Multilateral Convention ( MLI ) – Tax Evolution or Revolution ?

The Multilateral Convention (Multilateral Instrument to Modify Bilateral Tax Treaties – MLI) is an international agreement, which was signed on 7 June 2017 in Paris. The provisions thereof introduce a tax settlement counteracting the abuse of double taxation agreements. The aim of this article is to offer an insight into both the origin and the resolutions of MLI. In the publication, an attempt was made in order to analyse and assess the impact of the Convention on the taxation system.


INTRODUCTION
One of the major objectives of the international tax policy is to counteract the abuse of double taxation agreements. However, it is impossible without a mutual cooperation of tax administrative organs at the international level. The result of such a cooperation is the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI) 1 , which was signed by 68 signatories, including Poland, on 7 June 2017 in Paris. On 29 September 2017, in turn, the Parliament of the Republic of Poland (Sejm) adopted the Act on Ratification of the Multilateral Convention to Implement Tax Treaty Re-lated Measures to Prevent Base Erosion and Profit Shifting 2 . The provisions thereof introduce measures counteracting the abuse of double taxation agreements.
The aim of this article is to offer an insight into both the origin and the resolutions of MLI. In the publication, an attempt was made in order to analyse the provisions of the Convention and assess the impact thereof on the taxation system.

THE ORIGIN OF THE MULTILATERAL CONVENTION
The Multilateral Convention is the effect of the actions induced by the OECD within the framework of the Base Erosion and Profit Shifting (BEPS) Project. The objective of the measures undertaken in this Project was to develop mechanisms hindering international profit shifting to the countries applying preferential tax rates, as well as efficient measures aimed at tightening of tax systems of the countries engaged in the Project implementation 3 . In July 2013, the OECD published a report entitled Action Plan on Base Erosion and Profit Shifting with the list of the measures encompassing various tax areas and tax cooperation 4 . However, it was not until October 2015 that the detailed reports were published. The Report indicated 15 areas of analysis, the aim of which was to provide particular countries engaged in the Project implementation with the tools allowing for counteracting tax avoidance by entities functioning within international capital structures 5 . The BEPS Plan comprised i.a. the following areas: tax challenges of the digital economy; neutralising the effects of hybrid mismatch arrangements; designing effective controlled foreign company rules; limiting base erosion involving interest deductions and other financial payments; countering harmful tax practices more effectively, taking into account transparency and substance; preventing the granting of treaty benefits in inappropriate circumstances; preventing the artificial avoidance of permanent establishment status; upgrading transfer pricing mechanisms; making mutual cooperation procedure more effective; as well as developing a multilateral agreement allowing for the BEPS Plan introduction and modifying already existing bilateral tax treaties on double taxation.
The Report contains a final conclusion regarding the statement that the multilateral agreement is both possible and necessary. Therefore, in 2015, the working party ad hoc was appointed, and its members were provided with mandates to develop the content of the multilateral agreement provisions 6 . The ad hoc OECD group members, in which representatives of 99 countries were engaged, developed a mechanism allowing for amending double agreements through a multilateral instrument, which aimed at the most efficient implementation of the BEPS Plan. The result of the above mentioned activities was publishing on 24 November 2016 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting along with explanatory notes. The ceremonial signing of the Convention was held on 7 June 2017 in Paris.

MLI ESSENCE AND OBJECTIVES
As a multilateral international agreement, the MLI Convention allows for the automatic amendments to double taxation agreements concluded by a given country, being a party thereto, without the necessity of concluding a new international tax agreement. In consequence, the MLI provisions introduce a mechanism of one multilateral legal instrument that allows for introducing considerable amendments to the bilateral tax agreements, which have been in force so far, through a change of its scope -without the necessity of conducting new international negotiations and concluding a new tax agreement by the countries 7 . The Convention has been divided in seven parts -two general ones (introduction and final provisions) as well as five detailed ones (hybrid entities and instruments, including anti-double-taxation methods, abuse of double taxation agreements, preventing the avoidance of permanent establishment status, making dispute resolution mechanisms more effective, arbitrary).
Pursuant to Article 1 thereof, the Convention modifies all submitted double taxation agreements. It should be emphasised that covering a given tax agreement with the provisions of the Convention, pursuant to Article 2 Item 1 thereof, requires a notification by two countries being parties to a given agreement. Hence, agreements that have not been notified even by one Party will not be covered with the provisions of the Convention. What is equally important is the fact that the Parties are allowed to select the scope of the provisions thereof, which they intend to apply to the tax agreements that they have reported. However, the Convention envisages a so-called minimum introductory standard. Being Parties thereto, by U M C S notifying a given tax agreement, the countries are obliged to act pursuant to Article 6, 7 and 17 thereof, as they are not subject to exclusion. The Regulations state the following issues: − the objectives thereof expressed in preambles to tax agreements -avoidance of double taxation along with tax avoidance, − the general anti-tax-avoidance clause which is aimed at preventing making use of tax advantage arising from a tax agreement in cases when gaining such a tax advantage was one of the basic aims of the transaction, − the mutual agreement procedure that is to improve the mechanisms of resolving disputes, which have been applied so far. Yet another principle arising from the Convention is the fact that amending a given provision of a double taxation agreement or adding a new regulation to a given agreement requires a declaration of will of both contracting jurisdictions (countries).

