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15 August 2018 Ukraine signs Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS On 23 July 2018, Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI). For more background on the global significance of the MLI signature, see EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017. At the time of signature, Ukraine submitted a list of 77 tax treaties entered into by Ukraine and other jurisdictions that Ukraine would like to designate as Covered Tax Agreements (CTAs), i.e., tax treaties to be amended through the MLI. Together with the list of CTAs, Ukraine also submitted a provisional list of reservations and notifications (MLI positions) with respect to the various provisions of the MLI. The definitive MLI positions will be provided upon the deposit of its instrument of ratification of the MLI. On 5 October 2015, the Organisation for Economic Co-operation and Development (OECD) released its final report on developing a multilateral instrument to modify bilateral tax treaties under its Base Erosion and Profit Shifting (BEPS) Action Plan (Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties). This report was released in a package that included final reports on all 15 BEPS Actions. On 24 November 2016, the OECD released the text of the MLI and explanatory notes. See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016, for a more detailed analysis of the MLI-related BEPS measures on hybrid mismatch agreements, treaty abuse, permanent establishment (PE) status and dispute resolution. On 7 June 2017, 68 jurisdictions1 signed the MLI during a signing ceremony hosted by the OECD in Paris.2 Further, four additional jurisdictions (Cameroon, Curacao, Mauritius and Nigeria) signed the MLI after the first ceremony. On 23 January 2018, six jurisdictions (Barbados, Côte d'Ivoire, Jamaica, Malaysia, Panama and Tunisia) signed the MLI during a second signing ceremony at the plenary meeting of the Inclusive Framework on BEPS. Four more jurisdictions (Estonia, Kazakhstan, Peru and United Arab Emirates) signed the MLI in June 2018. Together with the list of CTAs, signatories also submitted a preliminary list of their MLI positions with respect to the various provisions of the MLI. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI. Recognizing the complexity of designing a general instrument that applies to the CTAs and to the specific provisions included in bilateral tax treaties, the MLI provides flexibility for Contracting Jurisdictions to implement (parts of) the MLI based on their needs. Many of the provisions of the MLI overlap with provisions found in CTAs. Where the provisions of the MLI may conflict with existing provisions covering the same subject matter, this conflict is addressed through one or more compatibility clauses which may, for example, describe the existing provisions which the MLI is intended to supersede, as well as the effect on CTAs that do not contain a provision of the same type. Contracting Jurisdictions have the right to reserve certain parts of the MLI (opt-out) and to have these specific articles not apply to their tax treaties. The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i) "in place of"; (ii) "applies to"; (iii) "in the absence of"; and (iv) "in place of or in the absence of." A provision that applies "in place of" an existing provision is intended "to replace an existing provision" if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that applies "in place of" shall replace a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision. A provision that "applies to" provisions of a CTA is intended "to change the application of an existing provision without replacing it," and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that "applies to" provisions shall change the application of a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision. A provision that applies "in the absence of" provisions of a CTA is intended "to add a provision" if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that do not contain a provision within the scope of the relevant MLI provision. A provision of the MLI that applies "in the absence of" provisions shall apply only in cases where all Contracting Jurisdictions notify the absence of an existing provision of the CTA. A provision that applies "in place of or in the absence of" provisions of a CTA is intended "to replace an existing provision or to add a provision." This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered "incompatible" with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA. Ukraine has submitted a list of 77 tax treaties that it wishes to designate as CTAs, i.e., to be amended through the MLI. Accordingly, Ukraine has chosen to include all of the jurisdictions that form part of the Ukraine tax treaty network. Some of the countries in Ukraine's CTA list, however, have not yet signed the MLI (for example, the United States, Moldova). Part II of the MLI (Articles 3 to 5) introduces provisions aimed at neutralizing certain effects of hybrid mismatch arrangements based on the recommendations made in the Final BEPS Action 2 and Action 6 final reports released in October 2015. The provisions cover hybrid mismatches related to transparent entities, dual resident entities and elimination of double taxation. These provisions are all not minimum standard provisions. Ukraine opted not to apply these provisions to its CTAs. This provision addresses the situation of hybrid mismatches as a result of entities that one or both Contracting Jurisdictions treat as wholly or partly transparent for tax purposes. Article 4 modifies the rules for determining the treaty residency of a person other than an individual that is a resident of more than one Contracting Jurisdiction (dual resident entity). Under this provision, treaty residency of a dual resident entity shall be determined by a mutual agreement procedure (MAP) between Contracting Jurisdictions. Ukraine has