The OECD’s Multilateral Instrument: spotting trends among the data

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Marlies de Ruiter
International Tax Services Policy Leader

Jose A Bustos
Partner - International Tax Services

David Corredor Velasquez
International Tax Services


We are living in rapidly changing times, where things are changing faster than ever before and will be changing even faster in the future. It is important to adapt to this new environment.

In the international tax arena, we are seeing a sea of changes. Jurisdictions have not finished implementing new recommendations and common approaches and many are already thinking on how to enhance, improve or make them more efficient and effective to achieve their purpose. We cannot wait for the dust to settle to make decisions.

One of the hot topics of this near decade of change - and of tax history, no less - will undoubtedly be the base erosion and profit shifting project.

Put in perspective, BEPS has been in our jargon for much of the present decade, and an unprecedented number of countries have committed to systematically, coherently and consistently implement the BEPS minimum standards.

To facilitate and expedite this, new approaches were considered, the end result being an entire Action of the BEPS Action Plan, Action 15.

The objective of Action 15 was to analyze the tax and public international law issues related to the development of a multilateral instrument that would enable jurisdictions to implement treaty-based measures developed in the course of the BEPS project by amending their bilateral tax treaties. On the basis of this analysis, it was concluded that such an instrument was not only feasible but desirable and, under a G20 mandate, an ad hoc group was created to negotiate the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (also known as the MLI), which was agreed upon in November 2016. The MLI has been open for countries to sign since 1 January 2017.

Detailed discussion

To date, 71 jurisdictions have signed the MLI and 7 have expressed their intent to sign in the near future. The MLI is open for signature by virtually any jurisdiction, irrespective of whether the jurisdiction is an OECD member or a member of the Inclusive Framework (IF) on BEPS. In fact, from the 78 jurisdictions that have either signed or expressed their intent to sign, 7 are not members of the IF on BEPSi. This can be seen as a signal that these non-BEPS member jurisdictions may be considering becoming BEPS members, which in turn would imply that more jurisdictions will be implementing the BEPS minimum standards in the future.

The IF on BEPS is currently comprised of 103 members. Sixty-six members have signed the MLI, and five have expressed their intent to sign it. Pascal Saint-Amans, the Director of the OECD’s Center for Tax Policy and Administration , recently told the audience1 at EY’s International Tax Conference that “we have another 30 (jurisdictions) in the pipeline. So by mid-2018, the MLI will cover around 100 jurisdictions.” This is an unprecedented achievement in the international tax arena.

For international tax, MLI represents the most subscribed-to instrument ever. In comparison, the original Convention on Mutual Administrative Assistance in Tax Matters (MAAC) has been open to the signature of member states of the Council of Europe and OECD since 1988. As of 1989, these international organizations had 21 and 24 members respectively. Likewise, the amending protocol to the MAAC was also open for signature by members of the Council of Europe and OECD countries, and to any other jurisdiction that requests to be invited to sign the MAAC and its amending protocol. During the first signing of the amended MAAC, just 15 jurisdictions signed the MAAC and/or its amending protocol.

In light of these examples, it is not only clear that the MLI is a milestone, but also that the MLI is evidence of the shift toward a more multilateral mindset in international taxation.

1See full remarks at:

Countries’ MLI positions

Minimum standards

Once a jurisdiction signs the MLI, it must submit a (preliminary) list of tax treaties that it would like to be covered. When a tax treaty in force is included in both parties’ lists, the tax treaty becomes a Covered Tax Agreement (CTA).

Signatories must also submit a list of positions reflecting the changes they would like to make to its CTAs. Generally, when both parties to a Covered Tax Agreement (CTA) have matching positions MLI provisions, those provisions will apply to that CTA - with the exception of provisions allowing for asymmetrical application. In early 2017, the OEDCD held multi-country negotiations sessions, to help countries establish their initial positions.

Although both parties to a CTA may equally decide what they do and don’t want from the MLI, those with a large number of tax treaties will have a larger overall impact on the global implementation of BEPS treaty-based recommendations. For example, if a jurisdiction with 100 CTAs does not want to adopt the MLI PE provisions, it effectively has the effect of excluding 100 tax treaties from being updated with those provisions. Conversely, if a jurisdiction with just five CTAs does not want a certain provision, the impact on the global treaty network is less.

After analyzing the preliminary positions of the MLI signatories to date, it seem clear that the MLI provision with the broadest application is the Principal Purpose Test (PPT) contained in Article 7 of the MLI.

