Luxembourg has just signed the OECD-sponsored Multilateral Convention to implement tax treaty-related measures to stop BEPS.
Therefore, the Grand-Duchy becomes one among the 68 countries within the first group of signatories to require this key step towards implementing the OECD/G20 BEPS Project.
Once Luxembourg and its co-signatories continue to ratify the Multilateral Convention — but not until then — tax treaties are going to be amended in several important areas.
Let’s examine what this suggests for Luxembourg financial players. What the BEPS agreement means for Luxembourg BEPS may be a revolution for international taxation.
Measures to curb tax treaty shopping are arguably the key “minimum standard” of the entire OECD/G20 BEPS Project.
The Multilateral Convention introduces into tax treaties a whole, but short, a new article that limits the scope of treaty benefits. It does this by imposing a “Principal Purposes Test.”
This test provides simply that a treaty benefit isn’t ‘t to be granted if obtaining that benefit was one among the principal purposes of any arrangement. So, only arrangements that are made for valid commercial reasons, which are supported by real operational activity, are getting to be entitled to all or any the advantages of tax treaties, like exemptions that prevent double taxation, or which reduce or eliminate the withholding burdens.
Luxembourg has chosen to incorporate a mechanism that permits competent authorities the discretion to grant treaty relief in appropriate cases, albeit the Principal Purposes Test is strictly in point.
We expect this is often a positive and pragmatic choice. All in all, transposing this Convention is complex as its provisions offer multiple options — not all the measures within the Convention needs to be applied by every signatory.
Now, the OECD has got to examine what options the countries have chosen, and harmonize it all. By choosing to use one significant optional a part of the Convention, Luxembourg has confirmed that it’s one among around 20 “early adopter” countries that support the utilization of the method of “mandatory binding arbitration” because of the most effective thanks to resolving international tax disputes. Again, this is often a positive move.