8 February, 2018
Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia have signed a multilateral instrument (MLI) to amend double tax treaties to bring into effect changes designed to prevent tax avoidance by multinational groups, the Organisation for Economic Cooperation & Development (OECD) has announced. These signatures bring the total number of signatories to date to 78.
The OECD has also announced that only one further country needs to ratify the MLI in accordance with its domestic law before it can begin to come into force. According to the OECD, Austria, the Isle of Man, Jersey and Poland have ratified the treaty so it will come into force three months after a fifth country ratifies it. The UK's legislation to ratify the MLI is contained in the Finance Bill, which is currently going through Parliament.
"We are likely to see an increase in international tax disputes over the next few years as countries implement the changes recommended by the OECD. We are also seeing countries, such as the UK and Australia, taking unilateral action against tax avoidance, which is even more likely to result in double taxation," said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.
"The OECD needs to continue to work on processes to prevent disputes arising in the first place as tax treaty mutual agreement provisions and arbitration are very much a last resort. The MLI is definitely a step in the right direction, but it will not be an immediate solution to all the problems," he said.
The MLI will enable over a thousand double tax treaties to be interpreted in a way that implements the OECD's recommendations for treaty changes. The recommendations were made as part of the OECD's base erosion and profit shifting (BEPS) project to prevent international tax avoidance by multinational companies.
The changes include measures designed to prevent the use of treaties for tax avoidance and improved tax dispute resolution procedures. An optional provision on mandatory binding arbitration, has been taken up by 28 jurisdictions, including the UK.
Each country which signs the MLI sets out the treaties to be covered by the instrument. The MLI will only apply to treaties between countries which have both chosen to apply the MLI to the relevant treaty and where any options they have chosen are compatible. It will only come into force in relation to a particular treaty three months after both contracting states have ratified the MLI and chosen to apply its provisions to the relevant treaty. The provisions will then take effect from the beginning of the next calendar year or fiscal period. The OECD is developing an online database to show how the MLI is likely to affect a specific tax treaty by matching information from signatories’ MLI positions.
"Once the MLI comes into force, applying double tax treaties will not be straightforward as the MLI gives a considerable amount of flexibility to countries to choose how and whether many of the provisions apply," said Jeremy Webster, a corporate tax expert at Pinsent Masons.
"You will need to locate the relevant treaty, check whether and when each party to the treaty ratified the MLI to establish when it comes into force and when the provisions take effect. It will then be necessary to use the OECD online tool to establish which provisions of the MLI apply to the treaty and apply the DTT, as amended by the MLI, to the facts," he said.
In June 2017, the first 68 countries signed the MLI. The signatories include almost all EU countries, as well as Russia, China, Hong Kong, India, South Africa, Australia, Turkey, Switzerland and Singapore, but not the US.
Algeria, Kazakhstan, Oman and Swaziland have expressed their intent to sign the Convention, and a number of other jurisdictions are actively working towards signature by June 2018, according to the OECD.
Both the UK and Australia have introduced their own 'diverted profits' taxes designed to prevent multinationals shifting profits overseas to avoid paying tax.
For further information, please contact:
Ian Hyde, Partner, Pinsent Masons
ian.hyde@pinsentmasons.com
