International concerns should note please note – a new super tax treaty is about to swoop.
The OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the “Multilateral Instrument” (MLI) will enter into force on July 1, 2018. The MLI will start to have effect for existing tax treaties as from 2019.
The MLI aims to extinguish an array of fancy tax planning techniques of multinational groups.
The MLI is separate from the OECD Common Reporting Standard (CRS) which mainly uncovers undeclared bank accounts of individuals.
Israel is an OECD member and signatory in principle to both the MLI and CRS. The Knesset is currently debating whether to ratify the MLI and CRS – few doubt that it will do so later this year.
Multinational enterprises everywhere are now re-assessing their international operating structures.
Even if no tax planning occurred, multiple taxation is now possible. If tax planning did occur, stand by for negative publicity due to greater transparency.
We are in a brave new tax world.
The MLI reflects a political commitment of most countries outside the USA to a multilateral approach to fighting base erosion and profit shifting (BEPS) by multinational enterprises.
Revenue losses from BEPS are estimated at $100 billion-$240b. annually, or the equivalent of 4-10% of global corporate income tax revenues. Over 110 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties.
“The entry into force of this multilateral convention marks a turning point in the implementation of OECD/G20 efforts to adapt international tax rules to the 21st Century,” said OECD Secretary- General Angel Gurría. “We are translating commitments into concrete legal provisions in more than 1,200 tax treaties worldwide.”
The MLI will have the effect of amending bilateral tax treaties rapidly, but only if both countries sign up to the MLI and select the same clause within the MLI where alternative options are offered.
The MLI contains measures for tightening up tax treaty rules regarding: transfer pricing, e-commerce, warehouses, agents, treaty shopping, high interest loans and hybrid loans (treated as loans in one country, equity in the other country), competent authority appeals, transparent entities (such as US LLCs and Israeli family companies) and much more. The MLI also strengthens provisions to resolve treaty disputes, including a binding arbitration facility which has been taken up by 28 signatories (not Israel).
Among other things, Israel intends to amend 36 treaties to allow reduced tax rates for dividends only if relevant ownership conditions are met throughout a 365 day period including the dividend payment date.
Also the concept of a permanent establishment (PE) – a taxable fixed place of business or a “dependent agent” – will be tightened in all Israel’s treaties.
A taxable dependent agent would now be a person in a country who: (1) habitually concludes contracts (2) or plays the principal role leading to the conclusion of contracts routinely without material modification.
Furthermore, a related company (over 50% control in terms of votes or value of shares by one party over the other, or common control) acting exclusively or almost exclusively for the group would now be considered a dependent agent.
That puts paid to many marketing subsidiaries.
Moreover, Israel joins a chorus of other countries that will now treat warehouses as a PE. They will no longer be considered preparatory or auxiliary.
These rules complicate trade and e-commerce for large and small operators, and may spell the death sentence for international agency arrangements.
Controversially, when taxing Israeli residents, Israel reserves the right to deny numerous treaty benefits, regarding: foreign tax credits, corresponding adjustments, services rendered to a foreign government, students researchers and professors, discriminatory taxation, competent authority appeals, pension and alimony taxation abroad only, other treaty exemptions.
For example, if the US IRS claims an Israeli online operator has a taxable US permanent establishment and the Israeli Tax Authority disagrees, the Israeli Tax Authority may refuse to give a foreign tax credit, resulting in double taxation The MLI and other OECD changes are transforming international taxation. If you are an importer, exporter, online trader or cross border investor, now is the time to check whether and how to re-structure international arrangements.
The new rules are detailed but the small print spells out what is now considered okay.
As always, consult experienced tax advisers in each country at an early stage of specific cases.
firstname.lastname@example.org The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.