Treaties in the Aftermath of BEPS

Brooklyn Journal of International Law

Volume 41

Issue 3 SYMPOSIUM: Reconsidering the Tax Treaty

2016

Treaties in the Aftermath of BEPS

Yariv Brauner

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Recommended Citation

Yariv Brauner, Treaties in the Aftermath of BEPS, 41 Brook. J. Int'l L. (2016).

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3

TREATIESINTHEAFTERMATH OF BEPS

YarivBrauner*

INTRODUCTION..........................................................................974

I. THE INTERNATIONAL TAX REGIME:CRYSTALLIZATIONAND

DISINTEGRATION.......................................................................977

A.TheCompetition-BasedInternationalTaxRegime........ 979

B.ADisintegrationoftheInternationalTaxRegime?........ 982

C.TheNatureandPurposeofTaxTreaties........................ 985

II. BEPS....................................................................................989

A.AConcise(andAlmost)FinalReportontheBEPS Action Plan....................................................................................... 992

1.ActionItem1:AddresstheTaxChallengesoftheDigital Economy............................................................................992

2.ActionItem2:NeutralizetheEffectsofHybrid MismatchArrangements..................................................995

3.ActionItem3:StrengthenControlledForeign CorporationRules.............................................................999

4.ActionItem4:LimitBaseErosionviaInterest DeductionsandOtherFinancialPayments..................1001

5.ActionItem5:Countering HarmfulTaxPracticesMore Effectively,TakingintoAccountTransparencyand Substance........................................................................1002

6.ActionItem6:PreventingtheGrantingofTreaty BenefitsinInappropriateCircumstances.....................1004

7.ActionItem7:PreventingtheArtificialAvoidanceof PermanentEstablishmentStatus.................................1006 *UniversityofFloridaResearchFoundationProfessorandProfessorof Law,UniversityofFlorida,LevinCollegeofLaw. The authorhasnotgranted rightsto reprintthisarticleunderaCreative CommonsAttribution-Non-Commercial license.Please contactthe authordirectlyforreprintpermission.

8.ActionItems8–10:GuidanceonTransfer-Pricing AspectsofIntangibles.....................................................1009

9.ActionItem11:MeasuringandMonitoringBEPS...1012

10.ActionItem12:MandatoryDisclosureRules..........1013

11.ActionItem13:GuidanceonTransfer-Pricing DocumentationandCountry-by-CountryReporting..1014

12.ActionItem14:MakingDispute Resolution MechanismsMoreEffective...........................................1017

13.ActionItem15:Developinga MultilateralInstrument toModifyBilateralTaxTreaties....................................1019

B.TheImpactofthe BEPS ProjectonTaxTreatyLaw.... 1020

C.BEPS,theInternationalTaxRegime,andEnhanced Coordination....................................................................... 1022

III. THE FUTUREOF TAX TREATIES........................................1023

A.TheInstitutionalDimension......................................... 1024

B.EnhancedCoordination................................................. 1029

1.TheMultilateralInstrument.....................................1030

2.StandardTransferPricingandCbCReporting........1031

3.DisputeResolution:IsitLeftBehind?......................1033

C.PrinciplesinaFog......................................................... 1034

1.TheSingleTaxPrinciple............................................1035

2.SourceandResidence.................................................1035

3.And,ofCourse:Arm’sLength....................................1037

D.CanCurrentBilateralTaxTreatiesSurvive Post-BEPS?......................................................................... 1038

CONCLUSION ...........................................................................1041

TINTRODUCTION axtreatiesarepeculiarcreatures.Theyareubiquitousand familiar,standardanduniversal.Beingamongthemost salientbuildingblocksofinternationaleconomiclaw,theyhave

analmostrespectablefaçade.Yet,theyarealsoelusivelegalinstruments andlackaconsensusabouttheirtrue natureandpurpose.Taxprofessionals insome countriesapplythemonadaily basis,sometimesasamatter-of-fact, yetothersrarelyresortto them.Standardasthey are,insomecountriestax treatiesprovidethecoreapplicabletaxnorms,whereasinothercountries theireffectontaxconsequencesismarginal.

Complexastheyare,nonetheless,taxtreatiesseemtobevery effectiveandpopular.Thenetworkofoverthreethousand bilateralincometaxtreatiesconstructsarather stableinternational taxregimethatessentiallydictatesthetaxtreatmentofamajorityofthecross-borderinvestmentsin theworld.1 Standard anduniversalin both substanceandgeographicalcoverage,and havingbeensoforfarmorethanhalfadecade,theyprovidethe taxpractice withcomfortandfamiliaritythatcompensatefor theoccasionallackofclarityandfinality.2

Suchstabilitymay,however,not lastlong.Globalizationand technologicalchangeshavechallengedtheverybasicsoftheregime,leavingitwithoutagoodsolutionforissuessuchaselectroniccommerce,derivativefinancialinstruments,andtransfer pricing,tonameafew.3 Further,geopoliticalchangeshavechallengedthedominanceoftheOrganisationforEconomicCo-operationandDevelopment(OECD)andtraditionallyrichcountriesovertheregime.4 Corporationsandothernon-stateorgani-

1. Reuven S. Avi-Yonah, Commentary,53TAX L.REV.167,169(2000)(explainingthat theinternationaltax regimeis constructedaroundthenetwork ofbilateral tax treaties,essentiallyallofwhicharemodeledaftertheOECD ModelTaxConvention).The originalacknowledgmentoftheexistenceofsuch a regimewas inReuven S. Avi-Yonah’ s “The Structure of InternationalTaxation:A ProposalforSimplification.” ReuvenS. Avi-Yonah, TheStructure ofInternationalTaxation:A ProposalforSimplification,74TEX. L.REV.1301,1349 (1996).

2.See,e g.,THE IMPACTOFTHE OECD AND UNMODEL CONVENTIONS ON BILATERAL TAX TREATIES (MichaelLang etal.eds.,2012).

3.Thesepressureshaveculminatedinthe BaseErosionandProfitShifting(BEPS)projectandtheacknowledgementofthe necessityto reform the regime. See ORG FOR ECON.CO-OPERATION &DEV [OECD],ADDRESSING BASE EROSIONAND PROFIT SHIFTING (2013).

4.See generally BRICS ANDTHE EMERGENCEOF INTERNATIONAL TAX COORDINATION (YarivBrauner &PasqualePistoneeds.,2015).

zationsalsogrewinpower,whichrequiredconsiderationsofactorsbeyondthestates.Thesechangescoincidedandputthefutureoftax treatiesinjeopardy.

OutofthisturmoilarosetheBaseErosionandProfitShifting (BEPS) project.5 Theprojectwastriggeredbypublicoutrageover aggressivecorporatetaxplanningandwasfueledbythemedia exposureofsuchschemes,whichmandatedthereformoftheinternationaltaxregime.6 Taxtreaties,asthe buildingblocksof sucharegime,were requiredtorespondtothechallengeand addresstheirfailuretodosobeforethepoliticalmandate.

Thisarticlearguesthatdespitethefanfarearoundit,7 theoutcomeoftheBEPSprojectisunlikelytobedramatic,atleastin theshort-term.Beyond aperiodofincreasedlegaluncertainty andperhapsanatmosphereofmore aggressiveenforcementby somecountries,8 oneshouldanticipatelittlesubstantivechange

5.See OECD, supra note 3;ORG FOR ECON.CO-OPERATION &DEV [OECD], ACTION PLAN ON BASE EROSIONAND PROFIT SHIFTING (2013); BEPS2015Final Reports, OECD.ORG, http://www.oecd.org/tax/beps-2015-final-reports.htm(last visitedJune 8,2016).

6.Initially,the tax-planning schemesofthelargesttechnologycorporations suchasApple,Microsoft,andGoogle were exposed. See Charles Duhigg &DavidKocieniewski, HowAppleSidestepsBillions in Taxes,N.Y. TIMES,Apr 28,2012, at A1;JesseDrucker, Google Revenues Sheltered in NoTaxBermudaSoarto$10Billion,BLOOMBERG (Dec.10,2012,12:01 AM), http://www.bloomberg.com/news/2012-12-10/google-revenues-sheltered-in-notax-bermuda-soar-to-10-billion.html;RichardWaters, Microsoft’sForeign Tax Planning Under Scrutiny,FIN.TIMES (June 7,2011,2:38AM), http://on.ft.com/1Uee9GS.Soonthereafter, however, it becameclear thatthe phenomenonwasmorewidespread.EdwardD.Kleinbard, ThroughaLatte Darkly:Starbucks’sStatelessIncome Planning,139TAX NOTES 1515,1515 (2013).

7.Foranexampleofsuch praise, seetheOECD’spressreleaseattheclosureoftheproject. OECDPresents OutputsofOECD/G20 BEPSProjectfor DiscussionatG20 FinanceMinisters Meeting,OECD.ORG (May10,2015), http://www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-fordiscussion-at-g20-finance-ministers-meeting.htm; seealso Lee A.Sheppard, OECDHeadTakesaBEPSVictoryLap, 149TAX NOTES 340,340(2015)

8.One couldalreadyobserve thischangeintheauditenvironment. See, e.g., Spain-ResponsetoBEPS,KPMG(Oct. 24,2015), https://home.kpmg.com/xx/en/home/insights/2015/10/spain-response-tobeps.html;C. DAVID SWENSON,PRICEWATERHOUSECOOPERS,GLOBAL TAX AUDITS AND DISPUTES:NEW FORCESARE CONVERGINGTO FORM SECOND WAVE, PWC(2013),http://www.pwc.com/gx/en/tax/publications/transfer-pricing/perspectives/assets/tpp-globaltaxauditsanddisputes.pdf;WilliamHoke, TaxDirectorsDetailUnconventionalApproachestoTransfer PricingAudits,80TAX

intaxtreaties.ThechallengestothedominanceoftheOECD andtherichestcountriesintheworldwouldlikelybeassuaged bymarginal concessions,mostorallofwhichdonotaffecttax treaties.Yet,thisarticleseesasilverlininginthenon-substantive,structural,andinstrumentaloutcomesoftheBEPSproject. Itarguesthat,evenif unintended,theseoutcomes,includingthe multilateralinstrument,thecompacttointensifytheuseofarbitration,andthestandardizationoftransfer-pricingreporting, willhavethemostmeaningfulimpactontaxtreaties,theircontent,andthefutureoftheinternationaltaxregime.

PartIofthearticlebeginswith an exposureofthecurrent stateoftheinternationaltaxregimeandtheunansweredchallengesthatthreatentodestabilize it.PartIIanalyzestheplace oftheBEPSprojectintheevolutionoftheregime.PartIII assessestheimpactof BEPSonthefutureoftaxtreaties andthe internationaltaxregime.Thearticlethenconcludes.

I. THE INTERNATIONAL TAX REGIME:CRYSTALLIZATIONAND DISINTEGRATION

Thecurrentinternationaltaxregimeiscomprisedofover threethousandbilateraltaxtreaties thatgovernthetaxationof thelargemajorityofcross-borderbusinessandinvestment.9 Thesetreatiesaremeaningfullystandard.Scholarsestimate thataround75percentofthelanguageofalltaxtreatiesistaken fromasingle source:theOECDModelTaxConventiononIncomeandonCapital(“OECD Model”).10 TheOECDModeldominatesthecurrenttax treatylaw.11

Thestandardizationofinternationaltaxlawisnotconfined, however,totax treaty law.Since(atleast)thepost-WWIIperiod,

NOTES INT’L 409,409 (2015);Raymond Doherty, CompaniesFearBEPS “Tax Chaos, ” ECONOMIA (May 13,2014),http://economia.icaew.com/news/may2014/companies-fear-beps-tax-chaos.

9.See Avi-Yonah, supra note 1.

10.TheOECDModelhasbeen amendedfromtimetotime. See THE IMPACT OFTHE OECD AND UNMODEL CONVENTIONS ON BILATERAL TAX TREATIES, supra note 2.

11.Id

internationaltaxlawsofessentiallyallcountrieshavesignificantlyconverged.12 Suchconvergenceoccurrednotonlyinincometaxes,onwhichthisarticlefocuses,but alsomoregenerally infiscaldevicesandpolicies.13 Muchofthisconvergencecanbe attributed to taxtreaties andtheirstandardization,14 yet some ofitrelatestonormsthataremerely tangentialorunrelatedto treatynorms.15

Suchstandardization,however,hasnotamountedto much harmonization.Aninternationaltaxregimehasemerged butis basedprimarilyonsoft law.16 Theconvergencehasattracted somescholarstoexaminewhetherthisregimehasreached a customary internationallawstatus.17 Such a conclusion,however,hasnotyetbeenreachedandremainsprimarilyadesirable goalfor some.Numerousdifferencesamong taxlawsstillexist, manyofwhicharedifficulttorationalize.18 Someofthesedifferenceshavefacilitatedthetypeof aggressivecorporatetaxplanningthattriggeredthelaunchoftheBEPSproject.19 AfundamentalinsightofBEPSwasthatcountriescouldnotproceedto makecompletelyindependenttaxpolicies becauseoftheinterdependenceoftheireconomies.20 It isdifficultforcountriestoact

12.See YarivBrauner, AnInternationalTaxRegime in Crystallization, 56 TAX L.REV.259,266(2003).

13.Amoregeneralreviewofthisconvergence is,however,beyondthescope ofthisarticleandwillhavetowaitforanotheroccasion.

14.Themostsalientexampleofthisphenomenonisperhapsthealmostuniversaluseofthepermanentestablishment(“PE”) conceptforthetaxationof business income offoreigners.

15.Thealmost universal convergence ofsource rulesisoneexampleofthis phenomenon. See Brauner, supra note12,at278–82.

16.See AllisonChristians, HardLaw,Soft Law,andInternationalTaxation,25WISC.INT’L L.J.325,331(2007);DianeRing, WhoisMakingInternationalTaxPolicy?: InternationalOrganizations as Power Playersin a High StakesWorld,33FORDHAM INT’L L.J.649,652(2010);Hugh J.Ault, Reflections on theRoleoftheOECD in DevelopingInternationalTaxNorms,34BROOK. J. INT’L L.757(2009);Jose M. Calderón, The OECDTransferPricingGuidelines asaSourceofTaxLaw: Is GlobalizationReachingtheTaxLaw?,35INTERTAX 4 (2007);Alberto Vega, InternationalGovernance Through SoftLaw: TheCase oftheOECD TransferPricingGuidelines (TransState,WorkingPaperNo. 163, 2012),http://hdl.handle.net/11858/00-001M-0000-000E-78E6-3.

17.See REUVEN S.AVI-YONAH,INTERNATIONAL TAXAS INTERNATIONAL LAW: AN ANALYSIS OF THE INTERNATIONAL TAX REGIME (2007).

18.Seegenerally Brauner, supra note12.

19.Seesupra text accompanyingnote6.

20.See YarivBrauner, WhattheBEPS?,16 FLA.TAX REV.55(2014).

quicklyonthisinsightandenhancecoordinationoftheirtaxpoliciessince,atitscore,theinternationaltaxregimeisdesigned toenhancecompetition,notcooperationamong taxjurisdictions.

A.TheCompetition-BasedInternationalTaxRegime

Thecurrent internationaltaxregimeisfirmlyconstructed aroundacompetitionframework.Obviously,itisnotinstitutionalized;21 itincludesno strongsupranational norms,ifany;it doesnothaveamandatorydisputeresolutiondevice;22 and,by design,legalactiontakenpursuanttotheregimeisdecisively unilateralandnotcooperative.23 Thisshouldnotbesurprising sincethe world’sstrongesteconomicpowersandenthusiastsof markettheory,followingtheso-called “WashingtonConsensus,” wereinstrumentalinconstructingtheregime.24 Theinternationaltax regimeevolvedwiththe apparent soleaimtoperfect suchcompetitionratherthancurbit.Unsurprisingly,itremaineda softlegalregimewithnoestablishedinternationalforumorsupranational andevolvingbodyoflaw.Somereputable

21.Theinternationaltax regime remainsnoninstitutionaldespiteattempts toadvocatesuchinstitutionalization. See,e.g.,FrancesM.Horner, DoWeNeed anInternationalTaxOrganization,24TAX NOTES INT’L 179(2001);Brauner, supra note12,at265–91

22.Eventherecommendedmandatory arbitrationprocedureshavenotyet beenincludedintheOECDModel.Arenewedattempttopromotetheideaby theBEPSprojectgarneredsupportofonlytwentydevelopedstates. Seeinfra text accompanyingnote31.

23.Thisistrue even in theapplicationofthetransfer-pricingrules that regulate cross-borderintra-firm transactions. Such transactions alwaysconcern at least two jurisdictions,yet the norm isforeach jurisdiction to regulate the “transferprice” asitaffectstheincomeof “its” taxpayer, regardlessofwhat theotherjurisdictiondoes.Bilateralandmultilateral rulings onthesematters, knownasadvancedpricing agreements,seemnaturalin this context, yetthey arerare.

24.Theterm “WashingtonConsensus” wascoinedbyJohnWilliamsonin a 1989summary oftenkeydevelopment-advice items commonlysharedbythe Washington,D.C.institutions theInternationalMonetaryFund,World Bank,andU.S.TreasuryDepartment.Initsoriginalcontext, it served asadvice toLatinAmerican countriesfollowing the1980s crisis. See JohnWilliamson, WhatWashingtonMeansby PolicyReform, in LATIN AMERICAN READJUSTMENT:HOW MUCH HAS HAPPENED 7(JohnWilliamsoned.,1989).This advice laterbecamethesymbolofwhatisoften calledmarketfundamentalism. Forareflection ontheevolutionof thetermanditssymbolism,see AFTERTHE WASHINGTON CONSENSUS:RESTARTING GROWTH AND REFORM IN LATIN AMERICA (Pedro-PabloKuczynski&JohnWilliamson eds.,2003).

scholarshavedisputedthemere existenceoftheregime,orperhapstheutilityofreferringtoitas such,basedonitscontinuous andconspicuous “softness.”25

Followingthisagenda,theacademicanalysisoftheinternationaltaxregimehasalsobeendominated by theperceivedbinarychoicebetweencompetition andharmonization.26 Sinceno oneseriously wishedforaglobaltaxgovernment,andsurelyno onebelievedthatcountrieswouldagreetoit,harmonizationwas generallyrejectedoutright.27 Consequently,theregimestuckto relianceoncompetition,primarilybasedontheunquestionedbeliefinthe invisibleforcesbehindmarketsandtheirvaguewelfare-maximizationproperties.28 Amoresophisticatedsupportof competitionasabasisfortheinternationaltaxregimedeveloped onpolitical distrustofcooperationattheinternationallevel.29 Suchanapproachviewseventhecurrent,softregimeasaninfluentialcartelthatservicesthemorepowerfulcountriesatthe expenseof lesspowerfulcountries.30 Yet,thecoreofthiscritique isitsdistrustoftheOECD,theclubofrich countriesthathas beenthecaretakeroftheinternationaltaxregime.31 TheOECD

25.H.DavidRosenbloom, TheDavidR.TillinghastLectureInternational TaxArbitrageand the “InternationalTaxSystem, ” 53TAX L.REV.137(1999).

26.See TsillyDagan, The Tax Treaties Myth,32N.Y.U.J. INT’L LAW &POL 939(2000);TsillyDagan, TheCostsofInternationalTaxCooperation, in GLOBALIZATIONANDTHE WELFARE STATE 49(E.Benvenisti,G.Nolte,&D. Barak-Erez eds.,2002);JulieRoin, TaxationWithoutCoordination, 31J. LEGAL STUD 61 (2002);JulieRoin, CompetitionandEvasion:AnotherPerspective on InternationalTaxCompetition,89GEO.L.J.543(2001).

27.See Brauner, supra note12,at259–62.

28.See Roin, TaxationWithoutCoordination, supra note26.

29.TsillyDagan, BRICS:TheoreticalFrameworkandthePotentialofCooperation, in BRICS ANDTHE EMERGENCE OF INTERNATIONAL TAX COORDINATION 15(YarivBrauner&PasqualePistoneeds.,2015).

30.Id.

31.Agoodexampleoftheimportanceofthis distrust is the fateofmandatory arbitration that hasbeenpromotedbytheOECDandtheUnitedNations foroveradecade, yet caughtlittletractionbeyondafewtreatiesamongexclusively richcountries.This remainsthe case despitethesupposedadvantage thatmandatory arbitrationpresentsto developingcountriesthat cannotoutpowerrich countriesin thecurrent treatymutualagreementprocedure (“MAP”).Itisa commonopinionthatdeveloping countriesexpect mandatory arbitrationtoadvantagethe rich countriessince theyexpectappropriatearbitratorstooriginatealmostexclusively fromthedevelopedworld. Therenewed promotionofmandatory arbitrationinBEPShasnotfared much better The implementationcommitmentincludesapproximatelytwentycountriesasof

dominatestheregimethroughitsexclusivepowersoverthe OECDModel,whichpermitsittosettheagendaforalldevelopmentsoftheregime.Yet,morefundamentally,thenormscontainedintheOECDModelarebiasedinfavorofresidencetaxationthatbenefitswealthiercountries,suchastheOECDmemberstates.32 Anyfurtherharmonization,astheclaimgoes, wouldhavetobebasedonthisbias,furtherfixatingthedominanceoftherichcountriesoverallothers.

