Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS)

The Korean government formally signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument”) in Paris on June 7, 2017. The Multilateral Instrument aims to transpose results from the OECD/G20 BEPS Project approved in November 2015 into bilateral tax treaties worldwide. If 68 countries including the OECD members sign the Multilateral Instrument, signatories to the instrument can efficiently update their treaties to reflect the measures, without the need to renegotiate each treaty with the counterpart jurisdictions. It is expected that 45 out of 91 double tax treaties of Korea may be affected due to Korea’s signing to the Multilateral Instrument (subject to the condition that both Korea and the other contracting party of the double tax treaty have ratification from the National Assembly and submit ratification instrument to the Depository of the OECD). Currently, although the Korean government signed the Multilateral Instrument, the Korean government deferred adoption of most of the articles of the Multilateral Instrument while adopting Articles 6, 7, 16, and 17. The Multilateral Instrument is expected to have the following effects among others:

 

Prevention of treaty abuse (Article 7): The Multilateral Instrument added a provision on the principalpurpose test and limitation on treaty benefits. This provision would not grant a treaty benefit (such as non-taxation or a lower tax rate) in respect of income or capital if it is reasonable to conclude that obtaining the treaty benefit was one of the principal purposes of an arrangement or a transaction of a multinational company. This is expected to help prevent tax avoidance by misusing tax treaties. Please note that the Korean government’s provisional position is to adopt a principal purpose test only.

 

 

Modified procedures for resolution of cross-border tax disputes (Article 16): The Multilateral Instrument

 

modifies the procedures for resolving cross-border tax disputes so that a taxpayer may file a protest against

certain  tax  assessments  with  the  tax  authorities  in  both  contracting  parties  to  a  tax  treaty.  Before  the

Multilateral Instrument, it can only be filed with the tax authorities in the taxpayer’s country of residence. The

 

instrument is expected to help resolve cross-border tax disputes more quickly and strengthen taxpayers’ rights.

 

The Korean government plans to take follow-up measures domestically including the National Assembly’s ratification of the instrument. It will come into effect through the following two-step procedures.

 

The Multilateral Instrument will take effect on the first day of the month following a three-month period after the submission of the Parliamentary ratifications to the OECD by the first five signatories to the instrument.

 

The 45 bilateral treaties, which will be automatically revised by the signing of the Multilateral Instrument, will

 

take effect on the first day of the month following a three-month period after the date on which both Korea and its other contracting parties submit their Parliamentary ratifications to the OECD.