Entities and hybrid instruments
With reference to tax transparent entities, the Convention envisages that the income earned by or through an entity or a structure, which -pursuant to tax law of either of the party to the agreement -is regarded fully or partly as being tax transparent, will be considered the income of the resident of the party thereto but only within a scope in which this income for taxation purposes is treated by this party as the income of its resident 8 . Furthermore, the provisions of the tax agreementwhich oblige a party thereto to income tax exemption, deduction or granting in the amount equal to the paid income tax, whereby this income has been earned by an entity having its seat or residence on the territory of this party, which may be taxed by another party, pursuant to the provisions the agreement to which the Convention refers -will not be in force within the scope allowing for taxation by another party exclusively due to the fact that such income simultaneously constitutes the income earned by an entity having its seat or residence on the territory of another party 9 . The objective of the regulations is to express the willingness to eradicate cases of artificial setting-up of transparent partnerships by a country ratifying the Convention, and as a result, to eradicate unfounded granting of prerogatives arising from double taxation agreements.
The Convention also refers to entities of double tax residences. Pursuant to Article 4 of the Convention, if a given entity (except for natural persons) -based on a double taxation agreement -may be treated as a resident of more than one country, the parties to this agreement have to reach a settlement regarding the question as U M C S to which of the countries will be the residence of a given entity (i.a. the location of the actual management board of a given entity, its seat and any other relevant factors should be taken into account). If no settlement has been reached, the entity will not be entitled to reliefs or exemptions arising from this agreement. Hence, from the moment of this regulation coming into force, the residential conflicts will be resolved individually, unlike the current methods based on the location of the actual management board.
In the part devoted to transparent entities, the Convention also envisages the possibility of transforming the exemption with progression method into the tax credit method. In the BEPS Project, it has been emphasised that the exemption with progression method -consisting in income tax exemption in the country of residence, when this income is subject to exemption in another country due to the local tax law -may lead to the double non-taxation of income 10 . Within the BEPS, it has been indicated that such phenomena are not desirable, and that they sometimes may be even considered an abuse. Such phenomena are supposed to be safeguarded against by the tax credit method, which consists in the fact that the income that may be taxed in another country should be taxed in the country of residence as well, however, the tax paid in the source country is subject to a proportional deduction from the tax due of the country of residence 11 . Within this scope, the Convention puts forward a proposal suggesting an automatic introduction of the tax credit method in the tax agreements which foresee applying the exemption method as a method of double taxation avoidance 12 . Article 5 of the Convention indicates three options of introducing clauses to double taxation agreements, whereby the parties thereto are given an opportunity not to select any of the options put forward. In the event when parties to the agreement choose different options, or only either of them does not choose any option, then the option selected by either of the parties will be applicable only to residents of this party. The Convention provisions may significantly restrict the exemption method -particularly in cases in which it could lead to the double non-taxation of income.

