More than 50% of the currently ratified Double Tax Treaties (DTTs) entered into by Albania, are expected to change from 1 January 2021, following the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI will bring about important changes to the DTTs covered by the MLI, including new preamble, anti-treaty abuse measures as well as more stringent rules on dividends, capital gains, and definition of permanent establishment. On the other hand, the MLI seeks to improve the dispute resolution and provide for corresponding adjustments in case of Transfer Pricing primary adjustments, therefore easing compliance burden. In light of these changes, taxpayers should carefully consider the practical impact of the MLI in their business transactions.
On 16 July 2020, the Albanian Parliament passed Law No. 93/2020 "On the ratification of the Multilateral Convention to Implement Tax Treaty related measures for the prevention of Base Erosion and Profit Shifting". The Law is published in the Official Gazette No. 140, dated 30 July 2020, which entered into force on 15 August 2020, effective since 1 January 2021.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) is one of the outcomes of the base BEPS project, aiming to tackle tax planning strategies artificially resulting in lower or overall no corporate income tax being paid. The MLI will significantly change the global network of DTTs from 94 countries that have signed to it, modifying more than 1680 tax treaties.
The MLI covers recommendations that affect double tax treaties and more specifically:
Hybrid mismatches (Action 2);
Tax treaty abuse (Action 6);
Permanent establishments (Action 7),
Dispute resolution (Action 14).
There are certain MLI provisions that MLI signatory territories are required to apply (minimum standards) unless, they will meet those minimum standards in alternative ways, whereas some provisions are optional (signatories reserve the right not to apply those articles). As part of ratification process, signatory territories shall notify their position and reservations on the articles of MLI and must make them final on ratification. Following ratification, DTTs can be automatically updated, as prescribed in the final position. Yet, parties to the MLI can choose to opt-in with respect to optional provisions, or remove reservations, but they cannot introduce reservations for articles previously accepted. While countries can withdraw from the MLI that would not affect already amended treaties prior to withdrawal.
The range of materials published by the OECD to help interpret the MLI can be found following this link.
Covered Tax Agreements
Following the ratification of the MLI, up to date, in case of Albania, 28 DTTs are covered by the MLI (Covered Tax Agreements – CTAs), which are going to automatically be updated since 1 January 2020. The affected DTTs are those entered by Albania and: Belgium, Bosnia-Herzegovina, Bulgaria, China (People’s Republic of), Croatia, Egypt, Estonia, Greece, Iceland, India, Ireland, Latvia, North Macedonia, Malaysia, Malta, Netherlands, Poland, Qatar, Romania, Russia, Serbia, Singapore, Slovenia, Spain, Sweden, Turkey, United Arab Emirates, and United Kingdom. The CTAs might change in the future considering that the position of a number of signatories is not final yet.
Ratification of the MLI implies significant changes in the Albanian CTAs, including a new preamble, more stringent anti-abuse rules, change in the definition of Permanent Establishments, as well as improved dispute resolution.
The new preamble found in Article 6 of the MLI, provides for required wording to be incorporated into covered tax agreements and clarifies the intent of the treaty. Starting from 1 January 2021 the intention of the CTAs is to eliminate double taxation, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping). This change is intended to impact treaty interpretation and access to treaty benefits.
New anti-avoidance measures in the form of a general anti-avoidance regime in the form of a Principal Purpose Test (PPT) - and perhaps one of the most important changes - will be introduced in the CTAs, based on article 7 of the MLI. This measure, restricts access to treaty benefits in case of transactions, where obtaining that benefit would be one of the principal purposes of any arrangement or transaction, unless it is established that granting a treaty benefit in those circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement. The practical application of this article will bring significant challenges, and therefore calls for careful consideration.
Additional rules on dividends and capital gains are provided in Articles 8 and 9 of the MLI qualifying dividends which can be granted treaty benefits, as well as determine allocation rules in case of certain capital gains.
An important addition relates to inclusion of commissionaire structures as Permanent Establishments. Until now, these structures have generally not been considered to constitute a permanent establishment, therefore do not create a taxable presence in Albania. Starting from 1 January 2021, this will change, therefore a detailed analysis on whether certain structures fall within the definition of permanent establishment is advisable.
Additional rules will also be introduced regarding dispute resolution and corresponding transfer pricing adjustments, which tend to reduce compliance burden for taxpayers. Hence taxpayers should consider whether they could benefit from these updates.
The above present a summary of the main changes to be introduced. The main takeaway is that MLI has entered into force and that it will bring additional practical challenges, increased uncertainty, more controversy and dispute resolution, especially in terms of anti-abuse measures, but will also bring additional benefits. Hence, taxpayers should become aware and carefully consider which aspects of the MLI will affect their business activity.
PwC can help you navigate these challenges on anti-abuse measures, PE status and dispute resolution, thereby preserving the value of your business. Our key strength is the wealth of experience, and best experts in the field of international taxation. For a deeper discussion of how these issues might affect your business, please contact us below: