According to the latest information provided by the OECD, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”) will come into force on 1 July 2018.
The Convention aims to implement unified rules preventing double taxation without the need for lengthy and complicated bilateral negotiations. Let us add that approximately 1,200 double taxation treaties are currently concluded across the world.
Ángel Gurría, the Secretary-General of the OECD, believes that the Convention will ensure that multinational companies will settle tax liabilities arising from their cross-border activities as appropriate.
The fact that the Convention will come into force after a mere year from the signing date is an indication of a strong political engagement in combatting base erosion and profit shifting (BEPS).
The Convention coming into force is based on ratification instruments deposited by five jurisdictions. Slovenia was the last jurisdiction to do so, on 22 March 2018. Ratification instruments had already been provided by Austria (22 September 2017), Isle of Man (19 October 2017), Jersey (15 December 2017) and Poland (23 January 2018).
The provisions of the Convention concerning withholding tax will take effect in the above-listed jurisdictions for all double taxation treaties concluded by these countries from the beginning of 2019. For other areas, the Convention will become effective within 12 months from coming into force, ie as of 1 July 2019 in the countries listed above. The Convention generally stipulates that provisions regulating the taxation of passive income will always take effect within six months from the Convention going into force while a 12-month period will apply to other provisions.
In other countries, the Convention will come into force within three months after these countries have deposited their ratification instruments. The information on how the ratification instruments have been signed and whether individual OECD countries have already signed them as of 22 March 2018 is available here.
Furthermore, the Convention will also introduce unified rules for handling hybrid mismatch arrangements, rules for defining permanent establishments and allocating profit to the permanent establishment as well as unified rules preventing the misuse of double taxation treaties. The Convention also includes a measure for addressing contractual disputes based on mandatory arbitration which was adopted by 28 signatories.
The Convention has not yet been ratified by the Czech Republic. Note that in the signing of the Convention, the Czech Republic reserved a right to introduce only minimum standards. In practice, a new preamble will apply in addition to Article 6 stipulating that the double taxation treaties aim to prevent double taxation as well as tax evasion as regards income and capital taxes. What is more, a possibility of restricting the advantages arising from individual treaties in case of their misuse is to be explicitly stated in Article 7. Improvements of problem resolution mechanisms for disputes concerning double taxation are newly specified in Article 16.
The article is part of dReport – May 2018, Tax news; Grants and investment Incentives
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