This is the fifth in our series of articles looking at some of the topics to be discussed at our November 2018 conference, Beyond Borders: International Taxation into 2020. More specifically, one of our panels will look at the future of double tax treaties (DTTs) in a BEPS world. Book your early bird ticket HERE before it’s too late!
Kazahkstan, Peru, Estonia and the UAE have been the latest group of countries to sign onto the OECD’s Multilateral Instrument (MLI) as part of the Base Erosion & Profit Shifting (BEPS) project.
With these latest signatures, the number of countries who have either approved the MLI or are covered by it grows to 82.
So far, eight of these jurisdictions have ratified the MLI at a national level.
Austria, the Isle of Man, Jersey, Poland and Slovenia will implement the MLI on July 1, with the same happening for Serbia, Sweden and New Zealand on October 1.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said, “The new signatures and the imminent entry into force of this landmark agreement underlines governments’ commitment to update the international tax rules and ensure they are fit for purpose in the 21st Century.”
More specifically, Saint Amans spoke about Peru, saying, “Peru’s signature of the Multilateral Convention sends a clear signal of determination to move forward decisively in international tax co-operation.”
“With a stroke of the pen, three of Peru’s bilateral tax treaties will be strengthened automatically following the entry into effect of the Convention,” he added.
This signature, reports the OECD, “will help to protect Peru’s tax base introducing a general anti-avoidance measure as well as improved dispute resolution mechanisms to Peru’s tax treaties.”
As for the UAE, DL Piper’s Ton van Doremalen and Sachin Sachdeva write, “The effect of the UAE having signed the MLI is that its tax treaty network will be updated to include the BEPS minimum standards in respect of the PPT [Principal Purpose Test] and the MAP [Mutual Agreement Procedure] provisions.”
Furthermore, they say, “The granting of tax treaty benefits will be subject to the satisfaction of the PPT in addition to the other (already existing) treaty requirements of "residence" and "beneficial ownership." Since the UAE does not currently levy corporate income tax (except for some specific industries), it is unlikely that the PPT will be invoked by the UAE tax authorities. Subsequent to the MLI taking effect for the UAE and its tax treaty partners, the PPT can be invoked by the tax authorities of a treaty partner country to scrutinize a transaction or arrangement for treaty abuse.”
Finally, van Doremalen and Sachdeva believe that, “since the UAE has been used by non-resident investors and businesses not only as the destination country of their investments and business operations but also to structure their investments into the wider region…the impact of the new rules will very likely be felt in the latter set of cases where a treaty partner country is the state of the source of income.”
“Where tax treaty benefits are denied and the higher tax costs cannot be used effectively as foreign tax credits in the home country of the taxpayer, they will end up becoming a permanent tax cost for that taxpayer,” they conclude.
UK Moves to Ratify the MLI as Part of BEPS Plan
Besides these new signatories, the UK also moved to ratify the MLI.
According to the OECD, “the United Kingdom deposited its instrument of ratification for the Multilateral Instrument with the OECD,” showing “its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises.”
Talking about the MLI and its significance to the UK, Jeremy Weber, a tax expert at Pinsent Masons, said, “For most of the UK's double tax treaties, the treaty abuse measures and the measures to improve dispute resolution are going to be most significant. Anyone with arrangements which rely on treaty relief should be considering the impact of the MLI changes now as income flows could be affected next year if treaty relief is denied and restructuring may be necessary.”
In the UK’s case, even though the MLI kicks in on October 1, it will not be applied to existing tax treaties until later in 2019.
According to Out-Law.com, “it will only enter into force in relation to a particular treaty three months after both parties to the treaty have ratified the MLI and opted for it to apply to the treaty in question.”
Overall, says Webster, “International businesses will be hoping that the MLI changes lead to a speedier resolution of disputes between tax authorities and that this reduces the number of instances where they suffer double taxation because neither tax authority is willing to give up the tax revenue.”
Are there any specific challenges you envision for the MLI and double tax treaties moving forward?
Let us know in the comments section!