reserved the right for the entirety of this article not to apply to its CTAs. Article 5 includes three options for Contracting Jurisdictions regarding methods to eliminate double taxation. Option A provides that provisions of a CTA that would otherwise exempt income derived or capital owned by a resident of a Contracting Jurisdiction would not apply where the other Contracting Jurisdiction applies the provisions of the CTA to exempt such income or capital from tax or to limit the rate at which such income or capital may be taxed (switch over clause). Instead, a deduction from tax is allowed subject to certain limitations. Under option B, Contracting Jurisdictions would not apply the exemption method with respect to dividends if those dividends are deductible in the other Contracting Jurisdiction. Option C includes that the credit method should be restricted to the net taxable income. Contracting Jurisdictions may choose different options resulting in an asymmetrical application of this provision. Contracting Jurisdictions may also opt not to apply Article 5 to one or more of its CTAs. Article 5 of the MLI is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this option entirely. Part III of the MLI (Articles 6 to 13) contains six provisions related to the prevention of treaty abuse, which correspond to changes proposed in the BEPS Action 6 final report (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). In particular, the report contains provisions relating to the so-called "minimum standard" aimed at ensuring a minimum level of protection against treaty shopping (Article 6 and Article 7 of the MLI). All CTAs concluded by Ukraine – provided that the other Contracting Jurisdiction has chosen the same preamble – will be amended to include the following preamble text: "Desiring to further develop their economic relationship and to enhance their co-operation in tax matters." Furthermore, the preamble of the existing CTAs appointed by Ukraine as being in scope for the MLI will be replaced – if the other Contracting Jurisdiction also applies Article 6, paragraph 4 – or will be broader – if the other Contracting Jurisdiction does not apply Article 6, paragraph 4 – by the first paragraph of Article 6. Article 6, paragraph 1 prescribes the following: "Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions." According to the minimum standard on treaty abuse as included in the final report on Action 6, countries should include in their tax treaties one of the following provisions (i) the PPT, (ii) a detailed limitation on benefits (LOB) provision modeled on the one contained in the US Model Tax Treaty supplemented by specific rules targeting conduit financing arrangements, or (iii) a combination of PPT and a simplified LOB provision. Options (i) PPT and (iii) simplified LOB in combination with a PPT, are included in the MLI. Where the other Contracting Jurisdiction has opted for a detailed LOB provision, the MLI will not result in a direct change of the relevant tax treaty and the two states "shall endeavor to reach a mutually satisfactory solution" that meets the BEPS minimum standard. In cases where the other Contracting Jurisdiction has opted for a simplified LOB provision, Ukraine has not affirmatively agreed to either a symmetrical application of the simplified LOB, or an asymmetrical approach by allowing the simplified LOB application by the other Contracting Jurisdiction. Therefore, only the PPT will be applied in that case. "Notwithstanding any provisions of a CTA, a benefit under the CTA 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, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the CTA." This means that granting of beneficial tax rates under the treaty could be denied if, based on the relevant circumstances, it is reasonable to conclude, that obtaining these benefits was one of the principal purposes of structure and/or the transaction or arrangement. A PPT analysis will be very case-specific. It is not a substance-test, but refers to the purpose of an arrangement or transaction. Where treaty access is relevant, it will therefore be important to properly document the purpose and intention of a transaction. Ukraine has also opted into the derivative benefits test included in paragraph 4 or Article 7 of the MLI, which grants treaty benefits when similar benefits would result if the arrangement of transaction would not have been used. In addition, Ukraine has made a notification with respect to the existing CTAs that already include a similar anti-abuse rule which should be replaced by the PPT (for example, Hungary, the United Arab Emirates and the United Kingdom). Article 8 of the MLI specifies anti-abuse rules for benefits provided to dividends transfer transactions consisting of exempting or limiting the tax rate on dividends paid by a company resident of a Contracting Jurisdiction to a beneficial owner or recipient that is resident of the other Contracting Jurisdiction, provided certain ownership requirements which need to be met throughout a 365-day period that includes the day of payment of the dividend are met. The 365-day holding period will apply in place or in the absence of a minimum holding period contained in the provisions described above. Article 9 – Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property Article 9 incorporates an anti-abuse rule with respect to capital gains realized from the sale of shares of entities deriving their value principally from immovable property. Ukraine has chosen to apply Article 9(4). It incorporates Article 13(4) of the OECD Model Tax Convention as included in the Action 6 final report that provides a 365-day holding period prior to the alienation of shares, and requires that the shares or comparable interests derive more than 50% of their value directly or indirectly from immovable property. Article 9(4) can apply for all CTAs which include an existing provision with respect to capital gains on the transfer of interests in