MULTILATERAL INSTRUMENT

www.dlapiper.com 0 17 October 2018

17 October 2018

MULTILATERAL INSTRUMENT

Joel Cooper and Shee Boon Law


Agenda Presenters

Joel Cooper contact card

Shee Boon Law

Head of Knowledge

T: +31 (0) 20 541 92 59

[email protected]

Joel Cooper

Partner, Co-Head International

Transfer Pricing

T: +44 (0)20 7796 6929

[email protected]

1 Current Status & Framework

2

Optional Provisions –

Specific Treaty Anti-Abuse Rules 3

Minimum Standards –

General Anti-Treaty Shopping and MAP

4 Key Takeaways

Current Status & Framework 1


Current Status (as at 1 October 2018)

MLI has already entered into force following fifth ratification by Slovenia

Austria, Isle of Man, Jersey, Poland and Slovenia (1 July 2018)

New Zealand, Serbia, Sweden, United Kingdom (1 October 2018)

Australia, France, Israel, Japan, Lithuania, Slovak Republic (1 January 2019)

Multilateral convention

negotiated by over

100 countries

Signing ceremony

7 June 2017

in Paris

84 countries signed

6 more countries expected to sign


Andorra China PRC Finland Ireland Lithuania Panama Slovak Republic

Argentina Colombia France Isle of Man Luxembourg Peru Slovenia

Armenia Costa Rica Gabon Israel Malaysia Poland South Africa

Australia Cote d'Ivoire Georgia Italy Malta Portugal Spain

Austria Croatia Germany Jamaica Mauritius Romania Sweden

Barbados Curacao Greece Japan Mexico Russia Switzerland

Belgium Cyprus Guernsey Jersey Monaco San Marino Tunisia

Bulgaria Czech

Republic

Hong Kong Kazakhstan Netherlands Saudi Arabia Turkey

Burkina

Faso

Denmark Hungary Korea New Zealand Senegal Ukraine

Cameroon Egypt Iceland Kuwait Nigeria Serbia United Arab Emirates

Canada Estonia India Latvia Norway Seychelles United Kingdom

Chile Fiji Indonesia Liechtenstein Pakistan Singapore Uruguay

Current MLI Signatories


A Survivor's Guide Some Tips

Review structures where access to treaty benefits are critical

Are your holding/financing/licensing and principal companies located in a country that

has signed up to the MLI?

Remember

How many treaties are covered?

What are their positions on optional provisions?

MLI only applies if both parties to a bilateral treaty adopt it as a covered tax

agreement

But time to act is now, not later!

Withholding tax, capital gains, permanent establishments

Specific structures that rely on other treaty benefits e.g. double tax reliefs, tax

sparing credits, non-discrimination, etc.


MLI Minimum Standards and Optional Provisions

Treaty anti-abuse rules (LOB

and/or PPT)

Resolving treaty disputes in a

timely, effective and efficient

manner

Tighter PE rules

Agency PE

Anti-fragmentation

Mandatory arbitration

Other specific anti-avoidance

Minimum

standards

Optional

provisions

Multilateral Convention

to Implement Tax Treaty

Related Measures to

Prevent Base Erosion and

Profit Shifting

MLI Minimum Standards 2


General Treaty Anti-Abuse Rules

Article 6 of the MLI

Article 6 (1) specifies intention of treaties is to eliminate double taxation without creating

opportunities for non-taxation, including through treaty shopping

Article 6 (3) provides an option to modify preamble of treaties (enhance economic relationship and

cooperation in tax matters)


Article 7 (1) contains the principal purpose test (PPT)

Article 7 (4) optional provision for competent authority discretion to grant treaty benefits

Article 7 (6) election to apply simplified limitation on benefits (SLoB) clauses

Impact of MLI varies

Add new provisions

Replace existing/similar provisions

Operate alongside existing/similar provisions


Treaty Anti-Abuse Rules – A Snapshot

Link to country positions here

Provisions Australia Austria France Japan New

Zealand Sweden UK

Number of

Treaties

Covered

42 38 91 35 37 64 121

Article 7

(1) - PPT Yes Yes Yes Yes Yes Yes Yes

Article 7

(4) CA

discretion

Yes No No No Yes No Yes

Article 7

(6) –

Simplified

LOB

No No No No No No No

Some

examples

Australia – United Kingdom (Art. 7(1) replaces Articles 10(7), 11(9), 12 (7) and 20(5));

Japan – United Kingdom (Art. 7(1) replaces Articles 10(10), 11(7), 12 (6) and 21(5)); etc.