The abuse of double taxation agreements
Article 6 Item 1 of the Convention, which is included in the minimum scope standard, envisages that the preambles of tax treaties covered by the Convention will be replaced or complemented by a following passage: 10  Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).
In consequence, preambles of tax treaties to which the Convention refers will be complemented or replaced by a new principle applicable for the purpose of the interpretation of agreements. The aim of those regulations still remains the same, namely to avoid double taxation, however, situations favourable to tax reducing or even tax avoiding, caused by actions that the Convention is supposed to prevent, cannot be created at the same time.
The Convention unequivocally emphasises the necessity of restricting the possibility of applying prerogatives arising from the tax agreement that envisages introducing the principal purpose test or the clause of limitation of benefits. Pursuant to Article 7 of the Convention, regardless of the provisions set forth in the tax agreement to which the Convention refers, the advantage (benefit) foreseen therein will not be granted with regard to the part of income or assets, if assumed rationally, taken into account any relevant facts and circumstances that gaining this advantage was one of the principal aims of setting up any structure or entering into any transaction, which directly or indirectly caused the arising of such an advantage, unless it was settled that granting such an advantage under given circumstances would be in line with the subject matter of appropriate provisions of the tax agreement. Moreover, the Parties to the Convention have a possibility of making the act of granting of tax advantages (e.g. applying a lower rate of tax at source) dependent on meeting additional requirements regarding the organisational form, owner structure, or manner of running the business activity. Fulfilling such conditions within the framework of the clause of restricting advantages by a given entity is to guarantee granting a tax advantage to a person who can be indeed considered a resident of a contracting jurisdiction (country) signing an agreement.
The Convention envisages the criterion of the minimum period as well. This provision makes the exemption (or a lower tax rate) in the source country by an entity receiving the dividend conditional upon meeting the minimum period (365 days) of holding shares, stock, voting rights or similar rights in a company paying the dividend. The aim of introducing the criterion of the minimum period is -first of all -to prevent situations in which a company that is a shareholder, holding less than, e.g. 25% of shares, prior to the dividend being paid, covers its capital interest in order to receive gains provided for in the tax agreement 13 .
The provisions of the Convention refer also to tax agreements which permit for taxation in the country of the income source from the transfer of shares in companies, the value of which stemmed mostly from real property assets located in this 13 Ibidem.
Pobrane z czasopisma Studia Iuridica Lublinensia http://studiaiuridica.umcs.pl Data: 05/10/2019 20:18:33 U M C S country. Pursuant to Article 9 thereof, it is sufficient to fulfil the aforementioned condition at any moment within 365 days preceding the disposal of shares (stock) in order to consider a given entity a real estate company 14 . Moreover, extending those regulations to shares in partnerships and trusts 15 has been envisaged therein.
In turn, Article 10 thereof is aimed at introducing a principle, whereby in the event when an enterprise (of a contracting jurisdiction) earns its income from another contracting jurisdiction, and the former jurisdiction considers this income as the one ascribed to the establishment of the enterprise that is located on the territory of the third country, as well as when profits that may be ascribed to this establishment are tax exempt in the former jurisdiction, then the tax advantages provided for in the tax agreement will not be granted with regard to any income part that has been already taxed in the third jurisdiction (country) in the amount less than 60% of the tax which would be imposed on in the former contracting jurisdiction (on this income part), provided that this establishment was located on the territory of the former jurisdiction. In such a case, the second contracting jurisdiction may tax this income pursuant to the domestic tax law, irrespective of any other provisions of the tax agreement.

