The author examines how the choices by Japan of the option in the entry-into-effect provision interact with that chosen by 4 of the other contracting jurisdictions of the MLI, such as India, Iceland, Sweden and the United Kingdom.

Table A: Entry into effect positions of the 5 selected contracting jurisdictions - [from Japan's perspective]

Deposit of ratification instrument

Entry into force

Entry-into-effect provision

Alternative Rules

Reservations

Article

35(1)(a)

Article

35(1)(b)

Article

35(2)

Article

35(3)

Article

35(6)

Article

35(7)(a)

India

6/25/2019

10/1/2019

X

X

Iceland

9/26/2019

1/1/2020

X

X

X

Japan

9/26/2018

1/1/2019

X

X

Sweden

6/22/2018

10/1/2018

X

X

X

The U.K.

6/29/2018

10/1/2018

X

X

Note: the "X's" in the table stands for the option that a contracting jurisdiction has chosen with respect to the entry into effect provision of the MLI.

As shown in Table A, with respect to the entry-into-effect dates, the selected contracting jurisdictions have taken different alternative provisions and opt-out provisions (reservations) in the application of the entry-into-effect article to its covered tax agreements (CTAs),

  • Japan has adopted the following articles: article 35(1)(a) with respect to withholding taxes, article 35(1)(b) with respect to other taxes, and article 35(4), which fast-tracks the entry-into-effect date for cases of mutual agreement procedure under article 16(1). 
  • India has chosen the alternative provision under article 35(2) for withholding taxes, adopted article 35(1)(b) for other taxes. It also adopted article 35(4) regarding MAP cases under article 16(1).
  • Iceland has chosen to adopt article 35(1)(a) for withholding taxes, the alternative provision under article 35(3) for other taxes. It has reserved its rights for article 35(4) not to apply to all its CTAs pursuant to article 35(6).
  • Sweden has chosen to adopt article 35(1)(a) for withholding taxes, the alternative provision under article 35(3) for other taxes, and article 35(4) for MAP cases under article 16(1). It has also reserved its right under article 35(7)(a) providing that it shall replace the entry-into-effect date of article 35(1), and article 35(4) with the texts described in article 35(7)(a)(i) and (ii) for its CTAs.
  • The United Kingdom has adopted the same articles 35(1)(a), 35(1)(b), and article 35(4) as that Japan has adopted.

1.1. Entry into Effect - the India-Japan CTA

Table B1(a) - The India-Japan CTA illustrates the asymmetrical application of Article 35(1)(a) and Article 35(2) with respect to withholding taxes and the symmetrical application of Article 35(1)(b) for other taxes.

India

Japan

(1)

Date of deposit of instrument of ratification

25 Jun 2019

26 Sept 2018

(2)

TA entry-into-force date

1st Oct 2019

1st Jan 2019

(3)

TA Entry into effect (unilateral)

1st Apr 2020

1st Jul 2019

(4)

CTA Entry into effect (bilateral) - WHT

Article 35(1)(a), 35(2)

Article 35(1)(a)

(5)

CTA Entry into effect (bilateral) - all other tax (non-WHT)

Article 35(1)(b)

Article 35(1)(b) 

A CTA stands for a covered tax agreement, as defined under article 2(1)(a) of the MLI.

India has chosen to adopt Article 35(2) while Japan does not. Article 35(2) is an alternative provision for Articles 35(1)(a) and (5)(a) respectively, and Article 35(3) is an alternative provision for Articles 35(1)(b) and (5)(b). Both Articles 35(2) and (3) read as follows:

1.2. The legal texts of Article 35(1)(a), as modified by Article 35(2) and Article 35(1)(b)

1. The Convention (the MLI) shall take effect in each contracting jurisdiction with respect to the covered tax agreement:

(a) with respect to taxes withheld at source on amounts paid or credited to non-residents (withholding tax), where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (the CTA); and

(b) with respect to all other taxes levied by that contracting jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of 6 calendar months from the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA.

