Categories
BEPS International Tax Multilateral Instrument

Article 12 of MLI | Avoidance of PE through Commissionnarie Arrangements

 

A country has a right to tax the income of its residents and the income of PE of non-resident MNEs. However, through a web of tax planning and corporate structures, many large corporates have artificially avoided the establishment of PE through Commissionnarie Arrangements (covered in Article 12 of MLI) and similar strategies. An OECD study Addressing Base Erosion and Profit Shifting (BEPS) finds that some multinationals use strategies that allow them to pay as little as 5% in corporate taxes when smaller businesses are paying up to 30%.

  1. Article 13 of MLI | Exceptions to PE
  2. Article 12 of MLI | Artificial Avoidance of PE through Commissionnaire Arrangements
Article 12 of MLI - PE through Commissionnarie Arrangements

PE through Commissionnarie Arrangements

“Notwithstanding the provisions of a Covered Tax Agreement that define the term “permanent establishment”, but subject to paragraph 2, where a person is acting in a Contracting Jurisdiction to a Covered Tax Agreement on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are:

a) in the name of the enterprise; or

b) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or

c) for the provision of services by that enterprise,

that enterprise shall be deemed to have a permanent establishment in that Contracting Jurisdiction in respect of any activities which that person undertakes for the enterprise unless these activities, if they were exercised by the enterprise through a fixed place of business of that enterprise situated in that Contracting Jurisdiction, would not cause that fixed place of business to be deemed to constitute a permanent establishment under the definition of permanent establishment included in the Covered Tax Agreement (as it may be modified by this Convention).”

Paragraph 1 of Article 12 has a non-obstante clause. It overrides the provisions of the definition of PE term given under the CTA but is subject to exclusion from Paragraph 2 of Article 12 to the independent agents.

To curb artificial avoidance of PE through Commissionnarie Arrangements, Paragraph 1 of Article 12 deems the existence of a PE if:

  • A person is acting in a Contracting jurisdiction (State of PE) of CTA
  • On behalf of an enterprise (State of Residence of the enterprise)
  • And habitually concludes contracts or habitually plays the principal role in the conclusion of contracts without material modifications from the enterprise,
  • And these contracts are in the name of the enterprise, or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or for the provision of services by that enterprise.

When Article 12(1) of MLI is triggered, the PE is established in the Contracting Jurisdiction (State of PE) for any activities that the person mentioned above undertakes for the enterprise. An exception to this is Paragraphs 4 and 5 of Article 5 of the OECD Model Tax Convention regarding the exclusions and fixed base PE.

Paragraph 2 of Article 12 of MLI – Independent Agent

“Paragraph 1 shall not apply where the person acting in a Contracting Jurisdiction to a Covered Tax Agreement on behalf of an enterprise of the other Contracting Jurisdiction carries on business in the first-mentioned Contracting Jurisdiction as an independent agent and acts for the enterprise in the ordinary course of that business. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent within the meaning of this paragraph with respect to any such enterprise.”

Paragraph 2 of Article 12 of MLI represents the provisions relating to independent agent exemption recommended under Final Report on BEPS Action 7. According to Paragraph 2 of Article 12 of MLI, Article 12(1) provisions will not apply to an independent agent representing the enterprise of other contracting jurisdiction in an ordinary course of business. However, when such a person works exclusively for two or more enterprises to which it is closely related, that person shall not be considered an independent agent for Paragraph 2 of Article 12 of MLI.

Paragraph 3 of Article 12 of MLI – Compatibility Clause

Paragraph 3 is a compatibility clause that describes the interaction between paragraphs 1 and 2 provisions on PE through Commissionnarie Arrangements and provisions of Covered Tax Agreements. Existing tax treaties may include a wide variety of such provisions.

Paragraph 3(a) provides that paragraph 1 of Article 12 of MLI would replace existing provisions of a Covered Tax Agreement on dependent agent permanent establishment. However, it applies only to the extent that such variations address the situation in which a person has, and habitually exercises, an authority to conclude contracts in the name of an enterprise.

Paragraph 3(b) provides that paragraph 2 of Article 12 of MLI would replace provisions of a Covered Tax Agreement that provide that an enterprise shall not be deemed to have a permanent establishment in a Contracting Jurisdiction regarding an activity which an agent of an independent status undertakes for the enterprise.

