Prevention of base erosion, profit-shifting by MNCs: Dual taxation treaties as modified by MLI inked with 28 states

ISLAMABAD: The Federal Board of Revenue (FBR) has issued a list of 28 countries, with which, Pakistan has signed Bilateral Full Scope Synthesized Treaties (double taxation agreements) to prevent base erosion and profit-shifting by multinational companies.

In this regard, the FBR has released the list of these 28 countries which have inked the Bilateral Full Scope Synthesized Treaties (double taxation agreements as modified by the “Multilateral Instrument” or MLI).

According to the FBR, the list included Austria; Belgium; Bosnia and Herzegovina; Canada; Czech Republic; Denmark; Egypt; Finland; Hungary; Indonesia; Ireland; Japan; Jordan; Kazakhstan; Malaysia; Malta; Mauritius; Netherlands; Oman; Poland; Portugal; Qatar; Saudi Arabia; Serbia; Singapore; Sweden; the United Arab Emirates, and the United Kingdom.

Shaheer Bin Tahir, a tax specialist on international taxation told Business Recorder that over 100 jurisdictions concluded negotiations on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises.

FBR enforces convention to prevent profit shifting

This was known as the BEPS (Base Erosion Profit Shifting) Protocols, through the BEPS Project of the OECD; which were implemented through multilateral negotiations, and concluded over fifteen Action Plans, which dealt with several different areas of international taxation, and dealt with ways to eliminate tax evasion by profit shifting, and principally were developed to bring the BEPS Action Plans into operation. It deals with several areas, including Controlled Foreign Companies (CFCs), Digital Economy Taxation, Transfer Pricing, etc. The MLI already covers 99 jurisdictions and entered into force on July 1, 2018.

Shaheer stated that the signatories include jurisdictions from all continents and all levels of development and other jurisdictions are also actively working towards signature. The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.

The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation, by way of interpreting the rules without having to renegotiate the entire tax treaty with the country.

It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies. Some issues that the MLI has been created for, is to eliminate attribution of income to offshore jurisdictions, a more robust abuse interpretation, by way of Principle Purpose Tests and Limitation of Benefits, the tax expert maintained.

Copyright Business Recorder, 2022