Executive summary

The Japanese Diet (Japanese legislature) passed the bill¹ for the multilateral instrument (MLI). As Japan has now completed the domestic process to ratify the MLI, the next step is to deposit its instrument of ratification, acceptance or approval of the MLI. The MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of Japan's instrument of ratification, acceptance or approval.

Detailed discussion

Background

On 7 June 2017, 67 jurisdictions, including Japan, signed the MLI at the signatory ceremony in Paris. There were other jurisdictions which later participated in the MLI and, as of 1 April 2018, 76 countries and jurisdictions have signed the MLI. The MLI was developed to provide a vehicle for the swift implementation of the tax treaty-related measures produced under Action 2 (hybrid mismatches), Action 6 (treaty abuse), Action 7 (permanent establishments), and Action 14 (mutual agreement procedures) of the Base Erosion and Profit Shifting (BEPS) project. When the MLI enters into force, Covered Tax Agreements (CTAs) will be modified.

Approval by the Japanese Diet

On 18 May 2018, the Japanese Diet passed the bill for the MLI. As Japan has completed the domestic process to ratify the MLI, the next step is to deposit its instrument of ratification, acceptance or approval of the MLI.

On 22 March 2018, the fifth country² deposited its instrument of ratification, acceptance or approval of the MLI, enabling the MLI to enter into force on 1 July 2018. Japan's MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of Japan's instrument of ratification, acceptance or approval.

Implications

With respect to a specific income tax treaty, the MLI provisions will have effect after all parties to a CTA have deposited their instrument of ratification, acceptance or approval of the MLI and a passage of a specified time. The timing differs for different provisions. For taxes withheld at source, the MLI will be effective on the first day of a year following a year in which the MLI entered into force for both of the contracting jurisdictions to the CTA. For all other taxes, the MLI will become effective on taxable periods beginning on or after a six-month period from the date on which the MLI entered into force for both of the contracting jurisdictions to the CTA.

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ENDNOTES

¹ The bill was passed on 18 May 2018.

² Slovenia. The other four jurisdictions are Austria, the Isle of Man, Jersey and Poland.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Co., Tokyo

• Jonathan Stuart-Smith
  jonathan.stuart-smith@jp.ey.com
• Hiroshi Namba
  hiroshi.namba@jp.ey.com

Ernst & Young LLP, Japanese Tax Desk, New York

• Hiroaki Ito
  hiroaki.ito1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty1@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

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ATTACHMENT

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