The OECD's Multilateral Instrument for BEPS: Building the Orchestra

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Jesus Romero

Jesus Romero Crowe Horwath Legal y Tributario, Spain

Jesus Romero is a Tax Partner at Crowe Horwath Legal y Tributario, Spain

The past decade has seen the tax affairs of multinational enterprises receiving unprecedented levels of scrutiny, with demands for international tax reform growing. However, bringing structure to that reform process has not been simple. The OECD has advocated the adoption of a multilateral instrument in an attempt to update international tax treaties simultaneously.

The past decade has seen the tax affairs of multinational enterprises receiving unprecedented levels of scrutiny in the face of global economic woe and turmoil. Demands for international tax reform have come from campaigners, the public and politicians alike. But with hundreds of competing jurisdictional voices clamoring to be heard, bringing structure to that reform process has been anything but simple.

In 2013, this movement led to the G-20 leaders endorsing the OECD's 15-point Action Plan to counter base erosion and profit shifting (“BEPS”) during their Saint Petersburg meeting. This agreement sought to capitalize on the movement of corporation tax issues into the mainstream of public awareness.

Development and Process

The breadth and scope of the recommendations set out under the BEPS Project is such that substantial reworking and rewriting of international treaties would be required. With an international tax treaty network spanning the globe, more than 2,000 bilateral agreements would need to be individually updated to reflect the newly agreed upon provisions. Given the impracticality—from a resource and logistics standpoint—of redrafting and re-signing such a large number of accords, the OECD advocated adoption of a multilateral instrument (“MLI”) to update treaties simultaneously.

A mandate to set up the ad hoc group for development of a multilateral instrument was established by the OECD Committee on Fiscal Affairs and duly endorsed by G-20 finance ministers and central bank governors at their February 2015 meeting. The ad hoc group held its first meeting on May 27, 2015, including 99 countries and seven international organizations participating as observers. The group was tasked with producing a final version of the MLI by the end of 2016.

Features of the MLI

Due to the number of jurisdictions involved and the multiple alternatives offered to solve issues dealt with in the BEPS Action Plan, the members of the ad hoc group were aware that flexibility should be offered to the signatory countries. This was to determine the bilateral treaties to be covered by the instrument, as well as flexibility being provided for implementation of provisions that were not minimum standards (the option to opt in or opt out).

During negotiations within the ad hoc group, it was agreed that the minimum standards covered by the MLI would be those rules that correspond to Action 6 of the BEPS Action Plan (“Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”).

In line with this, a new treaty preamble has been prepared which will replace the existing statements in the current network of treaties, and which will make express mention that the purpose of the contracting states is to prevent double taxation and the generation of opportunities for non-taxation (double non-taxation) or tax evasion.

Additionally, certain alternative formulae are introduced to prevent abusive practices such as treaty shopping. Tackling such abuse involves implementing a principal purpose test (“PPT”) clause or a limitation of benefits (“LoB”) clause, or a combination of both of these measures.

Rules covering dispute resolution—making dispute resolution mechanisms between states more effective by means of amicable proceedings (to tie in with recommendations laid out under Action 14 of the BEPS Action Plan, “Making Dispute Resolution Mechanisms More Effective”) are also part of the agreed minimum standard covered by the MLI.

The MLI also features other salient aspects of the BEPS Action Plan, including certain measures covered by Action 2 (“Neutralising the Effects of Hybrid Mismatch Arrangements”): in particular, measures that provide for the extension of treaty benefits to certain types of transparent entities and which limit the application of the exemption method where there is no taxation in the jurisdiction of origin of the income.

Measures included in Action 6 (“Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”) are developed under the MLI, including the introduction of a new rule to solve potential conflicts arising around dual-resident entities. This replaces the existing rule which was based around the place or center of effective management with an agreement between the competent authorities, anti-abuse rules for dividend distribution (introducing a minimum period of stock holding of 365 days to benefit from reduced treaty rates) or for the obtaining of equity profits derived from the transfer of shares of real estate companies.

Additionally, the possibility to implement a saving clause has been introduced, which establishes that treaties do not prevent or limit the capacity of a state to tax its residents, as well as specific rules to fight against treaty shopping by using permanent establishments (“PE”s) in third party states.

