In June 2017 Austria signed the Multilateral Instrument “MLI” in Paris together with almost 70 other states. The MLI is a convention which facilitates the implementation of tax treaty related measures to prevent base erosion and profit shifting, using the recommendations from the OECD BEPS Project. The MLI is designed to offer solutions to close gaps between international tax rules by directly modifying bilateral tax treaties. The measures are designed to make sure, that profits are taxed where actual economic activity and added value takes place. The transfer of profits to low-tax-countries should be stopped.
The MLI modifies double tax treaties directly, no further implementation is needed. In Austria, 38 double tax treaties are affected – including Germany, Switzerland, France and Italy. Austria also expressed some reservations, so the MLI is not fully applicable to every Austrian DTA. The alternative to implementation in a multilateral agreement would be to renegotiate all DBAs individually, so the MLI is the fastest way to achieve the objectives which were set in the BEPS project.
A list of the affected Austrian DBA can be found here.
The MLI includes the following measures:
- Measures to avoid hybrid mismatches
- Measures to avoid treaty abuse
- Measures regarding the avoidance of PE Status
- Measures to improve dispute resolution
Impacts of the MLI on Austrian DTA
The first measure is to avoid hybrid mismatches – where jurisdictions have different regulations to qualify for example whether entities are transparent for tax purposes. This could lead to double taxation or no taxation.
Especially the minimum standards – for example the measures to avoid treaty abuse – are modifying existing Austrian DTA. The „Principal Purpose Test“ should prevent, that the DTA benefits are applied, if the arrangement was made to achieve this DTA benefits in the first place. The DTA benefits may also not apply for entities located in third countries, if no actual activity is exercised.
Also the definition of permanent establishments is subject to changes in the MLI. Because the definition of the representative PE is not part of the minimum standard of the MLI, Austria has refrained from applying the provisions fully and has made reservations. The current administrative practice already provides a definition of the representative PE, but in order to be effective, the consent of both contracting parties (of the DTA) is required. Bilateral negotiations are planned. The definition of the auxiliary permanent establishment (preparatory activities) has effect on the Austrian DTA.
Austria approved to the new mutual agreement procedure and the corresponding adjustments without major reservations.
The implementation of the MLI can be expected in 2019, since the MLI is a state contract it requires the approval of the national assembly.
A list of countries participating in the Agreement can be found here.