Paragraph 4 of Article 12 of MLI – Reservation Clause

Given that provisions addressing artificial avoidance of permanent establishment status through commissionnaire arrangements and similar strategies are not required to meet a minimum standard, paragraph 4 allows a Party to reserve the right not to apply the entirety of Article 12 to its Covered Tax Agreements.

Categories
BEPS International Tax

Article 3 of MLI – Fiscally transparent entities

 

Fiscally transparent entities are the commonly used structure in cross-border investments for their tax efficiency. Fiscally transparent entities usually allow income to ‘pass through’ them; there is no taxation at the entity level. It faces hurdles when trying to access the tax treaty benefits because they often do not meet the definitions of ‘person’ and ‘resident’ in Article 1.

Article 3 of the Multilateral convention dealing with fiscally transparent entities

To mitigate the ongoing issues on taxation of income earned by the fiscally transparent entities, Article 3 of the Multilateral Convention deals with applying tax treaties to hybrid entities.

Income derived by or through fiscally transparent entities | Article 3(1)

For the Covered Tax Agreements,

  • Income derived by or through
  • An entity or arrangement,
  • That is treated as wholly or partially fiscally transparent, under the tax law of either Contracting Jurisdiction,
  • Shall be considered to be the income of a resident of a Contracting jurisdiction, but,
  • Only to the extent that the income is treated for taxation purposes by that Contracting jurisdiction, as the income of a resident of that contracting jurisdiction.

Paragraph 1 of Article 3 of the MLI seeks to ensure tax treaty benefit is granted only in appropriate cases and is not available when neither contracting State treats the entity’s income as that of its resident under its domestic laws. 

For a detailed explanation, click here.

Elimination of double taxation in case of fiscally transparent entities | Article 3(2)

Article 3(2) states:

  • Provisions of a Covered Tax Agreement that require a Contracting Jurisdiction to exempt from income tax  or provide a deduction or credit equal to the income tax paid
  • concerning income derived by a resident of that Contracting Jurisdiction
  • which may be taxed in the other Contracting Jurisdiction according to the provisions of the CTA
  • shall not apply to the extent
  • that such provisions allows taxation by that other Contracting jurisdiction solely because the income is also income derived by a resident of that Other Contracting Jurisdiction.

Paragraph 2 of Article 3 of MLI intends to modify the provisions relating to eliminating double taxation concerning fiscally transparent entities. As per this provision, the State of residence is required to relieve double taxation when income is taxable in the other State as per the treaty provisions only if the income is either sourced in the other State or attributed to a permanent establishment situated in the other State.

Let us break and analyze Article 3(2)

Illustration:

Mr. Joy and Mr. Moy are residents of State R and have registered a partnership firm ‘JM’ in State S. ‘JM’ receive interest income from Mr. A, a resident of State A. State R treats partnership firms as taxable entities, whereas State A treats ‘JM’ as a fiscally transparent entity. State R and State S, State S and State A, and State R and State A have adopted OECD Model tax convention.

  • State A has withheld tax @ 10% as per Article 11 of the OECD Model tax convention.
  • State S has taxed the income of ‘JM’ as the income of the resident @ 30% (domestic tax rate)

Can Mr. Joy and Mr. Moy receive a tax credit for the interest received?

Answer:

Mr. Joy and Mr. Moy will not receive a tax credit under Article 23A/B for the tax paid in State R on the interest received. State R has taxed the income as the income of its resident.

Mr. Joy and Mr. Moy will receive a tax credit under Article 23A/B for the tax paid in State S on the interest received. State S has taxed the income as the income derived in its Source.

“Saving Clause” in relation to fiscally transparent entities | Article 3(2)

Paragraph 3 of Article 3 of the MLI links Article 3 and the “saving clause” provided in Article 11 of the MLI dealing with ‘Application of tax agreements to restrict a party’s right to tax its residents. A saving clause preserves the right of a Contracting State to tax its residents.  This paragraph will apply to any covered tax agreement for which one or more country has reserved the right not to use Article 11 in entirety.

Compatibility Clause | Article 3(4)

Paragraph 4 is the compatibility clause and states that paragraph 1 shall apply in place of or in the absence of similar provisions in the Covered Tax Agreements.

