The MLI will modify existing bilateral tax treaties to implement the tax treaty measures developed through the OECD/ G20 BEPS project. The MLI provides for a mechanism to align tax treaties in a quick and effective way of measures against treaty shopping, artificial avoidance of permanent establishment (“PE”) status and hybrid mismatches and improvements of the dispute resolution mechanism.
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) and alternative provisions.
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. If a tax treaty already contains provisions regarding the BEPS issues, the MLI uses “compatibility clauses” that describe in detail under which circumstances the MLI provisions should be added to or replace a provision of an existing double tax treaty.
The MLI only has its effect if the treaty partners make the same choices regarding the different options. The governments have to prepare lists of treaties to be covered, consider which options to select and which reservations to make. The OECD needs to be notified on their choices and will keep a public record of this information.
Position the Netherlands
On 28 October 2016, the Dutch government has set its implementation preferences in a position paper. Various specific questions were raised by the Dutch Parliament following this initial announcement. On 21 March 2017, the Dutch Ministry of Finance submitted a letter to Parliament confirming their views regarding the MLI. The position of the Netherlands can be summarized as follows:
- The Netherlands intends to bring as many tax treaties within the scope of the MLI. The Netherlands may exclude double tax treaties on which treaty negotiations are currently pending.
- The Netherlands intends to implement the principle purpose test (“PPT”) to encounter treaty abuse. Based on the PPT a treaty benefit is denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the treaty benefit is in accordance with the object and purpose of a tax treaty. The PPT option is the default option, since it satisfies the minimum standard. No reservations will be made by the Netherlands for existing anti-abuse provisions in the Dutch tax treaties (in general a main purpose test). The tax authority is in much more favorable position in case of a PPT compared to a main purpose test, since the burden of proof for the taxpayer is, in case of a PPT, more demanding (i.e. the burden of proof is eventually placed on a taxpayer).
- A reservation will be made for the provision of the MLI to address hybrid mismatches to the extent that a double tax treaty contains a provision on hybrid mismatches.
- An integral reservations is made to the “saving clause” rule that preserves a state’s right to tax its own residents.
- The Netherlands intends to include a specific reservations to splitting-up of contracts in case of the exploration and exploitation of natural resources (the scope of existing anti-splitting provision in this field is broader).
- The Netherlands will exclude the mandatory binding arbitration procedure for double tax treaties already proving such a procedure.
- It is not yet clear if for internal purposes consolidated versions of the Dutch double tax treaties are prepared with the changes and additions based on the MLI.
- The Netherlands still intends to sign the MLI during the week of 5 June 2017 and expects to complete the mandatory Parliamentary procedures to ratify the MLI by the end of 2017. The State Secretary makes explicit that the options and reservations made by the Netherlands may be amended in the Parliamentary proceedings.