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What Is the OECD Multilateral Instrument?
The digitization and globalization of the economy have allowed businesses all over the world to rapidly expand in unprecedented ways. It’s never been easier to sell to customers anywhere in the world – even without having a physical presence or a fixed place of business (sometimes called a “permanent establishment”) in a jurisdiction.
But some of these businesses have adopted corporate tax planning strategies that exploit gaps and mismatches in tax rules among the countries where they do business. Known as base erosion and profit shifting (BEPS), these accounting strategies weaken a government’s ability to tax these businesses on income earned from foreign activities.
To protect their tax base and combat these BEPS activities, some countries have instituted measures such as digital services taxes. But these protective steps can prompt disputes about the amount of taxes owed and raise concerns about double taxation.
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.
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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.
Albania
Andorra
Argentina
Armenia
Australia
Austria
Azerbaijan
Bahrain
Barbados
Belgium
Belize
Bosnia and Herzegovina
Bulgaria
Burkina Faso
Cameroon
Canada
Chile
China (People’s Republic of)
Colombia
Costa Rica
Côte d’Ivoire
Croatia
Curaçao
Cyprus
Czechia
Denmark
Egypt
Estonia
Fiji
Finland
France
Gabon
Georgia
Germany
Greece
Guernsey
Hong Kong (China)
Hungary
Iceland
India
Indonesia
Ireland
Isle of Man
Israel
Italy
Jamaica
Japan
Jersey
Jordan
Kazakhstan
Kenya
Korea
Kuwait
Latvia
Lesotho
Liechtenstein
Lithuania
Luxembourg
Malaysia
Malta
Mauritius
Mexico
Monaco
Mongolia
Morocco
Namibia
Netherlands
Norway
New Zealand
Nigeria
North Macedonia
Norway
Oman
Pakistan
Panama
Papua New Guinea
Peru
Poland
Portugal
Qatar
Romania
Russian Federation
San Marino
Saudi Arabia
Senegal
Serbia
Seychelles
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Sweden
Switzerland
Thailand
Tunisia
Turkey
Ukraine
United Arab Emirates
United Kingdom
Uruguay
Vietnam
Has the U.S. signed the MLI?
The United States isn’t a signatory to the MLI, meaning U.S.-based multinational companies aren’t yet directly affected by the Multilateral Instrument or its changes to international tax treaties. However, the OECD’s 2017 model and its reflection in the treaties that have been modified by the MLI will influence future U.S. tax treaty negotiations as well as how foreign tax authorities interpret current treaties.
Track the developments that impact your business with Bloomberg Tax
Multinational corporations with operations and subsidiaries in MLI-adopting countries should expect those tax authorities to enforce new – and possibly more robust – tax treaty rules more aggressively. Tax professionals will need to familiarize themselves with how the OECD Inclusive Framework impacts their international tax planning in each country.
This roadmap provides an overview of all income tax treaties effective as of Jan. 1, 2024, and highlights additional key provisions of each treaty.
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