Ireland has agreed with its tax treaty partners to make changes to its network of double tax agreements to tackle base erosion and profit shifting.
Double tax agreements are crucial to countries that champion themselves as hubs for multinationals, such as Ireland. They include important provisions to ensure that income is not taxed twice, by allocating taxing rights between the two states party to the agreement, and typically include provisions to support taxpayers to resolve double tax disputes quickly. However, they can be abused and many of the provisions have not kept pace with the digitalisation of the global economy.
Recently, the OECD, under a mandate from the group of twenty nations, developed a comprehensive package of recommendations for adoption to tackle base erosion and profit shifting – the BEPS Action Plan. This work culminated in the release of 15 Action reports with recommendations that countries are being urged to adopt into their domestic tax regimes.
One of the most significant of these recommendations was that countries should adopt a new multilateral convention that would make immediate changes to their double tax agreements to mitigate BEPS.
Ireland was one of over 100 countries to sign up to the BEPS multilateral convention and following the country's ratification of the agreement the instrument entered into force in Ireland on 1 May 2019.
From this date, changes are introduced into Ireland's tax treaties with countries that have also ratified the BEPS multilateral instrument. The changes include provisions to:
• Counter tax treaty abuse (as set out in BEPS Action 6);
• Prevent the artificial avoidance of permanent establishment status (BEPS Action 7);
• Neutralise the effects of hybrid mismatches (BEPS Action 2); and
• Improve dispute resolution mechanisms (BEPS Action 14).
The MLI provides countries with some flexibility as to how they will amend their tax treaties. They can agree to adopt certain provisions for some of their treaties while excluding the changes from others, subject to agreement with the other state.
In ratifying the BEPS multilateral instrument, Ireland set out which provisions proposed by the OECD it would include in its tax treaty network and its reservations. This document has been published by the OECD for reference by taxpayers and their agents.
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The changes are highly technical. In summary, among other things, they are intended to prevent taxpayers from artificially redirecting their investments through a third country to take advantage of treaty benefits they would otherwise be ineligible for. They will also ensure that taxpayers are taxed appropriately when they establish significant physical operations in a territory and ensure that taxpayers are unable to inappropriately access double deductions for the same expense or establish structures to achieve double non-taxation.
In total, when all of Ireland's treaty partners ratify the BEPS MLI, 71 of Ireland's double tax agreements will include these new provisions.
The goal of the MLI is to enable countries to amend their tax treaties without going to the trouble of renegotiating agreements on a piecemeal basis – a process that would surely take several years. However, the MLI itself is far from simple, and multinational taxpayers will need to take into account the varying positions taken by countries when considering the impact on their tax affairs.