Combating base erosion and profit shifting

With Sovereign Ordinance No 7,343 of 15 February 2019, the Principality of Monaco made the Multilateral Convention enforceable to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which currently concerns more than 80 countries and jurisdictions.

The Multilateral Convention has been fully enforced in Monaco since 1 May 2019 and forms part of the BEPS (Base Erosion and Profit Shifting) initiative led by the OECD, which aims to combat tax evasion at international level by harmonizing tax rules among States and by providing them with tools to ensure that profits are taxed in the countries where they are actually made.

Using the Multilateral Convention, Monaco wishes to cover some bilateral tax agreements on double taxation (there are eight: France, Guernsey, Luxembourg,  Mali, Mauritius, Qatar, Seychelles, and Saint Kitts and Nevis).

The Principality's accession to the Convention marks the introduction of two substantive mechanisms within the tax agreements covered, namely:

• A measure aimed at resolving double exemptions that may arise if the State or territory of residence applies an exemption scheme;
• A general anti-abuse clause, making it possible to refuse to apply benefits granted by tax agreements where the arrangement or transaction is specifically aimed at obtaining a benefit from the agreement.

The scope of the instrument is, however, difficult to grasp, as a result of the complexity of its implementation: in order that a provision of the Multilateral Convention can amend the bilateral tax agreement, a check has to be performed (i) that the Multilateral Convention has actually been ratified by the other State, (ii) that the other State did in fact intend to cover the bilateral tax agreement by the Multilateral Convention and (iii) that the choices made by the two States regarding the reservations, options and notifications laid down by the Multilateral Convention are consistent. 

In fact, only practice will provide a clear view of the way in which this Convention will work alongside the bilateral tax agreements concluded by the Principality.