As a result of the OECD Base Erosion and Profit Shifting (BEPS) project to minimise tax leakage, amendments have been proposed to Double Tax Agreements (“DTA’s”) through use of a Multilateral Instrument (MLI). The changes impact a large number of countries across and its impact can vary from DTA to DTA.
Treaty Background
The MLI is a multilateral treaty that enables jurisdictions to swiftly modify their DTA’s to implement measures designed to better address multinational tax avoidance and to more effectively resolve tax disputes. The DTA’s that a jurisdiction wishes to be covered by the MLI are called 'Covered Tax Agreements' (“CTAs”).
Australia signed the MLI on 7 June 2017 and passed law to give the MLI legal effect on 24 August 2018. The extent to which the MLI will modify Australia’s bilateral tax treaties will depend on the final adoption positions taken by each country. (All signatories and parties are listed here).
When will this take effect?
The impact of the MLI for each of Australia’s CTAs depends on whether the corresponding jurisdiction has ratified the MLI for their domestic purposes and relevant notifications lodged with the OECD. This can vary from country to country, however, it is expected that the earliest the MLI can take effect in Australia is for:
- Withholding taxes, on income derived on or after 1 January 2019
- All other taxes, for income years starting on or after 1 July 2019
- Dispute resolution, after the MLI enters into force for each of the parties.
Each jurisdiction is required to identify which of their DTA’s they want the MLI to apply to and modify and which articles within the DTA are to be modified. Whilst some article changes are mandatory others are discretionary. As such, if one jurisdiction adopts a position and it’s not matched by the other jurisdiction then the DTA remains unchanged.
What will the impact be to Australian businesses and entities?
The main features of the MLI are to minimise tax leakage across a variety of areas within the DTA’s. For example, where jurisdictions adopt a different interpretation on the taxable status of income or the transparency of an entity or the potential avoidance of permanent establishments. The MLI will also impact the availability for concessional withholding tax rates under existing DTA’s.
Whilst not impacting an Australian entities current taxable income, close examination of existing transactions between the Australian entity and its overseas related parties or its overseas positions generally needs to be undertaken to ensure that the full impact of the adoption of the MLI is understood.
The added layer of legislation over the pre-existing layers of domestic and bi lateral treaty makes the interpretation of international transactions from tax perspective highly complex. Whilst guidance is expected to be received from the ATO, caution should be applied in respect of existing or proposed international transactions and structures to avoid unforeseen adverse taxation consequences.
Should you have any questions in relation to the above, please contact your engagement partner on 02 9283 1666.