Reservation Clause | Article 3(5)

Article 3 is not the minimum standard, hence Paragraph 5 of Article 3 provides for reservation clause.

The various alternatives for reserving the right with respect to the article is listed below

Categories
BEPS International Tax

Article 3(1) of MLI – Taxation of income derived by or through fiscally transparent entities

 

Article 3(1) is the primary provision of Article 3. It reflects BEPS Action Plan 2 measure that addresses income earned through fiscally transparent entities.

Paragraph 1 of Article 3 of Multilateral convention

To understand this provision’s genesis, we need to look into the issues of fiscally transparent entities while availing the treaty benefits.

Whether treaty applies to a Fiscally transparent entity?

Article 1 of the OECD model tax convention, a treaty applies to persons who are residents of one or both contracting states. The definition in the Model Tax Convention did not specifically cover the fiscally transparent entities.

Article 4 of the OECD Model tax convention defines ‘resident of a contracting state’ to mean any person who, under the laws of that State, is liable to tax therein because of his domicile, residence, place of management, or any other criteria of a similar nature including that State or any political subdivision or local authority thereof.

When you read both these provisions, it concludes that a fiscally transparent entity may not itself be liable to tax under the State’s laws where it is formed. Thus, the application of the treaty to such an entity could be denied.

Article 3(1) of Multilateral Convention

For the purpose of the Covered Tax Agreements,

  • Income derived by or through
  • An entity or arrangement,
  • That is treated as wholly or partially fiscally transparent, under the tax law of either Contracting Jurisdiction,
  • Shall be considered to be the income of a resident of a Contracting jurisdiction, but,
  • Only to the extent that the income is treated for taxation purposes by that Contracting jurisdiction, as the income of a resident of that contracting jurisdiction.

Paragraph 1 of Article 3 of the MLI seeks to ensure tax treaty benefit is granted only in appropriate cases and is not available when neither contracting State treats the entity’s income as that of its resident under its domestic laws. 

Application of Article 3(1) of Multilateral Convention

AYC is a partnership firm registered in State A, with Mr. A (resident of State A) and Mr. Y (resident of State B).  AYC has given a loan of 1 million euros to Candy Inc, registered in State C. Candy Inc pays an interest of 3000 euros per day to AYC, which is treated as a transparent entity under State C’s domestic tax laws.

Tax rates on interest income in State C is 30%. State A and State C have adopted the OECD model tax convention, and tax rates of interest under Article 11 are 10%. How much will State C withhold as tax?

Illustration for Article 3 Paragraph 1 of Multilateral convention

Candy Inc pays 3000 Euros per day to AYC Inc, which is equally owned by Mr. A and Mr. Y.

Hence 1500 Euros will be treated as interest income in the hands of Mr. A and Mr. Y each.

As Mr. A is a resident of State A, which has a tax treaty with State C, as per Article 3(1) of the MLI, the interest income will be taxable under Article 11 of the OECD Model Tax Convention. Hence State C will withhold the tax @10% on 1500 Euros paid towards Mr. A’s share.

Mr. Y is a State B resident, which does not have any tax treaty with State C; hence State C will tax the interest income as per the domestic law tax rate of State C @ 30% on 1500 Euros.

Categories
BEPS International Tax

Introduction to Part II of Multilateral Convention | Hybrid Mismatch

 

Part II of the Multilateral convention comprising of Article 3 to 5 covers ‘Hybrid mismatch arrangements’. ‘Hybrid mismatches’ refers to differences in the tax treatment of financial instruments, entities, and transfers between two or more jurisdictions. Cross border tax planning often involves exploiting hybrid mismatch, which provides double deduction and non-taxation avenues, helps defer, reduce or eliminate the overall tax.

Hybrid Mismatch as per BEPS Action Plan 2 and Part 2 of Multilateral convention

History about Hybrid Mismatch

Hybrid mismatch arrangements assist in achieving double non-taxation by:

  1. Double deduction – deduction for the same payment in two jurisdictions
  2. Deduction without corresponding taxation – Deduction in payers jurisdiction without corresponding income taxed in payee’s jurisdiction

The hybrid mismatch has been vastly used in the global business environment, resulting in substantial erosion of the countries’ tax base. To increase the coherence of corporate income taxation at the international level and remove distortions in competition, efficiency, transparency, and fairness, the OECD and G20 countries developed BEPS Action Point 2. BEPS Action Plan 2 – ‘Neutralising the Effects of Hybrid Mismatch arrangements’ tackles hybrid mismatches.

