Australia Embraces Innovative Multilateral Tax Treaty

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

The Australian government is almost certain to sign on to many of the specific provisions in a ground-breaking multilateral tax treaty—the final piece of the OECD’s sweeping plan to combat tax base erosion and profit shifting—at the ceremony scheduled in Paris the week of June 5, 2017.

Although the Australian government is yet to make a final decision on adopting the multilateral instrument (MLI), “signing and adopting it to the widest possible extent possible would be consistent with Australia’s strong track record on tackling multinational tax avoidance,” Australia’s Treasury said in a detailed Dec. 19 consultation paper.

Treasury said Australia’s initial view is to adopt: the MLI’s article 7 principal purpose test (PPT) to prevent the granting of treaty benefits in inappropriate circumstances; article 12 on the artificial avoidance of permanent establishment (PE) status through commissionaire arrangements; article 13 on PE specific activity exemptions; article 14 on splitting up of contracts; article 16 on mutual agreement procedures; article 17 on corresponding transfer pricing adjustments; and the MLI articles on arbitration of competent authority disputes.

The Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting , adopted by 100 countries, allows nations to quickly adopt recommendations from the Organization for Economic Cooperation and Development’s BEPS treaty initiatives, most of which are aimed at curbing tax avoidance by large multinational companies. The OECD published the treaty, often referred to as the multilateral instrument, Nov. 24.

Treasury’s Dec. 19 consultation paper, “Australia’s adoption of the BEPS Convention (Multilateral Instrument),” said in Australia’s case the MLI would need to be legislated and then formally ratified. “As a result, if adopted, it is expected that the MLI could potentially take effect in Australia from 1 January 2019 (for rules relating to withholding taxes) and 1 July 2019 (for rules relating to other taxes), subject to its ratification by Australia’s treaty partners.”

Treasury said some jurisdictions will take longer to complete their domestic ratification processes for the MLI than others. As a result, the efffective dates for amending different Australian tax treaties are likely to be staggered.

Australian Approach

Treasury said the MLI provides Australia with a unique opportunity to safeguard Australia’s tax treaty network by adopting internationally agreed integrity rules. “Given that these rules are closely aligned with Australia’s current treaty practice, Australia could adopt the MLI to the widest possible extent.”

Treasury said Australia’s approach to the MLI is guided by three principles:

First, the government’s initial approach would be to apply the MLI to all of Australia’s bilateral tax treaties that do not already incorporate BEPS rules. Thus, Australia would not apply the MLI to the 2015 Australia-Germany tax treaty because that treaty already incorporates most of the BEPS treaty-related measures.

Second, Australia would adopt the minimum standards and as many optional MLI articles as possible. “Broad adoption of the MLI articles would enable the full range of tax integrity measures recommended under the BEPS Action Plan to be applied across Australia’s tax treaty network (subject to the agreement of the relevant treaty partner).”

Third, Australia would make limited use of the MLI reservation system. “Australia might consider entering a reservation if Australia’s existing treaty practice already meets or exceeds the new standard, or it is necessary to avoid any significant unintended impacts.”

For instance, it would be appropriate for Australia to enter a reservation if adopting the MLI article “could create technical difficulties, or if adopting the MLI article would inadvertently override existing integrity provisions that Australia should retain.”

Consultation

Treasury is asking interested parties to make submissions on the potential impacts of Australia becoming a party to the MLI. “The key focus of this consultation is to seek stakeholder input on the adoption choices that Australia should make if it becomes a Party to the MLI.”

The closing date for submissions is Feb. 6, 2017.

Interested parties may submit their comments online.

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

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