More than 90 jurisdictions have now entered into the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). The MLI seeks to transpose results from the OECD/G20 base erosion and profit shifting (“BEPS”) project into a multilateral tax treaty.
The MLI was ultimately developed by an ad hoc group of more than 100 jurisdictions around the world. In effect, the MLI modifies tax treaties between two or more parties to the MLI. As such, it does not function in the same way as an amending protocol to a single existing treaty would; it is applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
Notably, the MLI includes measures against hybrid mismatch arrangements (BEPS Action No 2) and treaty abuse (BEPS Action No. 6), as well as other attributes. Signatories to the MLI remain free, however, to make subsequent amendments and modifications to their tax treaties through bilateral negotiations.
The MLI addresses the following notable topics, among others:
- Transparent / hybrid entities
- Dual resident entities
- Prevention of treaty abuse (limitations on benefits provisions)
- Capital gains on shareholdings in real estate entities;
- Anti-abuse rules for low-taxed third country permanent establishments;
- Artificial avoidance of permanent establishment status through commissionaire arrangements;
- Artificial avoidance of permanent establishment status through specific activity exemptions;
- Splitting-up of contracts;
- Mutual agreement procedures
The United States is not a signatory to the OECD’s MLI–and there is not currently an expectation that it will be. U.S. multinational entities will, nonetheless, be impacted by the MLI. The MLI may impact existing bilateral treaties between other jurisdictions, and foreign subsidiaries may be directly impacted by such changes.