Canada and Switzerland have both recently completed the domestic procedures that are necessary to bring about sweeping changes to their networks of double tax agreements — changes that are intended to tackle tax base erosion and profit shifting (BEPS).
Double tax agreements are agreed between jurisdictions to ease the tax burden on cross-border investments. They also aim to ensure that the same income is not taxed twice, by allocating taxing rights between jurisdictions. They may also include information exchange provisions and typically include provisions on the resolution of tax disputes through the Mutual Agreement Procedure.
The two countries have agreed to amend these double tax treaties in line with recommendations proposed by the OECD to reduce opportunities for BEPS, through signing up to the BEPS multilateral instrument (BEPS MLI).
The MLI will allow Canada and Switzerland to modify their existing tax treaties with other jurisdictions, and with each other, to include measures developed under the OECD/G20 BEPS project. The instrument will implement minimum standards to counter treaty abuse, prevent the artificial avoidance of permanent establishment status, neutralise the effects of hybrid mismatch arrangements, and improve dispute resolution mechanisms.
Canada has also decided to voluntarily adopt mandatory binding arbitration under the MLI. This will provide businesses with extra surety that their concerns about potential double taxation are conclusively remedied.
Importantly, double tax agreements amended by the MLI will include a new preamble and anti-avoidance provisions, which clarify that tax treaties are not intended to be used to generate double non-taxation.
Jurisdictions that sign up to the MLI must identify which of their treaties they wish the MLI to apply to and modify. These are known as “covered agreements”.
Switzerland has decided that just 12 of its treaties should be treaties covered by the BEPS MLI. Where necessary it will negotiate agreements on a piecemeal basis directly with other countries.
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Canada has elected to apply the BEPS MLI more broadly, with 84 territories.
The changes to be made to both territories' treaty networks are technical in nature. For that reason, to support taxpayers and their agents to come to terms with what changes will be made under the MLI, the OECD has developed the MLI Matching Database.
This database includes information on the entry into effect dates for agreements covered by the MLI and explains how each treaty will be amended, based on the reservations selected by territories upon ratification. Canada and Switzerland's reservations are set out at length in documents that were published on the OECD website when the two states ratified the pact.
For both Canada and Switzerland, the BEPS MLI will enter into effect from 1 December 2019. It will amend only those treaties that have been selected by Canada or Switzerland as being covered, and only where the other territory has also ratified the MLI and chosen to include the agreement as covered.
Where another treaty territory has yet to ratify the BEPS MLI, that pact may instead be amended under the MLI in the future, after that territory completes its domestic ratification procedures.
Several jurisdictions are already making the process for taxpayers of understanding the extensive changes easier by preparing “synthesised texts” of treaties. These synthesised texts are updated treaty texts that include the new provisions effected through the MLI. Where these texts have been released, the BEPS MLI Matching Database is updated to highlight their release.
Although the BEPS MLI has not entered into effect for both countries yet, taxpayers can begin to come to terms with how treaties will be amended and affect their circumstances by using the OECD's MLI Matching Database.