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hello everyone and welcome to the latest in video series of international tax webinars my name is Mark and joy I'll be chairing the webinar today we're going to be taking a look at the latest from the OECD the fundamental reform of the in tax treaty net workers we've titled the webinar looking at the the multilateral instrument which changes tax treaties it's a couple of our housekeeping points to start with this is a webinar which is coming to you through the the internet and your laptop so the audio should come through to you without you having to dial in occasionally however we do find that people have some difficulties with the audio particularly if the e-beam bandwidth isn't particularly strong where they are on the right-hand side of your screen you will see a phone symbol with a question mark if you are having trouble with the audio if you click on that phone symbol then darling numbers will appear which will give you a better quality of our audio for those of you who are in the US we do offer CPE points for attending this webinar you need to respond to at least 75% of the polling questions that will pop up on the right-hand side of the screen at funny regular intervals throughout the webinar we won't be pre announcing the polling question so please do keep an eye out for those questions when they pop up certificates will then be sent out via video in the US and they will take a few weeks to Araya teas that do please be patient with us but certificates will follow on providing you have responded to the requisite number of polling questions so I'd like to introduce my fellow presenters today we have hands Lord Amira from the Netherlands Sean dokgo from the US and John 1/4 from Canada Hansa and John we'll be talking through the the main technical points on the multilateral instrument and sure will then provide a u.s. perspective the agenda for today is I will help provide a quick overview and introduction and then hand over to to John and hand before going on to the new u.s. perspective so just a little bit of context to start off with the we all know the tax laws are set by individual governments and they're enshrined in domestic legislation and we know that tax treaties primarily exists to facilitate trade between countries they're there to eliminate still taxation which would otherwise happen when two countries tax systems overlap double taxation occurs then obviously inhibits international trade so we know why we have tax treaties but I think it's quite easy to forget the significance of the network of tax treaties for international trade they do play a very important role in the operations of many multinationals and if you look at many of the ownership structures that exist for multinational groups that is also if you look at the the regular flows of certain payments things like interests withholding tax royalty as dividends etc then to lots extent they are determined by the network of tax treaties we also need to look at tax treaties to determine to what extent we have a taxable presence in a foreign country where we might be operating so that we we do therefore rely quite heavily on the network of tax treaties now when the bats initiative was kicked off by the g20 back in 2013 it was clear that many of the impossible reforms of the international tax system would require changes to the tax no work but the tax treaties and sounds do take many years to negotiate the complex and there are thousands of them in existence so we it was clear that we would need a radical solution to the the overhaul of the tax treaty Network the multilateral instrument which is the subject of this webinar is this radical solution which is performed by the OECD so mention earlier Hansen John will talk us through how the multilateral instrument works and what the implications are of the changes that are being put through a multilateral instruments perhaps one of more intriguing issues around the multilateral instruments is that the u.s. obviously a very major economy in the world is not one of the countries that have signed up to the multilateral instruments this doesn't mean of the US multinationals are not affected by the multilateral instrument and Shawn from media in the US will talk us through the implications for the US businesses you may also offer us some insights as one the u.s. is not a signatory to the multinational instrument so without further ado I'm going to hand over to John who is going to talk us through what the multilateral instrument actually is all right thanks very much thanks very much for that introduction welcome and as Malcolm has said when the OECD began its work on reforming the international tax system back in 2013 it realized that and to implement many of the recommendations change changes we're going to have to be made to tax treaties which to a large extent are based on the OECD model tax treaty and adds a malcolm also alluded to to actually amend those treaties the traditional process for doing that is to negotiate tax treaties bilaterally between two countries and then go through a process of ratification it between those two countries there are 20 votes 2300 tax treaties globally and the process of renegotiating the country's entire tax treating network and ratifying those treaties was just a task that just seemed too great it would take years if not decades to be able to do that not only that if countries were going to renegotiate their treaties they would negotiate on their more important treaty partners first and then you know the smaller countries are the less important tax treaties would probably get left behind and therefore it was not a surprise to see in the BET's action plan action point 15 and this is the very last action point which called for the OECD to explore the feasibility of a multilateral instrument to basically expediate the entire process of amending a tax treaties so from 2014 to November 2016 the concept of an MLI multilateral instrument of refer to it as an m/l I now was examined they ultimately came to the conclusion that they determined it was legally feasible and the legal text of the instrument was drafted and agreed upon by approximately a hundred countries that participated in the process