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THE 2017 UPDATE TO THE OECD MODEL TAX CONVENTION
This note includes the contents of the 2017 update to the OECD Model Tax Convention (the 2017 Update). The 2017 Update was approved by the Committee on Fiscal Affairs on 28 September 2017 and by the OECD Council on 21 November 2017.
The 2017 Update primarily comprises changes to the OECD Model Tax Convention (the OECD Model) that were approved as part of the BEPS Package or were foreseen as part of the follow-up work on the treaty-related BEPS measures. These changes include the following:
• Changes to the Title and Preamble of the OECD Model, as well as to its Introduction, and related Commentary changes contained in the Report on Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances).
• The addition of new paragraph 2 to Article 1 (the transparent entity provision) and of related Commentary changes. These changes appear in Chapter 14 of the Report on Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements).
• The addition of new paragraph 3 to Article 1 (the “saving clause”) and of related Commentary changes. These changes appear in the Report on Action 6.
• Changes to the section of the Commentary on Article 1 on “Improper use of the Convention”, which include optional provisions to deny treaty benefits with respect to income benefiting from “special tax regimes” and in cases of certain subsequent changes to the domestic law of a treaty partner after the conclusion of a tax treaty. Draft proposals for these optional provisions were included in the Report on Action 6, which noted that the proposals would be reviewed in the light of similar proposals which had been released by the United States for public comment in September 2015. The optional provisions on “special tax regimes” and on subsequent changes to domestic law, as they appear in the 2017 Update, were finalised accordingly.
• Changes to Articles 3 and 4, and related Commentary changes, concerning the treaty residence of pension funds. Paragraph 12 of the Report on Action 6 called for additional work to ensure that a pension fund should be considered to be a resident of the State in which it is constituted regardless of whether that pension fund benefits from a limited or complete exemption from taxation in that State. On 29 February 2016 the Committee on Fiscal Affairs published a discussion draft containing proposed changes to Articles 3 and 4 and their Commentaries.
• Changes to paragraph 2 of Article 3 and related changes to the Commentaries on Articles 3 and 25. The Report on Action 14 (Making Dispute Resolution Procedures More Effective) called for the development of these changes – which are intended to remove any doubt that, in a case where the competent authorities have agreed on a common meaning of an undefined term, the domestic law meaning of that term would not be applicable – as part of the follow-up work on Action 14 to clarify the legal status of a competent authority mutual agreement.
• Changes to paragraph 3 of Article 4 (the tie-breaker rule for determining the treaty residence of dual-resident persons other than individuals) and related Commentary changes. These changes appear in the Report on Action 6.
• Changes to Article 5 and its Commentary resulting from the Report on Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and follow-up work on those changes.
• Changes to subparagraph 2 a) of Article 10, introducing a minimum holding period to access the 5 per cent rate applicable to dividends, and related Commentary changes. These changes appear in the Report on Action 6.
• The replacement of paragraph 17 of the Commentary on Article 10 with a paragraph containing an alternative provision that would deny the benefit of the lower rate provided in Article 10(2) a) to certain collective investment vehicles that do not pay tax on their investment income. That alternative provision was contained in the Report on Action 6.
• Changes to paragraph 4 of Article 13, addressing transactions that seek to circumvent the application of that provision, and related Commentary changes. These changes appear in the Report on Action 6.
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