On June 7, 2017, the OECD held a signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). See BEPS Action 15. 67 countries and jurisdictions signed the MLI and eight jurisdictions have expressed their intent to sign. The OECD expects an additional 25-30 countries to sign the MLI. Approximately 1,100 tax treaties will be modified by the MLI, which implements Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements), Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), Action 7 (Preventing the Artificial Avoidance of PE Status), and Action 14 (Making Dispute Resolution Mechanisms More Effective).
Also on June 7, the OECD released FAQs on the MLI, as well as an Information Brochure and a Step-by-Step Guide to applying the MLI, which sits alongside a jurisdiction’s existing tax treaties and any amending protocols. The MLI may modify tax treaties (also referred to in the Explanatory Statement as “Covered Tax Agreements”) between two or more parties to the agreement. If either Contracting Jurisdiction to the Covered Tax Agreement makes a reservation on the application of a provision of the MLI, then the MLI provision for which the reservation is made does not apply and does not modify the agreement.
It is likely that the first modifications to covered treaties will become effective during 2018. The entry into effect of the modifications is linked to the completion of the ratification procedures in the jurisdictions that are parties to the covered tax treaty. Signatories ratify the MLI in accordance with their domestic procedures. The MLI will enter into force three months after the deposit of the fifth instrument of ratification, acceptance or approval. Six months after the MLI has entered into force, it will take effect for taxes levied (except for taxes withheld at source).
With respect to BEPS Action 6, the Principal Purposes Test (PPT) will apply to all treaties covered by the MLI. In addition, 12 signatories have chosen to supplement the PPT with a simplified Limitation on Benefits (LOB) test, including Argentina, Armenia, Bulgaria, Chile, Colombia, India, Indonesia, Mexico, Russia, Senegal, Slovak Republic and Uruguay. Once introduced to a tax treaty through the MLI or bilateral negotiations, the PPT would apply to the treaty in its entirety and would address all cases of treaty abuse. Under the PPT, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied unless it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty. The PPT is a subjective test.
At the time of signature on June 7, there were 25 signatories signing up for the arbitration provisions provided for in the MLI: Andorra, Australia, Austria, Belgium, Canada, Fiji, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Malta, the Netherlands, New Zealand, Portugal, Singapore, Slovenia, Spain, Sweden, Switzerland, and the U.K. This will lead to the introduction of arbitration to over 150 existing treaties.