On 7 June 2017, Switzerland signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (hereinafter MLI and BEPS respectively), along with 671 other jurisdictions, during a signing ceremony hosted by the Organisation for Economic Co-operation and Development (OECD) in Paris. Eight other jurisdictions have expressed their intention to sign the MLI in the near future. The purpose of this MLI is to efficiently re-negotiate and amend double taxation agreements (hereinafter DTAs) to make them compliant with the minimum standards agreed upon in the BEPS project.
MLI in a nutshell
The MLI both includes provisions reflecting the minimum BEPS standards and provisions that do not reflect the minimum BEPS standards. The provisions of the MLI related to the minimum BEPS standards have to be implemented by signatory countries of the MLI. Conversely, countries have the flexibility to opt out of the provisions of the MLI which do not consist in minimum standards. Countries also have the flexibility to apply optional or alternative provisions.
At the time of signature of the MLI, countries submitted a list of their DTAs in force that they would like to be covered by the MLI, and hence, to be directly amended through the MLI. They also submitted a list of reservations and notifications regarding the various provisions of the MLI.
The MLI covers the following actions of the BEPS package: Action 2 (Hybrids), Action 6 (Treaty abuse), Action 7 (Permanent establishment status) and Action 14 (Dispute resolution).
What about Switzerland?
Switzerland has decided that its DTAs with Argentina, Chile, India, Iceland, Italy, Liechtenstein, Lithuania, Luxembourg, Austria, Poland, Portugal, South Africa, the Czech Republic and Turkey will directly be amended through the MLI. Other DTAs could also be amended directly through the MLI in the future if agreements on the technical implementation of the MLI are obtained with other signatory countries.
Alternatively, some DTAs could be amended not directly through the MLI but by means of a bilateral DTA amendment.
Switzerland has also decided (i) to adopt the new preamble on treaty abuse, (ii) to adopt the mandatory provisions related to the treaty abuse, (iii) to opt in for the mandatory and binding arbitration clause, and (iv) to opt out for all the other options. It is important to note that, for the mandatory treaty abuse provisions, Switzerland will adopt the Principal Purpose Test (PPT) and not the simplified limitation of benefits clause.
The opting in for the mandatory and binding arbitration clause could be a useful tool to prevent double taxation and the commitment to binding arbitration is certainly very welcome. However, Switzerland reserves the right for the provision on the implementation of a mutual agreement "notwithstanding any time limits in the domestic law" not to apply and instead meet the minimum standard by accepting a provision that no profit adjustments (to permanent establishments or associated entities) should be made after a period that is mutually agreed between the contracting jurisdictions.
The opting out of all other options includes the rejection of broadening the scope of the permanent establishment provisions. This is in line with the earlier policy statement of the UK and could make the treaty network more attractive as compared to countries that fully adopt the proposed changes. There is a certain risk though that tax authorities (continue to) broaden the permanent establishment notion irrespective of whether the treaty has been amended accordingly. The fact that a large number of countries opted out of the permanent establishment provisions may be reflective of this development. For the time being, there seems to be a preference to implement the changes on a case-by-case basis and through bilateral negotiations, if at all. For more thoughts on the topic please refer to the recent article by Gary Sprague from the Palo Alto office2.
The press release by the State Secretariat for International Financial Matters SIF of 7 June 2017 also confirms the position of Switzerland to implement the changes by effectively amending the treaty text (either through a competent authority agreement on the basis of the MLI or by means of bilateral negotiations). This is in contrast to the initial intent of the instrument, where the MLI would need to be read in parallel in order to understand the applicable provisions. The Swiss approach clearly provides more certainty on the "precise wording" of the amended provisions and facilitates the reading of the treaties. However, it may also take more time to implement the changes throughout the treaty network, as there seems to be reluctance on the part of other countries to follow that approach. The above list of countries has agreed to amend their treaties accordingly. It remains to be seen how many more countries will follow suit.
In Switzerland, the Federal Council will submit the MLI for public consultation towards the end of 2017. It will then undergo the standard parliamentary approval process. The entry into force should thus not be expected before 1 January 2019.
The MLI will enter into force after five jurisdictions have deposited its instruments of ratification, acceptance or approval.
The date at which the provisions of the MLI will enter into effect differs depending on the subject. For instance, mutual agreement procedure and arbitration provisions will generally be effective as from the date of entry into force for both contracting states.
1Andorra, Argentina, Armenia, Australia, Austria, Belgium, Bulgaria, Burkina Faso, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Monaco, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Russia, San Marino, Senegal, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turkey, United Kingdom and Uruguay.
2Gary D. Sprague, Esq. Baker & McKenzie LLP Palo Alto, California, "U.K. Announcement on MLI Raises Interesting Issues Regarding Different Deemed PE Rules in Important Treaty Networks", Bloomberg BNA, 5 May 2017