Australia has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention).
The Minister for Trade, Tourism and Investment, the Hon Steven Ciobo MP, signed the Convention for Australia at a ceremony hosted by the Organisation for Economic Cooperation and Development (OECD) in Paris on 7 June 2017. 67 other jurisdictions also signed the Convention, including 35 of Australia’s bilateral tax treaty partners.
The Convention is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which aims to ensure that multinationals pay tax in the jurisdiction where economic value is created or added.
The Convention complements the Government’s Multinational Anti-avoidance Law, the Diverted Profits Tax and the Tax Avoidance Taskforce, and reinforces our efforts to level the playing field for Australian businesses.
Once in force, the Convention will modify most of Australia’s bilateral tax treaties to implement new integrity rules that will help prevent exploitation for tax avoidance purposes and improve tax treaty-based dispute resolution mechanisms. In the absence of the Convention, Australia would have to introduce the new rules treaty by treaty, a process that could take decades.
Based on countries’ known adoption positions, the Convention will modify 30 of Australia’s bilateral tax treaties, those with 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.
The extent to which the Convention will modify these treaties will depend on the final adoption positions taken by each country. Australia notified its adoption positions on a provisional basis, to be confirmed upon ratification of the Convention.
The Convention will enter into force after signatories have completed their domestic requirements and deposited their instruments of ratification with the OECD. Legislation will be introduced into the Australian Parliament as soon as practicable to give the Convention the force of law in Australia.
A copy of the text of the Convention and information on jurisdictions’ adoption of it is available on the OECD website. Information on the main features of the Convention and Australia’s provisional adoption provisions is available on the Treasury website.
The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.
[Media Release by Ministers Cormann and Ciobo 8/6/17; LTN 107, 8/6/17]
Extract from the Treasury Website
Main features of the Multilateral Instrument and Australia’s provisional adoption provisions
The extent to which the Multilateral Instrument will modify Australia’s bilateral tax treaties will depend on the final adoption positions taken by each country. Australia notified its adoption positions on a provisional basis, to be confirmed upon ratification.
Article 3 – Transparent entities (optional article)
Treaty benefits will be granted for income derived through fiscally transparent entities, such as partnerships or trusts, but only where one of the two countries treats the income as income of one of its residents under its domestic law. These rules will not prevent either country from taxing its own residents.
Australia will adopt Article 3 but will preserve existing corresponding bilateral detailed rules where appropriate.
Article 4 — Dual resident entities (optional article)
Most treaties use an entity’s place of effective management as the key tiebreaker test to determine a dual resident’s country of tax residence for treaty purposes. This test will be expanded to include other factors and authorise the two tax administrations to agree on a single country of residence.
Australia will adopt Article 4 but not the rule that would allow the two tax administrations to grant treaty benefits in the absence of such an agreement.
Article 5 – Application of methods for elimination of double taxation (optional article)
Three options will ensure that countries relieve double taxation by crediting foreign tax against domestic tax rather than by exempting foreign income from domestic tax.
Australia will not adopt Article 5 because all of its treaties apply the credit method in relieving double taxation for Australian residents. Australia will also not adopt the provisions that would prevent other countries from applying their chosen positions under Article 5.
Article 6 – Purpose of a covered tax agreement (mandatory article)
A new treaty preamble will clarify that tax treaties are not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
Australia will adopt Article 6, including the optional text indicating a desire to further develop its economic relationships with other signatories and enhance cooperation in tax matters.
Article 7 – Prevention of treaty abuse (mandatory article)
New anti-abuse rules will enable tax administrations to deny treaty benefits in certain circumstances: the Principal Purpose Test (PPT) and the Simplified Limitation on Benefits Rule (S-LOB). Adopting the PPT is mandatory. The S-LOB is a supplementary and optional rule.
Australia will adopt Article 7 and only the PPT, including the discretion not to apply the PPT in certain circumstances.
Article 8 – Dividend transfer transactions (optional article)
Shares will be required to be held for 365 days before any non-portfolio intercorporate dividends payable in respect of those shares become eligible for reduced tax rates under tax treaties. This holding period will be added to bilateral treaties that do not already include a minimum holding period and replace existing holding periods in treaties that do.
Australia will adopt Article 8 without reservation.
Article 9 – Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property (optional article)
Countries will be able to tax capital gains derived by foreign residents from the disposal of shares or other interests in ‘land-rich’ entities (where the underlying property is located in that country) if the entity was land-rich at any time during the 365 days preceding the disposal.
