Tax Update: Ireland Signs Multilateral Tax Agreement
14 June 2017
On 7 June 2017, Ireland along with almost 70 other countries signed the OECD’s multilateral instrument (the “MLI”). The MLI incorporates certain recommendations made under the Base Erosion and Profit Shifting (BEPS) project. The BEPS project was launched in 2013 and aims to tackle aggressive international tax planning. Most OECD countries and some developing countries have now signed up to the MLI. Additional jurisdictions are expected to sign at a later date.
Scope of the MLI
The MLI was developed as a mechanism to introduce change to international double tax treaties ("DTTs"). It was chosen as an alternative to a more time-consuming exercise of individually amending the thousands of bilateral treaties in existence. Some provisions of the MLI are mandatory or “minimum standards” for the participating countries, while others are optional “best practices”. While the MLI modifies existing treaties, it does not prevent future renegotiation of those treaties and it is expected that Ireland will continue to expand and enhance its DTT network over the coming years.
Key provisions in the MLI
The focus of the MLI is on the BEPS recommendations on the treatment of hybrid structures, treaty abuse, permanent establishment status and dispute resolution.
Ireland’s position on key issues is as follows:
- Permanent establishment: The permanent establishment (“PE”) rules relate to the circumstances where a company can have a taxable presence in another country. A definition of what constitutes a PE is contained in a DTT. The MLI includes optional changes to the PE definition which, if adopted, would make it easier for a company to create a PE in a DTT country which also adopts the new rules.
Ireland has not opted into the MLI provision which would create a PE for a company where a dependent agent (e.g. employee) habitually plays the principal role leading to the conclusion of contracts. The Irish position on this will be of interest to groups with EMEA sales structures out of Ireland as currently a PE may not be created in another country provided the contract is not formally concluded by a dependent agent in the other country, even where the agent plays a key role in its negotiation. Since Ireland is not adopting this particular provision, other DTT countries will not have a right to impose tax under this provision even if the other country adopts the new rule.
The Irish Department of Finance has indicated that work is still underway at an OECD level to determine what profits, if any, would be attributable to PEs created under the new rule and Ireland is reserving its position due to the continuing uncertainty as to how the test would be applied in practice. However, Ireland has opted for other changes to the PE definition such as an “anti-fragmentation” rule which is designed to prevent groups from dividing a business into several smaller operations to avoid creating a PE and, therefore, some structures may be impacted by the MLI.
- Treaty abuse: Ireland will adopt the principle purpose test (PPT) which introduces a general anti-avoidance clause into Ireland’s DTTs which are covered by the MLI. Ireland has not opted to supplement the PPT with a limitation on benefits (LOB) clause. The US already uses LOB clauses in its DTTs (including its DTT with Ireland). The LOB provided for in the MLI would restrict the benefits of a DTT to a “qualified person” (eg persons who meet certain ownership criteria) unless the person is engaged in the active conduct of a business.
- Dispute resolution: Ireland has signed up to new rules around dispute resolution. Increased information sharing at an EU and OECD level is expected to lead to more cross-border tax disputes. The MLI is intended to provide better dispute resolution mechanisms for cross-border tax disputes. Ireland, like most countries, has opted into the default option of final offer or “baseball” arbitration. This is where each tax authority submits a proposal to address the issues to an arbitration panel which selects one of the proposals. Ireland is also one of 25 countries which have opted into mandatory binding arbitration in certain cases.
Entry into effect
Ireland’s DTT with another country will be modified by the MLI where both DTT partners have respectively ratified the MLI. The effective date for withholding taxes under a particular DTT will be the first day of the calendar year following ratification by both DTT parties. For all other taxes, it will take effect for taxable periods beginning on or after the expiry of six months after both have ratified the MLI. Therefore the earliest effective date for any of Ireland’s DTTs is 2018. However, this would seem ambitious as it is not yet known when Ireland will ratify the MLI.
Groups should assess whether the adoption of the MLI is likely to impact on the availability of DTT benefits or on existing sales structures using Ireland. A review should also consider the impact of other international tax developments, including the EU Directives on tax avoidance which will be implemented in the coming years.
For more information on the MLI and how it may potentially affect your business, please contact a member of our Tax team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.