Seminar E IFA/OECD The Multilateral Instrument IFA & OECD 2017
Panel members Pascal Saint-Amans, Director, OECD, Centre for Tax Policy and Administration Maikel Evers, Advisor, OECD, Tax Treaties, Transfer Pricing & Financial Transactions Division Centre for Tax Policy and Administration Mike Williams, Director, Business and International Tax, HM Treasury, United Kingdom Guglielmo Maisto, Maisto & Associati, Italy Johann Hattingh, Professor, University of Cape Town, South Africa Wolfgang Schön, Max Planck Institute for Tax Law and Public Finance, Germany (Chair) Selina Reif, Max Planck Institute for Tax Law and Public Finance, Germany (Secretary) www.ifa2017rio.com IFA/OECD 2017 2
BEPS and the International Tax Agenda - Brazil s application to the OECD - Development of the Inclusive Framework - Digital Economy - Tax certainty - Arbitration www.ifa2017rio.com IFA/OECD 2017 3
Why an MLI?
Prussia Saxony fixed base 5
2013 1920 1950 1890 1980 1869 2010 Base Profit Erosion Shifting 6
G20 endorses BEPS Action Plan G20 leaders endorse BEPS Package 2013 February 2013 October 2015 June 2016 July 2013 November 2015 July 2017 BEPS background report Launch of BEPS Package Establishment Inclusive Framework Implementation phase 7
How to modify 3000+ tax treaties? TREATY Divid TREATY end Divid TREATY end PE- Divid TREATY end PE- Divid end PE- PE- Multilateral Bilateral renegotiations Model protocol to amend treaties TREATY Divid MULTI end LATERAL TREATY PE- Multilateral convention to sit on top of and modify bilateral tax agreements 8
Multilateral negotiations Substance of tax treaty-related BEPS measures agreed in the BEPS Package Focus: How to modify tax treaties to implement the agreed BEPS measures MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BASE EROSION AND PROFIT SHIFTING Development of provisions on mandatory binding MAP arbitration 9
Facilitating different policy preferences Elements of flexibility Specifying tax agreement covered MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BASE EROSION AND PROFIT SHIFTING Meeting a Minimum Standard in another way Opting out non-minimum Standard provisions Applying additional or alternative provisions 10
Question 1 Are OECD and Inclusive Framework Members obliged to sign the MLI? Are they free to fulfill BEPS Minimum Standards in another fashion? www.ifa2017rio.com IFA/OECD 2017 11 11
Question 2 Under Art.1 MLI, the MLI will apply to Covered Tax Agreements. Are MLI signatories obliged to have all their tax agreements with other MLI signatories covered by the MLI? Can they decide in an arbitrary fashion? How does this relate to their obligation to fulfill BEPS Minimum Standards? www.ifa2017rio.com IFA/OECD 2017 12
Question 3 Are jurisdictions entitled to agree on bilateral negotiations instead of having their respective Double Tax Agreements covered by the MLI? www.ifa2017rio.com IFA/OECD 2017 13
Question 4 What happens if a specific bilateral tax agreement is notified as covered by the MLI by one involved jurisdiction but not by the counterparty? Do they have a duty to enter into bilateral negotiations on how to fulfill Minimum Standards? www.ifa2017rio.com IFA/OECD 2017 14
Question 5 Let s assume that a jurisdiction has signed the MLI and notified a specific agreement. Which domestic steps are required to render the MLI effective for and against an individual taxpayer? www.ifa2017rio.com IFA/OECD 2017 15
Question 6 Let s assume that a bilateral tax agreement has been notified by both Contracting Jurisdictions under the MLI. Art.35 par.7 MLI allows signatories to delay entry into effect of the MLI for individual tax agreements until it has completed its internal procedures for the entry into effect of the provisions of this Convention with respect to that specific Covered Tax Agreement. What does this mean? Is there additional leeway for signatories? www.ifa2017rio.com IFA/OECD 2017 16
Question 7 According to the Explanatory Statement, the MLI will work alongside existing bilateral agreements. What does that mean? Do we apply the rules on lex posterior and lex specialis? www.ifa2017rio.com IFA/OECD 2017 17
Question 8 Do governments have to change the wording of their bilateral agreements to render the MLI effective? Are they invited to do this? Are signatories allowed to agree on bilateral protocols or administrative agreements in order to clarify their bilateral relations and their common understanding of provisions and concepts under the MLI? www.ifa2017rio.com IFA/OECD 2017 18
Question 9 Let s assume a jurisdictions intends to walk away from its obligations under the MLI. Which options exist: - Internal Legislation ( Treaty Override )? - Termination of the MLI (Art.37 MLI)? - Withdrawal of submitted notifications (solely for specific tax agreements)? - Filing of reservations not exercised before? - Amendment of the bilateral tax agreement with another signatory? www.ifa2017rio.com IFA/OECD 2017 19
Question 10 The MLI is a product of the OECD following a mandate by the G20 and extended to the Inclusive Framework. Which OECD documents can be employed as context to construe the meaning of concepts and provisions contained in the MLI: - The Explanatory Statement? - The BEPS Material on Action Item 15? - The BEPS Material on other Action Items addressed by the MLI? - The OECD Model Double Tax Agreement and its Commentary? - Partnership Report, PE Profit Attribution Report, Transfer Pricing Guidelines? www.ifa2017rio.com IFA/OECD 2017 20
