The OECD has now published the multilateral instrument (“MLI”) that will implement certain of the treaty-related proposals from its project on tackling base erosion and profit shifting (“BEPS”). As mentioned in a previous article, the publication had been expected in November 2016, following negotiations over its terms being concluded between over 100 jurisdictions. The MLI has been published in both English and French, together with an accompanying explanatory statement currently available only in English, which can all be downloaded from the OECD website.
The intention of the MLI is broadly to implement the minimum standards relating to tax treaties that were agreed in the final BEPS package of proposals, by modifying existing bilateral tax treaties between those states that are each party to the MLI. It will not achieve this by actually amending the bilateral tax treaties in question, but will instead ‘sit on top of’ these treaties, as described further below.
The content of the MLI
The key implementing sections of the MLI are contained in Parts II, III and IV, which cover hybrid mismatches, treaty abuse and the avoidance of permanent establishment status respectively. Each of these parts then contains a number of articles dealing with a particular BEPS proposal in that area; for example, in Part II (Hybrid Mismatches), Article 3 deals with transparent entities, Article 4 with dual-resident entities, and Article 5 with the application of methods to eliminate double taxation.
Each article then sets out the changes to be made by the MLI to tax treaties; for example, by inserting additional text, or imposing conditions or restrictions on the operation of the tax treaty.
The other sections of the MLI relate to interpretation (Part I); dispute resolution and arbitration (Parts V and Part VI); and signing and other mechanics (Part VII). The MLI will be open for signing on behalf of jurisdictions from 31 December 2016, and signing is expected to take place early in 2017.
How the MLI will operate
The fact that the MLI has the potential to affect over 2,000 existing tax treaties means that by necessity it contains a high degree of flexibility. In particular, the MLI will only apply in relation to those tax treaties to which it is specified to apply by the parties, which are referred to in the MLI as ‘Covered Tax Agreements’. Parties may therefore choose not to apply the MLI to a particular tax treaty; the explanatory statement gives an example of a tax treaty that has already been negotiated to reflect BEPS proposals.
A party to the MLI may also opt out of a particular article applying to its tax treaties by way of the specific reservations set out alongside each article. This can be done in relation to either the whole or specific parts of the given article. On a similar basis, there are many places in the MLI where alternative options are offered, reflecting that the BEPS proposals may be met in various different ways. Parties may therefore choose the option that reflects their desired approach, or fits with the existing wording of the given tax treaty.
Considering and interpreting tax treaties
Once the MLI becomes operative, it will be necessary in assessing any tax treaty between two jurisdictions to consider (at least) the following:
- Are the jurisdictions in question both party to the MLI?
- Is the tax treaty in question covered by the MLI?
- Are the relevant provisions subject to a reservation?
- If there are different options available as to how the MLI applies to these provisions, which option has been chosen?
In interpreting the tax treaty, the explanatory statement accompanying the MLI suggests that the commentary developed alongside the BEPS proposals will be relevant, and notes that as a general rule where the wording in the MLI differs from the proposals this is to reflect the multilateral nature of the MLI, rather than to substantively change the meaning of the provisions of a BEPS proposal. From a practical perspective, jurisdictions may in time publish consolidated versions of their tax treaties, but it is still likely to be necessary to consult the MLI directly to accurately assess the tax treaty position regarding individual commercial arrangements.