More than 70 countries and jurisdictions signed an agreement Wednesday limiting the ability of multinationals to exploit divergences between tax treaties, a practice known as "treaty shopping" that enables companies to pay lower taxes.
The agreement -- the so-called multilateral instrument -- is part of an attempt by the Organization for Economic Cooperation and Development to limit companies' ability to shift profits to low-tax locations, a practice known as base erosion and profit shifting.
Continue Reading Below
The U.S. wasn't among the signatories, which include the European Union's 28 member states, China, India and Australia, among others.
"It [the multilateral instrument] is going to kill treaty shopping, which is one of the techniques for companies to avoid tax," said Pascal Saint-Amans, director of the center for tax policy and administration at the OECD.
The U.S., he said, already has robust anti-abuse provisions in place and companies have little opportunity to set up local operations in order to get tax breaks on their activities in other countries.
The effort to reduce tax avoidance was launched in 2012 following a surge in government spending to contain the financial crisis and the global recession. One goal of the drive was to harmonize a web of more than 3,000 bilateral treaties that provided a host of loopholes for businesses attempting to lower their tax bills.
The signing ceremony in Paris comes just days after the EU at the end of May adopted rules aimed at preventing companies from exploiting differences between EU tax systems and those of non-EU countries. They are set to go into effect in January 2020.
Corporate treasurers are now looking at the potential implications of the changes on their tax planning. "The multilateral instrument takes away uncertainty, but also removes opportunities for creative tax planning that companies have used in the past," said Michael Graf, co-head of European tax at Dentons Europe LLP, a law firm.
Once the agreement has been ratified by the legislatures of the signing countries -- a process expected to take months, if not years -- it should guarantee much greater coherence between international tax treaties, Mr. Graf said, ultimately benefiting a majority of multinationals. But some companies might be left with international tax structures that no longer work.
The emphasis on increased coherence between tax treaties will change how multinationals set up their tax structures, said Tim Wach, managing director at Taxand, a Canadian tax advisory firm.
Companies that are currently in the process of setting up new tax structures -- for example a new global treasury center -- could face challenges because of this, Mr. Wach said. "These firms will have to deal with uncertainty around whether their solutions are still fit for the purpose," he said.
The agreement includes an improved dispute-resolution process, one of the aspects that finance chiefs and tax directors support, Mr. Wach said. Nevertheless, complexity remains an issue. "The publication of consolidated versions of the treaties impacted by the multilateral instrument would simplify matters and add greater transparency," Mr. Wach said.
At a recent tax conference held by Taxand in Frankfurt, close to 80% of finance chiefs and treasurers said the multilateral instrument would benefit multinationals, according to Mr. Wach. A total of 136 finance and tax chiefs working at multinational companies in the Americas, Europe and Asia took part in that survey.
Write to Nina Trentmann at Nina.Trentmann@wsj.com and Paul Hannon at firstname.lastname@example.org
(END) Dow Jones Newswires
June 07, 2017 15:22 ET (19:22 GMT)