According to the OECD, governments still loose substantial amounts of corporate tax due to aggressive international tax planning strategies.
More and more countries are becoming aware of the importance to tax profits where substantive economic activities generating the profits are carried out and where value is created.
In this respect, the OECD published its final BEPS action plan in October 2015, aiming to prevent the erosion of the taxable basis and artificial shifting of profits. The most distinctive actions in this report are action 2 neutralising the effect of hybrid mismatches, action 6 preventing treaty abuse, action 7 preventing the artificial avoidance of permanent establishments or action 14 making dispute resolution mechanisms more effective.
On 7 June 2017, 68 jurisdictions have signed the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” (“MLI”) at the headquarters of the OECD. According to an update by the OECD on 17 August 2017, three additional countries appear to have signed the MLI meanwhile and six other countries have announced their intention to sign.
Aligning existing tax treaties with BEPS
Some of the BEPS measures can only be implemented through a modification of the tax treaties.
To ensure a swift, co-ordinated and consistent implementation of all BEPS actions in a multilateral context, BEPS action 15 analysed the feasibility of a multilateral instrument. In this context, the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” or “MLI” has been developed.
The MLI makes it easier for the participating countries to align their existing tax treaties with the BEPS actions, offering them the possibility to make adjustments to thosetax treaties all at once in a synchronised manner, which is more efficient and less time consuming than negotiating with other treaty partners on a one on one basis.
The MLI comprises minimum standards, which the participating countries have to include in their tax treaties to combat tax evasion efficiently:
- rules to prevent treaty abuse
- a mutual agreement procedure
The MLI, however, leaves a certain degree of freedom of choice as to how these minimum standards will be implemented.
The MLI also comprises a number of optional provisions, such as the provisions on the artificial avoidance of a permanent establishment, which the participating countries may choose to opt out of or to apply partially or completely in their bilateral tax treaties.
No automatic modification of tax treaties
Each country needs to specify the tax treaties that will be amended through the MLI, the so-called Covered Tax Agreements (CTAs).
The MLI which Belgium has signed does not change as such its existing tax treaties, but will be applied alongside. It modifies their application to implement the BEPS measures. These changes will only occur in a tax treaty if the MLI has been signed by the other treaty country and both countries have put the treaty on the CTA list.
Belgium changes 98 tax treaties
Belgium chooses to modify 98 tax treaties. Some of the treaties, e.g. with Germany, have not been included in the CTA list, whereas other treaties have been selected, knowing that the treaty partner will not sign the MLI (e.g. the USA).
To implement the minimum standard on treaty abuse, Belgium remarkably chooses to adopt the Principal Purpose Test (PPT), rather than the Limitation on Benefits Test that is included in the Belgian – US tax treaty.
In application of the Principal Purpose Test, treaty benefits can be denied if it can be concluded that obtaining these benefits is one of the main purposes of the structure set up by tax payer or the transaction effected. The treaty benefits will be granted if they are in line with the purpose and the intent of the treaty provision.
The MLI will only applyafter five countries have ratified the Convention. For Belgium, ratification of the MLI needs to be effected by the 3 different parliaments.
In relation to another treaty country, the MLI will only apply if:
- the treaty partner has put its treaty with Belgium on the CTA list; and
- has ratified the MLI, and this to the extent of the matching specific provisions.
Entry into force
In a bilateral context, the MLI will take effect on the first day of the month following a period of three calendar months after the last of both countries have ratified the Convention.
From that date onwards:
- Provisions relating to withholding tax are deemed to take effect at the earliest on 1 January of the next calendar year;
- Provisions related all other taxes take are deemed to take effect at the earliest from the taxable period starting 6 months after that date.
Impact on your operations abroad?
The MLI will bring changes to most tax treaties. This could have a substantial impact on your foreign transactions.
Questions regarding this subject can be addressed to your regular BDO contact or to our International Corporate Tax Team: