Multilateral Instrument (MLI) & Holding Company Jurisdictions: Will Mauritius have anything left to do? Anne Bennett, Tax Partner, Webber Wentzel
MLI and Holding Companies: What is the MLI? • The Multilateral Instrument, officially called the " Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion and Profit Shifting " (" MLI ") is part of the OECD Base Erosion and Profit Shifting (BEPS) initiative • The final BEPS Reports cover 15 action areas and recommend local law/treaty provisions to enforce certain "minimum standards" in key tax areas, and also "best practices" in other tax areas. • Some recommendations, e.g. those on treaty abuse, require countries to make changes to existing tax treaties. To enable this to happen quickly, Action 15 proposed the development of a Multilateral Instrument. • The MLI will work together with existing tax treaties to update the existing treaties in the short term with relevant BEPS amendments.
MLI and Holding Companies: What is the MLI? • MLI entered into force generally from 1 July 2018 • Over 80 countries including SA and Mauritius have now signed up to the MLI and are following the required internal processes to bring it into force under their domestic law • 1100+ treaties currently affected • For withholding taxes, the MLI (once in force) will apply to treaties selected as "Covered Tax Agreements" from the 1 January after both treaty states have ratified the Convention. Will potentially start to apply to holding company dividend/interest/royalty income from 1 Jan 2019 • Pre-existing investments will become fully subject to the new rules • MLI covers a number of treaty issues – for holding companies the most NB are the anti-treaty shopping provisions
MLI and Holding Companies: Rules against treaty shopping • BEPS Action 6 Report identifies treaty shopping as " one of the most important sources of BEPS concerns " • The BEPS Action 6 report recommends the adoption of a “minimum standard” (Article 7 of the MLI) to provide a minimum level of protection against treaty shopping. Under the minimum standard, countries must implement: (i) the combined approach of a principal purpose test (" PPT ") rule and Limitation on Benefits (" LOB ") rule; or (ii) a PPT rule alone; or (iii) an LOB rule, supplemented by specific rules targeting conduit financing arrangements (to ensure a purpose related focus). • Going forward, one of the above will therefore apply to every Covered Tax Agreement
MLI and Holding Companies: Rules Against Treaty Shopping • The PPT has been overwhelmingly chosen by signatories to the MLI to date, including by South Africa • Where one treaty state chooses the PPT and the other treaty state has chosen the LOB (or e.g. PPT plus LOB), the PPT will generally be the default test applied • Mauritius: " While Mauritius accepts the application of Article 7(1) alone as an interim measure [i.e. the PPT] , it intends where possible to adopt a limitation on benefits provision, in replacement of Article 7(1), through bilateral negotiation ." • For virtually all holding company jurisdictions at this stage, therefore, the PPT will become part of the treaties they select as Covered Tax Agreements under the MLI
MLI and Holding Companies Principal Purpose Test • If one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits will be denied unless it is established that granting these benefits would be in accordance with the object and purpose of the relevant treaty provisions. " Notwithstanding the other provisions of this Convention, a benefit under the Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit… "
MLI and Holding Companies • Mauritius has submitted a list of only 23 tax treaties (out of 44) that it would like to designate as Covered Tax Agreements. • These do not include Mauritius' treaties with African countries other than Congo, Lesotho, Madagascar, South Africa and Swaziland • Mauritius' treaties with a number of countries including Botswana, Egypt, Mozambique, Namibia, Rwanda, Senegal, Uganda, Zimbabwe and Zambia will therefore continue to apply in their current form until such time as they may be amended through bilateral negotiation
Mauritian holding companies : Business as before (at least for now)? South Africa Cayman Co Co 0% dividend withholding tax 0% dividend withholding tax Mauritian Co Namibia Botswana Mozambique Rwanda Senegal Zambia Zimbabwe
This structure may be more of a problem … BVI Co 0% dividend withholding tax (domestic law) Mauritian 20% dividend withholding tax Co (non-treaty rate) 5% DTA dividend withholding tax South Africa Co Could the PPT operate to deny the 5% dividends tax rate normally available under Article 10(2) of the Mauritius/SA treaty?
MLI and Holding Companies: PPT • The PPT is a subjective test which looks to purpose • A taxpayer's purpose is a question of fact • Purpose can evolve over time • PPT is not a substance test but substance is still relevant. OECD has said that "it should not be lightly assumed" that the fact that a structure has the effect of conferring treaty benefits means that this was necessarily one of its principal purposes. All facts and circumstances must be considered. • However, " Where an arrangement can only be reasonably explained by a benefit that arises under a treaty it may be concluded that one of the principal purposes of that arrangement was to obtain the benefit " • OECD has supplied some high level guidance in Commentary on Article 29 of Model Convention but ultimately tax authorities will develop their own approach to application of PPT
MLI and Holding Companies: Next Steps • Evaluate existing cross border holding/financing structures and their purpose Two core questions: • Why did we need an intermediary holding company? • Where use is made of an intermediary entity to secure clear commercial benefits it can be argued that tax benefits arising from the structure are ancillary • Ignoring tax benefits, why was an intermediary company in Mauritius the best option in terms of achieving these commercial objectives ?
MLI and Holding Companies • Taxpayers may be able to show their need for an intermediary holding entity was due to: • the nature of the investment (e.g. private equity, other co-investment) • legal benefits derived from centralised holding of investments (e.g. asset protection/ring-fencing) • business/administrative benefits derived from centralised management • exchange control considerations for SA outbound investments • In making a choice as to where to locate the entity, commercial considerations may include • geographical proximity to investments (time differences, ease of travel and communication) • access to particular skills/expertise/knowledge • access to regional grouping benefits • tax considerations can play a role but must not be the driving factor • If challenged, taxpayers will have to provide evidence of their stated purpose. • Documentary trails could be very helpful or very damaging!
MLI and Holding Companies Existing structures • What evidence is available to demonstrate (non-tax) commercial benefits of all entities/steps involved in the arrangement or transaction? • Look at documentation from date when structure set up. If unavailable/outdated/unhelpful, document current commercial rationale for structure • If this is difficult, change the structure to one that is defensible New structures • Routing of dividends, interest, royalties, etc through special purpose vehicles which result in tax treaty benefits could be very risky • Ensure that non-tax reasons for the arrangement/structure are timeously and appropriately documented • Mandates to tax advisors need to be appropriately worded!
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