OECD released the BEPS (Base Erosion and Profit Shifting) Project final package of measures of OECD/G20 in October 2015. The objective of this project is to prevent the tax avoidance strategies in multinational group structures and to ensure fair taxation for multinational enterprises.
Based on the text of the multilateral convention released on 24th of November 2016 a swift implementation of many BEPS standards is expected
1. What is the purpose of the multilateral convention?
Many of the OECD BEPS measures require a modification of double tax treaties for their implementation. As the renegotiation of double tax treaties is always conducted bilaterally between the respective states and it often takes years to complete the process, the OECD has developed a multilateral convention (“MLC”). The MLC should provide for the coordinated and swift implementation of the BEPS measures.
The contents of the multinational convention will subsequently supplement or modify the text of the existing double tax treaty between the respective states.
2. Which countries are involved?
The MLC was developed by an ad hoc group that included the representatives from more than 100 states. The list of the states represented in the ad hoc group may be found on the OECD website at:
Austria is also represented in this ad hoc group and will most likely sign the MLC.
3. When does the multinational convention come into effect?
By the end of December 2016 the MLC should be prepared to sign, in order to be quickly ratified. At least 5 states have to sign and ratify the MLC, so that it comes into force. This is expected to be the case in June 2017.
It should be stated that changes to double tax treaties become effective only if
- all the contracting parties have signed and ratified the MLC and
- the new regulations to be applied are clearly defined (a certain deadline should still be set)
From today’s perspective the modifications are not expected to come into legal force until 2018.
4. To which double tax treaties does the multinational convention apply?
Generally, the states have an option to apply the MLC to its whole Double Tax Treaty network or just to the part of it. The MLC is applicable only when all contracting parties of a double tax treaty intend to use it to modify the treaty.
5. What are the specific changes proposed by the MLC?
Generally, most of the changes aim to strengthen the rules of using the benefits under double tax treaties. If DBA falls under the scope of the new MLC, with the exception of the binding minimum standards, the contracting parties can freely decide which Double Tax Treaty clauses should be supplemented or modified. This approach ensures the flexibility of the MLC and allows to the different requirements of the states to be met to achieve the highest level on acceptance. There are three different types of clauses to be distinguished upon implementation:
- Minimal standards
- Opt-Out Clauses
- Opt-In Slauses
5.1 Minimal Standards
The minimum standards, which are mandatory for all signing states, deal with only a few aspects.
In particular, such a minimum standard is the “Principal Purpose Test”): This clause is mandatory and should prevent “treaty shopping” cases. Treaty shopping refers to practices in which business is structured in a certain way solely for the purpose of obtaining the most favorable conditions of a double tax treaty.
5.2 Opt-Out Clausel
In addition to the minimum standards, there are certain opt-out rules. These opt-out rules can only be applied by a state uniformly to all its double tax treaties or subgroups of double tax treaties. These rules relate in particular to the following:
- Permanent Establishments
The main changes refer to commissionaire arrangements and restrictions for the so-called preparatory and ancillary activities. Among other things, a large warehouse, maintained in a country, will now be deemed to constitute a permanent establishment („lex Amazon“). In the case of construction companies, an artificial avoidance of permanent establishment through splitting-up of contracts and also through dividing the contract between different group members should be prohibited.
- Real Estate ClauseA new anti-abuse regulation in connection with the real estate clause stipulated by lots of DBAs. This regulation provides for the retroactive observation period of 365 days for assessing the existence of a real estate company. It aims to prevent share deals where the application of the real estate clause that provides for the taxation right of the state where the real estate is situated, is avoided through restructuring measures.
- Benefits related to dividends
Reductions or exemptions from withholding tax on dividends (dividends paid to a corporation) should apply only after a minimum holding period of 365 days. Profit distributions before the expiry of this period should be subject to the general (and as a rule less favorable) withholding tax rate of the respective Double Tax Treaty.
- Anti-abuse regulations
Also, the anti-abuse regulations in connection with the hybrid mismatches und dual resident entities fall under this opt-out regime.
5.3 Opt-In Clausel
Opt-In regulations are usually valid only if all contractual parties of a DBA implement the clause for the specific DBA. Examples include the following cases:
- „Limitation on Benefits Provision“
This is a specific anti-abuse provision that defines the circumstances in which Double Tax Treaties apply to corporations.
- Arbitration for tax disputes
This arbitration procedure is an addition to the mutual agreement procedure already stipulated in tax treaties. This procedure has been completely renegotiated in the framework of OECD BEPS Action Plan.
6. What‘s next?
Only a few regulations of the MLC are provided as mandatory minimum standards. Therefore, the practical impact on specific international business models will mostly depend on how the signing states will implement these rules.
The arbitration procedure, which was designed not as a minimum standard but, on the contrary, to its lowest possible extent in the MLC, is a missed opportunity, especially because all other rules trigger increased double taxation risks.
It remains to be seen how Austria will implement these rules, although one can assume that most of the “opt-out regulations” will find their way into the treaties.
We recommend an early review of the new rules and their impact on the underlying business model. Any necessary adjustments of structures should be made at an early stage in order to avoid pitfalls.
Contact Iris Burgstaller, TPA expert for international tax structuring and transfer pricing.