On May 28, 2018, Canada’s Department of Finance sent draft legislation (the Multilateral Instrument in Respect of Tax Conventions Act) to the House of Commons (lower house of Parliament) for consideration, which would ratify the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
On the same day, the Department of Finance also issued a press release on Canada’s intended implementation of the MLI. The press release provides an overview of the MLI and Canada’s MLI notifications and reservations, both of which are discussed below.
Pending formal ratification by Canada and its bilateral tax treaty partners, the MLI will modify the majority of Canada’s bilateral tax treaties to implement the relevant BEPS recommendations.
The MLI will modify tax treaties (also referred to in the MLI Explanatory Statement as “covered tax agreements” (CTAs)) between two or more parties to the agreement. It will modify a treaty’s application to implement BEPS measures, as opposed to an amending protocol, which would amend the text of the treaty directly. It is possible for jurisdictions to agree subsequently to different modifications to their tax treaties.
TheMLI will sit alongside a jurisdiction’s existing tax treaties and any amending protocols. It is anticipated that jurisdictions will produce consolidated versions of their tax treaties. However, they are not required to do so.
TheMLI will implement the following:
- The provisions of the OECD Model Tax Convention (the “Convention”), developed under Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements) to address fiscally transparent entities, and the measures to address application of the exemption method to relieve double taxation.
- The provisions developed under Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) including the minimum standard on treaty abuse (e.g., treaty shopping); introduction of a “saving clause” to make explicit that treaties do not restrict a state’s (i.e., country’s) right to tax its own residents; and the specific anti-abuse rules related to (1) certain dividend transfer transactions; (2) transactions involving immovable property and holding companies; (3) dual-resident entities; and (4) treaty shopping using third-country permanent establishments (PEs).
- The provisions developed under Action 7 (Preventing the Artificial Avoidance of PE Status) including (1) measures to address commissionnaire arrangements and similar strategies; (2) modifications to the specific activity exemptions under Article 5(4) of the Convention and the addition of an anti-fragmentation rule; and (3) measures to address the splitting up of contracts that abuse the exception in Article 5(3) of the Convention.
- Measures included in the minimum standards and best practices produced under Action 14 (Making Dispute Resolution Mechanisms More Effective), including the changes to paragraphs 1 through 3 of Article 25 (Mutual Agreement Procedures) of the OECD Model Tax Convention, as well as the inclusion of paragraph 2 of Article 9 (Associated Enterprises) of the Convention.
In addition to implementing the measures described above, several countries declared their commitment to mandatory binding, mutual agreement procedure (MAP) arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specified timeframe. TheMLI includes an optional provision on mandatory binding arbitration.
Canada MLI CTAs
Canada listed 77 tax treaties as CTAs in its July 7, 2017 list of notifications and reservations, which will be modified by the MLI if Canada and the corresponding CTA partners ratify the MLI under their domestic laws.
On June 7, 2017, Canada’s Department of Finance announced that it would begin negotiations with the competent authorities of Germany and Switzerland in June 2017 to update the corresponding income tax treaties for certain MLI measures.
Canada MLI Notifications and Reservations
Canada listed the following notifications and reservations with the OECD:
- Preventing Treaty Abuse (BEPS Action 6):
- Article 7 of MLI: principal purposes test (PPT) selected, plus limitation on benefits (LOB) where possible. Under the PPT, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied, unless it is established that granting these benefits would be in accordance with the object and purpose of the treaty. The LOB rule would further limit the availability of treaty benefits to entities that meet certain additional conditions.
- Permanent Establishment (PE) Avoidance (BEPS Action 7):
- Article 12 of MLI (Commissionaire Arrangements and Similar Strategies): reserved – will not apply to all CTAs.
- Article 13 of MLI (Specific Activity Exemptions): reserved – will not apply to all CTAs.
- Article 14 of MLI (Splitting Up of Contracts): reserved – will not apply to all CTAs.
- Mandatory Binding Arbitration (BEPS Action 14):
- Part VI of MLI: opted in to apply.
- Type of arbitration selected: not identified.
- Excluded tax types from arbitration: cases involving application of general anti-abuse rules, whether in the MLI, a CTA, or domestic tax rules.
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