In words of the OECD, Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no tax jurisdictions where there is little or no economic activity.
Within the context of the OECD / G20 BEPS Project, jurisdictions jointly developed 15 actions to tackle tax avoidance. The Multilateral Instrument (MLI) helps the fight against BEPS by implementing tax treaty related measures in existing tax treaties in a synchronised manner.
Let us see which how will this be worked out.
✔ The MLI modifies treaties that are “Covered Tax Agreements”: these are treaties for the avoidance of double taxation (DTA) in force between the Parties to the MLI and for which the Parties have made a notification that they wish to modify the agreement.
✔ The MLI is a flexible instrument that will modify tax treaties according to a jurisdiction preference with respect to the implementation of the tax treaty – related BEP measures. Jurisdictions can, therefore, choose between alternative provisions in certain MLI articles and may even choose to reserve the right not to apply the MLI provisions through a “reservation”.
✔ Jurisdictions are required to express how they want the MLI to modify their Covered Tax Agreements. Each signatory country submits its MLI position before signing the MLI, setting up the treaties that it intends to cover, its choices on the available options and the reservations.
✔ At the end of FY 2020, 95 countries had signed the MLI out of which 59 had ratified it and for which the MLI had, therefore, entered into force. In the case of Spain, the ratification process has not yet been completed. It should be expected, though, that this process shall be completed at some point in time through this FY 2021.
✔ Once the MLI enters into force in a particular country, all the DTAs signed by this country will automatically change in so far as the other State has adopted the same article of the MLI. Hence, the Covered tax agreements will be modified with no need of going through bilateral negotiations.
✔ As the OECD has expressed, the MLI should not be considered as the end of bilateral tax treaties as it only modifies existing bilateral agreements. It is expected, then, that jurisdictions will continue to conclude tax treaties on a bilateral basis, which will include treaty related BEP measures.
The Multilateral Instrument (MLI) will permit that all the Double Taxation Agreements (DTA) signed by a relevant State in which the MLI enters into force, are automatically modified, providing that the other Contracting State of the bilateral convention has adopted the same article of the MLI.
In the Ratification instrument, Spain has identified 89 DTAs that will be modified by the MLI in so far as both Contracting States have expressly identified them.
Let us see which is Spain’s position in some of the areas of general concern.
- The MLI proposes as a criterion to resolve a conflict of residency of entities the agreement between the competent authorities. In this matter, the criterion of the effective place of management has been substituted as the rule to determine in which country a company is tax resident when, according to the domestic rules of the Contracting States, it can be resident of both jurisdictions.
- This content of the MLI is not a minimum standard and it is therefore permitted that each Contracting State applies it or not.
- Spain has elected for a reserve with respect to the whole article and to all its DTAs. Consequently, Spain shall continue applying the criterion of the effective place of management to resolve cases of double residency of entities.
Prevention of Treaty abuse:
✔ The MLI implements two anti – abuse clauses to avoid the use of a particular DTA, generally through the so – called Treaty shopping practice when an intermediary company would be interposed in a favorable jurisdiction to benefit from a particular DTA:
- The so- called “Principal purpose of a Transaction (PPT) that implies that a benefit under a 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.
- The Limitation of Benefits clause (LOB) which provides a number of objective criteria that restrict most treaty benefits to so- called qualified persons.
✔ The Spanish position consists in opting for the PPT clause; hence, benefits from a particular DTA shall not apply when the main purpose of a transaction is the application of such benefits.
✔ The effectiveness of the measures of the MLI will mainly depend on the number of countries identifying the DTAs that will be subject to these provisions. We should expect that those countries which have not yet joined the MLI will amend individual tax treaties bilaterally to adopt the provisions of the BEPs MLI.
Publicado el 06-2021 por PBS