On 8 February 2018, Treasury released draft legislation to give the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) the force of law in Australia. Treasury have asked for submissions by 23 February 2018.
On 7 June 2017, Australia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention), otherwise referred to as the Multilateral Instrument.
The ‘Multilateral Convention’, a key outcome of the G20/OECD Base Erosion and Profit Shifting (BEPS) project, was developed to efficiently modify jurisdictions’ bilateral tax treaties to prevent their exploitation for tax avoidance purposes and to improve tax treaty-based dispute resolution mechanisms.
Pending the ratification of the Convention by Australia and its bilateral tax treaty partners, the Convention will modify the majority of Australia’s bilateral tax treaties to implement the relevant BEPS outcomes.
The Convention and its Explanatory Statement, along with further information on the BEPS project and the OECD Model Tax Convention on Income and on Capital, are available on the OECD’s website.
The draft Bill would amend the International Tax Agreements Act 1953 (Tax Agreements Act) to give the MLI the force of law in Australia. It will do nothing more. The MLI has its own provisions about being activated for particular bi-lateral double tax agreement. In essence, a bi-lateral agreement is amended by the MLI, if it is a ‘Covered Agreement’ under the MLI. This will happen if:
- Australia nominated the bilateral tax agreement as a Covered Tax Agreement;
- the relevant partner jurisdiction ratified the MLI and notified the Depositary accordingly; and
- the partner jurisdiction also nominated the bilateral tax agreement with Australia as a Covered Tax Agreement.
Otherwise, the bilateral tax agreement will not be modified by the MLI and would continue to have force of law according to its tenor.
Extracts from the draft Explanatory Memorandum (giving further detail)
1.15 In November 2015, the G20 Leaders endorsed the OECD’s Final BEPS package of recommendations (BEPS reports), which included Action 15 (Develop a Multilateral Instrument), which culminated in the finalisation and adoption of the text of the Multilateral Convention and the Explanatory Statement to the Multilateral Convention on 24 November 2016.
1.12 The Multilateral Convention modifies in the most efficient way possible the provisions of existing tax agreements to implement these rules, thereby also aligning Australia’s bilateral tax agreements with current international standards.
Content of MLI
1.13 The integrity rules contained in the Multilateral Convention are based on the recommendations arising from the following BEPS Actions:
- Action 2 – Neutralising the Effects of Hybrid Mismatch Arrangements;
- Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances;
- Action 7 – Preventing the Artificial Avoidance of Permanent Establishment Status; and
- Action 14 – Making Dispute Resolution Mechanisms More Effective.
1.15 [Importantly/surprisingly] The Multilateral Convention also contain rules to:
- clarify that tax agreements do not prevent jurisdictions from taxing their own residents;
- prevent the double taxation of income relating to cross-border transactions between related parties; and
- implement improvements to tax treaty-based dispute resolution mechanisms, including the option of mandatory binding arbitration.
1.24 The main parts of the Multilateral Convention are separated into:
- Part I — Scope and interpretation of terms (Articles 1 and 2);
- Part II — Hybrid Mismatches (Articles 3 to 5);
- Part III — Treaty Abuse (Articles 6 to 11);
- Part IV — Avoidance of Permanent Establishment Status (Articles 12 to 15);
- Part V — Improving Dispute Resolution (Articles 16 and 17);
- Part VI — Arbitration (Articles 18 to 26); and
- Part VII — Final Provisions (Article 27 to 39).
The modification methods
1.45 The Multilateral Convention modifies the application of a Covered Tax Agreement in different ways [depending on the ‘compatibility’ of the bi-lateral agreement, with the MLI objective].
1.46 The different mechanisms described in the Multilateral Convention as follows:
- ‘in place of’ of an existing provision in a Covered Tax Agreement — the Multilateral Convention provision replaces an existing provision if there is one;
- ‘applies to’ or ‘modifies’ an existing provision in a Covered Tax Agreement — the Multilateral Convention provision changes the application of an existing provision without entirely replacing it;
- ‘in the absence of’ an existing provision in a Covered Tax Agreement —the Multilateral Convention provision is added to the Covered Tax Agreement if there is no existing provision; and
‘in place of or in the absence of’ an existing provision in a Covered Tax Agreement — the Multilateral Convention provision either replaces an existing provision or is added to the Covered Tax Agreement if there is no existing provision.
