OECD — RECENT DEVELOPMENTS — AN UPDATE

A. Amendments to OECD Model Tax Convention :

1. Draft contents of the 2010 update to the Model
Tax Convention — 21st May, 2010 :

The OECD Committee on Fiscal Affairs has just released the
draft contents of the 2010 update to the OECD Model Tax Convention prepared by
Working Party 1 of the Committee. The update will be submitted for approval of
the Committee in June and the OECD Council in July.

The 2010 update will include the changes that were previously
released for comments in the following discussion drafts :

The draft report was released on 9th December 2009 (see
http://www.oecd.org/dataoecd/47/3/44211901.pdf). It was based on an earlier
report by the Informal Consultative Group on the Taxation of Collective
Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors,
which itself was released for comments on 12th January 2009 (see http://www.oecd.org/dataoecd/34/26/41974553.pdf).
The changes to the Commentary on Article 1 included in the report were slightly
modified, based on the comments received at the February 2010 meeting of Working
Party 1 (WP1) on Tax Conventions and Related Questions (the CFA subsidiary body
responsible for changes to the OECD Model Tax Convention).

The draft was released on 24th November, 2009 (see http://www.oecd.org/dataoecd/30/52/44104593.pdf).
That revised draft reflected a number of changes made to the first version of
the new Article released on 7th July, 2008 (see http://www.oecd.org/dataoecd/37/8/40974117.pdf).
A few additional changes were made, based on the comments received on the
revised draft, at the February 2010 meeting of WP1.

The draft was released on 25th November 2009 (see http://www.oecd.org/dataoecd/59/63/44080490.pdf).
The changes included in this note reflect a few modifications made at the
February 2010 meeting of WP1 in light of the comments received on the changes
proposed in that draft.

The draft was released on 25th November, 2009 (see http://www.oecd.org/dataoecd/59/62/44148625.pdf).
The changes included in this note reflect a few modifications made at the
February 2010 meeting of WP1 in light of the comments received on the changes
proposed in that draft.

The first draft of these changes was released in April, 2004
(see http://www.oecd.org/dataoecd/52/61/31413358.pdf). Based on the comments
received and a public consultation meeting with business representatives and
other interested parties held on 30th January, 2006, a number of modifications
were made and revised proposals were released for comments on 12th March, 2007
(see http://www.oecd.org/dataoecd/36/32/38236197.pdf). The final version of the
changes included in this note reflects a number of additional changes made
following the comments received on that second discussion draft.

As all the substantive contents of the 2010 update have
previously been released for comments through these discussion drafts, this
draft is released for information only and not for additional comments. The
introduction to the draft summarises how the main comments received on these
discussion drafts have been dealt with.

The update will also include a number of changes to OECD
countries’ reservations and observations and to non-OECD countries’ positions,
which will be added to the update in the next few weeks. Among these will be the
elimination of all reservations and positions on Article 26 (Exchange of
Information), which the OECD Council has already approved.

The Committee on Fiscal Affairs has been asked to discuss and
approve the draft update at its June, 2010 meeting. A revised version of the
Model Tax Convention that will incorporate the changes made through the update
is expected to be released in September, following the approval by the OECD
Council.

2. OECD Releases Report on Granting of Treaty
Benefits with respect to the Income of
Collective Investment Vehicles — 31st May,
2010 :

The OECD Committee on Fiscal Affairs has released a Report on
‘The Granting of Treaty Benefits with respect to the Income of Collective
Investment Vehicles’ which contains proposed changes to the Commentary on the
OECD Model Tax Convention dealing with the question of the extent to which
either collective investment vehicles (CIVs) or their investors are entitled to
treaty benefits on income received by the CIVs. These changes are expected to be
included in the 2010 update to the Model Tax Convention (the draft contents of
which were released on 21st May, 2010) and the Report would then be included in
volume II of the loose-leaf and electronic versions of the Model.

The Report is a modified version of the Report ‘Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles’ of the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (‘ICG’) which was released on 12th January 2009. In that original Report, the ICG addressed the legal and policy issues specific to CIVs and formulated a comprehensive set of recommendations addressing the issues presented by CIVs in the cross-border context. The Committee referred the recommendations by the ICG to its Working Party 1 (‘WP1’) on Tax Conventions and Related Questions (the Committee’s subsidiary body responsible for changes to the OECD Model Tax Convention) for further consideration. The WP1 Report was issued as a discussion draft on 9th December 2009 and modified in response to public comments.

