Ukraine signed MLI Convention
On July 23, 2018 the acting Minister of Finance of Ukraine Oksana Markarova signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (hereafter referred to as MLI Convention).
It is expected that signing the MLI Convention will make it possible to reduce the shifting of capital from Ukraine to tax havens, which will contribute to the increase of tax revenues in Ukraine.
Ukraine became one of 83 countries signed MLI and joined the ranks in counteracting abuse of preferential tax treatment prescribed by double tax treaties.
Ukraine joined Base Erosion and Profit Shifting Plan (BEPS) on January 1st, 2017 and undertook to implement the minimum standard, which consist of 4 steps:
- Action 5: “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”;
- Action 6: “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”;
- Action 13: “Transfer Pricing Documentation and Country-by-Country Reporting”;
- Action 14: “Making Dispute Resolution Mechanisms More Effective”.
As a result, by signing and ratifying the MLI Convention, Ukraine will comply with actions 6 and 14 of the BEPS minimum standard.
Accession to the MLI Convention will allow making amendments to 77 bilateral double tax treaties promptly and simultaneously.
Ukraine also agreed to introduce Principal Purpose Test to double tax treaties, which allows to determine whether the provided preferential tax treatment was justified in every particular case.
Benefits under double tax treaties will not apply if the main purpose of the agreement or international corporate structure is to obtain benefits from such preferential tax treatment.
Therefore, now it`s time for business to assess its international structures for the existence of sufficient economic purpose; that is time consuming and expensive process. Firstly, it means that international company should have real economic substance in the jurisdiction of incorporation. In order to comply with Principal Purpose Test a company should have not only a real office, staff, telephone, but also should be authorized to make decisions on its commercial activity at its sole discretion.
It should be noted that Ukrainian Parliament will ratify the MLI Convention soon; otherwise Ukraine will be included in the EU offshore blacklist. However, in order amendments to double tax treaties will come into force all contractual jurisdictions should ratify MLI Convention. As of July 23, 2018 the MLI Convention was signed by 83 countries, 9 of which have already ratified it.
It is expected that accession to the MLI Convention will allow to unify the rules of international taxation and reduce profit shifting to low-tax jurisdictions, which will lead to the increase of tax revenues in Ukraine and will positively influence on investment attractiveness of Ukraine. Therefore, entrepreneurs should adapt to new business rules.
Author: Iryna Bandurko, associate