9 !{ArticleDetails-ReadTime} 27 Jul 2017
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Tax transparency: how MLI aims to mitigate BEPS fatigue


EY Americas

Multidisciplinary professional services organization

9 !{ArticleDetails-ReadTime} 27 Jul 2017

The MLI’s objective is to let any jurisdiction swiftly implement a range of BEPS minimum standards – bringing significant business impacts.

The last five years have been some of the busiest any of us will see in our tax careers. The global financial crisis gave way to increased scrutiny of taxpayers’ activities by the public, charities, media and politicians, not to mention from revenue authorities; a new era of tax transparency started; and with almost a decade of austerity under their belts, governments are looking for ways to tackle perceived profit shifting by multinational companies.

Much of the change is attributable to what is known as the base erosion and profit shifting (BEPS) project, mandated by the G20 and driven by the Organisation for Economic Co-operation and Development (OECD).

The next stage of that BEPS journey was marked by the early June signing by 68 jurisdictions (with another 20 to 25 expected to join later during the remainder of this year) of a key OECD recommendation in Action 15, formally known as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

The Multilateral Instrument (MLI) focuses on what might at surface level seem to be a relatively simple objective — to quickly and efficiently (when compared with bilateral processes) update the world’s 3,400 double tax treaties, to allow them to take into account the BEPS changes.

However, this also means it has the potential to deliver business a whole range of unexpected outcomes including increased scrutiny of previously accepted transactions, the need to invoke different funding models, and the need to completely restructure supply chains or operations.

At this stage, it is expected that more than 1,100 tax treaties will be modified based on matching the specific provisions that the 68 jurisdictions wish to add or change. That number will likely increase rapidly in coming months.

What the MLI is trying to achieve

Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other jurisdictions to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes on dividends, royalties or licensing fees.

Many business leaders may not be 100% aware of the mechanics of tax treaties, but they would notice the effects if the treaties did not exist; consider this, for example — if one resides in country X but has business operations in country Y, a tax treaty may reduce (or eradicate) the tax withheld from interest, dividends and royalties paid by entity X to entity Y.

The G20 and OECD feel, though, that while indeed such treaties help facilitate global business, they can also be abused. Several of the 2015 BEPS recommendations focus on techniques that are enshrined within a tax treaty, which means that these treaties needed to be updated to take such recommendations into account.

But with the bilateral renegotiation of treaties taking up to a decade or more, a more efficient process was needed. This led to the birth of the MLI.

The objective of the MLI is to enable any jurisdiction to swiftly amend the entirety or part of its treaty network by just signing and ratifying one multilateral convention, instead of having to renegotiate many bilateral ones.

And while many of the recommendations of the BEPS project are optional, a limited number of recommendations are minimum standards, meaning that all 100 countries that have signed up to the BEPS project agree to take these minimum standards forward into their treaties.

During a signing ceremony on 7 June, 67 jurisdictions signed the MLI, covering 68 jurisdictions, as China signed for Hong Kong. Nine other jurisdictions expressed their intent to sign the MLI in the near future, and, since 7 June, three others (Cameroon, Mauritius and Vietnam) have done so.

The MLI remains open to signature by any interested jurisdiction and in fact, the OECD has announced that it will organize a second signing ceremony later this year. It is expected that by the end of 2017, around 90 jurisdictions will have signed the MLI.

As a result, the new BEPS treaty rules will become applicable widely as of 2019, with early adoption possible for 2018.

Why business should care

The MLI means big changes to cross-border tax law. Indeed, many of the changes represent the most significant changes to tax treaties since they were first used more than 100 years ago.
Whether they introduce a BEPS minimum standard or not, the changes potentially adopted via the MLI will have significant issues for business. Consider this selection of three possible changes (one of which is mandatory for the more than 100 countries that are BEPS members) and their impacts:

1. Article 7 of the MLI on treaty abuse mandates that all countries signing the MLI should introduce a Principal Purpose Test (PPT), as well as allowing them to also (optionally) apply a simplified Limitation of Benefits (LOB) provision to curb treaty abuse. Using a PPT, a country may deny treaty benefits (such as reduced taxes) where obtaining the benefit was one of the principal purposes of an arrangement unless granting the treaty benefits would be in accordance with the object and purpose of the relevant provisions of the treaty. So in effect, 68 countries may start scrutinizing every dividend or royalty flow to see if this rule is met. While no one is saying that every treaty benefit will be denied, it is likely that certain structures and transactions will meet that fate, particularly in the early days when this subjective new rule remains untested. During the signing ceremony Secretary-General José Ángel Gurria of the OECD emphasized the determination with which countries have pursued this issue, which led to all BEPS members agreeing on a coordinated implementation of the new rules. That may mean a protracted period of uncertainty for business.