Criticsofthecompetitionframeworkrespondthatitassures thedominanceoftherichcountriesandtheircontroloverthe internationaltaxregime.33 Thus,furthercompetitionwouldnot giveavoice tothelesspowerfuleconomiesthatdonotcompete onalevelplayingfieldwiththerichcountriesandamongthemselves.Thecompetitionframeworklimitspolicychoicesthat mayassistdevelopingcountriestogrow,develop,andevencollectsufficientrevenuetosustaintheirpolicies.Onlycooperation atsomelevelwouldallowthesecountriestomakefreeandrationalpolicychoices.34 Thisapproachmaybebasedongeneral notionsoffairnessorequity,yetitmayalsobebasedoninterests thatmay be mutualtobothdevelopedanddeveloping(productive)countries,allofwhichsufferfrompoorrevenuecollection.35 Suchrevenuelossmaybefoundininappropriatetaxplanning thatuses non-productive,so-called “taxhaven,” jurisdictions to benefitfewpeopleattheeventualexpenseof manyothers.36 The BEPSprojectreflects a realizationthatmorecoordination,and January 2016, yet, none of themisadevelopingcountry.The non-OECD G20 countriesthatpartnered with theOECD in BEPS have all clearlyabandoned thisroute. See ORG. FOR ECON.CO-OPERATION &DEV. [OECD],MAKING DISPUTE RESOLUTION MECHANISMS MORE EFFECTIVE,ACTION 14-2015FINAL REPORT 41 (2015)[hereinafterACTION 14FINAL REPORT].

32.But see EkkehartReimer,5+7=Odd, APleaforMoreConsistencyBetweenthePEDefinitionandProfitAllocationRules intheOECDModelTax Convention,FLA.TAX REV.(forthcoming 2017)(arguing forexcessiveconcessionsbytheOECDinfavor ofso-calledsourcecountries).

33.See Brauner, supra note12,at307–08.

34.Id. at308.

35.See id.

36. AspredictedbyReuven S. Avi-Yonah.Reuven S. Avi-Yonah, Globalization,TaxCompetition, and theFiscalCrisis oftheWelfareState, 113HARV L. REV.1573(2000).

evensomeharmonization,maybebeneficialtobothdeveloped anddevelopingcountries.37

B.ADisintegrationoftheInternationalTaxRegime?

Whilecrystallizing,severalrecentdevelopmentshaveposed challengestotheinternationaltaxregime, addingtothedifficultiesitfaces.Recentgeopolitical changes havebeen particularlyimportantinthisregard. Thegeneralcriticismofthe OECDanditsdominanceovertheinternationaltaxregime sharpenedassomeofthedevelopingcountriesthatarenotmembersoftheOECDbeganemergingandestablishingbotheconomicandpoliticaldominance.38 Mostnotably,thecountriesof Brazil,Russia,India, ChinaandtheRepublicofSouthAfrica (“BRICS”),ledbyIndiaandChina,gainedstrongpositionsinthe globalmarketandbegandemandingacorrespondingvoicein thepolicymakingprocess.39 TheOECD anticipated theimportanceofcommunicatingwithnon-memberstateslongbefore thesedevelopmentsandlaunchedanobservationprogramfor suchcountries.40 Yet,thepowertoobserveproceedingswasnot sufficientforcountriesthatstartedviewingthemselvesasworld leaders,especiallywhen,formostpurposes,theirparticipation didnotresultinsignificantenoughchanges(subjectively)inthe divisionoftaxbases andothernorms.41 Thedemandformore sourcetaxationconflictedwiththeoppositetrendtoeliminate

37.See OECD, supra note 3.

38.See YarivBrauner&PasqualePistone, Introduction, in BRICS ANDTHE EMERGENCEOF INTERNATIONAL TAX COORDINATION 3–4 (YarivBrauner & PasqualePistoneeds.,2015).

39.Id.

40.Theinitiative,originallynamedtheSpecialCentreforCo-operation withNon-Members,isnowunderthe “GlobalRelations in Taxation” heading. See Global Relationsin Taxation, OECD.ORG, http://www.oecd.org/tax/taxglobal/(last visitedJune 19,2016).

41.Forexample,Chinalostthebattle overlocational savings, yetcontinued to pursue it under domestic laws despite itsrejectionbytheBEPSproject. See, e.g.,RyanFinley, PanelExpects Increased Transfer Pricing ComplianceBurdens, 80 TAX NOTES INT’L 488,489(2015).India couldnotachievefinalization or any recommendationsregarding action item1andthe taxationofthedigital economy. See ORG. FOR ECON.CO-OPERATION &DEV. [OECD],ADDRESSINGTHE TAX CHALLENGESOFTHE DIGITAL ECONOMY,ACTION 1- 2015FINAL REPORT (2015)[hereinafterACTION 1FINAL REPORT].

sourcetaxationinfavorofresidence-basedtaxationthathadalwaysbeenthehallmark ofOECDtaxpolicyandaconsequence ofthecompetitionframework oftheinternationaltaxregime.42 Somecountrieshaveunilaterallydeparted fromsomeofthe prioruniversalnormsoftheinternationaltaxregimetoassert theirtaxjurisdictionandviewsofappropriatedivisionof taxbases.43

Atthesametime,pasteconomic powershavelostsome or,in otherinstances,mostoftheir power(inthecaseoftheUnited Statesitlost itssuperpower).Today,eventheUnitedStatescannotdominateanyinternationaltaxpolicydiscussionalone.44 Globalizationandthe2008financialcrisiscausedathirstfor revenueamongeventhemost developedcountries,whichthen lackedthecapacitytoregeneratetheircollectionpowersindependently.45

Thefirstresponsetothiscrisisfocusedoncollectionandthe mosttraditionaland conservativetaxtreatymeasureofinformationexchange.46 Thethoughtwasthatenhancedand inexpensiveexchangeofinformation,coupledwiththedestructionof

42.See,e.g.,Reimer, supra note32.

43.Finley, supra note41,at488.Another exampleincludesthe renewed collectiondemandofVodafone by IndiafollowingthelitigationregardingIndia’sexceptionaltaxation(fromOECD norms)ofindirectsharetransfers. Stephanie Soong Johnston, IndiaRenews $2.1BillionVodafoneTaxDemand, 81TAX NOTES INT’L 650,651(2016)

44.ExamplesforthislossofpowercouldbetheinabilityoftheUnited Statestohave theBEPSproject recommendtheinclusionofcontrolledforeign corporation(“CFC”)measuresunderactionitem3. See ORG. FOR ECON.COOPERATION &DEV [OECD],DESIGNING EFFECTIVE CONTROLLED FOREIGN COMPANY RULES,ACTION 3- 2015FINAL REPORT (2015)[hereinafterACTION 3 FINAL REPORT];Ryan Finley, TheYear in BEPS:Phase1Completed, 80TAX NOTES INT’L 983,985 (2015).Anothersuch exampleistheverylimitedresponse tothemost importantitem ontheU.S.listin BEPS: mandatory arbitration See ACTION 14FINAL REPORT, supra note31,at41.

45.Hence,theBEPSproject.Theonepossibleexceptiontothismay bethe U.S.ability toimplementitsdomestic ForeignAccountTaxComplianceAct (FATCA)legislationsandessentially forcetherestoftheworldtocooperate withitscollectionefforts.Yet,thismay bea minor exceptionif onenotesthat FATCA may beconvenient forforeign tax authoritiesintheirownpursuitof aggressivecollection andwouldlay the politicalblameatthefeetoftheUnited States.

46.MODEL TAX CONVENTIONON INCOMEANDON CAPITAL art.26(ORG. FOR ECON.CO-OPERATION &DEV.2010)[hereinafterOECDMODEL CONVENTION 2010].

banksecrecy,wouldeliminatemost abusivetaxplanningand restorethepoweroftheoldinternationaltaxregime.Yet,the natureoftheglobalmarketofinformationandcontemporarytax planningpreventedricheconomiesfromimplementingthissolutionalone.ThepowereffectivelyshiftedinparttotheGroup ofTwenty(G20)organization,whichincludessomeOECDmembersaswellasemergingeconomiesthatdonotbelongtothe OECDbuthaveanequalvoiceto thatofthetraditionalpowers intheG20.47 Theoutcomewasthe “GlobalForum.”48 TheBEPS projectwasthenextstepwhereintheG20took initiative,even ifincooperationwiththeOECD,followingthepatternofthe GlobalForum.49

Thesame phenomena resultedin notonlypoliticalchallenges totheinternationaltaxregimebutalsodirectchallengestothe efficacyof thenorms. “New” economictrends,including theascentofelectroniccommerce,intangibles,sophisticatedfinancial instrumentsinglobalcapitalmarkets,andmultinationalenterprises(“MNEs”)facilitatedbyglobalization,havealldumbfoundedtheprevailingnormsthathavebeenestablishedfora simpler, “smaller,” brick-and-mortarworld.Formanyofthese transactions,thenormsbecameapparently inadequate,asdid thestructuralfoundationsoftheinternationaltaxregimes,such asthedichotomybetweensourceandresidence.Thesechallengestothenormsoftheregime havetestedtheefficacyoftax treatiesandtheirfutureasthefoundationoftheregime.They alsofurtherexposedthealreadyexistingandperhapsinherent weaknessesoftaxtreaties.

47.See MindyHerzfeld, News Analysis:WhyBEPSisJusttheBeginning, 79TAX NOTES INT’L 983(2015).

48.GlobalForumonTransparency andExchangeofInformationforTax Purposes,OECD.ORG, http://www.oecd.org/tax/transparency/(lastvisitedMar. 1,2016)[hereinafter GlobalForumonTransparency]. Note,however,thatin practice, theforum isheavily influencedbytherichestcountriesandrelieson theOECDpoliticallyandadministratively.

49.Somehaveeven identifiedapattern intheG20’sactionsontax See, e g., ItaiGrinberg, TheNewInternationalTaxDiplomacy, 104GEO L.J. 1137 (2016).Thispattern istootentativeandmisleading since,asexplained here, theleading OECDeconomiesandthe OECDitself have beentheprimarywinnersfromBEPSinthiscontext.

C.TheNatureandPurposeofTaxTreaties

In construction,shocksandcrisesoftenexposecracksinthe foundation.Thisisclearlytruefortax treatiesinrecenttimes. Thisisalsoagoodoccasion for an inquiryintothenatureand purposeoftaxtreaties.Suchan inquiryhasrarelybeenmade sincetaxtreatiesare viewedasinstrumentaldevicesforthedivisionoftaxbasesamongcountries.Areferencetothe “avoidanceofdoubletaxation” isoftenmadeasanimmediateresponse toanyquestionabout thepurposeoftaxtreaties.Thisreference hasastrongbacking inthehistoryoftaxtreatiesdeveloped amongneighboringjurisdictionstoresolveborder-relatedtaxjurisdictionconflicts.50 Furthermore,theoriginsofthetaxtreaty project foundintheworkofthe1920sLeagueofNations can alsobetracedtothedesiretofacilitatecross-bordertrade and investment.51 Thebasicideawassimplytoeliminatetaxbarriersthatresultfromconflicting claims,mainlythosebasedon sourceon theonehandandresidenceontheotherhand.The actualdivisionofthetaxbasedidnot(andstilldoesnot)follow anyrecognizablepolicy principle.Itwasconstructed froma patchworkofnormsthatfollowedefficiency-basedobservations, perceivedfairness,andotherlegitimacy-basedconstructs.Thus, asourcecountrycouldonlytaxincomegeneratedbyaforeign personwithsignificantpresencewithinitsjurisdiction,yetitreceivedessentiallyafreepasstotaxincomerelatedtorealpropertylocatedwithinits jurisdiction.Appropriatehereisanobservationby SecretaryoftheTreasury AndrewMellon,quotedin theinfluentialVogel bookontaxtreaties: “[T]heconcessionsare morelikelytobebasedonbargainingthanonsoundprinciples oftaxation.”52

50.See Sunita Jogarajan, Stamp,Seligman andthe Drafting ofthe1923 Experts’ ReportonDouble Taxation,5WORLD TAX J.368 (2013)(exposing the historyoftheLeagueofNationstaxtreatyworkandthecentralityofdouble taxationtothiswork); seealso A. J. VANDEN TEMPEL,RELIEFFROM DOUBLE TAXATION (1967)(extending theanalysisto thetakeover of thetaxtreatyprojectfromtheLeagueofNationsbytheOECD);RichardJ.Vann, WritingTax TreatyHistory 12–13 (Sydney LawSch. Legal StudiesResearch PaperSeries, PaperNo.10/19,2011), http://ssrn.com/abstract=1788603.

51.See Jogarajan, supra note50; ReportonDoubleTaxationSubmittedto theFinancialCommittee by Professors Bruins,Einaudi,Seligman,and SirJosiahStamp,League ofNationsDoc. E.F.S.73.F.19(1923).

52.KLAUS VOGEL,KLAUS VOGELON DOUBLE TAXATION CONVENTIONS:A COMMENTARYTOTHE OECD, UN, AND USMODEL CONVENTIONSFORTHE

Thecommitmenttoeliminatedoubletaxationitself,however, islimited.First,thereiscontroversyoverwhat constitutes doubletaxation.53 Thismaynotbeimportantinmostcasesoftax treatyinterpretationsincetreatyprovisionsdonotincludeadirectreference tothisconcept.Rather,theyreferenceaninstrumentalrulewith,perhaps,theeffectofdoubletaxelimination. Second,treatiesgenerallyeliminatejuridicalratherthaneconomicdoubletaxation(i.e.,theyareconcernedwiththetechnicalratherthantheactualincidenceoftaxation54).Finally, treatiesexplicitlydonoteliminatealldoubletaxation.Thereare varioussituationsthattreatiescannotresolveandthesesituationsare simplyleft unresolved,leavingtaxauthoritiestoaddressthemeventually,ornot.55

Animportantissueconcernsmultipartytransactionsthatextendbeyondtwojurisdictionsthatarepartiestoatax treaty(oftencalled “triangularsituations”).Mostoftheseremainbeyond thereachofcurrent treatylawbecausetheyarebilateral.56 Whilethelimitedscopeoftaxtreatiesmaybeviewedasoneof theirstrengths,becausetheyaddressonlyresolvablecases wherepossible,inrecentyearsithasbecomeamoresignificant limitation.GlobalizationandtheriseofMNEs naturallymake mostglobaltrademultilateralratherthanbilateral,andthebilateralnatureoftaxtreatieshasbecomemoreofaliabilitythan anadvantage asaresult.

Asimilardevelopmentchallengesasecond,andperhaps,originallyinferiorpurposeoftaxtreaties,phrasedasthecombatof fiscalevasion.Thispurposewassatisfiedprimarilybyaprovisionthatlooselyobligatedthepartiestoexchangerelevanttax informationamongthem.57 Laterdevelopments addedaweak

AVOIDANCEOF DOUBLE TAXATION ON INCOMEAND CAPITAL, WITH PARTICULAR REFERENCE TO GERMAN TREATY PRACTICE 4(3d.ed.1997).

53.Id.

54.U.N.Comm.ofExpertsonInt’lCooperationinTaxMatters, Noteonthe Revisionof theManualforNegotiationofBilateralTaxTreaties U.N.Doc. E/C.18/2011/CRP.11(Oct.19,2011),http://www.un.org/esa/ffd/tax/seventhsession/CRP11_Introduction_2011.pdf.

55.ORG. FOR ECON.CO-OPERATION &DEV. [OECD],COMMENTARIESONTHE ARTICLESOFTHE MODEL TAX CONVENTION arts.23A, 23B,para. 32(2010) [hereinafterOECD COMMENTARIES].

56.See EMILY FETT,TRIANGULAR CASES:THE APPLICATIONOF BILATERAL INCOME TAX TREATIES IN MULTILATERAL SITUATIONS (2014).

57.OECDMODEL CONVENTION 2010, supra note 46,art.26.

commitmenttoassistinthecollectionof taxesandaloose matchingofpoliciesamongthe parties.58 Withtheturnofthe millennium, thetermdouble non-taxationwascoinedto strengthenthiscorollaryfunctionoftaxtreaties.59 Accepting thattheinternational taxregimewishesto followa singletax principle,partiespermittedaregimebasedonageneralsentiment:toavoidoverburdeningcross-borderinvestorsandcreate incentivesbasedontaxlawtoinvestabroad.60 Thisprincipleappealsnot onlytothecommonsenseandequitableviewofthe regimebutalsotosupportersofthecompetition-based frameworksincesuchaprinciplemay also be readasanefficiencyenhancing,neutrality-promotingprinciple.Theproblemisthe languageandtheperceivedmetaphorsincedoubletaxationand doublenon-taxationnaturallysoundlikeparallel,mirrorproblems,especiallywhenbasedonasingleprinciple.Yet,pragmatically,theyrepresent verydifferentchallengesanddifficultiesin implementation.61 Governmentswereattractedbythisarticulation,identifyingnewopportunitiestousetaxtreatiestosupport theircollectionandenforcement efforts.Consequently,the OECDidentifiedthis as anopportunitytoenhanceitsinfluence

58.Onesuch example is the claw-backexemptionwithprogression,where one countryimposesitstax ratesbased not onlyontheincomeassociatedwith itsjurisdictionbut ratherbasedonthe worldwideincomeofthetaxpayer,for example,thecalculationofwhichrequires informationavailabletypicallyonly throughcooperationwith its treaty partnerorpartners

59.Themainmilestoneinthelaunchofdoublenon-taxation asa corollary todoubletaxationisprobably itschoice asamainissueinthe2004InternationalFiscalAssociation congressinVienna. See Int’lFiscal Assoc., 89a CAHIERSDE DROIT FISCAL INTERNATIONAL (2004).

60.Forareview of the evolutionofthe single taxprinciple,seeReuvenS. Avi-Yonah, WhoInventedtheSingle Tax Principle?AnEssay on the History of USTreatyPolicy (Univ.ofMich.Law Sch.,Pub Law& LegalTheory Research PaperSeries,PaperNo.318,2014),http://ssrn.com/abstract=2226309.Forthe originalexpositionofthesingletaxprincipleasafundamentalpillarofthe international taxregime,seeReuvenS.Avi-Yonah, InternationalTaxationof ElectronicCommerce,52TAX L.REV 507(1997).

61.Formore information, seemy critiqueofBEPSactionitem2(Hybrid Mismatches). See YarivBrauner, TheBad, theWorse,andtheUgly, in BASE EROSION AND PROFIT SHIFTING (BEPS):IMPACTFOR OECD AND EUTAX POLICY (RobertDanoned.,2016).

ontheinternationaltaxregime. In away,thewhole BEPSprojectisaboutdoublenon-taxationanditsintroductionintothe internationaltaxregime.62

Anadditionalviewoftaxtreatiesemphasizestheirroleas comitymechanisms,similarto membershipcardsinaclubof properjurisdictions.63 Themereexistenceof a taxtreatyseems tosendasignalofnormalcyand relativesafetyforinvestment. Taxtreatiesalsoinstitutionalizelinesofcommunicationbetweentaxauthoritiesonbothbilateralandmultilateral levels, andinsomecaseslegitimizesuchdiscoursein fiscalratherthan diplomaticchannels.Finally,taxtreatiespresentopportunities toamendtaxlawsin a mannerthatavoidsdomesticpolitics.Tax treatiesprovideflexibilityfortheexecutivebranchandaddan additionallayerofchecksandbalances,albeitwithademocratic deficit.

Thisviewacceptstheimperfectionsoftaxtreatiesonboth fronts(doubletaxationanddoublenon-taxation).Itfurtheracceptsthatsuchgoalsmaybemet withouttaxtreatiesinloose coordinationarrangementsorevenonaunilateralbasis.64 Such aviewbetterexplains theroleoftax treatiesintheconstruction oftheinternationaltaxregimethanthatoftheirtraditionaland allegedlyinstrumentalpurposes.Additionally,itaccountsfor thecontinuousdesireofcountriestoenterintotaxtreatieswithoutcarefulaccountingfortheirstraightforwardcostsandbenefits.65

62.Amoredetaileddiscussionofthisconceptwillbecoveredinthenext section.

63.Brauner, supra note12,at 292.

64.See Dagan, TaxTreatiesMyth, supra note26.

65.Notethattheeconomicliteratureontaxtreatiesis dividedregarding theirdesirabilityasinvestmentenhancers See BruceA.Blonigen&RonaldB. Davies, TheEffectsofBilateral TaxTreaties onU S FDIActivity (Univ ofOr., Econ.WorkingPaperNo.2001-14,2001), http://ssrn.com/abstract=445980; RonaldB.Davies, TaxTreaties,Renegotiations,andForeignDirectInvestment (Univ.ofOr.,Econ.Working PaperNo.2003-14,2001),http://ssrn.com/abstract=436502;Peter Egger, The Impact of EndogenousTaxTreaties on ForeignDirect Investment: Theory andEvidence,39CAN.J.ECON.901(2006);Eric Neumayer, DoDoubleTaxationTreaties IncreaseForeign DirectInvestmentto DevelopingCountries?,43J. DEV.STUD.1495(2007).

II. BEPS

Withmuchfanfare,theOECDannouncedthelaunchofthe BEPSprojectin2013.66 Itsexcitement,aswellastheoptimism ofmoststakeholders,hassincewaned,67 yettheintensityofthe workontheprojectanditsimpacthavenot.Internationaltax policyisstillashot a topicin2016asitwasin2012or2013. Thismay be surprisingforsome since,atits core,BEPSisapoliticalproject.G20politiciansinitiatedtheprojectinresponseto apublicoutrageoversomelarge corporations’ useoftax-planningschemes,which subsequentlywasfueledbythemedia’sinterestandexposureoftheseschemes.68 Interestingly,theOECD waschargedwithfixing theproblem,andfixingitquickly.69 This isthesameOECD organizationthathadbeenthecaretakerof theinternationaltaxregimeduringthelasthalfcenturyand,in someways,maybeviewedasresponsiblefortheproblemitwas chargedwithfixing.

