On June 7, 2017, the Organisation for Economic Co-operation and Development (OECD) held a signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”) (see BEPS Action 15).
Sixty-eight countries and jurisdictions signed the Multilateral Instrument (MLI) and nine jurisdictions have expressed their intent to sign. More than 1,100 tax treaties (also referred to in the Explanatory Statement as “Covered Tax Agreements” or “CTAs”) could be amended based on this development. The OECD expects an additional 25-30 countries to sign the MLI. Also on June 7, the OECD released MLI FAQs, as well as an Information Brochure and an MLI Application Toolkit.
The United States did not participate in the signing ceremony, stating during a recent tax conference that U.S. tax treaty policy is consistent with most of the MLI measures. Although the U.S. did not participate in the ceremony, or submit any notifications and reservations on the MLI, certain signatories listed their tax treaties with the U.S. as CTAs, which would modify the U.S. treaties if the U.S. signs and ratifies the MLI and the corresponding CTA partners ratify the MLI under their domestic laws.
Over 100 countries and jurisdictions developed the text of the MLI and the Explanatory Statement according to a mandate from G20 Finance Ministers and Central Bank Governors. The documents were adopted in English and French, both of which are considered equally authentic. The MLI provides governments the opportunity to close tax loopholes by implementing tax-treaty-related measures into bilateral tax treaties.
The MLI will sit alongside a jurisdiction’s existing tax treaties and any amending protocols. It will modify a treaty’s application to implement Base Erosion and Profit Shifting (BEPS) measures, as opposed to an amending protocol, which would amend the text of the treaty directly. It is possible for jurisdictions to agree subsequently to different modifications to their tax treaties.
Under the provisions of the MLI, each jurisdiction is required to provide a list of reservations and notifications (the “MLI Position”) at the time of signature. The MLI Positions provided at the time of signature may be subject to change. The definitive position for each jurisdiction will be provided on the deposit of its instrument of ratification, acceptance or approval of the MLI. These jurisdictions must ratify, accept or approve the MLI according to their domestic requirements.
If either contracting jurisdiction to the CTA makes a reservation on the application of a provision of the MLI, the MLI provision for which the reservation is made does not apply and does not modify the agreement. The first modifications to CTAs will likely become effective in 2018. The entry into effect of the modifications is linked to the completion of the ratification procedures in the jurisdictions that are parties to the CTA. The MLI will enter into force three months after the deposit of the fifth instrument of ratification, acceptance or approval. Six months after the MLI has entered into force, it will take effect for taxes levied, except for taxes withheld at source.
The MLI implements the following provisions:
- Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements) to address fiscally transparent entities and application of the exemption method to relieve double taxation.
- Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), including the minimum standard on treaty abuse (e.g., treaty shopping).
- Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status), including measures to address commissionaire arrangements and the anti-fragmentation rule.
- Action 14 (Making Dispute Resolution Mechanisms More Effective).
In addition to implementation of the measures described above, several countries have previously declared their commitment to mandatory binding, mutual agreement procedure arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specified time frame (see Action 14). The MLI includes an optional provision on mandatory binding arbitration.
At the time of signature on June 7, 24 signatories signed up for the arbitration provisions in the MLI: Andorra, Australia, Austria, Belgium, Canada, Fiji, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Malta, the Netherlands, New Zealand, Portugal, Singapore, Slovenia, Spain, Sweden, Switzerland and the UK. This will lead to the introduction of arbitration in over 150 existing treaties.
With respect to Action 6, the principal purpose test (PPT) will apply to all treaties covered by the MLI. In addition, 12 signatories have chosen to supplement the PPT with a simplified limitation on benefits test, including Argentina, Armenia, Bulgaria, Chile, Colombia, India, Indonesia, Mexico, Russia, Senegal, Slovak Republic and Uruguay. Once introduced to a tax treaty through the MLI or bilateral negotiations, the PPT would apply to the treaty in its entirety and address all cases of treaty abuse. Under the PPT, which is a subjective test, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied unless it is established that granting them would be in accordance with the object and purpose of the treaty.