Avoidance of permanent establishment status
The Convention introduces relevant regulations aimed at preventing tax abuse, which may occur with regard to establishments held by enterprises on the territory of third jurisdictions (countries), depending on the forms of such actions. In the BEPS Final Report, the importance of agency agreements in strategies aimed at avoiding the permanent establishment was also indicated. The meaning of agency agreements was particularly essential due to a narrow definition of a dependent (tied) agent set forth in the Model OECD Convention. Therefore, the objective of the MLI Convention is to provide more details to the regulations that have been applied so far, so that it would be possible to state when a permanent establishment is created in the case of a dependent agent being active. Pursuant to Article 12 thereof, in the event when a person (in a contracting jurisdiction) performs activities for the benefit of an enterprise and, by doing so, usually concludes agreements or plays a major role in the conclusion process of agreements, which are -as a matter of course -concluded by this enterprise without any significant amendments, such agreements are concluded: − on behalf of this enterprise; or − for the transfer of the ownership of, or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use; or − for the rendition of services by this enterprise, this enterprise is to be deemed as having a permanent establishment in that contracting jurisdiction with respect to any activities undertaken by such a person for this enterprise, unless these activities -if performed by the enterprise through a fixed place of business of that enterprise located in that contracting jurisdiction -would not allow for deeming this fixed place of business as constituting a permanent establishment pursuant to the definition of permanent establishment provided in the tax agreement, to which the Convention refers. The participation of such an entity in negotiating relevant elements and details of the contract that is binding for a foreign principal will be key for considering that the entity's activity resulted in the tax establishment being created. Moreover, for the purpose of stating as to whether the action of a given entity may be considered an independent agent's action, it is key to determine whether this entity is closely related to the enterprise. Pursuant to Article 15 of the Convention, it is assumed that a given person is closely related to an enterprise if, based on any relevant circumstances and facts, one controls another one or both of them are controlled by the same persons or enterprises. In each case, a person will be considered closely related to an enterprise, if this person holds directly or indirectly more than 50% of the beneficial interest in another person (or, in the case of a company, more than 50% of the total number of voting rights and value of the company's shares or stock or of the beneficial equity interest in the company) or if another person holds directly or indirectly more than 50% of the beneficial interest (or, in the case of a company, more than 50% of the total number of voting rights and value of the company's shares or stock or of the beneficial equity interest in the company) in the person and in the enterprise. Hence, excluding the establishment creation based on the concept of an independent agent will occur very rarely. It should be also emphasised that Article 12 of the Convention is not be applicable in the event when a given entity from the country (contracting jurisdiction) acts as an independent agent within its usual core activity for an enterprise for the benefit of another contracting jurisdiction. Furthermore, as Article 14 of the Convention provides, a clause preventing the splitting-up of the contracts, aimed at preventing an artificial division of a business activity for the purpose of applying exception to the general rule of the establishment creation abroad, is indispensable in order to accomplish the assumed results. Pursuant to Article 14 Item 1 thereof, for the purpose of determining whether the period (or periods) provided for in a provision of a tax agreement, to which the Convention refers, which stipulates a period (or periods) of time after which specific projects or activities may constitute a permanent establishment has been exceeded: − where an enterprise of a contracting jurisdiction conducts activities in another contracting jurisdiction at a place that constitutes a building site, construction works, installation works or carries on supervisory or consultancy activities in connection with such a place, and these activities are carried on during one or more periods of time that, in total, exceed 30 days, as well as − where the connected activities are conducted in another contracting jurisdiction at the same building site, construction or installation project during different periods of time, each of them exceeding 30 days, by one or more enterprises closely related to the former enterprise, then these separate periods of time will be added up to the total period of time during which the former enterprise has conducted activities at that building site, construction or installation project. Thus, the Convention introduces regulations pursuant to which the period of time of the activities conducted at one building site by a taxpayer or entities closely related to one another will be added up. After this period of time, the given projects or activities will be regarded as an establishment. The regulations are aimed at preventing an artificial splitting-up contracts in construction or assembly business activities.

Making dispute resolution mechanisms more effective
Generally, the provisions regarding mutual agreement procedure will remain in the same wording in tax agreements. Nevertheless, pursuant to Article 16 Item 1 of the Convention, if a person considers that the actions of one or both of the contracting jurisdictions result for that person in taxation that is not pursuant to the provisions of the tax agreement, then this person may, irrespective of the remedies provided for by the domestic law of those contracting jurisdictions, present the case to the competent authority of either contracting jurisdiction. Moreover, Article 16 Item 2 and 3 of the Convention envisages the following solutions: − within the framework of the mutual agreement procedure, presenting the case within 3 years from the first notification about the action resulting in taxation, which is not pursuant the provisions of the tax agreement to which the Convention refers, − provided that the objection appears to it to be justified and if it is not able to arrive at a satisfactory solution by itself, the competent authority is to endeavour to resolve the case by a bilateral agreement with the competent authority of another contracting jurisdiction in order to counteract the taxation violating the concluded agreement, − an agreement reached in a manner presented above will be implemented irrespective of any time limits provided for in the domestic law of the contracting jurisdictions, − the competent authorities of the contracting jurisdictions are to endeavour to resolve by mutual agreement any difficulties or doubts arising with regard to the interpretation or application of the tax agreement, − the competent authorities may also reach an agreement concerning the manner of the elimination of double taxation in cases not provided for in the given tax agreement. The provisions included in Article 25 Item 1-3 of the OECD Model Convention will be amended accordingly, so that their content would respect the terminology changes resulting from the MLI Convention.