Question 11 The MLI contains terms not defined by the MLI itself or by OECD materials directly related to the MLI. To what extent is it possible to employ - Definitions contained in the respective bilateral tax agreement (Art.2 par.2 MLI)? - Definitions contained in domestic law (Art.3 par.2 OECD Model DTC)? www.ifa2017rio.com IFA/OECD 2017 21
Question 12 To what extent will the interpretation of bilateral agreements not covered by the MLI be influenced by treaty practice within the framework of the MLI? www.ifa2017rio.com IFA/OECD 2017 22
Question 13 What role does it play if tax agreements have been concluded and ratified neither in French nor in English? www.ifa2017rio.com IFA/OECD 2017 23
Question 14 According to Art.32 MLI conflicts as to the interpretation of this multilateral convention are to be solved by the mutual agreement procedure (par.1) or by the conference of the parties (par.2). What does this entail in practical terms? How does this relate to the work of WP1 and the Inclusive Framework? www.ifa2017rio.com IFA/OECD 2017 24
Contents and Mechanics 25
Substantive provision Sometimes including different options 13 Country A - Artificial Avoidance of the Permanent Establishment Status Compatibility clause Reservation clause Clarity: Notification clause reflecting choice of options Certainty: Notification clause clarifying existing provisions within scope 2-3 4 5 6 7-8 Option A or Art Option 5(4) OECD B MTC Option B Par. 30.1. Commentary Art 5(4) Art 5(4.1) OECD MTC Fragmentation None Compatibility clause Reserve on entire Art 13 Reserve on Option A for certain CTAs Reserve on fragmentation provision Notify choice for Option A Make Art 5(4) notification of the Convention here with X 26
7 Prevention of Treaty Abuse (excerpt) 1 Default rule Principal Purposes Test Action 6 Minimum Standard Principal Purpose Test (PPT) only; PPT and simplified or detailed LOB Provision, or Detailed LOB provision combined with mechanism against conduit arrangements 4 6 7a 7b Optional Discretionary relief Optional Simplified LOB provision Optional Symmetrical application LOB Optional Asymmetrical application LOB
Question 15 All signatories have so far opted for the Principal Purpose Test. How do we provide consistent application of this test across jurisdictions in order to secure a level playing field? How will Peer Review among OECD/Inclusive Framework jurisdictions practically work as regards the implementation and application of the Principal Purpose Test? www.ifa2017rio.com IFA/OECD 2017 28 28
Question 16 How do we secure consistency between the Principal Purpose Test and domestic GAARs? How do we guarantee that the Principal Purpose Test does not grant too much leeway to tax authorities in particular against the background that many jurisdictions have introduced a special procedural framework for the application of a GAAR? www.ifa2017rio.com IFA/OECD 2017 29
Question 17 Under Art.12 15 MLI signatories have the option to extend the scope of the PE concept beyond its current state under Art.4 OECD Model. These options concern: - Commissionaire arrangements and similar strategies (Art.12 MLI) - Specific activity exemptions, in particular auxiliary and preparatory activities (Art.13 MLI) - Splitting-up of contracts (Art.14 MLI) To what extent are signatories entitled to pick and choose from the menu as regards - Choice of covered agreements? - Choice of reservations and options (Art.12 14 MLI)? www.ifa2017rio.com IFA/OECD 2017 30
Question 18 Art.12 15 MLI allow signatories to extend source taxation to some cases linked to base erosion and profit shifting. But none of these provisions becomes effective in a bilateral situation if one of the involved jurisdictions has filed a reservation against a provision ( asymmetric choice ). On the other hand, more and more jurisdictions have unilaterally introduced Anti-BEPS legislation covering some of the cases addressed in Art.12 15 MLI (e.g. the UK s and Australia s Diverted Profit Tax ). How does this unilateral legislation relate to the policy of the MLI to require symmetrical choices? www.ifa2017rio.com IFA/OECD 2017 31
Symmetrical Application: Reservations (opt-out of default rule) Country A Principal Purposes Test None of the MLI signatories have made this reservation. Are you sure? A-W treaty Principal Purposes Test A-X treaty A-Y treaty A-Z treaty Principal Purposes Test YES CANCEL Principal Purposes Test Principal Purposes Test
Asymmetrical Application: Optional application S-LOB (Article 7(7) MLI) Mexico S-LOB Russia S-LOB Match: S-LOB applies South-Africa S-LOB No match: S-LOB does not apply Denmark S-LOB Initially no match, but: 7(a) S-LOB applies symmetrically Greece S-LOB Initially no match, but: 7(b) S-LOB applies asymmetrically
Impact of the MLI
70 MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BASE EROSION AND PROFIT SHIFTING Signatures 71 MLI POSITIONS PROVISIONAL oe.cd/mli 35
Action 6 Minimum Standard 12 opt for S-LOB PPT adopted by all 71 signatories 4 accept S-LOB
