It is the result of a five-year effort by the OECD, aimed at
implementing anti-avoidance provisions through existing DTAs to
prevent multinationals from artificially shifting profits into
low or no tax jurisdictions.
The MLI is designed to only modify DTAs considered as
"covered tax agreements" (CTAs), without requiring separate
bilateral negotiations between each contracting jurisdictions.
In general, a CTA encompasses DTAs in force between two parties
to the MLI that have made reciprocal notifications expressing
their intention to either adopt or reserve their position with
regards to the applicability of the MLI provisions.
Mexico has effectively notified 61 jurisdictions about its
adoptions and reservations, including the Netherlands,
Luxemburg, Spain and the UK, most of which have corresponded
with reciprocal notifications intended to adopt/reserve certain
provisions under their corresponding CTAs. Notably, the US has
not signed the MLI as yet.
Although the precise date is yet unknown, modifications to
Mexican DTAs are not expected to become effective until 2018,
following the MLI’s approval process before the
Mexican Senate and its international ratification.
Provisions included in Articles 3 through to 5 of the MLI
are intended to neutralise the effects of hybrid mismatch
arrangements, which may take advantage of the different tax
treatment applicable in different jurisdictions to achieve
double-non taxation or long-term tax deferrals.
Mexico did not make a reservation with regards to the
application of Article 3 (transparent entities) of the MLI,
which states that income derived by arrangements treated as
wholly or partially transparent under the tax laws of a
contracting state shall be considered as income of a resident
thereof when the income is treated for tax purposes as income
of a resident of such contracting state.
We believe this provision will bring further clarity with
regards to the application of treaty benefits in cases where
Mexican tax authorities formerly challenged the application of
a DTA regarding arrangements that involved the use of entities
considered as fiscally transparent for Mexican tax purposes.
However, it may also impact some structures that were put in
place considering the existing regulations issued by the
Mexican tax authorities related to transparent vehicles, mainly
when claiming benefits under the Dutch treaty.
As a minimum standard provision (MSP), Article 6 (purpose of
a covered tax agreement) of the MLI shall be covered by all of
Mexico´s CTAs and implies the inclusion of a preamble
describing the intent of the contracting states to eliminate
double taxation without creating opportunities for non-taxation
or reduced taxation. Mexico additionally opted to include a
preamble stating that it is the contracting
states’ desire to further develop their economic
relationship and to enhance their cooperation in tax
In relation to Article 7 (prevention of treaty abuse), which
is also a MSP, Mexico opted to adopt by default the principal
purpose test (PPT) provision, supplemented with a simplified
limitation of benefits (LOB) provision for cases in which
counterparties reciprocated (only a few).
In general, the PPT provision establishes that a benefit
under the CTA shall not be granted if it is reasonable to
conclude that obtaining that benefit was one of the principal
purposes of any arrangement or transaction while the simplified
LOB provision establishes precise substance requirements that
shall be met in order to apply a benefit under a CTA.
Avoidance of PE status
Article 12 of the MLI is intended to counter the artificial
avoidance of PE status through commissionaire arrangements and
similar strategies by tightening the thresholds commonly used
to determine the independent status of an agent. Along with
jurisdictions like Chile, Spain and the Netherlands, Mexico has
opted to apply such provision in its CTAs.
With regards to Article 13 (artificial avoidance of PE
status through specific activity exemptions), Mexico has opted
to apply a broad threshold of activities that will not be
deemed to construe a PE, such that activities previously
covered in CTAs remain as non-PE activities regardless of them
being considered as having a preparatory or auxiliary nature.
However, an anti-fragmentation rule will be introduced to cover
"overall" activities carried through fixed places of business
as a threshold to determine whether, in conjunction, they have
an auxiliary or preparatory nature. Jurisdictions that have
also opted to apply this provision are the Netherlands, Spain,
Italy and Colombia.
Lastly, pursuant to Article 14 (splitting-up contracts),
Mexico reserved the right for the entirety of such provision
not to apply to its CTAs.
It is rather unfortunate that Mexico did not opt for the
application of the mandatory arbitration provisions included in
the MLI. Over the past years, mutual procedure agreements in
Mexico have regularly been left unsolved, a situation that
perhaps could have been mitigated through the implementation of
There are other relevant provisions regarding the tax
treatment of, among others, dividends and capital gains, which
companies should carefully review to determine the impact they
will have on their current investment structures.
This article was written by Oscar A. López Velarde
and Juan José Paullada Eguirao of Ritch, Mueller,
Heather y Nicolau, S.C.
Oscar A. López Velarde (firstname.lastname@example.org)
Juan José Paullada Eguirao (email@example.com)
Ritch, Mueller, Heather y Nicolau, S.C.