Target of BEPS Action Plan 2

BEPS Action Plan 2 targets mismatches arising from

Use of hybrid Entities

Entities that are disregarded or treated as transparent entities for tax purposes in one jurisdiction and opaque in another

Use of Hybrid Financial Instruments

Financial instruments involving a conflict in characterization, such as debt in one country and equity in another.

Recommendations of BEPS Action Plan 2

BEPS Action Plan 2 aimed at neutralizing the effects of hybrid mismatch arrangements through domestic rules and treaty provisions. It seeks to end the multiple deductions of a single expense, deductions without corresponding taxation, and eliminate various tax credits.

Recommendations of BEPS Action Plan 2 are:

  • Changes in domestic tax laws through primary and defensive rules result in non-reliance on other countries’ tax laws to neutralize hybrid mismatch.
  • Changes to treaty provisions ensure that hybrid arrangements are not used to obtain unduly the benefits of tax treaties.

The changes to treaty provisions recommended by BEPS Action Plan 2 and recommendations of BEPS Action Plan 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) are incorporated in Part II of the MLI, which deals with Hybrid mismatches.

Structure of Part II of the Multilateral Convention:

Article 3 – Transparent Entities

Article 4 – Dual Resident Entities

Article 5 – Application of Methods for Elimination of Double Taxation

To read OECD BEPS Action Plan 2 : Click here

Categories
BEPS International Tax

Article 1 and 2 of Multilateral Convention

 

Part 1 of Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting consists of two Articles, namely, Article 1 – Scope of the Convention and its operation and Article 2- Interpretation of Terms.

Article 1 and 2 of the MLI

Article 1- Scope of the Convention

Article 1 of the MLI describes its scope as:

“This Convention modifies all Covered Tax Agreements as defined in Subparagraph a) of Paragraph 1 of Article 2 ( Interpretation of Terms) .”

The MLI does not act as a protocol to a treaty. The MLI is a separate independent agreement applied to the relevant treaty provision, which it seeks to modify.

Article 2 – Interpretation of Terms

Terms defined under MLI

Covered Tax Agreement

Article 2(1) of MLI defines ‘Covered Tax Agreements’ to mean a double tax avoidance agreement relating to taxes on income in force between two or more parties.  It is irrespective that the agreement may include taxation of other than income ( for instance – capital gains, wealth tax).

If the double tax agreement deals solely with shipping or transport or other social security arrangements, then it is not included under the definition.

As per Article 2(1)(a)(ii) of MLI, the MLI will modify only those double tax agreements that :

  • Each Party has specifically identified and listed in a notification to the Depository
  • As well as any amending or accompanying instruments to it
  • Which is determined by title, names of the parties, date of signature, and if applicable at the time of notification, the date of entry into force).

To view the decision tree diagram: click here.

Party

Article 2(1)(b) of the MLI, defines the term ‘Party’ to mean :

  • States, and
  • Jurisdictions which have signed the MLI under Article 27(1)(b) or (c) [Signature and Ratification, Acceptance or Approval] for which the MLI is in force according to Article 34 [Entry into Force].

Contracting Jurisdictions

According to Article 2(1)(c) of the MLI, the term ‘Contracting Jurisdiction’ means the parties to a Covered Tax Agreements. It refers to the States, jurisdictions, or territories that are parties to a CTA.

The MLI does not use the term ‘Contracting States’ found commonly in tax treaties for two reasons:

  • There are tax treaties where one of the contracting parties is a non-State jurisdiction to which the MLI could apply in the future
  • An alternative, ‘Contracting Party’ could confuse given that ‘Party’ refers to a party to the MLI.

Signatory

Article 2(1)(d) of the MLI defines the term ‘Signatory’ to mean a State or Jurisdiction which has signed this Convention but for which the Convention is not yet in force.

Terms undefined in the MLI

Paragraph 2 of Article 2 of the MLI diverts the definition of all the undefined terms to the respective Covered Tax Agreements unless the context otherwise requires.

