by Hannelore Durieu and Bert Vandorpe
Due to the BEPS action plan, which was approved by the OECD in 2015, almost all double taxation agreements will have to be modified. After all, this is recommended by four of the fifteen action points. The action plan aims at countering the erosion of the taxable base and the artificial shift of profits to low-taxed areas, or ones that are not taxed at all. The specific BEPS action points therefore aim on the one hand to counteract the abuse of agreements. This is achieved, among other things, by using hybrid mismatches and the artificial avoidance of a permanent establishment in a treaty state. On the other hand, the BEPS action plan also aims to improve dispute resolution and arbitration.
To prevent each double taxation agreement having to be renegotiated by each contracting state, the BEPS action plan itself provides for an instrument to modify existing double taxation agreements. This instrument should ensure that the BEPS action points that change the model agreement can be implemented efficiently and coherently.
On 17 June 2017, this instrument, better known as the Multilateral Instrument or MLI, was signed by 68 member states, including Belgium. This number has now risen to 78 member states, and even more countries are expected to follow this example.
The MLI ensures that existing double taxation agreements are complemented by the introduction of new provisions and by the modification or replacement of existing provisions. To ensure that double taxation agreements are also actually adapted, the parties concerned must have opted to include that specific taxation agreement in the scope of the MLI. When this is the case, this double taxation agreement is regarded as a Covered Tax Agreement.
Belgium has registered about 98 double tax treaties as Covered Tax Agreements. A number of agreements, such as the agreement with the Netherlands or Germany, have not been registered. These agreements are in fact being renegotiated at the moment and will largely be aligned with the BEPS action points. The agreement with the United States is also not a Covered Tax Agreement as The United States has chosen not to sign the MLI.
Although the MLI contains several minimum standards that apply to every Covered Tax Agreement, the instrument also has a high degree of flexibility. For example, the MLI contains many optional provisions that only apply if both parties have made the same choice regarding their introduction. If both contracting parties have made a different choice with regard to that specific provision, the MLI will have no effect and the parties will revert to the original double taxation agreement.
In addition, parties to an agreement can issue reservations about various optional provisions or parts of it. When this is the case, certain articles of the MLI can be deemed non-applicable. Belgium has chosen, among other things, to issue a reservation on various articles of the MLI that avoid the artificial avoidance of a permanent establishment.
At the international level the MLI has entered into force 1 July 2018. The MLI itself, however, has no legal consequences. This instrument only entails legal consequences in conjunction with a double taxation agreement. In order for it to be applicable between contracting parties, this instrument must therefore have been internally ratified by both contracting parties.
In Belgium this will occur once it is approved by all competent parliaments and after publication in the Belgian Official Gazette. This is expected to occur in 2021 or 2022. It will therefore take at least till then for the MLI to produce legal effects in Belgium.
At the international level, the MLI is a real breakthrough. After all, this overarching treaty is bold and innovative. Nevertheless, it seems that the effect will be less than hoped for because of the flexibility of the treaty. The impact on the double taxation agreements concluded by Belgium thus depends on the choices made by the other contracting states.
If you have any questions about the Multilateral Instrument, about how it works or about the impact on your company, please contact one of our specialists via email@example.com.
In our opinions, we rely on current legislation, interpretations and legal doctrine. This does not prevent the administration from disputing them or from changing existing interpretations.
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