Australia will adopt Article 9 but preserve existing bilateral rules that apply to the disposal of comparable interests (non-share interests) in land-rich entities.
Article 10 – Anti-abuse rule for permanent establishments situated in third jurisdictions (optional article)
Treaty benefits will be denied where an entity that is a resident of one country derives ‘passive’ income from the other country through a permanent establishment located in a third country, and that income is both exempt in the entity’s home country and subject to reduced taxation in the third country.
Australia will not adopt Article 10 at this time, pending further review of its potential impacts in the Australian context.
Article 11 – Application of tax agreements to restrict a Party’s right to tax its own residents (optional article)
A tax treaty will not generally restrict a country’s right to tax its own residents. This rule will replace existing bilateral rules that give effect to this principle, some of which have more limited application.
Australia will adopt Article 11 without reservation.
Article 12 – Artificial avoidance of permanent establishment status through commissionnaire arrangements and similar strategies (optional article)
Where an intermediary plays the principal role in concluding substantively finalised business contracts in a country on behalf of a foreign enterprise, that arrangement will constitute a ‘permanent establishment’ of the foreign enterprise in that country. Genuine independent agency arrangements will not be affected.
Australia will not adopt Article 12 at this time. Australia will consider adopting these rules bilaterally, however, in future treaty negotiations to enable bilateral clarification of their application in practice. Pending this, the Multinational Anti-avoidance Law will continue to safeguard Australian revenue from egregious tax avoidance arrangements that rely on a ‘book offshore’ model.
Article 13 – Artificial avoidance of permanent establishment status through the specific activity exemptions (optional article)
Most tax treaties include a list of exceptions to the definition of permanent establishment where a place of business is used solely for specifically listed activities such as warehousing or purchasing goods.
Only genuine preparatory or auxiliary activities will be excluded from the definition of permanent establishment. In addition, related entities will be prevented from fragmenting their activities in order to qualify for this exclusion.
Australia will adopt Article 13 but preserve existing corresponding bilateral rules.
Article 14 – Splitting-up of contracts (optional article)
Most tax treaties include rules that deem building or construction projects that exceed a specified time period (e.g. 12 months) to constitute a permanent establishment.
Related entities will be prevented from avoiding the application of the specified time period by splitting building or construction-related contracts into several parts.
Australia will adopt Article 14 but preserve existing bilateral rules that deem a permanent establishment to exist in relation to offshore natural resource activities.
Article 15 – Definition of a person closely related to an enterprise (optional article)
A ‘person closely related to an enterprise’ will be defined for the purpose of establishing whether or not a permanent establishment exists under articles 12, 13 and 14.
Australia will adopt Article 15 without reservation.
Article 16 – Mutual agreement procedure (mandatory article)
New rules will ensure the consistent and proper implementation of tax treaties, including the resolution of disputes regarding their interpretation or application. This will provide taxpayers with a more effective tax treaty-based dispute resolution procedure.
Australia will adopt Article 16 without reservation.
Article 17 – Corresponding adjustments (mandatory article)
Transfer pricing adjustments can result in double taxation when one country makes an adjustment to an entity’s profits and the other country does not make a compensating adjustment to the profits of the relevant related entity.
A country will be required to make a downward adjustment to the profits of a resident entity, as a result of an upward adjustment by the other country to the profits of an associated entity which is a resident of that other country (provided both countries agree that the upward adjustment is justified).
Australia will adopt Article 17 but preserve existing corresponding bilateral rules.
Articles 18-26 – Arbitration (optional article)
Taxpayers will be able to refer Mutual Agreement Procedure disputes that remain unresolved after two years to independent and binding arbitration.
Australia will adopt independent and binding arbitration subject to the following conditions:
- Disputes which have been the subject of a decision by a court or administrative tribunal will not be eligible for arbitration, or will cause an existing arbitration process to terminate;
- Breaches of confidentiality by taxpayers or their advisors will terminate the arbitration process; and
- Disputes involving the application of either Part IVA of the Income Tax Assessment Act 1936 or section 67 of the Fringe Benefits Tax Assessment Act 1986 will be excluded from the scope of arbitration.
Based on countries’ known adoption positions, Mr Ciobo said the Convention will modify 30 of Australia’s bilateral tax treaties, those with 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.
The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.
[Treasury website – MLC]