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BEPS Multilateral Convention will enter into force on 1 July 2018 for first five jurisdictions

Executive summary

On 22 March 2018, the Organisation for Economic Co-operation and Development (OECD) announced that Slovenia has deposited its instrument of ratification, acceptance or approval of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI), becoming the fifth jurisdiction to do so. This means that the MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval, i.e., on 1 July 2018. Earlier, the Republic of Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017), and Poland (23 January 2018) deposited their instruments with the OECD. These five jurisdictions have confirmed their MLI positions without making any changes, with the exception of Slovenia that removed its tax treaty with Germany from its list of Covered Tax Agreements (CTAs).

With respect to a specific bilateral tax treaty, the provisions of the MLI will have effect after all parties to a CTA have deposited their instrument of ratification, acceptance or approval of the MLI and a specified time has passed. The timing differs for different provisions. With respect to taxes withheld at source on amounts paid or credited to nonresidents, the provisions of the MLI will have effect where the event giving rise to such taxes occurs on or after the first day of the calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to the CTA. With respect to all other taxes levied by that Contracting Jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the CTA.

Detailed discussion

Background

In October 2015, the OECD released final reports on the 15 action items of the Base Erosion and Profit Shifting (BEPS) Action Plan. The final reports contained recommendations that fall into different categories, with such recommendations ranging from minimum standards (which all parties agree to implement) to reinforced international standards and common approaches.

To enable jurisdictions to swiftly implement the BEPS tax treaty-based recommendations, the MLI was developed and agreed in November 20161 by approximately 100 jurisdictions, including OECD member countries, G20 countries and other developed and developing countries. The MLI is open for signature, by any interested jurisdiction, as of 31 December 2016.

On 7 June 2017, 68 jurisdictions2 signed the MLI during a signing ceremony hosted by the OECD in Paris.3 Four more jurisdictions, namely Cameroon, Curacao, Mauritius and Nigeria, signed the MLI after the first ceremony. On 24 January 2018, six additional jurisdictions4 signed the MLI during a second signing ceremony which took place at the OECD Headquarters in Paris, in conjunction with a plenary session of the Inclusive Framework on BEPS.5 Four other jurisdictions (Algeria, Kazakhstan, Oman and Swaziland) expressed their intent to sign the MLI in the near future.

Entry into effect of the MLI

On 22 March 2018, Slovenia deposited its instrument of ratification, acceptance or approval of the MLI, becoming the fifth jurisdiction to do so. Before Slovenia, Austria, the Isle of Man, Jersey, and Poland had deposited their respective instrument with the OECD. These five jurisdictions have confirmed their MLI positions without making any changes, with the exception of Slovenia that removed the tax treaty with Germany from its list of CTAs.

At the time of signature, signatories submit a list of their tax treaties in force that they designate as CTAs, i.e., to be covered by the MLI. The MLI is designed to allow Contracting Jurisdictions to permit the modification of tax treaties in an efficient manner. However, it will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the tax treaty. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.

Based on the current signatories and MLI positions, it is expected that over 1,200 tax treaties will be affected. Based on the current number of instruments of ratification, acceptance or approval that have been deposited with the OECD, three tax treaties will be affected by the MLI, namely the tax treaties between Austria-Poland, Austria-Slovenia, and Poland-Slovenia. Together with the list of CTAs, signatories also submit a preliminary list of their reservations and notifications (MLI positions) in respect of the various provisions of the MLI. For the minimum standard provisions, the right to opt-out only exists to the extent that the CTA already includes a similar minimum standard. Where a minimum standard can be satisfied in multiple alternative ways, the MLI does not give preference to a particular way of meeting the minimum standard. A Contracting Jurisdiction may reserve the right to opt-out of the other provisions that do not reflect minimum standards, and to not apply these articles to its tax treaties or to a subset of its tax treaties. For some specific articles, Contracting Jurisdictions may choose different options resulting in an asymmetrical application of these provisions. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI.

According to Article 34 of the MLI, the MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval. This threshold has now been met. For each signatory ratifying, accepting, or approving the MLI after the deposit of the fifth instrument of ratification, acceptance or approval, the MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance or approval.

The entry into force of the MLI, does not directly affect all MLI signatories. For the provisions of the MLI to have effect with respect to a CTA, it is necessary that:

i) Both parties of the CTA have to deposit their instrument of ratification, approval or acceptance of the MLI with the OECD

ii) The MLI has to have entered into effect

Even when these conditions are met, a further analysis is required as the MLI contains a number of alternatives or optional provisions that generally will apply only if all Contracting Jurisdictions to a CTA affirmatively choose to apply a particular alternative or option.

Article 35 of the MLI sets out when the provisions of the MLI will have effect in each Contracting Jurisdiction with respect to specific taxes which fall within the scope of a CTA:

  • With respect to taxes withheld at source on amounts paid or credited to nonresidents, the MLI will have effect where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to a CTA.
  • With respect to all other taxes levied by a Contracting Jurisdiction, the first taxes for which provisions of the MLI will enter into effect are those which are levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to a CTA.

