On March 29 the OECD discussed changes to the OECD Model Tax Convention on Income and on Capital that modifies the interpretation of the arm’s length treatment of interest payments between associated enterprises of different countries.
These changes would have the purpose to clarify the application of Article 9 as it relates to domestic laws on interest deductibility, including laws aimed at preventing tax avoidance described in Action 4 of the OECD’s base erosion and profit shifting (BEPS) project. The paragraph 3 of the Article 9 of the commentary would be replaced by new language to specify that:
- in assessing whether an interest payment reflects the arm’s length amount, states will generally consider the loan terms and conditions, such as the rate of interest;
- once the profits of the associated enterprises have been allocated in accordance with the arm’s length principle, domestic law determines whether and how those profits are taxed (to the extent consistent with other articles of the treaty);
- any mismatch arising from the subsequent computation of tax under domestic laws would not yield double taxation for purposes of the treaty (states, therefore, have no obligation to make a corresponding adjustment to an affiliated company when mismatches due to domestic law differences occur);
- states may also consider, based on the facts and circumstances, whether a purported loan should be regarded as a contribution to equity or another kind of transaction
The OECD is intentioned to add to its commentary additional clarifications regarding the availability of the mutual agreement procedure for transfer pricing cases in proposed new paragraph 12.1 to the commentary on Article 25 and additional request of information by a single country as follows:
- the economic double taxation that may result from a primary adjustment consisting of the inclusion of profits of associated enterprises in an amount not justified by reference to the arm’s length standard would result in taxation not in accordance with one of the objects and purposes of the Convention to eliminate double taxation;
- a denial of access to the mutual agreement procedure in these circumstances, with a view to eliminating the economic double taxation that could follow from such an adjustment, would likely frustrate an objective of the Convention;
- states can impose additional information requirements with respect to payments made to non-residents, including reversing the burden of proof, as such measures are intended to ensure similar levels of compliance and verification in the case of payments to residents and non-residents.
Final decisions are expected within the end of May 2021.