MLI will enter into force for Japan on January 1, 2019

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1 MLI will enter into force for Japan on January 1, 2019 October 2018 In brief On September 26, 2018, Japan deposited the instrument of acceptance of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS ( MLI ) with the OECD. As of Oct0ber 1, 2018, 84 jurisdictions 1 have signed the MLI, of which 15 jurisdictions have deposited the instrument of ratification (referring to either ratification, approval or acceptance) with the OECD. The number of Covered Tax Agreements under the MLI ( CTA ), as set out in Japan s instrument of acceptance, has increased from 35 (as at the MLI signing date) to 39. Other Japan notifications or reservations remain unchanged. Following the deposit of Japan s instrument of acceptance in September 2018, the MLI will enter into force for Japan on January 1, The provisions of the MLI shall have effect with respect to CTA with Israel, the United Kingdom, Sweden, New Zealand, Poland, Australia, France and the Slovak Republic, all of which deposited instruments of ratification by the end of September, This BEPS alert summarises the prospective effect of the MLI on tax treaties entered into by Japan. In detail 1. Current status of MLI The MLI was signed by 68 jurisdictions including Japan on June 7, 2017, and entered into force on July 1, As of Oct0ber 1, 2018, 84 jurisdictions have signed the MLI, of which 15 jurisdictions have deposited the instrument of ratification with the OECD. The instrument of ratification, approval or acceptance imports the provisions of the MLI into the domestic law of the signatory, and dictates when the MLI will enter into force in that jurisdiction. It also confirms the signatory s list of reservations and notifications (as well as CTA), which were submitted in draft at the MLI signing date. The MLI was approved by the Diet on May 18, 2018, and Japan s instrument of acceptance of the MLI was deposited on September 26, 2018, making Japan the 13 th jurisdiction to deposit its instrument of acceptance. The number of Japanese CTA, notified upon the deposit of the instrument of acceptance, increased from 35 (as notified at the point of signing the MLI) to 39. Additionally, Oman and Thailand, with which Japan has entered into tax treaties but which have not yet signed the MLI, have expressed their intention to sign the MLI. As further Japanese treaty countries are expected to sign the MLI, the number of CTA may increase in the future jurisdictions include Hong Kong and Curaçao. China and the Netherlands notified that the tax treaties concluded by Hong Kong as well as Curaçao would be covered by the MLI.

2 The MLI will generally enter into force on the first day of the month following a period of three calendar months beginning on the date of the deposit by the relevant signatory of its instrument of ratification, acceptance or approval (although slightly different rules applied to the first five jurisdictions to deposit instruments of ratification). The dates of entry into force of the MLI for the following jurisdictions are as follows: 2. Application of the MLI to the tax treaties The MLI applies to an existing tax treaty where both parties to that treaty have chosen to apply the MLI to it (i.e. the treaty is covered ) and where the MLI has entered into force for both parties. The provisions of the MLI which apply to a treaty, and the timing of their entry into force, are determined based on the choices of each party to the particular treaty. The MLI will, as a basic rule, come into force in respect of the various different matters covered by a CTA as follows: i. Withholding taxes the MLI will apply to withholding taxes arising from events which occur on or after January 1 of the next calendar year beginning on or after the latest MLI entry into force date for the relevant treaty parties. ii. Other taxes - the MLI will apply to taxable periods beginning on or after the expiration of a period of six months after the latest MLI entry into force date for the relevant treaty parties. 2

3 iii. Mutual agreement procedures (MAP) the MLI will apply to eligible cases presented to the competent authority of a treaty party after the latest MLI entry into force date for the treaty parties, except for cases that were not eligible to be presented as of that date under the CTA prior to its modification by the MLI, without regard to the taxable period to which the case relates. iv. Arbitration - the MLI will apply to cases presented to the competent authority of a treaty party on or after the later MLI entry into force date for the treaty parties (for cases presented prior to this date, the MLI will apply to cases in respect of which both parties have notified the OECD that they have reached mutual agreement, and confirmed the date or dates on which such cases shall be considered to have been presented to the competent authority). 3. Entry into Force of MLI for Japan s CTA The MLI will enter into force on January 1, 2018 for Japan s CTA with jurisdictions that have deposited the instrument of ratification on or before September 30, Treaty provisions modified by the MLI will generally enter into effect as shown in the chart below. 4. Japan s choice of provisions of MLI Japan s choice of provisions of the MLI, as specified in the List of Reservations and Notifications submitted to the OECD upon the deposit of its instrument of acceptance, is summarized below. The reservations and notifications submitted upon the deposit are the same as those submitted as a tentative list upon signing the MLI on June 7, 2017, except for the CTA. Since MLI signatories must select at least the principle purpose test ( PPT ) minimum standard under Article 7, unless a similar article is provided in an existing treaty, Japanese corporations should consider potential tax exposures triggered by the application of the PPT for investment in jurisdictions with which Japan has a CTA. Additionally, the application of Article 3 (fiscally transparent entities), Article 9 (taxation on capital gains from the alienation of shares or comparable rights deriving their value principally from immovable property), and Articles 12 and 13 (taxation of permanent establishments) may increase the tax burden of Japanese corporations or their subsidiaries based in a jurisdiction with a CTA. 3

4 Corporate taxpayers are urged to analyse the possible impact of these modified articles on their investment structures and business operations. 5. Application of the MLI provisions to the CTA The application of MLI provisions to the CTA, for jurisdictions which have already deposited an instrument of ratification, and the effective date of the MLI for CTA are summarised below. For more details, it will be necessary to review the text of the amended tax treaties, which will be uploaded on the MOF web site. Application of the MLI provisions to Japan s CTA 4

5 Effective date of MLI for CTA 6. Key takeaways On 26 September 2018, Japan deposited its instrument of acceptance of the MLI with the OECD. As a result of this, the MLI will enter into force in Japan on January 1, Japan has notified the OECD that 39 of its tax treaties will be covered by the MLI. Of these, 8 are with jurisdictions which notified before Japan, and as such the MLI will generally apply to Japan s treaties with those 8 territories from January 1, 2019 (depending on the specific matter). Further treaties will become subject to the MLI as more of Japan s treaty partners deposit instruments of acceptance of the MLI with the OECD. Under the MLI, a PPT will now apply to all CTAs, and corporate groups should evaluate the impact of this provision on existing investment structures and operating models. Other provisions will also be introduced to some or all covered tax agreements, which could increase the tax burden of corporate groups. These provisions should be considered further where relevant. For further information, please see the website below. 5

6 Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax Japan Kasumigaseki Bldg. 15F, 2-5, Kasumigaseki 3-chome, Chiyoda-ku, Tokyo Tel: pwcjapan.taxpr@jp.pwc.com Kimihito Takano Partner kimihito.k.takano@pwc.com Yoshiyasu Okada Advisor yoshiyasu.okada@pwc.com David Cohen Senior Manager dave.cohen@pwc.com Akemi Kito Partner akemi.kitou@jp.pwc.com Yumiko Arai Director yumiko.arai@pwc.com Ryann Thomas Partner ryann.thomas@pwc.com Ken Leong Director ken.leong@pwc.com Tax Japan, a member firm, is one of the largest professional tax corporations in Japan with about 680 people. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international taxation including financial and real estate, transfer pricing, M&A, group reorganisation, global tax planning, and the consolidated tax system to clients in various industries. At, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors Tax Japan. All rights reserved. refers to the network member firms and/or their specified subsidiaries in Japan, and may sometimes refer to the network. Each of such firms and subsidiaries is a separate legal entity. Please see for further details. 6