OECD's New Multilateral Instrument | KPMG | AU

New Multilateral Instrument: How it will apply in Australia

OECD's New Multilateral Instrument

Jenny Wong analyses Australia's planned approach to the OECD's new Multilateral Instrument.

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Director, Tax

KPMG Australia

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Interpreting international tax treaties is about to undergo a significant change. Treasury released on 19 December 2016 a discussion paper for public consultation setting out Australia’s initial approach to the Multilateral Instrument (MLI). The MLI was released by the Organisation for Economic Cooperation and Development (OECD) on 24 November 2016. The key focus of this discussion paper is to seek your input on the adoption of various choices that Australia should make if it became a party to the MLI.

The new MLI will sit side by side with Australia’s existing bilateral treaties to create new or modify existing treaty provisions. Consolidated texts of the modified treaty will not be produced by Government but the Australian Tax Office expects to develop guidance to help identify how the MLI modifies the individual treaties.

Broadly, Australia’s proposed approach to adopting the MLI is to apply the MLI to all bilateral tax treaties that do not already incorporate Base Erosion and Profit Shifting (BEPS) rules. The new Germany and Australia treaty will therefore be excluded as this already is ‘BEPS compliant’. Australia would also adopt the minimum standards, as many optional MLI articles as possible, and to limit its reservations to the MLI articles.

Three articles are mandatory: the purpose of the MLI; treaty abuse; and the mutual agreement procedure which the discussion paper says Australia will adopt in full or a modified form.

The discussion paper sets out two clauses Australia proposes not to adopt and these include the MLI Article 5 on the Elimination of Double Taxation and MLI Article 10 which is Anti-Abuse Rules for Permanent Establishment Located in Third Jurisdictions. Article 10 is relevant where there is a permanent establishment (PE) in a third country that is a low tax jurisdiction. This article will allow a treaty jurisdiction to impose tax on income attributed to this PE. Australia has indicated they would not adopt this article pending further analysis.

Some other important ‘rules of the game’ include:

  • Both bilateral partners would need to identify their bilateral treaty as a’ Covered Tax Agreement’. If only one country says ‘yes’ and the other says ‘no’ the bilateral treaty provisions remain unmodified.
  • Where there is a bilateral match i.e. both parties agree to adopt the MLI article in the same way, the MLI will modify the treaty.
  • Once a country has chosen that an agreement will be covered, its position including reservations must be applied for all countries.
  • Reservations can be withdrawn to expand their adoption but new reservations can’t be entered into after ratification that will narrow the adoption of the MLI.

The MLI will enter into force after it has been ratified by 5 jurisdictions. The first group of jurisdictions are expected to sign in June 2017. Australia is expected to be a signatory at this event although a final decision by the Australian Government is yet to be made. The prediction for entry into force is 2019.

Issues around the interaction of the MLI Arbitration clauses and Australia’s proposed overriding new diverted profits legislation have already been identified. There are also important articles in the MLI such as transparent entities and permanent establishments that should be considered. You should consider the discussion paper, talk to your advisor on how the new MLI impacts you and raise any issues before the submission due date of 6 February 2017.

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