Yet,fortheOECD,thispresentedanopportunityintheform ofpoliticalsupportforreformthathadalwaysbeendifficultto garner.Theopportunitywas,however,alsofraughtwithchallenges.First,thepoliticalchargewasnotaccompaniedbyclear guidanceaboutthegoalsandpurposesoftheproject.Ontheone hand,itwasclearthat schemesof thesortsexposedbythemedia ashavingtheeffectofBEPSshouldhavebeenaddressed.70 On theotherhand,amorecomprehensivereformwouldhavebeen requiredtopreventdifferentschemesfromreplacingthem.71

66.See OECD, supra note3.TheG20Leaders DeclarationofSeptember 2013providedtheexpandedpoliticalmandateenjoyedbytheOECD.Group of Twenty[G-20], St.PetersburgSummit Leaders’ Declaration (Sept.5–6,2013), https://www.g20.org.tr/wp-content/uploads/2014/12/Saint_Petersburg_Declaration_ENG.pdf.Themandate followedtheLosCabos declarationlaunching theproject. See Group ofTwenty[G-20], LosCabos SummitLeaders’ Declaration ¶48(June18–192012),https://g20.org.tr/wp-content/uploads/2014/12/G20_Leaders_Declaration_Final_Los_Cabos_0.pdf.

67.Take,forexample,theUnitedStates. See LeeA.Sheppard, NewsAnalysis:BEPSProgressReport,142TAX NOTES 1154,1154 (2014)(“Remember, BEPSisaEuropeanproject. ItisEU governmentsbeatingup on U.S. multinationals .... ”);MindyHerzfeld, News Analysis:TheU.S. Treasury andthe BEPSMess, 78TAX NOTES INT’L 1067(2015).

68.Seesupra text accompanyingnote6.

69.LosCabos SummitLeaders’ Declaration, supra note66,¶48.

70.Actionitems 2, 6,and8–10 maybe viewedasfocusing onthesetransactions. See OECD,ACTION PLANON BASE EROSION AND PROFIT SHIFTING, supra note5,at15–20.

71.Thus,actionitems3,6,8–10, 13,and15,inparticular. Id. at16–24.

Suchreformwouldhavebeennecessaryregardlessof BEPSdue tootherimminentneeds,suchastheascentofthedigitaleconomy,theineffectivenessofthetransfer-pricingrules,andthe riseofemergingeconomies.

Second,theOECDtaxwork,especiallythemaintenanceofthe OECDModel,positioned theorganizationastheabsolute leader orcaretakeroftheinternational taxregime.Yet,such maintenancerequirespoliticalwillthatisoftendeficienttoconstantly reformandadaptthemodeltothe changingcircumstances,such asglobalizationandcrises.Thepoliticalwillgranted in the BEPS contextpresentedanopportunitytopromotereformthat wouldhavebeenotherwisedifficult.Atthesametime,theleadingOECDcountrieshadall beenstrugglingwitheconomiccrises anddifficultiestocollectmuchneededrevenue.Consequently, BEPS providedtheOECD withbothanopportunityto strengthenitspositionbutalsoachallenge to ensurerevenue collectionbytheworld’srichesteconomies.

Third,the timingofBEPS,perhapsnotaccidentally,coincided withdramaticgeopoliticalshiftsof powerdirectlyaffecting the OECDingeneralanditspositionasaleaderinthedesignof internationaltaxpolicyinparticular.Theriseofthelarge emergingeconomies,mostnotablyBRICS,causedthese countriestodemandavoiceinthepolicymakingprocess(including taxpolicy).This,ofcourse,isnotnew:theOECDhadgranted someofthesecountries,mostnotablyChinaandIndia,theright toparticipateasobserversinits taxpolicy-makingmeetings.72 Yet,intheBEPScontext, BRICS countrieshaveasimilarstatus asleadingOECDmembersbecausetheBRICSareequalmembersintheG20,whichincludessomebutnotallOECDmembers.Thisisanewandlikelysourceofcontention,especiallyon mattersthat consistentlydivide developedanddevelopingcountries.WhatisclearisthatsourcejurisdictionsshouldbenefitunderBEPSfromanincreasedshareoftaxbases,yettheextentof thebenefitandhowtofittheshiftintoacoherentreformofthe internationaltaxregimeremainsfarfromclear.

Againstthis complexbackground,theOECD devisedadiverse actionplanwitha(nowwell-known)listof fifteenspecificaction

72.ForacompletelistofOECDmembershipandaffiliations,see Members andPartners,OECD.ORG,http://www.oecd.org/about/membersandpartners/ (last visited June 9,2016)(listingnationswithOECDmembership).

items.

73 Theplanisnotcohesive,yet,togetherwiththeoriginal OECD BEPS report,onecouldidentifythreebasicinsightsit provides.74 Thefirst,andmostimportantinsightforthepurposesofthisarticle,isthatinternationalcoordinationoftaxpoliciesisaconditionfor thesuccessofanysubstantialreform;and, therefore, unilateralaction,regardlessofits substance,cannot succeedbydefinition.Thisinsightstandsinstarkcontrasttothe mostfundamentalbasisofourcurrentcompetition-basedinternationaltaxregime.Itisclearthatsuchdesiredcoordination hastoincludenon-OECDcountries,whichwouldatleastchallengethe dominanceofthisorganizationovertheinternational taxregime.

AsecondinsightoftheBEPSprojectrelatestotheimportance of comprehensiveandholisticreformratherthan adhoc,partial reformsthathavebeentypicaloftheregime.Note thatthe OECDcouldnotgenerallybeblamedforpastpracticesinthis contextsincethiswasclearlyaconsequenceofpoliticalwillbeyonditscontrol.Nonetheless,despitetherhetoric,OECD personnelhavebluntlyignoredthisinsightthroughouttheproject, inbothpublicstatementsandin theirreports,preferring “ pragmatic” andspecific “solutions” andavoidingprinciples.75

AthirdinsightoftheBEPS projectisthat therearecertain challengesthathavebeenunderestimatedanddealtwithintraditionalmeans,usuallybyanalogytoold-economyissues.76 Itis clearthatmanyofthesechallengesrequireadifferent approach thatincludesinnovation.The mostdramaticsignalaboutthis insightisthewillingnesstoslaughtertheholiestofcowsandgo “beyond” arm ’slengthintransfer-pricingpractices.77 Inreality, BEPShasfailedtoinnovatebeyondthenewtransfer-pricingreportingrulesand,perhaps,inthe initiativetoestablish a multilateralinstrument.

73.Id.

74.See YarivBrauner, BEPS:AnInterimEvaluation,6WORLD TAX J.1,12 (2014).

75.See,e g., PascalSaint-Amans, TheOECDWorkon BaseErosion and ProfitShifting,YOUTUBE (Apr.16,2013), https://www.youtube.com/watch?v=b9VhFGU5mvI(discussingtheCentrefor Tax PolicyandAdministrationandtheOECD’sworkonBEPS).

76.See,e g.,ORG FOR ECON.CO-OPERATION &DEV.[OECD],ARETHE CURRENT TREATY RULESFOR TAXING BUSINESS PROFITS APPROPRIATEFOR ECOMMERCE?18 (2004).

77.See OECD, supra note3,at45.

InterimanalysesoftheBEPSprojectdeterminedthatithas failedtoadheretoitsbasicinsights.78 Inparticular,treaty-relatedissuessufferedalackofprogress.Thisarticlenextengages inaconcise,finalreportontheoutcomesofBEPS,astheproject windsdown,inordertoassesstheproject’simpactonthefuture of taxtreaties.

A.AConcise(andAlmost)FinalReportontheBEPS Action Plan

Thissectionbrieflyreviewsthegoalsofeachoftheplan’ sactionitemscomparedwiththeirachievements.Oneshouldrealizethatmostactionitemsrequireadditionalworkbeforethey canbeimplemented,ifatall;othersresulted in nooperative recommendations.

1.ActionItem1:AddresstheTaxChallengesoftheDigital Economy

Actionitem1required areport discussingthechallenges posedbythedigitaleconomytothecurrentinternationaltaxregime,whichwasneverdesignedforit.79 Theregimefailedto adapttotechnological progressandtotheascentofintangibles, asitmerelytweakedtherules80 inanapparently unsatisfactorilymannertofitthesedevelopments.81 TheBEPScontextwas obvioussince MNEs,whoseuseoftax-planningschemestriggeredthelaunchoftheBEPSproject,allhaveheavilyreliedon

78.See Brauner, supra note74,at38;Sheppard, supra note67.

79.See,e g., Chang HeeLee, ImpactofE-CommerceonAllocationofTax Revenue BetweenDevelopedandDeveloping Countries,4 J.KOREAN L., no. 1, 2004,at 19, 21(“[D]igitaltechnologycompletelydestroystheeconomicandlegalbasisfortheexistingrulesofinternationaltaxation,implyingthenecessity ofa completeoverhaul. . .. ”).

80.See,e.g.,OECD, supra note76,at54;ORG. FOR ECON.CO-OPERATION & DEV.[OECD],E-COMMERCE:TRANSFER PRICINGAND BUSINESS PROFITS TAXATION 113(2005).Themost significantoutcomesofthiswork were the changes to Article 5 in theOECDCommentary onthe ModelTaxConvention, resulting intheadditionof paragraphs42.1–42.10.OECDCOMMENTARIES, supra note55,art.5,para. 42.1–42.10.

81.ThisisevidencedbytheOECDidentifying the “[a]pplicationoftreaty conceptstoprofitsderivedfromthedeliveryofdigitalgoodsandservices” asa keypressure areathatmustbeaddressedbytheBEPSproject,laterreflected inactionitem1. See OECD, supra note3,at47.

intangiblesinexploiting thetax advantagesofanimperfectly regulated digitaleconomy.82

Thegoalofthisitemwasmodest:thegenerationofareport. Infact,theOECDquicklyunderstoodthatmorethanthatwas required.Consequently,theOECDfocusedonafewreasonable solutions forthemostimportantissuesatstake.Thefinalaction item1reportacknowledgestheneedforpost-BEPSmonitoring andseemstostatethatthedigitaleconomytaskforcewillcontinuetoexistforimplementationandmonitoringpurposes.83 It isunclear,however,whethermeaningfulactionwillbe takenon anyoftheissuesdiscussed.Actionwastakenregardingconsumptiontaxes,andaplanfor implementationisinplay,84 yet nooperativestepsareplannedintheincometaxarea.

Thefinalreportmentionsthreepossibleincometaxmeasures availableforcountriestoadopt,yetitdoes notrecommend(nor doesitstrictlyoppose)them:(i)nexus-basedtaxation,85 (ii)a withholdingtaxondigitaltransactions,86 and(iii)anequalizationlevy.Thereportasserts thatotherBEPSmeasures should amelioratethepressurecreated by thedigitaleconomy on tax enforcement, renderingspecialmeasuresunnecessary.The OECD failed,however,toexplain howthatwouldoccurorwhich operativenormswouldsogovern.Noaccountabilityormonitoringmeasureswereprovidedordiscussed.

82.Seesupra text accompanyingnote6.

83. Yet,nofinal recommendationshave been furnished andnopractical actionhasbeentakentoactually establish a follow-upforuminthe samemanner already doneregardingotheritems,such astheconsumption taxaspects of actionitems 1, 14,and15. See ACTION 1FINAL REPORT, supra note41,at13; ACTION 14FINAL REPORT, supra note 31, at37–41;ORG. FOR ECON.COOPERATION &DEV. [OECD],DEVELOPINGA MULTILATERAL INSTRUMENTTO MODIFY BILATERAL TAX TREATIES,ACTION 15-2015FINAL REPORT (2015)[hereinafterACTION 15FINAL REPORT].

84.ConsumptiontaximplicationsofBEPSarebeyondthescopeofthisarticle.

85.PeterHongler&PasqualePistone, BlueprintsforaNewPENexus to TaxBusiness Incomeinthe EraoftheDigital Economy 2(Int’l BureauofFiscal Documentation, Working PaperNo.20,2015),ssrn.com/abstract=2586196.

86.See YarivBrauner& Andres BaezMoreno, WithholdingTaxes in the ServiceofBEPSAction 1: AddresstheTaxChallengesofthe DigitalEconomy (WUInt’lTaxationResearch, PaperNo.2015-14, 2015), http://ssrn.com/abstract=2591830; seealso RichardDoernberg, ElectronicCommerceandInternationalTaxSharing,16TAX NOTES INT’L 1013 (1998).

ThisisaveryconservativemovebytheOECD.Itclearlyignoresthenecessityofinnovationthatisthethirdinsightof BEPS.It says: “Yes,weacknowledgeourfailuretodate, but, trustus,nowwe arereallygoing to getitright.” Realistically, theOECDprobablyanticipatedthelackofprogressonthematterdueto thevowof BEPSforconsensus.In thecaseof thedigitaleconomy,consensusmeantstagnation.

Yet,inactionmightbeundesirableforthestabilityoftheinternationaltaxregime,evenwhendisagreementsrundeep. SeveralcountriesdonottrusttheOECDonthismatter.Thesecountrieshavealreadyenactedavarietyofunilateralmeasures.87 Thismayleaveothercountrieswithlittlechoicebuttofollow. Theadoptionofthesemeasures,again,willbeuncoordinated andcontrary tothefirst insightofBEPS.ThelackofcommitmenttosolvingtheissuesthroughtheOECDwouldthenmake mattersworse,notbetter.ItisofcoursepossiblethatsomecountrieswouldcoordinateanewsetofstandardrulesforthetaxationofthedigitaleconomyoutsideoftheOECD.Thiswouldbe consistentwith BEPS,yetsuccessinsuchactionwouldbeatall orderwithouttheinfrastructureoftheBEPSprojectin place, andrealistically,onecannotseeanyindicationthatthatislikely to happen.Defensive,unilateral actionbasedonroughjustice andvague guidancetotaxpayersismuchmorelikelytooccurin theshort-term.

Theimpactofthisactionitemontaxtreatieswillbeminiscule. Yet,countriesadoptinganexus-basedsolutionmaychangetheir Article5definitions,effectivelyfollowinga “digitalPE” route.88

87.See,e.g., ItalyConsidersIntroductionof TaxonDigitalActivities, EY (Apr.27,2015),http://www.ey.com/GL/en/Services/Tax/InternationalTax/Alert Italy-considers-introduction-of-tax-on-digital-activities; TheLatest onBEPS, EY (Apr.27,2015),http://www.ey.com/Publication/vwLUAssets/Alert:_The_Latest_on_BEPS__27_April_2015/$FILE/2015G_CM5405_The%20Latest%20on%20BEPS%20%2027%20April%202015.pdf.

88.PE hasbecometheuniversal norm fortaxationofbusinessincome earnedbyforeigntaxpayersinhostcountries.Thenormisthatonly permanent businessactivitiesinterms ofbothplaceandtimemaybetaxed bysuch host (or “ source ”)countries. Suchpermanence mustbemanifested by both peopleonthegroundandaphysicalelementsuchasbricks,walls,etc.Thisrule is viewedasanachronisticinthedigitalagesinceverysignificant business maybedone(inthecolloquialsense)withouthavingtheabovementionedphys-

Countriesrefusingsuchsolutionswillhavetodealwiththe eventualdoubletaxationclaimsatthemutualagreementprocedureleveland,perhaps,claimsof treatyoverridesaswell. The challengeofthedigitaleconomywillnotsimplygoaway.The failureofBEPStoachieveprogress inthiscontextmadethings worseforallstakeholders.

2.ActionItem2:NeutralizetheEffectsofHybridMismatchArrangements

Actionitem2addresseshybridmismatcharrangements,the veryessenceofBEPS.Hybridmismatcharrangementsaretaxplanningschemesthatexploitdifferencesbetweenthelawsof thejurisdictionsinvolvedtominimizetaxationinaninappropriatemanner.Whatisinappropriateinthiscontext?Taxpayers cannotbe blamedfororganizingtheiraffairsinmannersthat takeadvantageofmeredifferencesintaxlaws,asthisisthe essenceof alltaxplanning,andevenfurther,someofthesedifferencesareclearlyintentional. Indeed,some ofthesedifferencesarepartoftaxcompetitionthatisatthecoreoftheinternationaltaxregime. Moreover,eventhelittlebitofcoordination providedbytaxtreatiesismanifestlyincomplete.Thereare manyinstancesofdoubletaxationnotresolvedbytaxtreaty normsbecausethecompetingjurisdictionscannotagreeonhow toresolvethem.Certainconflictsofqualificationsandconflicts regardingcorporateresidencearesalientexamples.89

Nonetheless,hybrid mismatchesaredifficulttostomachfor theinternationaltax regimesincetheypresentincomethatone feelsobviouslyshouldbetaxed,butisnot.Itisnottaxed either becauseitis “stateless,”90 itisgeneratedbya hybridentity,orit ischaracterizeddifferentlyindifferentjurisdictions.Onlyadou-

icalelementswithinthehost jurisdiction.ThedigitalPEexpandsthePEconcepttoincludealsosignificantdigitalfootprintin a host countrygrantingit taxingrightsdespitetheabsenceofsignificantphysicalpresenceby foreign taxpayers withinitsjurisdiction. TheBEPSprojectrejectedthe “digitalPE” route. See ACTION 1FINAL REPORT, supra note41; seealso LeeA. Sheppard, NewsAnalysis:OECDBEPSProjectUnlikelytoEndorseDigitalPE,TAX ANALYSTS (Jan.27,2014),http://www.taxanalysts.org/content/oecd-beps-project-unlikely-endorse-digital-pe.

89.Seesupra note46.

90.See EdwardD.Kleinbard, StatelessIncome,11FLA.TAX REV.699 (2011).

blenon-taxationperspectivecouldprovideapracticableframeworkforidentifyingwhatis inappropriateintaxplanningthat relieson mismatches.91

Thefinalreportclearlyidentifiestheproblemcreated by hybridmismatchesasoneofdoublenon-taxation,yetitchoosesto recommendatwo-prongedsolutionthatdoesnotincludeaclear articulationofdoublenon-taxationasafundamentalprinciple oftheinternationaltaxregimeortaxtreaties.Theprincipleof doublenon-taxation,regardlessofitsdesirability,couldatleast guidethefuturedevelopmentofstandardsofapplicationandoperativerulestocombattheundesirableconsequencesofhybrid mismatcharrangements.

Instead,thereportrecommends amendmentstodomesticand modeltreatylaws.92 Thisapproach demonstratesaclearpreferenceforminimizingthescopefor theBEPS projectandrejecting theopportunityitpresentsfora comprehensiveinternational taxreform.Onemayarguethat theOECD hastakena “ pragmatic” approach,yetthiswouldmerelybecamouflagingthepolicychoicetakenbytheOECD onthismatter.Itwouldalsobe a clearretreatfromthe generalobligationoftheOECD tothefundamentalinsightsofBEPS.Theemphasisondomesticantiabuserulesallbuteliminatesthecommitmenttoacollaborative approach,relyingprimarilyon adhoc,unilateralmeasureswith noinnovation,astherecommendationsreplicateworkalready launchedbytheOECDinthepre-BEPSera.93

PartIofthereportincludesasetofspecific recommendations basedondomesticlawchangestocombatpaymentsmadeunder hybridfinancialinstrumentsorbyahybridentityorhybrid mismatchesimportedintoathirdjurisdiction.Theideaherewasto establishasetof “bestpractices” basedonthetheorythatifall countriesfollowsuchpractices,hybridmismatcheswouldnotresultinundesirableoutcomes.Yet, eventhereportitselfseems unconvincedthatthedesiredresultwould occur,and henceit proposesalternative, “defensive” domesticanti-abuserulesthat wouldbeeffectiveincases whererelevantcountriesdonotfollow thefirst-orderrecommendations. TheOECDdidnotexplainwhy

91. See Brauner, supra note61.

92.ORG. FOR ECON.CO-OPERATION &DEV. [OECD],NEUTRALISINGTHE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS,ACTION 2-2015FINAL REPORT (2015)

93.See OECD, supra note 3, AnnexD:CurrentandPast OECDWorkRelatedto BaseErosionandProfitShifting, at83–87.

itexpects thatcountrieswouldignoreself-interest,bestself-assessmentofthedesirablerules,andthepossibilityofdefection byothercountriesinordertofollowitsbest practices.TheprovisionofthedefensiverulesisproofthattheOECDdoesnotbelievethat progresstowardresolvinglack ofcoordinationthat leadstoBEPSandhybridtaxplanningcantrulybemade.One isleftpuzzlinghowthatisdifferentfromthecurrentstateof affairs.

Yet,thecontentoftheseproposedbestpracticesisevenworse thantherefusaltoadmitdefeat.Itlacksanylogicorreasonand doesnotevenrelyonadouble non-taxationframework.The OECDsimplychoseonesetofcountries(generallytheresidencesofthepayors)tomake concessionsoverothers(generally theresidencesofthepayees)inavarietyof specifictax-planning outcomes.TheOECDdecided,withoutanyexplanationoranalysis,theconsequences of thesechoices.Itisallneatlysetinelaboratetables,butnothingisprovided intermsoftherationaleor evenanassessmentof thewinnersorlosersfromtherecommendations.ThesolutionsprovidedbytheOECDaremerelytechnical.Whywouldcountriesfollowtheserecommendationsunlesstheyexpectto “win” accidentally, andeventhen,theirwinningisconditionaluponthe “loser” country’ s decisiontofollow therulesaswellforreasonsunfathomable?Ofcourse,evenarbitrary arrangementscouldworkinawell-coordinated regime whenparticipantsbelievethat,overall,theywouldbenefitfrom such aregime,yetthisisnotthecasehere.Theactionitemdid notestablishoreven fullydiscusssuchacoordinationmechanism.Countriescouldeasilydefectwithessentiallynoconsequences.

