[1] Introduction

The Multilateral Convention to Implement Tax Related Measures to Prevent Base Erosion and Profit Shifting (the multilateral Instrument, the MLI), developed by the OECD and endorsed by the G20, offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation without creating opportunity for double non-taxation.

The MLI has been designed to strengthen existing tax treaties concluded among its parties without the need for burdensome and time-consuming bilateral renegotiations. It will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project.

In what follows, this analysis will cover Article 34 (entry-into-force) and Article 35 (entry-into-effect). It will also cover the use of opt-in provisions, opt-out provisions (reservations), and alternative provisions within the contexts of Article 35.

[2] Article 34 - Entry into Force

a) Legal texts of entry into force

Article 34(1) of the MLI provides that, the MLI entered into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification by the signatories. In chronological order, 5 jurisdictions, the Republic of Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017), Poland (23 January 2018) and Slovenia (22 March 2018), deposited their instruments with the OECD Depositary. Consequently, the MLI came into force on 1st July 2018. That is, the 1st day of the month following the expiration of a period of 3 calendar months beginning on 22 March 2018, the date on which Slovenia deposited the instrument of ratification to the OECD Depositary.

Article 34(2) of the MLI provides that for each Signatory ratifying, accepting, or approving this Convention after the deposit of the fifth instrument of ratification, acceptance or approval, the MLI shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance or approval.

b) Example of the entry-into-force date

The United Kingdom deposited its Instrument of Ratification to the OECD Depositary on 29 June 2018. The MLI shall enter into force on 1 October 2019 with respect to its covered tax agreement (CTAs). Singapore deposited its Instrument of Ratification on 21 December 2018. The MLI shall enter into force on 1 April 2019 with respect to the Singapore's CTAs.

In respect of the Singapore-United Kingdom CTA, the MLI shall enter into force on 1 April 2019, the latest of the dates on which the MLI came into force for each of the contracting jurisdiction.

Table 1 – Entry into Force date

Signature Deposit ratification instrument Entry into Force Status of List
Singapore 6/7/2017 12/21/2018 4/1/2019 Definitive
United Kingdom 6/7/2017 6/29/2018 10/1/2018 Definitive

[3] Article 35 - Entry into Effect

a) Legal texts of Article 35(1)

Article 35(1) is the entry-into-effect provision. It reads as follows:

1. The Convention (the MLI) shall take effect in each contracting jurisdiction with respect to the covered tax agreement:

  1. with respect to taxes withheld at source on amounts paid or credited to non-residents (withholding tax), where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (the CTA); and
  2. with respect to all other taxes levied by that contracting jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of 6 calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA.

Article 35(2) is an alternative provision for Articles 35(1)(a) and (5)(a) respectively, and Article 35(3) is an alternative provision for Articles 35(1)(b) and (5)(b). Both texts of Articles 35(2) and (3) read as follows:

b) Legal texts of Article 35(2) and Article 35(3)

2. Solely for the purpose of its own application of subparagraph a) of paragraph 1 and subparagraph a) of paragraph 5, a Party may choose to substitute "taxable period" for "calendar year", and shall notify the Depositary accordingly.

3. Solely for the purpose of its own application of subparagraph b) of paragraph 1 and subparagraph b) of paragraph 5, a Party may choose to replace the reference to "taxable periods beginning on or after the expiration of a period" with a reference to "taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period", and shall notify the Depositary accordingly.

Table 2 – The information is obtained from the OECD Depositary as of 29 August 2019.

Signature Deposit ratification instrument Entry into Force Status of List Option Alternative option
Article 35(1)(a) Article 35(1)(b) Article 35(2) Article 35(3)
Hong Kong (China) 6/7/2017 P X
India 6/7/2017 6/25/2019 10/1/2019 D X X
Israel 6/7/2017 9/13/2018 1/1/2019 D X X
Japan 6/7/2017 9/26/2018 1/1/2019 D X X
Malta 6/7/2017 12/18/2018 4/1/2019 D X X
Singapore 6/7/2017 12/21/2018 4/1/2019 D X X
United Kingdom 6/7/2017 6/29/2018 10/1/2018 D X X

Status of List: P=provisional; D=Definitive

(A) Table 2 from the OECD Depositary on 29 August 2019

As noted, Article 35(2) applies to Hong Kong, India, and Israel. As also noted, 6 contracting jurisdictions have deposited the instrument of ratification to the Depositary and chosen to apply article 35(3) to their CTA's. These contracting jurisdictions included Austria, Finland, Israel, Jersey, Malta, Russia, and Sweden. The design of Article 35(2) is to address the situation that the taxable period of some contracting jurisdictions does not follow the calendar year.

(B) Hong Kong's position on the entry-into-effect option

From Hong Kong's perspective, it has adopted the alternative provision under Article 35(2) to replace the option under Article 35(1)(a). It has also adopted Article 35(7)(a) to replace the option of Article 35(1)(b). As Hong Kong has not ratified its position, it is excluded from analysis below.

(C) Israeli position on withholding tax under Article 35(2)

Article 35(2) shall apply to the India-Israel CTA symmetrically. In respect of the Israel-Japan CTA, it is observed that Japan has adopted the entry-into-effect provision under Article 35(1)(a) while Israel has unilaterally chosen to replace "calendar year" with "taxable period" pursuant to Article 35(2). Therefore, the entry-into-effect date provision of the Israel-Japan CTA shall apply asymmetrically with respect to the withholding taxes. The same holds for the entry-into-effect date provision of the Israel-Malta CTA, the Israel-Singapore CTA, and the Israel-UK CTA.

c) Comparison between the use of 35(1) option and the alterative option is given below:

[i] Illustrated examples showing asymmetric application of Article 35(1)(a) and Article 35(2) with respect to withholding tax, and symmetric application of Article 35(3) with respect to other taxes

Example A: Entry-into-effect date under Malta-Israel CTA

Malta Israel
(1) Date of deposit of instrument of ratification 18 Dec 2018 13 Sept 2018
(2) Entry into force 01 April 2019 01 Jan 2019
(3) Entry into effect – WHT
Article 35(1)(a) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of the next calendar year beginning on or after the later of (2). 01 Jan 2020
Article 35(2) applies, where the event giving rise to WHT occurs on or after 1st day of the next taxable period beginning on or after the later of (2). 01 Jan 2020

(taxable period runs from 1st Jan to 31 Dec each year)
(4) Entry into effect – all other tax (non-WHT) 01 Jan 2020
Article 35(3) applies to non-WHT, for taxes levied with respect to taxable periods beginning on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the later of the entry-into-force dates (2019-4-1) the taxable periods beginning on 1 Jan of 2020 beginning after a period of 6 calendar months from 1 April 2019. the taxable periods beginning on 1 Jan of 2020 beginning after a period of 6 calendar months from 1 April 2019.

Malta's taxable period runs from 1st Jan to 31 Dec each year.

The Israeli position with respect to Article 35(3)

With respect to taxes other than withholding tax as per information in Table 2, Article 35(3) shall apply to the Israel-Malta CTA symmetrically because both of the two contracting jurisdictions have adopted the alternative rule under Article 35(3).

However, Article 35(3) shall not apply to the CTAs that Israel has concluded with the following 6 contracting jurisdictions: Hong Kong (provisionally), India, Japan, Singapore, and the United Kingdom because all of these contracting jurisdictions adopt the option under Article 35(1). In this regard, the entry-into-effect provision shall apply to these 6 CTAs asymmetrically.

Most of the contracting jurisdiction choose the above entry-into-effect date under Article 35(1)(a) with respect to withholding taxes and 35(1)(b) with respect to other taxes, meaning that the MLI shall take effect symmetrically on the contracting jurisdictions to the CTA. However, some contracting jurisdictions have adopted the alternative provisions for the withholding taxes under 35(2) and other taxes under 35(3). The application of a combination of option under Article 35(1) and alternative options will be examined in what follows.

