UK tax treaty anti tax avoidance changes to apply from 2019

This is as a result of the UK depositing its instrument ratifying the multilateral instrument to amend tax treaties (the MLI) with the Organisation for Economic Cooperation and Development (OECD) last week.

The MLI is designed to change thousands of double tax treaties without each treaty having to be separately amended. The changes are to implement the OECD's recommendations from its base erosion and profit shifting (BEPS) project to tackle international tax avoidance and relate to hybrid mismatches, treaty abuse, artificial avoidance of permanent establishments and improving dispute resolution.

"For most of the UK's double tax treaties, the treaty abuse measures and the measures to improve dispute resolution are going to be most significant. Anyone with arrangements which rely on treaty relief should be considering the impact of the MLI changes now as income flows could be affected next year if treaty relief is denied and restructuring may be necessary," said Jeremy Webster, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

For the UK the MLI enters into force on 1 October, but it will not apply to individual tax treaties until next year at the earliest. It will only enter into force in relation to a particular treaty three months after both parties to the treaty have ratified the MLI and opted for it to apply to the treaty in question. Even then the provisions will take effect from slightly later dates. For withholding purposes, it is from the beginning of the calendar year after the MLI comes into force for each of the parties to the relevant treaty and for other taxes it will generally be the beginning of the next fiscal year – in the UK's case, 1 April for companies and 6 April for individuals.

The MLI does not amend the text of an affected treaty, instead it provides that the treaty should be interpreted in accordance with the MLI. Applying the MLI to a particular treaty will be complex, according to Jeremy Webster, as not all the OECD recommendations are minimum standards which each country must agree to. Some recommendations also have a range of possible options and each country has to decide which option it will adopt in its treaties. The MLI sets out the implications for an individual treaty if the parties do not choose the same options.

The OECD is developing an online 'matching database' to assist with this process. The UK has said it will provide amended versions of its treaties, showing how they will be affected by the MLI.

In order to tackle treaty abuse, the UK has chosen to adopt a principal purpose test in its treaties.  This will deny treaty benefits where it is reasonable to conclude, having regard to all the facts and circumstances, that one of the principal purposes of the arrangement was to obtain the benefits of the treaty.

"The application of a principal purpose test is likely to cause uncertainty, as we have seen in relation to the many 'main purpose' tests in UK domestic legislation.  A tax authority's view of what it is 'reasonable to conclude' is likely to be wider than that of the taxpayer and disputes are likely," Jeremy Webster said.

In relation to the resolution of tax treaty disputes, the MLI revises the mutual agreement procedure (MAP) wording in treaties and it enables states, if they choose, to incorporate provisions for mandatory binding arbitration (MBA) of treaty disputes. The UK has opted for MBA in its treaties which do not already include such provisions. However, MBA will only apply to treaties where the other party has opted for it. 

"International businesses will be hoping that the MLI changes lead to a speedier resolution of disputes between tax authorities and that this reduces the number of instances where they suffer double taxation because neither tax authority is willing to give up the tax revenue," said Jeremy Webster.

In June 2017, 68 jurisdictions signed the MLI. Since then further jurisdictions have signed, with Estonia, Kazakhstan, Peru and the United Arab emirates signing at the end of last month, bringing the number of jurisdictions to be covered to 82. So far the countries which have deposited their instruments of ratification are Austria, Isle of Man, Jersey, New Zealand, Poland, Serbia, Slovenia, Sweden and the UK.