Measures introduced to prevent Base Erosion and Profit Shifting (BEPS)
TAX ALERT |
On June 7, 2017, Canada was among more than 70 other countries that voted to sign the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (the MLI). The MLI allows countries to advance their existing treaty to meet the minimum standards of the Base Erosion and Profit Shifting (BEPS) project in the areas of treaty abuse and dispute resolution without having to entirely renegotiate the treaty.
Bilateral tax treaties and Tax Information Exchange Agreements (TIEAs) play an important role on the global tax stage. Canada is a partner in 90 bilateral tax treaties and 20 TIEAs plus another dozen or so in the negotiation stage. Without the MLI Canada would have to engage in separate talks with each partner to update the treaty or agreement which could take years to realize.
The MLI allows a treaty partner to side-steps the usual renegotiation complexity by:
- Having options developed that would allow the BEPS minimum standard for treaty abuse and dispute resolution: and
- Having agreed upon language for every provision needed to apply the options.
Once Canada signed the MLI, Canada had to indicate which option it would apply to meet the minimum BEPS standard. The choice, however, will not bind Canada from choosing an alternative option when the treaty was officially renegotiated.
The principal purpose test
In order to contend with treaty abuse, Canada chose to use the principal purpose test, which analyzes whether one of the principal purposes of a transaction is to garner benefits which circumvents the original purpose of the treaty. As each treaty is negotiated anew, Canada has said it plans to include a limitation of benefits provision, as in the Canada-U.S. tax treaty.
Organizations with multinational operations would benefit from a review of all complex cross-border transactions to ensure the purpose isn’t solely to secure tax benefits.
The Department of Finance has said the earliest date the MLI would come into effect is January 1, 2019.
Once Canada and its relevant partner ratify the MLI, a list of more than 75 bilateral treaties will be affected. Absent from that list are trading partners Germany, Switzerland and the U.S. The European treaties are currently being renegotiated, while the U.S. treaty already meets the standards laid out by BEPS.
The MLI process provides a model for governments and national tax bodies to advance tax treaty updates without the need for time-consuming renegotiations. This process creates more agility as well as more rapid response time when loopholes arise.
Over the next two years, we recommend multinational organizations revisit their operational structures and transactions. If any of these fail to meet the principal purpose test, steps need to be taken to bring these structures back into the fold.