On 7 June 2017, over 70 Ministers and other high level government representatives participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI").
The MLI is the first treaty of its kind that has the effect of amending a series of bilateral treaties (there are over 3,000 bilateral double tax treaties in existence).
The effect of the MLI is that countries (including Ireland) will transpose certain provisions relating to the OECD's Base Erosion and Profit Shifting ("BEPS") project into their existing networks of bilateral tax treaties without the requirement to re-negotiate each treaty individually. This is a hugely significant development in the approach to international tax.
What it means for Ireland?
The MLI will implement a series of measures to update Ireland's existing network of bilateral tax treaties with the intention of reducing opportunities for tax avoidance by multinational enterprises. The new convention is also intended to strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.
The key provisions which will amend Ireland's double tax treaties relate to:
The adoption of a general anti-avoidance principal purpose test in relation to the prevention of treaty abuse; The adoption of the best practice tie-breaker test for determining tax residence for dual resident entities; and The adoption of certain mechanisms in respect of dispute resolution (including mandatory binding arbitration) in order to ensure disputes between treaty parties are resolved and double taxation does not arise. The adoption of the principal purpose test may have implications for certain types of holding companies and other intermediate vehicles which may have been set up to access lower withholding tax rates through double tax treaties.
Significantly, there are also a number of key areas in respect of which Ireland has chosen to reserve its position and will not adopt the proposed measures. In particular, Ireland will not adopt the proposed new tests for determining when an agent or commissionaire would be treated as a permanent establishment.
When will the MLI come into effect?
The earliest that any of these changes are likely to apply in Ireland is 1 January 2019.
In order for the MLI itself to enter into force, it must be ratified by five countries...