Ireland's Double Tax Treaties to be Amended Under Unprecedented MLI

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Ireland's Double Tax Treaties to be Amended Under Unprecedented MLIIt’s very innovative, it’s new and it’s unprecedented” is how Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD,

described the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”). Ireland along with 67 other countries signed the MLI on 7 June 2017. As indicated by Pascal Saint-Amans, this is an important development in international tax. It is the first time a multilateral convention has been agreed to update a series of bilateral treaties.

The effect of the MLI will be to incorporate new provisions agreed under the base erosion and profit shifting (“BEPS”) project into many of Ireland’s double tax treaties (“DTTs”). The key changes to Ireland’s DTTs that will be made under the MLI are:

  • adoption of a principal purpose test (“PPT”);
  • adoption of a tie-breaker test based on mutual agreement to determine tax residence for dual resident entities; and
  • adoption of a number of measures, including mandatory binding arbitration, to resolve DTT disputes more efficiently.

Although it is unclear at this stage when the changes will apply from, the very earliest date from which the changes are likely to apply is 1 January 2019.

Perhaps of most interest, are Ireland’s reservations to the MLI.  Ireland will not:

  • adopt the changes to the permanent establishment (“PE”) definition designed to treat commissionaires as PEs;
  • adopt the narrower specific activity exemptions within the PE definition.

What Irish DTTs will be affected by the MLI?

Ireland has agreed 73 DTTs (of which 72 are in effect). Ireland has confirmed that it will treat 71 of those DTTs as ‘Covered Tax Agreements’. If the DTT partner also opts to treat the Irish DTT as a ‘Covered Tax Agreement’, that DTT will be amended by the MLI.  If a DTT partner does not sign the MLI (the current US position) or does sign the MLI but does not opt to treat the Irish DTT as a ‘Covered Tax Agreement’ (the current Swiss position), no amendments will be made to that DTT under the MLI.

It has been bilaterally agreed not to include the Ireland / Netherlands DTT as a ‘Covered Tax Agreement’ as that DTT is currently being renegotiated.

A complete list of Ireland’s DTTs is available here along with confirmation of which countries have indicated that they will treat the Irish DTT as a ‘Covered Tax Agreement’.

What happens if Ireland adopts a change under the MLI and the DTT partner does not?

In that case, the DTT will not be updated.  In order for a change to be effective, both countries must adopt the change under the MLI.

When will the changes become effective?

That depends. A number of criteria must be satisfied under the MLI before the changes can take effect. First, a minimum number of countries must ratify the MLI before it can enter into force and a three month waiting period must expire.  Next, once both countries have ratified the MLI a further three month waiting period must expire before the MLI can enter into force between those two countries.

In addition, once the MLI enters into force a further waiting period must expire before the changes made under the MLI become effective to amend a DTT. Those waiting periods differ for withholding tax provisions and all other provisions:

  • the changes become effective for withholding tax provisions on the first day of the calendar year that begins after the MLI enters into force between two countries – at the very earliest, this would be 1 January 2019 for Ireland’s DTTs; and
  • the changes become effective for all other provisions for taxable periods beginning on or after the expiration of six months after the date the MLI enters into force between two countries – at the very earliest, this would be taxable periods beginning on or after 1 October 2018.

What should taxpayers do now?

Taxpayers that claim relief under any of Ireland’s DTTs should review the treatment in light of the MLI.  Most reliefs will continue to be available after the MLI becomes effective, however, it is a good idea to confirm that position sooner rather than later.

Additional detail on the Irish position on the MLI is available here.  If you would like to discuss any aspect of the MLI, or how it applies to your institution or transactions, please speak to your usual Matheson contact or any of our Tax Partners listed below.

By Catherine O’Meara, Joe Duffy of Matheson