Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument, or the MLI)

 

Official Texts and Explanatory Statement of Multilateral Convention

Design and Function of the Convention

The OECD Depositary

MLI Positions and policy considerations (by individual jurisdictions)

Matrix of Options and Reservations

Date of entry into force and Date of entry into effect 

Examples Showing how Article 35(1)(b) & Article 35(3) apply respectively with respect to the entry-into-Effect date

  • Japan-Singapore CTA
  • Japan-United Kingdom CTA
  • Malta-Singapore CTA
  • Malta-United Kingdom CTA

 

 


 

 

The Official Texts and Explanatory Statement

 

The multilateral Instrument (the MLI), developed by the OECD and endorsed by the G20, offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation.

 

Official texts of the MLI [read]

Explanatory Statement [read]

Legal notes on the functioning of the MLI under Public international law [read].

 

 

 

Design and Function of the Convention

 

The Convention is the first multilateral treaty of its kind, allowing jurisdictions to transpose results from the OECD/G20 BEPS Project into their existing bilateral tax treaties, transforming the way tax treaties are modified. The Convention has been designed to strengthen existing tax treaties concluded among its parties without the need for burdensome and time-consuming bilateral renegotiations.

 

The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to « disappear » or be artificially  shifted to low or no tax environments, where companies have little or no economic activity. The Convention will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project. Treaty measures that are included in the Convention include those on hybrid mismatch arrangementstreaty abuse and permanent establishment. The Convention also strengthens provisions to resolve treaty disputes, including through mandatory binding arbitration,which has been taken up by 28 signatories as at 7 June 2017.

 

 

 

 

The OECD Depositary

 

The OECD is the depositary of the Convention and is supporting governments in the process of signature, ratification and implementation. 

 

MLI Positions and Policy Considerations (by individual country)

 
The MLI position
 

The MLI Position refers to the choices and options made by the Signatory or Party to the MLI and provided to the OECD Depositary on listed tax agreements, reservations and notifications of optional provisions chosen and existing treaty provisions.

 

Each jurisdiction is required to provide a provisional list of tax treaties covered by the Convention (Covered Tax Agreements), reservations and notifications (the "MLI Position") at the time of signature. Each Signatory must prepare and submit its "MLI Position" before signing the MLI. 

 

The MLI Positions provided at the time of signature for the jurisdictions may be subject to changes. The definitive position for each jurisdiction will be provided upon the deposit by the Signatory of its instrument of ratification, acceptance or approval.

 

  • The MLI Positions for each jurisdiction are available [here].
  • For information on the matching of reservations and notifications under the MLI provisions, see the flow chart [here].

 

Policy considerations on MLI position by individual contracting jurisdictions 

 

Policy conciderations give explanations for the MLI positions that individual conntries (contracting jurisdictions) have adopted with respect to the application of the MLI to tax treaties. One can obtain a better understanding on the MLI position of a contracting jurisdiction by examining the policy forumulation process of that contracting jurisdiction.

 

 

 


 

Date of Entry into Force

 

Multilateral Convention to Implement Tax Treaty Related Measurements to Prevent Base Erosion and Profit Shifting (the Convention) took effect on 1st July 2018.

 

Article 34(1) of the Convention provides that, the Convention entered into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification by Slovenia on 22 March 2018.

In chronological order, 5 jurisdictions, the Republic of Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017), Poland (23 January 2018) and Slovenia (22 March 2018), deposited their instruments with the OECD Depositary. Consequently the Convention came into force on 1st July 2018. That is, the 1st day of the month following the expiration of a period of 3 calendar months beginning on 22 March 2018, the date on which Slovenia deposited the instrument of ratification to the OECD Depositary.

 

Article 34(2) of the Convention provides that for each Signatory ratifying, accepting, or approving this Convention after the deposit of the fifth instrument of ratification, acceptance or approval, the Convention shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance or approval.

 

In June 2018, 4 more signatories, New Zealand, Serbia, Sweden, and the UK, deposited the instrument of ratification to the OECD depositary on 27th June, 5th June, 22nd June and 29th June respectively, which all occured before the last day of June 2018. 

 

The Convention should enter into force for these 4 jurisdictions on 1st Oct 2018, the first day of the month following the expiration of a period of 3 calendar months on the said date. 

