The OECD's BEPS project envisages a wide range of measures for participating countries to prevent base erosion and profit-shifting by international corporations. In order to be able to integrate these measures quickly and effectively into the respective double taxation agreements (DTAs), the so-called Multilateral Instrument (MLI) was created. Germany signed this instrument in June 2017. However, the legal ratification procedure was only concluded in November 2020, so the MLI will become effective as of April 1, 2021.
Background
The "Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting", also known as the Multilateral Instrument (MLI), was published in November 2016 as a result of action item 15 of the OECD's so-called BEPS (Base Erosion and Profit Shifting) project. The overall objective of this OECD project was to counteract base erosion and profit shifting by multinational corporations and to ensure taxation at the place of business activity and economic value creation. One of the results of this is the MLI as a multilateral treaty under international law, with the basic idea of modifying a large number of DTAs without lengthy individual negotiations on the part of the countries involved. In this context, the MLI serves to implement numerous measures from other action items, namely the measures
- against hybrid financing (No. 2),
- against treaty abuse (No. 6),
- against artificial avoidance of permanent establishments (No. 7)
- and for the improvement of administrative cooperation in mutual agreement and arbitration proceedings (No. 14).
Implementation procedures
Up to now the MLI has been signed by over 90 different tax jurisdictions including Germany as one of the first signatories on June 7, 2017. However, the MLI only becomes effective three months after the respective state has deposited its certificate of ratification (Art. 34 MLI). Since this requires a legislative process in the individual contracting states, there may be different dates of entry into force.
With the resolution of the German parliament (Bundestag) on October 8, 2020 and the approval of the German Federal Council (Bundesrat) on November 6, 2020, the MLI has now been ratified. The MLI Act was published in the Federal Law Gazette on November 22, 2020 (BGBl. II 2020, No. 20 dtd. 27.11.2020, p. 946). The deposit of the certificate of ratification took place on December 18, 2020, so the MLI will become effective with respect to German DTAs on April 1, 2021.
Effects of the MLI on German Double Taxation Agreements
A (tax aggravating) effect on Double Taxation Agreements between Germany and other contracting states based on the MLI only arises if the MLI has entered into force in both contracting states and, in addition, both states have declared the MLI applicable with respect to the existing agreement (notification). Furthermore, some articles of the MLI can be deselected in whole or in part (so-called reservations) or it is possible to choose between different options within individual articles.
Originally, according to the German perspective, 35 tax agreements should be covered by the MLI. However, in the final version of the list of reservations and notifications to the MLI upon deposit of the instrument of ratification, the number of tax agreements covered by the MLI was reduced to 14 DTAs.
Subsequently, according to the request of the Federal Republic of Germany, the DTAs with the following contracting states fall under potential modifications of the MLI:
1. Austria
2. Croatia
3. Czech Republic
4. France
5. Greece
6. Hungary
7. Italy
8. Japan
9. Luxembourg
10. Malta
11. Romania
12. Slovakia
13. Spain
14. Turkey
According to the current status, the DTAs with Austria, the Czech Republic, France, Japan, Luxembourg, Malta and Slovakia are directly affected by possible modifications due to the entry into force of the MLI in the respective contracting states and their notification. The list of affected DTAs will grow if the MLI enters into force in another of the 14 notified countries. The extent of the modifications of the DTAs by the MLI depends on the reservations as well as the option selection in the individual contracting states, which requires an examination of the country-specific lists of reservations and notifications.
Consequence
The entry into force of the MLI in Germany on April 1, 2021 will increase the complexity of the review of the affected DTAs. A multi-stage process has tobe checked to determine the applicability of the regulations of the affected DTAs or rather their adjustment by the MLI:
1. Entry into force of the MLI in both contracting states
2. Notification of the DTA by both contracting states
3. Temporal applicability of the MLI
4. Reservations on articles of the MLI by either of the contracting states.
5. Exercise of options on articles of the MLI by either of the two contracting states
Considering the reduction in the number of DTAs generally affected by the MLI to just 14 contracting states, however, the German contribution to the MLI project has so far been comparatively small in relation to the OECD's ambitious goals.