2017
MultilateralInstrumentLaura Gheorghiu, Nadia Rusak
2
Agenda
• History and policy objectives of the MLI
• MLI mechanics
• MLI content
• Concluding remarks
3
HISTORY AND POLICY
OBJECTIVES OF THE MLI
4
BEPS
• BEPS Project – concerted effort by G20 and OECD countries to
address international tax arbitrage and international double non-
taxation of MNE
• Started in February 2013
• First Action Plan released in July 2013
• Final Report issued in October 2015
• Areas covered: digital economy, hybrid mismatch arrangements,
CFC rules, interest deductibility, harmful tax competition, treaty
abuse, artificial avoidance of PE status, transfer pricing principles
and documentation, mandatory disclosure, dispute resolution.
5
BEPS FINAL REPORT RECOMMENDATIONS
Minimum Standards Commitment to implement. Combating treaty shopping;
implementing country-by-
country (CbC) reporting; fighting
harmful tax practices; and
improving dispute resolution.
Common Approaches Agreement on ” general
policy direction” .
Hybrid mismatch arrangements
and interest deductibility.
Best Practices Proposed when negotiators
fail to reach consensus.
Mandatory disclosure and CFC
legislation.
Reinforcing Existing
International Standards
Addressing loopholes in
current international
standards (e.g. OECD
Model Convention).
Revision of existing standards
relating to tax treaties and
transfer pricing.
6
MLI
• Action 15 of BEPS - Proposal to create a single instrument that
addresses treaty-related BEPS measures
• Objectives:
• Enforce the minimum standards and provide guidance on
common approaches/best practices (”optional standards”)
• Achieve a degree of convergence of international tax regimes
without the need to renegotiate bi-lateral tax treaties
7
MLI
• Is neither a treaty amending protocol nor a multilateral treaty
• Applies alongside existing treaties and modifies their application in
order to streamline the implementation of treaty-related BEPS
measures
• Options as to how to implement minimum standards
• Flexibility in relation to provisions that do not reflect minimum
standards
• No obligation for countries to sign MLI or opt-in to all measures
• If there is significant buy-in, could have important consequences on
the current tax treaty system
8
MLI Timeline
• October 5, 2015 – Final BEPS Report Released (MLI is Action 15)
• July 2016 – OECD request for input on the multilateral instrument
• November 24, 2016 – Text of MLI adopted
• December 31, 2016 – MLI open for signing
• June 2017 – High-level signing ceremony / countries will sign and
begin ratification process
9
MECHANICS
10
Signature and Ratification Process
• Entry into force of the MLI in a country (earliest in 2018):
• Five countries must sign and complete domestic legal requirements for
ratification
• Each must advise which provisions of its CTAs are affected by the change, or
express a reservation on the change (i.e., choosing not to adopt it vis-à-vis that
CTA)
• Each must give notice to depositary once ratification is completed
• MLI enters into force for the five countries three calendar months after the last
notice is given
• Entry into effect as between two signatories as follows:
• N/R WHT – on first day of calendar year following entering into force in both
countries
• All other taxes – for taxable periods beginning six months after entering into
force in both countries
• Same delays for subsequent signatories
11
Example
June 2017
Countries A,
B, C, D and
Canada to
sign the MLI
August 2018
Upon
completion of
ratification
process, the
latest of 5
countries i.e.
Canada,
notifies the
depositary
(OECD)
November
2018
MLI to enter
into force
for countries
A, B, C, D
and Canada(3 months after
notice of
ratification)
MLI between country A
and Canada to enter
into effect
January 1,
2020
OTHER
TAXES(for tax period
that starts 6 months
after)
January 1,
2019
WTH
(1st day of next
calendar year)
12
Modifies Specific Article in a Treaty Where:
• Both Canada and the other country are signatories and MLI is in
effect vis-à-vis the treaty
• Both Canada and other country have identified treaty as a Covered
Tax Agreement (CTA)
• Neither country has opted out (reserved) of application of specific
article in relation to CTA
• Minimum standards must apply but opt out possible to extent CTA already
includes a similar provision (e.g. Canada-US Treaty LOB rules)
• Asymmetrical application of certain provisions
• Compatibility clauses – describe how existing provisions in CTA are superseded
by MLI or how new sections are inserted
• Can withdraw reservations over time
13
MLI CONTENT
14
MLI Article BEPS Action Goal of BEPS Actions
3 to 5 2 Neutralize the effects of hybrid mismatch
arrangements
(optional standard)
6 to 11 6 Prevent the granting of treaty benefits in
“inappropriate circumstances”
(minimum standard)
12 to 15 7 Prevent the artificial avoidance of PE
status
(optional standard)
16 to 17 14 Set out ways to make dispute resolution
mechanism more effective
(minimum standard)
15
Hybrid Mismatch
Arrangements (ACTION 2)
16
Hybrid Mismatch Arrangements
• Article 3 MLI: Fiscally transparent entities
• Article 4 MLI: Dual resident entities
• Article 5 MLI: Application of methods for elimination of double
taxation
17
Fiscally transparent entities
