The ongoing global base erosion and profit shifting (BEPS) project reached an important juncture on June 7, 2017, when almost 70 countries signed the BEPS Multilateral instrument (MLI), a new tool intended to curb tax treaty-related tax avoidance.
The Multilateral Instrument In Brief
The MLI, also known as the BEPS Convention, was developed by the OECD under Action 15 of the BEPS project and will transpose BEPS recommendations into tax treaties worldwide.
The Convention is intended to implement minimum standards to counter treaty abuse and to improve dispute resolution mechanisms, while providing flexibility to accommodate countries' specific tax treaty policies. Crucially, the MLI will achieve this without the need to renegotiate thousands of individual bilateral tax treaties, a process which could take several years, if not decades.
The first modifications to bilateral tax treaties are expected to enter into effect in early 2018, and the MLI remains open for additional signatories.
Impact Of The MLI
The MLI includes provisions that are far from a one-page bolt-on to tax treaties. In fact, its 39 articles stretch over almost 50 pages. Therefore, the MLI will add considerably to the tax treaties of countries that choose to incorporate it, either in full or in part.
Consequently, the ongoing implementation of these measures is expected have a significant impact on individuals and businesses with cross-border tax affairs and those who rely on tax treaties to prevent double taxation of the same income. Indeed, the Chartered Institute of Taxation in the UK has noted that the resulting complexity from the multilateral instrument will be “challenging.”
It also doesn’t help matters that the MLI is being adopted to varying degrees around the world.
The United Kingdom, for instance, has said that it will not implement the convention where existing treaty provisions or domestic law already provides suitable protection against BEPS.
Meanwhile, Ireland’s Department of Finance has announced that it will include 71 of its 72 existing bilateral tax treaties as being "covered" by the MLI. However, some treaties may be excluded before ratification of the Convention if the treaty partner's domestic procedures require that a bilateral protocol is necessary to implement the anti-BEPS measures.
Switzerland, on the other hand, will implement the BEPS minimum standards into its tax treaties either within the framework of the Multilateral Convention or by means of the bilateral negotiation of double taxation agreements.
Significantly, and to the consternation of BEPS campaigners, the United States has chosen not to sign the MLI, although its future participation in the Convention cannot be ruled out.
Ascertaining which countries have incorporated the MLI into their tax treaty networks and to what degree will therefore not be a straightforward task. Indeed, with regards to international commerce and investment, perhaps one problem – tax treaty abuse – may have been replaced by another: complexity and confusion.