Article 7(4) added to UK-New Zealand-Australia


Zealand Sweden UK

http://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf



PPT and SLoB: Election Mismatches

Slovak Republic has adopted PPT under Art. 7(1) and SLoB under Art. 7(6), which

creates asymmetrical adoption in respect of SLoB with many treaty partners

Further notifications needed in this case to determine the final outcomes on a

bilateral basis:

Scenario Outcome

Default SLoB does not apply; PPT alone applies symmetrically

Agreement of treaty

partner

(para. 7(a))

SLoB applies symmetrically under the treaty despite non-election

by the other state

Agreement of treaty

partner

(para. 7(b))

SLoB applies asymmetrically – applicable only in Slovak Republic

but not in the other state.

Art. 7(16), where no

agreement under

paragraph 7(a) or 7(b)

Slovak Republic may reserve the right for the entirety of Article 7

not to apply to a bilateral treaty but the treaty partners must

reach a mutually satisfactory agreement to implement the

minimum standard.

Scenario Outcome


Principal Purpose Test

What is a benefit?

What is an arrangement or

transaction?

Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the

Covered Tax Agreement shall not be granted in respect of an item of income or capital

if it is reasonable to conclude, having regard to all relevant facts and circumstances,

that obtaining that benefit was one of the principal purposes of any arrangement or

transaction that resulted directly or indirectly in that benefit, unless it is established

that granting that benefit in these circumstances would be in accordance with the

object and purpose of the relevant provisions of the Covered Tax Agreement.

that resulted directly or indirectly in that benefit


Potential Impact on Holding/Financing/IP Structures

Affiliates (ROW)

Hold Co

(Various Locations)

Top Co

Dividends/interest/royalties


Access to treaty for reduction/exemption of

withholding taxes, capital gains exemption and other

benefits may be subject to PPT

Adoption of PPT

Different requirements for different countries?

One of the principal purposes in the context of that

country only?

Applicable rules in the countries of Affiliates are

relevant

Experienced management, knowledgeable directors,

functionally relevant substance, commercial non-tax

reasons

OECD Guidelines in the 2017 Commentary

Substance will need to be considered on a case by case

basis


Simplified Limitation-on-Benefits Provision

Limited benefits unless a

qualified person

Individuals, Contracting

States, Listed companies

and entities and Other

specific inclusions

Active conduct of trade

or business Equivalent beneficiary

Competent authority

discretionary relief


Mutual Agreement Procedure

Minimum standards on dispute resolution


– MAP can be invoked for 'taxation not in

accordance with' the treaty in either contracting

states

Presentation can be made within 3 years of

notification of 'taxation not in accordance' with the

treaty

Agreement under MAP shall be implemented

notwithstanding domestic time limit

MAP can be invoked to resolve difficulties or doubts

in interpretation and application of tax treaties

MLI Optional Provisions 3


Limitation on hybrid entities

Limitation on dual resident entities

Dividend transfer

transactions

Gains from the sale of immovable property entities

Anti-abuse rule for

third state branch

structure

Artificial avoidance

of PE

Other Optional Anti-Abuse Provisions

Application only if both

parties to a tax treaty

adopt the rule

Existing rules that are

more stringent can be

preserved


Optional Provisions – A Snapshot


Zealand Sweden UK

Number of

CTAs 42 38 91 35 37 64 121

Hybrid Entity Yes No No Yes Yes No Yes

Dual

Resident Yes No No Yes Yes No Yes

Dividend

Transfer

Transactions

Yes No Yes No Yes No No

Real Estate

Entities

Yes,

holding

period only

No Yes, including

Art. 9(4)

