International Tax Reform Moves a Step Closer

International tax reform moved ahead as the Organisation for Economic Cooperation and Development (OECD) published its so-called multilateral instrument (MLI), along with an explanation of how it will work.

The MLI, a cornerstone of the OECD’s base erosion and profit shifting (BEPS) project, is formally known as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. It is expected to update more than 2,000 worldwide tax treaties and modify them to include specific BEPS provisions, such as the minimum standards to counter treaty abuse and improve dispute resolution mechanisms.

It will modify a treaty’s application, in order to implement BEPS measures, as opposed to an amending protocol, which would directly amend the text of the treaty. Jurisdictions may agree subsequently to different modifications to their treaties.

Provisions of the MLI

Here are some details about the MLI:

  • The convention specifies the tax treaties to which the MLI applies. There may be circumstances in which a jurisdiction prefers not to include a specific treaty in the scope of application, such as when the treaty has been recently renegotiated to implement the outcomes of the BEPS project.
  • If a provision reflects a BEPS minimum standard, opting out of that provision is possible only in limited circumstances, such as when the treaty already meets that standard. Jurisdictions may also adopt a different approach to meeting a minimum standard. Whether a treaty meets the minimum standard would be determined in the overall review and monitoring process by the BEPS Inclusive Framework.
  • There may be circumstances in which a party may have policy reasons for preserving the application of specific types of existing provisions.
  • In cases where the provisions of the MLI conflict with existing provisions covering the same subject matter, the conflict is addressed through one or more compatibility clauses, which may describe the existing provisions that the MLI is intended to supersede.
  • Parties are permitted to opt out of applying particular provisions to their tax treaties based on objective criteria. This is accomplished through one or more paragraphs in the articles of the convention that set out a list of permitted reservations.
  • If a provision supersedes or modifies specific types of existing provisions of a tax treaty, parties are generally required to make a notification specifying which treaties contain provisions of that type. The effect of these notifications varies depending on the type of compatibility clause that applies to the provision.

Hybrid Mismatches

A provision on fiscally transparent entities isn’t required in order to meet a minimum standard. The reservation clauses indicate that a party may opt out of this entirely. If either party to a tax treaty adopts a reservation, the existing provision will be preserved.

It’s also possible for a party to reserve the right to retain existing provisions that would deny benefits in the case of transparent entities established in third jurisdictions. Parties may also reserve the right to retain existing provisions that provide more detail about the treatment of factual situations and entities to which the provision is intended to apply.

Improving Dispute Resolution

A section of the MLI includes provisions for the mandatory binding arbitration of cases in which the competent authorities are unable to agree within a fixed period of time. This work includes the development of the substantive content of a mandatory binding arbitration provision.

A signing ceremony is expected to take place in early June 2017. The full MLI can be found here.

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