The road to ‘ratification’
1.19 On 7 June 2017, Australia was one of 68 jurisdictions that signed the Multilateral Convention, reinforcing Australia’s commitment to addressing tax avoidance and helping to ensure international consistency in the implementation of the relevant BEPS recommendations. Since then, further jurisdictions have signed the Multilateral Convention.
1.20 The Multilateral Convention was tabled in Parliament on 16 August 2017 and referred to the Joint Standing Committee on Treaties. On 27 November 2017, the Joint Standing Committee on Treaties supported the Multilateral Convention and recommended its ratification (Committee Report 175).
1.21 Passage of these amendments form part of the ratification process.
1.22 Once Australia and its relevant partner jurisdiction have ratified the Multilateral Convention and notified the Depositary (the Secretary-General of the OECD) accordingly, the application of the existing Covered Tax Agreement between Australia and the partner jurisdiction will be modified only if both jurisdictions have nominated for the Multilateral Convention to apply to the relevant Covered Tax Agreement.
1.33 Australia has provisionally notified the Depositary that all of its current bilateral tax agreements (described in section 3AAA of the Tax Agreements Act) are to be Covered Tax Agreements except the German agreement, which generally already contains equivalent integrity rules to those contained in the Multilateral Convention.
1.34 Based on the known or proposed adoption positions of other Signatories to the Multilateral Convention, the Convention is expected to modify 30 of Australia’s 44 bilateral tax agreements: Argentina, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Fiji, Finland, France, Hungary, India, Indonesia, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, New Zealand, Norway, Poland, Romania, Russia, Singapore, the Slovak Republic, South Africa, Spain, Turkey and the United Kingdom.
1.36 As a bilateral tax agreement will only be modified by the Multilateral Convention once it has entered into force for both jurisdictions, each of the 43 bilateral tax agreements nominated by Australia will be modified at different times.
1.40 The Multilateral Convention’s ultimate effect on Australia’s bilateral agreements is contingent upon the formal ratification of the Convention by Australia and the relevant jurisdictions party to those tax agreements, as well as the lodgement of each jurisdiction’s reservations and notifications. As these ratifications and lodgements are still to occur, it is not possible at this time to specify the full extent of the Multilateral Convention’s application to a particular Australian bilateral tax agreement.
Subsequent bi-lateral amendments
1.42 The Multilateral Convention modifies a Covered Tax Agreement without prejudice to any subsequent modifications to the underlying tax agreement as agreed between the parties to that agreement. [Article 30 of the Multilateral Convention]
1.43 That is, agreement partners are free to agree and amend or replace a bilateral tax agreement after it has been modified by the Multilateral Convention. Such action would supersede the modifications made to that agreement by the Multilateral Convention but only from the date on which the amended or new bilateral agreement enters into force.
Study questions (answers below*)
- Did Treasury release draft legislation, for comment, to give the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) the force of law in Australia.
- Will this be by way of amendment to the International Tax Agreements Act 1953?
- Will the International Agreements Act carry its own provisions, outside the MLI, to establish when one of our bi-lateral agreements is modified by the MLI (viz: a Covered Agreement)?
- Once activated, does the MLI amend a bi-lateral agreement to effect the BEPS Action Plans: recommendations: 2. (Hybrids); 6. (Treaty Abuse); 7. (P/E status) & 14. (Dispute Resolution).
- Under the MLI, will bi-lateral agreements continue to operate only to limit a country’s ability to tax certain income and gains?
- Will the MLI always operate to ‘replace’ an Article in a bi-lateral agreement, because of the range of ways they are expressed (that is with varying degrees of ‘compatibility’ with the MLI’s wording)?
- As at the date of the draft EM, do we expect 30 of Australia’s 44 bi-lateral agreements to be modified by the MLI?
- Will parties to a bi-lateral agreement, ‘Covered’ by the MLI, be able to undo a change, effected by the MLI, if they so agree?