that text was released by the OECD in late November 2016 and has been open for signing by countries since the end of 2016 but the big signing date was at the OECD in Paris on June 7th 2017 and on that day we learned which jurisdictions signed up for the treaty signed up for the multilateral instrument and how those jurisdictions were intending to use them the MLI on that day 68 jurisdictions there were actually 67 signatures but China signed on behalf of Hong Kong as well signed up for the multilateral instrument impacting approximately 1,100 tax treaties what when it's ultimately ratified at the problem of those 2300 tax treaties globally and nine additional jurisdictions indicated that day and intent to sign the MLI in the near future and a few more have signed up since since June 7th by the end of 2017 the OECD expects approximately 100 euros diction's to sign up and this is this is quite an achievement I think by the OECD Malcolm's already alluded to the fact that the US has not signed up most people do not see this as significance and Shawn will get into a little bit more detail about that later but mainly because the u.s. model treaty basically already meets most of the EPS minimum standards on treaty related provisions anyway to me this is one of the best projects big biggest successes I think for the first time we have a process where tax treaties can be modified without going through the traditional bilateral treaty negotiation and ratification process which happens bilaterally this means that the treaty related changes will probably effectively be implemented over the next two or three years not over the next several years or even decades if we had to go through amending not the entire process let's take a look at how the MLI is going to work from a big-picture point of view so the basically what the MLI does it actually doesn't amend the text of tax treaties what it does is it modifies tax treaties so it actually sits beside a tax treaty and will modify the text so when you're reading it a bilateral tax treaty now once the MLI is ratified you'll have to look at that by the wording the bilateral tax treaty and then see how the multilateral instrument will impact or modify the wording of that particular tax treaty a lot of people have been asking will consolidated tax treaties architects the tax treaty be prepared by countries the answer to that is I understand that some countries are considering that and probably we will do that the OECD will even assist countries in doing that but it's important to recognize that this will not be the legal text the actual legal text will still be that bilateral tax treaty that's in place as modified by the MLI which will sit beside it the MLI is in the OECD's to official language languages english and french and those are the two official versions of the multilateral instrument translations into other countries will likely be available I understand Spanish has already been done but again official language the official version is only in those two languages countries that sign the mo lie and this we learn this on June 7th will choose which parts of their tax treaties they wish to modify and with which countries so when we saw the announcement on June 7th and we're continuing to see we're seeing countries saying yet watch em Li this is what I want to use the M Li for and these are the treaties that I intend to be modified by the m li as long as the other country agrees as well and so we had these lists of the countries so for example Canada and Canada on June 7th announced that they wanted the ml lie to apply to 75 of our of our tax treaties out of 93 tax treaties and there are only certain provisions of the best recommendations that we wanted to the M Li to actually modify the wording of our tax treaty when we get a match and once the M Li is been ratified then you the memo I will modify the text at the existing tax treaty ultimately the OECD will release the database that hopefully will match the particular tax treaties that are modified by the M Li but we expect this to be quite a complicated process there's a lot of fiction out there right now and it is a little bit confusing to work your way through that information to determine what treaty is going to be amended and how we could just move on to the next slide to just see what the actual provisions of the the BET's recommendations were actually be modified with EMM Li and I think you can group that into four main areas of the best recommendations which require changes to the text of bilateral tax treaties to actually implement the recommendations those are the those are the four buckets are recommendations with respect to hi-bred mismatches hands is going to in a few minutes go through those as to how the MLI will modify tax treaties to implement those changes Treaty abuse and the recommendations with respect to tax treaty abuse and who can benefit from relief available under a tax treaty this is a big a huge impact I think from the MLI which we'll get into in a little bit use tax treaties are often used to reduce taxes and using third party jurisdictions and routing income or investments through a third party jurisdiction can provide tax benefits and the concept of treaty shopping has definitely come under attack under the best process so this is a very important change the third thing is the avoidance of permanent establishment status the changes that the OECD recommended to the definition of permanent establishment designed to eliminate specific provisions or such such situations where tax payers were avoiding a taxable presence in another jurisdiction that's the third bucket and lastly and I'd say the last one is least a good news for taxpayers all the things that need to be implemented the measures that are designed to improve the dispute resolution mechanisms between two countries a goal of resolving tax disputes over taxing rights more effectively and efficiently and I'll include in that bucket recommendations with respect to arbitration processes which are a means to help resolve tax disputes as well so those are the four main buckets in terms of what the MLI what is intended to modify tax treaties we could just go to the next slide please what wins all this going to happen and