Article 2(2) of the MLI words are in the same lines as Article 3(2) of the OECD Model Convention.

The rule refers to the relevant Covered Tax Agreement for the meaning of an undefined term in the MLI. The exception to this rule is where the context of the MLI points towards an autonomous interpretation.

Categories
BEPS

Checklist for applicability of Multi Lateral Instruments Provisions to existing tax treaty

 

In our previous posts of Compatibility clauses of MLI provisions, we discussed the relationship between the MLI provisions and the existing provisions of tax treaty among the Contracting Jurisdictions.

Flowchart for quick understanding

Today, we will see the simple checklist for understanding applicability of MLI provisions to Tax treaty.

Question 1: Whether the country is a signatory to MLI?

Yes : Jump to Question 2

No:  Provisions of Existing Tax Treaty will be applicable

Question 2: Whether both the Contracting Jurisdictions have notified each other in their list of tax treaties which are to be modified by MLI as Covered Tax Agreements?

Yes : Jump to Question 3

No:  Provisions of Existing Tax Treaty will be applicable

Question 3: Whether MLI provisions is a minimum standard?

Yes : Provisions of MLI will apply

No:  Jump to Question 4

Question 4: Whether either contracting jurisdictions of the CTA has expressed reservations for the non-applicability of the MLI provisions?

Yes : Provisions of Existing Tax Treaty will be applicable

No:  Jump to Question 5

Question 5: In case of optional provisions, whether both the Contracting Jurisdictions to the CTA have selected same option and notified to the Depository?

Yes : Provisions of MLI will apply

No:  Provisions of the Existing Tax treaty will be applicable

Categories
BEPS

Understanding Compatibility Clause

 

Do you wonder how Multilateral Instruments amend the Covered Tax Agreements? Compatibility clauses define the relationships between the Multilateral instruments and the Covered Tax Agreements. The impact of the MLI provisions on the Covered Tax Agreements is determined by the compatibility clause used in the respective articles of the MLI.

Compatibility Clause under the Multilateral Instruments

Can the countries change the compatibility clause defined under each MLI provision? No. They cannot. Compatibility expression for each MLI Article is prefixed in the MLI text, which the signatories of the MLI cannot change.

Types of Compatibility Clause.

“In place of”

This clause will replace existing provisions of a CTA with the provisions of the MLI.

If the CTA does not contain any provisions dealing with the subject matter, then the relevant provisions of the MLI will not be applicable.

“Applies to” or “ Modifies”

Here, the MLI “applies to” or “modifies” an existing provision of the CTA. The provisions of the MLI will not be applicable if there are no provisions in the CTA.

“In the absence of”

In provisions of the MLI shall apply only in the absence of existing provisions in CTA. If the CTA contains the existing provisions dealing with the subject matter, then the relevant MLI provisions will not apply

Note: Under the above three types of compatibility clauses, the MLI provisions apply only if both the Contracting Jurisdictions of the CTA make a notification concerning the existing provision of the CTA as described under MLI. IF either or both the Contracting Jurisdictions do not make such notifications, MLI provisions cannot be applied.

“in place of or in absence of”

This type of compatibility clause makes the MLI provisions applicable irrespective of the existence or non-existence of subject matter provisions in the CTA.

The general rule for its applicability:

When both the Contracting Jurisdictions to a CTA notify the existence of provision:

Then provision of CTA will be replaced by the requirements of the MLI.

In case there is an existing provision in CTA that is not notified. The MLI provisions will supersede to the extent the existing provisions of CTA are incompatible with the relevant provisions of the MLI. 

In case there are no existing provisions in CTA, the provision of the MLI will be added to the CTA.

Categories
BEPS

Date of Entry into Effect – Overview

 

After determining the Date of Entry into Force of MLI, the next step is determining the Date of Entry into effect.

Why is it important? Date of Entry into Force of the MLI leads to cut off date for the taxes’ applicability.

What is the “cut-off” date?

Once the MLI has come into force for both the countries of a Covered Tax Agreement, the later entry into force becomes the cut-off date.

Illustration:

Let us explain this with two examples :

Singapore – India CTA.