Thestubbornreluctancetodealwithprinciplesthathauntthis actionitemmayeventuallybecomethefocusofattention,mismatchesbeingthemost directarticulationofBEPS-styleplanning.TheOECDis attractedtotheappeal oftheso-calledsingle tax principleand,morespecifically,theview of doubletaxation anddoublenon-taxationasparallelormirrorproblems.Yet,as alreadymentioned,theimplementationofthisviewinpractice isproblematic(despitetheOECD approachtoactionitem2beingpragmatic)sincerequiringajurisdictiontoconcedetaxation isverydifferentfromrequiringittotaxwhenitdoesnot wish to.Intheformercase,revenuemaybelost,yetapromiseofmore investmentandabettercompetitivepositionensues.Inthelattersituation,however,thejurisdictiongetssomerevenue,ifany,

inexchangeforaworsecompetitivepositionbecausethecountry hadalreadymadethatassessmentwhenitchosenotto taxin thefirstplace.Theactualrecommendationprimarilyistodeny thedeductionandnottotaxthenon-includedincome,yetthe impactissimilar.Domestically,thischoicecouldbeworsethan reluctantinclusions sinceidenticaltransactions wouldgetadeductionin thepurely domesticsettingbutnotacrossborders, whichismanifestlyinefficient.

PartIIof thereport complementstheseruleswithrequired treatychangestoensurethecompatibilityoftreatieswiththe recommendationsofPartI.Thispartfocusesmainlyon thedifficultyofestablishingcorporateresidence,whichis an unresolvedissuetodate.94 Thesolutionistodropthecurrentproposedgeneralandtie-breakingruleofeffectivemanagement andreplaceitwitha case-by-caseanalysis. Thisisreasonable becausethecurrentrule hadnochanceofimplementationinthe firstplace,yet,toreplaceitwithano-test(case-by-caseanalysis) wouldnotprojectprogress.95 Thelackofasolutionforthisissue signalsaweaknessoftheBEPSproject.Ofcourse,itdoesnot innovate,forinstance,byeliminatingtheneedtodeterminecorporateresidence.Such conservatismis,again, incontrasttothe BEPS insights.

Onecannotignorethecentrality of theUnited States’ checkthe-boxregime96 inthis contextaswellasitseffectiverefusalto discussitsreform.What isatstakehereisarealissuethat not onlyfeatureswellintaxplanninggenerallybutalso figures prominentlyintheactualtransactionsthattriggeredtheBEPS project.Nonetheless, theBEPSprojectchosetoignorethiselephantintheroom.

94. Omri Y. Marian, Jurisdiction toTaxCorporations,54B.C. L.REV.1613 (2013).

95.Ano-test,ultimately,ismoredesirableinterms ofpolicy thanthe currentnorm,yet, in thecontext ofBEPS, onecannotavoidtheconclusion that it didnotpushtheBEPSagenda forward,regardlessofwhatonethinksthepurposeoftheprojectshouldhavebeen.

96.Treas.Reg. § 301.7701-3(asamendedin2016).CTBapparentlycame under significant scrutiny intheBEPS context, yettheUnited States appears adamantonkeeping it. See DavidD. Stewart, BEPSSeenasAreaof BothConsensusandConflict,TAX NOTES TODAY (Sept. 19,2013), http://www.taxnotes.com/tax-notes-today/corporate-taxation/beps-seen-areaboth-consensus-and-conflict/2013/09/19/41796.

Thereportfurtherrecommendsimplementationofthe1999 OECD PartnershipReport97 intheformofamodelconvention provisionandcommentary.The problemhereisthattheOECD’ s partnershipreporthasmadelittleprogressinthefifteenyears sinceitwaspublishedandhasfacedmuchcriticism.TheOECD promisesthatitwillreallyworkonceall ofthecountriesadopt it.Yet,there isnoinnovationoranyothernewargumentsto convinceopponentsandperceived loserstojoinin.Lastly,the actionitem2finalreporttackles potentialconflictsbetweenthe proposed(mostlydomestic)rulesandcurrenttreatiesandgladly assertsthat,iftheOECDrecommendationswereacceptedasis, noconflictsshouldarise.Thispartreadsagainlikeanadvertisingconclusionwithnoprinciplesandnoanalysis

Inconclusion,thisactionitemshouldresultinlittletono impactontaxtreaties.Theremovaloftheunworkabletie-breaking ruleforcorporateresidenceisappropriate,butismerelycosmeticbecauseithadnorealisticchanceofimpactanyway.Some countries,however,maychoosetoincludespecificrulesregardingpartnershipsandhybridentitiesintaxtreaties,perhapsfollowingtheOECD recommendationinitspartnershipreport.It isunlikelythatsuchinclusionwouldbeuniversal,however,becausesomanyofthemismatchissueswouldremainintact.Yet, intreatiesbetweensomelike-minded treatypartners,thiscould bepositivesinceitwould provide moreclarityonthisimportant issue.Thereare no actualsigns, however,thatsuchactioniseffectivelyplannedanywhere.

3.ActionItem3:StrengthenControlledForeignCorporation Rules

Deferralisanimportantfeatureoftaxplanninginmostproductivecountries.Therefore,reformofanti-deferralregimes, suchasthecontrolledforeigncorporation(“CFC”)rules,supposedlymakes sensewithintheBEPSproject.98 Itisnotonlyimportantbutalsorelevantbecausethemostconspicuousfailures

97.See Org.for Econ.Co-operation&Dev.[OECD], TheApplicationofthe OECDModel TaxConvention toPartnerships,ISSUES IN INT’L TAXATION, no.6, Aug. 26, 1999;MICHAEL LANG,THE APPLICATION OF THE OECDMODEL TAX CONVENTION TO PARTNERSHIPS:ACRITICAL ANALYSIS OF THE REPORT PREPARED BYTHE OECDCOMMITTEEON FISCAL AFFAIRS (1999).

98.See ACTION 3FINAL REPORT, supra note44.

oftheUnitedStates’ SubpartFregime99 wereexploitedinthe classicBEPS-initiatingschemes.100 Yet,thesewereratherparticularto U.S.law.CFCrulesaremostlyunilateralmeasures usedbyresidencecountriestoprotecttheirtaxbaseastheyview itwithintheframeworkofthecurrentcompetition-basedinternationaltaxregime. Sourcecountriestoleratethem,solongas theyarelimitedinscope,butonlyaspartofthegeneralrules of thecompetitiongame.Now,theresidencecountries,viaBEPS, wishtogeneralizetheuseofCFCrules,recruitingothercountries(attheexpenseoftheseothercountries) to protecttheirtax basesfornoconsideration.Itisdifficulttounderstandwhythe othercountrieswouldmakeanyefforttoaccommodatethese wishes.

Moreover,thewisdomofthechoicetofocusonCFCregimesis questionable.TheOECDhasnotdonemuchworkinthisarea beyondlegitimizingCFClegislationasnotbeingcontradictory totaxtreatyobligations.101 CFCregimesarea commontitlefor avarietyoflegalconstructsthattaxincomefromforeigninvestmentofresidenttaxpayers.102 Nonetheless,the valueofdeferral isnotmerelythetimevalueofmoneysupposedlygainedbutin ancillaryrulesandpotentialratechangesthatmakedeferralattractivefortaxplanning.103 Thesedifferentmethodshavedifferentgoalsandeffects,104 soitwouldbetrickytodevelopbest practiceshere.Itwouldbeespeciallydifficulttosellsucharegime to countriesnotworriedaboutdeferralbutworriedabout thecost ofenforcingtheCFCruleswithoutBEPS-relatedorotherreasons.

Thereporteffectivelyreadslike reluctantrecommendations forthosewishingtolegislateCFCrules.Itisclearthat the

99.ThisisSubpart FoftheInternalRevenue Code, §§ 951–960,which includestheUnitedStates’ CFC rules.I.R.C. §§ 951–960.

100.Theseschemeswere widelyexposedelsewhere. See supra textaccompanyingnote 6.

101.OECDCOMMENTARIES, supra note55,art.1,para. 23.

102.Forexample,theOECD’sowncomparativestudy. See ORG. FOR ECON. CO-OPERATION &DEV. [OECD],CONTROLLED FOREIGN COMPANY LEGISLATION (1996).For a recent studyofthese regimes,seeInt’lFiscal Assoc.,98aCAHIERS DE DROIT FISCAL INTERNATIONAL (2013).

103.Forfurther explanation, seeDANIEL N.SHAVIRO,FIXING U.S. INTERNATIONAL TAXATION (2014).

104.Seesupra text accompanyingnote6.

OECD doesnotexpect allcountriestofollowtheserecommendations.105 Therearenotaxtreatyimplicationsfortheserecommendations.

4.ActionItem4:LimitBaseErosionviaInterestDeductions andOtherFinancialPayments

Actionitem4isagain an interestingactionitemsinceits focus isquiteclearand acceptableasappropriateforBEPS.Infact,in thefirststagesoftheprojecttheconsensusopinionwasthatthis wouldbethefirstactionitemtogainconsensussince mostofthe variousanti-abuserulesusedbycountriesdidnotrelyonparticularpolicydifferencesorspecificinterestsbutratheronan arbitrarychoiceoutofanotverydiversemenu.Yet,progress hasstalled.Itislikelythatinstitutionalinterestsareatplay heresincethroughouttheprojecttheOECDfailedtofindabest ruleforharmonizationofinterestdeductibilityrules.Instead, theOECD wasbusyprotectingthearm’slengthprincipleandits actionitem2effortthatsignificantlyoverlappedwithaction item4,butwasmoregeneralandthusmorecomplextoresolve withconsensus.

Eventually,however, theOECD cameupwiththerecommendationthatwaspredictedtowinthedayfromthebeginning.106 Itisabestpracticerecommendationtoadoptadomesticrule limitinginterest(andequivalent)deductionsbasedon a fixed ratioofinteresttoapercentageofearningsbeforeinterest, taxes,depreciation,andamortization(“EBITDA”).107 TheOECD recommendsthatthefixedratiobesufficientlylow,between10 percentand30percent.TheOECD,however,alsopermitsavarietyofalternativerules.Thereportfurther recommendsthe

105.Especially not EUmember states, which areboundby EuropeanCourt ofJustice(ECJ)jurisprudencethatsignificantlylimits thepotentialscopeof CFCregimes. See OECD, supra note3,at38.

106.ORG FOR ECON.CO-OPERATION &DEV [OECD],LIMITING BASE EROSION INVOLVING INTEREST DEDUCTIONSAND OTHER FINANCIAL PAYMENTS,ACTION 42015FINAL REPORT (2015)[hereinafterACTION 4FINAL REPORT].

107.EBITDAisa financialaccounting measure typically usedasanapproximationofa company ’soperatingcashflowbasedondata froma corporation’ s incomestatement.Itisrelevantinthecontextofaction item4sinceitisessentially themoneythatthe corporationhasavailableforinterestpayments. NotethatEBITDAisrelevantforlargecorporationswithsignificantassets andpotentialaccountingdistortions;these arethesame corporationsthatthe BEPSproject is targeting.

adoptionofdomesticanti-abuserulesthatpreventcircumventionofthe primaryrule,whateveritmaybe.

Itisnotdifficulttoobservethatconsensus hasnot been reachedhereandtheOECDcannotrallythetroops,evenfora bestpractice singlerecommendation.Muchworkremains,as acknowledgedbythereportitself,soatbestafirststep toward veryloosecoordinationhasbeen taken,mainly intheformofa betterunderstanding of theoptions.Noimpact ontaxtreaties, however,isexpected.

5.ActionItem5:CounteringHarmfulTaxPracticesMoreEffectively,TakingintoAccountTransparencyandSubstance

Oneofthemostnewsworthy actionitems, actionitem5,focusesonso-calledpatentboxesorintellectual propertyregimes. Yetthescopeofthisactionitemiswiderandseeksabetterarticulationandfocustocombatharmfultaxcompetition.108 This isaproperBEPSgoal,asitacknowledgesthatthecurrentcompetitionframeworkhasfailed,andacoordinatedapproach againstinappropriateactorsisrequired.Similartothedilemma presentedbyactionitem2,thedifficultyistoidentifywhatis appropriate andwhat is not.Priorwork,includingthatofthe OECD attemptingto target typesofactors,taxhavens, andspecificbeneficialtaxregimes withinnon-havens,hasfailed.109 Therefore,actionitem5attemptsadifferentandperhapssubstantiveapproach.

Thefinalreportassertsthatcountriessupportanapproach basedonnexusand substantialactivityinacountrytojustify

108.ORG. FOR ECON.CO-OPERATION &DEV. [OECD],COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY,TAKINGINTO ACCOUNT TRANSPARENCYAND SUBSTANCE,ACTION 5- 2015FINAL REPORT (2015)[hereinafterACTION 5FINAL REPORT].

109.See, e g.,ORG FOR ECON.CO-OPERATION &DEV [OECD],HARMFUL TAX COMPETITION:AN EMERGING GLOBAL ISSUE 13 (1998), http://www.oecd.org/tax/transparency/44430243.pdf.The OECDhasevendiscontinuedthemaintenanceofitsHarmfulTaxCompetitionwebsite.For a more optimisticviewofthecampaign, yetonethatincludesafair,and not-sofavorableevaluationofit, seeReuven S. Avi-Yonah, TheOECDHarmful Tax Competition Report:A Tenth AnniversaryRetrospective 1(Univ.ofMich.Law Sch.,Pub.Law&Legal TheoryResearch PaperSeries,Working Paper No.115, 2008), http://ssrn.com/abstract=1194942.

taxjurisdiction.110 Costsincurredserveasaproxyforsubstantialactivityinajurisdiction.Thisisexplainedinthepatentbox context:ifataxpayerincurssignificantresearchanddevelopment(R&D)costsinajurisdiction,sheshouldbeabletoenjoy a preferentialregimethat attempts to incentivizeR&Dinsuchjurisdiction.So,suchapreferentialregimewouldnotbeconsideredharmful.Thisconceptshouldbeaccompaniedwithtransparency,includingtheexchangeofrulinginformation.

Theproposedconcepthasnotbeenrecommendedasarulebut ratherasaframeworkformonitoringandincreasingtransparency,includingapeer-reviewmechanism.This isaformatvery similartothatoftheGlobalForum’sandshouldmaketheG20 comfortableaswell.111 Theproblemisthatitisnotdramatically differentfrompastfailedattemptstoidentifyandeliminate harmfultaxcompetition thathadfollowedsimilarpatterns.112 Substantively,itisbasedonfamiliarconceptsofsubstance, nexus,andexpenditureanditdoesnotaddmuchclarificationto them.Akeyquestionhereiswhethertheinstitutionalprogress wouldnowmakethiseffortsuccessfulwherepasteffortsalong similarpathshavefailed.Itisdifficulttoassessthismatter. Further,recentconsiderationsamongsomeleadingeconomies toadoptratherthaneliminatethesamepatentboxesthatthis actionitemattemptstotargetarediscouragingsigns.113

Thereisnoimpactontaxtreatiesbeyondtheuseoftransparencymechanismssuchasexchangeofinformationprovisions.If translatedintoaneffectiveexchangeoftaxrulings,however, thismodestpartoftheactionplanmayeventuallydevelopinto

110.See ACTION 5FINAL REPORT, supra note108.

111.ForinformationontheGlobalForum,see GlobalForumonTransparency, supra note48.For informationon theG20taxwork, seeHerzfeld, supra note47;Grinberg, supra note 49;ItaiGrinberg &JoostPauwelyn, TheEmergence of a NewInternational Tax Regime: The OECD’ s Package on BaseErosionand ProfitShifting (BEPS),ASIL INSIGHTS (Oct. 28,2015), https://www.asil.org/insights/volume/19/issue/24/emergence-new-international-tax-regime-oecd%E2%80%99s-package-base-erosion-and. 112.Avi-Yonah,supra note109.

113.For example, theproposedbillfortheUnitedStates toadoptan “innovation box.” H. COMM ON WAYS &MEANS,112TH CONG.,INNOVATION PROMOTION ACTOF 2015DISCUSSION DRAFT (Comm.Print2015), http://waysandmeans.house.gov/wp-content/uploads/2015/07/Innovation-Box-2015-BillText.pdf; U K IssuesPatentBoxRules Legislation, WORLDWIDE TAX DAILY (Dec.9,2015),http://www.taxnotes.com/imp/18118686

thesolecoordinationregimedevelopedinthesubstantivepart oftheBEPSactionplan totheextentthatoneviewsexchange ofrulingsassubstantive.Noeffectiveimpact inthecontentof taxtreatiesisexpected.

6.ActionItem6:PreventingtheGrantingofTreatyBenefitsin InappropriateCircumstances

ThispeculiaractionitemmakesthestatementthatBEPS,or abusivetaxplanning,maybeaffectedthrough taxtreaties.114 Thisisacontroversialstatementsincetreatiesoperateatthe substantivelevelmerelytorestrictdomesticlawprovisions. Theydonotimpose or exemptfromtaxationand,mostimportantly,theyareessentiallyelective(evenif divergentlyunder differentconstitutionalconstructs). Yet,infact,actionitem6focusesontreatyshopping andfailstoestablishameaningfulpositionon whatmayconstitutetreatyabusebeyondtreatyshopping.Now,treatyshoppingisindeedanissuethat maybe viewedascontributingtoprofitshifting,yettheissuehereisnot oneofabusebutrathertheappropriatepurposeandscopeoftax treaties.TheUnitedStateshasbeenawell-knownpioneer(and attimesamuch-criticizedpioneer)intheapplicationofatreatybasedanti-shoppingrule, thenowwell-knownlimitationonbenefits(LOB).115 TheLOBhasbeenapoliterevisionoftheArticle 4residencerulesthatgavepowers totreatypartners (ofthe UnitedStatesinthiscase)todetermineeffectivelydomesticresidencefor corporationson a unilateralbasis.TheUnitedStates wasunwillingtoconcede suchpowertoallofitstreatypartners, understandingthatsomeofthemserveaswillingaccommodatingjurisdictionsfortreatyshopping.TheUnitedStateswasunwillingtoaccepta stateofaffairsthatwouldhaveeffectively madeeverytreaty “atreatywiththeworld,”116 at leastasfaras investmentthroughcorporationswasconcerned.Yet,theUnited Stateswantedtomaintainsuchtreaties,andtheadditionofthe

114.See ORG FOR ECON.CO-OPERATION &DEV [OECD],PREVENTINGTHE GRANTINGOF TREATY BENEFITS IN INAPPROPRIATE CIRCUMSTANCES,ACTION 62015FINAL REPORT (2015)[hereinafterACTION 6FINAL REPORT].

115.See U.S. MODEL INCOME TAX CONVENTION art.22(U.S.DEP’T OF THE TREASURY 2016).

116.See TECHNICAL EXPLANATION ACCOMPANYINGTHE UNITED STATES MODEL INCOME TAX CONVENTIONOF NOV.15, 2006(U.S.DEP’T OFTHE TREASURY 2006), https://www.treasury.gov/press-center/pressreleases/Documents/hp16802.pdf.

LOBwasconsideredagoodsolutionforthesecombinedwishes. ItalsofitthetaxlawcultureoftheUnitedStatesinitsobjective façadeandthroughitscircumventionofgeneralanti-avoidance rule(GAAR)-typedelegationsofpowertothe taxadministration. Actionitem6followedtheU.S.exampleandevenrecommends aU.S.-styleLOBprovisioninitsfinalreport.117 Thereportstates thatLOBprovisionsaresuccessfullyused,yetitdoesnotaddresstheirfaultsandthecriticism oversomeoftheirfeatures.118 Thisrecommendationissupplementedbyaverydifferentmeasure:theprinciplepurposetest(“PPT”).PPTreadsmuchlike a domesticGAARand empowerstaxauthoritiestodenytreaty benefitstotransactionsinordertotakeadvantageofthetax benefitsofthetreaty,unlessitisestablishedthatthegrantof suchbenefitsisinaccordancewith theobjectandpurposeofthe treaty.119 Thisprovisionisfraughtwithproblems,and,mostimportantly,itmayaddnothingtotaxtreatiesbeyondcompliance and enforcementexpenses.120 Itisobviousthatthefocusofthis ruleisnotmeretreatyshopping,yetthereport doesnotexpand onthereasonforthisrulebeyond itssimilaritytodomestic GAARs.Theserecommendationsarepresentedin aminimal standardframework(i.e.,theOECDexpects countriestoadopt eitherone or bothoftheserulesintheirtreaties).

Thestriking differencebetweentheLOBandthePPTisobvious.Theyrepresentdifferentnormsandfocusesandtheyare likelytoproducedifferentoutcomes.Theirmarriageheresimply hasnointellectualbasis.TheBEPSprojectacknowledgesthis throughtheactionitem7reportandanticipatesthatthePPT willpreventabuseofArticle5(3)bysplittingcontracts.121 Any LOBprovisionswouldclearlynotcoversuchabuse,yetitisand shouldbecoveredbythecommentaryandregularinterpretation ofArticle5(3).

117.See ACTION 6FINAL REPORT, supra note114.

118.See J.CliftonFleming, Searchingfor the UncertainRationaleUnderlying theUS Treasury’sAnti-treatyShoppingPolicy,40INTERTAX 245(2012).

119.Vienna ConventionontheLawofTreatiesart.31,opened forsignature May 23,1969,1155U.N.T.S.331.

120.See Michael Lang, BEPSAction 6: Introducing an AntiabuseRule in Tax Treaties,74TAX NOTES INT’L 655,656(2014).

121.See ORG. FOR ECON.CO-OPERATION &DEV. [OECD],PREVENTINGTHE ARTIFICIAL AVOIDANCEOF PERMANENT ESTABLISHMENT STATUS,ACTION 7- 2015 FINAL REPORT 44(2015)[hereinafterACTION 7FINAL REPORT].

Thecurrentarchitecture ofthereportsignalsalackofconsensusoracompromisethatisincompatiblewiththefirstinsight ofBEPS.Perhaps,however,atreatyanti-abuseruleisunnecessaryinthefirstplace,andtherecommendation(s)pursuantto actionitem6willeventuallyhavenoimpact on BEPSortheinternationaltaxregime.122

Thereportalsoincludesathirdrecommendationtoincludea statementaboutthe commitmentofthetreaty parties to combattingdouble non-taxationinordertosolidifyitas a purposeof tax treaties.123 Thisproposalwascriticizedassuperfluousasthe samecouldandshouldbeeasilyinterpretedinto thetreaty.This istrue,yetexperienceshowsthatwhatshouldbedoneisnot alwaysdone inthecourseoftreatyinterpretationand,therefore, thisadditionmayeventuallybehelpful.