The main conclusions and recommendations of the Report are similar to those in the ICG Report, with some modifications that reflect the varied experiences of the tax authorities of the OECD countries. Like the ICG Report, the Report therefore analyses the technical questions of whether a CIV should be considered a ‘person’, a ‘resident of a Contracting State’ and the ‘beneficial owner’ of the income it receives under treaties that, like the OECD Model Tax Convention, do not include a specific provision dealing with CIVs (i.e., the vast majority of existing treaties). Further, the Report includes changes to the Commentary on the Model Tax Convention to reflect the conclusions of the Committee with respect to these issues.

Although these changes to the Commentary will clarify the treatment of CIVs, it is clear that at least some forms of CIVs in some countries will not meet the requirements to claim treaty benefits on their own behalf. Accordingly, the Report also considers the appropriate treatment of such CIVs under both existing treaties and future treaties.

With respect to existing treaties, the Report concludes that, if a CIV is not entitled to claim benefits in its own right, its investors should in principle be able to claim treaty benefits. The Report reflects different views regarding whether such a right should be limited to investors who are residents of the Contracting State in which the CIV is organised, or whether that right should be extended to treaty-eligible residents of third States. In any event, administrative difficulties in many cases effectively prevent individual claims by investors. Accordingly, the Report concludes that countries should adopt procedures to allow a CIV to make the claim on behalf of investors.

With respect to future treaties, the Report endorses the ICG recommendation that the Commentary on Article 1 of the Model Tax Convention should be expanded to include a number of optional provisions for countries to consider in their future treaty negotiations. Inclusion of one or more of these provisions in bilateral treaties would provide certainty to CIVs, investors and intermediaries. The favoured approach for such a provision would treat a CIV as a resident of a Contracting State and the beneficial owner of its income, at least to the extent that its investors would themselves be eligible for benefits from the source country, rather than adopting a full look-through approach. Because different views were expressed on the issue of whether treaty-eligible residents of third countries should be taken into account in determining the extent to which the income of a CIV should be entitled to treaty benefits, the proposed Commentary includes alternative provisions that adopt different approaches with respect to the treatment of treaty-eligible residents of third countries. The proposed Commentary also includes an alternative provision that would adopt a full look-through approach, under which the CIV would make claims on behalf of its investors rather than in its own name. The look-through approach would be appropriate in cases where the investors, such as pension funds, would have been eligible for a lower, or zero, rate of withholding had they invested directly in the underlying securities.

B.    Amendments to OECD Transfer Pricing Guidelines:

1.    OECD invites comments on the Transfer Pricing Aspects of Intangibles — 2nd July, 2010:

The OECD is considering starting a new project on the Transfer Pricing Aspects of Intangibles and is inviting comments from interested parties on the scoping of such a project. Comments should be sent before 15th September 2010 to Jeffrey Owens, Director, CTPA (jeffrey.owens@oecd.org).

The OECD’s Committee on Fiscal Affairs is now completing its work on two transfer pricing projects which the OECD Council will be asked to approve by the end of July in the form of revisions to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPG)?: its review of Comparability and Profit Methods and its report on the Transfer Pricing Aspects of Business Restructuring.

In these two projects, transfer pricing issues pertaining to intangibles were identified as a key area of concern to governments and taxpayers, due to insufficient international guidance, in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.

OECD guidance on the transfer pricing aspects of intangibles is currently found in the TPG, especially in Chapters VI and VIII. Further and updated guidance will be available in the revised Chapters I-III of the TPG and in the final report on the Transfer Pricing Aspects of Business Restructuring once those are approved by the Council and publicly released. Intangibles are also addressed in the July 2008 Report on the Attribution of Profits to Permanent Establishments and in the Commentary on Article 12 of the Model Tax Convention.

The OECD is now considering starting a new project on the Transfer Pricing Aspects of Intangibles which could result in a revision of Chapters VI and VIII of the TPG. Working Party No. 6 of the Committee on Fiscal Affairs is still at the stage of scoping such a possible new project and would welcome the views of interested parties on?: what they see as the most significant issues encountered in practice in relation to the transfer pricing aspects of intangibles; what shortfalls, if any, they identify in the existing OECD guidance; what the areas are in which they believe the OECD could usefully do further work; and what they believe the format of the final output of the OECD work should be. Comments should be sent before 15th September 2010 in Word format to Jeffrey Owens, Director, CTPA (jeffrey.owens@ oecd.org).

