What is the MLI?
As part of the Organisation for Economic Co-operation and Development (OECD)/ G20 project to tackle Base Erosion and Profit Shifting (BEPS)[1], in June this year, over 70 countries participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). Nigeria became the 71st countryto sign the MLI in August this year.
The MLI is a legal instrument, designed to preventBEPSthrough the modification or override of certain provisions in existing bilateral double tax avoidance treaties between signatory countries. In other words, the MLI is designed to work through double tax avoidance treaties that already exist between contracting jurisdictions. This can only be possible however, if such treaties are listed by the signatory countries as ‘Covered Agreements’[2]under the MLI.
With the coming on board of more interested signatory jurisdictions, the MLI effectively modifies the application of thousands of bilateral tax treaties concluded for the elimination of double taxation, thereby significantly impacting the landscape of International Taxation.Once the MLI fully enters into force, practitioners of International Taxation would expediently need to interpret the double tax avoidance treaties or ‘covered agreements’ in conjunction with the MLI (and the MLI Positions[3]submitted by contracting parties under the respective treaties), to be able to determine what provisions of the MLI would apply in place of or alongside those of the tax treaties.
According to the OECD, the MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into these bilateral tax treaties worldwide. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific reservations and exercise of options (for optional provisions), by signatory countries on Covered Agreements.
Under the inclusive framework (which allows non OECD and G20 countries to also participate in an equal footing with the OECD and G20 countries), over 100 countries and jurisdictions are collaborating to implement the BEPSmeasures and tackle BEPS. Following negotiations involving all the more than 100 jurisdictions that indicated interest, the text of the Multilateral Instrument (MLI) and its Explanatory Statement were developed and adopted on 24 November 2016, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting. This mandate is also the Action 15 (of the 15 action plans) of the OECD/G20 BEPS Project.
Entry into Force and Effective Periods of Applicability of the MLI Provisions
Notwithstanding the existence of the MLI and the overwhelming number of currently participating signatories, the provisions of the MLI with regards to covered agreements may not take effect in any signatory jurisdiction (including Nigeria) for a substantially long period of time to come- probably over one year from now.
This is because the signatures of the participating countries on the MLI are subject to local ratification/ acceptance/ approval and the MLI itself cannot be in force until at least 5 jurisdictions have submitted their instruments of ratification/ acceptance/ approval. So far, none of the 71 signatory countries have deposited their instruments of ratification.
Further, even when the MLI itself comes into force, its provisions cannot be in force for any of the signatory countries with regards to its covered agreements unless both contracting parties to such covered agreements have deposited their instruments of ratification or acceptance of the MLI. Effective from the latest date of depositing the instrument of ratification, the MLI provisions will have effect on both contracting jurisdictions as follows:
- With respect to taxes withheld at source: the first day of the next calendar year following that date
- With respect to all other taxes levied by a contracting jurisdiction: taxable periods beginning after a period of 6 months from that date.
The MLI however provides exceptions to these general rules of effective dates and allows each signatory to choose the specific provisions as to effective dates. For Nigeria, with regard to all other taxes levied by a contracting jurisdiction, the effective date is described as ‘taxable periods beginning on or after the first day of the next calendar year beginning on or after the expiration of a period (6 months in this case)”.
Five Steps for the Application of the MLI
For the MLI provisions to apply to any covered agreement, the following must be in place:
- The MLI itself must be in force as we explained earlier. Also, the MLI must be in force for the each of the contracting parties on a covered agreement. That is, the contracting parties must have deposited their instruments of ratification or acceptance of the MLI subsequent to signing the MLI.
- Each of the contracting parties must have listed the tax treaty or tax agreement under consideration as a ‘covered agreement’ under the MLI and such covered agreement must be in force (The MLI cannot be applied to signed treaties that are not yet in force).
- Reservations have not been made by any of the contracting jurisdictions on the provision under consideration, and optional provisions have been jointly chosen to apply on the MLI provision under consideration.