let's just look at the steps as to what needs to happen on the left-hand side is kind of a timeline of what's already happened you know from the released of the the text of multilateral instrument to the signings there morning in in Paris that happened just a month ago in in June what needs to happen now is the MLI needs to get into force so how does that happen the first thing that needs to happen is that the MLI must become a legal document and that will only happen once five countries ratify the MLI domestically once five countries have ratified the ml I domestically three months after that date after the fifth country does it it becomes an effective legal document then the question becomes when does the ml I actually modify an existing bilateral tax treaties well the answer to that is both countries will have to follow their ratification will have to have ratify the MLI following their normal domestic procedures to ratify a tax treaty once both countries that are party to a bilateral tax treaty have ratified it ratified the the MLI and extrange instruments of ratification three months after that date the MLI will become effective to modify the provisions of the of that particular - bilateral tax treaty any changes then we would go on access into the taxes like things like withholding tax rates and things that are often modified by tax treaties when will those changes become effective well in the particular bilateral tax treaties changes relating to the withholding tax will only become effective on January 1st following the year in which the ratification has taken place by both countries so that once the second country is ratified then you go to January 1st of the next year that's when withholding tax rates will be modified if that has been modified by the MLI with respect to other taxes basically six months after ratification of the MLI so with that okay now thanks I was just just as you're going through now is just a few questions that Springs mining he mentioned early on there is that one the the the NL I was first being mooted by the OECD there was some concern as to whether or not just from a legal perspective as such an instrument could be brought into existence if there still any lingering concern about the effectiveness of the MLI as a sound legal documents or is that largely being put to that yeah well I'm certainly no lawyer but certainly I think the way the OECD has done the MLI is very smart because basically the MLI for it to be an effective legal document must be ratified by individual countries so basically passed into law by individual countries are going to use the MLI by ensuring that countries do that they're respecting the sovereign right of countries to adopt the MLI as a way to modify their tax treaties so they're leaving it up to countries to basically make it legally effective and so I haven't heard any noise lately that the MLI is not an effective legal document I think it's very interesting way for that osed to accomplish this goal and the 68 countries that have signed up for it is that is that more than was originally expected I know there was some concern that's maybe not that many countries that sign up for but 68 two-seam corner quite a lot of countries to some initial wave yeah 68 in the initial wave and the OECD and I think they're quite right on this they're expecting close to a hundred by the end of the year I think some countries just weren't quite ready to sign up and they had a hundred countries involved in the negotiation of the MLI so you know the fact that they expect pretty much all those countries to sign up by the end of the year I think it's a great success against all of the the enthusiasm for signing at an analyze is coming from some of the smaller countries which you mentioned one of the features of changing the treaties in this way is that all the treaties can be changed in the same time as opposed the bigger country is focusing on their larger trading partners and ignoring some of the smaller countries so perhaps that's one of the reasons it's been so popular in the in the first wave yep absolutely yeah interesting that to look at the countries that haven't signed up and also with the countries that in fact we've got some countries choosing which treaty is they're going to apply this to you mentioned Canada has chosen I think the 75 treaty is that the ml I would be effective for which interestingly is more than the 68 countries that have signed up so presumably they're just waiting for the other countries to join in the process and there they'll be there in readiness for them but there are some interesting ones the Canada is actually a design defend no they did yeah it's an interesting thing because when I first looked we have 93 tax treaties and when I first looked at what are the to be to cover tax treaties on June 7th the first thing that stood stood out was Germany was in Germany signed up for the MLA just like Canada signed up for the MLA and your natural reaction is what the heck's going on here and I after a bit more examination and notice that Switzerland also was not on the list which is an important tax treaty for Canada shortly after the the MLI was signed though Canada confirmed that we were going into renegotiations with the German and Swiss tax authorities on the renegotiation of our bilateral tax treaty so it's not like Canada's not intending to amend those particular treaties they're just choosing to do it on a bilateral basis rather than relying on the MLI I think so you know I think different treaties that countries might exclude different treaties for different reasons but often there will be a story behind why a particular jurisdiction has been included what the OECD did ask countries to do is basically say look at please consider using the MLI to amend all tax treaties and then eliminate countries from your list if there was a good reason to do so well thank you that John that's that's a good introduction to the the process the MRI and and how many Emily has come about how it operates we're going to turn now to look at some of the specific areas affected Arnie M Li and Hans is going to talk us through that thanks Malcolm yes indeed I will be addressing some of the areas affected by the MRI and I will do this following