Australia: The OECD multilateral instrument has widespread tax implications

In brief - Treasury has released the Treasury Laws Amendment (OECD Multilateral Instrument) Bill 2018, to amend the law to implement the OECD Multilateral Convention to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting (the Convention), otherwise referred to as the Multilateral Instrument

As with other relevant international agreements, the International Tax Agreements Act (1953) will be amended to include a reference to the Convention. Section 5 of the Act will make the Convention the substantive law of Australia "according to its tenor"

The Convention is the culmination of a long period of Base Erosion and Profit Shifting (BEPS) and transfer pricing considerations by the OECD.

The 2013 Action plan on base erosion and profit shifting identified a 15 point action plan to counter BEPS. The need to develop a multilateral instrument was identified in the action plan.

One of the elements of the Convention is to address hybrid mismatches

A hybrid is an organisation that is characterised as a corporation by one jurisdiction, a transparent entity by another jurisdiction. A hybrid instrument is an obligation classified as equity by one jurisdiction, and as debt by another jurisdiction.

Due to the differing classification of entities in different jurisdictions (eg pass through/transparent in one entity but not in the other) or differential characterisation of instruments and the active/passive income issue, hybrid mismatches can occur when, in particular, taxation arbitrage opportunities are used to achieve double non-taxation or deduction/non-inclusion.

In the less likely event that a hybrid/reverse hybrid creates double taxation, that is relatively easily dealt with under a DTA (double taxation agreement) eg Virgin Holdings SA v Commissioner of Taxation [2008] FCA 1503; Undershaft (No 1) Limited v Commissioner of Taxation [2009] FCA 41.

Article 3 of the Convention modifies the operation of covered tax agreements (DTAs) and provides for rules to reduce the incidence of hybrid double non-taxation or deductible/non-inclusion scenarios.

Article 4 provides that where under a DTA, a person other than an individual is a resident of more than one jurisdiction, the competent authorities shall endeavour to determine by mutual agreement the jurisdiction of which such person shall be deemed to be a resident for the purposes of the DTA.

Part III of the Convention provides mechanisms to combat treaty abuse

Article 7 provides that part of a DTA may be (in effect) disallowed (having regard to all of the facts and circumstances) where obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted indirectly or directly in that benefit, unless it can be established that granting the benefit under the DTA would be in accordance with the object and purpose of the relevant DTA (this has some parallels with Part IVA of the ITAA 1936, and specifically s177D).

The relevant authority may grant the benefit if, after having granted the relevant person a chance to be heard, the relevant authority determines that the benefits would have been granted in the absence of the transaction or arrangement.

Article 7.8 provides that except otherwise provided a resident of a party to a DTA shall not be entitled to a DTA benefit unless such resident is a "qualified person".

Article 7.9 defines a qualified person as:

  1. an individual;
  2. a relevant contracting jurisdiction or a political subdivision/local authority;
  3. a company or other entity if the principal class of its shares is regularly traded on a recognised stock exchange;
  4. a person other than an individual that is a non-profit or is treated as a separate person under the taxation laws; and
  5. a person other than an individual if the person owns, directly or indirectly, at least 50% of the shares of that person for at least half of the 12 month period including the time when the benefit would otherwise be accorded.

Article 7.11 provides that a resident who is not a qualified person shall be entitled to a benefit under a DTA if at least half of the 12 month period (including the time when the benefit would otherwise be accorded), persons that are equivalent beneficiaries own directly or indirectly at least 75% of the beneficial interest of the resident.

Article 8 provides that:

  1. any provisions of a DTA that exempt dividends paid by a company resident of a jurisdiction from tax or limiting the rate at which such dividends may be taxed;
  2. provided that the beneficial owner or the recipient is a company which is a resident of the other jurisdiction and which holds a certain amount of the capital, shares, voting power or similar of the company paying the dividends;
  3. it will only apply if the ownership conditions are met throughout a 365 day period, including the day of the dividends.

This aims to prevent artificial temporary shifts in order to take advantage of arbitrage opportunities.

Article 9 provides that:

  1. provisions of a DTA providing that gains derived by a resident of a jurisdiction from the alienation of shares or other rights of participation may be taxed in the other party of the DTA,
  2. (provided that the shares derived more than a certain part of their value from immovable property situated in the second jurisdiction),
  3. will apply if the relevant value threshold is met at any time during the 365 days preceding the alienation, and
  4. will also apply to shares or comparable interest such as interest in a partnership or trust in addition to any shares or rights already covered.

Article 10 provides an anti-abuse rule for permanent establishments situated in a third jurisdiction.

It provides that:

  1. where an enterprise of jurisdiction A derives income from jurisdiction B and jurisdiction A treats such income as attributable to a permanent establishment of the enterprise situated in a third jurisdiction, and
  2. profits attributable to that permanent establishment are exempt from tax in A, then
  3. the benefits of the DTA shall not apply to any item of income on which the tax in the third jurisdiction is less than 60% of the tax that would be imposed in A if the permanent establishment were situated in A.

This is designed to prevent third jurisdiction arbitrage/abuse.

Rules designed to prevent the artificial avoidance of permanent establishment status

Article 12 provides rules to prevent the artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies.

It expands the meaning of "permanent establishment" in the OECD model to include where:

  1. a person is acting in a contracting jurisdiction which is a party to a DTA on behalf of an enterprise,and
  2. (in doing so) habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are:
    1. routinely concluded without material modification by the enterprise;
    2. where the contracts are in the name of the enterprise or for the transfer of the ownership of or for the granting of the right to use property owned by the enterprise or for the provision of services by that enterprise.

Article 12.2 provides that the rule against artificial avoidance will not apply where the person in the jurisdiction carries on business as an independent agent and acts for the enterprise in the ordinary course of a business.

However, where that person acts exclusively or almost exclusively for one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent.

This may have some impact upon insurance arrangements for foreign insurers via coverholders or agents but may have an impact upon larger brokers whose practices may fall within the definition: see eg Tariff Reinsurances Limited v Commissioner of Taxes (Victoria) 21 (1938) CLR 194; Taisei Fire & Marine Ins Co v Commissioner 104 TC 535 (1995).

It may also have a significant impact upon agency/distribution agreements relating to an agent in Australia which routinely arranges offshore supply to onshore entities.

Article 13 provides that a party may apply rules to prevent the artificial avoidance of permanent establishment status through specific activity exemptions.

Rules against the splitting up of contracts in large projects

Article 14 provides rules against the splitting up of contracts in building sites, construction projects, installation projects or other specific projects identified in relevant provisions of a DTA, and supervisory or consultancy activities in connection with such a place, where these activities are carried on during one or more periods, where aggregate exceeds 30 days.

This provision will be important in respect of large infrastructure projects where contract splitting has led to beneficial tax treatment.

Part V provides for improving dispute resolution, and Part VI provides for arbitration.

Despite recent high profile cases in Australia relating to transfer pricing, a subset of base erosion and profit shifting [Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 1092 and SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635], it is unclear whether any real or useful lesson can be drawn from them.

However, it is clear that the Convention, which will require significant work on the part of companies, entities and the ATO, will have a much more dramatic impact.

Toby Blyth
Corporate advisory
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions