TAX ALERT: July 2021
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
In the Republic of Kazakhstan, the Multilateral Convention (MLI) was ratified by the Law of the Republic of Kazakhstan dated February 20, 2020 No. 304-VI and entered into force in 2021.
?What is MLI?
Multilateral convention (hereinafter - MLI) is an international treaty that, taking into account the recommendation of the BEPS project, simultaneously amends all conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains (hereinafter - DTTs).
Which articles were adopted by Kazakhstan?
? Article 4: Dual Resident Entities
Determination of legal entities residency by the authorized bodies of the two contracting states.
?? Article 6: Purpose of a Covered Tax Agreement
The main goal is to prevent the abuse of articles of DTTs.
?? Article 7: Prevention of Treaty Abuse
Methods for determining the purpose of cooperation between a non-resident and a resident:
·???????Principal purpose test? (PPT)
·??????Simplified limitation of benefits (SLOB).
?? Article 8: Dividend Transfer Transactions
Conditions for the application of a reduced tax rate related to paid dividends.
?? Article 9: Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property
Conditions under which property income of a non-resident can be taxed in a separate contracting state.
?? Article 10: Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions
New conditions for taxation of permanent establishments created by non-residents in third countries.
?? Article 12: Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies
Regulation of the artificial formation of a permanent establishment for the purpose of obtaining tax benefits of a particular contracting state.
?? Article 14: Separation of contracts
Conditions for division of work between two or more entities, at which a permanent establishment is created.
?? Article 16: Mutual agreement procedure
Provision of a right for entities to appeal to the authorized bodies of any contracting state, including the country of their residence.
?Principal purpose test?
The MLI introduces a “principal purpose test” (hereinafter- PPT), which is mandatory for all acceding countries.
The essence of PPT is that the benefits stipulated by provisions of DDTs will not apply if, at passing PPT, it is revealed that obtaining of such benefits was one of the main objectives of an agreement conclusion or a transaction execution.
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PPT is personalized for each country and Kazakhstan was not an exception. Kazakhstan has already been introduced into the development of methodological recommendations on PPT’s application.
Simplified limitation of benefits (SLOB)
Unlike PPT, SLOB is more objective, as it contains a number of clear and formal requirements, in case of non-fulfillment of which, taxpayers are deprived of the opportunity to apply tax benefits stipulated by DTTs. At that, it is important to mention that not many states applying MLI have chosen application of SLOB, in this number of states along with Kazakhstan SLOB will apply also Russian Federation.
Please note, that SLOB, applies only to countries taxpayers that have also selected this provision, therefore it will not apply to the country taxpayers that has not chosen SLOB for use in its territory.?
Note
Besides PPT and provisions of SLOB, it is important to remember about other articles of MLI, accepted by Kazakhstan, including a definition of tax residency status, withholding tax on dividends, disposal of shares as well as permanent establishment definition and others.
Each article has its own nuances that must be taken into account at the analysis of contracts for the application of DTTs, as well as a collection of the necessary evidence base.
Conclusion
In connection with the adopted changes, from 2021 intercountry transactions of residents with non-residents will be administered in a new format in accordance with new requirements.
Therefore, starting from this year, our taxpayers will have to spend additional time and attract resources for checking each forthcoming agreement and transaction with a non-resident to identify applicability of DTTs provisions as well as for gathering evidence documents to successfully pass tax audits.
Our team of SCHNEIDER GROUP in Kazakhstan will be happy to provide you with our professional support in question of application of the provisions of DTTs as well as in gathering and preparation of evidence documents for successful and safe tax administration.
?With best regards,
SCHNEIDER GROUP in Kazakhstan
Contact information:
Kirill Afanasyev
Partner
?+7 (777) 233 00 80
?
Mariya Nazarova
Head of tax practice
+7 (771) 553 30 87