and international tax rules to inappropriately reduce their taxes. For example, some enterprises will seek to shift their taxable profits away from the jurisdiction where the underlying economic activity has taken place in order to avoid paying their fair share.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Convention") is a global initiative. Its objective is to modify existing bilateral tax treaties in a coordinated manner in order to swiftly implement treaty-related measures developed during the Organisation for Economic Co-operation and Development and G20 BEPS project. These measures include provisions to counter abuse of bilateral tax treaties and to improve dispute resolution, as well as a number of other treaty provisions.
The Multilateral Convention will allow Canada to address treaty abuse in accordance with the BEPS minimum standard. The minimum standard consists of the inclusion of a new tax treaty preamble and a substantive technical rule. The substantive technical rule is intended to prevent the inappropriate use of bilateral tax treaties by third-country residents as an instrument to reduce or eliminate taxation. This use of tax treaties, often referred to as "treaty shopping," defeats the purpose of bilateral tax treaties and poses risks to the Canadian and international tax bases. Canada will opt for the "principal purpose test" as a substantive technical rule. This test is a general anti-abuse rule based on the principal purpose of transactions or arrangements. It has the effect of denying a benefit under a tax treaty where one of the principal purposes of an arrangement or transaction that has been entered into is to obtain a benefit under the tax treaty. Where appropriate, Canada will, over the longer term, seek to negotiate, on a bilateral basis, a detailed limitation of benefits provision that would also meet the minimum standard.
In addition, Canada has chosen to adopt a provision to improve dispute resolution, namely the mandatory binding arbitration provision. In terms of scope and type of arbitration, it is similar to the provision included in the Canada-United States tax treaty.
Other than minimum standard provisions and binding mandatory arbitration, Canada will register a reservation on all other provisions in the Multilateral Convention at this time. Canada will continue to assess whether to adopt these provisions at the time the Multilateral Convention is ratified. A country may expand the scope of its commitment under the Multilateral Convention by withdrawing or limiting a reservation, but it cannot subsequently narrow its commitment by adding or broadening a reservation at a later date.
Once ratified, the Multilateral Convention will modify many of Canada's tax treaties. The list of tax treaties registered by Canada includes almost all countries and jurisdictions that were members of the ad hoc group that developed the Multilateral Convention and that have a bilateral tax treaty with Canada. However, for the modification to apply to a tax treaty listed by Canada, Canada's treaty partner must also ratify the Multilateral Convention and list its tax treaty with Canada. In certain circumstances, it may be preferable, or necessary, to update particular tax treaties bilaterally.