Singapore and India Multi Lateral Instrument Cut off date for the date of entry int o effect
Singapore – India : Cut off date for the Date of Entry into Effect of MLI

Canada – Singapore CTA

Singapore and Canada Multi Lateral Instrument Cut off date for the date of entry int o effect
Canada – Singapore : Cut off date for the Date of Entry in to Effect of MLI

How to Determine the Date of Entry into Force?

Date of Entry into Force is to calculated separately for two different categories:

  1. Withholding taxes
  2. Other taxes.

Withholding taxes

The MLI shall enter into effect for the taxable events :

  • Arising on or after the first day of the Calendar year
  • That begins after the “Cut-off” date.

Countries have the option to substitute the “Calendar year” to “Taxable period.”

Illustration:

Continuing our previous example

Singapore – India CTA

Singapore and India Multi Lateral Instrument date of entry into effect for Withholding Taxes

Canada – Singapore CTA

Singapore and Canada Multi Lateral Instrument date of entry into effect for Withholding Taxes

Note: India has opted for a Taxable period (April to March) in Article 35 of the MLI, and Singapore follows the Calendar Year (January – December).

For Other Taxes

The MLI shall enter into effect :

  • For the taxable period
  • Beginning on or after the expiration of six calendar months
  • From the “cut-off date.”

Illustration:

Continuing our previous example

Singapore – India CTA

Singapore and India Multi Lateral Instrument date of entry into effect for Other Taxes

Canada- Singapore CTA

Singapore and Canada Multi Lateral Instrument date of entry into effect for Other Taxes

Note:

Whereas there can be only one “date of entry into Force” for MLI qua one country, there can be different “date of entry into effect of MLI qua various CTA.”

Categories
BEPS

Date of Entry into Force under Multilateral Instruments

 

For understanding the date of implementation and from when a provision of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent  Base Erosion and Profit Shifting (Multilateral Instruments or ‘MLI’) apply towards an existing bilateral treaty, it is critical to understand the two key concepts: Date of Entry into Force and Date of Entry into Effect

What is the Date of Entry into Force?

Article 34 of the MLI  defines the Date of Entry into Force. The Article provides the method for determination of the Date of Entry into Force for two categories.

Paragraph 1 of Article 34 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent  Base Erosion and Profit Shifting

For the first five MLI deposited, the Convention/MLI shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument. As of that date, the five Signatories depositing their instruments of ratification, acceptance, or approval to the Convention will become Parties and bound by the Convention.

What if the fifth instrument of ratification, acceptance, or approval is deposited on the first day of a month?

The Explanatory Statement to Multilateral Convention to Implement Tax Treaty Related Measures to Prevent  Base Erosion and Profit Shifting states in such a situation, “the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit” will be four months after the deposit of the instrument or instruments of ratification, acceptance or approval.

Illustration: State A being the fifth country to deposit its instrument of ratification, deposits the instrument on 1st April 2018, the Convention will enter into force on 1st August 2018.

The first five countries to deposit the MLI of ratification, acceptance, or approval are, i.e., Austria, the Isle of Man, Jersey, Poland, and Slovenia.

CountryDeposit of Instrument of Ratification, Acceptance or Approval
Austria22/09/2017
The Isle of Man25/10/2017
Jersey15/12/2017
Poland23/01/2018
Slovenia22/03/2018

As Slovenia was the fifth country to deposit the MLI, the date of entry into force for all the above mentioned five countries is 1st July 2018.

Paragraph 2 of Article 34 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent  Base Erosion and Profit Shifting

For all the other signatories, the date of entry into force will be the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance, or approval.

What if the deposit of the instrument of ratification, acceptance, or approval occurs on the first day of a month?

The Explanatory Statement to Multilateral Convention to Implement Tax Treaty Related Measures to Prevent  Base Erosion and Profit Shifting states in such a situation, “the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit” will be four months after the deposit of the instrument or instruments of ratification, acceptance or approval.

CountryDeposit of Instrument of Ratification, Acceptance or ApprovalDate of Entry into Force
Belgium26/06/201901/10/2019
Canada29/08/201901/12/2019
France26/09/201801/01/2019
Ireland29/01/201901/05/2019
Japan26/09/201801/01/2019

Note: The concept of entry into force applies to each country and not to each CTA.