Yes,

including

Art. 9(4)

Yes, including

Art. 9(4) No No

Third state

PE No Yes No Yes (??) Yes No No

Link to country positions here


Zealand Sweden UK




Anti-hybrid Rules

For the purposes of a Covered Tax Agreement, income derived by or through an entity or

arrangement that is treated as wholly or partly fiscally transparent under the tax law of either

Contracting Jurisdiction shall be considered to be income of a resident of a Contracting Jurisdiction

but only to the extent that the income is treated, for purposes of taxation by that Contracting

Jurisdiction, as the income of a resident of that Contracting Jurisdiction.

Country H

Country S Affiliates

Fiscally transparent

Participants in Country H may rely on the treaty if

income is treated as their income

Country S would not give relief to fiscally

transparent entity in Country H Interest/royalties


Dual Resident Entities

Affiliates (ROW)

Dual Resident Co

Top Co

Interest/royalties


Source countries may adopt rules to deny treaty benefits under

MLI

A dual resident entity and the countries could not

agree where the entity is resident under a mutual

agreement procedure

Treaty benefits are denied under Article 4 when recipient of

income is:

Use of MAP

Effects on domestic law when there is no tie-break

Watch out for:


Real Estate Company or Entity

Company or

Other Entity

Hold Co

Real

Estate

Sale of share/interest

Countries where the real estate is located may adopt MLI

provision to retain the right to tax capital gains from the

disposal of shares in a company or participation rights in an

entity

Article 9 (1) of the MLI extends existing treaty rules to allow

situs state to tax capital gains when:

Value of real estate meets the requisite threshold at

any time during the 365 days preceding the sale

The entity is another entity such as a partnership or

a trust

Article 9(4) adds the real estate entity provision to existing

treaties that do not currently have one


Example Real Estate Fund Structuring

Real Estate

Fund

R Co

B Co A Co C Co

Hold Co

Real Estate Real Estate Real Estate


Dividend Transfer Transactions

X Shares

B Co

X Shares

A Co

65% 5%

Sale and repurchase around dividend dates

Dividends, subject to reduced treaty

withholding rate...

Countries where the company distributing the dividends is

located may adopt MLI to deny a reduction in, or an

exemption from, dividend withholding taxes under a tax treaty

Treaty benefits are denied under Article 8 of MLI when:

Ownership conditions are not met throughout a

365 day period that includes the day of the payment

of the dividends


Third State PE

Affiliates (ROW)

Head Office Co PE

Interest/royalties

Countries where the affiliates are located may adopt rules to

deny treaty benefits under MLI

Treaty benefits are denied under Article 10 (primarily for

passive income) when the recipient of income

Has a PE in a third state and the income is

attributable to the PE; and

The attributed income is exempt from tax in the

Head office Co

Tax in the third state (ie on the PE) is less than 60

per cent of the tax in the country of the Head

office Co


New PE Concepts Examples of Bilateral Positions

Agency PE

(Article 12 MLI)

Netherlands (NL-Egypt; NL-France; NL-India; NL-Japan; NL-New Zealand; NL-Romania; NL-

Russia; NL-Slovak Republic)

Spain (Spain-Chile; Spain-Argentina; Spain-Uruguay)

Preparatory/Auxiliary

(Article 13(2) or 13 (3))

Belgium (Belgium-France)

Luxembourg (Lux-France; Lux-Lithuania)

Netherlands (NL-Egypt; NL-Germany; NL-India; NL-Italy; NL-Japan; NL-New Zealand; NL-

Romania; NL-Russia; NL-Slovak Republic; NL-South Africa)

Singapore (Singapore-France)

Spain (Spain-Argentina; Spain-Uruguay)

Anti-Fragmentation

(Article 13(4))

Belgium (Belgium-Italy; Belgium-Egypt; Belgium-France; Belgium-Spain)

