Multilateral Tax Treaty Revision to Combat Tax Avoidance: On the Merits and Limits of BEPS’s Multilateral Instrument

Summary Since 2015, more than 140 countries have cooperated in the OECD’s ‘Base Erosion and Profit Shifting’ (BEPS) project to combat multinational tax avoidance. Several of the key actions, most importantly measures against tax treaty shopping, require changes to double taxation treaties. The OECD designed a special instrument – the ‘multilateral instrument’ (MLI) – to allow for a swift implementation of BEPS-related tax treaty changes. In this paper, we show that MLI take-up is incomplete, and we present (partly surprising) correlates of the take-up decision and develop a simple theoretical model to rationalize the observed take-up behaviour. A key insight is that conduit countries, which are the beneficiaries of tax treaty shopping, can benefit from anti-treaty shopping laws as firms have incentives to scale-up real activity in conduit nations in order to be exempted from the new anti-treaty shopping rules. Empirical findings are consistent with these considerations: MLI adoption rates of conduit countries are high. Treaty shopping has, to date, not significantly dropped. And there is indeed indication that firms have scaled up their real economic activity in conduit nations. Overall, our findings reject that treaty shopping has been ‘killed’ as envisaged by the OECD.