Selected business commentators will be invited to meet with Working Party No. 6 on 9th November 2010 in Paris.

C.    Tax Transparency and Exchange of Information Agreements:

1.    OECD updates — Brazil, Indonesia ranked as implementing International Information Standard — 3rd June 2010?:

As a result of details provided to the Global Forum on Transparency and Exchange of Information for Tax Purposes, Brazil and Indonesia are now ranked in the category of jurisdictions that have substantially implemented the internationally agreed tax standard.

The OECD said it had updated its progress report, first issued in conjunction with the G20 London summit in April 2009, to take account of communications from Brazil and Indonesia on their legal and regulatory frameworks for exchange of information.

According to the information provided, Brazil has more than 25 bilateral tax treaties that provide for exchange of information in tax matters to the internationally agreed standard while Indonesia has 53 agreements that meet the standard. The two countries joined the Global Forum last September.

A full description of the two countries’ legal and regulatory frameworks will be included in the Global Forum’s 2010 annual assessment to be published later this year. As with all members of the Global Forum, both the countries will undergo peer reviews of their exchange of information laws and practices, Brazil in 2011 and 2012 and Indonesia in 2011 and 2013. Brazil is a member both of the Forum’s Steering Group and of its Peer Review Group.

Since April 2009, more than 500 bilateral tax information exchange agreements have been signed worldwide, with 28 jurisdictions joining those ranked as having substantially implemented the internationally agreed standard.

For more information, visit the following sites:
www.oecd.org/tax
www.oecd.org/tax/transparency
www.oecd.org/tax/evasion

B.    Amendments to OECD Transfer Pricing Guidelines:

2.    A boost to multilateral tax cooperation: 15 countries sign updated Convention on Mutual Administrative Assistance in Tax Matters — 27th May, 2010:

In April 2009, the G20 called for action “to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information.” In response, the OECD and the Council of Europe developed a Protocol amending the multilateral Convention on Mutual Administrative Assistance in Tax Matters to bring it in line with the international standard on exchange of information for tax purposes and to open it up to countries that are neither members of the OECD, nor of the Council of Europe.

On 27th May 2010, the updated Convention was presented to Ministers and Ambassadors attending the annual OECD Ministerial meeting held in Paris and was signed by 11 countries already Parties to the Convention (Denmark, Finland, Iceland, Italy, France, the Netherlands, Norway, Sweden, Ukraine, the United Kingdom and the United States). In addition, Korea, Mexico, Portugal and Slovenia signed both the Convention and the amending Protocol.

The Convention provides for a wide range of tools for cross-border tax co-operation including exchange of information, multilateral simultaneous tax examinations, service of documents, and cross-border assistance in tax collection, while imposing extensive safeguards to protect the confidentiality of the information exchanged (see background brief for more information). Once the Protocol has entered into force, the Convention will become a more powerful tool for multilateral tax cooperation as it will enable a wider group of countries to become parties and will require full exchange of information on request in all tax matters without regard to a domestic tax interest requirement or bank secrecy for tax purposes.

3.    Three Caribbean jurisdictions move up on OECD progress report — 19th May, 2010:

Dominica, Grenada and Saint Lucia have been moved into the category of jurisdictions considered to have substantially implemented the standard on transparency and exchange of information, having now all signed at least 12 exchange of information agreements conforming to the standard.

This brings to 28 the number of jurisdictions that have moved into this category since April 2009. The move affecting Dominica, Grenada and Saint Lucia follows the signature of a series of agreements involving these three jurisdictions plus Antigua and Barbuda, which had already reached 12 agreements on 7th December 2009, and the Nordic countries (Denmark, Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden).

Following these signatures, Antigua and Barbuda has now signed a total of 20 agreements meeting the international standard. Dominica and Grenada have now signed 13 agreements each, and Saint Lucia has signed 15 agreements.

As members of the Global Forum on Transparency and Exchange of Information for Tax Purposes, each of these jurisdictions agreed to participate in a peer review of their laws and practices in this area. According to a schedule published by the Global Forum, Antigua and Barbuda, Grenada and Saint Lucia will undergo reviews of their legal and regulatory framework for exchange of information in 2011 and reviews of their information exchange practices in 2013. Dominica’s peer reviews will take place in 2012 and 2014.

For more information, visit: www.oecd.org/tax/transparency/ www.oecd.org/tax and www.oecd.org/tax/evasion.