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The Multilateral Convention: Ireland’s Approach

  • Ireland
  • General

05-07-2017

The Multilateral Convention: Ireland’s Approach

On 7 June 2017, Ireland was one of 68 countries to sign the Multilateral Convention, which provides a mechanism to transpose the new provisions agreed under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project into such countries’ existing double tax treaties (“DTTs”), without the need to re-negotiate each DTT. BEPS is a series of recommendations for international tax changes in order to combat aggressive tax planning and reduce opportunities for tax avoidance by multinational corporations.

The Effect of the Multilateral Convention

The Multilateral Convention permits the amendment of existing DTTs, by way of one streamlined legislative process. It represents a significant development in international tax law because it is the first time a multilateral convention has been agreed upon to update existing DTTs. Essentially the Multilateral Convention will enable Ireland to amend up to 71 of its 72 effective DTTs, constituting “Covered Tax Agreements”, to ensure that they are BEPS compliant without having to re-negotiate such DTTs. It has been bilaterally agreed that the existing DTT between Ireland and the Netherlands will be excluded from the Multilateral Convention because that DTT is currently being re-negotiated.

When will the changes become Effective?

The date from which these changes will take effect is not yet known. In order for the Multilateral Convention to enter into force it must be ratified by at least five countries, which will be followed by a three month waiting period. Of note, the Multilateral Convention can only apply between two countries where both countries have ratified it, which is followed by a three month waiting period before the changes made under the Multilateral Convention to amend a particular DTT will become operative.

Presently, while the timing of the Multilateral Convention’s entry into force in Ireland is unknown, the earliest date from which amendments are likely to apply is 1 January 2019.

Opt in / Opt out

The final text of the Multilateral Convention provides an option for countries to opt in or out of certain Articles. This option was provided to allow for a certain degree of flexibility so as to encourage signature by as many countries as possible. The changes to the DTTs are dependent upon both countries, to each relevant DTT, adopting the same changes under the Multilateral Convention (i.e. a change can only be made if it has been adopted by both parties). If Ireland adopts a change under the Multilateral Convention and the DTT partner does not (or vice versa), the relevant DTT will not be updated.

While the Irish Government has issued guidance on its planned approach to the Multilateral Convention, this is dependent on the relevant DTT partner countries opting in and out of the same Articles. In that regard, the changes that will take effect will not be clear until the relevant treaty parties have ratified the Multilateral Convention into their domestic law. This gives companies that are engaged in cross border activities and multinational groups time to identify the DTT provisions they currently rely on and put systems into place to deal with the potential changes.

Important Changes for Ireland

The following are some of the more important changes that will be implemented by Ireland:

  1. the inclusion of a tie-breaker test for determining tax residence for dual resident entities;
  2. the adoption of a Principal Purpose Test (“PPT”) which will introduce a general anti-avoidance clause aimed at preventing treaty abuse; and
  3. the implementation of several measures related to improving dispute resolution, such as the mutual agreement procedure, more efficient corresponding adjustments mechanism and mandatory binding arbitration to ensure disputes are resolved.

Ireland will opt out of several Articles such as:

  1. Article 5 (application of methods for elimination of double taxation) which relates to methods to address problems where a country uses the exemption method to relieve foreign tax;
  2. Article 10 (anti-abuse rule for permanent establishments situated in third jurisdictions) which provides antiavoidance rules to target certain arrangements where
    foreign branch profits are exempt from tax; and 
  3. Article 12 (artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies) which introduces a new test for when an agent can constitute a permanent establishment (i.e. a taxable presence). Foreign companies that engage in trading activity in Ireland or Irish companies that engage in trading activities in other jurisdictions that adopt Article 12 will need to carefully consider the Multilateral Convention provisions on taxable presence.

Practical Implications

The Multilateral Convention is a novel, but significant amendment to international tax treaty law. One of the practical implications of the Multilateral Convention is that most DTT reliefs that presently exist in Ireland will continue to be available after the Multilateral Convention becomes effective. For example, outbound payments, including interest and dividends, will not be significantly affected because of the ability to make payments gross from Ireland is typically due to reliance on domestic exemptions, rather than DTT based exemptions.

However, as a result of the impending implementation of the Multilateral Convention in Ireland, it is advised that taxpayers should:

a) review the DTT reliefs they currently avail of; and
b) following this review, they should determine in light of the Multilateral Convention what, if any, revisions should be made to their structures.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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