Global Tax Alert | 28 June 2018
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS: new signatories and additional deposits of ratification
On 27 June 2018, three additional jurisdictions (Kazakhstan, Peru and the United Arab Emirates (UAE)) signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) (the MLI) during a third signing ceremony which took place in Lima, Peru, in conjunction with the fifth plenary session of the Inclusive Framework on BEPS.1 At the time of signature, the three signatories submitted a list of their tax treaties in force that they would like to designate as Covered Tax Agreements (CTAs), i.e., treaties to be amended through the MLI. Based on the current overall positions, it is expected that over 1,300 tax treaties will be modified based on matching of the specific provisions that jurisdictions wish to add or change within the CTAs nominated by signatories. The three new signatories listed a total of 175 tax treaties.
Together with the list of CTAs, signatories also submitted a preliminary list of their reservations and notifications in relation to the CTAs (MLI positions) in respect of the various provisions of the MLI. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI. As part of the options contained in the MLI, jurisdictions may opt into mandatory binding arbitration, an element of BEPS Action 14 on dispute resolution. None of the three jurisdictions that signed the MLI at this session opted in for mandatory binding arbitration.
Furthermore, Estonia expressed its intent to sign the MLI on 29 June 2018, and the Organisation for Economic Co-operation and Development (OECD) announced that New Zealand and Sweden have deposited their instruments of ratification of the MLI, becoming the seventh and eighth jurisdiction to do so – after Austria, the Isle of Man, Jersey, Poland, Serbia, and Slovenia.2 Sweden confirmed its MLI positions without making any changes, and New Zealand also confirmed its positions but it added a new CTA (Fiji) and updated some of its notifications. The MLI will enter into force, for New Zealand and Sweden, 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 instrument of ratification, i.e., for New Zealand and Sweden the MLI will enter into force on 1 October 2018.
In October 2015, the OECD released the final reports on the 15 action items of the BEPS Action Plan. The final reports contained recommendations that fall into different categories, with such recommendations ranging from minimum standards (which all members of the Inclusive Framework on BEPS agree to implement), reinforced international standards and common approaches.
The MLI was developed and agreed in November 20163 by approximately 100 jurisdictions, including OECD member countries, G20 countries and other developed and developing countries. However, it is open for signature to any interested jurisdictions.
On 7 June 2017, 68 jurisdictions4 signed the MLI during a signing ceremony hosted by the OECD in Paris.5 Although the MLI has been open for signature since 1 January 2017, June 2017 was the first time that countries signed the instrument. Four more jurisdictions, namely Cameroon, Curacao, Mauritius and Nigeria, signed the MLI after the first ceremony. On 23 January 2018, Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the MLI during a second signing ceremony.6
Positions of the new signatories7
Overall, the three new signatories of the MLI have opted to apply the minimum standard provisions and some of the optional provisions. For example, none of the three new signatories chose to apply Article 3 (transparent entities) and Article 11 (savings clause). Kazakhstan and Peru chose to apply the new tie breaker rule (Article 4), the revised dividend transfer transactions provision (Article 8), the capital gains from alienation of shares or interests of entities deriving their value principally from immovable property provision (Article 9), and the anti-abuse rule for permanent establishments (PEs) situated in third jurisdictions (Article 10).
With respect to the PE provisions, the UAE reserved its right to not apply any of the PE provisions, while Peru and Kazakhstan chose to apply the new language on agency PE (Article 12 of the MLI) and option A (i.e., the exception should only be available if the specific activity listed is of a preparatory or auxiliary character) of Article 13 on the PE specific activity exemptions together with the anti-fragmentation rule (Article 13.4). Regarding the anti-contract splitting rule (Article 14), only Kazakhstan chose to apply this provision to their CTAs.
Finally, in terms of the minimum standard provisions, all three jurisdictions opted to apply the Principal Purpose Test (PPT) (Article 7) and the new preamble language (Article 6). However, Peru accepts the PPT as an interim measure and intends, where possible, to adopt a Limitation on Benefits (LOB) provision, and Kazakhstan supplemented the PPT by selecting to also apply a simplified LOB provision. Only the UAE has chosen to allow for the optional inclusion of a discretionary relief provision when treaty benefits are denied under the PPT.
Deposit of instruments of ratification of the MLI
On 22 and 27 June 2018, Sweden and New Zealand, respectively, deposited their instrument of ratification of the MLI. At the time of depositing the instrument of ratification, jurisdictions must confirm their MLI positions. Accordingly, Sweden confirmed its MLI positions without making any changes, and New Zealand confirmed its positions with a few changes (e.g., it added a new CTA (Fiji) and updated some of its notifications). 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 instrument of ratification, acceptance or approval. As noted above, this means that for New Zealand and Sweden the MLI will enter into force on 1 October 2018.
For New Zealand, based on the current instruments of ratification that have been deposited with the OECD, the first two treaties affected by the MLI will be those with Poland and Sweden, taking effect during 2019. More specifically, 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 while for all other taxes levied by New Zealand, the applicable provisions of MLI will have effect six months after 1 October 2018, i.e., from 1 April 2019.
For Sweden, based on the current instrument of ratification, acceptance or approval of the MLI, the first two treaties affected by the MLI will be those with Poland and New Zealand, taking effect during 2019. More specifically, 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 while for all other taxes levied by Sweden the applicable provisions of MLI will have effect from 1 January 2020, as Sweden 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.
The expectation that over 1,300 tax treaties will be modified as a result of the current positions of the 81 jurisdictions that have now signed the MLI constitutes an unprecedented moment in international taxation. It is also a key milestone in the implementation of the treaty-based BEPS recommendations.
With the deposit of the instrument of ratification of the MLI by Sweden and New Zealand, the number of tax treaties impacted by the MLI continues to increase. The minimum standards on anti-abuse provisions and mutual agreement procedures, as well as other relevant provisions (e.g., changes to the PE definition) will be incorporated into the CTAs of these countries.
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.
2. See EY Global Tax Alert, BEPS Multilateral Convention will enter into force on 1 July 2018 for first five jurisdictions, dated 23 March 2018.
3. 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 related BEPS measures.
4. 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.
5. See EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017.
6. For more information on the second signing ceremony, see EY Global Tax Alert, Six additional jurisdictions sign Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 26 January 2018.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
- Chris Sanger
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Konstantina Tsilimigka
Ernst & Young LLP, Global Tax Desk Network, New York
- Gerrit Groen
- Jose A. (Jano) Bustos
- David Corredor-Velásquez
Ernst & Young LLP, Washington, DC
- Rob Thomas
EYG no. 010102-18Gbl