All 71 signatories have chosen to adopt a PPT, 12 have chosen to apply a Simplified Limitation on Benefits (S-LOB) rule in addition,iii and 9 have included a statement indicating that they intend, where possible, to adopt a detailed LOB, in addition to or in replacement of a PPT.iv

Only Mauritius indicated that it intends to negotiate a detailed LOB in replacement of the PPT, and only Chile indicated that it intends to negotiate a detailed LOB in addition to the PPT. The remaining 7 jurisdictions will pursue either a detailed LOB in addition to or in replacement of a PPT.

The above is not surprising, given that the minimum standard in Action 6 (Preventing the Granting of Treaty Benefits Inappropriate Circumstances) requires all BEPS members to have a minimum level of protection in their tax treaties against treaty shopping and tax avoidance.

Although jurisdictions can choose to meet these minimum standard via bilateral negotiations, none made this choice - not even signatories who are not BEPS members, and thus are not committed to this minimum level of protection.

By contrast, 24 jurisdictions made a reservation to not apply Article 16(1) (Dispute Resolution2) on the basis that they intend to meet the minimum standard for improving dispute resolution outside of the MLI.

It is interesting to put these two MLI articles in perspective: Jurisdictions are clearly concerned about tax avoidance and want to quickly access new tools (e.g., a PPT) to tackle the issue.

At the same time, they are aware of the increasing number of tax disputes and the need for more effective dispute resolution. It seems, however, that is not a pressing issue for a number of jurisdictions that would rather comply with the minimum standard in BEPS Action 14 (making dispute resolution mechanisms more effective) outside the MLI.

Given that the PPT will probably be the MLI provision applied the most (as well as, ironically, potentially driving the largest number of future disputes!) it would be beneficial if the OECD were able to provide additional guidance on its application. This in turn may also help reduce disputes.

Furthermore, jurisdictions’ experience administering and applying these kind of rules is somewhat unclear. The MLI has a specific reservation that jurisdictions can make for the PPT to not apply to a CTA which already has a PPT. Using this reservation as a point of reference, an estimate can be made of how many CTAs have an equivalent PPT, and also which countries may have prior experience in applying a PPT.

Surprisingly, just 11 jurisdictions (i.e., 15% of the signatories) made this reservation, and, in total, 38 tax treaties were listed as having a provision within the scope of this reservation.

This is a relative number, considering that there are cases in which, although both contracting jurisdictions made this reservation, their CTA is not listed as having a provision within the scope of the reservation. For example, Chile listed the CTA with Italy as being within the scope of this reservation, while Italy did not list the CTA with Chile as being within the scope of the reservation.

Also, some jurisdictions did not make this reservation in spite of already having a PPT provision in a CTA. For example, China did not make this reservation and Chile and Germany listed their CTA with China as being within the scope of the reservation.

But overall the message is clear: few jurisdictions have much PPT experience.

2Article 16(1) of the MLI (which would permit a person to requests Mutual Agreement Procedure (MAP) assistance to the competent authority of either Contracting State - instead of only permitting to make this request in the jurisdictions where the taxpayer is resident)

Minimum standards

In terms of optional provisions (i.e., those that are not BEPS minimum standards), the provisions that seemed less desirable to jurisdictions are the anti-abuse rules for PEs situated in third jurisdictions (Article 10 of the MLI) and the saving clause that clarifies that the treaty does not restrict a jurisdiction’s right to tax its own residents, except with respect to certain treaty provisions (Article 11 of the MLI).

Forty-nine jurisdictions (i.e., 69% of the signatories) made a reservation for Article 10 and 11 of the MLI not to apply to their CTAs.

Conversely, the most attractive provision is Article 13 of the MLI which deals with the artificial avoidance of PE status through the specific activity exemptions provision.

Article 13 contains two substantive provisions. On the one hand, Article 13(1) contains a set of options on the interpretation of the list of specific activity exemptions. On the other hand, Article 13(4) contains an anti-fragmentation clause.

44 signatories (i.e., 62% of the signatories) indicated that they would like article 13(1) to apply, by not making a reservation. For the purpose of Article 13(1), signatories were required to choose whether they wanted:

  • Option A (i.e., each of the exceptions included in that provision needs to meet the “preparatory or auxiliary” threshold)
  • Option B (i.e., each of the exceptions is intrinsically preparatory or auxiliary and, thus these activities should not be subject to the “preparatory or auxiliary” threshold) or;
  • None of the options.

The preference of jurisdictions towards option A is clear. From the 44 signatories that want to apply this MLI provision, 77% of the signatories want option A, 16% option B and the remaining 7% did not choose an option.

