EY’s Global Tax Alert outlines an excellent presentation of the verbiage contained in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), in addition to specificity re: China’s intent of each of the BEPS Action Items.
The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i)”in place of”; (ii)”applies to”; (iii)”in the absence of”; and (iv)”in place of or in the absence of.”
A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.
A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision.
A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that does not contain a provision within the scope of the relevant MLI provision.
A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.
China’s intent with respect to its positions for each of the BEPS Actions are also outlined in the EY Global Tax Alert, as such intent would affect over 100 double tax treaties.
Needless to say, the process of reading, and reviewing, the Action Items has commenced by many.
Importantly, multinationals now have the final rules by which the impact on their organization can be assessed, and action plans developed accordingly. However, there will be timing differences as to when such guidance is implemented into law by countries, as well as “soft law” conformity.
The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States. Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.
Article 116 TFEU:
Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.
If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives. Any other appropriate measures provided for in the Treaties may be adopted.
The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:
EU Common Corporate Tax Base (CCTB)
Country-by-Country (CbC) reporting, public disclosure
Tax rulings, (redacted) public disclosure
Permanent Establishment (PE) definition
Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
EU Dispute Resolution approach
Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.
The OECD has released comments received in response to BEPS Action Item 14: Make Dispute Resolutions More Effective. These comments are valuable in understanding these important mechanisms that could minimize potential double taxation and increase certainty in a timely manner, as well as comprehend its significant impact on other current BEPS Guidelines that are being drafted such as Action Item 6: Treaty Abuse re: subjective tests being proposed such as the Principal Purpose Test (PPT).
Unfortunately, mandatory arbitration, as well as consistent consideration and application of the MAP procedure, are ideals that will not be realized, due in part to countries not wanting to give up their control and concept of sovereignty. As the BEPS guidelines, and unilateral country legislative actions, become more complex and subjective, the dispute resolution process increases its vital importance exponentially. Therefore, it is in everyone’s interest to make these mechanisms work efficiently and consistently in a transparent environment.
The link to the respective comments are included for reference: