Worldwide: Multilateral Instrument: The Application Of The Entry-into-Effect Article To The Iceland-Japan Tax Agreement (Part 2)

Multilateral Instrument: the application of the Entry-into-Effect Article to the Iceland-Japan Tax Agreement (Part 2)

1. Introduction

The author examines how the choices by Japan of the option in the entry-into-effect provision interact with that chosen by 4 of the other contracting jurisdictions of the MLI, such as India, Iceland, Sweden and the United Kingdom.

Table A: Entry into effect positions of the 5 selected contracting jurisdictions - [from Japan's perspective]

The "X's" in the table stands for the option that a contracting jurisdiction has chosen with respect to the entry into effect provision of the MLI.

As shown in Table A, with respect to the entry-into-effect dates, the selected contracting jurisdictions have taken different alternative provisions and opt-out provisions (reservations) in the application of the entry-into-effect article to its covered tax agreements (CTAs),

• Japan has adopted the following articles: article 35(1)(a) with respect to withholding taxes, article 35(1)(b) with respect to other taxes, and article 35(4), which fast-tracks the entry-into-effect date for cases of mutual agreement procedure under article 16(1).
• India has chosen the alternative provision under article 35(2) solely for its own application with respect to withholding taxes, adopted article 35(1)(b) for other taxes. It also adopted article 35(4) regarding MAP cases under article 16(1).
• Iceland has chosen to adopt article 35(1)(a) for withholding taxes, the alternative provision under article 35(3) solely for its own application with respect to other taxes. It has reserved its rights for article 35(4) not to apply to all its CTAs pursuant to article 35(6).
• Sweden has chosen to adopt article 35(1)(a) for withholding taxes, the alternative provision under article 35(3) sole for its own application with respect to other taxes, and article 35(4) for MAP cases under article 16(1). It has also reserved its right under article 35(7)(a) providing that it shall replace the entry-into-effect date of article 35(1), and article 35(4) with the texts described in article 35(7)(a)(i) and (ii) for its CTAs.
• The United Kingdom has adopted the same articles 35(1)(a), 35(1)(b), and article 35(4) as that Japan has adopted.

2.1. Entry into Effect – the Iceland-Japan Double Tax Agreement (subject to notification)

2.1.1. A comparison between Iceland's and Japan's position under the Multilateral Instrument shows the symmetrical choice of Article 35(1)(a) with respect to withholding taxes and the asymmetrical choice of Article 35(1)(b), as modified by Article 35(3), with respect to other taxes. The respective entry-into-effect dates for Iceland and Japan are set out in the table below:

Table B2 - Entry into effect dates as per information of the OECD Depositary

2.1.2. Coming into effect and legal relevance

As of 1st July 2020, a double tax agreement exists between Iceland and Japan, but neither jurisdiction has included it in its notification to the Depositary. Therefore, the Iceland-Japan DTA is not a CTA, as defined in article 2(1)(a). One possible reason may be that both parties are re-negotiating the existing tax agreements with a view to bringing it more in line with the provisions of the MLI than now.

For Japan and Iceland, the MLI has come into force since 1st Jan 2019 and 1st Jan 2020 respectively. But the Iceland-Japan double tax agreement has not become a covered tax agreement (CTA) as defined under article 2(1)(a)(ii) of the MLI. That is, the Iceland-Japan DTA has no legal relevance with respect to the MLI until both parties have given a matched notification to the Depositary as defined in article 2(1)(a)(ii), in accordance with article 29(5).

2.2. Covered tax agreement, defined in Article 2(1)(a)

2.2.1. Texts of Article 2(1) of the MLI

"1. For the purpose of this Convention, the following definitions apply:

1. a) The term “Covered Tax Agreement” means an agreement for the avoidance of double taxation with respect to taxes on income (whether or not other taxes are also covered):
2. i) that is in force between two or more:
3. A) Parties; and/or
4. B) jurisdictions or territories which are parties to an agreement described above and for whose international relations a Party is responsible; and
5. ii) with respect to which each such Party has made a notification to the Depositary listing the agreement as well as any amending or accompanying instruments thereto (identified by title, names of the parties, date of signature, and, if applicable at the time of the notification, date of entry into force) as an agreement which it wishes to be covered by this Convention."

Sub-paragraph a) sets out two conditions for a tax treaty to become a covered tax agreement (a CTA). The first condition is that there shall be a double tax agreement in force between two or more parties (jurisdictions). It is observed that there exists a DTA in force between the two jurisdictions so the first condition is met. The second condition is that each party has notified the Depositary that the above-mentioned DTA is included in the list of the agreement. As of 1st July 2020, neither Iceland nor Japan has included the DTA into the list as defined under Article 2(1)(a). Therefore, the Iceland-Japan DTA is not a CTA, to which the provisions of the MLI shall not apply.

