The future of international Tax planning and International Banking Christodoulos Kourtellaris Legal Aspects of Investing in Ukraine and European Jurisdictions IBC Legal Services 2019
CONTENTS ✓ The Multilateral Instrument ✓ The EU Anti Tax Avoidance Directive ✓ Exchange of Information Update ✓ Transfer pricing requirements in Cyprus-existing and new legislation ✓ Substance and tax residency for companies
MULTI-LATERAL INSTRUMENT TREATY SHOPPING TREATY ABUSE IMPLEMENTATION
MULTI-LATERAL INSTRUMENT TREATY SHOPPING TREATY ABUSE IMPLEMENTATION • In June 2017 under the OECD BEPS initiative, 68 countries (including Cyprus, Russia and Ukraine but not the USA) signed the Multi-lateral instrument (MLI), which will implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. • Subsequently more countries signed the MLI bringing the total of signatories to 87. • On 22 March 2018, the OECD announced that the MLI will enter into force on 1 July 2018, following the deposit of the ratification instrument by a fifth jurisdiction. • By the end of October 2019 36 countries deposited the ratification instruments with the OECD. • These countries include a number of Cyprus treaty partners (highlighted below). • These countries include: Australia, Austria, Curacao, Finland, France, Georgia, Guernsey, Ireland, the Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, Netherlands, New Zealand, Poland, Serbia, Singapore, Slovakia, Slovenia, Sweden the UK, Ukraine.
Multi-lateral instrument The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the BEPS project into their bilateral tax treaties by: • Modifying the application of thousands of bilateral tax treaties concluded to eliminate double taxation • Implementing agreed minimum standards to combat treaty abuse • Improving dispute resolution mechanisms • Providing flexibility to accommodate specific tax treaty policies
Multi-lateral instrument The MLI covers the following subjects: • Hybrid mismatches • Treaty abuse • Avoidance of permanent establishment status • Improving dispute resolution • Arbitration Most countries have elected to deal only with the Treaty Abuse provisions
Position of Cyprus on the MLI • Cyprus extended the application of the MLI to the 55 individual treaties signed by Cyprus, plus three treaties covered under the old treaty with the Republic of Yugoslavia (Bosnia and Herzegovina, Montenegro and Serbia) plus three treaties covered under the old treaty with the USSR (Azerbaijan, Kyrgyzstan and Uzbekistan) • No tax treaties of Cyprus have been excluded
Key information on MLI MLI Entry into force MLI - Multilateral Convention to MLI entered into force on 1 July 2018. • • implement Tax Treaty related measures to prevent Base Erosion and Profit Signatories Shifting (“BEPS”) . Developed on the 90 signatories as of 30 October 2019. For • basis of Action 15 of OECD BEPS Action Ukraine MLI enters into force on 1 Plan. December 2019. BEPS Action Plan – 15 actions • developed by OECD and G20 to equip Definition governments to address tax avoidance, ensuring that profits are Covered Tax Agreement (“CTA”) - • taxed where value is created. means an agreement for the avoidance of double taxation (“DTT”) with respect to tax on income (...): Purpose (i) which is in force between two Parties; and Swift implementation by governments • (ii) with respect to which each Party has of measures strengthening double- made a notification listing the agreement tax treaties protecting governments as well as any amending or accompanying against tax avoidance strategies that instrument thereto (...) as an agreement inappropriately use tax treaties to which it wishes to be covered by the artificially shift profits to low or no-tax Convention. jurisdictions.
Key information on MLI The MLI provisions for a particular CTA enter into force: as of • MLI ENTERS INTO the latest date on which MLI enters into force for each FORCE Contracting Jurisdictions AND with respect to taxes withheld at source (from the 1 st day of the next calendar year) / with respect to all other taxes (as of expiration of a period of 6 months). For both Contracting Jurisdictions for which MLI has • TWO DTTS ARE CTA entered into force (i.e. both parties to a CTA have deposited their ratification instruments with the OECD Secretariat) AND For both Contracting Jurisdictions which listed the • respective DTT in their MLI position as Covered Tax Agreement. CTA will be changed if there is a match between • PROVISIONS MATCH reservations and optional provisions selected by both parties.
MLI provisions Neutralization of negative effect of hybrid mismatch HYBRID arrangements (transparent and dual resident entities). MISMATCHES Preventing granting of treaty benefits in inappropriate circumstances . TREATY ABUSE Rethinking of commissionaire and similar arrangements to ARTIFICIAL prevent the artificial avoidance of PE status. AVOIDANCE OF PE STATUS Resolving disputes concerning application/interpretation of IMPROVEMENTS CTA by mutual TO DISPUTE agreement procedures. RESOLUTION
MLI, treaty abuse PREAMBLE, TREATY ABUSE PREAMBLE Source : Changes to the preamble to emphasize that DTTs are not intended to be used to generate double non-taxation (art. 6 MLI). Key outcome : Elimination of double-taxation without giving opportunities for tax evasion or avoidance (including through treaty-shopping arrangements). “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). ” TREATY ABUSE Source: Changes ensuring protection from treaty-shopping (art.7 MLI) Key outcome: PPT: a GAAR denying the benefit of a DTT (clear ); or • Detailed LOB and a mechanism to deal with conduit arrangements not already dealt with in • the LOB provision; or Combined approach with a simplified LOB or detailed LOB , and PPT . •
Principal Purpose Test • The benefit under a double tax treaty (either by granting exemption from or deduction of withholding taxes) can be denied to a person, where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with such an arrangement or transaction, was to obtain those benefits. • This means that if in a structure there are only tax reasons for putting the structure in place in the first place and there are no business reason to support, then there will be no tax treaty benefit granted and normal taxes will be paid.
MLI, treaty abuse MEASURES TO COUNTER TREATY ABUSE Principle Purpose Test (PPT) Limitation of Benefits (LOB) “ ..a benefit under the Covered Tax Agreement shall not be granted in respect of a resident of a Contracting Jurisdiction would an item of income or capital if it is reasonable be entitled to the benefits only if they to conclude, having regard to all relevant constitute a “qualified person” under article facts and circumstances, that obtaining that 7(9) of the simplified LOB benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit”
MLI, PE arrangements ARTIFICIAL AVOIDANCE OF PE STATUS AGENCY PE AND COMMISSIONAIRE Source : Change to address “commissionaire arrangements and similar strategies” (art. 12 MLI). Key outcome : Widening of dependent agent PE definition. PREPARATORY OR AUXILIARY EXEMPTION Source: Change to address the artificial avoidance of PE status through the “specific activity exemptions” (art. 13 MLI). Key outcome: Limitation of PE exception for exempt activities. SPLITTING-UP OF CONTRACTS Source: Changes with respect to the artificial splitting up of contracts (art. 14 MLI). Key outcome: Adding of a new anti-fragmentation rule.
MLI, PE arrangements Pre-BEPS, dependent agent PE Pursuant to Art. 5(5) OECD MTC an agency PE is created: Commissionaire If a person is acting on behalf of ➢ R-co the enterprise . arrangement Concludes contracts in the name ➢ of the enterprise. % commission fee And performs these activities ➢ habitually. Pursuant to Art. 5(6) OECD MTC an S-co enterprise shall not be deemed to Customer have a PE if it carries on business Not a PE through a broker, general ➢ commission agent or any other agent of independent status, Sale in its own name, but for the provided that such persons are ➢ account of R-co acting in the ordinary course of their business .
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