The ‘how’ and the ‘when’ of international tax reform took a large step forward with the 24 November 2016 release by the Organisation for Economic Co-operation and Development (OECD) of the text, and accompanying explanatory statement to the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”.
Not a title that rolls conveniently off the tongue, this multilateral convention is the means by which the treaty-related changes arising from the G20/OECD rewrite of the international tax framework (the BEPS – Base Erosion and Profit Shifting – project) will be given effect.
When will this tax reform become effective?
The text of the Multinational Convention (MLC-BEPS) is now available publicly, following the conclusion of the ‘closed doors’ negotiating process between some 100 sovereign States. Taxpayers and advisers now have a better insight into how the BEPS treaty-related changes will be implemented, and can begin the process of reviewing existing tax structures. (The non treaty-related BEPS measures, to be implemented through States’ domestic tax law changes, will also require consideration.)
A signing ceremony is planned for June 2017, and before that, all States are required to indicate, at least on a preliminary basis, which of the BEPS measures they will adopt, and where appropriate, how those measures will be applied.
In line with similar international conventions, Australia’s signing of the MLC-BEPS will be likely to require an Act of Parliament to bring the convention into force, and then a transition period before the new provisions take effect. This detail remains to be confirmed.
How will the MLC-BEPS operate?
There are currently in excess of 3,000 double tax agreements operating around the world. To implement the agreed treaty-related BEPS measures through the normal process of renegotiating treaties would take too long, and would subvert the objective of the BEPS project. The MLC-BEPS has been developed so that all (or at least as many as possible) of the existing double tax agreements can be upgraded to the BEPS standard in the shortest possible time.
The MLC-BEPS will not modify the actual text of any existing agreements but rather “will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures”.
The MLC-BEPS has to accommodate the variety of positions which exist within the present tax treaties, the different means by which those positions are achieved, and the fact that the signatories to tax treaties are sovereign States. On the other hand, the BEPS project has resulted in globally agreed changes to international tax law, with some instances of ‘minimum standards’ having been agreed amongst participating states.
The MLC-BEPS addresses each of the treaty related BEPS measures and provides alternative means of applying the measures. Through a series of ‘compatibility clauses’ and a reservations process, States can indicate whether they will adopt changes, and if so how they will do so.
For the agreed ‘minimum standard’ changes, States flexibility is limited to how they will implement the changes, not whether they will.
Each State is required to review all its tax treaties and prepare detailed ‘notifications’ of the changes it will (and will not) adopt, and the means by which changes will be adopted.
A draft of those ‘notifications’ is required to be lodged by each State ahead of the signing ceremony. Continued and more detailed reviews are expected to follow, with final notifications to be lodged as soon as practicable.
Bilateral tax negotiations are free to continue in the ordinary course, and States can change their notified positions on BEPS measures over time, with appropriate notifications being lodged.
Having lodged their notified positions to all applicable tax treaties, the positions of signatory States to a particular tax treaty will be compared, and where there is mutual agreement to apply BEPS measures and upgrade a treaty, then the treaty will operate as upgraded.
If there is not mutual agreement between States over particular BEPS measures, then the existing negotiated text will continue in force.
This process will apply to each bilateral tax treaty.
Further action to tax reform
With the upgrade options now clear, through the release of the MLC-BEPS text, multinational groups should be reviewing the efficacy of their existing structures. The future release of States’ positions will finalise that review process (taking into account the domestic BEPS changes) but the newly released information permits clear planning to proceed now.
For any questions about the impact of the MLC-BEPS on existing corporate structures, or more generally in relation to the G20/OECD BEPS project, please contact your RSM tax adviser.