On 28 September 2018, Australia ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (Multilateral Instrument). The Multilateral Instrument is a multilateral treaty that enables jurisdictions to swiftly modify their bilateral tax treaties to implement measures designed to better address multinational tax avoidance.
The Multilateral Instrument will enter into force in Australia on 1 January 2019.
The extent to which the Multilateral Instrument will modify Australia’s bilateral tax treaties will depend on the final adoption positions taken by other countries but the following are some main features of the multilateral instrument:
Article 3 – Transparent entities
Treaty benefits will be granted for income derived through fiscally transparent entities but only where one of the two countries treats the income as income of one of its residents under its domestic law.
Article 6 – Purpose of a covered tax agreement
A new treaty preamble will clarify that tax treaties are not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
Article 7 – Prevention of treaty abuse
New anti-abuse rules will enable tax administrations to deny treaty benefits in certain circumstances: the Principal Purpose Test (PPT) and the Simplified Limitation on Benefits (S-LOB) rule.
Article 8 – Dividend transfer transactions
Shares must be held for 365 days before any non-portfolio intercorporate dividends payable on those shares become eligible for reduced tax rates under tax treaties. This holding period will be added to bilateral treaties that do not already include a minimum holding period and replace any existing holding periods in treaties.
Article 9 – Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property
Countries will be able to tax capital gains derived by foreign residents from the disposal of shares or other interests in ‘land-rich’ entities (where the underlying property is located in that country) if the entity was land-rich at any time during the 365 days preceding the disposal.
Article 13 – Artificial avoidance of permanent establishment status through the specific activity exemptions
Most tax treaties include a list of exceptions to the definition of permanent establishment where a place of business is used solely for specifically listed activities such as warehousing or purchasing goods.
Only genuine preparatory or auxiliary activities will be excluded from the definition of permanent establishment. In addition, related entities will be prevented from fragmenting their activities in order to qualify for this exclusion.
Article 14 – Splitting-up of contracts
Most tax treaties include rules that deem building or construction projects that exceed a specified period (e.g. 12 months) to constitute a permanent establishment.
Related entities will be prevented from avoiding the application of the specified period by splitting building or construction-related contracts into several parts.
Article 16 – Mutual agreement procedure
New rules will ensure the consistent and proper implementation of tax treaties, including the resolution of disputes regarding their interpretation or application. This will provide taxpayers with a more effective tax treaty-based dispute resolution procedure.
Article 17 – Corresponding adjustments
Transfer pricing adjustments can result in double taxation when one country makes an adjustment to an entity’s profits and the other country does not make a compensating adjustment to the profits of the relevant related entity.
A country will be required to make a downward adjustment to the profits of a resident entity, as a result of an upward adjustment by the other country to the profits of an associated entity which is a resident of that other country (provided both countries agree that the upward adjustment is justified).