MLI measures to be implemented over the next year

Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting is now in place, but what does that mean? Louise Kelly explains.

The signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) took place on 7 June. Minister for Finance, Michael Noonan T.D. signed on Ireland’s behalf.

The MLI was designed to implement the tax treaty-related measures developed through the BEPS Project by providing a mechanism for countries to transpose these recommendations into their existing double tax treaties while providing for options in certain areas. It’s a significant step forward in implanting the BEPS agenda, with far reaching consequences for taxpayers.

What will it do?

The MLI enables Ireland to simultaneously update up to 71 of our 72 tax treaties which ensures they comply with certain BEPS recommendations without the need for separate bilateral negotiations. The Ireland-Netherlands tax treaty does not appear to be included as an agreement covered by the Convention. 

On 2 June, the Department of Finance issued its position document in connection with the measures contained within the MLI. The Department’s Technical Note can be read here. Ireland has some key positions.

BEPS Action 2

Articles 3, 4 and 5 address BEPS Action 2, which is concerned with hybrid mismatch arrangements. Article 3 is focused on income earned through transparent entities and aims to ensure that the benefits of tax treaties are granted in appropriate cases, but that these benefits are not granted where neither Contracting State treats the income of an entity as the income of one of its residents under its domestic law.

Article 4 concerning Dual Residents allows Contracting States to determine by mutual agreement the state of residence for tax treaty purposes, and an entity may not entitled to treaty benefits in the absence of such an agreement. Ireland has reserved from Article 5.

BEPS Action 6

Articles 6-11 address BEPS Action 6, which is concerned with preventing the granting of treaty benefits in inappropriate circumstances. Critically, from an Irish perspective, Ireland will adopt the Principal Purpose Test (PPT) under Article 7. As noted by the Department, this PPT is a form of general anti-avoidance rule within the treaty itself. Ireland will adopt Article 8, which addresses dividend transfer transactions, and Article 9, concerned with capital gains from the alienation of shares or interests of entities deriving their value principally from immovable property. Ireland has reserved from Articles 10 and 11.

BEPS Action 7

Articles 12-15 address BEPS Action 7, which aims to counter the artificial avoidance of permanent establishment status. Article 12 of the Convention sought to introduce a new test for when an agent can constitute a permanent establishment in a particular country and particularly through commissionaire arrangements and similar strategies. Specifically, Article 12 can apply where a person is acting in a Contracting Jurisdiction on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.

The Department has noted that work is still underway at OECD level to determine what profits, if any, would be attributable to new permanent establishment created under this new test and that “Ireland intends to reserve on Article 12 due to the continuing significant uncertainty as to how the test would be applied in practice”. 

Ireland will adopt Article 13 which addresses the artificial avoidance of PE status through the specific activity exemptions, which are contained in most tax treaties. The effect of applying Option B in Article 13 (which is the Department of Finance’s preference) would be to preserve the exceptions for activities described in existing tax treaties, and to ensure that those exceptions will apply irrespective of whether the activity is of a preparatory or auxiliary character.

BEPS Action 14

Articles 16 and 17 of the MLI are concerned with dispute resolution and look at the Mutual agreement procedure and corresponding adjustments respectively. Ireland will also sign up to Part VI Mandatory Binding Arbitration. The rules will apply only if both parties to a treaty opt in.

Implementation

We would expect implementation of the MLI measures over the coming year. Ireland’s tax treaties will be amended where both Ireland and the relevant treaty partner have fully ratified the convention in their domestic laws.

Louise Kelly FCA is a Tax Partner in Deloitte.