Ukraine signed the Multilateral Convention to implement BEPS
Tax & Legal Alert
24 July 2018
On 23 July 2018, Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Convention”). Already joined by more than 80 countries, the Multilateral Convention is open for additional signatories and is expected to be signed by a number of other jurisdictions.
The Multilateral Convention is one of the 15 Actions of the BEPS Action Plan - the project of the Organization for Economic Cooperation and Development (OECD) to develop measures to counter base erosion and profit shifting.
I. The scope of the Multilateral Convention
The Multilateral Convention is intended to automatically modify all existing bilateral treaties/conventions for the avoidance of double taxation (“bilateral tax treaties”) specified by the signatories to the Multilateral Convention (“contracting countries”) in their notifications to the Depository (OECD). This eliminates the need for bilateral negotiations on changes to the existing tax treaties between the countries.
Ukraine notified the OECD of its intention to update its 77 bilateral tax treaties, including those with Cyprus, the United Kingdom and the Netherlands.
A bilateral tax treaty will be subject to the provisions of the Multilateral Convention if the following conditions are met simultaneously:
- both contracting parties have ratified the Multilateral Convention;
- both contracting parties have notified the OECD of their willingness to modify the existing bilateral tax treaty through the Multilateral Convention.
The Multilateral Convention is expected to make changes to more than 2,000 bilateral tax treaties concluded between different countries worldwide.
II. The effects of the Multilateral Convention
The specific feature of the Multilateral Convention is that it allows making the same changes to the chosen bilateral tax treaties instead of all. It is flexible as it provides for the implementation of various versions of provisions (on a choice of contracting states) regulating the list of issues and enables to reject certain changes to the existing bilateral tax treaties.
Consequently, the effects of signing the Multilateral Convention may differ from treaty to treaty. In order to determine the impact of the Multilateral Convention on a specific bilateral tax treaty it is necessary to analyze the provisions (and their versions) accepted by each of the contracting countries for such treaty as well as whether both contracting states have notified the OECD about their intention to modify such treaty.
III. Key modifications accepted by Ukraine by signing the Multilateral Convention
1) The purpose of bilateral tax treaties
The wording of preambles of bilateral tax treaties will be amended to include the contracting countries’ intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in bilateral tax treaties for the benefit of residents of third states).
2) Prevention of tax treaty abuse (Principal Purpose Test)
Bilateral tax treaties will include an important rule aimed at preventing tax treaty abuse based on the Principal Purpose Test (“PPT”).
Under the PPT, if one of the principal purposes of transactions or arrangements is to obtain benefits under a tax treaty, these benefits will be denied.
In practical terms, this means that tax authorities may challenge the use of bilateral tax agreements by asking questions about the purpose of establishing a company abroad and the nature of making payments to such a company.
3) Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property
Usually bilateral tax treaties envisage that gains derived by a resident of a contracting country from the alienation of shares or other rights of participation in an entity may be taxed in the other contracting country provided that these shares or rights derived more than a certain part of their value from immovable property situated in that other contracting country (or provided that more than a certain part of the property of the entity consists of such immovable property.
Currently this rule shall apply if the relevant value threshold is met at any time during the 365 days preceding the alienation.
4) Permanent establishment
The Multilateral Convention introduces a number of changes concerning the cases of creating of a permanent establishment (e.g. splitting-up of contracts, changes in respect of activities that do not lead to a permanent establishment, anti-abuse rule for permanent establishments in third jurisdictions etc.).
5) Mutual agreement procedure
The Multilateral Convention includes measures to improve the procedure for resolving treaty-related disputes. If a taxpayer considers that the actions of one or both of the contracting countries result or may result in taxation not in accordance with the bilateral tax treaty, the procedure allows such taxpayer to request an inquiry by a competent authority of any of the contracting countries.
If the competent authority finds the taxpayer’s request to be justified but cannot decide on the matter at its own discretion, the case is to be resolved through the mutual agreement procedure involving the competent authority of the other contracting country.
IV. Entry into force
With respect to Ukraine the Multilateral Convention will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by Ukraine of its instrument of ratification. Ukraine has not ratified the Multilateral Convention yet.
Should you have any questions regarding the signing of the Multilateral Convention and its effects we will be glad to provide you with our professional advice.