Finally,thereportincludescarefullanguagethateffectively servestodiscouragecountriesfromsigning taxtreatieswithlow orno-taxjurisdictions.Thereare,however, no coordinationor implementationaspectsforthispart.Thisisanobviousmissed opportunity forcoordinationamongtheproductivecountriesof theworld; yet,itislikelythatthispartdidnotgarnerthenecessarypoliticalwill.

Ofcourse,thisactionitem affectstaxtreatiesandrequiresthe additionofaninternalanti-abuserule(s).It is unclear,infact doubtful,however,whetheritwould effectivelyimpactthe practiceoftaxtreatylaw.Thisarticlesuggeststhatitwouldnotdo sobeyondsomecountriesattemptingtouseitforaggressive,unprincipledauditpractices,which cannotbedesirable.Hence, thisactionitemmayresultinlesscoordinationamongcountries, notmore.

7.ActionItem7:PreventingtheArtificialAvoidanceofPermanentEstablishmentStatus

Thepermanentestablishment(PE)rulesareclearlypartofthe corearchitectureoftax treaties.124 Theyarealsothemostimportant treatynorm adoptedbydomesticlegislationworldwide,

122.Beyond,perhaps,astandardizationofLOBprovisions.

123.See ACTION 6FINAL REPORT, supra note114.

124.Foranauthoritative reviewofthe history andoriginsofthe concept,see ARVID A.SKAAR,PERMANENT ESTABLISHMENT:EROSIONOF A TAX TREATY PRINCIPLE (1991).

evenifnotuniversally.125 Yet,thedeficiencyoftheruleshas beenexposedbychangesintheglobaleconomyandthethriving ofglobalization.126 The key challengefortheserulesispresented bythedigitaleconomy,yetdealingwiththatchallengewasoutsourcedtoactionitem1,withaclearunderstandingthat the OECD wouldnotrecommendtheinclusionof an innovativedigitalPE.127 Nevertheless,manyotherissuesrelatedtothePE rulesremainedatthetopof theinternationaltax regime agenda.128 Awkwardly,theBEPS projectchosetofocusononly threeissues:oneserious,yetfundamentalandnotnecessarily relatedtoBEPS;thesecondnotveryserious,resultingfrom manifestlyfaultyinterpretationsoftaxtreatiesbyvarious courts;andthefinal,important,(ifsectoral)applicationtoinsurancecompanies.129 Thefinalreportdealtonlywiththefirst twoissues,simplystatingthattheregularrulesaresufficientto dealwithproblemsrelatedtoinsurancearrangements,despite thepracticaldifficultiesfacedbycountriesinthisregard.130 ThefirstissueregardsArticle5(4)oftheOECDModelandits languageas “preparatoryorauxiliary.” ItisarguedthatthislanguagedoesnotliterallyapplytoallofthecircumstancesmentionedinthisPE “negativelist,”131 leavingawidewindowofopportunityforforeignbusinessestooperatewithinajurisdiction

125.See,e.g., JacqueSasseville&ArvidA.Skaar(GeneralReporters), Is There a Permanent Establishment?, 94aIFACAHIERSDE DROIT FISCAL INTERNATIONAL (2009).

126.Indeed,priortoBEPStheOECD hadbeenengagedinalengthy and comprehensiveprojecttoresolvemanyoftheseissues.Thisworkresultedin theOECDModelTaxConventionrevisionsofArticle5. See ORG FOR ECON CO-OPERATION &DEV [OECD],OECDMODEL TAX CONVENTION:REVISED PROPOSALS CONCERNINGTHE INTERPRETATION AND APPLICATIONOF ARTICLE 5 (PERMANENT ESTABLISHMENT)(2012–2013),http://www.oecd.org/ctp/treaties/PermanentEstablishment.pdf.

127.ACTION 1FINAL REPORT, supra note41,at283.

128.See Sasseville&Skaar, supra note125.

129.The restofthework wasexplicitly “shelved.” See,e g.,StephanieSoong Johnston, OECD’sWorkonPermanentEstablishments on HoldforBEPS,TAX NOTES TODAY (June4,2013),http://www.taxnotes.com/beps-expert/corporatetaxation/oecds-work-permanent-establishments-holdbeps/2013/06/05/16715881.

130.See ACTION 7FINAL REPORT, supra note121.

131.Article5(4)oftheOECD Modellistsinstancesthatwould not constitute PE,and,hence, itisoftendescribedasthePE “negativelist.” See OECD MODEL CONVENTION 2010, supra note 46,art.5(4).

withouttriggeringPE taxation.Boththepurposeofthenegative listandacertainreadingofitslanguagerequiressuchaninterpretationinthefirstplace,yetthe OECD asarepresentativeof theresidencestatescouldnotmakeitclearpriortothisreport. ThereportrecommendschangingtheModelandCommentary toreflectthisinterpretationinordertoaddfurtherclarification intheformofananti-fragmentationrule.Thisoutcomefitsthe politicalbackgroundofBEPSandexpandssourcetaxation.

Thesecondissuerelatestocommissionairearrangements,interpreted underthelawsofsomecountries,bysomecourts,132 as nottriggeringPEforasellingcorporationbecausetheselling agent(thecommissionaireagent)doesnothavetheauthorityto concludecontractsonbehalfoftheprincipal(thesellingcorporation).Suchauthority isrequired under Article5(5)ofthe OECD model.Thereportclarifies thatthepolicyistopermitPE taxationinacountry wheresalesareaffectedbyagents on a regularbasisandimplementedby theprincipalcorporation,despitethelackofformalcontracting authority.Thereportshall amendtheOECD Model andCommentarytoreflectthispolicy clearly.

Taxtreatiesareimpacted,ofcourse,bythesechangestothe OECDModelandCommentary,yetmostofthechangesareessentiallyclarificationsratherthanmaterialinnovationsorrealignmentsoftaxingrights.TheOECDchosetochangethelanguageoftheModelratherthanjustchangethecommentary, whichisthenormalpracticeincasesofclarifications. This shouldleadtoconfusion,atleastintheshort-term.Taxpayers arelikelytoclaimthat languagechangesmusthaveindependentmeaning andhencecannotbeviewedas mereclarifications, despitetheOECD rhetoric.Thismaynotcarrythedayinmost courts,yet it willsurelybecostlyforbothtaxpayersandtaxauthorities,andcoordinationisunlikelytobeenhanced.

132.See,e g , CE, Mar. 31,2010,Rec Lebon304715(Fr.);DellProducts v. SkattØst,HR-2011-02245-A(Dec.2,2011)(Nor.);S.T.S.,Jan.11, 2012(R.J., No.1626/2008) (Spain); seealso J.CliftonFleming,Jr., ANoteontheZimmer Caseand theConceptofPermanentEstablishment, in TAX TREATY CASE LAW AROUNDTHE GLOBE 107(2011),http://ssrn.com/abstract=2079317.

8.ActionItems8–10:GuidanceonTransfer-PricingAspectsof Intangibles

Transfer pricing,and particularlythearm’ s lengthstandard thatdominatesthepracticeoftransferpricing,isatthevery heartoftheBEPS project. Aggressivetransferpricingfor intangibleswasthe keycomponentin essentially alloftheschemes thattriggered theproject.133 Themost visibleoftheseschemes reliesprimarilyonthebenefits ofU.S.cost-sharingregulations thatarespecifictoU.S.taxlaw.134 Nonetheless,theapplication ofarm’slengthtointangibleshas neverbeen adequate.135 Itdictatesmarket-basedvaluationof property(intangibleproperty) thatisuniquebylawordesign,andhenceverydifficultto value.136 Itrequirestheuseofmarketcomparablesincircumstanceswheresuchcomparablesorrelevantmarketssimplydo notexist. Thisproblemhasbeen knownforsometime,yet(essentiallyall)governments,andtheOECD,chose nottoaddress theproblemandstuck to thearm’ s lengthstandardwithoutdeviation.

TheBEPSprojecthadtoaddressit.Itsoriginaldocuments clearlyadmittedtheproblemandacknowledged thenecessityof deviatingfromthearm’slengthstandardincertaincases.137 The finalreport,aswellaspriordocumentsreleased,indicatesthat theOECD intendstocontinueandprotecttherelianceonarm’ s

133.See Brauner, supra note20,at 41;Kleinbard, supra note90,at706; YarivBrauner, CostSharing andtheAcrobaticsof Arm’sLengthTaxation, 38 INTERTAX 554(2010);Harry Grubert, Foreign Taxesandthe Growing Shareof U.S.MultinationalCompanyIncome Abroad:Profits,NotSales, areBeing Globalized, 65NAT’L TAX J.247(2012).

134.See Brauner, supra note20,at41(referencing Treas.Reg. § 1482-7).

135.Itprovidesinherent, yetimplicit,advantagestolarge,intangible-heavy MNEs.Theseadvantagesincludetheobviousopportunitiestoengage intax ratesandrulesarbitrageandtheability to takeadvantageoftherangeofacceptabletransferprices. See YarivBrauner, ValueintheEyeoftheBeholder: TheValuationofIntangiblesfor Transfer PricingPurposes, 28VA. TAX REV.79, 161–62 (2008)(explaining thatthetransfer-pricing rulesproduce a range of acceptableprices;suchrangeisavailableonlyto MNEs andmoresotointangible-extensiveMNEs tominimizetheireffective taxationunrelated to other taxplanning).

136.Id.

137.See OECD, supra note3,at42–43.

lengthfortransfer-pricingpurposes.138 Thefinalreportposits thattheproblemisnotinthestandarditselfbutratherinthe factthatitispronetoabuse,andhenceitneedsprotection,includingspecialmeasuresthatmaydeviatefromthestandard’ s directarticulation.139

Interestingly,yetreasonably,theOECDintroducedaprincipleinthis context a principle thatrequiresprofitstofollowreal incomegenerationactivityor “valuecreation” inthelanguageof BEPS.Itisinterestingsincesuch a principle does notobviously correspondtothemarket-based arm ’slengthstandard.Value creationmayormay notbeperfectlyreflectedinprices.Nonetheless,thereportpresumesthatthevalue-creationprincipleis notaninnovationbutmerelythecorrectinterpretationofthe arm ’slengthstandard.Theimplicationofthisapproachisarevisionofthetransferpricingguidelines(“TPG”)140 to require profitallocation,based onarm ’slengthmethodology,onlyto value-creatingactivitiesandtodisregard activitiesthatdonot makebusinesssenseorarenotcontributingtothecreationof valueforthetaxpayer.

Acomplementary statementwouldbetherejectionofprofitallocationbasedonmere legalownershipof an intangiblegood. ThisisBEPScompatible andshouldbelauded,butthereal test wouldbewhetheritcouldbeimplementedandhowcourtswould reactwhenthisapproachconflictswithtraditional,literalarm’ s lengthjurisprudence.141 Moreover,evenifthevaluecreation principleisvague,it is unlikely to permittaxationby source countriessolelybasedontheirbeingthetarget,orthemarket forthetestedgoodsandservices.Thisisrelevantfortransferpricingclaimsbasedonmarketfacilitiesratherthanvaluecreation,andevenforclaimsbydevelopingcountriesforextraallocationsbasedonlocationalsavings.

Asimilarconflictwouldariseinthecontextofactionitem1if anexus-basedapproachweretobetaken.Notethatthereisno

138.ORG FOR ECON.CO-OPERATION &DEV [OECD],ALIGNING TRANSFER PRICING OUTCOMESWITH VALUE CREATION,ACTIONS 8–10-2015FINAL REPORTS (2015)[hereinafterACTIONS 8–10FINAL REPORTS].

139.Id.

140.Id.

141.See,e.g., JensWittendorff, BEPSActions8–10:Birth of aNew Arm’ s Length Principle, 81TAX NOTES INT’L 331(2016).Also notethatprior U.S.experiencewas notvery promisingin thisregard.Forexample, see theVeritas andAltera decisionsandanalysis. See MichaelL. Schler, The Arm’s-Length StandardAfter Altera and BEPS,149TAX NOTES 1149(2015).

rightorwronghere.Itismerelypartoftherenegotiationofthe tax-basedivisiondeal.Yet,thecurrentsystem,whichiscoordinatedwiththevalue-creationprinciple,attemptstobasethe dealonsupposedeconomictruth.Thismustbeunsustainable;it maybepossibletoreachcompromises,orforcelegitimacybased onthepseudoeconomicjustificationsforthecurrentrules,but nottoactuallyjustifytheminanycoherentandcomprehensive manner.Moreover,oncecountries suchasChinaandIndiaagree tothevalue-creationrhetorictheywouldfindthemselvesin a problematicpositionofseekingenhancedtaxjurisdictionbased onparametersotherthanvaluecreation.The disagreementover themeaningofthetermwasnotresolvedby thefinalreport,and hencenoprogresswasmadeontheimportantaspectofrevenue divisionundertheinternationaltaxregime.

Asecondtransfer-pricingruleestablishedbythereportisthe limitationontheallocationofprofitstorisk-taking.Originally, thispartofthework, usingapuretax-haven cash-boxexample todemonstrateinappropriateplanning,purportedtodisallowallocationofprofitsto merecashinvestors.142 Thefinalreportestablishesasofterrulethatpermitsrisk-taking tobetakeninto accountonlywhentherelevanttaxpayerhasthecapacitytoboth meaningfullycontrolandassumetherisk.Itremainstobeseen howmuchabusethissofterrulewillpreventbeyondthemost egregiousofcases.Theprohibitiononassignmentofprofitsbeyondrisk-freereturnsoncash-onlycontributionsremainspart ofthereport,whichisdesirable,yetitisnotclearwhetherit wouldpracticallyapplyalsoinsituationswherethetaxpayer canestablishminimalcontributionbeyondcashforthecashbox, low-taxentity.

Thereportpromotestheprofitsplitmethodinamovethathas beeninthemakingforalongtime now.143 Yet,thecontentof thispromotionwasleftforthepost-BEPSera(i.e.,probablyfor anOECD-onlyforum).Itfurther providesthatsynergisticvalue willhavetobeallocatedaccordingtotheparties’ contributionto suchvalues.144 Thispartofthereport isawkwardsincesynergiesarenotreallyaresultofonecontributionoranother.Again, itisdifficulttoseehowsucharulewouldaffecttaxplanning.

142.See ACTIONS 8–10FINAL REPORTS, supra note138.

143.Id.

144.Id.

Inconclusion,theimpactoftheactionitems8–10finalreport ontaxtreatiesislikelytobeminimalbeyondtheamendments itintroducestotheTPG.Ifwidelyadopted,thechangestothe TPGmayenduphavingaminimalimpact,preventingonlythe mostaggressiveandextremecases,suchaspurecashboxes.It doesnotalleviatethedifficultiesofintangiblevaluation,and doesnotprovideconcretestepsinthedirectionofdeviations fromarm’slengthinnecessarycases.Theonlyimmediateeffect isperhapsthemaintenanceofOECDdominanceovertheTPG, whichis deferredtoregularlybymanycountries’ courts.This continuousshiftofpowerfromgovernmentsofnon-OECDcountriestotheOECDasaninstitutionmay,however,beresisted again,withthelikelyconsequenceofless, notmorecoordination amongjurisdictionsregardingtheirmostimportanttaxpolicies. Itremainstobeseenhowsignificanttheintroductionofthe value-creationprincipleitself willbe.Ifmanycountriesfollow it strictly,itmaysignificantlyalter thepracticeoftransferpricing (albeitone shouldthenexpectseriousvariationintheimplementationofthis principlebecauseBEPSdoesnotprovideguidance inthearea).Amore realisticoutcomewould bethatitwould haveaminimalimpactsolelyonthetransfer-pricingpractice duetothestrongcommitmentof governmentsandtheir courts toliteralarm’slengthandthecomfortthatthebusinesscommunityalreadyhasacquiredwiththisstateof affairs.Thislikely outcomeshouldbeviewedasthebiggestdisappointmentofthe BEPSprojectandpresentsthemostconservativeoutcomeinthe areamostinneedofreformandinnovation.

9.ActionItem11:MeasuringandMonitoringBEPS

Actionitem11beginsthe “administrative” partofthe BEPS actionplan,following actionitems1–10thataddresssubstantive,tax-basedividing,normsoftheinternationaltaxregime. Precedingtheentire BEPSproject,oneshould haveasked the question: “IsBEPS a probleminaperfectworld?” Yet,asmentionedalready,BEPSisessentiallyapolitical ratherthanascientificproject.Itwaslaunchedbasedonanecdotaldataandpublicoutrageratherthanfactsandanalysis.Actionitem11intendstoremedythisdeficiencyandhelptheprojecttoassessthe magnitudeoftheproblemandmonitorit,includingtheimpact oftheproject’ssolutionstotheBEPSproblemovertime.

Thefinalreportonactionitem11isnotfinal,asitischarged withestablishinganongoingmeasurementandmonitoringplatform,yetitconfirmsthenegativeimpactsofBEPS,primarily duetoinefficiencies(economicdistortions)andrevenue losses, whichdisproportionallyaresufferedbydevelopingcountries.145 Thereportfurtherassertsthat BEPSissignificantandislikely toincrease.146 Itnotes,however,that itsconclusionsareseverely limitedby thescarcityandqualityofdataavailable.Thereport, therefore,setsthestagefortheincreasedcollectionofbetter datathatwillpermitathoroughassessmentofBEPSinthefuture.

Thisactionitemdoesnothaveadirectimpactontaxtreaties orpolicyingeneral.Additionally,itisbeyondthescope ofthis articletoanalyzethemethodologyusedbythereporters.Yet,an educatedstudyoftheimpactofinternational taxnormsandthe greatercollectionofbetterdatamustbewelcomed.Accountabilityshould be partofeverypolicyaction,yetsooftenitisignored, sotheworkonthisactionitemmustbelauded.Onemayraise concern,however,abouttheopportunitiesitwouldpresentto themorepowerfultoabusethelesspowerful,butthatsituation couldnotbeworsepost-BEPS incomparisontothepre-BEPS era.

10.ActionItem12:MandatoryDisclosureRules

PerhapstheleastdiscussedBEPSactionitem,actionitem12, presentsaframework forcountriesthatwish to adoptrulesfor mandatorydisclosureofaggressivetaxpositionsbytaxpayers. Inthelanguageofthefinalreport,theframeworkispresented as,butis notrequiredtobe,aminimumstandard.147 Thepurposeofamandatorydisclosureregimeistoimproveawareness oftax-planningtechniquesfortaxauthorities,toincreasetransparencyintaxplanning, andtodeterbothtaxpayersandpromoters.Itsbenefitsmustbeweighedagainstitscosts.

145.ORG. FOR ECON.CO-OPERATION &DEV. [OECD],MEASURINGAND MONITORING BEPS,ACTION 11-2015FINAL REPORT (2015)[hereinafterACTION 11FINAL REPORT].

146.Id. at16.

147.ORG. FOR ECON.CO-OPERATION &DEV. [OECD],MANDATORY DISCLOSURE RULES,ACTION 12-2015FINAL REPORT 13(2015)[hereinafterACTION 12FINAL REPORT].

TheappealofsuchregimesinthecontextofBEPSisunderstandable,anditfitswellamong theothertransparency-enhancingmeasures,yettheexperienceofcountriesalreadyutilizing themisnotveryencouraging.148 Thekeyissueiswhich transactionsrequirereporting,adeterminationthatdynamicallyaffectsinappropriatetaxplanningaswellastaxplanning generally.Thus,thelack ofenthusiasmoverthisactionitemis understandableaswell.Ultimately,thisactionitemdoes notaffecttax treaties.

11.ActionItem13:GuidanceonTransfer-PricingDocumentationandCountry-by-CountryReporting

ThemosttangibleachievementofBEPS,andperhapsitsonly realcontributiontotheevolutionof theinternationaltaxregime, istheintroductionof standardtransfer-pricingdocumentation andCountry-by-Country(“CbC”) reporting.Transfer-pricing regulationintendstokeepMNEsincheck,requiringthemtoestablishtransferprices basedonarm’slength(i.e.,market)analysisanddocumenttheirpositioncontemporaneously.149 The documentationrequirementfixesthetaxpayers’ positionsandlimitstheiroptions.Despitetheinherentbilateral(ormultilateral) natureoftransferprices,therulesandreportingapplyonaunilateralbasiswithnocoordinationorastrongrequirementofconsistency.Thisisstrangein a regimethatappliesanessentially universalstandardtomultiplecountriesinparalleltothesame transactions.

Actionitem13seekstofixsomeaspectsofthisanomalyby standardizingthedocumentationrequirements.Thefinalreport establishesathree-tierreportingregime.150 Amasterfile includesinformationthatwouldbenecessaryfortheimplementationoftherulesineveryrelevantcountry.151 Astandardform

148.FortheU.S.Rules,seeToddC.Simmens & James G.Hartford, ReportableTransactions,648-1st TaxMgmt.(BNA),U.S.Income,https://www.bloomberglaw.com/document/2657753640(last visitedOct.1,2016).Asimilar Brazilianexperiencehasalsonotbeennoted. See,e.g.,Mesa DeDebatesDoIBDT De10/15/2015(Oct. 15,2015)(unpublishedmanuscript)(onfilewithauthor). 149.See,e.g., supra note136.

150.ORG FOR ECON.CO-OPERATION &DEV [OECD],TRANSFER PRICING DOCUMENTATIONAND COUNTRY-BY-COUNTRY REPORTING,ACTION 13-2015 FINAL REPORT 9(2015)[hereinafterACTION 13FINAL REPORT].

