On 8 August 2019, Ukraine deposited the Instrument of Ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) with the OECD's Secretary-General. Ukraine is the 31st jurisdiction to have deposited their ratification instrument.
Accordingly, the MLI will enter into force in Ukraine on 1 December 2019 – the first day of the month following the three-month period beginning on the date of the deposit of the instrument of ratification.
What does it mean?
Application of the MLI is aimed at combating abuse of bilateral tax treaties in a synchronized and efficient way by amending about 40 of Ukraine's designated bilateral tax treaties (Covered Tax Agreements or CTAs). The MLI will transpose the following developments into CTAs:
- Principal Purpose Test (PPT) under BEPS Action 6. As one of the key changes, the PPT would operate to deny treaty benefits where it is reasonable to conclude that "obtaining that benefit was one of the principal purposes" of the associated arrangement or transaction.
- Improved provisions on taxation of permanent establishments (PE) in line with BEPS Action 7. The MLI would expand the definition of PE by introducing provisions that specifically address (i) abusive agency and commissionaire arrangements, (ii) reliance on preparatory or auxiliary activity exemptions, and (iii) fragmentation of activities – a significant step in ensuring that profits are taxed in the country where the added value is actually created.
- Mutual Agreement Procedure (MAP) under bilateral tax treaties pursuant to BEPS Action 14. The MLI addresses obstacles that prevent countries from efficiently solving treaty-related disputes under the MAP. In particular, it allows a taxpayer to present its MAP case before a foreign tax office.
What is next?
On 1 December 2019, the MLI will enter into force, but will not "enter into effect." For the MLI to become applicable, it must enter into effect subject to specific provisions of this international treaty.
The MLI will apply from 1 January 2020 for withholding taxes in relation to CTAs between Ukraine and other jurisdictions that have also deposited their ratification instruments. For instance, the MLI will affect withholding tax levied on payments taking place starting from 1 January 2020, and covered by the double tax treaties between Ukraine and the UK, Ireland, the UAE, Singapore, Luxembourg and Malta, to name a few.
In terms of other taxes, such as corporate income tax, the MLI will apply as early as from 1 June 2020 in relation to CTAs between Ukraine and other jurisdictions that have also deposited their ratification instruments.
Actions to consider
Given the magnitude of upcoming changes in tax treatment of international transactions, a new gender of tax disputes involving multinationals operating in Ukraine may mushroom once the MLI comes into force. The complexity of the process and amount of time that may be needed to align corporate models with the new approaches in international taxation necessitate multinational companies to take proactive steps. In this context, we recommend:
- Continuously monitoring whether, when and how the applicable tax treaties are affected by the MLI.
- Reconsidering corporate structures by removing economically unsubstantiated intermediaries from the group.
- Reexamining international structuring of operations in Ukraine to comply with the freshly calibrated PE rules.
Points to remember
To summarize, the MLI could affect your business as early as 2020. Therefore, we recommend aligning your business model to be in compliance with the upcoming tax changes.