2. Solely for the purpose of its own application of subparagraph a) of paragraph 1 and subparagraph a) of paragraph 5, a Party may choose to substitute "taxable period" for "calendar year", and shall notify the Depositary accordingly.

3. Solely for the purpose of its own application of subparagraph b) of paragraph 1 and subparagraph b) of paragraph 5, a Party may choose to replace the reference to "taxable periods beginning on or after the expiration of a period" with a reference to "taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period", and shall notify the Depositary accordingly.

1.3.1. Synthesized text for withholding taxes

(a) For the application of article 35(1)(a) in Japan

This provision shall have effect in Japan with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after 1st January 2020.

[Note: For the application by Japan of article 35(1)(a) to the India-Japan CTA, "the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA" is 1st Oct 2019 [Text-A]. Therefore, the first day of the next calendar year beginning on or after Text-A in the preceding sentence is 1st Jan 2020.]

(b) For the application of article 35(1)(a), modified by article 35(2), in India

This provision shall have effect in India with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after the first day of the next taxable period that begins on or after October 1, 2019.

 [Note: The taxable period for India runs from 1 April to 31 March in the following year. The first day of the next taxable period beginning on or after Text-A is 1 Oct 2019.]

The Explanatory Statement of the MLI explains that paragraph 2 of article 35 provides that a Party may choose to substitute "taxable period" for "calendar year" for the purposes of its own application of Article 35(1)(a) and article (5)(a), and must notify the Depositary accordingly if they do so. This will permit Contracting Jurisdictions to choose to link the entry into effect of provisions related to withholding taxes to the taxable period, to address situations in which the taxable period does not follow the calendar year. That applies to India.

As noted above, the use of the word "solely" at the beginning of paragraph 2 is intended to make clear that this choice would apply asymmetrically and would apply only with respect to the application of paragraphs 1(a) and 5(a) of article 35 by the Contracting Jurisdiction that opted for it.

1.3.2. Synthesized text for other taxes

(a) For the application of article 35(1)(b) in India

The provision shall have effect in India with respect to the CTA, with respect to other taxes levied by that contracting jurisdiction, for taxes levied with respect to the taxable periods beginning on or after 1st April 2020.

(b) For the application of article 35(1)(b) in Japan

The provision shall have effect in Japan with respect to the CTA,  with respect to other taxes levied by that contracting jurisdiction  for  taxes levied with respect to  the taxable periods beginning on or after 1 April 2020.

Note: For article 35(1)(b), the phrase "the latest of the dates the MLI comes into force for each of the contracting jurisdiction to the CTA" [Text-A, see the later of the entry-into-force in row (2) of Table B1 above.] refers to 1 Oct 2019. The taxable periods beginning on or after the expiration of a period of six calendar months (from 2019-10-1 to 2020-03-31) from Text-A are the periods beginning on and after 1st April 2020.

1.4. Article 35(4) - Early access to mutual agreement procedure

In line with the policy objective of providing early access to MAP for the taxpayer, article 35(4) modifies the entry-into-effect provision of the India-Japan CTA with respect to MAP cases which comes under article 16(1) - Mutual Agreement Procedure. The synthesized texts are set out below:

Notwithstanding the provisions of articles 35(1), 35(2), and 35(3), article 16 (Mutual Agreement Procedure) of the MLI shall have effect with respect to the Convention for a case presented to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 24 - Discrimination, to that of the Contracting State of which he is a national on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (See row 2, Table B1) 1st Oct 2019, except for cases that were not eligible to be presented as of that date under the Convention prior to its modification by the MLI, without regard to the taxable period to which the case relates.

As the information in Table 1 shows, the entry into effect date under article 35(4) shall also apply to the corresponding provision in the India-United Kingdom CTA. However, the application of article 35(4) to the Japan-Sweden CTA will be subject to modification as Sweden has reserved its right for the entry into effect provision under article 35(4) to be replaced by that given under article 35(7)(a). The entry-into-effect provision under article 35(4) shall also not apply to the Iceland-Japan CTA because Iceland has reserved its right not to apply article 35(4), pursuant to article 35(6).

