BEPS, Action 15
We would like to remind you that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (herein MLI) that was signed in summer 2018 is be ratified shortly by Verkhovna Rada of Ukraine. This convention will allow Ukraine to update international tax rules with more than 70 countries of the world.
MLI is the action 15 of BEPS project that stipulates the provision of powerful capabilities for more accelerated revision (or adjustment) of international bilateral treaties on double taxation avoidance.
MLI is a convenient tool for implementation of new international tax standards and allows avoiding protracted bilateral negotiations between states – partners on double taxation agreement.
MLI application mechanism
For Ukraine the MLI Positions will become effective as of its ratification by the Verkhovna Rada of Ukraine and not before than 3 months from the date of filing the report on successful ratification to OECD.
The texts of existing bilateral tax treaties, signed between countries actually will not be changed. The one text of MLI will be applied to all tax treaties that are signed by MLI-members in the form of substantive addendum. In case of conflict of texts, MLI Positions shall prevail.
Structure of MLI
MLI consists of 2 blocks. The first block is mandatory for all countries participating in the BEPS Project. It is so called minimal standard of accession that includes measures against treaty abusive (preventing the granting of treaty benefits) and provisions on mutual agreement procedures (MAP).
The second block consists of optional provisions that the participating countries independently choose among the suggested articles. For the further practical application of the provisions it is necessary two parts of tax treaty choose the same standard.
To compare and to determine the common MLI Positions of specific tax treaty choose by state member offers the MLI Matching Database developed by OECD.
With dispute countries Ukraine can negotiate on unified application position harmonization. In case the unified position will not be reached, the controversial provisions will not be applied.
Minimal MLI standards
The main MLI innovation is the proclamation of prohibition against treaty abuse for the reason of tax avoidance. This declarative principle amends all effective double tax treaties as a preamble.
Practical evaluation of this principal is represented in Article 7 of the MLI, under which the Principal Purpose Test is introduced (herein PP test). In accordance to PP test the benefits stipulated in the double taxation treaties will not be applied, if the collection of such benefits is the main purpose of using tax treaty and company activity.
Consequently, if the international business activity company is not able to economically substantiate the reasonability of business founding and its existence, such company can be deprived of the opportunity to use benefits under taxation treaties that will lead to taxation in all jurisdictions where the taxable activity is performed.
In order to prove the real economic purpose (completion of PP test) the company should have the reasoning on the following questions:
- the reason why the particular jurisdiction has been chosen for the company registration;
- the reason why the particular partner(s) has(have) been chosen for collaboration;
- the reason why the group of companies have the particular structure;
- and many other questions, answers to which exclude the possibility of excessive use of benefits from tax treaties.
The second MLI innovation is the introduction of Procedure for mutual dispute settlement (Article 16 of the MLI) that allows taxpayers to make an inquiry to the tax authorities of any contracting state with the purpose of resolving disputed tax matters. Previously it was possible to inquire only to the tax authorities by the taxpayer place of residence.
Optional MLI standards applied by Ukraine
Apart from the abovementioned mandatory minimal standards, Ukraine has applied the following MLI Positions:
- The profit, that generated from the transfer of company shares (or similar rights), the 50% value of which at any time during the 365 days preceding the alienation, represented directly or indirectly by immovable property, should be taxed in the country where such property is located.
- Countering the abuse of permanent establishment status by:
- Providing more detailed definition of “preparatory and auxiliary activity”. Consequently, the company deemed to have not permanent establishment status, if the economic activity of the company is not the primary activity and does not meet the definition of “permanent establishment”. Furthermore, according to the new provision it is forbidden to divide business process into separate types of activity that can be deemed as activities of preparatory and auxiliary nature to avoid formation of permanent establishment.
- Prohibition of activity separation into several contracts at the construction site. Formerly in order to avoid permanent establishment formation, the construction site, construction project or assembly object that exist more than 12 months, were artificially registered under several contracts with shorter term of contract.
- Inability of carrying out activities by the agent without permanent establishment formation. Thus, if the agent systematically enters into agreements on behalf of the enterprise or plays key role in conclusion of agreements, it is considered that enterprise do business through permanent establishment.
- Preventing of tax evasion by using permanent establishment status in the third jurisdictions – provides the right for the profit source state to impose a tax on permanent establishment, if such income cannot be taxed in the state of the main office residence and is taxed at reduced rates in the state of permanent establishment location.
Thus, MLI specifies the texts of tax treaties and prevents the applying of previously popular methods of tax avoidance or tax base reduction.
In the further international taxation work (as of MLI enter into force in Ukraine) apart from the analysis of the internal tax regulation and operating tax treaties, it will be necessary to analyze the MLI Positions.
Our specialists use the analysis of international tax conventions on a regular basis, contact us if you need any assistance on the analysis of the MLI effect on your business.
Prepared by Evgenia Krykhtina, Legal advisor