With respect to the anti-fragmentation clause, from the 44 signatories that wish to apply Article 13, only four jurisdictions (Austria, Germany, Luxembourg and Singapore) reserved the right for the anti-fragmentation clause not to apply, i.e., 91% of the signatories wishing to apply Article 13 of the MLI, also want the anti-fragmentation clause.

European dimensions

Surprisingly, an important number of jurisdictions not wanting the PE provisions are European Union (EU) Member States (MS).

This is surprising in light of the European Commission (EC) recommendation on the implementation of measures against tax treaty abuse wherein Member States were encouraged to implement and make use of the new PE provisions in order to address artificial avoidance of PE status as drawn up in the final report on Action 7.

Overall, 40 jurisdictions (i.e., 56% of the signatories) do not want to apply the broadened agency PE definition (Article 12 of the MLI). At the EU level, where 27 out of 28 MS have signed, 19 EU jurisdictions (i.e., 70% of EU MS signatories) do not want to apply the broadened agency PE definition.

The EC also encouraged MS to include a PPT in the tax treaties that they conclude among themselves or with third countries. The recommended PPT, nonetheless, has additional language over and above the PPT in the MLI. The additional European language, which aims to align the MLI PPT with EU law, provides that treaty benefits cannot be denied under the PPT in cases of a genuine economic activity.

This additional language could have easily been included in the MLI as an option, enabling EU MS to follow the EC recommendation. It is unclear why this did not occur, particularly since the final report on Action 6 acknowledges that “Some countries may have constitutional restrictions or concerns based on EU law that prevent them from adopting the exact wording of the model provisions that are recommended in this report … . For these reasons, a number of the model provisions included in this report offer alternatives and a certain degree of flexibility.”

Moreover, it comes as a surprise that the OECD has not included this additional language in the MLI PPT, considering that the EU is a G20 member, that all EU MS participated on the work on BEPS, and that the OECD took into account the particularities of EU law (see for example final report on Action 3 on designing effective Controlled Foreign Company (CFC) rules).

The way forward

There will be a second signing ceremony: This will likely occur around the fourth plenary meeting of the IF on BEPS (expected in January 2018). From the IF on BEPS, only the US is not likely to sign the MLI. This leaves 31 other BEPS members that may be considering signing the MLI in the second signing ceremony (in addition to any non-BEPS members).

The MLI will come into effect in 2018: This will happen on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval. So far, Austria and the Isle of Man have submitted their ratification instruments and confirmed their positions without making any changes. Singapore and Poland will likely be next in line.

In Singapore, the Income Tax Amendment Bill 2017 has been passed by Parliament and includes a provision that allows the Minister to issue an order to give effect to Singapore’s obligations under the MLI. In Poland, the Polish Senate approved the law for the ratification of the MLI. The law is now awaiting the President’s signature after which the ratification process will be completed. It will also be interesting to watch whether those countries with an end-of-year legislative cycle include ratification in their annual Finance Bills/Acts.

Implementation of the treaty-based BEPS recommendations through bilateral negotiations will continue: Some jurisdictions had been renegotiating and concluding new tax treaties containing BEPS recommendations before the BEPS final reports were released. However, it seems this has not attracted much attention, yet there are treaties coming into force which already contain the new PE definitions, a PPT and/or other treaty-based BEPS recommendations. It is important to monitor these treaties; they can give us hints and lessons on how certain MLI provisions will be applied/construed in practice by some jurisdictions.

The 2020 BEPS review may drive new MLI articles: It is important to keep in mind that the IF on BEPS will undertake a BEPS review in 2020. Depending on the outcomes of this review, we may see new BEPS recommendations agreed as minimum standards. In turn, new treaty-based recommendations could lead to jurisdictions agreeing to withdraw certain reservations that become minimum standards.

Although the future remains unclear, it is certainly a moment of continuous change. Given the amount and speed of changes, one cannot wait for the dust to settle down to take action. It is critical to adapt and anticipate in the current times.


iArmenia, Cyprus, Fiji, Kuwait and Serbia have signed the MLI, and Tunisia and Lebanon have expressed their intent to sign the MLI.

iiFor a more detailed explanation of the MLI, see EY Global Tax Alert, Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider, dated 14 June 2017.

iiiArgentina, Armenia, Bulgaria, Chile, Colombia, India, Indonesia, Mexico, Russia, Senegal, Slovakia, and Uruguay.

ivCanada, Chile, Colombia, Kuwait, Mauritius, Norway, Poland, Senegal and Seychelles.

vSee European Commission recommendations on the implementation of measures against tax treaty abuse of 28 January 2016, C(2016) 217 final.