 
Date of Entry into Effect
 
 
Article 35(1) provides that the Multilateral Convention (the MLI) shall take effect in each contracting jurisdiction with respect to the covered tax agreement:

(a) for taxes withheld at source on amounts paid or credited to non-residents (withholding tax), where the events giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (the CTA); and

(b) with respect to all other taxes leived by that contracting jurisdiction, for taxes levied with respect to taxable periods beginning on or after an expiration of a period of 6 calendar months from the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA.

 
Notes:
 
1) Most of the contracting jurisdiciton choose the above entry-into-effect date under Article 35(1), meaning that the MLI shall take effect symmetrically on the contracting jurisdictions to the CTA.
 
2) Where a contracting jurisdiction chooses to apply Article 35(1)(a) with respect to the provision for withholding taxes, the MLI shall take effect with respect to withholding tax on the same date as the entry-into-force date.  Japan is one of the contracting jurisdictions that adopts this approach for the entry-into-effect date with respect to the provision for withholding taxes. See the illustrated examples below.
 
3) Solely for purpose of its own application of Article 35(1)(b), a contracting jurisdiction can unilaterally apply the alternative provision for the entry-into-effect date with respect to all other taxes under Article 35(3) of the MLI. That is, if that contracting jurisdiction opts in for Article 35(3), it will replace the provisions under Article 35(1)(b) with Article 35(3). In that case, the entry-into-effect provision will be applied asymmetrically. Malta is one of the contracting jurisdictions that opts in for Article 35(3). See the illustrated examples below.
 

 

 

 

Illustrated examples showing how Article 35(1)(b) and 35(3) apply respectively with respect to the entry-into-effect date

 
[1] Article 35(1) - Entry into effect under the Japan-Singapore CTA
 

 

 

Singapore

Japan

(1)

Date of deposit of instrument of ratification

21 Dec 2018

26 Sept 2018

(2)

Entry-into-force date

01 Apr 2019

01 Jan 2019

(3)

Entry into effect – WHT

01 Jan 2020

01 Jan 2020

 

Article 35(1)(a) applies to withholding taxes, on or after 1st day of the next calendar year beginning on or after the later of entry-into-force date in (2).

 

 

(4)

Entry into effect – Other tax

01 Oct 2019

01 Oct 2019

 

Article 35(1)(b) applies to all other taxes, with respect to the taxable periods beginning on or after 6 calendar months from the later date of (2) above.

years of assessment beginning on and after 1st Jan 2020

taxable periods beginning on and after 1st Jan 2020

 
Singapore adopts Article 35(1)(b). Its taxable period runs from 1st January to 31st December each year.
 
 

[2] Article 35(1) – entry into effect under the Japan-United Kingdom CTA

In respect of Article 35(1)(a) as applied to the Japan-UK CTA, Japan can adopt the entry-into-effect date on 1 Jan 2019 for withholding taxes. It is because the MLI was in force on the later of the entry-into-force dates for Japan (1 Jan 2019) and the UK (1 Oct 2018).  

 

 

 

United Kingdom

Japan

(1)

Date of deposit of instrument of ratification

29/06/2018

26/09/2018

(2)

Entry into force

01/10/2018

01/01/2019

(3)

Entry into effect – WHT

01/01/2019

01/01/2019

 

Article 35(1)(a) applies to WHT, on or after 1st day of next calendar year beginning on or after the later of entry-into-force date in (2).

 

 

(4)

Entry into effect – Other tax

01/07/2019

01/07/2019

 

Article 35(1)(b) applies to all other taxes, with respect to the taxable periods beginning on or after 6 calendar months from the later of entry-into-force date in (2) above.

taxable periods on and after 1st Apr 2020 (corporate tax), and 6 Apr 2020 (income tax and capital gains tax)

taxable periods on and after 1st Jan 2020

 

For withholding tax purpose, it is noted that the entry-into-effect date is on the same date as the entry-into-force date for Japan under Article 35(1)(a). In that regard, the OECD Secretariat has specifically dealt with this issue, as set out below.