the outline the MRI as given by John and yeah as you can see one of the affected area concerns transparent entities article three years is dealing with that it's what we call not a minimum standard it means that countries can opt in and out of this provision and we also need to note that some countries will already have domestic legislation that counters the use of hybrid mismatches and finally it's very important to realize that in the European Union the anti tax avoidance directive will be extended in 2020 to also address this point so what does article 3 of the Emmaline cover it ensures that tax treaties can only apply to persons that are a resident and it means that tracks treaty benefits are only available for transparent entities to be extend that the income is effectively text in the state of residence and thereby avoiding double non taxation and article 3 also ensures that there is no excessive double tax relief given in case the same income is taxed in the hands of different tax payers we have looked at some of the MRI positions that countries have made public when they signed up for the MMI and certain countries have elected not to apply the entire article 3 and notably among them are Canada and Germany so this is one of the examples of countries picking and choosing which articles they will want to apply so what does this mean in practice if we go to the next slide then we can see an example of a situation that is called by article 3 we have a USC Corp and the tax haven company which owned shares in a company resident country X through a hybrid entity a US LLC the LLC is transparent for u.s. purposes and and not transparent for X country so what does mean what does it mean for interest payments what withholding tax should country X apply the result of the MLI is that in so far the interest is being allocated to the C Corp the treaty withholding tax rate should be applied where as in so far the interest payment relates to the tax haven company and the full withholding tax rate needs to apply so this is an example of the effect of the mi if we move on to the next slide another area that's going to be affected by the MRI our dual resident entities again this article is not a minimum standard so countries can opt in and out of it and the purpose of this article is to avoid tax arbitrage by residents by entities resident in two countries the article also allows that the tie breaker becomes subject to competent authority agreements rather than place of effective management and countries can opt for the fact that if there is not a competent authority agreement that treaty benefits are denied to that dual resident entity again we've seen that some countries do not want to apply this article notably Canada Germany in Luxembourg and also some examples of countries that denied treaty benefits in the absence of such competent authority agreement and Australia and Japan are examples of that if we look at to the next slide then we see an example of a structure that's being targeted by article 4 so here we have company to which seems to be resident in two countries and the objective of the structure was to deduct losses via tax consolidation in two countries but the effect of article 4 will be that there is not an automatic tiebreaker anymore so it may prevent two countries taking a different view as you got the tax residents of a company how do just sorry coming with a question there on the links one extent example you got there involved some chilled residents and steers we've just been looking into other hybrid entities another example to an extent we still think multinationals make use of things like general residents and is in corporate structures well I think there's still quite a number of structures around that have these dual resident entities but over time we've seen that countries in their domestic law have enacted rules preventing use of these hybrids companies and I think the MLI will have the effect that even more situations that even in more situations it will not be possible anymore to use these hybrid entities and I'm guessing from my experience the dual residence entity is a probably more a feature of Canadian or us groups rather than necessarily European structures that's true we often see them in US structures and there of course it's quite interesting to note that the US has not signed up to the Emmaline so we had it will be interesting to see how that will impact structure in going forward okay I think the next article article 7 that's that's one of the most important articles of the nli it's a minimum standard which basically means that if a country signs up to the aniline Bennet also signs up to article 7 an article 7 does give concrete three ways to counter prevention of treaty abuse by means of either a principal purpose test or the combination of a principal purpose test and the simplified limitation on benefits clause or even a detailed limitation on benefits clause and combined with the principal purpose test or anti-congress rules in the text 3d option 1 is the default choice and having looked at some of the provision election made by the country signing up for the MLA seems that most countries will opt for option 1 so what does it mean it means that in essence when you sign up to the MLA as a country this country adopts measures to prevent treaty abuse and I think we have to realize that this will have quite a serious impact on international tax structures indeed Enlai F or the principal purpose test in the MLI is is a key element and if you look at the definition on the left side of the screen then it's also quite broad because a reference is made to a benefit under a cover tax agreement shall not be granted so this is quite broad and in essence much broader than for instance the beneficial owner test that we see in many treaties as regards withholding tax so a benefit it's not just a benefit in relation to reduced withholding tax that's that's something you have to realise also you see in the definition that it refers to one of the principal purposes and if you look at a structure then Texas very often a consideration because if you set up a structure or an entity somewhere you usually do not want to increase your tax burden so it's definitely something you