The Organization for Economic Cooperation and Development (OECD) is an organization of industrialized countries responsible for creating a model tax treaty known as the Model Tax Convention. Since 2006, NAREIT and its foreign partners in the Real Estate Equity Securitization Alliance (REESA) have worked collaboratively with the OECD on REIT-related provisions in the treaty.
The Model Tax Convention suggests REIT dividends paid to portfolio investors residing in other countries should be taxed at a lower tax rate – usually 15 percent. However, following concerns from the G-20 nations regarding the perception of tax avoidance by multinational companies, the OECD launched a project in 2014 to address Base Erosion and Profit Shifting (BEPS). While the OECD’s BEPS plan involves 15 separate action items, Action 6, which suggested restrictions to prevent companies from using tax treaties to lower their tax rates, has particular relevance to REITs that invest overseas.
The OECD on Oct. 5, 2015 released the final reports from the OECD/G20 BEPs Project. REITs should continue to qualify as residents capable of securing tax treaty benefits, according to the OECD. The report on Action 6 of the project, which is aimed at preventing tax treaty benefits from being granted in inappropriate circumstances, is consistent with suggestions made by NAREIT’s BEPS task force in comments submitted to the OECD in June 2014 and January 2015.
In addition to Article 6, the final OECD report also addressed a separate proposal (Action 2: Neutralize the Effect of Hybrid Mismatch Arrangements) that potentially could affect REITs. The OECD noted that “[h]ybrid mismatch arrangements can be used to achieve unintended double non-taxation or long-term tax deferral by, for instance, creating two deductions for one borrowing, generating deductions without corresponding income inclusions, or misusing foreign tax credit and participation exemption regimes.” The concern raised for REITs was that the OECD may consider a REIT a “hybrid” because it may deduct distributions (through the dividends paid deduction), but certain recipients (e.g., pension funds) in certain countries do not currently include those distributions in income – hence the “mismatch.” That Action contemplated a change to domestic country law to address this “hybrid mismatch” situation. Theoretically, this change could have required an elimination of the dividends paid deduction.
The Action 2 report issued on Oct. 5, 2015 provides a specific exclusion from the definition of hybrid financial instrument for dividend payments that are deductible because of the status of the payer (in other words, dividends deductible in the U.S. or other countries because the payor is a REIT). As a result, a REIT dividend eligible for the dividends paid deduction will not be considered to be a hybrid merely because of the dividends paid deduction.
The Action 2 report also indicates that REIT dividends may be addressed in the situation in which the REIT may claim a deduction for the dividend in its home country, but current law in the recipient’s country allows the recipient to treat the dividend as “exempt” from tax. Some, but apparently, not all of the European countries with dividend exemption rules exclude REIT dividends from their general dividend tax exemption. The final Action 2 report recommendation is for the domestic tax dividend exemption rule to be “turned off” in the case of REIT dividends.
STATUS: Now that the OECD has issued the final BEPs reports, countries may consider adopting some or all of the recommendations in their domestic tax laws and/or bilateral tax treaties. NAREIT will continue to monitor developments so that U.S. REITs and their shareholders are treated appropriately.
- Final OECD Action 6 Report - 10/5/15
- NAREIT Letter to the U.S. Treasury Department Regarding Proposed Changes to the Model US Tax Convention - 9/15/15
- NAREIT Comments on the OECD Revised Discussion Draft on BEPS Action 6 - 6/17/15
- NAREIT’s Submission to the OECD Regarding BEPS Action 6 - 1/9/15
- OECD Public Discussion Draft: “Follow Up Work on BEPs Action 6: Preventing Treaty Abuse” - 11/21/14
- OECD/G20 Base Erosion and Profit Shifting Project: “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” – Action 6: 2014 Deliverable - 9/15/14
- NAREIT Submission on BEPS Action 6 - 6/5/14
- BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances - 4/9/14
- 2008 Update to OECD Model - 7/16/08
- Global Real Estate Organizations Comment on OECD Public Discussion Draft on Tax Treaty Issues Related to REITs - 1/2/08
- OECD Tax Treaty Issues Related to REITs - 10/30/07