1.5. Article 35(5) - Extension of the list of covered tax agreements after a party has deposited the ratification of instrument

(a) Main provision

Article 35(5) provides that for a new CTA resulting from an extension pursuant to Article 29(5) of the list of agreements notified under clause ii) of subparagraph a) of paragraph 1 of Article 2 (Interpretation of Terms), the provisions of this Convention shall have effect in each Contracting Jurisdiction:

a) with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after 30 days after the date of the communication by the Depositary of the notification of the extension of the list of agreements; and

b) with respect to all other taxes levied by that Contracting Jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period  of nine calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the date of the communication by the Depositary of the notification of the extension of the list of agreements.

(b) Alternative provisions providing for the asymmetric application of Article 35(1) and Article 35(5)

Article 35(2) provides that "[s]olely for the purpose of its own application of subparagraph a) of paragraph 1 and subparagraph a) of paragraph 5, a Party may choose to substitute "taxable period" for "calendar year", and shall notify the Depositary accordingly.

Article 35(3) provides that "[s]olely for the purpose of its own application of subparagraph b) of paragraph 1 and subparagraph b) of paragraph 5, a Party may choose to replace the reference to "taxable periods beginning on or after the expiration of a period" with a reference to "taxable periods beginning on or after 1 January of the next year beginning on or after the expiration of a period", and shall notify the Depositary accordingly."

Table B1(b) - Relations between the entry-into-effect provisions and the alternative provisions of articles 35(2) and (3), and between the entry-into-effect provisions and the opt-out provisions (reservations) under article 35(7)(a)

List of CTAs upon deposit of the Instrument of Ratification

New CTA added after the deposit of Instrument of Ratification

Article 35(1)(a)

Withholding taxes

Article 35(1)(b)

Other taxes

Article 35(5)(a)

Withholding taxes

Article 35(5)(b)

Other taxes

Can Article 35(2) modify it?

Yes

Yes

Can Article 35(3) modify it?

Yes

Yes

Reservation?

If chosen, both Article 35(1) and 35(4) will be subject to modification under article 35(7)(a)(i)

If chosen, article 35(5) will be subject to modification under article 35(7(a)(ii)

(c) Notification of the extension of tax agreements to be covered after the deposit of the ratification instrument

Solely for its application, India adopts article 35(2) that modifies the application of article 35(1)(a) with respect to withholding taxes. India has not added any new CTA to the list of agreements pursuant to Article 2(1)(a)(ii) after it deposited the instrument of ratification. If India later extends its list of CTAs pursuant to article 29(5), Article 35(a), as modified by 35(2), and Article 35(b) shall apply to the CTAs concluded by India with its partner jurisdictions.

As a separate but related matter, Japan has added the Qatar-Japan CTA to its list of CTAs in accordance with Article 29(5). Japan notified the Depositary of the new CTA resulting from the extension of the list of agreements on 14th Feb 2020. Qatar has not chosen to adopt any of the alternative provision under 35(2) or 35(3). Thus, the entry-into-effect provision of Articles 35(5)(a) and (b) shall apply to the Qatar-Japan CTA without being modified by Article 35(2) or Article 35(3).

1.6. Articles 35(7)(a)(i) and (a)(ii) - Reservation on Entry-into-Effect provision

Both India and Japan do not make the reservation under article 35(7)(a)(i) that modifies the application of articles 35(1) and 35(4), and under article 35(7)(a)(ii) that modifies 35(5).

To be continued in Part II is the application of the entry-into-effect provision for the Japan-Sweden CTA, in respect of which Sweden has reserved its right under Article 35(7)(a) for the entry-into-effect date to be contingent upon the notification given by Sweden to the Depositary that it has completed its internal procedure for the entry-into-effect provision with respect to the Japan-Sweden CTA.

Originally published 15th June 2020.

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.