Here we look at recent changes to the double tax avoidance agreement between Ireland and New Zealand, which are intended to incorporate numerous elements of the OECD's base erosion and profit shifting (BEPS) final recommendations.
The BEPS Multilateral Instrument (MLI)
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, to give the MLI its full title, was developed through negotiations involving more than 100 countries and jurisdictions as part of the OECD's BEPS project.
It is intended to enable countries to add BEPS-related amendments to their tax treaties without having to renegotiate treaties on a country-by-country basis – something that would have taken several years to achieve.
The MLI entered into force on July 1, 2018, and now covers almost 100 jurisdictions.
The salient amendments to the Ireland-New Zealand tax treaty are summarised in the following sections.
The treaty features a new preamble, which states that its purpose is to eliminate double taxation while also preventing opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
Dual resident entities
Article 4 of the MLI deals with dual resident entities. In cases where a company is a resident in both states, the countries must reach a mutual agreement on the location of the company's residence, considering factors such as the company's effective place of management and the place where it is incorporated, among other things. In the absence of such an agreement, a taxpayer may not be entitled to the treaty's tax reliefs.
Permanent Establishment Status
Key to determining whether an entity has a taxable presence in a certain country is whether it has established a permanent establishment there. Article 13 of the MLI seeks to prevent the artificial avoidance of PE status through specific activity exemptions.
In short, under this amendment, an enterprise or closely related enterprise with a fixed place of business in either country will be considered a permanent establishment there, unless the specifically excluded activities undertaken are of a preparatory or auxiliary nature.
The treaty includes provisions from Article 9 of the MLI, which allows gains derived by a resident of one country from the sale of shares or comparable interests (e.g., interests in a partnership or trust), to be taxed in the other country if, at any time during the preceding 365 days these shares or comparable interests derived more than 50% of their value from immovable property situated in that other country.
Mutual Agreement Procedure (MAP) and Arbitration
The updated treaty incorporates improved provisions on Mutual Agreement Procedure dispute resolution, from Article 16 of the MLI. The MAP provides a mechanism for two or more countries to resolve a dispute arising from the legal interpretation of a double tax avoidance agreement. Usually, such disputes involve double taxation, where the same profits have been taxed by both parties to a tax treaty.
In cases where a resolution cannot be found within two years of the initiation of a MAP, the taxpayer may submit a request for the case to be resolved by an independent arbitration panel, whose decision will be final.
The modifications outlined above are effective from January 1, 2020, for taxes withheld at source, and from November 1, 2019, for all other taxes.