On 21 March 2022, the Organisation for Economic Co-operation and Development (OECD) released the fourth annual peer review report (the Report) on the implementation of the Action 6 minimum standard on Base Erosion and Profit Shifting (BEPS) relating to prevention of treaty abuse.
The peer reviews included in the Report were carried out under the revised peer review methodology published in April 2021. The Report reflects detailed information on the implementation of the minimum standard by the 139 jurisdictions that were members of the Inclusive Framework on 31 May 2021.1 Under the revised methodology, jurisdictions’ progress in implementing the minimum standard has been measured in greater detail than in the previous years. As required by the revised methodology, jurisdictions were asked to provide plans for introducing the Action 6 minimum standard in agreements which on 31 May 2021 were not compliant with the minimum standard or subject to a complying instrument.
The main findings show that compliant agreements concluded between members of the Inclusive Framework and covered by the Multilateral Instrument (MLI) have almost doubled from 350 to more than 650 between 2020 and 2021. Also, more than 960 additional agreements will become compliant under the MLI once all relevant signatories have ratified it. Moreover, nearly 70% of the agreements concluded among the members of the Inclusive Framework are being brought into compliance through the MLI.
Finally, under the revised methodology, recommendations were made in this year’s peer review to jurisdictions that were requested to formulate a plan for the implementation of the BEPS Action 6 minimum standard in agreements which on the assessment date were not yet compliant or subject to a complying instrument, and to those that have signed the MLI but have not yet completed the steps for the entry into effect of its provisions.
Action 6, relating to the prevention of treaty abuse, is one of the minimum standards resulting from the BEPS project. The final reports were released in October 2015, including the announcement that all minimum standards would be subject to a peer review process. The mechanics of the peer review process were not included as part of the final reports on the BEPS Actions. Instead, the OECD indicated at the time of the release of the BEPS reports that it would, at a later stage, issue peer review documents on these Actions providing the terms of reference and the methodology by which the peer reviews would be conducted.
In 2017, the OECD released the peer review documents for BEPS Action 6. The terms of reference reiterated that to be in compliance with the minimum standard on treaty shopping, jurisdictions are required to include in their tax treaties: (i) an express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements; and (ii) an anti-abuse provision in the terms specified in the Action 6 final report. Jurisdictions can meet the minimum standard either by renegotiating their bilateral tax treaties and protocols or through the MLI.2 Partially compliant agreements — agreements that contain only one element of the minimum standard — are shown as non-compliant.
The first peer review was conducted in 2018 and covered the 116 jurisdictions that were members of the Inclusive Framework on 30 June 2018.3 The second peer review was conducted in 2019 and covered the 129 jurisdictions that were members of the Inclusive Framework on 30 June 2019.4 Following that, the third peer review was conducted in 2021 and covered the 137 jurisdictions that were members of the Inclusive Framework on 30 June 2020.5
In April 2021, the OECD released an updated version of the peer review documents on BEPS Action 6.6 The updated peer review documents include the agreed terms of reference containing the evaluation criteria for the minimum standard and the assessment methodology for the peer review process. While the terms of reference have remained largely unchanged, the updated peer review documents establish a framework through which, in certain situations, assistance would be given to an Inclusive Framework member that has non-compliant agreements. Moreover, the revised methodology has made it explicit that where both partners have signed the MLI, but only one has listed the agreement, listing the agreement would be interpreted as a request to implement the minimum standard.
Fourth Action 6 peer review report
On 21 March 2022, the OECD released the fourth Action 6 peer review report and an accompanying press release. The Report was approved by the Inclusive Framework on 9 February 2022 and prepared for publication by the OECD Secretariat. The peer review reflects information available as of 31 May 2021 (the cut-off date) and was carried out using the revised peer review documents published in April 2021.
The Report’s structure is different from previous peer review reports and contains the following sections:
- Implementation of the minimum standard: Aggregate data and key figures
- Key role of the MLI
- Plans for the implementation of the minimum standard and support provided to jurisdictions
- Difficulties in implementing the minimum standard
- Conclusion and next steps
- Background on the Action 6 minimum standard and peer review
- Jurisdictional sections
Implementation of the minimum standard
According to the Report, the 139 jurisdictions that were members of the Inclusive Framework on 31 May 2021 reported a total of 2,390 agreements in force on that date between Inclusive Framework members, including 5 multilateral agreements, and 890 agreements between Inclusive Framework members and non-members. Eight member jurisdictions7 reported they had no comprehensive tax agreements in force. The Report shows that, on 31 May 2021, 116 Inclusive Framework members had at least some agreements that already complied with the minimum standard or that were subject to a complying instrument and would therefore become compliant soon.