2. Article 12 of the MLI on the avoidance of permanent establishment (PE) status sets out how changes to the wording of article 5 of the OECD Model Tax Convention to address the artificial avoidance of PE status through commissionaire arrangements and similar strategies will be embedded into treaties by the MLI. A commissionaire arrangement may be loosely defined as an arrangement through which a person sells products in a jurisdiction in its own name but on behalf of a foreign enterprise that is the owner of these products. Through such an arrangement, a foreign enterprise is able to sell its products in a State without technically having a permanent establishment to which such sales may be attributed for tax purposes and without, therefore, being taxable in that State on the profits derived from such sales. Since the person that concludes the sales does not own the products that it sells, that person cannot be taxed on the profits derived from such sales and may only be taxed on the remuneration that it receives for its services (usually a commission). The proposed changes delivered via the MLI would deem that a PE exists if a commissionaire’s activities are intended to result in the conclusion of contracts that are then to be performed by the foreign principal — unless the commissionaire performs these activities in the course of their own independent business. In effect, this means that businesses currently relying on this model will need to adapt and change their delivery model in response — or risk disputes, penalties and business disruption.

3. Article 13 looks at the artificial avoidance of PE status through business activities that were previously seen as exempt in terms of resulting in a PE for business. In this regard, some activities previously considered to be merely “preparatory” or “auxiliary” in nature may nowadays correspond to core business activities. So that profits derived from core activities performed in a country can be taxed in that country, the BEPS changes modify the OECD model convention on tax so that each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary” character. Again, this means that businesses currently relying such activities to deliver their business model in a jurisdiction will need to adapt and change their delivery model in response — else risk increasing scrutiny and disruption in coming years.

These are just some examples of the many changes that will be delivered into reality via the MLI.

These are significant changes to the way in which the final tax bill is calculated, potentially driving business to restructure finance and holding companies, supply chain and operations.

Little wonder, then, that OECD Secretary-General José Ángel Gurria remarked that, “We are about to make tax treaty history!” at the Paris signing ceremony, where the 68 jurisdictions not only signed the MLI but also unveiled which treaties they will be changing first and which options they have agreed with their bilateral partners.

Given the size and nature of the potential changes ahead, one might expect tax department leaders to be picking through the country positions with a fine-toothed comb as a result. But our recent webcast attended by nearly 2,000 clients and other external stakeholders revealed a different picture, perhaps indicating that a “BEPS fatigue” is plaguing business.

Nearly 60% of company tax leaders watching the webcast, for example, said that the MLI will have a significant or moderate impact on their tax strategy. But less than 1 in 10 (7%) said they fully understood how it worked or what impacts it might have on their business.

Less than 2 in 10 (16%) say they are already assessing risk or have concrete plans to do so. That's concerning when 61% of the same group also say that the MLI will result in tax disputes rising “significantly” or “somewhat.”


The MLI is a key part of the OECD’s effort toward implementation of the recommended BEPS measures.

But countries do not need to use the MLI to adopt treaty changes; such changes may still be made bilaterally, and in some cases, countries have already pressed on and developed their own national laws that are similar to those suggested by the OECD in effect, if not form.

The MLI will enter into force after five jurisdictions have deposited its instrument of ratification, acceptance or approval of the MLI. During the ratification process the choices made by jurisdictions may still change.

With respect to a specific bilateral tax treaty, the measures will only enter into effect after both parties to the treaty have deposited its instrument of ratification, acceptance or approval of the MLI and a specified time has passed. The specified time differs for different provisions.

The first modifications to bilateral tax treaties are expected to enter into effect in early 2018. However, given the anticipated time needed for ratification, it is expected that most treaty changes will enter into effect in 2019.

What we recommend

While the existence of the MLI may help the OECD meet a key objective of making sure treaty changes occur as quickly as possible, the pace of the implementation of the BEPS measures by the BEPS members shows just how intricate, voluminous and fast-paced those changes are likely to be. Ratification of the MLI will be a priority for many countries.

Many investment location choices are based on long-standing organizational practices; one may be familiar with every aspect of investing through a particular location and using particular vehicles. These routines may no longer be available; putting new processes in place will take time and considerable effort.

Companies will therefore need to ask themselves a series of questions, which in turn will permit them to formulate a robust assessment and action plan:

  • Do we know every situation where we are relying on treaty relief?
  • Do we have a process in place to check if the MLI may impact on our treaty analysis?
  • Do we have the resources to deliver that process?

Things are still developing rapidly, and what we see now are very much the early days of change. But these are not small changes — they are a real shift in the world of tax — history being made, so to speak.


The current MLI positions as stated today represent a relevant starting point for an analysis, but not a reference framework that reflects the final situation. Future developments will have to be tracked to be aware of the latest status in relation to a specific tax treaty. In that regard, establishing an ongoing process to monitor and track MLI implementation and then constantly assess impacts against current tax footprint will be an imperative.



EY Americas

Multidisciplinary professional services organization