Loose language

As impetus builds behind the BEPS Multilateral Convention, with more and more countries signing and ratifying, the question to consider is when will the new provisions apply?

There are two different issues: withholding taxes on the payment of interest, dividends and royalties and provisions affecting the taxable presence, overall profit or dispute resolution rights of companies and individuals. 

The OECD secretariat has just published a note on the effective date for withholding tax – which is 1 January.  The question put is which 1 January?  Was it the one immediately following the expiration of the three months after the second country ratified – or was there a further year’s grace?  The note sets out the legal advice from OECD Directorate for Legal Affairs, which states that it’s the first date – and there is no extra year.  The problem arose because of slightly loose language in the English version of the Convention.  Naturally the Vienna Convention on Treaties was considered.

A similar question arose in the UK, at least, on the effective date of the taxable period changes. Some argued that the changes took effect by reference to a company’s accounting period – not the country’s overall financial year.  HMRC disagreed and clearly state that changes apply from 1 or 6 April, as appropriate. 

Commission finds mismatch in US and European laws isn’t state aid

There will be a collective sigh of relief from many UK and US multinationals at the European Commission’s ruling in favour of Luxembourg and McDonald’s.  The US-parented group held intellectual property rights in a Luxembourg company, which assigned them to a US branch.  The Luxembourg tax authority agreed that the income from the rights (intragroup royalties) should be allocated to the US, under the Luxembourg-US tax treaty.  However, as the branch’s presence did not amount to a taxable presence under US law, no actual tax arose. 

The Commission finally agreed that the US presence did amount to a foreign branch or permanent establishment, as defined in Luxembourg law.   In this case (and many others like it) the effective non-taxation of almost all the profits arose from the US definition of taxable presence, which does not follow the OECD standard.

Luxembourg, like many other countries, is taking steps under the BEPS project to modify its law, such that non-taxation may not arise in the future.  The US has a new model treaty, which would do the same thing – although the Senate has not ratified any US Double Tax Treaties for many years.

The ruling may cause the UK to be more optimistic about the outcome of its own state aid enquiry into the finance company exemption, under controlled foreign companies’ legislation.  For the first time in recent years, the Commission has acknowledged that low, or even no, taxation isn’t necessarily state aid.

BEPS Update

Work on the Base Erosion and Profit Shifting project continues to move forward.   The BEPS Inclusive Framework met in Peru on 27-28 June, with representatives from over 80 countries. 

The Inclusive Framework delegates

The Inclusive Framework now includes 116 countries and jurisdictions, with others expected to join.  The EU’s Non-cooperative jurisdictions measures have certainly acted as an encouragement, since a requirement to stay off that list is adoption of the four BEPS minimum standards.

More countries have signed the BEPS Multilateral Convention, bringing the participants to 82.  Peru, together with Kazakhstan and the UAE, naturally signed during the framework meeting.  The last remaining EU state, Estonia, has also signed.  Nine countries have now ratified the Convention, including the UK.  The key start date for these countries, and others which ratify by 30 September, will be 1 January 2019 when the anti-treaty abuse rules kick in, which will stop some funds and holding companies within multinational groups from claiming reduced withholding taxes on interest, royalties and dividends.  The vastly-improved dispute resolution provisions will take effect from the start of the 2019 tax year (1 April for the UK and 1 January in most other countries).  A smaller number of countries will see changes to the definition of taxable presence for companies, since there is less agreement on how best to change those rules.  The Working Party on Tax Treaties is working on additional guidance on when taxpayers may claim the benefit of treaties, to improve global consistency in defining treaty abuse.   

The OECD secretariat released on 21 June final transfer pricing guidance on of the profit-split method and the application of principles to hard-to-value intangibles.  Still to come is the controversial first draft of new guidance on financial transactions.

Update: the draft guidance on financial transactions was released on 3 July for comment.