151.Id. at25.

avoidsduplication,andhencereducesthecostsofcompliance andpreventsinconsistentreporting. Acountryfilecomplements themasterfilewithmoreparticularinformationthatmaybe relevanttospecificcountriesor,forlegitimatereasons,informationuniquelyrequiredbyone involvedcountrybutnotbyanother.152 Finally,astandardCbCreportprovidesanoverview of theentirebusinessofthetaxpayerinthedifferentrelevant countriesinordertogiveindividualcountriesabetterperspectiveonthespecificcountryreportinginformationrelevantto themandhowitfits thegeneralstructureandstrategy ofthe taxpayer.153 Suchreportingalsoencouragesconsistencyincomplianceandfiling.

Thisstandardthree-tierreportingshouldimprovetheconsistencyoftransfer-pricingcompliance,whichonewouldexpect tobeinherentofthisnorm,yethasbeenneglectedinthecurrent competition-basedinternationaltaxregime.Itwouldobviously beconsistentwiththesingletaxprincipleor,morepointedly, wouldassist inavoiding untaxed “ gaps ” inincomereportingbecauseofinconsistenttransfer-pricingpositions.Itwouldreduce thecostsofcomplianceandenforcement,especiallyforcountries withinsufficientbudgetsforsophisticatedenforcementof transferpricing.Itwouldpreventbiasedreportingeitherduetotaxpayers ’ interestsorpowerpositionsofcertaincountries.Finally, itwouldcentralizethecontroloverthetransfer-pricing regime and,therefore,setthestageforopportunitiesforcoordinationof policiesand enforcement.

TheCbCreportisthesingletrueinnovationofBEPStoday. Yet,theconservativeforceswithintheprojecthavefoughttodiminishitsscope,supposedlyinthenameofprotectingtaxpayers’ data.154 Whethercorporate taxdatashouldbeconfidentialatall

152.Id. at27.

153.Id. at29.

154.Comparewith theoriginal discussiondraft.ORG. FOR ECON.COOPERATION &DEV [OECD],DISCUSSION DRAFTON TRANSFER PRICING DOCUMENTATIONAND CBCREPORTING (2014),https://www.oecd.org/tax/transfer-pricing/discussion-draft-transfer-pricing-documentation.pdf; seealso Lee Sheppard, OECDBEPSCountry-by-Country Reportingis TooBurdensome, HMRCOfficialSays,TAX NOTES TODAY (Feb.11,2014), http://www.taxnotes.com/tax-notes-today/corporate-taxation/beps-seen-areaboth-consensus-and-conflict/2013/09/19/41796 (quoting oppositionexpressed byaU.K.officialtothediscussiondraft,claimingthatitgoes toofarandrequiresreportingofinformation that isnotobviously necessaryforeffective tax

is beyondthescopeofthisarticle,yetitisclearthattheconservativeforceshavesucceededinsignificantlylimitingthe scopeoftheCbCreporttoinformationthatis generallyalready availableorcouldbeavailabletomostsophisticated,wellfundedtaxauthorities.Moreover,thesameforcesdictated that thereport shouldonlybeavailabletothetax authoritiestokeep theinformationconfidential.155 Finally,thesameforcessucceededinaddingaclarificationthattheCbCreportwouldnot directlybeusedfortaxassessmentbutonlyforriskassessment purposes(i.e.,toidentifyproblems).156 Suchclarificationaims primarilyatthepreventionofdeviationfromarm’slengthand resortstoformularyapportionment.157 ThestructureoftheCbC reportisparticularly amenabletoformularytaxationthat has beenconsistentlyrejected,atleastrhetorically,bytheOECD. Theveryresorttosuch areportdemonstratesthenecessityof formulary apportionmentforasensibleenforcementofincome taxesonMNEs.

Theactualimplementationoftheactionitem13reportswill likelybethemajortestforthefutureimpactofBEPS. Theimpactontaxtreatiesisindirectsincethe reportswouldnot changethesubstanceoftaxtreaties,butwouldmaketransferpricingconsistencynecessarily better,whichwouldreducethe

audits,whichisverymuchinlinewith thetraditionalOECDcompetitionbasedapproach).

155.Forarguments infavor of confidentiality, seeACTION 13FINAL REPORT, supra note150,at19,22;DavidErnick, WillPublicDisclosureofCountry-byCountryReportingDataBecome Mandatory?,44 TAX MGMT.INT’L J. 362(2015). But see Communication fromtheCommissionto the EuropeanParliament and theCouncilonTaxTransparencytoFightTaxEvasionandAvoidance,COM (2015)136final(Mar.18,2015),http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf (EUproposaltomandatepublicdisclosure of such tax information).

156.See ACTION 13FINAL REPORT, supra note150,at 16.

157.Foranexampleofaproposalto adoptformulary taxation ofbusiness profitsmoregenerally,seeReuven S. Avi-Yonah&KimberlyClausing, ReformingCorporateTaxation intheGlobal Economy:A ProposaltoAdoptFormulary Apportionment, in PATHTO PROSPERITY:HAMILTON PROJECT IDEAS ON INCOME SECURITY,EDUCATION, AND TAXES 319–44 (JasonFurman&JasonBordoffeds., 2007); seealso Reuven S. Avi-Yonah&Ilan Benshalom, FormularyApportionment:Myths andProspects - PromotingBetter InternationalTaxPolicyand Utilizing theMisunderstoodandUnder-Theorized FormularyAlternative (Univ.ofMich.Law Sch., Pub. Law&LegalTheoryResearchPaper Series, WorkingPaperNo.221,2010), http://ssrn.com/abstract=1693105.

inefficiencyoftreatiesand enhanceinternationalcoordination oftaxpoliciesandenforcement.

Note,however,thatthefailuretoestablishacooperativeenvironmentwithintheBEPS projectmaymakeactionitem13the biggestdisappointmenttoOECDconservatives.Fewsharethe illusionthatCbCreportscanbe keptconfidentialandthatthey wouldbeusedmerely forriskassessmentpurposes.Thinkabout themany developingcountries thatstruggletocollectrevenue fromMNEs,thatstruggletofinancetheirrevenueauthorities adequately,andthatmayresentthemost developedcountries fornotyieldingmore taxingrights tothem.Nowtheseauthoritiesaregoingtoobtainofficialreportsthat provideasimplemap fortaxation byformula cheaply,oratnocost.Unlessquickactiontowardcoordinationistakenpost-BEPS, thelogicalpredictionisthatsuchtaxauthorities willmorelikelythannotusethe transfer-pricingreports inmannersotherthanthoseprescribed by the OECD.

12.ActionItem14:MakingDispute ResolutionMechanisms MoreEffective

Aninternational legal regimeisoftenmeasuredbytheefficacy ofitsdisputeresolutionregime.Thecurrent,soft,non-legalistic mutualagreementprocedure(“MAP”)regimehasundoubtedly beenprovensuccessfulfortheformingyearsoftheregime.Its non-mandatorynature reducedtheperceivedthreatposed by theinternationaltaxregimetothetaxsovereigntyofthe participatingnations.158 Italsohasnotpreventedtheconvergenceof theinternationaltaxrules,despitenothavingcontributedmuch totheirdevelopment.Manyfundamentaldisputeshaveactually beenresolvedwithoutresorttotaxwars,a non-trivialachievementindeed.Yet,inrecentyears, it becameincreasingly apparentthat progressisrequired.A quicker,cheaper,andmoredecisiveregimeisneeded.Scarcity ofrevenue,increasedcompetitionforinvestment,globalization,anddecentralizationofpower,

158.See, e.g.,RobertA.Green, AntilegalisticApproaches toResolvingDisputesBetween Governments:AComparisonoftheInternationalTaxandTrade Regimes,23YALE J.INT’L L.79(1998).

andtheincreasingcomplexityandsophisticationofglobalbusinessrequires amore resoluteregimethatwouldcontributeratherthanjustadheretotheuniversalnorms.

159

Thepre-BEPSOECDprojecthasresultedinarecommendationformandatory “baseball” arbitrationtobeaddedtotheMAP incasesthatthelatterfails to resolveinanacceptable timeframe.160 Somecountrieshaveadoptedthisrecommendation,yetdespitetherelativesuccessthatthesolutionapparently enjoys,onlyafewtreatieswereconcludedbasedonthisrecommendation.161 Thisfailure exacerbatedBEPSontheone hand andtheunjusttreatmentofsometaxpayers whocould notget relief ontheotherhand.Afterwards,theBEPSprojectmade anotherattemptand employeditsfirstinsighttoorganizearelativelylarge,yetincomplete,groupofcountriesthatnowcommit toadoptionofmandatoryarbitration inalloftheirtreaties.162

Successinadoptingamultilateralinstrumentofthekinddescribednextmayproveto be importantforachanceof success inrealizingsuchcommitment.Yet,alltheevidenceleadstoa conclusionthatmostcountriessimplydonottrusttheOECD anditsleadingmemberstoestablishafairarbitrationprocess. Theyfurther believethatqualifiedarbitratorswilllikelycome predominantlyfromsuchOECDcountriesand,hence,disadvantagethemintheprocess.Nothingwasdoneinthework on actionitem14toresolvethisfundamentalproblemandensure wideandwillingcooperation.Thereisnoreasontobelievethat progresswillbemade untilsucheffortismadeinearnest.This actionitemdoesnotaffectthesubstanceoftaxtreaties,andis notevennewtotheOECDModel,yetitisobviouslyveryimportantforthefutureoftaxtreatiesaseffectivebuilding blocks oftheinternationaltaxregime.Thisfuturemaybeindoubtifit isnotrealized.

159.See ORG. FOR ECON.CO-OPERATION &DEV. [OECD],IMPROVINGTHE RESOLUTION OF TAX TREATY DISPUTES (2007),http://www.oecd.org/ctp/dispute/38055311.pdf.

160.Id.

161.See ACTION 14FINAL REPORT, supra note31.

162.Encouragingly,theOECDnotesthat these countrieswere involvedin 90percent ofoutstandingMAP casesattheendof2013. Id. at10.None of thesecountries, however,representsa developingoran emerging economy.

13.ActionItem15:Developinga MultilateralInstrumentto ModifyBilateralTax Treaties

Enhancedcoordinationoftaxlaws andpoliciesisthekeyinsightoftheBEPSproject:countriesarenowunabletoapplyunilaterallytheirtaxsystem,independentofallothercountries. The intuitivenotionofnationalsovereignty at itsmostfundamentallevel taxpolicymaking,collection,andenforcement hasbrutallycrashed.Eventhestrongestcountriesintheworld findthemselvesvulnerable.Thus,agreeingtoamultilateralsolutionagainstthisbackdropbecameinevitable.Actionitem15 wascharged,therefore,inassessingthefeasibilityofadopting suchaninstrument.Despitethelong-standingoppositionof manycountriesandexpertstothenotion,theactionitem15reportclarifiesthatsuchaninstrumentisbothlegallyandpracticallyfeasible.163 Thisisdramaticenough,yetthereportexceeds itsmandatemerelytoissueareportandproceedstowork on the implementationofthe instrument.164

Thefinalactionitem 15 reportuseslanguageconsistentwith theminimalviewofBEPStopromotetheadoptionofthemultilateralinstrument.165 ItexplainsthattobeeffectivetheBEPS recommendationsmust beimplementedquickly,cheaply,and coherentlyinasynchronizedmanner.Thisisimpossibleinthe currentparadigmofpurebilateralnegotiationandconclusionof taxtreaties.TheBEPSproject tookadvantageofitspolitical supportto concludethatitschargecouldonly be metifsuch an instrumentisadopted.Thisperceivedinstrumentdoeschange thebilateralnatureoftax treatiesandstreamlinesstandard amendmentstotax treaties,suchasthoserequiredbyBEPS. It alsopreventstheelaborategive-and-take natureofbilateral treatynegotiationsandtheirbudgetconstraintsfrombeingobstaclesinrealizingthesegoals.

Additionally,thereportrealizesthepossibilityofpartialor gradualadoptionofthemultilateralinstrument.166 Suchflexibilitymakestheinstrumentmoreappealing(orlessintimidating)andmostimportantlysidestepstheall-or-nothingapproach thatsotypifiedthedebateovermultilateralismintaxation.Naturally,thesuccessof theinstrumentwilldependonthesizeof

163.ACTION 15FINAL REPORT, supra note83.

164.Id.

165.Id. at16.

166.Aspreviously arguedbyBrauner. See Brauner, supra note12,at 262.

itsearlyadopters.Thedevilhereistrulyinthedetails.Howwill theinstrumentworkifcountriesbegintodemanditemsnot agreedonwithintheBEPSproject?Howwillconsensusbe achievedwithmanydiversecountrieswithdifferentinterests involved?Manysuchquestions leavethiswelcomedevelopment withanunclearfuture.Ultimately,thisaction itemdoes notimmediatelyaffectthesubstanceof taxtreaties,yetitmay revolutionizetax treatylaw andpracticeandguaranteetheircontinuousimportancefortheinternationaltaxregime.

B.TheImpactofthe BEPS ProjectonTaxTreaty Law

Theconclusionofthe BEPSprojectprovides an opportunityto assessitsimpactontheinternationaltaxregime.Thissection focusesonthetaxtreatyimplications.Forthepurposesofthis analysis,itisassumed thattherecommendationsoftheBEPS projectwould generallybeadopted.

First,veryfewsubstantivenormsintaxtreatieswill be impactedbyBEPS.Thealreadyineffectivetie-breaking rulefor corporate residenceinArticle4(3)wouldbereplacedwith a facts-and-circumstances no-rule.TheclarificationtoArticle5(4) andthecorrespondinganti-fragmentationrulearejustthat clarificationsthatcouldhave beenachievedthroughbetterinterpretationoftheprovision.Similarly,theclarificationoncommissionairearrangementssimplycorrectsinappropriate interpretationsofArticle5(5)bysome courts.TheonlyotherpotentiallysubstantivechangemaybetheinsertionofadigitalPE provisionintreatiesorasimilarprovisiontargetingthetaxation ofthedigitaleconomy.Suchachangehasnotyetbeenrecommended(norhasitbeenoutrightrejected),but,unlike these otherminorchanges,itwouldactuallyalterthetaxbasedivision insomecircumstances.Otherwise,nochangesinthedivisionof taxbasesareaffectedbyBEPS,whichmustbeviewedas at least ashort-termachievementfortheOECD.However,itisdifficult toseehowthedevelopingworldcouldstomachsuchanoutcome.

ThechangestotheTPGcannotbeviewedassubstantive changestotaxtreatyrulessincethetreatiesarevaguelythe source,ifany,ofthelegalobligationtoadheretotheTPG.Nonetheless,theintimate relationshipbetweentax treatiesandthe TPGmaketheirdiscussionrelevanttothegeneralassessment oftheimpactofBEPSontaxtreaties.Itispossible,however,to arguethatthesubstantiveimpactofBEPS on transferpricing

isnotdramatic.Purecashboxesaregoingtobedifficulttojustify,businessactivitieswillprobably167 matter morethanrisks, andprofit splitwillcontinuetobethestaroftheshow(together withthecomparablepricingmodelandthetransactionalnet marginmethod),eventhoughthedetailsregardingprofitsplit areleftforthepost-BEPSera.

Acareful assessmentshould,however,bemorepatientand acknowledgethatthesechanges,togetherwiththeinfusionof thevalue-creationprincipleandthecompletelynewstandard reportingsystems,maybemoreimpactfulonthepracticeoftransferpricing.ThisistrueiftheOECDis successfulandthe changesareproperlyenforcedandcoordinatedamongjurisdictions.But,itwouldalsobe meaningfulifthechangesare unpopular,inwhichcasemassivelitigationanddoubletaxationare thelikelyresult,whichwouldputimmensepressureoncountriestorevisitcoordination.

Yet,onecannotavoidexpressingadisappointmentatthese achievements.Nofundamentalreformoccurred,andmostlyit seemedthat theOECDwasmoreinterestedindeclaringsuccess thanreformingtheregime.Thisofcoursemaybethefaultof politicalforces,notthestaffoftheBEPSproject,yetthebottom lineisthe same.Thisisparticularlydisappointinginlightofthe originalpromiseofBEPStoinnovateand addresssituations wherearm’slengthhadfailedtodothetrick. TheBEPSproject neglectedtofollowthispromise.Theadditionofatreatyantiabusemechanismisitselfachangeofthemodel conventionand notachangeofthetax-basedivisionrules.Thischangeisnot likelytobesodramaticsinceLOBprovisionsalreadyexistintax treatiesandPPT provisionsareunlikelytohavemuchimpact, evenifadoptedinactualtaxtreaties.

TheservicepartofBEPSpromisestomake amuchstronger impacton taxtreaties.Firstandforemost,themultinationalinstrumentcouldrevolutionizetaxtreatylaw.Evenifitsimplementation stallsforawhile,the conclusion aboutitsfeasibility transformsthediscoursefromtheall-or-nothingbinarychoice betweenthecurrent regimeandaworldtaxgovernmenttoa moreseriousdiscourseonpossible evolutionoftheregimeanda betterunderstanding of taxtreaties.Ifonetakestheviewoftax

167.Albeit,thereportdependsonfamiliarconceptssuchasnexus andsubstance and such may raisethe suspicion that not muchwouldindeedchange inthisregard.

treatiesas signals,supportedbythisarticle,heorshewouldobservethat thepotentialfutureregimeisalsobettersuitedfor thetruenatureoftaxtreaties.

Second,butinmany waysasimportant,istheprogressmade towardreformofthedisputeresolutionmechanism,andtheadditionofmandatory arbitrationprovisionstomanymoretax treaties.MandatoryarbitrationisnotaBEPSinnovation,yetits adoptionhasbeenveryslowandinconsistenttodate.Apact amongmanypowerfulcountries wouldprovideahugestepforwardandwouldadd meaningfultreaty-baseddisputeresolution totheinternationaltaxregime.

Third,BEPSintroduced theimportantinnovationofstandard transfer-pricingreporting,yet,as alreadymentioned,thisisnot strictlytreaty related.Thatagainwouldsignificantlyimprove thecoordinationvalueoftaxtreatiesandwouldmaketheiroperationmoreeffectiveandhopefullymorejust.Finally,theother informationcollectionaspectsofBEPSwouldsimilarlyaddto theefficacyoftheregimeandoftaxtreaties(nottomentiontheir contributiontothestudyoftax treaties).

Inconclusion,theimpactofBEPSontaxtreatiesisgenerally small,yetthestructural,serviceelementspresentapromiseof amuchmore significantreformoftaxtreatiesandtheinternationalregime.Sincemostoftheseelementsdonotincludeconcreteandimmediate reformsofthenorms,itisdifficult topredicttheiractualimpact.

C.BEPS,theInternationalTaxRegime,andEnhancedCoordination

Asimilar,moreindirectimpact ofBEPSon taxtreatiesmay beitsimpactontheinternationaltaxregimebeyondtaxtreaty law.The non-taxtreaty reformsdwarf theabove-discussed changestotaxtreaties.ThebulkoftheworkoftheBEPSproject focusedon changestodomesticlawsinthegeneralformatofbest practices. Theideawasthatsuchbestpracticeswouldeventuallybeadopteduniversallywith littlechangestoenhancethe standardizationofthenormsoftheinternationaltaxregime, whichwouldeliminatestateless incomeandthepreventionof BEPS.Thesekeyreformsinclude theanti-hybrid-planningnorm recommendedbytheactionitem2report,theintroductionof standardCFCregimes,astandard limitoninterestdeduction,a limitationonpreferentialregimesingeneralandpatentboxes

inparticular,therevisedTPG,andaself-reportingmechanism foraggressivetaxplanning.

Itisdifficulttofindacoherentpolicythatwoulduniteallof thesechangesbeyondsimplisticanti-BEPSmeasures.Yet, a commonthreaddoesexist:theyalloperatein a mannerthatrequiresorenhancescoordinationintheinternationaltaxregime. Thisisinterestingsince,ascoordinationdevices,these areallat leastsecond-bestmeasuresbecausetheyare softlaw.Yet,one canmake a validargumentthatthisisthebestthattheOECD couldpoliticallyachieveinthedirectionofenhancedcoordination.Perhapscountriesdonotfullycomprehendthefirstinsight ofBEPS.Adiscussionaboutthesoundnessofthisargumentis beyondthescopeofthisarticleandmaybefruitlessinanyevent. Onemaycriticizethe tacticsandstrategy ofBEPS,theOECD, andthevariousparticipants,yet,atthesametime,oneshould alsoberealisticabouttheachievementsoftheproject.

Theoverallprogresstowardenhancedcoordinationoftaxpoliciesandpracticesindirectlyinfluencestaxtreatiesasapartof themoregeneralinternationaltaxregime.Thisarticleconcludesthattheemphasisondomesticlawchangeswasperhaps misguided,yet,intheend,ithasnotalteredthebalanceinthe regimetowardneglectoftaxtreaties ascriticalbuildingblocks oftheregime.Themostimportantnon-treaty effectofBEPS, however,isnotlegal.Itisthechangeinthecompliance andenforcementenvironmentacrosstheglobe.Taxpayersfaceatsunamiofuncertaintyandaserious threattotheruleoflawintax matters.Onemayviewthesechangesasbeneficial perhapsas apricetopayforBEPS yetthethreatthat thisscenarioposes tothestabilityoftheinternationaltaxregime,andevento globalinvestment,isquiteserious.Again,theoneclearoutcome ofBEPSisthatitdecimatedratherthanenhancedinternational cooperationandcoordinationoftaxpolicies.Thequestionbecomeswhetherthisoutcomeisjusttemporary,settingupa desirableand meaningfulreform,orjustafirststeptowardthe dismantlingofthe(taxtreatybased)internationaltaxregimeas weknowit.

