On May 9, 2018, several members of the U.K. Parliament and the Financial Secretary to the Treasury, Mel Stride, debated and approved the draft order (Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018) of March 28, 2018 during a meeting of the Third Delegated Legislation Committee. The legislation would implement the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) into U.K. domestic law. See also Explanatory Memorandum on the draft order.
The U.K. must issue statutory instruments to implement the draft order, followed by its deposit of these instruments with the OECD. The MLI will enter into force in the U.K. on the first day of the month following the expiration of a period of three calendar months after the deposit of ratification.
Editor’s Note: The MLI will first come into force in certain jurisdictions on July 1, 2018, following the deposit by Slovenia of its instrument of ratification with the OECD on March 22, 2018, the fifth state to do so.
On June 7, 2017, the U.K. signed the MLI with 67 other jurisdictions at the first OECD signing ceremony in Paris. The U.K. has listed 121 tax treaties as Covered Tax Agreements (CTAs), which will be modified by the MLI if the U.K. and the corresponding CTA partners ratify the MLI under their domestic laws.
On April 16, 2018, HMRC published amendments to the U.K.’s provisional list of MLI reservations and notifications. The U.K.’s amended position reflects income tax treaties that were omitted in error (i.e., Faroes Islands) or signed after June 7, 2017 (i.e., Kyrgyzstan, Ukraine, and United Arab Emirates). It also reflects that the U.K. and Germany will implement certain BEPS recommendations in separate agreements outside the MLI.
According to the Explanatory Memorandum to the draft order, the MLI will modify the application of double tax treaties currently in force with the U.K. These treaties will only be modified if both the U.K. and the other jurisdiction give notice that they wish them to be CTAs (and that both have ratified the MLI under their domestic laws). Notice can be given at the time of signature, ratification, or at a later date. Where the U.K. has listed a double tax treaty to be a CTA, and either the other jurisdiction has not made the same notification, or is not a signatory to the MLI, then the MLI will not modify that treaty until the other jurisdiction either makes an equivalent notification, or signs and ratifies the MLI and makes a notification.
CTAs are modified only to the extent of the provisions contained in the articles of the MLI. Most of these articles permit a jurisdiction to reserve against making the modification that it contains, or to make a reservation to preserve certain existing provisions in the CTAs. Where either signatory to a CTA reserves against a provision contained in the MLI, then the modification will not apply to that CTA.
The MLI enables all parties to meet the treaty-related minimum standards that were agreed as part of the BEPS package under Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and Action 14 (Making Dispute Resolution Mechanisms More Effective). The MLI also enables parties to implement recommendations for changes to tax treaties contained in the reports on Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements) and Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status).
HMRC intends to release consolidated texts of its bilateral double tax treaties to determine how the MLI will affect each one in accordance with the positions taken by the U.K. and the CTA jurisdiction.
The U.K. has listed the following notifications and reservations with the OECD, among others:
Preventing Treaty Abuse (BEPS Action 6):
- Article 7 of MLI: principal purposes test (PPT) selected. 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.
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): the U.K. listed CTAs that already contain these clauses.
- 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 (Articles 18-21): opted-in to apply.
- Type of arbitration selected: not identified.
- Excluded tax types from arbitration: not identified.
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