Update on BEPS and the OECD’s Multilateral Instrument (MLI)

Update on BEPS and the OECD’s Multilateral Instrument (MLI)

Work on the OECD’s Base Erosion and Profit Shifting (BEPS) project continues with six additional countries signing the multilateral instrument (MLI) designed to quickly adapt double tax treaties to better combat tax avoidance by multinational companies.

Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia have recently agreed to implement the MLI, making it a total of 78 countries that have opted to join the fray.

Additionally, Algeria, Kazakhstan, Oman, and Swaziland have announced they will move to adopt the MLI, while Austria, the Isle of Man, Jersey, and Poland have already ratified the instrument and are waiting for a fifth jurisdiction to approve it for it to enter into force. 

Following these additions to the BEPS project on dispute resolution, OECD Secretary-General Angel Gurria said, “Today's signing of the multilateral convention is another major step towards updating the international tax rules through the swift implementation of the BEPS package.”

“Beyond saving signatories from the burden of re-negotiating thousands of tax treaties bilaterally, the convention results in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens,” Gurria added.

The OECD still has plenty of work to do, however.

According to Pinsent Masons’ Ian Hyde, “The OECD needs to continue to work on processes to prevent disputes arising in the first place as tax treaty mutual agreement provisions and arbitration are very much a last resort.  The MLI is definitely a step in the right direction, but it will not be an immediate solution to all the problems.”

Hyde added, “We are also seeing countries, such as the UK and Australia, taking unilateral action against tax avoidance, which is even more likely to result in double taxation."

OECD’s Multilateral Instrument

What is the OECD’s Multilateral Instrument?

Developed as part of the OECD’s BEPS project, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.”

Furthermore, as presented by the OECD, this instrument “modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation” and “implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.”

Furthermore, as explained by Pinsent Masons Out-Law, “the MLI will enable over a thousand double tax treaties to be interpreted in a way that implements the OECD's recommendations for treaty changes” and contains “measures designed to prevent the use of treaties for tax avoidance and improved tax dispute resolution procedures,” alongside  “an optional provision on mandatory binding arbitration.”

In terms of its application, Pinsent Masons Out-Law writes that this instrument “will only apply to treaties between countries which have both chosen to apply the MLI to the relevant treaty and where any options they have chosen are compatible.”

Furthermore, the MLI will apply to the relevant treaties 90 days after both parties involved approve of the MLI.

Jeremy Webster, a Pinsent Masons tax expert, says, “Once the MLI comes into force, applying double tax treaties will not be straightforward as the MLI gives a considerable amount of flexibility to countries to choose how and whether many of the provisions apply.”

“You will need to locate the relevant treaty, check whether and when each party to the treaty ratified the MLI to establish when it comes into force and when the provisions take effect. It will then be necessary to use the OECD online tool to establish which provisions of the MLI apply to the treaty and apply the DTT, as amended by the MLI, to the facts,” Webster added.

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