From bilateralism to multilateralism in international taxation
Multilateralism is gaining popularity in international taxation. Is the focus shifting from bilateral towards multilateral agreements?
The regulation of international taxation matters has habitually been based on bilateral inter-state tax conventions. The bilateral setup of organising tax matters is related to the advantages it brings states in organising their fiscal affairs in a tailor-made, state-by-state way.
However, the bilateral format is showing its age. As we speak, a shift is taking place from the bilateral method of organising tax matters, to multilateralism. Or in other words: the traditional ‘every-man-for-himself’ approach, in which the interests of the individual state are paramount, is making way for an approach that takes into account the collective interests of a group of states. This shift plays an important role in two areas of international tax law, where, in general terms, states must cooperate in order to be able to protect their tax sovereignty.
The first area relates to the OECD project on Base Erosion and Profit Shifting (BEPS), that addresses the opportunities for multinationals to reduce their domestic tax burdens. The second area where multilateralism is replacing the bilateralism is in the exchange of information for tax matters. The developments in both areas are fuelled by increased political interest, that is to some extent triggered by the world’s fiscal and economic crises.
As regards the first area: the BEPS project aims to tackle gaps that exist in the interaction between different domestic taxation rules and tax treaties applicable to cross-border activities. Although no concrete multilateral conventions have yet resulted from this work, there is a chance that a multilateral agreement will be created in the future. The success of the BEPS project to a considerable degree depends on the extent that multilateralism can be achieved. The most optimal solutions would uniformly change domestic tax laws, thereby reducing the risk of ‘jurisdiction shopping’ by multinationals. And insofar the BEPS project entails changes to bilateral tax treaties: anything but a multilateral agreement would significantly reduce the effect of the outcomes of the project, as this would otherwise require the lengthy process of renegotiating the (3000 or so) tax treaties currently in force.
A shift from bilateral to multilateral agreements can also be noticed in the rules on tax information exchange between tax jurisdictions. Up till now, sharing information between states for tax purposes has been arranged in bilateral Tax Information Exchange Agreements (TIAs) and within bilateral tax treaties (e.g. art. 26 and 27 OECD Model Convention). These rules are becoming more and more obsolete due to recent developments, such as the endorsement of the multilateral Convention on Mutual Administrative Assistance in Tax Matters and the proposals for the adaptation of a (stronger) EU Savings Tax Directive. The Convention provides for administrative cooperation between parties in the assessment and collection of taxes, and in December 2013, Kazakhstan was the 64th country to sign the agreement. The proposed amendment of the EU Savings Tax Directive is aimed at tackling bank secrecy and tax evasion. There are signals that Luxembourg and Austria, two countries with strict bank secrecy, are willing to endorse the amendment.
We greatly anticipate the developments in both areas. Multilateral arrangements in matters of international taxation are another step towards fairer international taxation rules.