What Is the OECD Multilateral Instrument?

OECD BEPS action plan

To help reduce disputes and standardize compliance requirements – and help counter the abuse of international tax treaties – the Organisation for Economic Co-operation and Development (OECD) has worked with governments, policymakers, and citizens across the globe on an action plan to create international BEPS minimum standards, which have been set forth in the OECD Inclusive Framework and its Pillar One and Pillar Two proposals.

Through this BEPS project, the OECD has developed a set of 15 actions that provide governments with rules and instruments to address tax avoidance. The OECD has implemented the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – known as the Multilateral Instrument or MLI – as Action 15.

How Pillar Two is reshaping the digital global economy

Tax Law Analyst Alexis Sharp breaks down the importance of GloBE Rules and the Subject to Tax Rule, which are key components of the OECD’s Pillar Two.

What is the Multilateral Instrument?

A group of more than 100 countries and jurisdictions, including all members of the OECD and G20, developed the Multilateral Instrument to address aggressive tax-reduction measures and structures. The MLI seeks to preserve the role of bilateral income tax treaties in eliminating double taxation worldwide while combating opportunities for businesses to use treaties to eliminate all tax liability or to reduce tax rates to aggressively low levels.

The BEPS MLI entered into force on July 1, 2018. More than 70 jurisdictions participated in the first formal signing ceremony on June 7, 2017. So far, more than 100 countries and jurisdictions across the globe have signed the MLI.

What does the MLI do?

The MLI isn’t a self-standing income tax treaty or an amending protocol. Rather, it implements “a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises,” the OECD confirms.

The Multilateral Instrument supplements and modifies almost 2,000 existing bilateral income tax treaties worldwide to close loopholes and eliminate double taxation and opportunities for tax avoidance. In this way, governments don’t need to bilaterally negotiate separate treaties or amending protocols.

Because the MLI was designed to be flexible, its impact will vary significantly from treaty to treaty.

Covered tax agreements

The MLI applies to “Covered Tax Agreements” (CTAs). For a tax agreement to be covered by the MLI, each participating country must notify the OECD of the specific bilateral income tax treaties it wishes to designate as CTAs. Then, that country designates which provisions of the MLI it wishes to adopt for each CTA. Some provisions, known as minimum standards, must be adopted, while others are optional. If both parties to a bilateral tax agreement designate it as such, it becomes a CTA, and the Multilateral Instrument will modify the agreement.

Countries can designate treaties and protocols that are signed but not yet in force with the expectation that they will become CTAs when they enter into force.

Upon signature and subsequently at ratification, each party is required to provide a list of reservations and notifications – known as the “MLI position” – to the OECD. In its notification, each country either accepts each MLI provision as written or rejects it by “reserving” against it. The MLI’s impact on each tax treaty will depend on the parties’ mutual acceptance of, or reservations against, specific MLI provisions. The MLI provides various reservations to each provision, which will change how those provisions apply to the CTA. Silence by one party to a tax treaty generally means acceptance of the other party’s list of reservations and notifications – though certain articles, such as Part VI (Arbitration), require that both parties affirmatively elect the additional measures.

The MLI’s specific articles can affect a CTA in several possible ways, depending on the language of compatibility clauses (e.g., applying a provision “in place of” or “in the absence of” an existing provision). Countries can tailor the way the MLI affects their treaties by “opting out” of various provisions that aren’t designated as minimum standards.

What are the BEPS minimum standards of the MLI?

Certain MLI provisions are designated as minimum standards and must be accepted unless a CTA already contains such a provision. Articles 6, 7, and 16 of the MLI are considered BEPS minimum standards. Every signatory to the MLI must agree to incorporate these measures into each of its CTAs. A signatory may reserve against these minimum standards only if they commit to implementing an alternative process that achieves the same result.

Which countries are MLI signatories?

As of Jan. 17, 2024, there are 102 signatories to the MLI. The MLI is open for additional signatories, and the OECD notes that Algeria and Lebanon have each expressed their intent to sign the convention.