Chapter 3 - How the multilateral instrument provisions will address BEPS concerns
3.1 As discussed in chapter 2, the MLI’s substantive provisions fall into two categories: minimum standards and optional provisions. These provisions to address BEPS concerns in four key areas, which are summarised at a high level in the table below. Generally speaking, New Zealand intends to adopt the minimum standards and optional provisions.
3.2 Further detail of each provision and New Zealand’s approach is provided in the table in the appendix.
|Substantive BEPS provisions||Minimum standard?|
|Preventing the granting of treaty benefits in inappropriate circumstances (for example, treaty shopping)
This will be achieved primarily by inserting a “principal purpose test” (PPT) or equivalent provision into Covered Tax Agreements.
The PPT is a treaty anti-abuse rule similar to our domestic law general anti-avoidance rule (GAAR) and New Zealand intends to adopt the PPT. This corresponds to Action 6 of the BEPS Action Plan.
|Preventing the artificial avoidance of permanent establishment status
Unless a multinational’s activity in a jurisdiction reaches a sufficient threshold level known as a PE, that jurisdiction cannot tax any business profits made by that multinational.
If a multinational is able to avoid having a PE in a jurisdiction, then it can avoid paying tax on its profits in that jurisdiction. DTAs contain the definition of a PE and this needs to be strengthened to prevent entities structuring around it.
This corresponds to Action 7 of the BEPS Action Plan.
|Neutralising the effects of hybrid mismatch entities
These arrangements allow multinationals to structure their commercial arrangements to pay little or no tax by arbitraging the different domestic law treatment of certain instruments and entities between jurisdictions.
For example, one jurisdiction may see income as being derived by a partnership as an entity, whereas another jurisdiction may treat that income as being derived directly by the underlying partners (that is, they disregard or look-through the partnership).
The changes implemented through the MLI complement the domestic law changes outlined in the recently released officials’ issues paper on hybrid mismatch arrangements. This corresponds to Action 2 of the BEPS Action Plan.
|Providing improved mechanisms for effective dispute resolution
This is a taxpayer-friendly measure allowing for mandatory binding arbitration of disagreements between competent authorities (CAs). It recognises the fact that measures to counter BEPS should not lead to unnecessary uncertainty for compliant taxpayers and to unintended double taxation. Improving dispute resolution mechanisms is therefore an integral component of the work on BEPS issues.
The changes in the MLI will improve the MAP – which allows taxpayers to ask the CAs of each treaty partner to agree the correct interpretation and application of a DTA in a particular case – and will also allow the taxpayer to refer the case to an independent arbitrator (or panel of arbitrators) if the CAs cannot agree on the correct treaty position. This corresponds to Action 14 of the BEPS Action Plan.
(in respect of MAP only, arbitration is optional