Ireland signs Multilateral Instrument

Niamh Keogh, of counselT: +353 1 614 5000E: nkeogh@mhc.ie

John Gulliver, tax partnerT: +353 1 614 5007E: jgulliver@mhc.ie

On June 7 2017, Ireland along with almost 70 other countries signed the OECD’s MLI. The MLI incorporates certain recommendations made under the BEPS project. Most OECD countries and some developing countries have now signed up to the MLI. Additional jurisdictions are expected to sign at a later date.

The MLI was developed as a mechanism to introduce change to international double tax treaties (DTAs). It was chosen as an alternative to a more time-consuming exercise of individually amending the thousands of bilateral treaties in existence. Some provisions of the MLI are mandatory (or “minimum standards”) for the participating countries, while others are optional “best practices”. While the MLI modifies existing treaties, it does not prevent future renegotiation of those treaties and it is expected that Ireland will continue to expand and enhance its DTA network over the coming years.

The focus of the MLI is on the BEPS recommendations on the treatment of hybrid structures, treaty abuse, permanent establishment status and dispute resolution.

Ireland’s position on key issues is discussed below.

The permanent establishment (PE) rules relate to the circumstances where a company can have a taxable presence in another country. A definition of what constitutes a PE is contained in a DTA. The MLI includes optional changes to the PE definition which, if adopted, would make it easier for a company to create a PE in a DTA country which also adopts the new rules.

Ireland has not opted into the MLI provision which would create a PE for a company where a dependent agent (e.g. employee) habitually plays the principal role leading to the conclusion of contracts. Since Ireland is not adopting this particular provision, other DTA countries will not have a right to impose tax under this provision even if the other country adopts the new rule.

The Irish Department of Finance has indicated that work is still underway at an OECD level to determine what profits, if any, would be attributable to PEs created under the new rule and Ireland is reserving its position due to the continuing uncertainty as to how the test would be applied in practice. However, Ireland has opted for other changes to the PE definition such as an “anti-fragmentation” rule which is designed to prevent groups from dividing a business into several smaller operations to avoid creating a PE and, therefore, some structures may be impacted by the MLI.

Ireland will adopt the principle purpose test (PPT) which introduces a general anti-avoidance clause into Ireland’s DTAs which are covered by the MLI. Ireland has not opted to supplement the PPT with a limitation on benefits (LOB) clause.

Ireland has signed up to new rules around dispute resolution. Increased information sharing at an EU and OECD level is expected to lead to more cross-border tax disputes. The MLI is intended to provide better dispute resolution mechanisms for cross-border tax disputes. Ireland, like most countries, has opted into the default option of final offer or “baseball” arbitration. This is where each tax authority submits a proposal to address the issues to an arbitration panel which selects one of the proposals. Ireland is also one of 25 countries which have opted into mandatory binding arbitration in certain cases.

Ireland’s DTA with another country will be modified by the MLI where both DTA partners have respectively ratified the MLI. The effective date for withholding taxes under a particular DTA will be the first day of the calendar year following ratification by both DTA parties. For all other taxes, it will take effect for taxable periods beginning on or after the expiry of six months after both have ratified the MLI. Therefore the earliest effective date for any of Ireland’s DTAs is 2018. However, this would seem ambitious as it is not yet known when Ireland will ratify the MLI.

Groups should assess whether the adoption of the MLI is likely to impact on the availability of DTA benefits or on existing sales structures using Ireland. A review should also consider the impact of other international tax developments, including the EU directives on tax avoidance which will be implemented in the coming years.

This article was prepared by Mason Hayes & Curran, International Tax Review’s correspondents in Ireland.