entities which main assets consist of immovable property. If CTA partner jurisdictions have also chosen to apply Article 9, the provision included in the existing treaty will be replaced by the underlying measure. Article 10 contains the anti-abuse rule for PEs situated in third jurisdictions, the so-called "triangular provision." The article provides that treaty benefits will be denied if an item of income derived by a treaty resident and attributable to a PE in a third jurisdiction, is exempt from tax in the residence state and the tax in the PE jurisdiction is less than 60% of the tax that would be imposed in the residence state if the PE were located there. The article makes an exception for cases where the income is derived in connection to or incidental to an active trade or business carried out through the PE, and allows discretionary relief to be requested when treaty benefits are denied under this article. Article 10 of the MLI applies "in place of or in the absence of" an existing provision. Article 10 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this Article entirely. Ukraine has not made any reservations with respect to the application of Article 10 and as such this article can be added to the relevant existing CTAs as part of the MLI initiative if the CTA partner jurisdictions have also chosen to apply Article 10. Article 11 contains a so-called "saving clause" rule that preserves a Party's right to tax its own residents. Ukraine reserved its right not to apply this provision. Part IV of the MLI (Articles 12 to 15) describes the mechanism by which the PE definition in existing tax treaties may be amended pursuant to the BEPS Action 7 final report to prevent the artificial avoidance of PE status through: (i) commissionaire arrangements and similar strategies (Article 12); (ii) the specific activity exemptions (Article 13); and (iii) the splitting-up of contracts (Article 14). Article 15 of the MLI provides the definition of the term "closely related to an enterprise," which is used in Articles 12 through 14. Article 12 – Artificial avoidance of PE status through commissionaire arrangements and similar strategies This article sets out how the changes to the wording of Article 5 of the OECD Model Tax Convention to address the artificial avoidance of PE status through commissionaire arrangements and similar strategies that can be incorporated in the CTAs specified by the parties. In particular:
Article 12 of the MLI applies "in place of" an existing provision. This Article is intended to replace an existing provision if one exists, and is not intended to apply if an existing provision does not exist. Article 12 of the MLI will apply only in cases where all Contracting Jurisdictions (i.e., parties to a CTA under the MLI) make a notification with respect to the existing provision of the CTA. Article 12 has two notification clauses. One for the definition of dependent agent and another for definition of independent agent. Further, Article 12 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this Article entirely. Ukraine decided to apply Article 12 as a whole, which means that both the rules that determine that a commissionaire arrangement may create a PE and the rules regarding the concept of dependent agent PE and independent agent are opted into. All CTAs are in scope of these rules from a Ukraine perspective. These rules should apply if there is the other relevant jurisdiction has also chosen to apply (part) of these rules. This article addresses the artificial avoidance of PE status through the specific activity exemptions included in Article 5(4) of the OECD Model Tax Convention. Action 7 recommended that this exemption should only be available if the specific activity listed is of a preparatory or auxiliary character. The MLI provides two options for implementing the changes. Option A is based on the proposed wording in Action 7 (i.e., this exemption should only be available if the specific activity listed is of a preparatory or auxiliary character), while option B allows the Contracting Jurisdiction to preserve the existing exemption for certain specified activities. This article applies "in place of" an existing provision and therefore the first part of this article is intended to replace an existing provision if one exists, and is not intended to apply if an existing provision does not exist. Article 13(4) contains a second substantial provision: the anti-fragmentation clause, pursuant to which exemptions included in Article 5(4) will not apply in situations where the business activities may constitute complementary functions that are part of a cohesive business operation. Article 13(4) "applies to" provisions of a CTAs. This type of provision is intended to change the application of an existing provision without replacing it, and therefore can only apply if there is an existing provision. For this reason, the notification provision of Article 13 states that the provision of the Convention will apply only in cases where all Contracting Jurisdictions make a notification with respect to the existing provision of the CTA. The anti-fragmentation clause is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this option entirely. In amending the exemptions as included in Article 5, paragraph 4 of the OECD Model Tax Convention, Ukraine has chosen to apply option A. As such, all the underlying CTAs as included within the scope of the MLI from a Ukraine perspective should – provided that the other jurisdiction applies for the same option – be amended in a way that the exemption only applies to specific activities of a preparatory or auxiliary character. Furthermore, Ukraine has not made any reservation with respect to the anti-fragmentation clause of Article 13, paragraph 4, which implies that the anti-fragmentation clause should – provided that the other jurisdiction has also not made any reservation in this respect – apply going forward from a Ukraine perspective. Under the Action 7 