It has now been two years since Australia, along with many other nations, signed “The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” (often referred to as the multilateral instrument or MLI).
With the MLI now in force for Australia’s income tax treaties, taxpayers need to consider how the adoption of the MLI is affecting the network of Australia’s tax treaties. The implications of the MLI on a particular treaty will require a careful understanding of both Australia and the treaty partner’s positions in relation to the MLI.
MLI key points
The MLI allows jurisdictions to swiftly modify their tax treaties with the aim of reducing multinational tax avoidance and is a key component of the OECD’s base erosion and profit shifting (BEPS) project.
Australia signed the MLI on 7 June 2017 and, following ratification on 26 September 2018, the MLI entered into force for Australia from 1 January 2019.
Ratification by Australia, though, is only the first step in the MLI applying to an income tax treaty. In order for the MLI to modify a particular tax treaty, both Australia and the relevant treaty partner need to identify that treaty as a “covered tax agreement” (CTA). Australia has identified all of its current tax treaties, apart from the tax treaty with Germany, as CTAs to which it wants to apply the MLI (the reason the treaty with Germany has not been identified as a CTA is because it was already “BEPS compliant” and therefore was not seen as requiring any further modification under the MLI).
However, many of Australia’s treaty partner countries either have not signed the MLI or, even if they have signed it, have not yet ratified the MLI—meaning that the implications of the MLI on Australia’s treaties continues to evolve. Furthermore, while some of articles within the MLI are mandatory, most are optional. Thus, each treaty in Australia’s network of tax treaties may be affected differently depending on the positions of both of the treaty parties.
For example, although Australia’s treaties with both New Zealand and the United Kingdom have been modified by the MLI, only New Zealand and Australia have both ratified Article 8 (regarding dividend transfer transactions); therefore, the Australia-New Zealand income tax treaty has been modified by Article 8 of the MLI. Conversely, as the United Kingdom has not ratified this particular article (even though Australia has), that article of the MLI will not apply to Australia’s treaty with the United Kingdom.
Finally, each country may make reservations in relation to the MLI that can modify how the standard OECD MLI clauses will apply to their CTAs. Australia has made several such reservations to the MLI clauses, so these will also need to be reconciled with the position of its treaty partners.
Read a June 2019 report prepared by the KPMG member firm in Australia
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