On June 7, 2017, representatives from jurisdictions around the world joined together in Paris for the signing of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly referred to as the Multilateral Instrument or MLI. Notably, the United States did not join the other nations in signing up for the MLI.
The MLI was conceived as part of the Organisation for Economic Co-operation and Development (OECD) BEPS project. The MLI provides a mechanism for signatories to meet the certain minimum standards required under the BEPS project pertaining to income tax treaty provisions. As opposed to traditional treaty protocol procedures, the MLI provides a path to amend many existing bilateral treaties without negotiating protocols bilaterally with each individual country.
Specifically, the MLI provides for the adoption of minimum standards provisions related to BEPS Action 6, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances,” and Action 14, “Making Dispute Resolution Mechanisms More Effective.”
Additionally, recommendations were made on best practices on Action 2, related to hybrid mismatch arrangements; Action 7, related to permanent establishment; and Action 14, related to binding arbitration.
Signatories to the MLI were provided certain flexibility in the recommended provisions that they chose to adopt and which of their existing treaties they chose to be subject to the MLI (opt-out). Officially, 68 countries signed the MLI resulting in approximately 1,100 “matching agreements.” Each signatory individually opted out of some or all of the recommendations. A complete list of signatories and related adoption information is available on the OECD website.
The United States did not join in signing the agreement because “the bulk of the multilateral instrument is consistent with the U.S. tax treaty policy that the Treasury has followed for decades,” according to the deputy international tax counsel. In addition, challenges in getting the MLI approved by the State Department and U.S. Senate further bolstered the case for not signing at this time.
The MLI will become effective only when ratified under local law for each signatory. The MLI itself will not enter into force until such time as five signatories have ratified the MLI. It is expected that most treaty modifications will become effective in 2019 and beyond. However, it is possible that some provisions could be effective in 2018.
The signing of the MLI represents a significant milestone for the OECD’s BEPS project. Notwithstanding the U.S.’s decision not to participate, the modification of such a large number of treaty provisions marks a significant step forward in the adoption of the BEPS Action Items.
Partner, Washington National Tax Office
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