What happens if you threw a party and the guest of honour did not turn up?
The international aspects of the G20/OECD’s Base Erosion and Profit Shifting (BEPS) project will become a reality at a treaty signing ceremony to be held in Paris, on 7 June 2017.
Reports suggest that some 60 to 70 nations will attend the event and sign the Multilateral Instrument (MLI).
The MLI will upgrade existing bilateral and multilateral tax treaties operating between those of the signatory countries, to the extent agreed between the treaty parties.
The MLI is an innovative measure, mixing bureaucratic optimism with political pragmatism. It provides signing countries with flexibility in deciding both the extent to which they wish to upgrade existing treaties to a BEPS compliant standard, and also the manner in which those upgrades are implemented.
For the agreed ‘minimum standards’, there is only flexibility around the ‘how’
The MLI can only operate to upgrade an existing treaty where both treaty parties have signed the MLI, and the upgrade will then apply to only those provisions of the existing treaty where there is mutual agreement.
For example, if Australia and New Zealand agree to adopt all the recommended changes in the MLI, and reflect that in their signing instruments, then the Australia/New Zealand tax treaty will be automatically upgraded on all points, once the waiting period expires.
But existing provisions in current treaties will remain in force, unchanged, where one party does not agree to adopt a particular recommendation, but nevertheless does sign the MLI.
If a country does not sign the MLI, then all tax treaties to which it is a signatory will remain in their current state, totally unaffected by the BEPS recommendations.
And the US position…..?
The indications are that the US will not sign the MLI, at least not on 7 June 2017. This brings into question the likely breadth of the operation of the MLI.
Some may see this as further evidence of the US retreating from its position of ‘global leadership’ and returning to the splendid isolation of the Monroe era.
And is it merely coincidental that this is the second international treaty associated with Paris which may not be supported by the US?
However, the US approach to and engagement with the BEPS project has been mixed from the outset. It would be no surprise if the US is not at the signing table on 7 June.
The last laugh?
But the US may yet have a significant contribution to make in shaping the international tax framework of the future.
President Trump and the Congressional Republicans remain committed to wide ranging tax reform which, amongst other consequences, would reduce the current Federal corporate tax rate “significantly”. In addition there is the strong likelihood of a deal being done on a transitional low rate arrangement which would see a major repatriation to the US of those profits of US corporations which are currently “committed” outside the US.
Too many ‘ifs’ can undermine any reality – but consider this: a US with a low corporate Federal tax rate would go a long way to removing the logic for many existing BEPS structures and strategies. What an irony it would be if the US was to adopt a low corporate tax rate, and the MLI came to be seen as the solution to a problem which has disappeared.
In fact, this will not be the outcome, as those remaining high tax jurisdictions in the world will need the protection of the BEPS-enhanced international tax framework to protect them against corporate groups formed in low tax jurisdictions. And how our world view will need to change when the list of low tax jurisdictions extends beyond the Cayman Islands, Bermuda, Ireland and Singapore to include the US and the UK.
From the Australian perspective, and against the background of declining corporate tax rates in our major investor countries, much has been written about the need to reduce the Australian corporate tax rate in order to continue to attract foreign investment capital. No doubt this is a real risk, but the alternative clear and potential danger lies in Australia remaining as a high tax jurisdiction; in those circumstances, the Australian Tax Office will need more than merely the MLI to protect the Australian tax base.
We await with interest the reports of the MLI signing ceremony in Paris...
How does BEPS and the MLI impact the definition of a permanent establishment?
If you would like to know more about the signing of the Multilateral Instrument resulting from BEPS Action 15, RSM US are hosting a one hour long webcast on 21 June, 1.00pm EDT (22 June, 3.00am, AEST). To register your interest, click here.