* At the point of signing the MLI, each signatory country is expected to submit its provisional ‘MLI Position’ and a final MLI Position, subsequently, when depositing the instrument of ratification. This MLI Position contains a list of all the covered agreements, the ‘Reservations[4]’, ‘Notifications[5]’ and choices of optional provisions which the signatory country desires to make, with regards to the extent of applicability of the MLI to its covered agreements.
- The MLI provision will not apply to a contracting jurisdiction where it has made a reservation with regards to that particular provision, as long as such reservation does not dilute the effectiveness of the covered agreement below the minimum acceptable standard of the convention. This will counteract the anti-treaty abuse measures which the MLI seeks to uphold.
- The choice of an optional provision will apply if both contracting parties make the exact same choice of optional provision, otherwise, it will not apply.
- Notifications of existing provisions by both contracting parties to the covered agreement renders such notifications subject to modification or replacement by the provisions of the MLI.
- The existing provisions contained in the Notifications, to be modified by the MLI should be identified.
- The effective dates of the MLI provisions should be ascertained in order to determine when the provision(s) under consideration would actually take effect.
Implications for Nigeria
On 17 August 2017, the Executive Chairman of the Federal Inland Revenue Service (FIRS) signed the MLI on behalf of Nigeria, making Nigeria the 71stsignatory jurisdiction. On the same day, he also signed the Common Reporting Standard Multilateral Competent Authority Agreement (CSR MCAA) as the 94th signatory country.
The CRS MCAA was designed to implement the automatic exchange of Multinational Entities (MNEs)’ financial account information in line with OECD’s common reporting standards, and to deliver this automatic exchange by 2018 between 101 countries. Please see our previous newsletterexplaining the meaning of the MCAA in details and the necessary economic infrastructure required for it to take effect. The CRS MCAA makes the MCAA effective and prescribes the minimum reporting standards (in line with OECD’s common reporting standards) for such financial accounts information to be exchanged.
In Nigeria’s provisional MLI Position, Nineteen (19)[6]double tax avoidance treaties are listed as covered agreements; Twelve (12)[7]of these covered agreements are in force while Seven (7)[8]are not yet in force. In the MLI position, Nigeria considered its treaty with Spain and Sweden, respectively, as not yet in force (although the treaty was signed into force by President Buhari on Friday, 26 January 2018), but contrary to this, the two countries, in their respective MLI Positions, considered that the treaties were already in force (Spain: as at 2015, Sweden: as at 2014).
Nigeria is also yet to deposit its instrument of ratification of the MLI, and until then, the MLI cannot be applied to Nigeria’s covered agreements. Further, according to the second step for ‘application of the MLI’ as described above, the MLI can only be applied to the 12 tax agreements in force.
Thirdly, and very importantly, 16 countries out of the 19 treaty parties listed by Nigeria, have all also signed the MLI, though 3 countries out of these (Korea, Mauritius and Singapore) have not listed their individual treaties with Nigeria as covered agreements in their provisional MLI positions (possibly because the treaties are not yet in force). The 3 countries out of Nigeria’s 19 treaty parties which are yet to sign the MLI are Philippines, Qatar and United Arab Emirates.
Nigeria currently has double tax avoidance agreements with only two African countries- South Africa and Mauritius, and both of them are also signatories to the MLI. The treaty between Nigeria and Mauritius is however yet to enter into force, and Mauritius has also not listed its treaty with Nigeria as a covered agreement in its provisional MLI position. This leaves South Africa as the only potentially effective African treaty party to Nigeria under the MLI.
Some of the ‘Notifications’, ‘Choice of Optional Provisions’ and ‘Reservations’ made in Nigeria’s provisional MLI position which will impact the practical application of the provisions of Nigeria’s covered treaties in force include:
- Article 4on dual resident entities (not being individuals)- all such entities which principal country of residence cannot be determined will no longer benefit from double tax relief under Nigeria’s covered agreements.
