Peculiarities of Taxation in 2020

The desire of entrepreneurs to use gaps or imperfections in national legislation and international legal norms to reduce the tax burden on their business seems to be quite natural. At the same time, national governments and international organizations are trying to prevent the erosion of the tax base at significantly reduced rates or avoidance of taxation in general.

One of the global control measures for international business is the Base Erosion and Profit Shifting (BEPS) project. It was developed by the Organization for Economic Cooperation and Development (OECD) with the participation of the G-20 countries. BEPS is a 15-step action plan aimed at countering unfair tax practices. Today, more than 130 countries are working to implement the plan into national legislation.

Ukraine is not a member of the OECD, but it has been actively cooperating with the organization since 1997 and has pledged to implement the Minimum Standard of the BEPS Action Plan. Last year, we took a significant step from declaring support for BEPS to implementing it. On December 1, the MLI Convention entered into force for Ukraine. Let’s figure out what it is and how it will affect the Ukrainian business environment.

How Does It Work?

To effectively counter the erosion of the base, governments of different countries must cooperate with each other and implement OECD standards in their own legislation and in various international agreements. To speed up and simplify the implementation of these changes, which can usually last for years, a multilateral convention mechanism was invented.

Having ratified the MLI Convention, Ukraine indicated a list of bilateral tax treaties with 76 countries, which will be amended automatically. Among them are well-known jurisdictions used to reduce the tax burden, such as the United Kingdom of Great Britain and Northern Ireland, the Republic of Cyprus, and the Republic of Malta. However, the Republic of Cyprus has not yet ratified the MLI, while in the United Kingdom of Great Britain and Northern Ireland and the Republic of Malta, it is already in force.

According to the MLI Convention, changes to a specific agreement with a specific state are made automatically if all of the following conditions are present simultaneously:

– another state, which is a party to the bilateral tax treaty with Ukraine, has also ratified the MLI Convention;

– Ukraine, in a message sent to the depository of the MLI Convention, indicated that the MLI Convention applies to a specific international agreement with another state;

– the same state, in a message sent to the depository of the MLI Convention, indicated that the MLI Convention applies to the agreement with Ukraine.

Thus, each state has the right to determine that a specific norm of the MLI Convention, by agreement with a specific country, operates with reservations. This means that the intention of countries to make specific changes to the bilateral agreement should be mutual. It is possible to check for which bilateral agreements the MLI Convention is valid (for a specific country and to what extent) on the OECD website, which is constantly updated.

What Will Be the Effect of the MLI Convention?

One of the main provisions of the MLI Convention, which can affect business, is the introduction of the so-called “main purpose test“.

The first part of Article 7 of the MLI states: “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.”

Thus, the tax authorities are able to check the purpose of creation or activity of a legal entity, as well as the purpose of each specific operation, and establish whether the activity of a legal entity or a specific operation is not aimed solely at obtaining a tax benefit. This issue will be decided on a case-by-case basis, considering all important circumstances.

Mirror

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