2.2.2. Japan-Qatar CTA as a reference

As a separate but related matter, Japan gave notification to the Depositary that it had extended the list of CTAs to cover the Japan-Qatar DTA in accordance with Article 29(5). It is noted that Japan deposited the Instrument of Ratification on 2018.9.26, without including Qatar in the list of CTAs as defined in Article 2(1)(a). However, Qatar included Japan on the list when it deposited its Instrument of Ratification on 2019.12.23. Because the list of CTAs is not matched between Japan and Qatar, the Qatar-Japan tax agreement is not a CTA. The Japan-Qatar tax agreement was "covered" on 14 February 2020 when Japan gave notification to the Depositary that it had included the Japan-Qatar tax agreement into the list of the CTAs.

2.2.3. Article 35(5) - New CTA resulting from extension of CTA list

Article 35(5) provides that

"For a new Covered Tax Agreement resulting from an extension pursuant to paragraph 5 of Article 29 (Notifications) of the list of agreements notified under clause ii) of subparagraph a) of paragraph 1 of Article 2 (Interpretation of Terms), the provisions of this Convention shall have effect in each Contracting Jurisdiction:

1. a) with respect to taxes withheld at source on amounts paid or credited to non-residents, 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 30 days after the date of the communication by the Depositary of the notification of the extension of the list of agreements; and
2. b) 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 nine calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the date of the communication by the Depositary of the notification of the extension of the list of agreements."

As mentioned above under paragraph 2.1., neither Iceland nor Japan has included the other party in the list of CTAs as defined under article 2(1)(a).

2.3. Bilateral CTA and Multilateral CTA

The term “CTA” not only includes a bilateral agreement but also includes a multilateral one. The use of the language in a multilateral relationship will differ from that in a bilateral relationship, as shown in Tables B2A and B2B below:

Table B2A: comparing the relationship in a multilateral CTA and a bilateral CTA

Table B2B: comparing the notification received

The following are two more examples of the different languages used in the bilateral and multilateral contexts:

Paragraph 1(b) of Article 28 (Reservation) reads: -

1. b) with respect to a Covered Tax Agreement for which one or moreContracting Jurisdictions becomes a Party to this Convention after the date of receipt by the Depositary of the notification of withdrawal or replacement: on the latest of the dates on which the Convention enters into force for those Contracting Jurisdictions. [emphasis added]

Article 35(7)(c) also provides that: -

1. c) If one or moreContracting Jurisdictions to a Covered Tax Agreement makes a reservation under this paragraph, the date of entry into effect of the provisions of the Convention, of the withdrawal or replacement of a reservation, of an additional notification with respect to that Covered Tax Agreement, or of Part VI (Arbitration) shall be governed by this paragraph for all Contracting Jurisdictions to the Covered Tax Agreement. [emphasis added]

2.4. Extension of the application of article 35 to a multilateral CTA

Article 35(5) shall also apply to a multilateral tax agreement such as the Nordic Tax Convention (the NTC) that consists of 6 members including Demark, the Faroe Islands, Finland, Iceland, Norway, and Sweden. The application of the entry-into-effect articles to the NTC would depend on whether all the NTC member states have deposited the instrument of ratification to the Depositary and given the notifications required under article 29. It also depends on whether a reservation has been made under articles 35(7)(a)(ii). If such a reservation is made, article 35(5), as modified by reservation under article 35(7)(a)(ii) should apply to the NTC in full without any modification as follows: -

With respect to article 35(5), as modified by article 35(7)(a)(ii), the text “the date of the communication by the Depositary of the notification of the extension of the list of agreements” shall be replaced by “the date of receipt by the Depositary of the latest notification by each contracting jurisdiction making the reservation described in paragraph 7 of Article 35 (Entry into Effect) that it has completed its internal procedure for the entry into effect of the provisions of this Convention with respect to that specific Covered Tax Agreement”.

2.5. Contracting jurisdiction having no status of an independent state

It is also noted that, as of the date of writing this article, the Faroe Islands is a member of the NTC but is not a party to the MLI because it does not have the status of an independent state as required under paragraph (1)(a) of article 27 (Signature and Ratification, Acceptance or Approval). In accordance with Article 29 (Notification), all the contracting jurisdictions to a CTA including the NTC shall give matching notifications in order for any article of the MLI to take legal effect. If the Faroe Islands is to become a party, Denmark needs to sign the MLI on its behalf, in the same way as China signed the MLI for Hong Kong in accordance with article 29(4).

It is noted that Hong Kong has provisionally made a reservation under article 35(7)(a) but China has not made such a reservation provisionally. Article 28(4) provides that:

“Reservations applicable to Covered Tax Agreement entered into by or on behalf of a jurisdiction or territory for whose international relations a party is responsible… shall be made by the responsible party and can be different from the reservations made by that Party for its own Covered Tax Agreements.”

To be continued in Part 3 is the application of the entry-into-effect provision for the Japan-Sweden CTA, in respect of which Sweden has reserved its right under Article 35(7)(a) for the entry-into-effect date to be contingent upon the notification given by Sweden to the Depositary that it has completed its internal procedure for the entry-into-effect provision with respect to the Japan-Sweden CTA.

Originally published 08 July, 2020

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