Netherlands (NL-Egypt; NL-France; NL-India; NL-Italy; NL-Japan; NL-New Zealand; NL-

Romania; NL-Portugal; NL-Russia; NL-Slovak Republic; NL-South Africa)

Spain (Spain-Chile; Spain-Argentina; Spain-Portugal; Spain-Uruguay)

United Kingdom (UK-Australia; UK-Belgium; UK-Chile; UK-Egypt; UK-France; UK-India;

UK-Indonesia; UK-Israel; UK-Italy; UK-Japan; UK-Malaysia; UK-Mexico; UK-New Zealand;

UK-Portugal)

Avoidance of PE – Selected Positions

New PE Concepts Examples of Bilateral Positions


Specific Activity Exception – Warehouse PE

Foreign enterprise

Warehouse Customer

Online sales

Delivery of goods

State R

State S

Activities are preparatory or auxiliary depending on whether or not the activity of the

fixed place of business itself forms an essential and significant part of the activity of the

enterprise as a whole

The storage or maintenance of goods that is not actually preparatory or auxiliary may

constitute a PE - for example online retailers where the warehousing and distribution

activities are a core value driver of the business model


Agency PE

Foreign enterprise

Commissionaire Customer

Transfer ownership of

goods/provisions of

services

Conclude contract

State R

State S

Commission

Current Article 5(5) agency PE rule

"…where a person other than an agent of an

independent status…is acting on behalf of an

[foreign] enterprise and habitually concludes

contracts in the name of the [foreign] enterprise"

Agency PE rule under MLI (Article 12)

"…where a person …plays the principal role leading to the

conclusion of contracts that are routinely concluded without

material modification by the enterprise… …, and these contracts

are

a. ….

b. for the transfer of ownership of, or granting of right to use,

property owned by the [foreign] enterprise, or that

[foreign] enterprise has the right to use, or

c. for the provision of services by that [foreign] enterprise."


Anti-Fragmentation Rules

Exception does not apply to a fixed

place of business used or maintained

by an enterprise if the enterprise, or

a closely related enterprise,

carries on business activities at that

same place, or at another place in

the same State, and

That place, or other place, is a PE

of the enterprise or the closely

related enterprise: or

The overall activity resulting

from the combination of

activities carried on by the two

enterprises at the same place, or

by the same enterprise or closely

related enterprises at the two

places is not of preparatory or

auxiliary character

The anti-fragmentation

rule applies when

activities carried on by

two enterprises at the

same place, or by the

same enterprise or

closely related

enterprise at the two

places, constitute

complementary

functions that are

part of a cohesive

business operation

Anti-fragmentation provision in Article 13(4) covers situations where the combined

activities of closely related persons at the same place or different places in the same

country exceed what is considered to be preparatory or auxiliary


Example Principal Company with Local Supply Chain

S Co and R Co are closely related enterprises

The business activities carried on by R Co at its warehouse and by S Co at its store

constitute complementary functions that are part of a cohesive business operation (i.e.

the storing of goods in one place and the selling of these goods through another place)

R Co

Principal

S Co

Seller (store) Customer

Sales contract, invoicing

and delivery of goods

State R

State S

R Co's

warehouse

Takes possession of

goods

Key Takeaways 4


Key Takeaways

Identify and review existing structures that rely on treaty

benefits to determine if there is sufficient substance

(including commercial purpose)

Identify and monitor structures which rely on the absence of

certain treaty provisions (eg real estate provisions)

Consolidate specific structures involving special purpose

vehicles – these are unlikely to work in the long term if

treaty access is important

Factor in MLI requirements for planned/future transactions

and any ownership/supply chain reorganizations

Existing operating models need to be considered to address

PE risks


Presenters

Shee Boon Law

Head of Knowledge

T: +31 (0) 20 541 92 59

F: +31 (0) 20 541 99 41

[email protected]

Joel Cooper

Partner,

Co-Head International Transfer Pricing

T: +44 (0)20 7796 6929

[email protected]


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