European BEPS multilateral convention to enter into force in July

Tax Hot Topics newsletter Following the ratification by Slovenia of the Multilateral Convention to Implement Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly referred to as the Multilateral Instrument (MLI), the MLI will enter into force on July 1.

The MLI, which was conceived as part of the Organization for Economic Co-operation and Development’s (OECD) BEPS project, was signed on June 7, 2017, by numerous countries, but not the United States. The MLI provides a mechanism for signatories to meet the certain minimum standards required under BEPS 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 individually with each individual country.

On March 22, the OECD announced that Slovenia had deposited its instrument of ratification, acceptance or approval of the MLI. With this ratification, five members have now ratified the MLI and it will enter into force on July 1. The other countries that have ratified are Austria, Isle of Man, Jersey and Poland. The provisions of the MLI will take effect after all parties to the covered tax agreement (CTA) have deposited their instrument for ratification. As of July 1, treaties among the five ratifying countries will be affected for withholding taxes under the MLI as of Jan. 1, 2019. Other provisions take affect within six months or agreed shorter period.

Now that the five-country milestone has been reached, the MLI is effective and ratified. New countries can now deposit their ratification and have the MLI apply to their CTAs. For each country ratifying, accepting and approving the MLI in the future, the MLI will enter into force the first day of the third month after acceptance. Furthermore, each country can agree to certain modifications and amendments. Once ratified, the MLI takes affect and all MLI treaties that have been ratified take effect with the ratifying country.

The MLI is a key step toward implementation of the recommended BEPS action steps. It is expected that over 1,200 tax treaties will be affected and modified based on matching specific provisions in the MLI to the existing treaty. During 2018, it is possible that many countries will finalize their ratification of the MLI. As such, the MLI will become effective in most countries in 2019. Of key importance are the minimum standards provisions of the principal purpose test, binding arbitration, and the limitations on benefits provisions. Many of the countries will also agree to the MLI permanent establishment and anti-treaty-abuse provisions. These changes should be monitored and their impact assessed on each jurisdiction.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Tax – Exp. Manager
Washington National Tax Office
T +1 202 521 1509

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