62 LEXPERT MAGAZINE
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SEPTEMBER 2017
the near future, though the Unit-
ed States is a notable exception.
"It's not clear how the refusal
of the US to sign will impact
MLI's future," says Patrick Mar-
ley, a tax lawyer at Osler, Hoskin
& Harcourt LLP in Toronto.
"It's conceivable that some coun-
tries will see it as giving the US a
competitive advantage, and those
countries could refuse to ratify
and incorporate MLI into their
domestic law."
e US maintains that adopting MLI
is unnecessary because its treaties already
comply with the Convention's minimum
standards. But Marley says that's not com-
pletely accurate. He notes, for example,
that US treaties do not include the manda-
tory preamble imposed by MLI that evinc-
es an intention for tax treaties to eliminate
double taxation without creating opportu-
nities for non-taxation or reduced taxation
through tax evasion or avoidance.
"Still, many countries may go ahead and
ratify because they recognize that it's just
about impossible to get support for any
kind of tax treaty in Congress right now,"
Marley says.
e MLI will allow for countries to
sign up in the future. Indeed, the OECD
expects some 100 countries (about 30, in
addition to the original signatories) to have
joined the pact by year's end.
But even in Canada there are skeptics.
"I would describe MLI as inserting a sig-
nificant level of uncertainty — one that's
very poorly timed — into international
trade, and especially so in a world that's
looking to develop third-party economies,"
says Claire Kennedy, a tax lawyer in Ben-
nett Jones LLP's Toronto office.
At the heart of the uncertainty is the
principal purpose test (PPT) that forms
MLI's core. "Tax treaty benefits will be de-
nied where one of the principal purposes of
a transaction is to, directly to indirectly, ob-
tain the benefit, unless granting the benefit
would be in accordance with the object and
purpose of the Covered Tax Agreement,"
Marley explains. "Unfortunately, the broad
wording of the PPT, together with the lim-
ited interpretive guidance provided by the
OECD to date, will result in uncertainty
regarding whether treaty benefits will ap-
ply in a variety of situations."
Compounding the uncertainty is the
fact that domestic courts will be the ulti-
mate arbiters of the PPT's interpretation.
Common law countries, for example,
might interpret the PPT differently from
civil law jurisdictions. "Whether or not
one of the principal purposes of a transac-
tion is to get an unwarranted benefit from
a tax treaty is very much in the eyes of the
beholder," Kennedy says.
At particular risk are collective investors
such as private equity, corporate securiti-
zation vehicles and real estate funds. "Al-
though the OECD has acknowledged that
it is important to provide treaty benefits to
private equity and other collective investors
in appropriate circumstances, the OECD
has done very little to provide such inves-
tors with the certainty they need at the
time investments are made," Marley says.
According to Kennedy, the difficulties
arising from an inevitable increase in the
number of disputes relating to tax treaties
will not be resolved by the binding arbitra-
tion process that the OECD has formu-
lated to resolve these disputes. "Binding
arbitration is certainly a welcome addition
to the playing field, but it's an ex post facto
remedy that doesn't resolve the conun-
drum resulting from the uncertainty, and
one that will still create delays and signifi-
cant costs for investors," she says.
WHEN SOME 68 countries signed the
OECD's Multilateral Convention to Im-
plement Tax Treaty Related Measures to
Prevent BEPS on June 7th, the internation-
al community managed to avoid years of
bilateral negotiations aimed at amending
as many as 1,100 of the 3,000 tax treaties
that currently exist.
e multilateral instrument (MLI) is
an important step forward in the OECD's
base erosion and profit shiing (BEPS) ini-
tiative. When the Convention comes into
effect, it will apply to the various tax trea-
ties that Canada has designated as Covered
Tax Agreements (CTA).
"e MLI's purpose is to implement a
wholesale amendment of bilateral tax trea-
ties that result in mismatches and allow
abuses including 'treaty shopping'," says
David Rotfleisch of Rotfleisch & Samulo-
vitch Professional Corporation, a Toronto
tax boutique. "Treaty shopping has allowed
taxpayers to create multi-jurisdictional
structures that benefit from the different
rates of taxation that exist among a nation's
various tax treaties."
e Convention, which Canada expects
to ratify and implement by 2019, deals pri-
marily with anti-treaty shopping rules and
dispute-resolution procedures. Some eight
other countries are expected to sign on in
Canada's signature on an OECD instrument to fight BEPS will carry a "level of uncertainty" BY JULIUS MELNITZER
Combatting Global Profit Shifting
PHOTO:
SHUTTERSTOCK
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