[ii] Illustrated examples showing symmetric application of Article 35(1)(a) and Article 35(1)(b) with respect to withholding tax and other taxes respectively

Example B1: Entry-into-effect date under the Japan-Singapore CTA

Singapore Japan
(1) Date of deposit of the instrument of ratification 21 Dec 2018 26 Sept 2018
(2) Entry-into-force date 01 Apr 2019 01 Jan 2019
(3) Entry into effect – withholding tax (WHT) 01 Jan 2020 01 Jan 2020
Article 35(1)(a) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of the next calendar year beginning on or after the later of entry-into-force date in (2).
(4) Entry into effect – all other tax (non-WHT) 01 Oct 2019 01 Oct 2019
Article 35(1)(b) applies to non-withholding tax, for taxes levied with respect to the taxable periods beginning on or after 6 calendar months from the later date of (2) above. years of assessment beginning on 1st Jan 2020 taxable periods beginning on 1st Jan 2020

Singapore's taxable period runs concurrently with the calendar year from 1st January to 31st December each year. Both Japan and Singapore adopt the provisions under Articles 35(1)(a) and 35(1)(b) with respect to withholding tax and other taxes.

Example B2. Entry-into-effect date under the Japan-United Kingdom CTA

United Kingdom Japan
(1) Date of deposit of instrument of ratification 29/06/2018 26/09/2018
(2) Entry into force 01/10/2018 01/01/2019
(3) Entry into effect – WHT 01/01/2019 01/01/2019
Article 35(1)(a) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of next calendar year beginning on or after the later of entry-into-force date in (2).
(4) Entry into effect – all other tax (non-WHT) 01/07/2019 01/07/2019
Article 35(1)(b) applies to non-withholding tax, for taxes levied with respect to the taxable periods beginning on or after 6 calendar months from the later of entry-into-force date in (2) above. taxable periods beginning on 1st Apr 2020 (corporate tax), and 6 Apr 2020 (income tax and capital gains tax) taxable periods beginning on 1st Jan 2020

For withholding tax purpose, the entry-into-effect date for Japan falls on the same date as the entry-into-force date under Article 35(1)(a). In that regard, the OECD Secretariat has specifically dealt with this issue, as set out below.

Where a second of the pair of contracting jurisdictions deposits its instrument of ratification on a day in September 2018, the date of entry into force of the MLI for that contracting jurisdiction pursuant to Article 34 will be 1 Jan 2019. The question raised is whether the inclusion of the word "next" in Article 35(1)(a) means that, in such a case, the MLI has effect for events giving rise to withholding taxes which occur on or after 1 Jan 2019 or on or after 1 Jan 2020. The Secretariat has clarified that the use of the word "on" can only mean that the date from which the MLI have effect can be the same as the latest of the dates of entry into force. The same reasoning applies to the interpretation of the similar formulations used in Article 35(3) ("... 1 Jan of the next year beginning on or after...") and Article 35(5) ("... the first day of the next calendar year that begins on or after..."). See the notes issued by the OECD Secretariat.1

[iii] Illustrated examples showing symmetric application of Article 35(1)(a) with respect to withholding tax, and asymmetric application of Article 35(1)(b) and Article 35(3) with respect to other taxes

Solely for purpose of its own application of Article 35(1)(b), a contracting jurisdiction can unilaterally apply the alternative provision for the entry-into-effect date with respect to all other taxes under Article 35(3). As noted, where a contracting jurisdiction to the CTA opts in for Article 35(3) in place of 35(1)(b) while the other contracting jurisdiction adopt the provision under article 35(1), the entry-into-effect provision shall apply asymmetrically with respect to the CTA.

As the Explanatory Statement to the MLI clarifies, Article 35(3) is to allow Contracting Jurisdictions to ensure that the entry into effect would take place only after the start of a calendar year. Malta is one of the contracting jurisdictions that opt-in for Article 35(3).

