The consequences of the ratification of the Convention (hereinafter - the Convention) for business, were examined by our experts.
At the moment, based on the official website of the Organization for Economic Cooperation and Development (hereinafter - the OECD), 87 countries have joined the Convention. The Convention is only one of the 15 steps approved by the BEPS (Base Erosion and Profit Shifting) plan (the OECD plan to combat the erosion of the tax base and shifting profit from taxation. Its signatories must comply with certain tax requirements.
From January 1, 2017, Ukraine joined the Extended Cooperation Program within the OECD and committed to implement the "BEPS minimum standard". Mandatory for Ukraine are four steps out of the fifteen proposed, namely:
- Step 5 "Improving measures to combat tax abuse";
- Step 6 “Preventing the abuse of benefits under bilateral tax treaties”;
- Step 13 "Recommendations on transfer pricing documentation and country information disclosure";
- Step 14 “Improving the mutual agreement procedure by resolving disputes”.
Mechanism of action
The peculiarity of the Convention is that it changes "at one fell swoop" the Agreements of the country ratifying the Convention that such a country has indicated.
A country that has signed and ratified the Convention automatically changes the bilateral conventions indicated by it by means of a “minimum standard” in 3 ways (at the choice of country): (1) the implementation of the “test for basic goals” (mandatory provision of the Convention), (2) the implementation of the “test for basic goals” and “provisions for simplified restriction of benefits”, and (3) the implementation of “detailed provisions for restriction of benefits”.
Choice of Ukraine
The Convention contains two types of provisions: mandatory and optional, the application of which will depend on the choice of the country ratifying the Convention.
The provisions, which are mandatory for all States which have signed the multilateral conventions, including those adopted by Ukraine are the following:
- Each Agreement is supplemented by a preamble, in which it is stated that it should not apply to persons using the advising Agreement for tax evasion;
- restriction of the application of the privileged provisions of the Agreement, if the main purpose is to obtain such benefits - "test for basic goals"
- establishment of the possibility of the taxpayer independently initiate a mutual agreement procedure.
- Regulations on the procedure for taxation of income from the alienation of shares or the rights of participation of business entities, the value of which is based mainly on real estate: the rule on taxation of the said income at the location of real estate;
- provisions related to permanent representative offices (for example, opposition to evasion of the status of permanent representation through agency relations, separation of contracts, exceptions for certain types of activities), etc.
It is expected that the Convention will fully work for Ukraine next year, but, in our deep conviction, Ukrainian business should be prepared for this now. The fact is that the main risk for the current state of affairs is a "test for basic goals." This test implies that obtaining a tax benefit should not be an end in itself relevant payment. Taxpayers will be forced to prove to tax authorities that their goals are, for example, maintaining an operating company, purchasing raw materials, property, etc. If the foreign company, by which the payments will be made does not have an office, employees, and its directors and/or founders are nominal, then this test will be an extremely difficult task. It is worth noting that in case of failure in passing the test, the tax authorities may refuse to use the benefits provided for in the relevant Agreement.
Thus, a large number of structures of Ukrainian business that use a foreign element will be threatened and the need for such foreign elements of the structure may, over time, disappear due to the unjustified high cost of maintaining a real company in many jurisdictions.
* * *
In conclusion, I would like to say the following. We can not now predict the application of the Convention by the Ukrainian tax authorities and are not ready to specifically say when the Convention will be fully applied. However, we advise you to study in detail and, most importantly, critically examine the current structure of your business and try to assess possible losses in the case of: (1) depriving of your structure of benefits under the Agreement, or (2) maintenance of a real company with office, employees and other attributes in applicable jurisdiction , in order to preserve such benefits. Having done this, it is possible that the question on the expediency of the further use of a foreign element you will may no longer needed.