The Multilateral Convention (MLI) signed last night in Paris is a single instrument that ultimately alters several thousand double tax treaties currently in existence.
The MLI is a direct output of the OECD’s BEPS global tax anti-avoidance drive. The objective was to create one instrument that altered various clauses in existing double tax treaties, without the need for multiple lengthy bilateral negotiations to alter individual tax treaties.
Broadly, the Articles in the new MLI combat perceived tax avoidance and make it more difficult for companies to avoid a tax presence in another jurisdiction, as well as improving dispute resolution processes.
There was considerable scepticism initially at the likelihood of achieving real progress in a short time frame from so many countries. In that sense, tonight’s signing ceremony will be considered a significant success of the BEPS project.
In order to achieve the consensus position, the OECD provided countries with different options in respect of several of the proposed treaty changes, with only certain changes being classified as “minimum standard” or obligatory. Ireland, similar to other countries, has already indicated its preferences where an option exists or where it intends to reserve its position for the time being.
Broadly, where different countries choose different options, no change to the existing tax treaty will take place. Where both countries choose the same option, then it is expected that in due course, following ratification in the domestic law of both countries if required, the relevant tax treaty between those two countries will be amended.
The net result of the above is that we could see considerably more inconsistency in Ireland’s tax treaty network, depending on the position adopted by each of our treaty partners. For example, the UK has adopted a different position to Ireland in respect of a number of the proposals.
Thus an Irish company operating in several jurisdictions is likely to be faced with greater complexity in establishing the overseas tax position, as well as higher overseas tax costs on the assumption that the changes will bring certain activities within the overseas tax net that were heretofore excluded.
As a result of both the new MLI and other BEPS developments, we are likely to see more disputes in the future as different Revenue authorities look to tax the same bucket of profits. This is likely to be a feature of the new global tax landscape until things settle down. Helpfully, there has been significant work in putting in place appropriate dispute resolution frameworks to deal with this expected development, including a binding arbitration process where agreement between Revenue authorities cannot be reached.
In summary, the new MLI will be considered a big success by the OECD, achieving consensus on many of the proposals discussed over the course of the BEPS tax anti-avoidance project. However it is likely to add further complexity for Irish companies doing business overseas. It also has the potential to suck a portion of profits out of the Irish tax net as it will generally become easier to have a tax presence overseas, particularly when initially entering a new market.
More generally, we are likely entering a new phase of increased disputes as countries interpret BEPS in different ways, with mandatory binding arbitration an important agreed feature of this new landscape in order to mitigate the impact of disputes.