oecd’s multilateral instrument for the implementation of ... ppts...multilateral instrument/treaty...

Tuesday April 25 & Wednesday April 26 Metro Toronto Convention Centre

OECD’s Multilateral Instrument for the Implementation of Tax Treaty-

Related BEPS Measures

2017 IFA International Tax Conference

Presentation Title Multilateral Instrument/Treaty Update

Moderator: Patrick Marley, Osler, Hoskin & Harcourt LLP, TorontoYIN Rapporteur: Ryan Walker, McCarthy Tétrault LLP, TorontoPresenters:● Jesse F. Eggert, KPMG, Washington, DC● Hersh Joshi, CA, CPA, Ontario Teachers' Pension Plan,

Toronto● Stephanie Smith, Department of Finance, Ottawa● Juan Carlos Trujillo Barroso, General Director attached

to International Treaties, Federal Government of Mexico, Mexico

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Moderator and Speakers



● Welcome and Introduction● Background to the Multilateral Instrument (MLI)ObjectiveOverview of Structure

● Signature, Ratification, and Entry into Force● Selected Provisions of MLI● Providing Clarity and Addressing Differences in

Country Approaches● Next steps

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Agenda



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Background to the MLI



● Provide a vehicle for the swift implementation of the BEPS tax treaty based measures:

Hybrid Mismatches (Action 2)

Treaty Abuse (Action 6)

Artificial Avoidance of PE (Action 7)

Improving Dispute Resolution and Arbitration (Action 14)

● Not an amending protocol – operates alongside existing treaties

● Implements agreed final BEPS recommendations with limited modification

● Arbitration provision developed as part of MLI negotiation

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Objective of the MLI – BEPS Action 15



The BEPS work often produced multiple options for addressing the same problem. This flexibility is reflected in the MLI’s structure:

● Selectivity with respect to Covered Tax Agreements (CTAs)

● Alternative options for meeting minimum standards

● Ability to opt out of certain provisions completely or partially

● Ability to apply reservations to a subset of CTAs (generally based on objective characteristics)

● Flexibility to apply optional or alternative provisions

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Flexibility



● Each provision implementing a BEPS measure includes a “compatibility clause” describing how that provision will interact with existing treaty provisions

● Compatibility clauses take several forms:Provision of Convention applies “in place of,” but not in

the absence of existing provisionProvision of Convention “applies to,” or “modifies” existing

provisionProvision of Convention applies only “in the absence of”

existing provisionProvision of Convention applies “in place of, or in the

absence of” an existing provision

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Compatibility with Existing Provisions



Several types of notifications are used to provide clarity about the application of the MLI:● Notification of Covered Tax Agreements● Notification clauses reflecting choices of optional

provisions and addressing the consequences of mismatch between countries

● Notification clauses specifying provisions within the scope of compatibility clauses and addressing the consequences of mismatch between countries

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Notification Clauses



● Parties can opt out of certain provisions across the board, or only with respect to certain CTAs

● Articles of the Convention include a “closed list” of permissible reservations (with an exception for “free form” reservations from the scope of arbitration)

● Parties making reservations applying to a subset of CTAs must provide a list of the existing provisions in their CTAs that are within the scope of the reservation

● Where a party has made a reservation with respect to a provision, that reservation applies between that party and all other parties to the Convention

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Reservations and Reservation Clauses



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Signature, Ratification and Implementation



● Open for signature by countries and listed non-State jurisdictions as of December 31, 2016, subject to ratification, acceptance or approval by the Signatory

● Subject to ratification, acceptance, or approval according to the domestic procedures of the signatories

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Signature and Reservations



Entry into Force (Art. 34)● Once at least five parties submit their instruments of

ratification, acceptance, or approval, those five Signatories become Parties and generally are bound as of the first day of the month following three calendar months after fifth deposit (or four months later if on first day of month)Example: if five deposits made in January 2017, then first

five Signatories are Parties starting May 1, 2017

● Subsequent Signatories have same three-month period following their deposit

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Effective Dates



Entry into Effect (Art. 35)● Withholding tax: takes effect for the first day of the year after both

parties to a CTA have MLI enter into forceExample: Jurisdiction 1 has MLI enter into force on March 1, 2018

and Jurisdiction 2 has MLI enter into force on March 1, 2019; MLI applies to modify the Jurisdiction 1 – Jurisdiction 2 treaty with respect to withholding taxes for events occurring from January 1, 2020

● All other taxes: taxes levied with respect to taxable periods beginning on or after six months after the MLI enters into force for the two partiesSame example as above: if latest date is March 1, 2019, then MLI

applies to other taxes levied for taxable periods beginning on or after September 1, 2019 (thus January 1, 2020 for calendar-year taxpayers)

● Effective Date provisions are also subject to a number of reservations

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Effective Dates



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Selected provisions of the MLI



● Minimum Standard● Preamble language regarding purpose of treaties● Principal Purposes Test (PPT)Benefits not granted “if it is reasonable to conclude . . .

