Argentina Signs OECD Multilateral Convention

1. Introduction

For the last few years, the OECD has been developing several initiatives to prevent aggressive tax-planning with the objective of achieving double non-taxation or shifting income to non-cooperative jurisdictions.

In this context, the BEPS Project was created: Its objective is to prevent tax planning strategies that exploit taxation gaps or inconsistencies to artificially direct profits towards non-cooperative jurisdictions, or to maximize the application of double taxation treaties, achieving double non-taxation.

According to BEPS, although there are certain schemes that might be considered illegal, most of them are not. For this reason, this Project consists of 15 “actions” that address a number of tax matters (permanent establishments, electronic commerce, transfer pricing, etc.) to issue recommendations regarding how to control and limit tax-abusing practices.

The Multilateral Convention (“Convention”) is the means by which the OECD embodied the BEPS principles that can be automatically applied, under certain conditions, to the bilateral Tax Treaties to avoid Double Taxation (“Treaties”) that have been executed by the different signing countries amongst themselves.

The purpose of the Convention is to insert the recommendations that arose from the BEPS Project in the existing Treaties in a coordinated manner, to standardize bilateral processes, as separate negotiations for each Treaty would take many years. In the first signing ceremony, 67 countries took part, covering a total of 68 jurisdictions, including Argentina.

2. The Convention

The Convention provides a way to implement the recommendations that arose from the BEPS in relation to the previously signed Treaties. The Convention emphasizes matters such as hybrid instruments, tax abuse, artificial avoidance/evasion of permanent establishments and improvement in conflict resolution and arbitrage mechanisms.

The Convention makes particular emphasis on avoiding the abuse of the Treaties and avoiding double non-taxation. Similarly, it refers to the need to guarantee that the Treaties are interpreted in the sense so as to avoid double taxation of taxes, without generating non-taxation opportunities. In the same manner, it intends to discourage reduced taxation by tax avoidance or evasion and tax relief foreseen in the Treaties for the indirect benefit of residents of third jurisdictions.

The objective is for the Convention to apply to all the Treaties of which the relevant jurisdiction has informed as a Treaty to be subject to the Convention to the OECD.

3. Main aspects

The Treaty addresses matters that, according to the BEPS Plan, are usual practices of abusive tax planning, but the signed document is mainly focused on subjects related to permanent establishments and conflict resolution.

Nonetheless, the most affected matters are those related to treaties’ abuse and permanent establishment. The reason for this is that international transactions and comprehensive tax planning using permanent establishments and Treaties appear very frequently and are not classed as illegal. A case-by-case analysis will be necessary to conclude whether the anti-avoidance measures provided in the Convention are applicable or not.

The way of entering into force by the signing parties and the possibility to opt between different forms of rules over other forms, for example regarding treaty abuse is a novel topic set forth in the Convention.

The Convention states that, for it to be operational in each country internally, the relevant legislative and administrative procedures must be fulfilled. That said, it is also true that for certain clauses provided by the Convention to be effectively applicable to bilateral relations, both jurisdictions must have opted for the same form of rule regarding a given subject. This means that, if for one clause of the Convention there are two different alternatives to enact one same anti-avoidance measure, for this measure to be automatically applicable, both jurisdictions involved must have opted, and duly notified the OECD, of the same alternative.

This goes in line with the possibility of achieving a double effect: (i) standardizing the approach of certain given matters with measures that were internationally agreed on and (ii) that, at the same time, certain given limits are applied to specific subjects to avoid disputes between the different jurisdictions.

4. Conclusion

The Convention represents a major progress in the international context of abusive tax-planning prevention and the mechanism for it to be operative allows for quickly setting it into motion.

Nonetheless, it will be each jurisdiction’s duty to analyze with caution each case to avoid incurring in rush application of anti-avoidance measures or in arbitrarily denying the relevant tax benefits.