- Article 6on purpose of covered agreements- in addition to the preamble language in Nigeria’s treaties, “Desiring to conclude an Agreement for the avoidance of double taxation and the preventionof fiscal evasion with respect to taxes on income and capital gains”, the following expressions will now be included:
“Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),” and
“Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,”
These additional preamble languages render the covered agreements much more encompassing in preventing BEPS, treaty abuse/ shopping and in enhancing unrestricted co-operation in tax matters.
- Article 7on prevention of treaty abuse- a provision must be in place to deny all or part of the benefits that would otherwise be provided under the Covered Tax Agreement where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits.
- Article 8on Dividend Transfer Transactions- Nigeria has made a reservation not to apply the whole of the provisions of article 8 of the MLI on its covered agreements.
- Article 11– Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents- Nigeria has made a reservation not to apply the whole of the provisions of article 11 of the MLI on its covered agreements.
For details of other notifications, reservations and choice of optional provisions made by Nigeria, including the effective period of the MLI provisions on its covered agreements, please see Nigeria’s provisional MLI Positionas the time of signing the MLI. Note that the OECD allows any signatory country to submit its final MLI position at the time of depositing its instrument of ratification or acceptance/ approval.
Conclusion
The MLI, and the OECD/G20 BEPS Project are serious indications that the international community is keen on tackling the issue of tax base erosion and profit shifting. A further indication of the seriousness of this drive is the level of participation by jurisdictions from all continents and all levels of economic development, with an increasing number of jurisdictions still indicating interest to join in the ‘movement’. With these new developments, the international tax landscape is gradually but drastically changing.
Nigeria’s active participation in these international developments isalso yet another indication of the vision of our government with regards to taxation. Both local and international instruments are now being leveraged by the Nigerian Government to combat tax avoidance/ evasion and increase tax revenues in the long run.
While this gradual shift in focus is being intensely pursued and implemented, and both the Nigerian resident MNEs and intra-country players are becoming increasingly aware of their statutory tax compliance obligations, the pertinent question still remains, “How willing and prepared is the Nigerian Government, to execute its own side of the social contract when all the taxes are collected?”.
[1]Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits, to low or no-tax locations.
[2]Covered Agreements are tax agreements or treaties specifically listed in the MLI as ‘covered’, by the contracting parties to the agreement who are signatories to the MLI
[3]The MLI Position contains a list of all the covered agreements, the ‘Reservations’, ‘Notifications’ and choices of optional provisions which an MLI signatory country desires to make, with regards to the extent of applicability of the MLI to its covered agreements.
[4]A reservation is a declaration made by a state by which it purports to exclude or alter the legal effect of certain provisions of the treaty in their application to that state. A reservation enables a state to accept a multilateral treaty as a whole by giving it the possibility not to apply certain provisions with which it does not want to comply. Reservations can be made when the treaty is signed, ratified, accepted, approved or acceded to. Reservations must not be incompatible with the object and the purpose of the treaty. Furthermore, a treaty might prohibit reservations or only allow for certain reservations to be made.
[Arts.2 (1) (d) and 19-23, Vienna Convention of the Law of Treaties 1969]
[5]The term “notification” refers to a formality through which a state or an international organization communicates certain facts or events of legal importance. Notification is increasingly resorted to as a means of expressing final consent. Instead of opting for the exchange of documents or deposit, states may be content to notify their consent to the other party or to the depositary. However, all other acts and instruments relating to the life of a treaty may also call for notifications.
[Arts.16 (c), 78 etc,. Vienna Convention on the Law of Treaties 1969]
[6]Belgium, Canada, China, Czech Republic, Slovak Republic, France, Korea, Mauritius, Netherlands, Pakistan, Philippines, Qatar, Romania, Singapore, South Africa, Spain, Sweden, United Arab Emirates and United Kingdom of Great Britain and Northern Ireland.
[7]Belgium, Canada, China, Czech Republic, Slovak Republic, France, Netherlands, Pakistan, Philippines, Romania, South Africa and United Kingdom of Great Britain and Northern Ireland.
[8]Korea, Mauritius, Qatar, Singapore, Spain, Sweden and United Arab Emirates.