III. THE FUTUREOF TAX TREATIES

Thispartwilladdressthefutureoftaxtreatiesinlightofthe analysisoftheimpactofBEPSontaxtreatiesandtheinternationaltaxregime.Theseareinterestingtimesfortax treaties. AstheBEPSprojectwindsdownthereis littlefinalityastoits

impactontaxtreatiesorotherwise.TheBEPSproposalsfor amendmentstotheOECDModelpromiseminimalimpact(at best)aswell.Yet,perhapsthe “fogofwar” obscuressomematerialdevelopmentsthatmaybevery meaningfulforthefutureof taxtreaties.Thefollowingsectionswillanalyzesomeofthese potentialdevelopments.

A.TheInstitutionalDimension

Theinstitutionaldimensionof theinternationaltaxregimeis criticallyimportantforanyanalysisoftaxtreaties.Thelackof currentinstitutionalizationoftheregimefitsitssoft lawessence,its flexibility,andresilience.Yet,largely,theOECDhas servedasaforumforinternationaltaxpolicymaking.168 Therole oftheOECD hasbeenparticularlysignificantforthecentrality oftaxtreaties,thembeinglargelymodeledaftertheOECD Model.169 Suchrolewas leftessentiallyunchallenged.170

Alloftheotherpotentialplayershavenotevenenteredthe match.TheUnitedNationseffectivelyhasabandoneditstax treatyprojectand,whenitrecently resumed theproject, it preferredtopositionitselfascomplementarytotheOECD rather thanacontestantforleadership.171 TheWorldTradeOrganization(WTO)escapedresponsibilityintaxationandhasnever gainedexpertiseinthefield.172 Anindependent taxforum, alt-

168.See Brauner, supra note12,at 310–16;Arthur J.Cockfield, TheRiseof the OECDasInformal ‘World TaxOrganization’ Through NationalResponses toE-commerce TaxChallenges,8YALE J.L.&TECH.136(2006).

169.See THE IMPACTOFTHE OECD AND UNMODEL CONVENTIONSON BILATERAL TAX TREATIES, supra note 2.

170.TheUnited Nationstaxproject,although nominallya competing initiative withits ownmodel convention,hasnever presenteditself as analternative and hasneverbeenone.

171.See THE IMPACTOFTHE OECD AND UNMODEL CONVENTIONSON BILATERAL TAX TREATIES, supra note2;WimWijnen&JandeGoede, TheUN Model inPractice 1997–2013,68BULL. FOR INT’L TAX.118(2014), http://www.un.org/esa/ffd/wp-content/uploads/2014/11/9STM_FinalPublishedVersionIBFD.pdf.

172.See Brauner, supra note12,at315–16; seealso ReuvenAvi-Yonah & JoelSlemrod, (How)ShouldTradeAgreementsDealwith Income TaxIssues?, 55TAX L.REV.533(2002)(contemplatingthepossibilityoftheWTO as also encompassinganinternationaltaxagreementandpromoterofit).

houghproposedfromtimetotime,wasshotdownasunreasonablebecauseitwaspaintedwiththeunappealingcolorsofa worldtax government.173

Interestingly,theG20hasenteredthepicture,whichprovides politicallegitimacyandbacking fortheBEPSproject.For a while,themoreexclusiveG8(nowtheG7)organizationattemptedtohighjacktheprojectbutfailed.174 TheG20includes thelargest,butnottherichesteconomiesoftheworld,representingbothOECDandnon-OECDmembers.175 Itsinvolvement clearlychallengestheOECD that haddominatedtheinternationaltaxregime,atleastuntilrecently.176 Yet,suchchallenge mayalsobeviewedotherwise aconvenientrolefortheOECD ascaretaker oftheinternationaltaxregime.

First,theOECDischargedwiththeactual managementand implementationoftheBEPSproject,keepingitinthedominant position,andprecludinganindependentdevelopmentofexpertiseelsewhere(even theG20is currentlyunequippedforthat). Second,theOECDis abletopositionitselfasapartner rather thananagentfortheG20inthe BEPSproject.177 ThisisparticularlystrikinginlightofthefactthatBEPSisaresponseto failuresofthecurrentOECD-ledinternationaltax regime. Third,thepartnershipwiththeG20relievesmuchofthepressureontheOECDtogiveavoicetonon-OECDmembers,especiallyemergingeconomieswithstrongpositionsintheworld marketslikeChinaandIndia.Asalreadymentioned,theOECD attempted to relievesomeofthispressurebygrantingobservationprivilegestodevelopingcountriesandinvolvingtheminthe discourse,yetthathasnotbeenenough.Thesecountriesdemandedarealvoice(votingpowers)andactualchangesinthe norms.Thepartnership withtheG20permits someacceptance

173.See,e.g.,Horner, supra note21.

174.See PrimeMinister’sOffice&CabinetOffice, G8 Factsheet:Tax,GOV UK (June7,2013),https://www.gov.uk/government/publications/g8-factsheettax/g8-factsheet-tax.

175.See, e.g., G20 Members,G20.ORG, http://g20.org.tr/about-g20/g20-members/(last visitedApr 7,2016).

176.See, e g.,Herzfeld, supra note47;Grinberg, supra note 49

177.Throughout theBEPSdocumentstheOECDpresentsitselfasapartner “onequalfooting” withtheG20. See,e g.,OECD,ACTION PLAN ON BASE EROSIONAND PROFIT SHIFTING, supra note5,at25.

BROOK.J.INT

ofthesedemandswithoutasignificanteffectiveconcessionof powerbytheOECD itself.

Finally,partneringwithleading developingcountriesassists theresolutionofsomefundamentalconflicts thatmaynothave beenpossibletoresolvewithin theOECD.Inanall-OECDforum,itwouldbedifficulttoconsiderconcessionstosourcecountriesona unilateralbasis,butin suchlargerforums,politicians couldexplainsuchconcessions.Thislatteradvantagewasvery apparentsincecollaboratingwiththeG20isnotnewforthe OECD.The establishmentoftheGlobalForumhadsimilarorigins,albeitinamorelimitedscope.178 Therelativesuccessofthe GlobalForum,coupledwiththepreservationoftheinfluenceof theOECD overit,perhapsmadetheOECD particularlycomfortablewiththisarrangement.

Againstthis backdrop,oneshouldpredictthattheOECDwill besuccessfulinkeepingmuchofitsdominantpositionoverthe internationaltaxregimeafterBEPS.Thismeansthatone shouldnotexpect dramaticchangesintaxtreaties,but rather a slow-paced,gradual,andmostlypredictablerefocusingofthetax basedivision,probablyinthedirectionofmoredeferenceto sourcetaxation.Thisarticlelargelyagreeswithsuchaprediction,yetitwouldaddthataparadigmshifttowardenhanced coordinationwouldrequirechangesthat maybemoresignificantthanpredicted.Someofthesechangeswouldalignwith OECDpolicies,andsomewouldnot.

Awordof cautionisduehereregardingtheroleoftheG20in theprocess.Itmaybe temptingtomaketheargumentthatthe powerwithin theinternationaltaxregimeisshiftingfromthe OECD to theG20.179 Thelatterisin chargeofBEPSandits adoptionpolitically.ItisquiteclearthattheOECDalonecannot proceedwithanymeaningfulpolicyreformsrelatedtotheinternationaltaxregimewithoutsome keyG20members,especially ChinaandIndia.Moreover,parallelsbetween theBEPSproject andtheGlobalForum,forinstance,maybeviewedasashift towardtheway “thingsaredone” bytheG20,especiallywhen coupledwiththedevelopmentsintheGlobalForumandother internationalactionstakenbytheG20.180

178.See Grinberg, supra note49.

179.See id

180.See id.

Yet,oneshouldrealizethattheG20isaverydifferentorganizationfromtheOECD.G20goals(globalfinancialstability)are morelimitedtobegin with.181 Itdoes notcomparetothesizeand expertiseoftheOECDpersonnel(asfarastaxationisconcerned).Itisanumbrellapoliticalorganizationwithlittleindependentinstitutionalpowerandlacksapermanentsecretariat orevenaheadquarters.Therevolvingleadershipoftheorganizationalsoaffectstheever-changingagendathatisstronglyrelatedtotheagendaofthehostandchairingcountry.Interestingly(andconvincingly),prominentscholarshaveargued that theOECD effectivelyservesasthesecretariatfortheG20.182 Therefore,theconclusionthattheG20isnotabouttotakeover fromtheOECDandchangetheinternationaltaxregime stands.

ThemoreinterestingquestioniswhatpositionkeyG20members(such as theBRICSnations)willholdinthediscoursewith theOECD overpost-BEPSdevelopmentsintheregime.Theansweris difficulttopredictaccurately,ofcourse,but,asanalyzed elsewhere,itisbothdesirableandlikelythattheOECDwill needtobemoreinclusiveandflexibleifitwishestopreservethe internationaltaxregime.183 Aninformalinitiative,suchasthe onerunfortheBEPSprojectwiththesupportoftheG20,providesacomfortableenvironmentfortheOECD.IftheOECDcan sustainit,itprobablywill.Thismaybemoredifficultwhen “ new ” orothernon-BEPSconflicts comeup.Atthatpointin time,amoreinstitutionalized,yetsimilar,forumforinternationaltaxcoordinationislikelytobeanaturalprogressionfrom the adhoc BEPSprojectpartnershipbetweentheOECDandthe G20.

So,whatcouldchange?Thereal questioniswhetheranykind ofaninternationaltax forumcanarisepost-BEPS.Notethatthe BEPSprojectitselfshouldnotbeconsideredassuchsincethe OECDgovernsitalone(evenifitisendorsedlooselybytheG20). Veryrecently,theOECD publishedacallfortheestablishment

181.See id.

182.See Jan Wouters& SvenVanKerckhoven,TheOECD andtheG20:An EverCloser Relationship?, 43 GEO.WASH.INT’L L.REV.345 (2011).

183.See ReuvenAvi-Yonah, A Perspectiveof Supra-NationalityinTaxLaw, in BRICS ANDTHE EMERGENCE OF INTERNATIONAL TAX COORDINATION 33–38 (YarivBrauner &PasqualePistoneeds.,2015).

ofanewforumfortheimplementationoftheBEPSproject.184 Interestingly,thiscallcameafewmonthsaftertheconclusion oftheBEPSproject,notas a directcontinuationofBEPSand withlittleanchoringinthefinalstagesoftheBEPSproject.The OECD alonecalledallcountries,notjusttheG20,tojoin itin thisforum.ItsaidthattheOECD shallpresenttheforumtothe G20in2016asanatural partofanongoingpartnershipbetween thetwoorganizations.Thisisaninterestingdevelopmentand onethatwasalongtime coming,despitebeingresisteduntilnow bytheOECD.185 ItfitstheBEPSagendaanditsinsights,even iftheactualprojecthasviolatedsuchinsights.Viewedsimply, itisjusttheOECDunderstanding thatitcouldachievenothing orclosetonothingbyactingalone.Yet,suchamovealsokeeps theOECDatthehelmandblocksanyoneelse fromleadinga parallelinitiative.

Furthermore, thecreationofsuchaforumalsofitstwoother majorBEPS developments,regardingactionitems14 and15. BEPScallsforarbitration,which requiresanewforumtobetter promoteitssuccess.Bytheendoftheproject,onlytwentyrich countriesjoined,andthatwillnotbesufficient.Thenewforum willpresentanopportunitytoconvinceothercountriestojoin andtobreak dealsthat wouldhaveasimilareffect.Moreimportantly,theimplementationofthemultilateralinstrument wouldrequireaseparate forumalready createdbytheOECD,186 andlargelycontrolledbyit,yetsomeOECD countries(mostimportantlytheUnitedStates)arestillnotonboard.Thisleaves theOECDanditsmembersvulnerableinacrucialforumthat includesmanycountriesthatdonotnecessarilyhaveinterests alignedwiththatoftheOECD.

ThecombinationoftheforumswouldgivetheOECDmore powerandwouldhopefullyconvincetheUnitedStatestojoin, especiallyifarbitrationwouldbe partofthedealbrokeredbecauseitisthemostimportantgoaloftheUnitedStateswith respectto BEPS.Additionally,theOECD must understandthat

184.AllInterestedCountries and Jurisdictions to be Invited to JoinGlobal EffortsLed by theOECDandG20 toCloseInternationalTaxLoopholes, OECD.ORG (Feb.23,2016),http://www.oecd.org/tax/all-interested-countriesand-jurisdictions-to-be-invited-to-join-global-efforts-led-by-the-oecd-and-g20to-close-international-tax-loopholes.htm.

185.See Brauner, supra note12.

186.See ACTION 14FINAL REPORT, supra note31,at37–41.

thecombinationwouldalsobeimportantsinceitisunlikelythat onceamultilateralinstrumentisestablished,ifindeedit is successfullyestablished,itwouldbeusedsolelytoimplementBEPS accordingtoOECDprescription.Suchaninstrumentwillhave tobethebasisforanewinternationaltaxregimeand,itself,an internationaltaxforum.Itwouldbecrucialfor theOECD togain controloversucha forumfromthebeginningwhenitstillholds allthecards.187

B.EnhancedCoordination

OneoftheprimaryweaknessesoftheBEPSprojecthasbeen itslackof a clearidentity. Fromthebeginning,itsufferedfrom adualityofpurposes.Ontheonehanditwantedtoreformthe internationaltaxregime,bringingitintothetwenty-firstcentury,yetontheotherhandmuchofitwaslimitedtothepursuit ofspecific,limited(evenifmajorinimpact)tax-planning schemes. Thelatter, minimalistviewoftheBEPSprojectdominatedthroughout,perhapsdueto theunreasonablytightscheduledictated. Yet,itquiteobviouslyconflictedwiththefirstinsightofBEPSthatidentifiedthenecessityofenhanced coordination.Coordinationisaproblem sinceitconflictswiththevery natureofourcompetition-based regime.

Asalreadyexplained,muchoftheactualBEPSdeliverables, andclearlytheimmediateimpactoftheproject,shouldbeattributedtoitsminimalistview.188 Nonetheless,someoftheactionitemsindividuallyreflectedthemaximalist,reform-seeking viewoftheproject.189 Theseactionitems,however,maynothave animmediateimpactontheinternationaltaxregimeandtax treaties.Bydesign,theseactionitemshavemostlybeencharged withproducingreports,notactionplans(nopunintended).One mayinterpretthisasasignaloftheOECD’ s disbelieforlackof interestin comprehensivereform.Yet,itisnotunreasonableto

187.Notethatthisisadesirabledevelopmentsince,ifsuccessful(andthat isnotcertain since allcountriesobservetheactionsof theOECD),itwould eventuallyprovideachancefor a newcoordination-based ratherthan competition-based regimetobeestablished. 188.I.e.,thecombatofBEPSbythelargestMNEs.

189.Forexample,actionitems1,3,4,5,6,14,and15.ACTION 1FINAL REPORT, supra note41;ACTION 3FINAL REPORT, supra note44;ACTION 4FINAL REPORT, supra note106;ACTION 5FINAL REPORT, supra note108;ACTION 6 FINAL REPORT, supra note114;ACTION 14FINAL REPORT, supra note31;ACTION 15FINAL REPORT, supra note83.

acknowledge thattheshorttimeframeofBEPScouldnotaccommodateseriousreformofthismagnitude.This articlesupports thislatterinterpretationandarguesthatthemostsignificant contributionoftheBEPSproject to theinternationaltaxregime willnotbeintheimplementation oftheimmediaterecommendationsbutratherin thestepsmadetoward comprehensivereform.Thissectionsubstantiatesthisargument,beginningfirst withitsmosttypical andimportantexample:BEPSactionitem 15.

1.TheMultilateralInstrument

ThefirstdramaticachievementofBEPSisitsconclusion that amultilateraltaxtreaty instrumentisnotonlydesirablebut alsobothlegallypossibleandpracticallyfeasible.190 Actionitem 15hadalimitedgoal:toexplorewhethersuchaconclusioncould bemade.Yet,theOECDhasgonefurther,usingthepowerof inertiatoproceedtoward theestablishmentoftheinstrumentin thepost-BEPSera.

Thedramahereisnotsomuchtheactualprogress,itselfan unmistakableachievement,butthedismissalofthemost commonopposingarguments againstmultilateraltaxarrangement: thatthey arelegallyimpossible to constructandclearlyimpossibletoimplement.Theargumentaboutthelimitedscopeofthe instrumentaccordingtothecurrentBEPS project(i.e.,the amendmentofmultipletaxtreatiestoconformtosomeBEPS norms)is unimportant. Itwouldbe senselesstobelievethat such aninstrumentwould be abandonedafterthecountriescommit toan instrumentthatimplementsthefew BEPStreatynorms thatgainedconsensus.Amultilateralinstrumentwillclearlybe supportiveofaninternationaltaxforum,evenifitisnotaconditionfor theestablishmentofsuchforum.Thisinstrument wouldgivepowerforsuchaforumandwouldincentivizecountriestoparticipateinit.

Itiscrucialtounderstandthata multilateralinstrumentdoes notpresentadeathsentenceforbilateraltaxtreatiesandthe currentregime.Onemayreasonablyclaimthatitwouldsave them.Muchduplication andwaste wouldbeavoidediftreaty negotiationwerestreamlined.Aproperunderstandingoftax

190.See ACTION 15FINAL REPORT, supra note83.

treaties,notasessentialnormmakersbutratherascomityenhancingtools,should maketreatiesmoreratherthanlesseffective.

Finally,amultilateralinstrumentdoesnothavetodevelop intoamultilateraltaxtreaty,atleastnotofthekindtypically criticizedbyconservative observers.Theall-or-nothingapproach dominatedtheinternationaltaxdiscourse,dictating a binary choicebetween a singleall-encompassingsupranationalmultilateraltax treatythat is supposedly promotedby(complete)harmonizationproponentsandthecurrentregime thatisbasedon alargenumberofbilateraltaxtreaties.Breakingaway fromthis approachwouldpermitcountriestomakeprogress including effectivemultilateralreforms withoutgivingupthe whole store.Countrieswouldbeabletokeepnegotiatingandwould holdsome uniquepositionsinbilateralorothersettings,yetthey wouldnot be required to wasteeffortsandcapitaloverunnecessary,non-policy-relatedmatters.Theseareluxuryexpensesthat mostcountries,includingtherichest,presentlycannotafford.

2.StandardTransferPricingandCbCReporting

Thesecond dramaticachievementofBEPSisthestandard transfer-pricingreporting,particularlytheCbCreporting framework.Inastrikingsimilaritytotherhetoriconthemultilateralinstrumentpreviouslydiscussed,theOECD is attemptingtoamelioratetheimpactofthisdevelopment.CbCreporting hasbeendramaticallydecimatedtoaframeworkandincludes verylittlereportingthatisnew,relevant,orusefulforBEPSto countersophisticatedtaxauthorities.Now,however,suchinformationisalsoavailabletolesssophisticatedandlessfundedauthorities.ItisalsopartoftheofficialcorrespondenceofMNEs. Thisreportingisusefulnotonlyforbenevolenttaxauthorities thatsimplycouldnot affordeconomicallyorpoliticallytoobtain theneededinformationtoenforce theirtaxlawsbutalsoincases where transparencywaslackingforotherreasons.Now,itwould bedifficultfortaxauthoritiestoignorethedisturbingnumbers,191 theexposureofwhichtriggered theBEPSproject.One shouldnot forgetthattaxauthoritiesdidnotstarttheprojector initiatethecomplaintsprecedingit.Infact,theprojectwas forcedandcompelledbypoliticians.Thetaxauthoritieshave

191.Seesupra note 6.

longignoredthisdata,ataskthatwouldbe verydifficultwhen itisclearlyanduniformlypresentedtothemandtoomanyother authoritiesatthesametime.192

Evenmoreobviousis theimpactonthetaxpayersthemselves. MNEswouldhavetooperatemuchmorecarefullywhensuch workpapersbecomemandatory.Collusionbetweentaxpayers andtaxauthoritieswouldalsobemoredifficultwhenthereports areavailabletomultipletaxauthorities.Amorerealisticview ofthesereportsrevealsamuchlargerpotentialimpactofthese reports.First,oncedisseminated,thesereportsarepotentially exposable,especiallywithmultipletaxauthoritiesinvolved.Media,disgruntledwhistle-blowers, andlitigationcometomind firstinthisregard.This makesthestakesmuchhigherforboth taxauthoritiesandtaxpayers,andthechanceofrealsuccessis significantlymoremeaningful.

Beyondtheinformation itself,thesereportsmaybeinfluential inanotherway.TheOECDhasstronglyemphasizedthat the CbCreportsinparticularmayonlybeused by taxauthorities (beingconfidential,notpubliclyavailable)andonlyforthepurposesofrisk assessmentintheprocessoftransfer-pricingenforcement.Thisemphasishides a concernthat taxauthorities wouldapplyformularymechanismstochallengetaxpayersand deviatefromthearm’slengthstandard.Thetemptationtotake thisroutewouldbethattheinformationisorganizedandavailableinamannerthat makesformularytaxation easyandalmost direct.Thisisinterestingatatime wheretheOECD haspromisedtoquestionitsdevotiontothearm’slengthstandardand deviatefrom itwhenitdoesnotwork.Regardlessofthenormativeaspectsoftheissue,itisclear thattheOECDhereiseither naïveornotgenuine.Itisnotreasonabletorequestsuchrestraintfromsmall,poortaxauthoritieswhentheymayviewit astheonlypaththey cantaketocollectingrevenuefromMNEs. Whatisthetax-treatyanglehere?Mostobviously,theimplementationofthearm’slengthstandardispresentedaspartof taxtreatylaw,despitethelackofanobviousobligationtothat effectinactualtaxtreaties.Thereportingandthestandardizationwouldclearlyassistthevaryingtransfer-pricingchargeof treaties.Yet,moreimportantly,themultilateralsettingofthe

192 See, e.g., Caterpillar’sOffshoreTaxStrategy:Hearing Before theSubcomm. onInvestigationsoftheS.Comm.onHomelandSec. & Gov’t Affairs, 113thCong. (2014).

reportswillnecessarilyenhancecoordinationoftransfer-pricing normsandwouldmakeitcheaperandseamlessinimplementation.Akeycomponentherecouldbetherequirementtoreporta singlesetoftransferpricesinmultiplejurisdictions,which,ifat all,ispresentlyveryweak.Taxtreatieswouldbeanaturalplace toclarifyandimplementsuchanorm.193 Notethattheseadvantageswouldariseinbothabilateralandamultilateraltax treatysetting.