that obtaining that benefit was one of the principal purposes of any arrangement or transaction” Optional provision to grant benefits if benefits would have

been granted in absence of arrangementCountries may opt out of PPT if they commit to include a

detailed limitation on benefits (LOB) and anti-conduit provisions

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Treaty Abuse



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Treaty Abuse

● Optional Simplified LOBTo be paired with PPTIf one jurisdiction adopts and other does not, other

jurisdiction can o Allow simplified LOB to apply symmetrically with

jurisdictions that adopt simplified LOB;o Allow adopting jurisdiction to apply unilaterally; or o Provide that the simplified LOB will not apply at all to the

bilateral agreement



● Optional Provisions● “Dividend Transfer Transactions”Would impose 365 holding period for direct dividend rate

● Gains from Shares of Entities Deriving Their Value Principally from Real Property365 look-back period to determine if threshold percentage

of assets were real propertySimilar treatment to interests in partnerships and trusts

● Triangular PE ArrangementsDoes not apply to PE in one of the Contracting States

● Saving clause

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Treaty Abuse



● Minimum Standard● Provision to allow taxpayers to present case to either

Competent Authority if taxpayer considers that there is taxation not in accordance with the CTA

● Alternatively, provision to allow taxpayers to present to Competent Authority of state of residence and bilateral notification or consultation process if that Competent Authority does not consider the objection to be justified

● Provision imposing obligation on Competent Authorities to endeavor to resolve cases

● Provision imposing obligation to make corresponding adjustments where the other Competent Authority has made an appropriate adjustment

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Mutual Agreement Procedure



● Procedural framework provided, but competent authority agreement is neededModel competent authority agreement to be developed

● Issues submitted to arbitration if not resolved within two years of start date (alternative three-year period possible)

● Procedures to ensure that arbitration generally cannot be held up unilaterally

● Choice between “last best offer” (“baseball-style”) or “independent opinion”Baseball is default, but if one jurisdiction chooses

independent opinion, independent opinion applies, unless other jurisdiction makes reservation

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Arbitration



● Artificial Avoidance of PE status through Commissionaire Arrangements and Similar Strategies (Article 12)Dependent agent PE definition expanded to include a

person that habitually plays a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterpriseo Would replace existing provisiono Not required to meet the minimum standardProvides that an independent agent that acts exclusively

or almost exclusively on behalf of one or more closely related enterprises is not treated as an independent agento Would replace existing provisiono Not required to meet the minimum standard

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Artificial Avoidance of PE



● Artificial Avoidance of PE Status through the Specific Activity Exemptions (Article 13)Provides amendments to the wording of the specific activity

exemptions from PE status where activities are preparatory or auxiliaryo Would replace existing provisiono Not required to meet the minimum standard

Adopts the anti-fragmentation provision outlined in the Action 7 Final Report where an enterprise or closely related enterprise carries on business activities in the same place or at another place in the same State that rise to the level of a PEo Would apply where a CTA describes a list of specific activities

that do not constitute a PE even if conducted through a fixed place of business

o Not required to meet the minimum standard

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● Splitting-up contracts (Article 14)Would generally require aggregation of time spent (30-

days or more) at a building site or construction or installation project by the enterprise and connected activities carried out at the same building site or construction or installation project during different periods of time, by closely related enterpriseso Would replace existing provision or be added if no

provision existso Not required to meet the minimum requirement

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● MLI incorporates limited recommendations in the Action 2 Final Report

● Transparent Entities (Article 3) Include a provision addressing whether an item of income

derived through a transparent entity is eligible for treaty reliefo Would replace existing provision or be added if no provision

existso Not required to meet the minimum standard Include a provision denying application of relief from double tax

article where CTA allows the other Contracting Jurisdiction to tax the income because the income is also income derived by a resident of that other Contracting Jurisdictiono Not required to meet the minimum standard

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Hybrid Mismatches




● Dual Resident Entities (Article 4)Include a residence tie-breaker rule for persons other

than individuals based on whether the competent authorities can mutually agree on a single Jurisdiction of residenceo Would replace existing provision or be added if no

provision existso Not required to meet the minimum standard

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Hybrid Mismatches




● Application of Methods for Elimination of Double Taxation (Article 5)Provides three alternatives designed to address problems

where an exemption is granted but the income is not taxed in the source Stateo Not required to meet the minimum standardo Each Jurisdiction may choose a different option

● Option B is newDeny a resident’s ability to benefit from an exemption

provided in the relief from double tax article for dividends received by it if the issuer is entitled to a deduction for the dividend

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Hybrid Mismatches



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Providing Clarity and Addressing Mismatches in Country Positions



● Flexible approach of MLI raises possibility that two countries would disagree with respect to:Which CTAs would be coveredWhich optional provisions should applyWhich existing provisions should be replaced or preserved

● MLI provides mechanical rules to address these disagreements

● Bilateral discussions may also help clarify positions in advance to avoid disagreements “Speed dating” exercise in February/March 2017

● Accompanied by Explanatory Statement

● Other mechanisms for providing clarity?

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Addressing mismatches and uncertainty



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Next Steps



● Signing ceremony June 7, 2017● List (or provisional list) of notifications and

reservations are to be made at time of signatureOECD will act as depositary, and will maintain and publish

these lists as well as additional tools to aid in determining application of the MLI between country pairsTiming of release of this information?

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Next Steps

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