Categories
BEPS

Understanding what is Covered Tax Agreement “CTA”

 

In our previous post, we have discussed the questions of Why and How relating to the Multilateral Instruments (MLI). So today, we move forward to understand how to read an MLI.

Though MLI intended to simplify and create one treaty to bring changes in all other, it will not be easy to interpret if we cannot eschew the fundamental concepts driving the MLI.

So let’s begin!

What is Covered Tax Agreements (CTA)?

Multilateral Instruments are developed to be uniform and also flexible for the countries agreeing. It respects the sovereign power of all nations, and hence countries are free to decide:

  1. Whether to sign the MLI or not,
  2. Which bilateral treaties should be modified by the MLI; and
  3. Which provisions of the MLI should be accepted or not.

As discussed in our introductory post, MLI applies only to Covered Tax Agreements. A Covered Tax Agreement is the existing bilateral tax treaty that is to be modified by the MLI provisions.

When does the existing bilateral tax treaty become a Covered Tax Agreement?

For treating an existing bilateral treaty as a Covered Tax Agreement, the following conditions should be satisfied:

  1. Both the Contracting jurisdictions to an existing bilateral tax treaty have signed the MLI,
  2. Both the Contracting jurisdiction to an existing bilateral tax treaty have ratified the MLI as per their domestic procedure,
  3. Both the Contracting jurisdiction to an existing bilateral tax treaty have deposited the ratified copy of MLI with the depository, and
  4. In the deposited copy, both the contracting jurisdiction to an existing bilateral tax treaty have listed each other in their tax treaties, which are to be modified by MLI.

Understanding CTA with the MLI submitted

We will understand these conditions with the MLI deposited by the Netherlands.

While depositing the ratified copy of MLI with Depositary, Netherlands notified 81 countries in the list of its tax treaties, which are to be modified by the MLI.

Among all the bilateral tax treaties entered by the Netherlands, only those tax treaties will become CTA, which:

  • Where the other country is also a signatory to MLI
  • The country has ratified and deposited the ratified copy of MLI with the depository
  • In the ratified and deposited copy, Netherlands is notified in the list of its tax treaties to be modified.

We will discuss all the four situations with examples

Understanding Covered Tax Agreement conditions with live MLI positions of countries
Understanding Covered Tax Agreement conditions

When the country is not the signatory to the MLI

So will MLI apply to The kingdom of Netherlands and the United States of America tax treaty?

The Kingdom of Netherlands is a signatory to the MLI and has notified the United States in the list of its tax treaties modified by MLI. But the United States is not the signatory to MLI. Hence the tax treaty between the United States and the Kingdom of Netherlands will not be a Covered Tax Agreement and will not attract MLI.

When the country has not ratified and deposited the MLI

So will MLI apply to The kingdom of the Netherlands and the China tax treaty?

The Kingdom of Netherlands is a signatory to the MLI and has notified China of the tax treaties modified by MLI. Though China is the signatory to the MLI, as of September 30, 2020, it has not deposited the ratified copy of MLI with the depository. Hence the tax treaty between China and the Kingdom of Netherlands will not be a Covered Tax Agreement and thus will not attract MLI.

When the country has not notified another country in the MLI

So will MLI apply to India and the Germany tax treaty?

India is a signatory to the MLI and has notified Germany in the list of its tax treaties, which are to be modified by MLI. Germany is the signatory to the MLI and has deposited the ratified copy of MLI with the depository, but not listed India in the list of tax treaties to be modified. Hence the tax treaty between Germany and India will not be a Covered Tax Agreement and hence will not attract MLI.

When all the four conditions are satisfied

So will MLI apply to the kingdom of Netherlands and Canada Tax Treaty?

The Kingdom of Netherlands is a signatory to the MLI and has notified Canada in the list of its tax treaties, which are to be modified by MLI. Canada is the signatory of the MLI. It has deposited the ratified copy of MLI with the depository and listed the Kingdom of Netherlands in the list of tax treaties to be modified. Hence the tax treaty between Canada and the Kingdom of Netherlands will be a Covered Tax Agreement and thus will attract MLI.

Please find below the links to MLI submitted by the Countries

Link to Netherlands MLI

Link to Canada MLI

error: Content is protected !!