look at the question is will countries interpret that that particular consideration then as one of the principal purposes I think we can expect quite some discussion and perhaps controversy about that when you look at the commentary to the analyte n references made that also the best commentary is relevant and from that section 6 it follows that economic substance in the country is key if you have economic substance to be in a particular country then there is a good chance that the principle purpose to set up the structure is not to gain a treaty benefit and well we have to wait and see how all the countries will actually implement it and it's expected that countries will take different views on those sons and I what do you think back to the original aim of the old maps initiative there was a lot of concern that double tax treaties were being abused they were originally intended to facilitate trading activity between nations without creating double taxation but one of the concerns behind perhaps is that treaties were being used to permit double non taxation so profits were falling between the gaps and this introduction of the principle purpose test I think that's clearly seen as one of the key ways of addressing that perceived abuse before you've just been describing it sometimes it's still going to be quite an element's of judgments in all of this and 2010 do you think this will be effective in in preventing the abusive use of tax treaties to commit double non taxation these I think the key concern is the element of judgment that are still being allowed and if there are such room for judgment then yeah there's there's of course the expectation that countries will interpret it differently to a certain extent that's also foreseen in the MRI and countries can make the choice that if one of the contracting parties invokes the principal purposes that before actually applying it they need to consult the other jurisdiction and come to an agreement if the principal purposes indeed needs to be applied so that may be a balancing of powers there which prevents the to widespread use or misuse of a principal purposes but still if it's an area of concern and I think we just have to wait and see how that develops in brackets indeed and of course this isn't the first time that we've had to look in some detail about treaty abuse and that the helpee in some cases internationally on trees your views over the years notably couple of Canadian cases I think John you're getting talk is through now the velcroing case in particular and and how that fits in with the latest on on principle harvesters yeah happy to do so Malcolm and yeah there's been some significant cases in Canada on treaty abuse the Canadian government has been quite active in trying to tackle treaty abuse and historic very unsuccessful doing so there's been three main cases in Canada two of which use the where the Canadian government attacked the realization of treaty benefits because they said the beneficial owner ship test was not satisfied that's in the current wording of bilateral tax treaties just a word with respect to you know the uncertainty that we're entering into with respect to a principal purpose test the principal purpose test is the general anti-avoidance rule and I come from a jurisdiction where we've hadded a broad general anti-avoidance ruling on the domestic level for 20-some years now and it does enter a lot of subjectivity in uncertainty into the interpretation of rules one key point of the principal purpose test is that you only need to have one of the principal purposes to be taxed for it to apply that's unlike our Canadian GAR for example where you put the GAR as long as the principal purpose is a non tax purpose that is not the case with the principal purpose test it's a much broader oddly worded general and general anti-avoidance rule we just going to create some challenges so let's just take a look at the velcro case and quickly see how that this is going to happen because this is a case where the taxpayer was successful simple facts we had velcro of Canada which was a subsidiary in Canada and the the velcro brand and the IP and Technology of velcro was all held in a Dutch company royalties were paid to the Dutch company at the time this structure was in place there was a 10% withholding tax on the royalty payments made from Canada to the Netherlands you could just go to the next slide please and so what happened is the Dutch Velcro of industries decided to relocate the residents of tax residence of velcro of industries to the Dutch Antilles what that meant though was now we had royalty payments being made from Velcro of Canada to a dutch antilles company there is no tax treaty between the netherlands antilles therefore the withholding tax rate on the royalty payments was going to be 25 percent not 10% at that particular time this all happened back in 1995 so what the tax payer did was basically assign the IP licenses to a new company velcro Holdings BV which was tax residents in the Netherlands and therefore velcro Canada now started making the with royalty payments to velcro Holdings BV in the Netherlands not to the dutch antilles company ultimately a lot most of those royalties were passed on to the debt until these companies and that was in the in the facts such velcro holdings didn't have a lot of substance in it but it was legally constituted the Canadian government used the concept of beneficial ownership to attack this particular structure saying that beneficial owner of the IP was not velcro holdings but was velcro of industries which was resident in the Dutch Antilles and the tax payer was successful in holding in in getting the courts to agree that the beneficial ownership of the IP was velcro Holdings BV and that's because they were they met the four key elements of beneficial ownership possession of the IP use of the IP risk associated with the IP and control of the IP when you look at the underlying facts of this case so you realize that there wasn't a heck of a lot of substance in velcro Holdings BV so now that we come to an error where the eye is going to modify tax raise and introduce a propensity principal purpose test you know does this structure continue to work under the principal purpose test I