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Multilateral Instrument

Department of Finance announces Irish positions

Department of Finance outlines Ireland’s approach to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS)

On 2 June the Department of Finance issued its position document in connection with the ‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS’ which the Minister for Finance, Michael Noonan T.D. will sign on Ireland’s behalf on June 7 next. The OECD BEPS project made recommendations for international tax changes and the Multilateral Convention provides a mechanism for countries to transpose these recommendations into their existing double tax treaties while providing for options in certain areas.

Ireland has 72 tax treaties and the Multilateral Convention will enable Ireland to update the majority of these treaties to ensure they comply with the BEPS recommendations without the need for separate bilateral negotiations. Ireland will include 71 tax treaties as being covered by the Convention. The Department notes that it has been agreed to exclude one existing treaty which is currently being renegotiated (the US tax treaty).  It is possible that other treaties may be excluded before ratification of the Multilateral Convention.

In signing up to the Multilateral Convention, countries will indicate their provisional approach to the options provided for in the Multilateral Convention. The OECD will publish these lists on their website following the signing ceremony. 

Outlined below is a high level summary of the approach Ireland intends to adopt (i.e. excluding reservations) in implementing the Multilateral Convention. The Department of Finance’s Technical Briefing Note can be read here.  The text of the Multilateral Convention and a detailed explanatory statement are available on the OECD’s website here

BEPS Action 2 – Hybrid Mismatch Arrangements Provision in the Convention


Provision in the Convention Ireland’s approach Department of Finance Commentary
Article 3 - Transparent Entities Adopt Article 3 Article 3(1) introduces a useful provision to ensure a consistent tax treatment when countries differently classify entities as being transparent or opaque.
Article 4 – Dual Resident Entities Adopt Ireland intends to adopt the new best practice rule in Article 4 on determining tax residence for dual resident entities.
Our thoughts 

Ireland will adopt Article 3, which implements aspects of the BEPS Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements) report and BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) report. Article 3 is concerned with income earned through transparent entities. For the purposes of the Convention, where income is derived by an entity which is treated as a wholly or partly transparent entity under the tax law of either Contracting State, that income will be considered to be income of a resident of a Contracting State, to the extent that such income is treated for tax purposes as income of a resident of that State. This is in accordance with the principles of the OECD Partnership Report. This should ensure that the benefits of tax treaties are granted in appropriate cases, but that these benefits are not granted where neither Contracting State treats the income of an entity as the income of one of its residents under its domestic law.

Where an entity is dual resident then, in general, the current tax treaty approach would allow for determination of residence by reference to its location of effective management and control. The Multilateral Convention approach allows the competent authorities of the Contracting Jurisdictions to determine by mutual agreement the state of residence for tax treaty purposes having regard to various features comprising the entity’s place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement that entity shall not be entitled to treaty benefits except to the extent agreed upon by the competent authorities. This may delay determination of treaty benefits for taxpayers.

BEPS Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Provision in the Convention


Provision in the Convention Ireland’s approach Department of Finance Commentary
Article 6 – Purpose of a Covered Tax Agreement Adopt Article 6 introduces a new Preamble into tax treaties to confirm that the intention of such treaties is to prevent double taxation while not facilitating double non-taxation or reduced taxation. Ireland intends to adopt this article, as it is a minimum standard.
Article 7 – Prevention of Treaty Abuse (This is a minimum standard) Adopt Principal Purpose Test Ireland intends to adopt the Principal Purpose Test (PPT) provided for in Article 7. This will introduce this general anti-avoidance clause into any treaty where the treaty partner also chooses the PPT option.
Article 8 – Dividend Transfer Transactions Adopt Ireland intends to adopt the anti-avoidance rule in Article 8 providing a minimum holding period to be met before certain reduced rates on dividends are available.
Article 9 – Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property Adopt Ireland intends to adopt the anti-avoidance rule in Article 9 which is designed to prevent companies from artificially avoiding capital gains tax on the sale of real property.
Our thoughts 

It was understood that Ireland would adopt a Principal Purpose Test (PPT) as opposed to any form of Limitations On Benefits (LOB) article. The LOB has been the preferred approach of the United States in its double tax treaties and is contained in the model tax treaty currently used as the subject of the US-Ireland treaty renegotiation process which is ongoing. As noted by the Department, this PPT is a form of general anti-avoidance rule within the treaty itself. In brief it notes that “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement”. Ireland has a domestic general anti-avoidance rule as part of TCA97 s811C and the above is similar in its nature for treaty purposes.

The Convention goes on to outline certain forms of specific anti-avoidance in articles 8 to 11 but Ireland has only adopted articles 8 and 9. Article 8 looks at dividends. Generally, Ireland’s treaties do not impose a holding period in order to access reduced tax rates on dividends where certain ownership requirements are met, generally a particular percentage of the paying company’s capital. This reduced rate shall apply only if the ownership conditions described in the treaty provisions are met throughout a 365 day period that includes the day of the payment of the dividends. This will require additional scrutiny of dividends paid between entities resident in the Multilateral Convention countries.

Article 9 deals with treaty provisions which provide that gains derived by a resident of treaty state from disposing of shares or other rights may be taxed in the other treaty country where these shares and rights derive more than a certain part of their value from immovable property. The article states that these provisions shall apply if the relevant value threshold is met at any time during the 365 days preceding the disposal. Irish domestic law subjects a non-resident to capital gains tax on the disposal of shares that derive the greater part of their value from Irish land. This anti-avoidance provision in the Multilateral Convention is designed to prevent companies from artificially avoiding capital gains tax on the sale of real property by allowing the authorities a form of look back rule prior to the disposal.

