Global Tax Alert | 14 June 2017

Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider

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Executive summary

On 7 June 2017, 68 jurisdictions signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) during a signing ceremony1 hosted by the Organisation for Economic Co-operation and Development (OECD) in Paris. Eight other jurisdictions expressed their intent to sign the MLI in the near future. Norway did not submit its MLI positions at the time of the signing ceremony.2

The MLI is designed to allow modifications to tax treaties between two or more parties. It will not however, function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the tax treaty. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the Base Erosion and Profit Shifting (BEPS) measures.

At the time of signature, signatories submitted a list of their tax treaties in force that they designate as Covered Tax Agreements (CTAs), i.e., to be amended through the MLI. At this stage, it is expected that over 1,100 tax treaties will be modified based on matching the specific provisions that jurisdictions wish to add or change within the CTAs nominated by the signatories. Both the number of jurisdictions and the number of CTAs designated are anticipated to grow over time, with Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration noting at the signing ceremony that he expects 20 to 25 additional jurisdictions to sign the MLI during the remainder of the calendar year.

Together with the list of CTAs, signatories also submitted a preliminary list of their reservations and notifications (MLI positions) in respect of the various provisions of the MLI. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI. The OECD has published on its website the list of signatories and country-specific files containing an overview of the CTAs and reservations and notifications as filed as of 7 June by those countries.

Detailed discussion

Background

On 5 October 2015, the OECD released its final report on developing an MLI to modify bilateral tax treaties under its BEPS Action Plan (Action 15). This report was released in a package that included final reports on all 15 BEPS Actions.

The tax treaty related BEPS measures covered by the MLI include (elements of): (i) Action 2 on hybrid mismatch arrangements; (ii) Action 6 on treaty abuse; (iii) Action 7 on the artificial avoidance of the permanent establishment (PE) status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The MLI does not modify or add to the substance of these provisions. The MLI is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.

The only action for which the negotiations both related to developing the substance of the provision and the modalities of its implementation in bilateral and regional tax treaties, concerns the mandatory and binding arbitration provision which was announced in the Action 14 final report. A group of 20 jurisdictions expressed their willingness to voluntarily include mandatory and binding arbitration in their existing tax treaties at the time of conclusion of the Action 14 final report. Eventually, 27 jurisdictions participated in the subgroup which developed this provision and 25 jurisdictions chose to include this option when signing the MLI on 7 June.

One of the primary aims of the MLI is to enable all jurisdictions to meet the treaty-related minimum standards that were agreed as part of the final BEPS package. These include the minimum standard for the prevention of treaty abuse under Action 6 and the minimum standard for the improvement of dispute resolution under Action 14. Given, however, that each of those minimum standards can be satisfied in multiple different ways and given the broad range of jurisdictions involved in the negotiations, the MLI was designed to be flexible enough to accommodate the positions of different jurisdictions. The MLI is also drafted to provide flexibility in relation to provisions that do not reflect minimum standards.

The MLI provides that flexibility by:

  • Allowing jurisdictions to specify the tax treaties to which the MLI applies
  • Creating flexibility with regard to the provisions that relate to a minimum standard, in order to allow countries to choose for the option that fits them best
  • Including the possibility to opt out of provisions when the provisions do not relate to a minimum standard
  • Including the possibility to opt out of provisions for treaties with existing provisions with specific, objectively defined characteristics
  • Allowing a choice to apply optional or alternative provisions, such as for example the optional provision on mandatory and binding arbitration

Since 2015, the MLI has been developed via negotiations involving more than 100 jurisdictions including OECD member countries, G20 countries and other developed and developing countries, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting. The text of the MLI and explanatory notes are available on the OECD website.3

The 7 June 2017 MLI signing ceremony marks another key milestone in the BEPS project, in particular with respect to the implementation of the treaty-related BEPS minimum standards. At the time of signature, signatories submitted a list of their tax treaties in force that they would like to designate as CTAs, i.e., to be amended through the MLI. At this stage, it is expected that over 1,100 tax treaties will be modified based on matching the specific provisions that jurisdictions wish to add or change within the CTAs nominated by the signatories.

Together with the list of CTAs, signatories also submitted a preliminary list of their reservations and notifications (MLI positions) in respect of the various provisions of the MLI. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI. The OECD has published on its website the list of signatories and country-specific files containing an overview of the CTAs and reservations and notifications as filed as of 7 June by those countries.

This Tax Alert provides summary information on the preliminary list of MLI positions. Additional information on MLI positions relating to each article of the MLI is available in an appendix to this alert.

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.

Structure of the MLI

The MLI is made up of 39 articles contained in seven sections (parts) as follows:

  • Part I: Scope and interpretation of terms
  • Part II: Hybrid mismatches
  • Part III: Treaty abuse
  • Part IV: Avoidance of permanent establishment status
  • Part V: Improving dispute resolution
  • Part VI: Arbitration
  • Part VII: Final provisions

Mechanics of the MLI

Recognizing the complexity of designing a general instrument that applies to the CTAs and to the specific provisions included in bilateral tax treaties, the MLI provides flexibility for Contracting Jurisdictions to implement parts of the MLI based on their needs.

