The future of international Tax planning and International Banking Christodoulos Damianou 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 ✓ Beneficial Ownership of Income Issues
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 92 (November 2019). • On 22 March 2018, the OCED 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 November 2019 37 countries deposited the ratification instruments with the OECD. • These countries include a number of Cyprus treaty partners (highlighted below). • These countries include amongst others: 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 and the UK
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
MLI – The purpose of Double Tax Treaties The instrument is quite flexible. At their own discretion, signatories may define which treaties will be covered and which provisions will apply. The signatories to the MLI have three options on international tax treaty abuse: • Option 1: adopting only the principal purpose test (PPT) • Option 2: adopting the PPT test and the simplified limitation on benefits provision (Simplified LOB) • Option 3: adopting the detailed LOB in combination with the mechanism to address conduit financing
Limitation of benefits • 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.
Next step on the MLI process in Cyprus • Publication in the Official Gazette expected before the end of the year • Exchange of notes with the respective countries which have completed the ratification process under their laws • Publication in the Official Gazette for the amendment of individual treaties • The earliest that it can be implemented is as from January 2020 if the process is completed by 30 September 2019 or January 2021 if the process is completed between October 2019 and September 2020 • The question is whether there will be pressure on Cyprus to complete its internal procedures and notify the OECD accordingly • Already a number of the Cyprus treaty partners have completed the formalities including Russia. • It is understood that discussions are taking place at the OECD level on certain aspects of the MLI • Thus it could reasonably be expected that no pressure would be exerted until the end of this year for the implementation of the MLI by Cyprus
Key information on MLI (1/2) 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 92 signatories as of end of November • basis of Action 15 of OECD BEPS Action 2019. For Russian Federation, MLI Plan. enters into force on 1 October 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 (2/2) 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, PE arrangements (1/5) 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 (2/5) 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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