On 7 June 2017, over 70 Ministers and other high level government representatives participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI").
The MLI is the first treaty of its kind that has the effect of amending a series of bilateral treaties (there are over 3,000 bilateral double tax treaties in existence).
The effect of the MLI is that countries (including Ireland) will transpose certain provisions relating to the OECD's Base Erosion and Profit Shifting ("BEPS") project into their existing networks of bilateral tax treaties without the requirement to re-negotiate each treaty individually. This is a hugely significant development in the approach to international tax.
What it means for Ireland?
The MLI will implement a series of measures to update Ireland's existing network of bilateral tax treaties with the intention of reducing opportunities for tax avoidance by multinational enterprises. The new convention is also intended to strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.
The key provisions which will amend Ireland's double tax treaties relate to:
- The adoption of a general anti-avoidance principal purpose test in relation to the prevention of treaty abuse;
- The adoption of the best practice tie-breaker test for determining tax residence for dual resident entities; and
- The adoption of certain mechanisms in respect of dispute resolution (including mandatory binding arbitration) in order to ensure disputes between treaty parties are resolved and double taxation does not arise.
The adoption of the principal purpose test may have implications for certain types of holding companies and other intermediate vehicles which may have been set up to access lower withholding tax rates through double tax treaties.
Significantly, there are also a number of key areas in respect of which Ireland has chosen to reserve its position and will not adopt the proposed measures. In particular, Ireland will not adopt the proposed new tests for determining when an agent or commissionaire would be treated as a permanent establishment.
When will the MLI come into effect?
The earliest that any of these changes are likely to apply in Ireland is 1 January 2019.
In order for the MLI itself to enter into force, it must be ratified by five countries, following which there is a three month waiting period at the end of which the MLI will enter into force for those five countries.
Similar waiting periods will apply for all other countries that subsequently ratify the MLI. The MLI can take effect for a specific treaty only after the relevant waiting period has expired for both countries. In addition, there are different waiting periods for certain provisions and ultimately the entry into force in Ireland is dependent on the MLI being first ratified in Ireland (most likely pursuant to the 2017 Finance Act).
Which double tax treaties will be affected?
The Irish government has confirmed that 71 of Ireland's 73 double tax treaties will be treated as covered by the MLI, constituting "Covered Tax Agreements". It has been bilaterally agreed to exclude the treaty with the Netherlands as this is currently being renegotiated. Where a treaty partner agrees to treat its double tax treaty with Ireland as a Covered Tax Agreement, that treaty will be amended by the MLI once it has entered into force.
BEPS Action 6 – the principal purpose test
A key aim of the MLI is to implement the recommendations of BEPS Action 6 report on treaty abuse which introduced minimum standards to prevent the granting of treaty benefits in unintended circumstances. In all cases, countries must include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements. The Action 6 report also states that tax treaties should, at a minimum, include: (i) a principal purpose test ("PPT") only; (ii) a PPT and either a simplified or detailed limitation on benefits test ("LOB") or (iii) a detailed LOB provision, supplemented by a mechanism that would deal with conduit arrangements.
Ireland has chosen to adopt the PPT which is the only approach that can satisfy the minimum standard on its own. Outbound payments by Irish entities should continue to benefit from existing domestic exemptions from withholding tax.
The PPT could deny a treaty benefit (such as a reduced rate of withholding tax) if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. On 6 January 2017 the OECD published a consultation on so-called "non-CIV" funds which includes three case studies setting out fact patterns where OECD would regard the PPT as having been met. This should assist in achieving a consistent interpretation and application of the PPT in the context of alternative investment funds and securitisation companies.