would suggest to you that there's a huge risk here that this is going to be a big problem you know the is one of the principal purposes of insert invoke certain velcro Holdings into the structure to reduce taxes and I think that's going to be a very difficult test to meet for velcro going forward if you just move to the next slide this is another situation where a very common situation where an intermediary intermediate holding company is use again to reduce withholding taxes you have a separate with a subsidiary in another jurisdiction they want to take dividends from the subsidiary up to the parent if they can insert a intermediary holding company in the structure to reduce the withholding taxes on the dividend they can realize a tax benefit again in the past those types of structures certainly from a Canadian point of view were held to be legally effective this one looks a lot like the previous which was argued in Canada a number of years ago and that was held to be effective from a tax point of view to realize tax treaty point of views again because the holding company wants the beneficial owner of the shares of the subsidiary company now putting the principal purpose test is in test into this situation you know it what is the principal purpose or what is one of the principal purposes of this structure to realize a tax benefit again that's going to be a very difficult test to meet when you look at the commentary that hen's referred to and there's a number a few examples now that are going into the commentary I think what's key is if you have a whole if you have a holding company which has very little substance that is basically legally constituted I'm not a lot of substance in that holding company I think the principal purpose test is going to cause you some huge problems and you really need to take a look at those structures there is an example in the commentary about regional holding companies and if regional holding companies are held in a jurisdiction where their organization already has substantial business operations in substance there's a better chance that the principal purpose test will not apply as the holding company could arguably be in accordance with the object and purpose of the provisions of the tax treaty which is one of the exceptions which is the main exception to the application of the principal purpose test so I think we're seeing going to see some very interesting days coming up with respect to the principal purpose test there are a lot of structures out there that are effective today from it to reduce taxes particularly on flows of income between third countries withholding taxes on interest or dividends or royalties I think what you're going to find under a principal purpose test if there is not substance in those jurisdictions they're going to have huge issues going forward and they're going to need companies organizations are going to re need to relook at their structures to see what they should do as a result of the impact of the ml line thanks John I think your honor I think as you say that there's going to be a lot of structures out there that now very much needs to be reviewed to see if they are still effective if you have intermediate holding companies so that was a look at the principal purpose test we're going to move on now to the another area which has got very significant practical application and it's an area that we get an awful lot of questions about and that's the question of when a permanent establishment is triggered when you are operating in a foreign country and I think it's answer is going to talk us through these changes the yes indeed Malcolm also an important part of the MLI is the what I've called avoidance of b/e articles 12 to 14 and they are aimed at situations where groups are trying to avoid having a taxable presence again it's important to realize that this is not a minimum standard so countries can opt in and out and basically three situations are being thought of commissionaire structures auxiliary activity structures which I'll talk about a little bit more later on and splitting up of contracts because many treaties they have a period of 12 months if you do a project that becomes a taxable presence and what we've seen in practice is that companies split the activities over more entities just to fall below the threshold of the 12 months and so these articles 12 to 14 create what I would call newbies and there has been much debate about that because one of the practical problems is what is the profit that needs to be allocated to these newbies and I think that also perhaps explains why quite a number of countries have said that they will not apply article 12 for instance Australia Canada Germany Luxembourg and UK or countries that will not apply article 14 they're also listed on the right side of your screen so although these articles these new bees could have quite a substantial impact early indications are that quite a number of countries will choose not to adopt these articles if we move onto to the next slide going into a little bit more detail about article 13 and you may be aware that the current text read is often list certain auxiliary activities that are considered not to be a taxable presence for instance if you have a warehouse to store goods or if you have aware as where you keep stock for speedy delivery to clients or if you use an office to to purchase goods or collect information currently those activities are not considered a taxable presence the an ally is going to change that because they have added a provision that these activities can also become the taxable presence if they are of a key nature for the business for instance examples that are given if you are a web store and the part of your business model is bringing your goods very quickly to the clients then a warehouse in a local country performs a vital function in your supply chain and that that becomes under the new rules a taxable presence similarly if you are a company that's in the business of purchasing and selling a particular type of goods say flowers then you can have a purchasing office in another country that is essential to your business because that's how you make sure that you mind the best flowers available in the new situation that would