BEPS Action 7 – Artificial Avoidance of Permanent Establishment Status

Provision in the Convention Ireland’s approach Department of Finance Commentary
Article 13 – Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions Adopt Option B and the Anti-fragmentation rule Article 13 provides two options to clarify how certain exemptions from the permanent establishment test are to be interpreted. Option B is consistent with Ireland’s longstanding interpretation of the provisions and Ireland intends to adopt this option. Ireland intends to also adopt the anti-fragmentation rule in Article 13(4) which is designed to prevent corporate groups from fragmenting a cohesive operating business into several small operations in order to avail of these exemptions.
Article 14 – Splitting-up of Contracts Adopt Ireland intends to adopt the anti-avoidance rule in Article 14 which is designed to prevent contractual arrangements being done in a manner which artificially prevents a long standing building site from being classified as a permanent establishment.
Article 15 – Definition of a Person Closely Related to an Enterprise Adopt Article 15 introduces a definition for the term “person closely related to an enterprise”. Ireland intends to adopt this Article as the definition is relevant for the interpretation for Articles 13 and 14.
Our thoughts  

Critically, Article 12 of the Convention sought to introduce a new test for when an agent can constitute a permanent establishment (i.e. a taxable presence) in a particular country and particularly through Commissionaire Arrangements and similar strategies. Specifically Article 12 can apply where a person is acting in a Contracting Jurisdiction on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.
The Department has noted that work is still underway at OECD level to determine what profits, if any, would be attributable to new permanent establishment created under this new test and that “Ireland intends to reserve on Article 12 due to the continuing significant uncertainty as to how the test would be applied in practice”.

Article 13 addresses the artificial avoidance of PE status through the specific activity exemptions, which are contained in most tax treaties. The effect of applying Option B (which is the Department of Finance’s preference) would be to preserve the exceptions for activities described in existing tax treaties, and to ensure that those exceptions will apply irrespective of whether the activity is of a preparatory or auxiliary character. However an exception is provided to preserve existing provisions of a tax treaty that explicitly provide that a specific activity shall be deemed not to constitute a PE provided that the activity is of a preparatory or auxiliary character. Article 13 also contains a rule to prevent fragmentation of activities by a foreign resident enterprise itself or with related entities, where the business activities constitute complementary functions that are part of a cohesive business operation.
The Action 7 BEPS Report noted that the splitting-up of contracts was a potential strategy for the artificial avoidance of PE status through abuse of the exception dealing with long duration construction contracts. The Action 7 Report includes a provision specifically addressing the splitting-up of contracts for use in treaties that would not include the PPT, or for Contracting Jurisdictions that wished to address such abuses explicitly. Article 14 of the Convention provides for the implementation of that provision.

BEPS Action 14 – Improving Dispute Resolutions

Provision in the Convention Ireland’s approach Department of Finance Commentary
Article 16 – Mutual Agreement Procedure Adopt Article 16 sets out standard time limits and procedural rules for how disputes under tax treaties should be dealt with. Ireland intends to adopt this Article. This is a minimum standard.
Article 17 – Corresponding Adjustments Adopt Article 17 provides for countries to unilaterally adjust the amount of tax paid by a taxpayer in certain cases. It is intended to provide a more efficient mechanism to resolve certain disputes, and Ireland intends to adopt this article.
Articles 18 – 26 (Part VI) - Arbitration Articles 18 – 26 (Part VI) - Arbitration

Part VI deals with mandatory binding arbitration. Countries must first decide whether to opt into Part VI at all and, if they do, they must adopt or reserve on a number of articles dealing with how arbitration would work.

Ireland intends to opt into Part VI as mandatory binding arbitration provides an important mechanism for ensuring disputes are resolved and that double taxation does not arise. Within the various articles, Ireland is open to the type of arbitration that is used. Ireland generally supports arbitration being available wherever possible except where:

• the issue has been decided by a Court,

• the case involves domestic anti-abuse rules, or

• the taxpayer may be liable to penalties as a result of “deliberate behaviour”.  

Our thoughts

Articles 16 and 17 of the Multilateral Convention are concerned with dispute resolution and look at the Mutual agreement procedure and corresponding adjustments respectively. They implement elements of BEPS Action 14, which according to that report are designed to ensure that the actions to counter BEPS must be complemented with actions that ensure certainty and predictability for businesses.

Ireland will sign up to Part VI Mandatory Binding Arbitration. The rules will apply only if both parties to a treaty opt in.  Unlike in most other areas of the Convention where reservations are standardized, parties are free to determine the scope of cases that will be eligible for arbitration (subject to acceptance by the other relevant parties).  Typically a taxpayer can request arbitration where a case has been subject to a MAP for at least two years without resolution. The arbitration panel will comprise of three arbitrators: the competent authorities have one nomination each with a chair from a third jurisdiction appointed by the other two arbitrators.

Two different types of decision-making processes are facilitated: “final offer” rules, whereby each competent authority presents its own proposed resolutions and the arbitrators choose their preferred outcome; and the “independent opinion” approach, which results in a decision written by the arbitrators based on their analysis of the information provided. If jurisdictions have mandated different default approaches, arbitration cannot proceed until the competent authorities can agree on an approach. 

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