final report recommendations on "Preventing the Artificial Avoidance of PE Status," the splitting-up of contracts is a potential strategy for the avoidance of PE status through abuse of the exception in Article 5(3) of the OECD Model Tax Convention, governing the situations where building sites, construction or installation projects may constitute a PE. The Action 7 final report further noted, however, that the PPT provision could still address BEPS concerns related to the abusive splitting-up of contracts in these types of cases. Article 14 of the MLI applies "in place of or in the absence of" an existing provision. Article 14 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely. Ukraine has not made any reservations with respect to the application of Article 14 and as such this article will include provisions in the existing CTAs – if adopted by both jurisdictions – that creation of a PE can no longer be prevented by splitting up contracts. Article 15 describes the conditions under which a person will be considered to be "closely related" to an enterprise for the purposes of Articles 12, 13 and 14 of the MLI. Therefore, only jurisdictions that have made the reservations under Article 12(4), Article 13(6)(a), Article 13(6)(c) and Article 14(3)(a), may reserve their right for the entirety of Article 15 to apply. As Ukraine has not made a reservation to not apply Articles 12, 13 or 14 entirely, this article should apply. Part V of the MLI (Articles 16 and 17) includes provisions which aim to introduce the minimum standards for improving dispute resolution (the BEPS Action 14 minimum standard) and a number of complementing best practices. Article 16 of the MLI requires countries to include in their tax treaties the provisions regarding the MAP of Article 25 paragraph 1 through paragraph 3 of the OECD Model Tax Convention, including certain modifications of those provisions. Ukraine has chosen to implement the minimum standard for the MAP. Most CTAs already contain an option to initiate a MAP, but due to the minimum standard the procedure will be similar in all CTAs. This provision is meant to apply in the absence of provisions in CTAs that require a corresponding adjustment where the other treaty party makes a transfer pricing adjustment. Article 17 of the MLI applies "in place of or in the absence of" an existing provision. Article 17 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely. However, the BEPS Action 14 minimum standard requires that jurisdictions provide access to the MAP in transfer pricing cases and implement the resulting mutual agreements regardless of whether the tax treaty contains a provision dealing with corresponding adjustments. In light of this, a Party may reserve the right not to apply Article 17 of the MLI on the basis that in the absence of a corresponding adjustments provision, either: (i) the Party making the reservation will make the corresponding adjustment as described in Article 17 of the MLI; or (ii) its competent authority will endeavor to resolve a transfer pricing case under the MAP provision of its tax treaty. Where one Contracting Jurisdiction to a CTA makes such a reservation and the other Contracting Jurisdiction does not, Article 17 of the MLI will not apply to the CTA, and there is no expectation created under the MLI that the Contracting Jurisdiction that has not made the reservation will make a corresponding adjustment. Ukraine has reserved the right not to apply Article 17 of the MLI subject to the obligation to provide access to the MAP in transfer pricing cases and implement the resulting mutual agreements regardless of whether the tax treaty contains a provision dealing with corresponding adjustments. Part VI of the MLI (Articles 18 to 26) enables countries to include mandatory binding treaty arbitration (MBTA) in their CTAs in accordance with the special procedures provided by the MLI. Unlike the other Articles of the MLI, Part VI applies only between jurisdictions that expressly choose to apply Part VI with respect to their tax treaties. Ukraine wishes to apply MLI provisions to the 77 tax treaties which make up its tax treaty network. This constitutes an unprecedented moment for the Ukraine international taxation and the implementation of the treaty-based BEPS recommendations in Ukraine. The provisional reservations and notifications made by Ukraine at the MLI signing seems quite balanced and consistent with the double tax treaty negotiation policies followed by Ukraine during the past years. The MLI entered into force on 1 July 2018 after the first five jurisdictions (i.e., Austria, the Isle of Man, Jersey, Poland and Slovenia) deposited their instrument of ratification, acceptance or approval of the MLI with the OECD. Following this, four additional jurisdictions (i.e., New Zealand, Serbia, Sweden and the United Kingdom) deposited their instrument of ratification, acceptance or approval of the MLI with the OECD and the MLI will come into force for these jurisdictions on 1 October 2018. During the ratification process the choices made by jurisdictions may still change. With respect to a specific bilateral tax treaty, the measures will only enter into effect after both parties to the treaty have deposited their instrument of ratification, acceptance or approval of the MLI and a specified time has passed. The specified time differs for different provisions. For example, for provisions relating to withholding taxes, the entry into force date is the 1 January of the following year after the last party has notified of its ratification. 1 Andorra, Argentina, Armenia, Australia, Austria, Belgium, Bulgaria, Burkina Faso, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Monaco, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Russia, San Marino, Senegal, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and Uruguay. 2 See EY Global Tax Alert, Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider, dated 14 June 2017. Document ID: 2018-5981 |