On 31 May 2021, over 650 bilateral agreements between members of the Inclusive Framework complied with the minimum standard. An additional 60 agreements not subject to the review (i.e., agreements between Inclusive Framework members and non-members) also complied with the minimum standard. In all agreements between Inclusive Framework members that already complied with the minimum standard, the minimum standard was implemented through the inclusion of the preamble statement and the principal purpose test (PPT). In 40 of those agreements, the PPT was supplemented with a limitation on benefits (LOB) provision.
Moreover, it was found that over 960 of the 2,385 bilateral agreements between Inclusive Framework members were set to become covered tax agreements under the MLI (i.e., because both Contracting Jurisdictions had listed the agreement under the MLI and, as a result, the MLI modifies the agreement once in effect) and were thereby set to become compliant with the minimum standard.
Further, 23 agreements between members of the Inclusive Framework were subject to a bilateral amending instrument (e.g., a protocol) that was not yet in force on 31 May 2021.
For the agreements listed under the MLI, all 93 parties and signatories to the MLI have included the preamble statement and the PPT. Fifteen jurisdictions have also opted to apply the simplified LOB through the MLI to supplement the PPT when relevant. Six additional jurisdictions agreed to accept a simplified LOB in agreements with partners that opted for it under the MLI.
With respect to the steps taken to implement the BEPS Action 6 minimum standard, some jurisdictions have chosen to implement the minimum standard by listing all their agreements under the MLI, whereas other jurisdictions have been pursuing bilateral renegotiations of some of their agreements and are using the MLI for other agreements. According to the Report, the MLI remains the most widely used route taken for the implementation of the minimum standard in non-compliant agreements, covering more than 470 agreements which are not yet compliant. Of the countries looking for bilateral negotiations of their agreements, the United States and Trinidad and Tobago have made a general statement that they intend to use the detailed LOB as part of their commitment to implement the minimum standard in all their bilateral agreements. The detailed LOB provision is not included in the MLI and requires substantive bilateral discussions and customization to each tax agreement. If a jurisdiction makes such a statement, its treaty partners will not generally be required to provide any additional information about their tax agreement with that jurisdiction.
The Report additionally notes that approximately 2,330 agreements concluded between members of the Inclusive Framework are compliant, subject to a complying instrument, subject to steps taken by at least one treaty partner to implement the minimum standard, or the object of a general statement by a treaty partner on the detailed LOB provision. According to the Report, this figure represents more than 70% of the global tax treaty network.
Regarding the approaches to meet the BEPS Action 6 minimum standard (i.e., the PPT, the PPT supplemented by a detailed or simplified LOB, or a detailed LOB together with an anti-conduit mechanism), the PPT alone remains the most widely used. The Report notes that over 65 agreements are or will be brought into compliance with the minimum standard using the PPT supplemented by a detailed or simplified LOB. The MLI can be used to implement the PPT together with a simplified LOB and 14 jurisdictions have chosen this option. Six jurisdictions8 have agreed to implement the simplified LOB in cases where their treaty partner has chosen to adopt that measure. Moreover, as noted, the United States and Trinidad and Tobago intend to use a detailed LOB to implement the minimum standard in all their bilateral agreements, including 79 agreements concluded with other members of the Inclusive Framework.
Key role of the MLI
The Report recognizes the effect the MLI has had in the bilateral tax treaty network. The number of agreements that became compliant with the MLI has increased from 350 to over 650 between 2020 and 2021. Further, around 50% of the bilateral agreements of jurisdictions for which the MLI took effect as of 1 January 2021 are compliant with the minimum standard as of 2021.
In contrast, jurisdictions that have not signed or ratified the MLI have made little progress in implementing the minimum standard. Only around 8% of the agreements concluded by those jurisdictions are compliant.
The OECD Secretariat has liaised with the signatories of the MLI that have not yet ratified and notes that China expects to deposit its instrument of ratification of the MLI in 2022. The deposit of China’s instrument of ratification will also cover Hong Kong. In addition, the OECD Secretariat notes that Bulgaria, Cameroon, Jamaica and North Macedonia intended to deposit their instrument of ratification of the MLI during the last quarter of 2021. However, on the date of the release of the Report these deposits had not yet taken place.
