The Multilateral Instrument (MLI) may be last on the list of the 15 action plans contained in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, but for Barbados it most definitely is not the least. Indeed, quite the opposite. The MLI is a milestone for international taxation as well as for the implementation of BEPS recommendations as a whole. At the time of writing, approximately 70 countries have signed onto the MLI, effectively agreeing to modify their existing Double Taxation Agreements (DTAs), bringing them in line with the new international standards for DTAs. Barbados is also set to sign on by the end of 2017.
Barbados’ wide treaty network is the very foundation on which Barbados has built its reputation for integrity and transparency as an international financial services centre. Such integrity and transparency are of paramount importance to the island, and signing on to the MLI is an important step in protecting them.
The intent behind the entire BEPS project is one we readily accept. However, since the MLI allows countries the choice of opting into or out of specific provisions, as we proceed to revise and modify our 37 treaties we need to pay close attention to what our major tax treaty partners, such as Canada, the United Kingdom and the United States are doing. It would hardly be wise to opt out where they have chosen to opt in.
The MLI is designed to stop companies headquartered in one country from using bi-lateral tax treaties to shift profits to a no-tax or low-tax jurisdiction where the company carries on no meaningful economic activity or creates no value. The intent is to ensure that all countries that sign on will adopt a shared set of minimum standards to prevent BEPS. In plain terms, the MLI facilitates the process whereby countries can ensure that many of the actions and aims of the BEPS project are baked into their bi-lateral treaties.
Already, model provisions to curb tax treaty abuse, such as treaty shopping, have been developed for inclusion in such treaties. For example, signatory countries entering into a tax treaty will have to include in their treaty language a clear statement that they intend to prevent treaty shopping.
These “minimum standards”, also include such items as the Principle Purpose and Limitation on Benefit Tests. These tests make it more difficult to benefit from treaty provisions and require that entities align their profits with substantive economic activity in the treaty jurisdiction from which the seek benefits. Subsidiaries and branches will no longer be able to claim tax treaty benefits by simply establishing a registered office in a low-tax or no-tax jurisdiction.
It is possible that the MLI amendments would be effective in 2019, though some tax treaties may be affected as early as 2018. We are likely to see restructuring of some Barbados entities which will have to prove “substance” in terms of genuine economic activity, and that means not only operating permanent offices but also hiring managers and employees with the skill sets needed to run such businesses. Barbados has always been supportive of the concept of “substance”, and the island has a ready supply of highly educated staff with the requisite skills.
It won’t all be plain sailing as countries seek to conform while protecting their best interests. Disputes are sure to arise, but the MLI also provides signatory countries with the opportunity to sign up for mandatory binding arbitration to resolve such disputes.