OECD – 2017 UPDATE TO THE OECD MODEL TAX CONVENTION. This note includes the contents of the 2017 update to the OECD Model Tax Convention (the 2017 Update). The 2017 Update was approved by the Committee on Fiscal Affairs on 28 September 2017 and by the OECD Council on 21 November 2017. The 2017 Update primarily comprises changes to the OECD Model Tax Convention (the OECD Model) that were approved as part of the BEPS Package or were foreseen as part of the follow-up work on the treaty-related BEPS measures. These changes include the following: • Changes to the Title and Preamble of the OECD Model, as well as to its Introduction, and related Commentary changes contained in the Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). • The addition of new paragraph 2 to Article 1 (the transparent entity provision) and of related Commentary changes. These changes appear in Chapter 14 of the Report on Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements). • The addition of new paragraph 3 to Article 1 (the “saving clause”) and of related Commentary changes. These changes appear in the Report on Action 6. • Changes to the section of the Commentary on Article 1 on “Improper use of the Convention”, which include optional provisions to deny treaty benefits with respect to income benefiting from “special tax regimes” and in cases of certain subsequent changes to the domestic law of a treaty partner after the conclusion of a tax treaty. Draft proposals for these optional provisions were included in the Report on Action 6, which noted that the proposals would be reviewed in the light of similar proposals which had been released by the United States for public comment in September 2015. The optional provisions on “special tax regimes” and on subsequent changes to domestic law, as they appear in the 2017 Update, were finalised accordingly. • Changes to Articles 3 and 4, and related Commentary changes, concerning the treaty residence of pension funds. Paragraph 12 of the Report on Action 6 called for additional work to ensure that a pension fund should be considered to be a resident of the State in which it is constituted regardless of whether that pension fund benefits from a limited or complete exemption from taxation in that State. On 29 February 2016 the Committee on Fiscal Affairs published a discussion draft containing proposed changes to Articles 3 and 4 and their Commentaries. • Changes to paragraph 2 of Article 3 and related changes to the Commentaries on Articles 3 and 25. The Report on Action 14 (Making Dispute Resolution Procedures More Effective) called for the development of these changes – which are intended to remove any doubt that, in a case where the competent authorities have agreed on a common meaning of an undefined term, the domestic law meaning of that term would not be applicable – as part of the follow-up work on Action 14 to clarify the legal status of a competent authority mutual agreement. • Changes to paragraph 3 of Article 4 (the tie-breaker rule for determining the treaty residence of dual-resident persons other than individuals) and related Commentary changes. These changes appear in the Report on Action 6. • Changes to Article 5 and its Commentary resulting from the Report on Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and follow-up work on those changes. • Changes to subparagraph 2 a) of Article 10, introducing a minimum holding period to access the 5 per cent rate applicable to dividends, and related Commentary changes. These changes appear in the Report on Action 6. • The replacement of paragraph 17 of the Commentary on Article 10 with a paragraph containing an alternative provision that would deny the benefit of the lower rate provided in Article 10(2) a) to certain collective investment vehicles that do not pay tax on their investment income. That alternative provision was contained in the Report on Action 6. • Changes to paragraph 4 of Article 13, addressing transactions that seek to circumvent the application of that provision, and related Commentary changes. These changes appear in the Report on Action 6. • Changes to Articles 23 A and 23 B and related changes to the Commentaries on Articles 10, 11, 21, and 23 A and 23 B. These changes address issues relating to the relief of double taxation that arose during the work on new paragraphs 2 and 3 of Article 1. Draft proposals for certain of these changes were included in the Report on Action 6. • Changes to Article 25 and to the Commentaries on Articles 2, 7, 9 and 25 contained in the Report on Action 14 or which that Report indicated would be developed as part of the follow-up work on Action 14. These changes include changes to paragraph 5 of Article 25, related Commentary changes and amendments to the “Sample Mutual Agreement on Arbitration” contained in an Annex to that Commentary. The changes related to the OECD Model MAP arbitration provision and its Commentary are intended to reflect the MAP arbitration provision developed in the negotiation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument or “MLI”) adopted on 24 November 2016. • The addition of a new Article 29 (Entitlement to Benefits) and related Commentary, which includes in the OECD Model a limitation-on-benefits (LOB) rule (simplified and detailed versions), an anti-abuse rule for permanent establishments situated in third States, and a principal purposes test (PPT) rule. These provisions were contained in the Report on Action 6. As noted in that Report, the two versions of the LOB rule and the anti-abuse rule for permanent establishments situated in third States as presented in the Report were draft provisions subject to changes, in the light of the versions of those rules that would be included in the 2016 United States Model Income Tax Convention, which had not been finalised at the time the Report on Action 6 was approved. Those provisions, as they appear in the 2017 Update, have been finalised accordingly. The Commentary on Article 29 also contains three additional examples on the application of the PPT rule to non-CIV funds (which were not included in the Report on Action 6) which were released in draft form in a March 2016 discussion draft. • Consequential changes required as a result of the changes described above. The 2017 Update also includes certain other changes to the OECD Model that were previously released for comments and were not developed as part of the work on the treaty-related BEPS measures. These changes include: • Changes to the Commentary on Article 5 integrating the changes resulting from the work on BEPS Action 7 with previous work on the interpretation and application of Article 5. The proposals that resulted from that earlier work – which was based on the pre-2017 Update version of Article 5 – were originally published in an October 2011 discussion draft, discussed at a 7 September 2012 public consultation and subsequently released in a revised October 2012 discussion draft. • Changes to Article 8, related changes to subparagraph 1 e) of Article 3 (the definition of “international traffic”) and paragraph 3 of Article 15 (concerning the taxation of the crews of ships and aircraft operated in international traffic), and consequential changes to Articles 6, 13 and 22. The changes include related Commentary changes. These changes were released in a November 2013 discussion draft The 2017 Update additionally includes the following four changes that were included in the 11 July 2017 public release and that had not been previously released for comments: • Changes to paragraph 13 of the Commentary on Article 4 related to the issue whether a house rented to an unrelated person can be considered to be a “permanent home available to” the landlord for purposes of the tie-breaker rule in Article 4(2) a). • Changes to paragraphs 17 and 19 of, and the addition of new paragraph 19.1 to, the Commentary on Article 4. These changes are intended to clarify the meaning of “habitual abode” in the tiebreaker rule in Article 4(2) c). • The addition of new paragraph 5 to the Commentary on Article 5. That paragraph indicates that registration for the purposes of a value added tax or goods and services tax is, by itself, irrelevant for the purposes of the application and interpretation of the permanent establishment definition. • Deletion of the parenthetical reference “(other than a partnership)” from subparagraph 2 a) of Article 10, which is intended to ensure that the reduced rate of source taxation on dividends provided by that subparagraph is applicable in the case where new Article 1(2) would have the effect that a dividend paid to a transparent entity would be considered to be income of a resident of a Contracting State because it is taxed either in the hands of the entity or in the hands of the members of that entity. That deletion is accompanied by new paragraphs 11 and 11.1 of the Commentary on Article 10. In response to the public comments received on these four proposed changes, an addition was made to the end of paragraph 5 of the Commentary on Article 5. This addition is intended to clarify the paragraph and to provide a cross-reference to similar language in the Report on Action 1 (Addressing the Tax Challenges of the Digital Economy) and the International VAT/GST Guidelines. Finally, the 2017 Update includes the changes and additions made to the observations and reservations of OECD member countries and the positions of non-OECD economies. These changes include the replacement of the positions of Latvia, which became a member of the OECD after the publication of the 2014 version of the OECD Model, by reservations and observations. 21 November 2017.