Example C1. Entry-into-effect date under Malta-Singapore CTA

Malta Singapore
(1) Date of deposit of instrument of ratification 18/12/2018 21/12/2018
(2) Entry into force 01/04/2019 01/04/2019
(3) Entry into effect – WHT 01/01/2020 01/01/2020
Article 35(1)(a) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of the next calendar year beginning on or after the later of entry-into-force date in (2) above.
(4) Entry into effect – all other tax (non-WHT) 01/10/2019 01/10/2019
Article 35(1)(b) applies to non-WHT, for taxes levied with respect to taxable periods beginning on or after 6 calendar months from the later of entry-into-force date in (2) above. years of assessment beginning on and after 1st Jan 2020.
Article 35(3) applies to non-WHT, for non-WHT levied with respect to taxable periods beginning on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the latest of the entry-into-force dates (2019-4-1) the taxable periods beginning on 1 Jan 2020 beginning on or after 6 months from 1 April 2019.

Example C2. Entry-into-effect date under Malta-UK CTA

Malta United Kingdom
(1) Date of deposit of instrument of ratification 18 Dec 2018 29 Jun 2018
(2) Entry into force 01 April 2019 01 Oct 2018
(3) Entry into effect – WHT 01 Jan 2020 01 Jan 2020
Article 35(1)(a) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of the next calendar year beginning on or after the later of (2).
(4) Entry into effect – all other tax (non-WHT) 01 Jan 2020 01 Jan 2020
Article 35(1)(b) applies to non-WHT, for taxes levied with respect to the taxable periods beginning on or after a period of 6 calendar months from the later of (2) above. the taxable period on and after 1 Apr 2020 (corporate tax), and 6 Apr 2020 (income tax and capital gains tax)
Article 35(3) applies to non-WHT, for taxes levied with respect to taxable periods beginning on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the later of the entry-into-force dates (2019-4-1) the taxable periods beginning on 1 Jan of 2020 beginning after a period of 6 calendar months from 1 April 2019.

Malta unilaterally adopts the alternative provision under Article 35(3) solely for its own application of Article 35(1)(b). Accordingly, the entry-into-effect date of Malta, for all other taxes levied with respect to the taxable periods, shall begin on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the latest of the dates (1 April 2019) on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement.

In contrast, the Malta-United Kingdom CTA shows that the entry-into-effect date for the U.K. shall begin on and after 1 April 2020 under Article 35(1)(b).

In this regard, the entry-into-effect article shall apply asymmetrically with respect to the Malta-United Kingdom covered tax agreement.

[iv] Symmetrical Application Article 35(2) with respect to withholding taxes, and symmetrical application of Articles 35(3) with respect to other taxes, under the alternative rule

Example D. Entry-into-effect date under India-Israel CTA

India Israel
(1) Date of deposit of instrument of ratification 18 Dec 2018 13 Sept 2018
(2) Entry into force 25 Jun 2019 01 Jan 2019
(3) Entry into effect – WHT
Article 35(2) applies to WHT, where the event giving rise to WHT occurs on or after 1st day of the next taxable period beginning on or after the later of (2). 01 Oct 2020 01 Jan 2020

(taxable period runs from 1st Jan to 31 Dec each year)
(4) Entry into effect – all other tax (non-WHT) 01 Jan 2020
Article 35(3) applies to non-WHT, for taxes levied with respect to taxable periods beginning on or after 1 January of the next year (2020) beginning on or after the expiration of a period of 6 calendar months from the later of the entry-into-force dates (2019-4-1) the taxable periods beginning on 1 Jan of 2020 beginning after a period of 6 calendar months from 1 April 2019. the taxable periods beginning on 1 Jan of 2020 beginning after a period of 6 calendar months from 1 April 2019.

Both India and Israel adopt the alternative option under article 35(2) with respect to withholding taxes and article 35(3) with respect to other taxes. Therefore, the entry-into-effect shall apply symmetrically with respect to the CTA between India and Israel.

Footnote

1. http://www.oecd.org/tax/treaties/beps-mli-secretariat-note-entry-into-effect-under-article-35-1-a.pdf

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