Notwithstanding the above, Article 36 of the MLI governs the entry into effect of the provisions of Part VI of the MLI (Mandatory binding arbitration).6 Accordingly:

  • Article 36(1)(a) provides that Part VI will have effect with respect to cases presented to the competent authority of a Contracting Jurisdiction on or after the later of the dates on which the Convention enters into force for each of the Contracting Jurisdictions.
  • Article 36(1)(a) provides that Part VI will have effect with respect to cases presented to the competent authority of a Contracting Jurisdiction prior to the later of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the CTA, on the date when both Contracting Jurisdictions have notified the Depositary that they have reached mutual agreement pursuant to paragraph 10 of Article 19 of the MLI.7

To illustrate the MLI mechanics, two examples are set out below.

Example 1: Austria-Poland

Both Austria and Poland have deposited their instrument of ratification, acceptance or approval of the MLI, and have a CTA. The MLI will enter into force for them on 1 July 2018. The applicable provisions of the MLI will have effect from 1 January 2019 for taxes withheld at source on amounts paid or credited to a nonresident. For all other taxes levied by Poland, the applicable provisions of MLI will have effect six months after 1 July 2018, being from 1 January 2019. For all other taxes levied by Austria, the applicable provisions of MLI have effect from 1 January 2020, as Austria notified its intention to replace the reference to “taxable periods beginning on or after the expiration of a period” with a reference to “taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period” for the purpose of the application of Article 35(1)(b) and 5(b) of the MLI. This option allows for asymmetrical entry into effect of the MLI’s provisions between Contracting Jurisdictions.

Example 2: Slovenia-Spain

In this case, Slovenia has deposited its instrument of ratification of the MLI, while Spain has not yet done so. Thus, for this specific CTA, the MLI provision will not have effect until Spain has deposited its instrument of ratification, acceptance or approval and certain time has elapsed, as summarized in this Alert.

Implications

The MLI is a key milestone toward implementation of the recommended BEPS measures. At this stage, it is expected that over 1,200 tax treaties will be modified based on matching the specific provisions that jurisdictions wish to add or change within the CTAs nominated by the signatories.

Many jurisdictions are expected to finalize their ratification procedures of the MLI during the course of 2018. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI, while during the ratification procedures the decisions of countries in relation to their rights to reserve on certain parts of the MLI (a reservation or opt-out) may change. Businesses are therefore encouraged to monitor the positions of signatories, before and after the ratification, and assess their impact on the jurisdictions in which they operate.

Endnotes

1. See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016, for a more detailed analysis of the MLI measures.

2. Andorra, Argentina, Armenia, Australia, Austria, Belgium, Bulgaria, Burkina Faso, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Monaco, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Russia, San Marino, Senegal, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and Uruguay.

3. See EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017.

4. Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia.

5. See EY Global Tax Alert, Six additional jurisdictions sign Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 26 January 2018.

6. See EY Global Tax Alert, Mandatory Binding Treaty Arbitration under OECD’s Multilateral Instrument, dated 2 December 2016.

7. Article 19(10) of the MLI reads: “The competent authorities of the Contracting Jurisdictions shall by mutual agreement (pursuant to the article of the relevant Covered Tax Agreement regarding procedures for mutual agreement) settle the mode of application of the provisions contained in this Part, including the minimum information necessary for each competent authority to undertake substantive consideration of the case. Such an agreement shall be concluded before the date on which unresolved issues in a case are first eligible to be submitted to arbitration and may be modified from time to time thereafter.”

Annex: Entry into effect of the MLI – summary table:

 

Entry into effect

Possible variation

With respect to taxes withheld at source on amounts paid or credited to nonresidents – Art. 35(1)(a)

The MLI will have effect where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to a CTA.

Solely for the purpose of its own application (i.e., allows for asymmetrical entry into effect), a Contracting Jurisdiction may choose to substitute “taxable period” for “calendar year.”

With respect to all other taxes levied by a Contracting Jurisdiction – Art. 35(1)(b)

The MLI will have effect on taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to a CTA.

Solely for the purpose of its own application (i.e., allows for asymmetrical entry into effect) a Contracting Jurisdiction may choose to replace the reference to “taxable periods beginning on or after the expiration of a period” with a reference to “taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period.”

Provisions of Part VI of the MLI (Mandatory binding arbitration) – Art. 36(1)(a) and (b)

  • Article 36(1)(a) provides that Part VI will have effect with respect to cases presented to the competent authority of a Contracting Jurisdiction on or after the later of the dates on which the Convention enters into force for each of the Contracting Jurisdictions.
  • Article 36(1)(a) provides that Part VI will have effect with respect to cases presented to the competent authority of a Contracting Jurisdiction prior to the later of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the CTA, on the date when both Contracting Jurisdictions have notified the Depositary that they have reached mutual agreement pursuant to paragraph 10 of Article 19 of the MLI.
 

EYG no. 01786-181Gbl

Download this Tax Alert as a PDF file

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