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MLI implementation shakes up international tax treaties

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Pablo Laquidain Moyna, senior associate at Deloitte Spain, explains the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) and its implementation.

In times of rising public concern over tax matters, especially regarding application of treaty or law subterfuges to lower taxation of multinational entities, the OECD has released the BEPS guidelines to prevent erosion of the tax base. The stakes are high and the scope of the initiative is very ambitious, focusing on cornerstones of international taxation including the concept of permanent establishments, hybrid mismatches and information available to tax authorities through transfer pricing documentation and exchange of information. All this extensive analysis has been embodied in 14 actions.

Notwithstanding, this extensive work of defining or reinterpreting existing international tax concepts would have come to nothing if not for the inclusion of action 15, the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which provides member states with the tools to implement the measures derived from the rest of the actions within the BEPS initiative. The MLI was signed by 68 states on June 7 2017 in a ceremony in Paris.

Purpose of the MLI

The MLI is designed to implement the tax treaty-related measures arising from the BEPS initiative by the jurisdictions that signed up.  It sets out two sets of measures. On the one hand, minimum standard changes to the functioning of existing bilateral agreements are introduced. These de-minimis rules are mandatory for all signatories of the MLI, and comprise changes in the areas of treaty abuse, mutual agreement procedures and treaty preambles. On the other hand, certain optional changes are included.

The vast existing network of tax treaties (over 3,000) made the implementation of the MLI an essential issue, as excessive bureaucracy could deem the instrument useless. In this regard, the purpose of the MLI is not to operate as an amendment of the existing tax treaties in force between the different member estates, but to be applied alongside these existing tax treaties, modifying the application of such treaties.

Minimum standard changes

Signatory states agreed that in order for the MLI to be effective there were certain measures that had to be introduced by all of them. The most important measures would be the ones related to measures to prevent tax erosion through treaty abuse and articulating effective mutual agreement procedures among states.

1. Treaty abuse

Introducing measures to prevent treaty abuse is the most evident change to make the BEPS initiative a success story. All the measures included in actions 1 to 14 are pointless if they can be avoided through the abuse of double tax treaties. The MLI requires countries to include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

But how is this commitment implemented? By forcing the signatories to introduce a prevention of treaty abuse clause in line with action 6 of the BEPS initiative in their tax treaties. In this regard, signatory states can opt to apply:

i)               A principal purpose test (PPT) provision, which comes as the default anti-abuse provision and prohibits the application of benefits under a tax treaty to arrangements or transactions whose primary purpose is to obtain such tax benefit,

ii)              A combination of a PPT provision with a limitation of benefits (LOB) provision, or

iii)             A detailed LOB provision.

Given that a detailed LOB provision requires substantial bilateral customisation, for practical reasons, the OECD decided to choose the PPT provision as the default provision. Nevertheless, signatory states that decide to apply a LOB provision can opt out of the default PPT provision.

To date, most signatory states have maintained the PPT provision. Nonetheless, some states have decided to include the combination of PPT and a simplified LOB provision. As of July 14 2017, 12 states have opted for the combination of a PPT and a simplified LOB provision: Argentina, Armenia, Bulgaria, Chile, Colombia, India, Indonesia, Mexico, Russia, Senegal, Slovakia and Uruguay.

2. Mutual Agreement Procedures

The MLI prevails for a Mutual Agreement Procedure (MAP) in order to tackle situations where a person understands that taxation is not in accordance with the MLI. In this regard, the person is entitled to claim for a MAP procedure during the three following years to the first notification resulting in taxation not in accordance with the MLI.

MAP rules make compulsory for the signatory states affected by the claim to endeavor to resolve, by mutual agreement, any claim that might arise about the application or interpretation of the MLI.

Optional changes

Along with minimum standard changes that the signatory states have included as compulsory, the MLI also includes certain optional changes on certain elements of international tax treaties. Due to their importance, we focus on the optional changes proposed on the definition of permanent establishment and mandatory binding arbitration rules.

1. Permanent establishment

The existing limits on the concept of permanent establishment (PE), one of the cornerstones of tax sovereignty, have been used in some cases to erode taxation in certain states. It is important to have in mind that when addressing the existence of a PE it comes to the ever-difficult equilibrium between the interest of the states (increasing their taxable base) and a global economic environment, in need of fast international growth and increasingly based on the digital economy and intangibles that are hard to trace back to a certain jurisdiction.

As per the concept of PE in force in most signatory states, the existence of a fixed place of business or a dependent agent would result in the existence of a PE, unless their activities were considered preparatory or auxiliary.

The MLI prevails for certain provisions that can be adopted by the signatory states to lower the threshold at which a PE may arise by:

i)                Including commissionaires as dependent agents,

ii)               Narrowing the definition of preparatory or auxiliary activities,

iii)             Introducing anti-fragmentation rules, so as to prevent multinational groups from splitting their activities in one country through a series of companies, none of which individually could be deemed as a PE, but looking at the whole picture, it could be inferred that the multinational group indeed had a fixed place of business in such country, and

iv)             Introducing anti-avoidance rules where long-duration construction contracts are split into a series of shorter contracts.

2. Mandatory binding arbitration

The MLI includes different options for mandatory binding application clauses. Including mandatory binding arbitration clauses is optional for signatory states. In this regard, the MLI prevails that if such clauses are included, there are two available options.

On the one hand, the final offer arbitration is considered the default mandatory binding arbitration clause. Under the final offer arbitration clause, or “baseball arbitration”, when two tax authorities are unable to reach an agreement under a MAP procedure, involved individuals can claim for arbitration. In this case, the competent tax authorities would present their proposed resolution to an arbitration panel that would choose one of the proposed resolutions, without further reasoning.

On the other hand, countries can opt for the independent opinion arbitration clause. Under this clause, the competent tax authorities would give all the facts and information to an arbitration panel that would come to a reasoned decision taking into account the background of the case.

Entry into force and into effect

Drafting the MLI was impressive work, but what comes next? How do we turn this paper into the game-changing tool that it is designed to be?

The first step was made on June 7 2017, when 68 states signed the MLI and started the procedures for its entry into effect. After this, each signatory state must complete its domestic procedures to ratify the MLI. In the case of Spain, this requires parliamentary approval.

Once ratified, this has to be communicated to the OECD, and a three month period starts, at the end of which the MLI will enter into force in that signatory state. The effective dates of the MLI would then be:

  • For withholding taxes, on the first day of the calendar year after the MLI has entered into force.

  • For other taxes, for taxable periods beginning at least six months after the MLI has entered into force.



During the signing ceremony of the MLI, 68 states were present, which in combination have more than 1,100 tax treaties that would be affected by the MLI - almost one third of all the tax treaties currently in force. Furthermore, the OECD expects to reach 90 signatories by the end of the year. This is proof of the rising concern on base erosion and the deep commitment by a large number of states to cooperate on tax matters.

Pablo Laquidain Moyna

Pablo Laquidain Moyna

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