Russia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS
The Action Plan on Base Erosion and Profit Shifting (BEPS Plan) developed by the OECD and approved by the G20 provides for a number of tools that enable participating countries to combat the withdrawal of profits to low-tax jurisdictions.
Action 15 of the BEPS Plan stands out. It provided for the development of a multilateral instrument to modify bilateral Double Taxation Avoidance Agreements (DTAs) and its further use by interested parties.
On 24 November 2016, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS was published. Signatories to the Convention were given an option choose the provisions they consider acceptable for themselves, with the exception of mandatory “minimum standards”. These mandatory provisions include modification of DTAs preambles to introduce requirements for treaties non-abuse, introduction of symmetric adjustments, i.e. changes in taxes an enterprise should pay if its profits were taxed in another country, and new requirements to the mutual agreement procedure. In addition, the Convention contains provisions that can be implemented by countries in a flexible manner. In general, the OECD-developed document introduces changes to DTAs aimed at neutralizing negative effects of using mismatches in national legislations (hybrid instruments) (Action 2 of the BEPS Plan), preventing tax treaty abuse (Action 6), artificial avoidance of permanent establishment status (Action 7), and making dispute resolution mechanisms more effective (Action 14).
On 7 June 2017, 68 countries, including Russia, signed the Multilateral Convention. The effects of its entry into force upon ratification will be substantial, given that our country decided to apply the Convention to 66 DTAs out of 82, including non-ratified agreements with Belgium and Brazil. For the remaining 16 agreements, the Convention is not applicable, as the countries concerned were not members of the OECD Ad Hoc Working Group that developed it. Moreover, Russia chose the most comprehensive approach to the implementation of the Convention, which presupposes the application of not only “minimum standards”, but also of other provisions with a very tough restriction on the tax agreements benefits.
The entry into force of the Convention may result in significant changes to the agreements on avoidance of double taxation concluded by the Russian Federation with foreign states. The most important of them will be the tax agreements amendments to include rules limiting the application of tax benefits. In addition to the Principal Purpose Test (not granting benefits under tax agreements if obtaining those benefits was the principal purpose or one of the principal purposes of any arrangement or transaction), Russia decided to supplement its tax agreements with a Simplified Limitation on Benefits Provision. It allows benefits under tax agreements only if persons claiming them meet certain criteria.
Russia also intends to fully integrate into its tax agreements the provisions of the Convention that either leave a choice as to the scope of their application or can be included only in selected agreements. In particular, it is planned to impose restrictions on certain types of indirect benefits, including dividends and gains from alienation of shares or interests of entities deriving their value principally from immovable property; introduce provisions to prevent various types of artificial avoidance of permanent establishment status; neutralize the effects of differences in country legislation, including with regard to taxation of dual resident entities.
It is important to note that despite the stringency of the Russian approach, the final scope of changes in each specific DTA will depend on the position of the foreign partner. Only the “minimum standards” of the Convention will apply to all agreements, whereas application of other provisions will depend on the approaches of both parties to each DTA.
Nevertheless, certain changes in the Russian tax regime resulting from the ratification of the Convention are inevitable. Being an important step in implementing the measures proposed in the BEPS Plan, it will require increased attention and awareness of Russian tax residents when structuring their businesses and correct interpretation of all sources of law in aggregate, given that provisions of the Convention mutually applied by Russia and its partner countries will become elements of the national tax regime along with the Russian national legislation and earlier adopted DTAs.
Author: Andrey Shelepov, Researcher, RANEPA CIIR