The multilateral instrument:
the most important tax treaty in the world?

On 7 June 2017, Belgium and 70 other countries signed the so-called multilateral instrument (MLI), which brings about an adjustment of the tax treaties of the signatories.

What is it about?

In response to the recent tax scandals (Luxleaks, Panama Papers, Google, Amazon, etc.), the OECD developed an action plan to counter of tax base erosion and artificial profit shifts; the so-called BEPS or Base Erosion and Profit Shifting action plan.

Some companies are (or were) specifically looking for loopholes in tax treaties for double non-tax situations.  The typical example is the PPL (or Profit Participating Loan): the interest on profit-sharing loans is deductible in Belgium, whereas in Luxembourg it can be regarded as an untaxed dividend as a result of which the company does not pay tax, neither in Belgium nor in Luxembourg.

To put these action points into practice, countries must implement certain changes to their tax treaties.  If you know that it took around 12 years before the Netherlands and the United States reached an agreement on a new tax treaty, it was necessary to find a better and faster way to adjust tax treaties.

On 7 June 2017, around 70 countries simultaneously signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS or in short MLI.  The MLI allows involved countries to adjust their tax treaties in an efficient and time-saving manner.  The MLI will have an impact on over 3,000 tax treaties worldwide, saving at least 30 years of negotiations.

Why?

The aim of the MLI is to “automate” the implementation of the BEPS provisions in existing double tax treaties, but only in those cases where the two treaty states accept the requested amendment or the adjustment as included in the MLI.

How is it done?

The MLI contains a number of provisions (minimum standards) that must be introduced (e.g. anti-abuse rules).

The remaining articles of the MLI are only “recommendations”.  It is not mandatory to include these recommendations in the existing double taxation treaties (“DTTs”).  We are talking about:

• hybrid entities;
• double residence of legal persons;
• methods for avoiding double taxation on dividend transactions;
• capital gains on shares of real estate companies;
• anti-abuse provision for permanent establishments located in third countries; and
• measures to combat the evasion of the permanent establishment status

The fact that Belgium is signing the MLI does not mean that all Belgian DTTs are automatically adjusted.  The rule of symmetry applies here, which means that a provision in a DTT will only be changed if both parties have included this provision in the MLI.

US are not joining

The US will not be not a party in the MLI because they fear that the MLI will lead to a higher non-US tax.  As the US has a credit system, i.e. that the foreign tax can be set off against the US tax, they are not keen on extra foreign taxes. You will understand that the IRS was not very happy with the 13 billion EUR fine imposed by the European Commission on Apple.

Belgium changes around 100 DTTs

Belgium chooses to change 98 DDTs.  Certain DTTs are not included in the Belgian list, such as Germany.

Ratification and implementation

The MLI does not take effect for Belgium until the MLI is ratified by the different parliaments in Belgium.  As for the other countries, the MLI is only applicable if the other country is a party to the MLI, if the other country has ratified the MLI and to the extent that there is agreement on the chosen options.  The MLI takes effect on the first day following a three-month period after the last ratification of the MLI. For the DDT, this leads to the following:

• withholding taxes: 1 January following the year of coming into force;
• other taxes: 6 months after the first taxable period.

If you do business internationally, you have every interest in keeping up with and keeping close tabs on the development of the MLI.

Frank De Langhe – Hans Decleir

Publised in VOKA – “Ondernemers Oost-Vlaanderen” edition 10, 1 December 2017