The Multilateral Convention to implement tax treaty-related
measures to prevent base erosion and profit shifting (MLI) was
unveiled by the OECD on November 24 2016. The MLI was developed
to swiftly amend existing bilateral tax treaties to transpose
the recommendations under the OECD BEPS Project into more than
2,000 existing tax treaties worldwide.
The purpose of the MLI is to fundamentally revamp the
international tax landscape. It includes a set of minimum
standards that all participating countries have agreed to
implement, i.e. rules regarding hybrid mismatches, treaty
abuse, permanent establishments (PEs) and dispute resolution.
Furthermore, it is important to note that the MLI will modify
only treaties specifically identified by the participating
jurisdictions in notifications to the OECD.
The MLI provides recommendations to address hybrid
situations arising from differences in the tax classification
of an entity under the laws of two or more jurisdictions that
could result in tax benefits (e.g. double non-taxation).
Treaty abuse has also been identified as one of the most
important sources of BEPS. The MLI provides different
approaches to achieve the minimum standard. The use of the
principal purpose test (PPT) to deny treaty benefits in
situations where one of the main objectives of an arrangement
is to obtain treaty benefits is recommended. Other options
include the adoption of a simplified limitation on benefits
(LOB) clause, or a combination of a detailed LOB clause and
either specific rules to address conduit financing structures
or a PPT.
The provisions of the MLI, such as the extension of the
scope of the dependent agent test and the narrowing of the
existing exemptions from PE status, will significantly lower
the PE threshold. An anti-fragmentation rule aimed at
preventing the split of activities across separate legal
entities is also recommended.
Furthermore, all covered tax treaties will include a mutual
The MLI will not operate in the same manner as an amending
protocol to an existing treaty, nor will it directly amend the
provisions of existing bilateral treaties. Instead, it will
apply alongside the existing treaties. However, there is a
possibility to opt out of provisions that do not reflect a
minimum standard, as well as to apply optional or alternative
In terms of transparency, the OECD will act as a depositary,
supporting governments in the process of the signature,
ratification and implementation of the MLI, as well as
providing tax administrations and the general public with
information about the treaties covered and options implemented
by the relevant jurisdictions.
The MLI is already open for signature, and a signing
ceremony is due to take place in June 2017. It will enter into
force upon ratification by at least five jurisdictions.
Participating jurisdictions are compiling the lists of
treaties to be covered by the MLI and are considering which
provisions to implement. Monitoring the effects of the MLI on
the international tax framework will be key to identifying and
responding effectively to any uncertainties. For instance,
following the implementation of the MLI, depending on the
options selected, the tax residence of corporate entities may
be determined by mutual agreement of the contracting states,
rather than based on the place of effective management of the
Julien Lamotte (email@example.com)
and Vincent Reynvoet (firstname.lastname@example.org)