Many of the provisions of the MLI overlap with provisions already found in CTAs. Where the provisions of the MLI may conflict with existing provisions covering the same subject matter, this conflict is addressed through one or more compatibility clauses which describe the impact of the MLI on these existing provisions. The MLI may, for example, describe the existing provisions on a specific subject which the MLI is intended to supersede, as well as the effect on CTAs that do not contain a provision of the same type. In the latter case, the MLI may allow for the MLI provision to be introduced in the treaty.

Jurisdictions have the right to reserve certain parts of the MLI (a reservation or opt-out) and to have these specific articles not apply to their tax treaties. However, once a jurisdiction has ratified the MLI, reservations cannot be introduced or broadened. Reservations may be withdrawn or limited both before and after ratification. New jurisdictions may also enter the MLI in the future and existing jurisdictions may nominate additional CTAs for inclusion in the MLI.

The different types of provisions

The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i) ”in place of”; (ii) ”applies to”; (iii) ”in the absence of”; and (iv) ”in place of or in the absence of.”

A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that applies ”in place of” shall replace a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision.

A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that ”applies to” provisions shall change the application of a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision.

A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that does not contain a provision within the scope of the relevant MLI provision. A provision of the MLI that applies ”in the absence of” provisions shall apply only in cases where all Contracting Jurisdictions notify the absence of an existing provision of the CTA.

A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.

Minimum standard provisions

One of the main purposes of the MLI is to enable countries to meet the treaty related minimum standards that were agreed as part of the final BEPS package, which are the minimum standard for the prevention of treaty abuse under Action 6 and the minimum standard for the improvement of dispute resolution under Action 14. Those minimum standards can be satisfied in different ways.

For the minimum standard provisions, the right to opt-out only exists to the extent the CTA already includes a similar minimum standard.

Where a minimum standard can be satisfied in multiple alternative ways, the MLI does not give preference to a particular way of meeting the minimum standard.

Other provisions

The MLI is drafted to provide flexibility in relation to provisions that do not reflect minimum standards. Those provisions include the articles relating to hybrid mismatches (Articles 3, 4 and 5 of the MLI) and the provisions tackling the avoidance of permanent establishment status (Articles 12, 13, 14 and 15 of the MLI). Also, some of the articles relating to the prevention of treaty abuse (Articles 8, 10 and 11 of the MLI) are not considered to be minimum standard provisions.

A jurisdiction may reserve the right to opt-out of the other provisions and to not apply these articles to its tax treaties or to a subset of its tax treaties.

For some specific articles, Contracting Jurisdictions may choose different options resulting in an asymmetrical application of these provisions

To view a summary of jurisdiction MLI provisions, please download the PDF version.

Next steps – timing

The MLI is a key part of the OECD’s effort toward implementation of the recommended BEPS measures. At this stage, it is expected that over 1,100 tax treaties will be modified based on matching the specific provisions that jurisdictions wish to add or change within the CTAs nominated by the signatories.

Together with the list of CTAs, on 7 June 2017 signatories also submitted a preliminary list of their reservations and notifications in respect of the various provisions of the MLI. The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI.

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. For example, for provisions relating to withholdinsg taxes, the entry into force date is the 1 January of the following year after the last party has notified of its ratification.

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.

Implications

The expectation that 1,100 tax treaties will be modified as a result of 68 jurisdictions signing the MLI constitutes an unprecedented moment in international taxation. It is also a key milestone in the implementation of the treaty-based BEPS recommendations. That number is also expected to rise during the course of 2017 and beyond, with Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration noting at the signing ceremony that he expects 20 to 25 additional jurisdictions to sign the MLI during the remainder of the calendar year.

While the definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI, relevant information that enables companies to assess current position in relation to the BEPS minimum standards now exists and such assessment should be carried out in a thorough but time sensitive manner.

It should be noted that, because during the ratification procedures the decisions of countries in relation to their rights to reserve on certain parts of the MLI (a reservation or opt-out) may change and because additional countries are expected to sign the MLI, the current MLI positions as stated in this alert and its appendix 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 in order to guarantee the latest status in relation to a specific CTA.

EY is currently preparing additional analysis on MLI positions for future issuance.

To view the Appendix tables, please download the PDF version.

Endnotes

1. See EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017.

2. Norway did not submit its MLI position at the time of signature but will make its positions available as soon as it has submitted the MLI to the Norwegian Parliament in line with the required procedures in Norway.

3. See http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Marlies de Ruiter
    +31 88 407 7887
    marlies.de.ruiter@nl.ey.com
  • Ronald van den Brekel
    +31 88 407 9016
    ronald.van.den.brekel@nl.ey.com
Ernst & Young LLP (United Kingdom), London
  • Rob Thomas
    +44 20 7760 5538
    rthomas5@uk.ey.com
Ernst & Young LLP, Global Tax Desk Network, New York
  • Gerrit Groen
    +1 212 773 8627
    gerrit.groen@ey.com
  • Jose Bustos
    +1 212 773 9584
    joseantonio.bustos@ey.com
  • David Corredor-Velásquez
    +1 212 773 6259
    david.corredorvelasquez@ey.com

EYG no. 03818-171Gbl