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Current BEPS Action Items for Asset Managers

Likely outcomes deserving immediate attention

ANNA BURCHNER, PARTNER, CMS

TECHNICAL

For asset managers including managers of Alternative Investment Funds (AIFs) the Base Erosion and Profit Shifting project (BEPS) is a particular issue. Many outcomes will likely affect this industry, but those regarding permanent establishments (PE), tax treaty shopping and transfer pricing deserve immediate attention.

Why now?

The Multilateral Instrument (MLI), designed to affect many of the tax treaty based BEPS changes, was adopted on 24 November 2016 and signed by representatives of approximately 70 governments in June 2017. The operation of the MLI is rather complex, due to two key factors: it is to achieve its objective by forming a layer over existing bilateral tax treaties; and allows broad optionality for governments. Upon signature of the MLI, each signatory government was requested to submit its ‘MLI Positions’ inter alia listing Covered Tax Agreements (existing bilateral tax treaties to be modified by the MLI), choices of options and reservations. These MLI Positions may be changed during the ratification processes. Once the MLI takes effect, the interpretation of bilateral tax treaties will become an elaborate exercise. MLI Positions, options and reservations taken by respective treaty partners will have to be analysed to assess how the MLI modifies, or not, a single bilateral tax treaty. For example, the MLI will only apply to modify a bilateral tax treaty if both treaty partners have listed that specific tax treaty in their respective MLI Positions document. A relevant MLI provision will not apply if either of those two partners has made a respective reservation. It is expected HMRC will publish consolidated versions of UK bilateral tax treaties, as modified by the MLI, while other countries (e.g. Australia) are not proposing to do this. The first modifications by the MLI are expected to become operative in the course of 2018. The timeline is dependent on the ratification processes of the signatory governments.

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