On March 28, 2018, the U.K. issued a draft order (The Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018) to implement the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI") into U.K. domestic law. See BEPS Action 15. The U.K. also released an Explanatory Memorandum on the draft order.
According to the Explanatory Memorandum, the MLI will modify the application of double tax treaties currently in force with the U.K. These treaties will only be modified if both the U.K. and the other jurisdiction give notice that they wish them to be Covered Tax Agreements (CTAs). Notice can be given at the time of signature, ratification, or at a later date. Where the U.K. has listed a double tax treaty to be a CTA, and either the other jurisdiction has not made the same notification, or is not a signatory to the MLI, the MLI will not modify that treaty until the other jurisdiction either makes an equivalent notification, or signs and ratifies the MLI and makes a notification.
CTAs are modified only to the extent of the provisions contained in the articles of the MLI. Most of these articles permit a jurisdiction to reserve against making the modification that it contains, or to make a reservation to preserve certain existing provisions in the CTAs. Where either signatory to a CTA reserves against a provision contained in the MLI, then the modification it provides for will not apply to that CTA.
The MLI enables all parties to meet the treaty-related minimum standards that were agreed as part of the BEPS package under Actions 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and 14 (Making Dispute Resolution Mechanisms More Effective). The MLI also enables parties to implement recommendations for changes to tax treaties contained in the reports on Actions 2 (Neutralising the Effects of Hybrid Mismatch Arrangements) and 7 (Preventing the Artificial Avoidance of Permanent Establishment Status). HMRC will make available consolidated texts of its bilateral double tax treaties, which explain how the MLI will affect each one in accordance with the positions taken by the U.K. and the other jurisdiction.
The U.K. does not intend to reserve against any of the Action 2 provisions that are applicable to its tax treaties, other than a provision in paragraph 2 of Article 3 of the MLI.
The U.K. intends to reserve against the provisions in the MLI which are not part of the minimum standard and that it considers unnecessary because of its adoption of the principal purposes test (PPT) in paragraph 1 of Article 7 of the MLI.
The U.K. intends to adopt the anti-fragmentation rule under paragraph 4 of Article 13 of the MLI, which prevents the fragmentation of activities to avoid the creation of a permanent establishment (PE). The U.K. does not intend to adopt the other provisions in Article 13 (changes to the rules on specific activity exemptions), and plans to reserve against the provisions in Articles 12 and 14 of the MLI.
The U.K. will adopt all of the provisions contained in the MLI, and also intends to apply the optional provisions under Part VI of the MLI regarding mandatory binding arbitration for mutual agreement procedure (MAP) disputes.
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