Grant Wardell-Johnson highlights Australia's role in the BEPS Multilateral Instrument agreement signed in Paris recently.
The Organisation for Economic Co-operation and Development (OECD) Multilateral Instrument (MLI) was signed by 68 countries, including Australia, in Paris overnight. An additional eight countries expressed an intention to sign. Australia has not signed up to the modified Permanent Establishment article that dealt with Dependent Permanent Establishments (PE) (Article 12 of the MLI which refers to Commissionaire and similar arrangements).
Put simply, this provision was designed to redraw the boundary between when a company was considered to be selling to a country (which was not taxable in that jurisdiction under the treaty) and when a company was selling within a country (which was considered taxable).
Australian Treasury and the Government are to be commended for the position they have adopted given that there was not sufficient international consensus for this change and Australia may have been an outlier for some of our key trading partners. If Australia had embraced this change there would have been the potential to damage Australia’s revenue base. The position adopted in the MLI by the Australian Treasury was a change from their tentative position outlined in a consultation paper in December last year. KPMG, and many companies in the energy and resources (ENR) sector, advocated that Australia should not embrace this new rule.
Australia has Double Tax Agreements (DTAs) with 44 countries. Of those 44 countries, Australia chose 43 DTAs to be what are technically known as Covered Tax Agreements (CTA). Germany was excluded because Australia recently signed a new DTA with Germany that included substantially all the new BEPS changes, including the proposed Dependent PE article, which Australia is not now embracing for other countries. However, the mere fact that Australia has chosen to include certain DTAs as CTAs does not mean there will be a change to the relevant treaty.
Of the 43 DTAs which Australia has chosen as CTAs, nine countries have chosen not to sign up to the MLI: United States, Philippines, Malaysia, Thailand, Vietnam, Taiwan, Sri Lanka, PNG and Kiribati. A 10th country, Norway, is seeking direction from its Parliament before it can commit to signing the MLI, although it is expected that this will occur.
Also of the remaining 33 countries, four countries have not chosen the Australian DTA as a CTA from their perspective. They are Austria, Korea, Sweden and Switzerland. We seek to explore why they have chosen to adopt this view.
That leaves 29 countries where there is an intention for both countries to change the treaty. They are Argentina, Belgium, Canada, Chile, China, Czech Republic, Denmark, Fiji, Finland, France, Hungary, India, Indonesia, Ireland, Italy, Japan, Malta, Mexico, Netherlands, New Zealand, Poland, Romania, Russia, Singapore, Slovak Republic, South Africa, Spain, Turkey and the United Kingdom. Importantly the MLI provided an option for Mandatory Binding Arbitration. This is something that business has wanted to help resolve disputes more efficiently. However, there has only been partial success.
Globally it is understood that 26 out of the 68 countries are willing to adopt Mandatory Binding Arbitration in one form or another. Looking at Australia, of the 29 DTAs where there is an intention to change the treaty because both sides have included the treaty as a CTA, 14 countries are willing to embrace Mandatory Binding Arbitration. They are Belgium, Canada, Fiji, Finland, France, Ireland, Italy, Japan, Malta, Netherlands, New Zealand, Singapore, Spain and the United Kingdom. Singapore is a surprising addition to the group because they had previously announced that they would embrace binding arbitration.
The remaining 15 countries which are not willing to accept Mandatory Binding Arbitration are Argentina, Chile, China, Czech Republic, Denmark, Hungary, India, Indonesia, Mexico, Poland, Romania, Russia, Slovak Republic, South Africa and Turkey. This is unfortunate.
I should add the Principal Purpose Test has become the near universal position for the prevention of treaty abuse with the Simplified Limitation of Benefits article taking little or no role. The major exception is the United States which has not signed up to the MLI and will continue to require a “Detailed Limitation of Benefits” article in its treaties. The Principle Purpose Test and Limitation of Benefits articles are designed to stop inserting companies into a structure in order to inappropriately gain a treaty benefit.
The other point to note is that Australia has not embraced the anti-abuse rule for PEs situated in third jurisdictions (which is contained in Article 10). Planning using PEs in third jurisdictions has been limited in the Australian context although there will be a number of Australian groups which may be impacted within their structure outside of a specifically Australian context where Swiss or Singapore branches have been adopted for instance.