Action 14 Minimum Standard (example) 47 accept MAP submission to both CAs Will implement notification or consultation process All 71 signatories bring MAP up to standard
Action 14: Arbitration 26 opt for arbitration
Action 14: Arbitration 26 opt for arbitration
Action 7 Recommendations 2631 adopt 41 adopt specific new either definition rules option against of of Special Splitting Commissionnaires Activities up of Contracts Exemption
Question 19 Many governments have decided not to adopt Art.12 MLI (Dependent agents and commissionaire agreements). Does this mean that for these governments the long-standing debate on how to correctly construe the existing version Art.5 par.5 and 6 OECD Model DTC has been decided in favor of the state of residence? www.ifa2017rio.com IFA/OECD 2017 42
Question 20 Overall, the impact of Action Item 7 on future practice as to the PE status seems to be rather limited as one does not find an overwhelming number of bilateral situations where the PE concept is effectively extended under Art.12 14 MLI. What does this bode for the future of the PE concept at large? www.ifa2017rio.com IFA/OECD 2017 43
Timeline Domestic procedures for signature Additional signatures Domestic procedures for ratification February 2015 November 2016 June 2017 Entry into Force Entry into Effect 44
Entry into force 1 2 3 4 5 MLI in force Entry into force of the MLI Ratification by 5 signatories required Entry into force for each other signatory 8 45
Entry into force: impact on treaty networks 71 jurisdictions signed up First five ratify > MLI in Force MLI modifies Covered Tax Agreements
Entry into effect: timing Withholding taxes 1/4/2018 1/12/2017 As of the latest date on which the MLI enters into force for each of the Contracting Jurisdictions MLI provisions have effect as of 1 January of next calendar year 1/4/2018 1/1/2019 Other taxes (taxable periods) As of the latest date on which the MLI enters into force for each of the Contracting Jurisdictions Expiration of a period of 6 months Effect for taxes levied with respect to taxable periods beginning as of that moment 1/4/2018 1/10/2018 e.g. 1/1/2019 8 47
Clarity: Application toolkit Already online: Depositary tools Matching database beta version online @ oe.cd/mli To be further developed by Secretariat and ad hoc Group MLI POSI- TIONS Articles 10(11), 11(10) & 12(8) will be replaced by Article 7(1). 48
Consolidation and languages Consolidation Legal relevance Relevance for practice Language EN & FR authentic Covering 90% DTAs Other languages available 49
Question 21 In the course of the BEPS Action Plan, a group of 20 jurisdictions has obliged themselves to establish mandatory arbitration for situations where mutual agreement procedures do not lead to an agreed outcome. Art.18 26 MLI offer a framework for this commitment. While Art.18 26 MLI do not contain a Minimum Standard in the general sense, those jurisdictions are not free whether to introduce mandatory arbitration at all. - Do these jurisdictions have to sign up to Art.18 26 MLI or are they at liberty to pursue other options to introduce mandatory arbitration? - Do jurisdictions which do not belong to this group of committed jurisdictions have the option to sign up to Art.18 26 MLI? www.ifa2017rio.com IFA/OECD 2017 50 50
Question 22 When is a covered agreement under Art.2 MLI also covered by Art.18 26 MLI? Are signatories free to sign up to Art.18 26 MLI only with regard to some specific bilateral treaties? How does this relate to existing mandatory arbitration provisions in their respective treaties? www.ifa2017rio.com IFA/OECD 2017 51
Question 23 Under Art.23 par.1 MLI, the default type for the arbitration procedure is baseball arbitration whereunder each of the parties submits to the arbitration panel a proposed resolution. The panel is left with these two options. Under Art.23 par.2 MLI, parties have the right to reject baseball arbitration in order to apply the rules of traditional arbitration. - What happens if two Contracting jurisdictions, go for different options under Art.23, par.1 and 2 MLI? - Are MLI signatories free to go for third type of arbitration before or after the dispute has arisen? www.ifa2017rio.com IFA/OECD 2017 52
Action 14: Arbitration 26 opt for arbitration
Action 14: Arbitration 23 Type of Arbitration process(excerpt) 1 Default rule Final offer arbitration Canada Sweden 4 Alternative Comprehensive arbitration Sweden 6 Reservation blocking par. 2 Canada Until competent authorities reach agreement on the type of arbitration process, Part VI will not apply between Canada and Sweden
Question 24 Will the MLI be a Moment in Time or an ongoing project meant to become more effective and more sophisticated in the future? Will the MLI become obsolete once jurisdictions have decided how to amend the existing treaty network? www.ifa2017rio.com IFA/OECD 2017 55
Question 25 What will be the relationship between the MLI and the OECD Model Tax Convention? Will more and more content beyond BEPS find its way from the Model Tax Convention into the MLI? Are we entering a new era of multilateralism? www.ifa2017rio.com IFA/OECD 2017 56
Question 26 Who will decide on the future shape and scope of the MLI: OECD Member States or all governments that have signed up to the Inclusive Framework? www.ifa2017rio.com IFA/OECD 2017 57