Arbitration
The provisions of the arbitration procedure set forth in the Convention allow for introducing obligatory and binding arbitration when competent organs are unable to reach an agreement within the mutual agreement procedure in a given period of time. Pursuant to Article 19 thereof, an entity whose case has not been resolved within 2 years (counting from the day of presenting the case to the competent organ within the mutual agreement procedure) will be entitled to submit this case to arbitration. In accordance with Article 20 thereof, the arbitration panel will consist of three members having competence or experience in international tax law. Each competent organ is to appoint one member of the arbitration panel within 60 days of the date of submitting the request for undertaking the arbitration procedure. Then, those two members are to appoint the third member, who is supposed to serve as the chairman of the arbitration panel. The chairman cannot be a citizen or a resident of either of the contracting jurisdictions.
Moreover, the Convention distinguishes between various kinds of arbitrary proceedings, adopting generally two principles of taking decisions within the arbitrary procedure 16 : − the principle of a proposed resolution, pursuant to which each of the competent authorities of the contracting jurisdictions presents their solution proposal covering all questions of a given issue that have not been resolved so far, leaving the final decision to arbiters, − the principle of arbiters' independent decision, pursuant to which issuing a final decision by arbiters will be based on an independent analysis of the gathered material. In the arbitrary proceeding, the arbiters' remuneration and other costs incurred within the arbitrary procedure will be borne by jurisdictions in a manner set forth in the mutual agreement procedure between the competent organs of those jurisdictions 17 . In the event of the lack of such an agreement, each jurisdiction is to bear its own expenses regarding the arbiter chosen by this jurisdiction. The costs concerning the chairman of the arbitrary panel, as well as other expenses accompanying the arbitrary procedure, will be borne in equal parts by the contacting jurisdictions.

EFFECTS OF MLI ON INTERNATIONAL TAX LAW
The Multilateral Convention will be in force from the first day of the month, within 3 calendar months since submitting the ratification document (or the document expressing acceptance or expressing the will) by the fifth jurisdiction (country) in a row 18 . However, it should be noted that with regard to a given double taxation agreement, the Convention will not be in force until two contracting jurisdictions sign the Convention and perform the ratification process along with other procedures required by their domestic law. The Convention does not waive -fully or partly -any binding double taxation agreement. Those agreements are still in force, and the Convention only complements them with new provisions and/ or amends (replaces) the already existing provisions 19 . The Convention will be applicable exclusively to those agreements which will be notified at the moment of the submission of a ratification document at the latest. Countries being party thereto are given an opportunity to choose an option, that is, to reject, to adoptfully or conditionally -the provisions of the Convention, except for the so-called minimum standard.
Implementing the Convention should contribute to tightening tax system and hindering the profit shifting from one country to another that has a lower taxation 20 . Introducing the anti-abuse provisions set forth in the Convention will certainly be of a preventive character and should positively impact taxpayers' attitude towards the aggressive tax optimisation.
However, the attitude of particular countries towards the Convention is diverse. Some countries obliged themselves to adopt exclusively the minimal standard. At the moment of signing the Convention, Poland expressed its will to encompass the scope of 78 double taxation agreements. However, Poland made a reservation that the solutions regarding avoidance of establishment creation and arbitrary will not apply to the notified agreements. It should be also noted that other countries expressed only a limited interest in solutions regarding arbitrary. Despite the fact that introducing the arbitrary regulations will most certainly bring about positive consequences, some countries (including Poland) adopt a standpoint that at the current stage the drawbacks of the arbitrary procedure, especially the risk of bearing considerable costs by the countries' budgets, outweigh its advantages. 18

CONCLUSIONS
Undoubtedly, the Multilateral Convention constitutes a significant agreement in the history of the international tax law, as it allows for the automatic amendment to the double taxation agreements, without the necessity to conclude yet another tax agreement. The Convention implements the treaty tax law aimed at counteracting the base tax erosion and profit shifting. The need to modify tax agreements result from the evolution of tax law, as well as from the increasingly more complicated and complex economic transactions and social phenomena. Signing the Convention was revolutionary with regard to both the scope of its provisions and the number of countries which have decided to encompass it with the provisions of the double taxation agreements that have been concluded so far. It is difficult to assess the scope of actual changes that the Convention may bring about. The question as to whether it will come to a revolution in the international tax law that has been in force so far will be now dependent on the signatory-countries. Nevertheless, the Convention coming in force will most certainly hinder tax law interpretations and enforcement. From the moment of the Convention coming into force, the assessment of the tax situation of a given entity will be based only on tax acts or bilateral tax agreements, as it will be necessary to take into account its regulations which within a given scope, selected by the contracting jurisdictions, will modify the provisions of bilateral tax agreements. The provisions of the MLI Convention will be applied as a priority within both the domestic legal order and the relations between parties to the concluded double taxation agreements.