Double taxation treaties are the subject of interest for any entity generating profit in multiple countries to ensure that the entity’s proceeds are not taxed in several jurisdictions. The MLI is an international instrument modifying a substantial part of those double taxation treaties and may give rise to a new tax liability.
In late February 2019, the Committee on Budgetary Control and a day later also the Committee on Foreign Affairs recommended that the Chamber of Deputies of the Czech Republic give its consent to the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The Czech Republic acceded to the MLI in Paris in 2017; however, it opted for the minimum standard within the MLI, i.e. the least-stringent option. The Czech Republic reserved the right not to apply almost all of the articles amending the respective provisions in relation to the tax treaties concerned. Besides, the application of the MLI depends on the principle purpose test (“PPT”), which is one of the minimum standards identifying whether a transaction or an organisational arrangement were realised on other than solely tax-related grounds (e.g. for economic reasons). The test corresponds to the institute of law abuse, which was already passed by the Chamber of Deputies on 12 March 2019 as part of the 2019 tax package. Furthermore, the minimum standard also defines rules for the more-effective dispute resolution by agreement.
The Senate already gave its consent to ratification on 20 December 2018; therefore, the ratification process depends on the Chamber of Deputies’ resolution in the second reading. However, Deputies will presumably follow the recommendation of the Committees. For example, the Committee on Budgetary Control was not asked to consider the draft and, despite that, it did so and ultimately recommended its ratification. Pursuant to the information from the reporter for this act, the second reading is to take place between May and June 2019 and, as an international presidential treaty is involved, the President’s signature will be required for the treaty to take effect.
It is necessary to remember that not all countries acceded to the MLI to the same extent, which is why the MLI may have much wider impacts on tax administration in other jurisdictions in practice. In some cases, the MLI will considerably affect the wording of bilateral double taxation treaties; for example, the MLI is already effective in Poland and Slovakia but the ratification process in the Netherlands remains underway. In mid-March 2019, the MLI ratification instrument was deposited in 21 countries including, inter alia, Ireland in which the MLI is to take effect on 1 May 2019. Unlike the Czech Republic, Ireland will be bound by the provisions of the key Article 13 providing for the artificial avoidance of a permanent establishment based on specific exceptions to tax treaties.*
It looks likely that the tax administration in the Czech Republic will use the new, recently adopted tax rule to prevent law abuse. Nevertheless, the MLI as well as the EU’s Anti-Tax-Avoidance Directive (“ATAD”) build on the same ideological and application principles – to prevent tax evasion.
*Ratification in Ireland will likely be another imaginary “nail in the coffin” for the “Double Irish with Dutch Sandwich” arrangement, i.e. a structure using subsidiaries in Ireland and the Netherlands for shifting profits to jurisdictions with low or zero taxation, which is anticipated to terminate in 2020.
The article is part of dReport – March 2019, Tax news; Grants and investment Incentives.
Seminars, webcasts, business breakfasts and other events organized by Deloitte.