The Report also notes some gaps in the coverage of the MLI. About 160 bilateral agreements, concluded between pairs of signatories to the MLI that are members of the Inclusive Framework, have not been modified by the MLI because, at the assessment date, only one jurisdiction had listed the agreement under the MLI (one-way agreements). The revised methodology provides that when both partners have signed the MLI, but only one has listed the agreement, listing the agreement is interpreted as a request to implement the BEPS Action 6 minimum standard. Therefore, the parties would have an obligation to implement the BEPS Action 6 minimum standard in the agreement and agree bilaterally how it would be done (by using the MLI or bilateral negotiations). With respect to the one-way agreements, a number of countries have listed their agreements with Georgia, Germany, Indonesia, Italy, Norway, Sweden and Switzerland whereas these countries have not listed their agreements under the MLI with the other partners that listed them, which amounts to requests to implement the minimum standard.
Also, there are about 390 agreements concluded between pairs of jurisdictions that are members of the Inclusive Framework where only one of them has signed the MLI (waiting agreements). Only after the other party has signed the MLI and indicated its covered agreements, will it be clear if and what portion of these agreements will actually be modified by the MLI. After liaising with a number of jurisdictions (including Botswana, Mongolia, Montenegro, Thailand and Vietnam9) working toward signature of the MLI, the OECD Secretariat established that among them, the number of waiting agreements that would become covered agreements under the MLI is more than 140.
Plans for the implementation of the minimum standard and support provided to jurisdictions
According to the Report, a number of jurisdictions reported agreements concluded with other members of the Inclusive Framework that are either not compliant, not subject to a complying instrument or to a general statement on the detailed LOB, and in respect of which no steps have been taken to implement the BEPS Action 6 minimum standard.
When a jurisdiction did not provide considerations why a specific agreement does not raise material treaty-shopping concerns, it was invited to develop a plan on implementation of the minimum standard in those agreements. This implementation plan includes information on how BEPS Action 6 will be implemented (e.g., sign and ratify the MLI or expand its list of agreements to be covered under the MLI to include the concerned agreements).
Jurisdictions are to provide an annual update to the implementation plan. In those cases where a jurisdiction did not make a plan (or provide an update on the plan), a recommendation to provide one has been issued.
In total, 28 jurisdictions10 have developed a plan for the implementation of the minimum standard, covering around 350 non-compliant agreements. Most of the plans that have been developed to implement the BEPS Action 6 minimum standard involve the application of the provisions of the MLI. In fact, 15 out of 21 jurisdictions that have confirmed their plan intend to implement the BEPS Action 6 minimum standard by way of an extension of their existing covered tax agreements or joining the MLI.
The Report also notes that each implementation plan prepared by jurisdictions, where applicable, will be subject to review and the next year’s peer review will provide a status of these implementation plans.
Under the revised peer review methodology, recommendations are issued to the Inclusive Framework members in two categories. The first category involves cases where an Inclusive Framework member needs to take steps to have the MLI take effect. This type of recommendation mostly concerns jurisdictions that have signed the MLI but have not yet deposited the instrument of ratification of the MLI. It also includes jurisdictions that are parties to the MLI but have made a reservation under article 35(7) to delay the entry into effect of the provisions of the MLI until the completion of their domestic procedures. The Report indicates that in this peer review, 26 jurisdictions have been recommended to take steps under this category.11
The second category concerns Inclusive Framework members that have tax agreements for which a plan for the implementation of the BEPS Action 6 minimum standard is required to be developed under the new peer review approach. If the jurisdiction does not provide a plan (or provide an update on the plan) a recommendation is issued to provide a plan with respect to the relevant tax agreement. The Report provides that in this peer review, nine jurisdictions have been recommended to develop a plan, or provide an update on a plan.12
According to the Report, there will be an update in next year’s peer review report on the steps taken by each jurisdiction that has received a recommendation.
Difficulties in implementing the minimum standard
The Report describes some difficulties encountered by Inclusive Framework members in implementing the Action 6 minimum standard. Under the revised peer review documents, a jurisdiction that encounters difficulties in reaching agreement with another jurisdiction to implement the Action 6 minimum standard has the opportunity to raise its concerns in writing to the Secretariat.
During the course of the 2019 peer review, one jurisdiction raised a concern with respect to the Caribbean Community (CARICOM) Agreement, a multilateral agreement concluded in 1994 by 11 jurisdictions,13 10 of which are members of the Inclusive Framework. This concern remained in 2020 as the parties to the CARICOM agreement did not modify it. This issue continued to be relevant in 2021 as the parties to the CARICOM agreement still have not modified it. All parties have been made aware that the CARICOM agreement does not at this stage comply with the minimum standard. It is expected that in time a review of the CARICOM agreement will be conducted.
Another issue that has been identified in the implementation of the Action 6 minimum standard concerns several members of the Inclusive Framework renegotiating bilateral tax treaties and requesting their treaty partner also introduce other elements unrelated to the minimum standard in their tax treaties. The Report emphasizes that agreeing to implement the minimum standard should not be made conditional upon any additional amendment being made to an agreement.
