Executive summary
On 25 March 2021, the Organisation for Economic Co-operation and Development (OECD) published the Arbitration Profiles (pdf) of 30 jurisdictions applying Part VI (mandatory binding arbitration) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI).
The Arbitration Profiles provide taxpayers with additional information on the application of Part VI of the MLI for each jurisdiction that chose to apply arbitration. They also allow jurisdictions to make publicly available clarifications on their position on arbitration under the MLI.
On the same date, the OECD announced that on 15 March 2021, the Conference of the Parties to the MLI adopted an opinion (pdf) (the Opinion) regarding the entry into effect of the MLI with respect to taxes withheld at source in specific cases. The Opinion confirms the conclusion reached by the OECD Secretariat in November 2018 on the same issue.1
Detailed discussion
Background
Mandatory binding arbitration
The MLI was developed by an ad hoc group of approximately 100 jurisdictions participating in the OECD Base Erosion and Profit Shifting (BEPS) project. It was agreed in November 2016,2 and it has been open for signature by any interested jurisdictions since then. To date, 95 jurisdictions have signed the MLI, and 64 jurisdictions have deposited their instruments of ratification, acceptance or approval of the MLI with the OECD. The MLI entered into effect for the first time on 1 January 2019.
Part VI of the MLI (Articles 18 to 26) allows jurisdictions to apply mandatory binding arbitration in a mutual agreement procedure (MAP) to their Covered Tax Agreements (CTAs). Currently, 31 signatories3 have chosen to apply mandatory binding arbitration in their CTAs.
Mandatory Binding Arbitration is a mechanism that, in defined circumstances, obligates competent authorities under a treaty to submit unresolved issues in a MAP case to an independent and impartial arbitration panel. The decision reached by the arbitration panel is binding on the competent authorities and thus resolves the issues that can otherwise prevent agreement in MAP cases. A jurisdiction and its treaty partner must expressly choose to adopt Part VI of the MLI in order for the mandatory binding arbitration provisions to apply. Also, jurisdictions may reserve the right not to apply the mandatory binding arbitration provisions of the MLI to some or all of its CTAs that already have an arbitration provision.
Entry into effect
In November 2018, the OECD Secretariat released a note (pdf) clarifying the interpretation and application of Article 35(1)(a) of the MLI on the entry into effect of the provisions of the MLI. According to this Article, the provisions of the MLI have effect with respect to taxes withheld at source on amounts paid or credited to nonresidents, where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions to the CTA. The note addressed the situation where the latest of the dates on which the MLI enters into force is 1 January of a given year and concluded that in such a case the MLI will have effect for taxes withheld at source on 1 January of that same year.
Arbitration profiles
On 25 March 2021, the OECD in its capacity as Depositary of the MLI, published the Arbitration profiles of 30 of the jurisdictions4 applying Part VI on Arbitration of the MLI.
All the Arbitration Profiles have the same structure and contain the following:
- References to a jurisdiction’s MLI position, MAP profile and the synthesized texts obtainable from the MLI Matching Database.
- Indication of the type of arbitration process that will apply to that jurisdiction as the default type of arbitration, but without describing the matching outcome on the basis of the choices of the other Contracting Jurisdiction.
- Any reservations made by that jurisdiction governing the scope of cases eligible for arbitration.
- Hyperlinks to the competent authority agreements concluded in respect to the Arbitration clause of the MLI and the respective dates on which the jurisdictions have reached agreement.5
- Any further clarifications that jurisdictions wish to make publicly available.
Going forward, the OECD may publish additional Arbitration Profiles for those jurisdictions that choose to apply Part VI of the MLI. Likewise, the OECD may update an Arbitration Profile when a jurisdiction deposits its instrument of ratification of the MLI and chooses to apply Part VI of the MLI or changes its initial position by choosing not to apply Part VI of the MLI.
Opinion of the Conference of the Parties to the MLI
The Parties to the MLI may convene a Conference of the Parties for the purposes of making any decisions or exercising any functions as may be required or appropriate under the provisions of the MLI. Any question arising as to the interpretation or implementation of the MLI may be addressed by a Conference of the Parties. The Conference of the Parties may also be convened to consider amendments proposed by Parties to the MLI.
On 25 March 2021, the OECD published the first Opinion of the Conference of the Parties to the MLI clarifying the interpretation and application of Article 35(1)(a) of the MLI on the entry into effect of the provisions of the MLI. The Opinion addresses questions related to the word “next” in the provision of Article 35(1)(a) in situations where the latest of the dates of entry into force of the MLI for a pair of Contracting Jurisdictions is on 1 January of a given calendar year.
The Opinion of the Conference of the Parties of the MLI confirms the conclusion reached by the OECD Secretariat in November 2018 on the same issue. Therefore, where the latest of the dates on which the MLI enters into force is 1 January of a given year, the MLI will have effect for taxes withheld at source on 1 January of that year. For example, if the second of the pair of Contracting Jurisdictions deposited its instrument of ratification on 15 September 2020, the date of entry into force of the MLI for that Contracting Jurisdiction pursuant to Article 34 of the MLI is 1 January 2021, and the MLI will have effect for events giving rise to withholding taxes which occur on or after 1 January 2021 as well (and not 1 January 2022).
The Opinion further provides that the same reasoning and conclusion apply to the interpretation of the similar formulations used in Article 35(3) (“… 1 January of the next year beginning on or after …”) and Article 35(5) (“ … first day of the next calendar year that begins on or after …”).
Implications
The arbitration profiles provide a centralized overview of each jurisdiction that choses to apply Part VI of the MLI. The profiles provide taxpayers with additional information on the application of Part VI of the MLI, while also allowing jurisdictions to make publicly available clarifications of their positions on the MLI Arbitration provision. This information should make the arbitration processes more accessible, which in turn will enhance tax certainty.
It is important to note that the Arbitration provision included in the MLI is just one source of binding arbitration. There are numerous jurisdictions that have bilaterally implemented a ‘’mandatory binding arbitration’’ provision in their tax treaties, including some important relationships, such as certain tax treaties of the United States not covered by the MLI. Moreover, there are two additional sources of binding arbitration in the European Union (EU): i) the EU Arbitration Convention; and ii) the EU Directive on Tax Dispute Resolution.
Furthermore, the Opinion brings additional certainty regarding the entry into effect of the MLI in situations where the MLI enters into force for the second of the pair of Contracting Jurisdictions on 1 January of a given year. This clarification means that the provisions of the MLI may enter into effect sooner with respect to withholding taxes than it might have appeared from an initial reading of the provisions governing the MLI’s entry into effect. This Opinion is particularly relevant to the CTAs of MLI Parties that deposited their instrument of ratification in September. Businesses and investors dealing with such CTAs are encouraged to closely consider the relevant provisions and may want to seek external advice on the interpretation of the MLI.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
- Maikel Evers
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Gerritt Groen
- David Corredor-Velásquez
- Konstantina Tsilimigka
- Roberto Aviles Gutierrez
Ernst & Young Solutions LLP, Singapore
- Luis Coronado
Ernst & Young LLP (United Kingdom), Global Tax Desk Network, London
- Joel Cooper
Ernst & Young LLP (United States), Global Tax Desk Network, New York
- Jose A. (Jano) Bustos
Ernst & Young LLP (United States), Washington, DC
- Barbara M. Angus
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