also become a permanent establishment so it's quite important to realize that this is quite an important change but it's also quite difficult to assess in in essence it requires a transfer pricing type of assessment to see okay is the activity in the other country of a vital nature or not article 13 also adds what we call an anti fragmentation rule and we can see that on on the next slide again using the example of a group engaged in a webstore business what they currently did is trying to split up activities over various group companies so a separate storage company a transport and a marketing company and although each of them has a presence in the other country under the current rules that's not yet a taxable presence what the anti fragmentation rule says is that you need to add the activities of related parties together to see if those combined activity is in the other country are of a vital nature and then you have a taxable presence so I think to the extent that this article will be applied by various countries subscribing to the online this will have a very very big impact and requires a thorough review of your supply chain to see if your company's affected - very interesting news saying earlier on about the countries that haven't signed up for the the permanence establishments are article when they've signed up for the MLI and certainly in the UK that was one of the the most eye-catching things we heard when we were talking to the revenue in the UK and the reasons we were given in the UK as to why the UK hasn't signed up but partly that the the most egregious examples of a p avoidance were being dealt with by the diversity profits tax in the UK which is a very UK tax it's um not something that's very widely i've been implemented elsewhere and also i think there was concern that the changes to the p definition could result in lots of lots of companies having to file tax returns but not actually much extra tax being paid as a result of those different we know why are the countries have chosen not to introduce e the changes on permit establishment definition well what I've seen so far are basically some of the arguments you've already mentioned it could create quite a number of bees which could increase the compliance burden of companies very much but at the other side if there's not much profit to be attributed to those bees then yeah it will bring very little text so if you wait and compliance obligations on one side very little tax revenue on the other side I can see that as being a very good reason that tax authorities do not want to go there the other man's the OECD will provide further guidance on profit allocations in situations like this so it could very well be that over time the view of countries will change and that this becomes a much more widespread adoption by the countries subscribing to the online make sure even avanti really connects fun and disputes and arbitration yeah I think from from what we've talked about so far and also what Jonas mentioned some of the concepts being used in the ANA lie are open to different interpretation so it's not unlikely that disputes will arise and in that sense it's very good to see that the MLI does contain several articles that deal with mechanisms for resolution of disputes and I've looked at a number of countries to see what their position is and I've only checked the countries listed on the right but all of them they are opting for part six arbitration so to that extent the analyte does provide some recognition of potential disputes and also some solutions for that yeah I think then if we move on to the next slide sort of summing up what we've heard so far about the ANA lie what does it mean in practice as John mentioned in the beginning once the MLI enters into force so once five countries have subscribed and ratified then tax treaties can change and the OECD has mentioned that from the current country positions that have been made public so far already more than a thousand text treaties are potentially affected and that's that's a huge number and a thing for companies operating in many jurisdictions the challenge is to keep track of at what moments does the m/l I actually have impact on a particular tax treaty once you've identified that then you need to check ok what changes in the text reading that's currently in place between two of those countries and where do you find those tax treaties I've seen that just a couple of days ago the OECD introduced a beta version of a software database where you can compare two countries to see the provisions that they have elected or they have opted in and opted out of but still the most important moment will occur when and match this between two countries that have signed up for the MRI and what the impact is and so I think yeah the suggested approach to keep the stars manageable is that for your group you identify which treaty benefits are the most important and keep track of those developments or at least those 3d developments and then as a follow-up do a more thorough impact review because once a treaty is changed you need to see what has exactly changed in the treaty and of course video will be happy to assist you with with that and then I think as a final observation also John mentioned that some countries have opted not to bring all the all the tax treaties under the Emma lie so you might say that the MRI perhaps is temporary in the sense that if a country will renegotiate a tax treaty with another country then they may incorporate in that treaty some of the elements or all the elements that are now in the Emeline so maybe over time many many years away the MLI becomes obsolete and we only have the dextry until their tax treaties again but yeah that's something we'll have to see in the future and I guess in the meantime quite a lot of complexity just working our way through what has changed and what hasn't Sarah thank you very much for that and Sam John for you so true we'll move over just for the final five minutes or so to review from the US and Thank You Sean for waiting patiently on this webinar but Sean John sisters talk us through how us groups should be looking at the the changes that we've just been hearing about in the MLI sure sure I can cover that so I mean as was mentioned