Dual tax resident companies impacted by MLI

By Denise Honey - June 13, 2019

Australia has elected to apply the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) to many of its tax treaties, which will change the way in which those treaties apply. Two broad categories of companies will be affected.

Which companies will be affected?

The change applies to a company that falls within either of the following categories:

1. An Australian incorporated company with central management and control in New Zealand, the United Kingdom, Poland or the Slovak Republic; or

2. A company incorporated in New Zealand, the United Kingdom, Poland or the Slovak Republic, with its central management and control in Australia.

What is the MLI?

The MLI is a multilateral treaty that enables jurisdictions to swiftly modify their bilateral tax treaties to implement measures to address multinational tax avoidance. These measures were developed as part of the OECD Base Erosion and Profit Shifting (BEPS) project.

Which treaties do the changes apply to?

Where Australia or its treaty partner have determined that the MLI is not applicable to a particular treaty, that treaty will remain the same.

Where both treaty partners have elected for the MLI to apply, the way in which the treaty changes will depend upon choices made by Australia and its treaty partner. Consequently, the way in which the MLI changes Australia’s treaties will vary significantly. 

Impact on the ‘residency’ article in Australia’s tax treaties

MLI changes will affect the ‘residency’ article in Australia’s tax treaties. At this point in time, four treaties are affected with:

  • New Zealand
  • the UK
  • Poland, and
  • Slovakia [1]  

How does the residency article work?

Where a company is tax resident in two jurisdictions, the residency article in a tax treaty typically contains a ‘tie break’ provision which deems the company to be resident in only one of those jurisdictions for the purposes of the treaty. This deeming will be based on certain criteria, such as the location of the company’s place of effective management.

The tie break provision in Australia’s tax treaties with New Zealand, the UK, Poland and Slovakia has been modified by the MLI. As a result, it is now no longer the case that a company that is dual tax resident in Australia and one of these four jurisdictions will, under the tie break article, be treated as tax resident in the country in which the company’s place of effective management is located for the purposes of the treaty. Instead, it will be necessary to apply to the competent authorities (i.e. specific individuals within the relevant tax authorities, in the case of Australia this is the ATO) for a determination of this issue. It is unknown how long this process could take. 

In the absence of such agreement by the competent authorities, the company will be treated as tax resident in both jurisdictions for the purposes of the treaty and as such will not be entitled to any treaty relief.

When do the changes apply from?

The changes in relation to Australia’s tax treaties with New Zealand, the UK, Poland and Slovakia came into effect with respect to withholding taxes on income derived on or after 1 January 2019 and for other taxes come into effect for income years beginning on or after 1 July 2019.[2]


Case study: How the changes will operate

A company that is incorporated in the United Kingdom but has its central management and control in Australia, may tie break to the place of effective management (i.e. Australia) under the Australia/United Kingdom tax treaty prior to the MLI changes. This means that it would be treated as tax resident in Australia for the purposes of the treaty. Under the MLI modified treaty, it is for the competent authorities (i.e. representatives of the ATO and HMRC) to decide on the country in which the company is resident for the purposes of the treaty. In the absence of competent authority agreement, the company will be treated as tax resident in both jurisdictions and no treaty benefits will be available.

Company with the sole activity to earn interest from an Australian bank account

Prior to the MLI coming into effect, Australia would be expected to have sole taxing rights over the interest income and the Australian tax payable would be credited to the company’s Australian franking account. The United Kingdom would not be expected to levy tax on the amount. After the MLI comes into effect, then assuming that competent authority sign-off hasn’t been granted, Australia and the United Kingdom will both tax the interest income. Australia will not allow a foreign income tax offset for the United Kingdom tax. Therefore, unless the United Kingdom’s domestic tax legislation allows a foreign tax credit for the Australian tax, this income will be taxed in both countries with no tax relief.


What are the next steps?

If your company falls within one of the two categories identified above, please contact your Pitcher Partners expert for support as soon as possible.

 

[1]       Although the Australia/Japan tax treaty has also been modified by the MLI, the MLI version of the dual resident company article is essentially the same as it was prior to the modification.
[2]       Changes in relation to Australia’s tax treaties with France and Japan also came into effect on these dates.  However, the French treaty contains no change to the dual resident company article and the dual resident company article in the Japanese treaty (although rewritten) has essentially remained the same.

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