Connected to this last provision, the MLI also covers newly-defined concepts for “dependent and independent agents” (dealt with under Action 7, “Preventing the Artificial Avoidance of PE Status”) to prevent the use of commissionaire structures and similar activities to skirt PE status, as well as the redefinition of activities that may be viewed as preliminary or ancillary in nature. Other rules are also introduced to prevent fragmentation of contracts in relation to works or construction projects carried out by closely-related companies.

On top of flexibility, the MLI aims to promote “clarity and transparency.” This manifests itself in compatibility clauses, along with explanatory notes issued by the ad hoc working group which should help to tackle potential conflicts that may arise between the MLI and bilateral treaties.

Application and Operation

After the publication of the final version of the MLI in November 2016, a signature period was opened, during which participating states should communicate to the OECD the list of treaties that would be covered by the MLI, expressing provisions adopted, plus reservations.

The opening stage of this signing period ended on June 7, 2017, when the finance ministers and senior officials of 68 jurisdictions gathered in Paris for a formal MLI signing ceremony, although this group did not include the U.S. or Brazil (both key G-20 members). The OECD considers that five states must ratify the MLI before it can come into effect. At present, it expects this number to be achieved by September 2017, meaning that the MLI changes would take effect from January 1, 2018.

The application of MLI measures to a specific bilateral treaty requires both ratification from the contracting states, as well as for a specific minimum period of time to have elapsed, allowing for greater legal certainty and clarity. For example, let's say Spain ratifies the MLI and no reservation is introduced regarding Article 8 (which requires a minimum holding term of 365 days to apply a reduction on the dividend withholding). For such an amendment to become effective in bilateral treaties signed by Spain, it would be necessary that the other countries with which there is a bilateral treaty provide notice that they accept the application of Article 8 and include the treaty with Spain under the umbrella of treaties to be amended. The application of the measures contained in the MLI therefore requires symmetry—the consent of both parties in relation to reservations or amendments is required.

The Future of the MLI

Despite the fact the MLI has been signed by many jurisdictions, ratification processes often drag on, which could delay the implementation of BEPS measures dealt with in the MLI or, in some cases, change the provisions and/or reservations initially adopted by some jurisdictions (particularly those where national parliaments have the final say on international treaties). This, together with the remarkable absence of influential jurisdictions like Brazil and the U.S. in the signing of the MLI, could further delay or devalue the substance of BEPS measures adopted within the MLI framework.

Key Concerns

In the specific case of the U.S., several senators and notable economists have expressed concern that the BEPS Project deliverables could have a disproportionately negative effect on the U.S. economy. Other concerns surround the fact that if, as stated by the G-20 leaders in Saint Petersburg, the purpose of the BEPS package of deliverables is to redirect tax systems so that income is taxed in the location where it has been generated, it may be probable that this, together with the increased formal obligations imposed on taxpayers by other BEPS Project actions (for example country-by-country reporting) may result in movement of part of the economic activity carried out by large multinational enterprises to low tax countries. Corporate behavioral changes like this would likely lead to an increase in tax competition between and among jurisdictions, competing to offer the most attractive incentives to appeal to multinational group investment.

Aside from the long ratification process and the notable non-signatories, a key concern remains around the disputes environment. The broad flexibility provided by the MLI for member states to implement BEPS measures in their network of bilateral treaties leaves the mechanism open to dispute, with many predicting a surge in cross-border litigation. This will principally center around implementation and timing differences.

Looking Forward

Despite the existence of roadblocks, the BEPS Project has a groundswell of political support behind it. A period of turbulence is inevitable, and an initial spike in litigation is likely. But once the first round of modifications to covered bilateral tax treaties is assessed, which will come during 2018, jurisdictions should have a much clearer picture of the new provisions and minimum standards governing cross-border corporation tax issues. The volume of voices in the choir means that projects of this scope are always nigh on impossible to coordinate, but the ultimate aim is to promote harmony over discord.

Jesus Romero is a Tax Partner at Crowe Horwath Legal y Tributario, the Spanish member firm of Crowe Horwath International. The author may be contacted at:

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