earlier the United States did not find the multilateral instruments so I believe the last time I checked it's the United States Brazil and Saudi Arabia are the only three countries out of the g20 that did not sign in the case of the United States the head of the OECD tax unit nail task I'll take Imams he even stated that given the u.s. is tough anti-abuse measures and its tax treaties the fact that the US moon sign isn't really a serious problem for the success of the multilateral instrument and so ultimately I think the bulk of the multilateral in strength it is really consistent with the u.s. tax treaty policy that the Treasury Department has already been falling for several decades so I don't think there's a lot of concern regarding the fact that the United States designed the multilateral instrument and really I think like I mentioned you know there's there in general I think the US tax tree network has relatively low risk of base erosion and profit shifting issues you know out of the 60 some treaties that we have you know all of them except for maybe five or six have some sort of form of a limitations on benefits article write an article specifically designed to prevent treaty shopping and to prevent non-treaty jurisdiction residents from improperly claiming treaty benefits and you know a lot of our treaties already include arbitration provisions including many treaties with mandatory arbitration provisions so the United States we already have binding arbitration and force signed or agreed upon in principle with I believe eight of the countries that have signed on to the arbitration provisions in the NRI you know the US tax treaties most US tax treaties including savings clause which is also consistent with the multilateral instrument you know to make it clear that the United States reserves the right to tax all income items of US citizens residents and US corporations another reason why the United States and sign the multilateral instrument is because of certain procedural issues you know the State Department so that's the executive department that handles foreign policy and issues that you would need to prove and also the US Senate they generally have to approve tax freeze negotiated by the United States so you know Treasury official stated that you know Senate would probably want to have some kind of assurance that all of our treaty partners share the same interpretation of what the multilateral instrument does to allow tax treaties but going to back to your mat question Malcolm I'm even if the u.s. didn't sign the agreement the multilateral and stranded still don't have an impact on us multinational groups and these US companies really should be reviewing the impact the instrument can have with regards to subsidiaries located in jurisdictions that have signed the instrument and in particularly they really should be reviewing the tax consequences of foreign foreign entity relationships within the multinational group the last point I wanted to mention was that even though the United States didn't find the US Treasury didn't find instrument Treasury Department has left open the possibility of signing the instrumentalize date and there really hasn't been any official decision made about whether the US will sign or participate in the future okay I think those are the items that I wanted to cover and I think social and I guess some in the US the question of tax reform still dominates in fact our last webinar back in March was focused very much on the proposals that were out for tax reform at that time and I guess that's much higher up the agenda in the u.s. than signing the multilateral instrument but perhaps just a very quickly Jai has there been any change in mood in the US recently in terms of the likelihood of reform coming through in sometime in 2017 is that still on the on the cards do you think I guess it depends on who you ask I mean we have you know Republican tax plan between plant you know we have the Trump tax plan where I should say it's really an outline it's just a one-page there was really no details I mean some of the key changes in both plans are lowering corporate tax rates and moving to a territorial system I mean right now tax reform has taken a backseat to health care reform but still a Paul Ryan the Speaker of the House of Representatives he essentially about to complete tax reform in 2017 and so I think his plan is to tackle tax reform and D fall of 2017 after the summer recess and get it finished before 2018 which is an election year in the US and I don't think anyone wants to be working on tax reform or if it's even feasible to do so in an election year at the same time William Holden is the senior vice president of the bipartisan policy center in the Washington and he was the former Republican staff director for the Senate budget yesterday he was quoted in an article as saying you know there's a train wreck coming with regards to tax reform and essentially saying there's no way for comprehensive tax reform to occur in 2017 you know which isn't too reassuring overall so you know is tax reform coming in 2017 or is it going to be more you know short term tax cuts I think it's a little too soon to say you know ultimately given the dysfunction that exists within you know our federal government you know it does raise questions in my mind whether you know they'll be able to get their act together and actually agree you know upon getting something done so I know that doesn't really answer your question I think it's it's still too soon to say one way or the other no that stuff's very helpful and thank you very much for giving us your thoughts on that we are just about up all the time we haven't a few questions coming in there's a Q&A facility on these webinars and people have been asking questions so we have attempted to answer a number of those as we've gone along the ones we haven't answered we will we will get a response out to you after this webinar so it just reminds me to say thank you very much to all of you for dialing in thanks in particular to my fellow panelists because John and Shawn and to remind you that the next webinar in our series of international tax webinars will take place on the 10th of October so look forward to welcoming you back then thank you