Double Tax Treaties and BEPS
Double Tax Treaties and BEPS
The Revenue Commissioners have updated its Tax and Duty Manual Part 34-00-02 to incorporate changes to the Double Tax Treaty between Ireland and the UK arising from the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Can you explain the implications of this change?
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) came into force in Ireland from 1 May 2019. On the entry of the MLI, the provisions modify the application of Ireland’s Double Taxation Convention (“DTC”) with other jurisdictions that have also ratified the MLI. Ireland introduced the new rule under Article 4 of the MLI in relation to the determination of the residence of dual-resident persons, referred to as the tie-breaker rule.
Under the tie-breaker rule, a dual-resident person, other than an individual, no longer automatically qualifies for a single jurisdiction of residence status based solely on the place of effective management. Instead, the Competent Authorities will determine a sole jurisdiction of residence through mutual agreement, considering the relevant factors (e.g. the place of effective management, the place of incorporation or otherwise constituted). In order for the Competent Authorities to consider the case, the taxpayers affected need to implement the Mutual Agreement Procedure (“MAP”) as provided for in the MAP article of the DTC. Generally, the MAP article allows a taxpayer to submit their case to the Competent Authority of either jurisdiction. If an agreement cannot be reached, the company will only be entitled to treaty benefits to the extent that the Competent Authorities agree.
The Tax and Duty Manual Part 34-00-02 has been updated to incorporate the changes brought in by the tie-breaker rule for the Double Tax Treaty between Ireland and the UK for determining the residence of trusts and estates. Previously, a trust was deemed to be resident where its place of effective management was situated, however, the Competent Authorities are now required to determine the tax residence position through the MAP.
For the purpose of the modified tie-breaker rule, and while other relevant factors will be taken into consideration, “place of effective management” is still an important factor and the following should be considered in that regard:
• If the trustees are all individuals residing in one country, that country should be the place of effective management.
• If the trustees are all individuals who reside in different countries, the place of effective management should be the country where the individual who generally controls and supervises the administration of the trust resides. If there is no such individual, the place of effective management should be the country where the majority of meetings were held.
• If a professional body is acting as trustee, the place of effective management should generally be the place of business of that professional body.
• If the professional body acting as a trustee is a UK bank with a branch/subsidiary in Ireland and the work is carried out by that branch/subsidiary, Ireland should be regarded as the place of effective management, and vice versa.
The modified tie-breaker rule has effect in Ireland with respect to taxes levied by Ireland with respect to taxable periods beginning on or after 1 November 2019; and in the United Kingdom, from 1 April 2020 for corporation tax and from 6 April 2020 for income tax and capital gains tax.
Taxpayers need to be mindful of the impact of the modified tie-breaker rule if there is a risk of being considered dual-resident as the MAP can be a lengthy process.
Contributor: Michelle Adams, Senior Manager, Financial Services Tax.