Conclusion and next steps
The Report concludes that in general, most jurisdictions that are members of the Inclusive Framework are respecting their commitment to implement the BEPS Action 6 minimum standard. It also highlights that the MLI continues to have a significant and increased effect.
As with last year’s peer review, the Report confirms once again that the implementation of the BEPS Action 6 minimum standard has been uneven. The Report notes that the difference in the progress made between jurisdictions that have ratified the MLI and those that have not has become very evident.
The implementation of the minimum standard, and, in particular, the actions taken to follow up on the recommendations made and to give effect to the implementation plans that have been developed, will continue to be monitored. The next peer review will be launched in the first half of 2022.
The Report shows that the peer review mechanism of the Inclusive Framework has been tightened following the revision of the peer review process as published in April 2021. The focus now is very much on those bilateral and multilateral agreements for which no viable route to adoption of the minimum standard has been established. Jurisdictions are being asked to develop plans and will be held accountable for executing these plans. The Report shows a relevant and continuous implementation of the minimum standard in agreements, in particular in those between Inclusive Framework members as of 2021. With this new peer review approach, the expectation is that the pace of implementation of the minimum standard will remain high.
For businesses, this may create some uncertainty, as the interpretation of the PPT by the respective source countries is subjective and often unilateral given the limited and somewhat ambiguous nature of the guidance that has been developed by the OECD. This may lead to controversy that is multilateral in nature, and multilateral solutions such as Mutual Agreement Procedures and arbitration (if available) will likely be the most effective in resolving any differences in interpretation between source and residence country.
The expectation is that the attention on this issue will remain high over the coming years, as illustrated by the release by the European Commission on 22 December 2021 of a draft Directive focused on addressing shell companies (the Unshell Directive).14
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ronald van den Brekel
Marlies de Ruiter
Ernst & Young Belastingadviseurs LLP, Amsterdam
Roberto Aviles Gutierrez
Ernst & Young Limited (New Zealand), Auckland
- Matt Andrew
Ernst & Young LLP (United Kingdom), London
- Matthew Mealey
Ernst & Young LLP (United States), Global Tax Desk Network, New York
- Jose A. (Jano) Bustos
Ernst & Young LLP (United States), Washington, DC
- Barbara M. Angus
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
Togo and Mauritania joined the Inclusive Framework on BEPS after the cut-off date and therefore are not included in the Report. Both jurisdictions will be included in the next peer review report on BEPS Action 6.
See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016.
See EY Global Tax Alert, OECD releases first annual peer review report on BEPS Action 6, dated 15 February 2019.
See EY Global Tax Alert, OECD releases second annual peer review report on BEPS Action 6 relating to prevention of treaty abuse, dated 27 March 2020.
See EY Global Tax Alert, OECD releases third annual peer review report and revised peer review documents on BEPS Action 6 relating to prevention of treaty abuse, dated 16 April 2021.
See EY Global Tax Alert, OECD releases third annual peer review report and revised peer review documents on BEPS Action 6 relating to prevention of treaty abuse, dated 16 April 2021.
Anguilla, the Bahamas, the Cayman Islands, the Cook Islands, Djibouti, Haiti, Honduras, and Turks and Caicos Islands.
Côte d'Ivoire, Denmark, Greece, Iceland, Jamaica, Norway.
Thailand and Viet Nam signed the MLI on 9 February 2022.
Albania, Antigua and Barbuda, Austria, Belize, Benin, Botswana, Bulgaria, Cabo Verde, Czech Republic, Democratic Republic of the Congo, Eswatini, Gabon, Georgia, Germany, Indonesia, Italy, Kenya, Maldives, Mongolia, Montenegro, Norway, Paraguay, Saint Kitts and Nevis, South Africa, Sri Lanka, Thailand, Viet Nam, and Zambia,
Argentina, Armenia, Bahrain, Belize, Bulgaria, Cameroon, China, Colombia, Cote d’Ivoire, Gabon, Germany, Italy, Jamaica, Kenya, Mexico, Morocco, Nigeria, Republic of North Macedonia, Papua New Guinea, Peru, Romania, Senegal, South Africa, Sweden, Tunisia, Turkey.
Belarus, Congo, Democratic Republic of the Congo, Grenada, Jersey, Russian Federation, Sierra Leone, Sweden, United Arab Emirates.
Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. All members of the Inclusive Framework except for Guyana.
See EY Global Tax Alert, European Commission publishes draft Directive for preventing the misuse of shell entities (UNSHELL), dated 22 December 2021.