Multilateral instrument to implement BEPS measures

A group of more than 100 jurisdictions have agreed upon a multilateral instrument (“MLI”) for the implementation of certain tax treaty measures of the BEPS projects in the bilateral tax treaties. This MLI gives the governments a mechanism to align their treaties with the several action points laid down in the BEPS projects in a quick and effective way. Depending on the ratification process, this instrument could be used to amend up to 2000 treaties.

The MLI will supplement existing tax treaties by adding new provisions or by modifying or replacing existing provisions. The MLI facilitates  a certain level of flexibility through opt-in and opt-out mechanisms (except for certain mandatory minimum standards).  The Explanatory Statement to the MLI provides guidance on the interaction of the MLI with the existing tax treaties and contains commentary on the provisions to ensure an consistent application.

Tax treaty measures

Based on the MLI, existing treaties will be modified through, inter alia, the following provisions:

(i) Prevent treaty abuse

The instrument introduces a principle purpose test, that can optionally be supplemented with a limitation-on-benefits provision. Countries can opt-out of this rule, as long as there is an alternative provision in the treaty that meets the minimum standard of treaty abuse regarding BEPS. In addition specific anti-abuse provisions are implemented.

(ii) Prevent artificial avoidance of the permanent establishment (PE) status

The instrument provides optional provisions to counter the PE avoidance by lowering the PE threshold in tax treaties.

(iii) Hybrid mismatches

The MLI contains optional treaty provisions regarding hybrid mismatches as a result of different tax classifications of an entity under the laws of two or more countries. No tax treaty benefits will be granted if income is not considered to be income of a resident of one of the countries. In addition an optional tie-breaker rule is included.

(iv) Improving dispute resolution

The instrument aims to create more effectiveness and efficiency regarding the mutual agreement procedure (MAP). To guarantee that treaty related issues will be solved in a specific timeframe, the instrument provides for an optional provision on mandatory binding MAP arbitration.

Implementation & effect

The MLI needs to be ratified by at least five countries before it enters into force. The MLI will only impact treaties if both treaty partners have ratified the MLI.  The governments are currently making lists of treaties to be covered and decide which options to select.

The MLI only has its effect if the treaty partners make the same choices regarding the different options. If not, the countries need to negotiate about the option they will use in their treaty.

The MLI provisions will not be included in specific bilateral tax treaties. The MLI will be read and applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. For internal purposes, some countries may develop consolidated versions of their tax treaties as modified by the MLI.