by JP Canavan
Along with 67 other countries, Ireland became a signatory to the OECD’s Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting (MLI) at the highly publicised June 7 signing ceremony held in Paris.
Ireland followed many of its counterparts by adopting the vast majority of the MLI provisions. This included opting for the principal purpose test (PPT) to prevent tax treaty abuse and mandatory binding arbitration for tax dispute resolution.
However, it is interesting to also note some reservations Ireland made, particularly its reluctance to follow the full restructured permanent establishment (PE) status provisions.
The following is a review of Ireland’s MLI adoptions and reservations. For a determinative view, it is necessary to also review the adoptions and reservations taken by relevant treaty partners.
MLI covered tax agreements
Ireland included 71 of its 72 double tax treaties currently in effect as “covered tax agreements” under the MLI. The exception being Ireland’s treaty with the Netherlands, which is under bilateral renegotiation between the tax authorities.
Of the 71 tax treaties put forward by Ireland, 23 will require the relevant treaty partner to also sign the MLI for the provisions to amend the relevant treaty.
Switzerland has chosen not to include its treaty with Ireland as a covered tax agreement and Norway has not yet concluded on their list of covered tax agreements.
Hybrid mismatch, dual residents
Ireland has adopted Articles 3 and 4 of the MLI, which deal with entities that are transparent or dual residents, respectively.
Article 3 on transparent entities provides that where an entity is deemed transparent in either Ireland or the treaty partner State, the income earned by that entity shall be treated as income of a resident of that contracting State. This provides assurance for taxpayers that they should not suffer double taxation while also ensuring the income is taxable in one State.
Ireland’s adoption of Article 4 of the MLI on dual resident entities may prove to be one of the more problematic changes for part-Irish dual resident companies.
The rule invokes a more flexible tie-breaker clause, where the State of residence is determined by the competent authorities of the contracting States. This is a significant change from most of Ireland’s tax treaties, which generally follow a place of effective management principles.
Ireland chose to reserve on Article 5 as this article deals with the exemption method of eliminating double taxation. As Ireland operates a credit mechanism, the provision is inapplicable.
Tax treaty abuse
For prevention of tax treaty abuse, Ireland opted for the PPT rather than a limitation on benefits (LOB) provision.
One notable outlier to this approach is Ireland ‘s tax treaty with the United States, which contains the US-preferred LOB provisions, as does a draft treaty under negotiation between Ireland and the US.
Under Article 8, Ireland will introduce a new minimum holding period of 365 days to be met before reduced treaty rates on dividends payable are available. The dividend payments affected are those between entities resident in Ireland and other MLI signatory States, subject to the treaty specific holding requirements also being met.
Ireland has committed to implementing the Article 9 anti-avoidance provisions designed to prevent companies from avoiding capital gains tax when disposing of interests or shares that derive a threshold value from immovable property.
Ireland invoked its option to reserve Articles 10 and 11, dealing with the tax exemption of foreign branches and certain safe harbour rules concerning the right of a State to tax its own residents respectively.
Ireland & permanent establishment status
Ireland reserved on Article 12 of the MLI, which is primarily focused on tackling the artificial avoidance of PE status where commissionaire and similar arrangements are implemented. The Irish Department of Finance reasoned that this reservation is due to the “continuing significant uncertainty as to how the test would be applied in practice.”
Article 13 of the MLI provided two options as regards the exemption from PE status in relation to certain activities. Ireland opted for Option B, with the Department of Finance specifically noting that “Option B is consistent with Ireland’s longstanding interpretation of the provisions and Ireland intends to adopt this option.”
The above reference may be viewed (at least in part) as a political play, consistent with one line of argument put forward in Ireland’s appeal of the Apple EU State aid ruling. By following Option B, the list of activities contained within Irish tax treaties remain exempt when considering PE status, irrespective of whether the activity is of a preparatory or auxiliary character.
Ireland adopted the MLI’s anti-fragmentation provisions, targeted at corporate groups that divide complementary functions or activities between group entities but which still form a coherent business operation, to benefit from the listed exempt activities.
Ireland followed the recommendations under Action 7 of the OECD/G20 base erosion profit shifting (BEPS) report, adopting Article 14 of the MLI concerning anti-avoidance provisions targeted at the avoidance of PE status mainly in the construction sector, where contract splitting initiatives are used to avoid lengthy-duration construction contracts.
Ireland has also adopted Article 15 of the MLI, relating to the definition of a “person closely related to an enterprise” as this is seen as integral to the effective operation of Articles 13 and 14.
In the backdrop to BEPS Action 14, Irish Revenue released its bilateral advance pricing agreement (APA) guidelines in September 2016, as part of Ireland’s commitment to BEPS Action 14. This formal bilateral APA programme provides certainty to taxpayers in respect of transfer pricing issues for complex cross-border transactions.
As a minimum standard, Ireland will fully adopt Article 16 in relation to standard time limits and procedural policies concerned with mutual agreement procedures.
In keeping with the combined intentions of the BEPS project to not only prevent base erosion and profit shifting but also ease tax dispute resolution process and procedures, Ireland will allow for certain unilateral corresponding adjustments for tax paid by taxpayers where appropriate, as provided for in Article 17 of the MLI.
Ireland was part of the ad-hoc group that developed the new optional provisions for mandatory binding arbitration and, as such, is a signatory to Article 18 – 26 (Part IV) on mandatory binding tax treaty arbitration. Ireland is also “open to the type of arbitration that is used,” according to the Irish Department of Finance’s Technical Briefing Note.
Ireland mainly performed in line with commentator’s predictions on the position to be adopted with regards to the MLI.
The most notable points for multinational entities either with operations in Ireland or those looking to Ireland as a potential business hub include:
- The strengthening of Ireland’s “tax certainty,” pillar which plays a pivotal role in Ireland’s inward investment strategy, by reserving on certain controversial elements of the new PE rules.
- Adoption of the PPT for limiting tax treaty benefits to entities seeking to add an Irish arm to their global business operations and have genuine commercial reasoning for doing so.
- Adoption of mandatory binding treaty arbitration to assist taxpayers with disputes where agreement between competing authorities cannot be met.
However, there is also a well-founded concern surrounding the practical implications of the newly adopted best practice rule for determining corporate tax residence of dual resident entities and how this will be interpreted by Ireland and its treaty partners that similarly adopt the provision.