 

Where a second of the pair of contracting jurisdictions deposits its instrument of ratification on a day in September 2018, the date of entry into force of the MLI for that contracting jurisdiction pursuant to Article 34 will be 1 Jan 2019. The question raised is whether the inclusion of the word "next" in Article 35(1)(a) means that, in such a case, the MLI has effect for events giving rise to withholding taxes which occur on or after 1 Jan 2019 or on or after 1 Jan 2020. The Secretariat has clarified that the use of the word "on" can only mean that the date from which the MLI have effect can be the same as the latest of the dates of entry into force. The same reasoning applies to the interpretation of the similar formulations used in Article 35(3) ("... 1 Jan of the next year beginning on or after...") and Article 35(5) ("... first day of the next calendar year that begins on or after...").

 

See the notes issued by the OECD Secretariat. [here]

 
 
 
[3] Article 35(1) and Article 35(3) – entry into effect under Malta-Singapore CTA 
 

 

 

Malta

Singapore

(1)

Date of deposit of instrument of ratification

18/12/2018

21/12/2018

(2)

Entry into force

01/04/2019

01/04/2019

(3)

Entry into effect – WHT

01/01/2020

01/01/2020

 

Article 35(1)(a) applies to WHT, on or after 1st day of the next calendar year beginning on or after the later of entry-into-force date in (2) above.

 

 

(4)

Entry into effect – Other tax

01/10/2019

01/10/2019

 

Article 35(1)(b) Applies to other taxes, for the taxable periods beginning on or after 6 calendar months from the later of entry-into-force date in (2) above.

 

years of assessment beginning on and after 1st Jan 2020.

 

Article 35(3) applies to other taxes, effective where the taxable periods begin on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the latest of the entry-into-force dates (2019-4-1)

the taxable periods beginning on 1 Jan 2020 beginning after 6 months from 1 April 2019.

 

 
 
 

[4] Article 35(1) and Article 35(3) – entry into effect under Malta-UK CTA

 

 

 

Malta

United Kingdom

(1)

Date of deposit of instrument of ratification

18 Dec 2018

29 Jun 2018

(2)

Entry into force

01 April 2019

01 Oct 2018

(3)

Entry into effect – WHT

01 Jan 2020

01 Jan 2020

 

Article 35(1)(a) applies to WHT, beginning on or after 1st day of the next calendar year beginning on or after the later of (2).

 

 

(4)

Entry into effect – all other tax

01 Jan 2020

01 Jan 2020

 

Article 35(1)(b) Applies to all other taxes, for the taxable periods beginning on or after 6 calendar months from the later of (2) above.

 

the taxable period on and after 1 Apr 2020 (corporate tax), and 6 Apr 2020 (income tax and capital gains tax)

 

Article 35(3) applies to all other taxes, where the taxable periods begin on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the later of the entry-into-force dates (2019-4-1)

the taxable periods beginning on 1 Jan 2020 beginning on or after 6 calendar months from 1 April 2019.

 

 

 

Malta adopts the alternative provision under Article 35(3). It provides that the entry-into-effect date in Malta for all other taxes levied with respect to the taxable periods shall begin on or after 1 January of the next year (2020) beginning on or after a period of 6 calendar months from the latest of the dates (1 April 2019) on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement. 

 

Our Comment

 

The Malta-United Kingdom CTA shows that, as Malta adopts the alternative provision under Article 35(3), the MLI entry-into-effect date falls on 1 Jan 2020. Therefore, it can come earlier than (but not later than) the entry-into-effect date for the U.K. which begins on and after 1 April 2020 under Article 35(1)(b). 

 

Article 35(3) is an alternative provision that a contracting jurisdiction can adopt to replace Article 35(1)(b). It is incorrect to conclude that a contracting jurisdiction can apply the entry-into-effect date later than the "default day" under Article 35(1)(b). Rather Article 35(3) allows a contracting jruisdiction to unilaterally apply the entry-into-effect article to the covered tax agreement, without the obtaining the acceptance of the other treaty partner. That means Article 35(3) shall apply asymmetrically to the tax treaty.

 

 

 

Matrix of Options and Reservations

 

For information of MLI database - Matrix of Options and Reservations, please refer to the Matrix at OECD website [read]

 

 

 


 

BEPS Cases - tax avoidance and less than single taxation by treaty abuse

 

  • How Google France took advantage of gaps in tax treaties between France and Ireland [read]
  • How Apple Company has been engaged in tax avoidance globally [read-Chinese version]