Representatives from over 70 jurisdictions on 7 June 2017 participated in an OECD ceremony for the signing of a multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting (BEPS).
Tax professionals from KPMG member firms around the globe are considering what may be the effect or implications of the multilateral instrument (MLI) on their subject tax treaties.
The MLI was signed by 11 countries in the Asia Pacific region, and six of these signatories are in the top 20 economies in terms of GDP: China, Japan, India, Korea, Australia, and Indonesia. The remaining countries in the Asia Pacific region that signed the MLI are: Fiji, Hong Kong, New Zealand, Pakistan and Singapore.
There are 11 Asia-Pacific countries that did not sign the MLI: Bangladesh, Cambodia, Laos, Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Sri Lanka, Thailand, and Vietnam.
Read a June 2017 report [PDF 1.2 MB] prepared by the KPMG member firm in Australia
Read a June 2017 report prepared by the KPMG member firm in Australia
Read a June 2017 report [PDF 78 KB] prepared by the KPMG member firm in Canada
The first round of MLI updates will update 49 of China’s income tax treaties, and the number may rise to 55 treaties in the near future.
Read a June 2017 report prepared by the KPMG member firm in China
Until now, it was not clear what approach to MLI the Czech Republic would take. It appears that the Czech Republic will only adopt the minimum standard—i.e., the rule to prevent treaty abuse or the “principal purpose test” and the rule allowing for the effective resolution of disputes by mutual agreement (dispute resolution).
The Czech Republic intends to subject all valid tax treaties to the multilateral convention (except for the treaty with South Korea because it already includes the required provisions). Modifications to each income tax treaty will only be made if the other treaty-partner state also subjects the treaty to the regime of the MLI and if both parties agree on the identical wording of the provision.
How the MLI will affect bilateral treaties will thus depend on further bilateral negotiations. This means that the implementation may eventually take place in a broader scope than the minimum standard presently proposed by the Czech Republic.
Read a June 2017 report prepared by the KPMG member firm in the Czech Republic
Read a June 2017 report prepared by KPMG’s EU Tax Centre
Regarding France's tax treaties, 88 are covered (out of a total of 125 treaties) by the MLI, including those concluded with major business partners—e.g., Germany, the Netherlands, and the United Kingdom. As did several other countries, France also included the treaty concluded with the United States even though the United States was not expected to sign the MLI.
The statements made by France, to date, reveal that the following proposals on permanent establishments (PEs) have been adopted:
Other implications for France's tax treaties include:
These positions taken by France are expected to be confirmed at the time of depositing the instrument ratifying the MLI.
For more information, contact a tax professional at FIDAL* in Paris or KPMG's French Tax Center in New York:
Patrick Seroin | +1 212-954-2523 | firstname.lastname@example.org
Nathalie Cordier-Deltour| +33 (0)1 55 68 14 54 | Nathalie.Cordier-Deltour@fidal.com
*FIDAL is a French law firm that is independent from KPMG and its member firms.
Concerning the treaties in India's network of income tax treaties:
Read a June 2017 report [PDF 378 KB] prepared by the KPMG member firm in India
Concerning the implications of MLI provisions affecting India’s network of income tax treaties include the following:
Read a June 2017 report [PDF 377 KB] prepared by the KPMG member firm in India
Ireland’s Department of Finance on 2 June 2017 (prior to signing) issued a technical briefing note that set out Ireland’s proposed approach to the introduction of agreed international tax treaty measures under the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the multilateral instrument or “MLI”). Ireland was among the countries signing the MLI on 7 June 2017.
The first step involves Ireland selecting the proposed measures that it intends to adopt into its network of tax treaties. Certainty of access to tax treaty benefits is critical to Irish-based businesses. This underpins the effectiveness of Ireland’s existing tax treaty network, one of the key attractions of Ireland as a hub for international business. Ireland’s proposed choices are believed to balance effectively its obligations to adopt the agreed international “minimum standard” measures that protect tax treaties from potential misuse, while trying to maintain certainty of access to tax treaty benefits for business operating internationally from an Irish base.
Read a June 2017 report prepared by the KPMG member firm in Ireland, that provides background to the MLI and an analysis of Ireland’s proposed choices.
The Japanese Ministry of Finance on 8 June 2017 released a statement on the MLI, and that briefly explains measures to prevent BEPS, and tax agreements covered by the MLI.
Read a June 2017 report [PDF 125 KB] prepared by the KPMG member firm in Japan
Read a June 2017 report prepared by the KPMG member firm in Luxembourg
The MLI in the Mauritian context covers 23 of the 42 existing tax treaties to which Mauritius is a treaty partner. However, of the 23 tax treaties, eight countries have not signed the MLI. Thus, this leaves 15 tax treaties to be amended by the MLI. For the remaining tax treaties, it is reported that Mauritius will discuss bilaterally with the respective treaty partners in order to implement BEPS minimum standards, at latest by end of 2018.
Read a July 2017 report [PDF 375 KB] prepared by the KPMG member firm in Mauritius
The Dutch Deputy Minister of Finance had previously outlined the Dutch position on the MLI in a March 2017 letter to the Lower House and in an October 2016 position paper. The Ministry of Finance on 7 June 2017 published an information notice with comments on the outcome of the signing ceremony for the Netherlands. The List of Reservations and Notifications for the Netherlands (PDF 950 KB) (published 7 June 2017) is mostly in accordance with the previously communicated positions. These include:
The next step is the ratification process in the Netherlands, which is expected to start in the second half of 2017. Assuming ratification by the Netherlands takes place during the course of 2018, the MLI provisions can enter into force for covered tax agreements with a match (listed by jurisdictions that have also ratified before the end of 2018) as of January 1, 2019.
Read a June 2017 report prepared by the KPMG member firm in the Netherlands
Information on New Zealand’s adoption of the MLI, and the positions taken, is available on the Inland Revenue website.
Polish authorities announced its position on 78 income tax treaties will be covered by the MLI. However, not all of these income tax treaties are with countries that have signed the MLI. Among the items in the MLI reflecting Poland's position are the following:
However, amendments to the permanent establishment provision will not be introduced. Thus, the entry into force of the MLI would not appear to affect the current language of the existing income tax treaties.
Read a June 2017 report [PDF 371 KB] prepared by the KPMG member firm in Poland
The principal purpose test (PPT test) is expected to be applied to certain income tax treaties that Russia has signed, including the treaties with Cyprus, the Netherlands, and Luxembourg. In practice this means that, notwithstanding the lack of specific limitation of benefits provisions in a tax treaty, the ability to benefit from a tax treaty measure could be complicated and will require a real business purpose for creating the structure or for entering into the transaction.
Preferential rates of withholding tax on dividends will only apply if a person or company is the beneficial owner of the dividends and owns/exercises control for at least 365 days over the necessary amount of capital/shares/participatory interest required under the income tax treaty to qualify for such benefits. Such conditions for lower withholding rates on dividends will apply to the tax treaties with Cyprus, Hong Kong, Luxembourg, the Netherlands, Singapore, and Switzerland, among others.
Any income from the sale of shares (or a participatory interest) of a Russian company, the assets of which consist of more than 50% real estate located in the Russian Federation, is subject to tax in Russia, notwithstanding the fact that the relevant tax treaty generally exempts gain from the sale of shares from tax in Russia. This provision will apply, if, pursuant to the MLI, a tax treaty signatory announces its intention to follow this approach. For example, the tax treaties with the Netherlands, Singapore, and Austria now exempt gain from the sale of a real property company shares (participation interest) from tax (in respect of Singapore, the criterion is “consist of more than 75% real estate” instead of 50%). The current approach of the income tax treaties will continue to apply, i.e., such exemption will still be available, provided that the anti-avoidance (PPT and other conditions specified in the MLI) are met.
Read a June 2017 report [PDF 275 KB] prepared by the KPMG member firm in Russia
Singapore has selected 68 out of the possible 82 income tax treaties as potential covered tax agreements (CTAs). Of these 68 tax treaties, three treaty partners—Germany, Sweden, and Switzerland—have not chosen the treaty with Singapore as a CTA, and 17 countries have not signed the MLI. This leaves 47 of the 68 income tax treaties in Singapore’s tax treaty network to be changed with the signing of the MLI.
Singapore has will adopt the following MLI provisions (among others) under the selected CTAs:
Read a June 2017 report [PDF 408 KB] prepared by the KPMG member firm in Singapore
Switzerland announced at the time of the signing of the MLI that income tax treaties with only 14 countries or jurisdictions—Argentina, Chile, India, Iceland, Italy, Liechtenstein, Lithuania, Luxembourg, Austria, Poland, Portugal, South Africa, the Czech Republic, and Turkey—would be renegotiated and amended through the MLI. If agreements on the technical implementation of the MLI can be obtained with other treaty partners, those corresponding treaties would also be amended at a later stage, and to the extent that an agreement is reached, additional treaty partners may be included.
Switzerland is focusing primarily on the implementation of the BEPS minimum standards, which could alternatively be agreed upon by means of a bilateral tax treaty amendment. This implies that Switzerland has reserved the right not to apply the MLI provisions on matters that go beyond the minimum standards. These include the BEPS provisions concerning transparent entities and dual resident entities, anti-abuse rules for permanent establishments (PEs) situated in third jurisdictions, or the artificial avoidance of PE status through commissionaire arrangements. In the area of treaty abuse, Switzerland opts for the “principal purpose test.” In accordance with this treaty policy, Switzerland will opt for the inclusion of the mandatory and binding arbitration clause, as provided by the MLI.
The new treaty provisions resulting from the implementation of the BEPS minimum standards modify the description of the purpose in the preamble, include a standard anti-abuse clause, and adjust the provisions governing dispute resolution within the framework of mutual agreement procedures. Switzerland has decided to implement the mandatory and binding arbitration provision.
Switzerland’s Federal Council is expected to publish and submit the MLI for public consultation towards the end of 2017, to be followed by the usual parliamentary approval process before it can enter into force. If this process is successful, the MLI items would enter into force at the earliest by 1 January 2019.
Read a June blog item posted by the KPMG member firm in Switzerland
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