3.DisputeResolution:IsitLeftBehind?

TheunfinishednatureoftheprogressmadeinBEPStoward institutionalizationandfurthercentralizationoftheinternationaltaxregimeisparticularly apparentintheproject’ sprogressondisputeresolution.Disputeresolutionisveryimportant tocompleteaminimalinfrastructure fortheregime.Onceamultilateralinstrumentisimplemented,theregimewouldhavea norm-makingprocedureaswellasimperfectimplementation andreportingpowers.Thecurrent regime’sdisputeresolution mechanism,however,islackingandwithout a robustoperation forresolvingdisputes.Thus,itis doubtfulthatthenextsteptowardinstitutionalizationcanbe made.

Interestingly,theissuehereisnot thecontent,asitseemsthat thereislittleoppositiontomandatory “baseball” arbitrationas adesiredsolution(even ifalternativemechanismsmaybeable tosupplementit).TheOECDsupportedthissolutionevenbefore BEPSandcontinuestopromoteitthroughactionitem14ofthe BEPS action plan.Yet,littleprogresswasmadeonthismatter. Asalreadymentioned,thepactof a significantgroupofpowerful countriestocommittomandatoryarbitrationinalloftheirtax treatiesisencouraging,yetitisdifficulttoassesswhethereventuallyitwouldbemeaningfulandsuccessful.

Itisnotdifficulttoobservethat theproblemhereisthedistrustamongthenew partnersintheproject.Outsourcing adjudicationmayexposesomecountries’ concessionsoftaxsovereignty,makingitpoliticallynotfeasibletosupportiteven in the contextofBEPS,andespeciallywhenOECDispromotingthe

193.Indeed,the useoftaxtreaties,ormore specificallytheexchange ofinformationmechanismsin tax treaties, couldbethenext battlegroundinthe implementation ofthesetransfer-pricingreportingrequirements.TheUnited Stateshasalreadyexpresseditsanxiety overthematter. See AlexM.Parker, Stack:U.S. WouldHaltExchangeofTaxDataIfMadePublic, 24TAX MGMT. TRANSFER PRICING REP. 1291(2016).

solution.Suchlackof progressislikelytohamperseriousprogresstowardinstitutionalizationoftheinternationaltaxregime. Technically,itispossibletokeepthecurrent noncommittalregime,butthatwouldlimititsefficacy.Perhapsabettersolution wouldbetoexploitthe flexibilityofthecurrentregimeandstep outsideofitforthepurposesofdisputeresolution.Outsideorganizationsdominatesimilardisputeresolutionregimesandare quiteeffectiveForexample,theEuropeanArbitrationConventionisaseparatetreaty (andentity)from theEuropeanUnion,194 andtheInternationalCentreforSettlementofInvestmentDisputes(“ICSID”)isthemostcommoninstitutionusedin arbitrationpursuanttotheinternationalinvestmentregime.195 Thereisnoreasonwhytrustissuescouldnotbeovercomebythe useofdifferentinstitutions.Tax treatiescanclearlyaccommodatesuch a solutionandisevidencedbythetreatiesthatactuallyadoptedmandatoryarbitration.Suchadevelopmentshould notaffect thefutureoftaxtreatiesbeyondtheriskofnonaction onthestabilityofthewholeinternationaltaxregime.

C.PrinciplesinaFog

Someotherfundamentalnormshavetaken lessclearpaths. Unfortunately,thesubstantiverulesoftaxtreatieshavebeen muchlesssuccessfulthantheirstructuralaspects.BEPSdealt withthreebasicissuesrelatedtothesubstantiverulesofthe internationaltaxregime,allof whicharestronglyembeddedin taxtreaties.First, “ more ” sourcetaxationwasrequiredtoappeasedevelopingcountries.Second,somecircumstanceswere noteffectivelyregulated,eitherbecauseofdeficientrulesoreconomicdevelopmentnotanticipatedbythecurrentrules,and thereforerequiredchangesinthenorms.Third,unacceptable, so-calledstatelessincomeavoidedtaxation,whichrequired

194.See ConventionontheEliminationofDoubleTaxationinConnection withtheAdjustmentofProfitsof AssociatedEnterprises, Aug. 20,1990,1990 O.J.(L225)10(EC); seealso DirkSchelpe, TheArbitrationConvention:Its Origin, ItsOpportunitiesandIts Weaknesses,4 ECTAX REV.68,70–71(1995); LucHinnekens, European ArbitrationConvention: ThoughtsonItsPrinciples, Procedures andFirst Experience,19ECTAX REV.109(2010).

195.See SergioPuig, Emergence &DynamisminInternationalOrganizations:ICSID,Investor-State Arbitration&International InvestmentLaw,44 GEO.J.INT’L L.531,540(2012)(discussing thedominance ofICSIDininternationalinvestmentlawanditschallenges).

changesinthenorminordertosubjectittotaxjurisdiction.Unfortunately,BEPSprimarilyfocusesonthelastissue,effectively abandoningthefirsttwo.Ultimately,theunclearprinciplesunderlyingtheinternationaltaxregimeandthereluctanceofcountriestoengageina meaningfuldiscourseoversuchprinciples areatfault.Untilsuchadiscussiontakesplace,reformhasno chanceofsuccess.

1.TheSingleTaxPrinciple

Theappealingsingletaxprinciplenaturallymakesdouble non-taxationacorollarytodoubletaxation,thelongstanding corepurposeoftaxtreaties.Yet, presentingthesetwo issuesas mirrorimagesofeachotheriswrongandharmful,bothnormativelyand practically. Themostobviouspracticalexampleisthe BEPS work onactionitem2,whichrecommendsthatcertain countries taxincome thattheydonotwish to taxundertheir domesticlawsjustso thatsuchincomedoesnotgountaxed.196 Thereisnoprinciple-basedreason,exceptforperceivedadministrativeconvenience,tochoose theseandnotothercountries. Thissolutionisverydifferentfromthesupposedlymirrorsituationwherebothjurisdictionswish totaxasingleitemofincome andoneorbothconcedepartoralloftheirclaims.

Thesingletaxprincipleignoresthekeyissueoftaxbase divisionthatisatthecoreoftheBEPSproject.TheBEPSsolutions donotsupportaclaimbysourcecountriestotax,andsometimes theydonotsupporttheirclaimnottotax. Thisisunlikelyto improvethelegitimacy oftheBEPSprojectand(bythat)its chancesofsuccess.Finally,taxtreatiesarenotreallydesigned tocombat againstdoublenon-taxation,exceptthroughpurposiveinterpretation.Theattemptto infusenormsofthiskindinto treatiesisquestionableandwouldinterferewithproperinterpretation.

2.SourceandResidence

Riversofinkhavebeenpoured overthedichotomybetween residenceandsourcetaxationanditsdominanceoftheinternationaltaxdiscourse.Thisarticledoesnotjointhisdiscourse,but

196.These couldbe countriesthat useexemptionasamethodto relieve doubletaxationor countriesthat granttax incentivestoattractforeigninvestment.Inanyevent,thepointisthattheymadepolicydecisionsthatthey shouldnottaxinthesecircumstances. Seesupra note60.

ratherraisesaquestionabouttheutilityofthisdichotomyand pointstotheharmthatstubborninsistenceoforganizingthe wholeregimearoundtheseconceptsmaycause.

Take,forexample,actionitem2.Theconflictthereistypically betweenaresidenceandsourcecountry,althoughconflictsbetweentwo potentialresidencecountriesorsourcecountriesalso arise.197 Third-partycountriesmayalsobeaffected.Thepointis thattwocountriesindependentlyhavelegitimatetaxjurisdictionaseitherresidenceorsourcecountries,yettheyapply rules, legitimateinandofthemselves,thatfailtoresultinacceptable “single” taxation(doublenon-taxation).Theresidence/source rulesoftheinternationaltaxregime were designed todeal primarilywithdoubletaxationanditselimination.Hence,their primaryeffectistolimitsourcetaxationandthen,secondarily, torelievedoubletaxationbyrequiringtheresidencecountryto respectwhateversourcetaxationleftisdulycollected.Despite itssuccessovertheyears,this mechanism hasbeenimperfect, andmuchdoubletaxationwasleftunresolvedbyit.TheOECD hasattemptedtoimprovethisbyapplying unifyingstandards forsomeconflictofqualifications198 and inthepartnerships area,199 forexample,yettheseattemptsareonlysomewhatsuccessful,partlybecausetheyareleftasguidanceexternaltothe coreinternationaltaxregimeandbecausetheyhavenotenjoyed ameaningfulconsensus.Sometimesclassificationsofresidence orsourcedoesnotsimplymeanwhatitdoesinthestraightforward,simplecases.200 Thisisthe casewithhybridmismatches. Therulessimplydonotfitthem.Therefore,itshouldnothave beensurprisingthatthestandardsappliedbytheOECDtoresolveconflicts,basedonprinciplesdeveloped in thecourseofthe attemptto resolvedoubletaxation,donotfiteither.Doublenontaxationwasnotoriginallyperceivedas a problemoftheinternationaltaxregime. Thecreatorsoftheregimewhowereconcernedwithovertaxationwantedtoensurefreetradeandlimit

197.Id.

198.OECDCOMMENTARIES, supra note55,art.1,para. 23.

199.See OECD, supra note97.

200.Thisoccurs inmany different ways, forexample:whenthe universal sourcerulerefers to residence, such as in thecase ofdividendsorcapital gains; orwhenthe source isarbitrary, suchas inmanycasesofdigitalproducts;or in thevariouscomplexcircumstancesknown astriangular cases. See FETT, supra note56.

thepowersofoverextendinggovernmentinorderto protectinvestorsandentrepreneurs.Exchangeofinformationwas consideredsufficienttoprotectthetaxbaseofcountries.Thecurrent rules,therefore,are unsurprisinglyincapableofdealingwith powerfultaxpayerswhoerodesuchtaxbases.Nonetheless,the OECDandcountriesingeneralhaveacknowledgedtheproblem ofdouble non-taxationasamirrorproblemofdoubletaxation, andassuchhaveappliedsupposedly “mirror” rules.

Nevertheless,thesourceandresidenceruleshaveproblems beyondtheinteractionwiththesingletaxprinciple.Sometimes theyaredifficulttoapplytonovelcircumstances.Theobvious exampleisthedigitaleconomy.Itwouldberidiculoustosource incomegeneratedby thateconomyandevenhardertoenforce rulesbasedonsuchsourcing.

Similarly, theresidenceconceptdoesnotfaremuchbetter,althoughitsmainproblemisnotnew.BEPSisaboutcorporations andthecorporatetax,andcorporationsdonot “reside” anywhere.Countriesassigncorporateresidencebasedonvarious unconvincingconstructs.Yet,eventually,assumingweaccept thecorporate fictionormetaphorfortaxpurposes,thecorporate residencerulesaremerelytechnicalintheserviceofgeneraltax policies.201 EvennowattheendoftheBEPSproject,theOECD cannotdisconnectfromtheneedtohaveastandardruleforcorporateresidence(itdidgetridofthecompletelyunworkable rule itpreviouslyused).

3.And,ofCourse:Arm’sLength

Whatever façadetheOECD wishestomaintain,itstransferpricingnormsarenotworking.Theproblemis notjustinthe implementationorthemoralcharacterofpractitionersasthe OECDseemstoargue.Theproblemisthatthearm’slength standardisclearlyunworkable,particularlyforintangiblesor anyotherdifficultcases(yet,awkwardly,this standardhasbeen elevatedtoalevelof “principle,” asallOECDcommunications nowusethisnewsemanticthatisveryironicinsuchanunprincipledproject202).TheOECDalreadyacknowledgedit,yetcould

201.See, e g.,Marian, supra note94.

202.Formore onthis unfortunateaction,see YarivBrauner, Changes? BEPS,Transfer PricingforIntangibles, andCCAs, in TRANSFER PRICING IN BEPS(forthcoming 2016).

notmaketheleapforwardtoreformtherulesbasedonitsoriginalobservationthatinsomecases “goingbeyondarm’ s length” isinevitable.Theresortto profit splitsisnotsufficientsincethe OECDandgovernmentshaveinsistedforthelongesttimenow thatprofitsplitisarm’slengthcompatible203 and,therefore, haveconstrainedthemethod,inflictingitwithmanyofthedefectsoftheotherrules.

Infusingtheruleswithformularyelementsisinevitableindeedandwillhappenregardlessoftheoppositionortheverbal dressupoftherules.Interestingly,theadoptionofCbCreportingwould,perhapsunintentionally,assistinthisprocess,despitethe opposition of theOECDandotherconservatives. Poorercountriesare unlikelysimplytoignorethepotential in thereportforefficientenforcementwhiletheystrugglewith costlyandconvolutedarm’slengthenforcement.Anhonestreformwouldhavebeenmuchmoredesirable,efficient,effective, andjust.Ultimately,thesearejustafewofthemostsalient examplesof thehurdlesthattheOECDcreatedbyitsinsistenceto avoidaprincipledapproachtointernational taxreformandto sticktotraditionalconceptswithout muchthoughtabout theimplicationsofsuchadecision.

D.CanCurrentBilateralTaxTreatiesSurvive Post-BEPS?

Ifoneaffirmativeconclusioncanbemadehere,itisthattax treatieswouldsurvivepost-BEPSand,perhaps,wouldevencontinuetothrive(likelywithfewchangesintheshort-term).The mostsignificantriskthattaxtreatiesfaceisthedismantlingof theinternationaltaxregime.Inpracticethatwouldoccurif countriesdecidetoabandontaxtreaties,likelyinfavorofunilateral,defensivemeasures,204 and,perhaps,somelooser,minimalarrangementsin regionsorinpoliticalgroups.

This,ofcourse,wouldbeindirectcontrasttothepurpose of theBEPSprojectthatseeksmoreratherthan lesscoordination andevendesignates suchenhancedcoordinationasnecessary forallofthecountriesinvolvedintheproject.Yet,theimmediate

203.See François Vincent, TransferPricing andAttribution ofIncometo PermanentEstablishments:TheCaseforSystematicGlobalProfitSplits (Just Don’t SayFormularyApportionment),53CAN.TAX J.409(2005).

204.Thisarticleassumesthat thechoice of a comprehensivemultilateral, supranationaltreatyoftheWTOsortpresentlyisoffthetable.

impactof BEPS,particularlyits practicalimplementations(reflectingtheminimalview oftheproject),hasbeentheexactopposite.Perversely,manycountrieschosetopreemptBEPS and unilaterallyadoptBEPS-fightingmechanismsthroughlegislation,regulation,orevenjustadministrativechangesofcourse.205 Thisisparticularlydisturbingsinceperceivedleadersof theprojecttooksomeofthemostegregiousactions.Notably,whenthe UnitedKingdomenacteda “divertedprofitstax” andpatentbox regime,theformeronlyvaguelyresembledBEPSaction, andthe latterwasenactedduringeffortsto combat patentboxregimes.206

Yet,thisshouldnotbetoosurprisingsincetheOECD’ s work onthepracticalaspectsofBEPSwasdominatedbytheideaof seekingbestpracticesthatwouldbeunilaterallyimplemented intolawbythevariouscountriesinvolved.Atfirstimpression, thisshouldnotsurprisesincebestpracticesaretheultimate soft-lawmechanismfornormativechange.Standardizationof theinternationaltaxregimeistheultimategoaloftheOECD, andbestpracticesisthequickestmechanismtoaffectchange.It ismoredifficulttoseekconsensusovermodeltreatyamendmentsand,eventhen,itcantake a longtimeuntilactualtreatiesimplementthem.Moreover,thefocusoftheminimalviewof BEPSisthatantiabuseandanti-abusenorms areprimarilydomesticbytraditionandthroughdecisionsbytheOECD, even whentreatiesapply.Anadditional advantageisthat bestpracticescouldbepresentedasdeliverablesinashorttimeframe, makingBEPSapotentiallysuccessfulproject,evenifnoneofthe rulesactuallycarrylegalsignificanceatthe timesuccessisdeclared.

Asalreadyexplained,thenormativebasisformostofthe BEPSactionsisveryquestionable.Attheendoftheday,BEPS deliveredapotpourriofanti-abuseruleswithessentiallyno standardsorprinciplestoguidetheirinterpretationandreasonableimplementation.Ifsuccessmeansvastimplementationby countriesofthevariousproposedbestpractices,thenBEPS

205.See AmandaAthanasiou, Jumpingthe GateonBEPSUnilateral Actions,77TAX NOTES INT’L 937(2015);Stuart Gibson, Jumpingthe Gun on BEPS IstheUnitedStatesNext?, 78TAX NOTES INT’L 689(2015).

206.See MindyHerzfeld, TheU K EmbracesTaxCompetitionandBEPS,75 TAX NOTES INT’L 85(2014)

wouldnecessarilyfailtoachieve itsoriginalpromiseandpurpose:toenhancecoordinationintheacknowledgmentthat unilateralactionisboundtofailinourinterdependentworld.

Therealitymaybeevenworse.Countrieshave,asalready said,adoptedadditionaldomesticrulesin an uncoordinated manner,evenbeforeknowingwhattheOECDrecommendations wouldbe.207 Suchactiondirectlyincreasesmismatchesinlaws, itincentivizesretaliationorevenlesstacticalbehaviorthatis unlikelytofollowthestrategy eventuallyprovidedfor by the OECD,andpenalizes thecountriesthathavebeenmost cooperativewith theOECD by waiting patientlyforitsrecommendations.MNEsarealsoclearlosershere,atleastintheshort-term. Theyfacelessratherthanmoreclarity.Eventually,theremay bemoretax-planningopportunitieswhenthefogdisappears, yet,currently,thecostsofuncertaintyarequitesignificant.Perhapsthemostworryingtrendisthetighteningofenforcement inmanycountries.Again,this mayseemdesirableandconsistentwithBEPS,yetoftenitisdoneinanunorganizedand legallyquestionable manner,anditclearlychangestraditions thatmay be harmfulinthelongrun.Notethatmuchofthese costsarelikelytogotowasteandnottothecoffersofgovernments.

Presently,themagnitudeofrogueactiondoesnotseemtobe significantenoughtocollapsetheregime.Yet,retaliationand short-termstrategiesofcountriesarelikely to weakenrather thanstrengthentheregime.Ashift offocustoantiabuseisnecessarilyashiftoffocusawayfromcoordinationand,subsequently,fromtaxtreaties tounilateraldomesticmeasures.Lack ofcertaintyandweakeningoftheruleoflaw,evenifjustinthe formofreducedstandardizationaseffectedbytaxtreaties, wouldobviouslydiminishtheimpactoftaxtreatiesandtreaty lawoninternationaltrade.Itmayspiraltoacompletecollapse oftheregime.Ifthismomentumcontinuespost-BEPS,rather thanenhancedcoordinationandinstitutionalization,the chance ofsurvivalfortheinternationaltaxregimeandtaxtreatieswill notbepromising.

207.See, e.g., supra textaccompanyingnote 200; seealso MindyHerzfeld, A LoomingGlobalTaxWar?, 81TAX NOTES INT’L 467(2016).

CONCLUSION

Tax treatiesshallsurviveBEPS.Thisarticlearguesthat, at best,theprojectwilllikelyresultinminimalreformofthe internationaltaxregimeanditsinstitutions.Nooneshouldbehappy withthisoutcome,exceptperhaps afewOECDofficials,asthe worldisnowlesscertainwithrespecttocross-borderinvestment,the ruleoflaw becomeslessrobust,andthefundamental problemof fairdivisionoftaxbasesremainsunresolved.Yet,the articlepointstoa silverlininginthedynamicsoftheBEPSproject,specificallyintheimplementationphase.Themultilateral instrumenttalks evenifnotsuccessfullyconcludedinthe short-term haveeffectivelydisposedofthenotionthattaxcoordinationonaglobalbasisisnottechnicallyfeasible.Theprogressondisputeresolution,emphasizingmandatoryarbitration, hasprovenagainthatthechallengesarenottechnicalbutrather amatteroftrustbuilding.Andthestandardizationoftransferpricingreporting,likelythemostmeaningfulofallactualreforms,providesaroadmapforcoordinatedandstandardtax rulesforthebenefitofall.Together,thesedevelopments demonstratethatenhancedcoordination,alreadyacknowledgedby mostasthesole path forprogressoninternationaltaxmatters, ispossibleandbeneficial,evenifdislikedbyafewpowerfulinterestgroups.Resistancedoesnotstirreforminadifferentdirectionbutrathersimplydefersprogress,oftenwith graveconsequences to moststakeholders.

Thearticleexplainstheimportanceofinstitutionalreformand itsimpactonthesuccessofcoordination-centeredreform.Itfurthernotesthatarushed,politicalprogramthatisnotbasedon relativelyclearandagreeduponprinciplescannotsucceed,as clearlydemonstrated by BEPS.Ironically,if BEPSfollowedthe rhetoricitusedinitsinitialstages(coordination,holisticreform, andinnovation),itwouldhavea muchbetterchanceofsuccess. Therefore, futuredecisionmakersdonotneedto"reinventthe wheel"andwilldowelltostudytheBEPSproject,itspromise, anditsshortcomingsinthenext"round"that islikely to take placesoon,asthefundamentalchallengesaretooimportantfor allandhavenotgone away.