MLI Big Picture Changes Update 2.0

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The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) is a multilateral treaty created by the Organization for Economic Co-operation and Development (“OECD”). The MLI modifies bilateral tax treaties between participating jurisdictions to implement international tax rules, and to lessen the opportunity for tax avoidance by multinational enterprises.

The MLI was released on November 24, 2016, and it already covers 94 jurisdictions.[1] Notably, the United States did not sign the MLI.

On June 7, 2017, Canada signed the MLI. On May 28, 2018, Canada introduced a Notice of Ways and Means Motion[2] to introduce an Act to implement the MLI in Canadian law. Within a month, on June 20, 2018, Bill C-82,[3] called Multilateral Instrument in Respect of Tax Conventions Act, was introduced. On June 21, 2019, Bill C-82 received Royal Assent,[4] and on August 29, 2019, Canada deposited its instrument of ratification with the MLI depository.[5]

When Canada signed the MLI, it listed 75 of its 93 tax treaties as Covered Tax Agreements.[6] Upon ratification of the MLI, Canada expanded the list to 84 Covered Tax Agreements[7] which are affected by the MLI or which will be affected by the MLI if the relevant Covered Tax Agreement partner also ratifies the MLI under its respective domestic laws. Some of the tax treaties that are not in the list, apart from the US, include Canada’s tax treaties with Switzerland and Germany, presumably because Canada is currently holding bilateral treaty negotiations with these treaty countries.

The MLI entered into force for Canada on December 1, 2019.[8] For Canada’s Covered Tax Agreements with countries that have also caused the MLI to come into force on or before December 1, 2019, including the United Kingdom, Australia, the Netherlands, Luxembourg, Ireland, India, Russia, Ukraine, Singapore, and the United Arab Emirates,[9] the MLI (a) entered into effect for withholding taxes on January 1, 2020, and (b) will enter into effect, for other taxes, for tax years beginning on or after June 1, 2020.

For Canada’s Covered Tax Agreements with countries that have not yet caused the MLI to come into force, the MLI will enter into force for a counterparty on the first day of the month beginning three months after the relevant treaty partner completes its notification to the OECD, and it will enter into effect for (a) withholding taxes, on the first day of the next calendar year, and (b) for other taxes, for tax years beginning six months after the MLI enters into force for the counterparty.[10]

Every participating jurisdiction was required to sign on to the minimum standard provisions in respect of the prevention of treaty abuse and to improve dispute resolution mechanisms.[11]

To address the situations of treaty abuse, the participating countries had an option to adopt a principal purpose test (“PPT”) or a PPT supplemented with a simplified limitation on benefits provision (“LOB”). The PPT disallows a treaty benefit where obtaining the benefit was one of the principal purposes of effecting a particular transaction or arrangement, unless granting the benefit would be in accordance with the object and purpose of the provisions of the treaty. Canada opted for the PPT as a substantive technical rule. In the long term, however, Canada, where appropriate, will seek to negotiate, on bilateral basis, a detailed LOB.[12]

Aside from these minimum standard provisions, participating jurisdictions were able to opt in or opt out of various other provisions. When Canada signed the MLI, it provided a provisional list of reservations regarding the optional provisions.

On May 28, 2018, Canada expressed its intention to modify its list of reservations to remove reservations on some of the optional provisions dealing with dividends (Article 8), capital gains (Article 9), dual residency tie-breaker rules (Article 4) and relief from double taxation (Article 5). In particular, Canada proposed to:

  • adopt a 365-day holding period for shares of Canadian subsidiaries held by foreign corporate shareholders for such shareholder to be entitled to the reduced withholding tax rate on dividends from its Canadian subsidiary. The changes in ownership resulting from a corporate reorganization will not be taken into account for the purposes of computing that period;
  • adopt a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests that derived their value principally from Canadian immovable property. Essentially, the MLI will deny the treaty benefit if this test is met at any time during such period preceding the disposition;
  • introduce an approach to resolve dual resident entity cases (other than of individuals); and
  • introduce a provision that will allow certain treaty jurisdictions to relieve double taxation by moving from an exemption system to a foreign tax credit system.[13]

Upon ratification of the MLI, Canada provided its definitive list of reservations and notifications[14] that was generally consistent with its earlier position. However, under Article 5(8), Canada reserved the right for the entirety of Article 5 not to apply for most of its current Covered Tax Agreements in respect of a provision that would allow treaty partners to move from an exemption system to a foreign tax credit system.

The overall impact that the specific provisions of the MLI will have on any particular Canada’s Covered Tax Treaty depends on the reservations and notifications provided by Canada and by the counterparty upon signature of the MLI and upon ratification of the MLI.  The OECD created the Multilateral Instrument Matching Database[15] that makes projections on how the MLI modifies a specific Covered Tax Agreement, based on the reservations and notifications of the two relevant jurisdictions.[16]

 

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[1] OECD, 94 “Signatories and Parties to the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion and Profit Shifting” (July 22, 2020), online: OECD <https://www.oecd.org/ctp/treaties/beps-mli-signatories-and-parties.pdf>.

[2] Canada, Department of Finance, “Notice of Ways and Means Motion to Introduce an Act to Implement a Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion And Profit Shifting” (May 2018), online: Department of Finance: <https://fin.canada.ca/drleg-apl/2018/adtpfe-edipef-bil.pdf>.

[3]  Parliament of Canada, Bill C-82, online: Parliament of Canada:  <http://www.parl.ca/DocumentViewer/en/42-1/bill/C-82/first-reading#itemSUMMARY>.

[4] Parliament of Canada, House Government Bill, online: Parliament of Canada <https://www.parl.ca/legisinfo/BillDetails.aspx?billId=9898204&Language=E>.

[5] Canada, Department of Finance, “Canada Ratifies the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (August 29, 2019): online: Department of Finance  <https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/notices/2019/canada-ratifies-multilateral-convention-prevent-base-erosion-profit-shifting.html>.

[6] Department of Foreign Affairs, “Trade and Development, Status of List of Reservations and Notifications at the Time of Signature” (May 30, 2017), online: OECD <http://www.oecd.org/tax/treaties/beps-mli-position-canada.pdf>.

[7] OECD, “Canada Status of List of Reservations and Notifications upon Deposit of the Instrument of Ratification” (August 29, 2019), online: OECD <http://www.oecd.org/tax/treaties/beps-mli-position-canada-instrument-deposit.pdf>.

[8] Supra note 5.

[9] Supra note 1.

[10] OECD, Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting at paras 322-327, online: OECD <https://www.oecd.org/tax/treaties/explanatory-statement-multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf>.

[11]  Canada, Department of Finance, Backgrounder: The Next Step in the Fight Against Aggressive International Tax Avoidance (May 28, 2018): online: <Department of Finance  <https://www.canada.ca/en/department-finance/news/2018/05/backgrounder-the-next-step-in-the-fight-against-aggressive-international-tax-avoidance.html>.

[12] Canada, Department of Finance, Backgrounder: Impact of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (June 7, 2017), online: Department of Finance <https://www.canada.ca/en/department-finance/news/2017/06/backgrounder_impactofmultilateralconventiontoimplementtaxtreatyr.html>.

[13] Supra note 11.

[14] Supra note 7.

[15] OECD, “MLI Matching Database (beta)”, online: OECD <http://www.oecd.org/tax/treaties/mli-matching-database.htm>.

[16] OECD, “The Manual for Multilateral Instrument Matching Database”, online: OECD <http://www.oecd.org/tax/treaties/MLI-database-disclaimer-and-manual.pdf>.

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