• ”Fiscally transparent entities” – entities treated by one or both states
as flow-through, i.e. income is taxable in hands of the entity
participants and not of the entity itself (e.g. partnership, ULC, LLC,
trust)
• Such entities are used by MNE to generate double non-taxation or
excessive double taxation relief (e.g., deduction/non-inclusion,
multiple deductions, multiple FTC)
18
Example
A
B
C
Royalty
payment
D
NI
Country I
Country II
Hybrid Entity
A
B
C
Interest
payment
D
D
Country I
Country II
Double Deduction
Interest
payment
19
Article 3 MLI
• Income derived by/through a fiscally transparent entity is treated as
income of a resident of a state only if it is treated as income of a
resident of that state for domestic tax purposes
• Clarification that a jurisdiction does not have to grant exemption,
deduction or credit for taxes paid in the other jurisdiction if the other
jurisdiction has the right to tax solely because income is also
income derived by its resident
• Optional provision – countries may opt-out of the whole or part of
Article 3 or identify specific scenarios to which the article may apply
20
Dual resident entities
• Treaties apply to “ resident” of a state per domestic laws
• Contain dual-resident tie-breaker rules
• Key tie-breaker rule for persons other than individuals : place of
effective management (PEM) (e.g. art. 4(3) OECD Model
Convention)
• Thus, an entity can shift tax residence to a low-tax jurisdiction by
relocating PEM
21
Article 4 MLI
• Competent authority tie-breaker -- expands criteria for determining
dual-resident entity’s treaty residence to include other factors in
addition to PEM (e.g. place of incorporation or constitution, and
similar criteria)
• Competent authorities need to reach agreement on residence,
otherwise entity not entitled to treaty benefits
22
Elimination of double taxation
• Treaties include an exemption method that allows the residence
jurisdiction to exempt prescribed foreign income from taxation
• This may result in double non-taxation if income is not taxed in the
source jurisdiction
23
Article 5 MLI
Options To Deal With The Exemption Method In Treaties
Option A
(switchover
clause)
No exem pti oni n Country A wher e Country Ba ppli es t he trea ty
to exem pt or reduce ra te of ta x. Country Asha ll off er a forei gn
tax credit on the basis of net income.
Option B No exem pti on i n Country A f or di vi dends t ha t a re ta x
deducti bl e i n Country B. Country A sha ll off er a forei gn ta x
credit on the basis of net income.
Option C If income is taxed under the treaty in Country B, Country A
shall offer a foreign tax credit on the basis of net income. If
income is exempt from tax in Country A, Country A may still
give a foreign tax credit for taxes paid in Country B.
24
Example
A
BTax-deductible
interestD
NI
Country I
Country II Hybrid
instrument
Exempted
dividend
25
Article 5 MLI
• Optional standard
• Asymmetrical application is possible (e.g. one jurisdiction chooses
Option A and the other Option B).
• Can reserve the right with respect of the entire Article 5 not to apply
to CTAs
• If not choosing Option C, can prevent the other jurisdiction from
applying Option C
26
Preventing Treaty Abuse
(Action 6)
27
Minimum Standards for Preventing Treaty Abuse
Article 6 Purpose of a CTA
Article 7 Prevention of treaty abuse
Optional Standards for Preventing Treaty Abuse
Article 8 Dividend transfer transactions
Article 9 Ca pi ta l gai ns from a li ena ti on of sha res or i nt erest s of enti ti es
deriving their value principally from immovable property
Article 10 Anti-abuse rule for PEs located in third jurisdictions
Article 11 Application of agreements to restrict a party’ s right to tax its own
residents (“ saving clause” )
28
Art. 6 MLI: Purpose of a CTA
• Include in preamble : “ purpose of tax treaty is to eliminate double
taxation without creating opportunities for non-taxation or reduced
taxation through avoidance and evasion (including treaty-shopping
arrangements aimed at obtaining ... [treaty benefits for] residents of
third jurisdictions)”
• Minimum standard but option not to include where CTAs already
contain similar preamble language
• Tax treaties interpreted in their context and in light of their object
and purpose – preamble will guide interpretation
-Treaty integrity rules –e.g. beneficial ownership etc. (can still abuse the rule)
29
Art. 7 MLI: Anti-Treaty Abuse Standards
• Anti-avoidance rules to prevent benefits being used in unintended
circumstances (treaty-shopping and other abusive arrangements)
• One of three provisions to curb treaty abuse
• Principal Purpose Test (PPT)
• PPT + Simplified LOB
• Detailed LOB supplemented by an anti-conduit rule
• Default option is Principal Purpose Test (PPT) (minimum standard)
• Limitation on benefits (LOB) is a supplemental and optional rule
• Based on conclusions of Finance’s domestic anti-treaty shopping
consultation, Canada expected to adopt PPT
30
Art. 7(1) MLI: PPT
• Denies treaty benefits when obtaining benefit is one of the principal
purposes of the arrangement, unless granting the benefit would be
in accordance with purpose of provision
• General anti-abuse rule (like GAAR)
• Default provision / minimum standard
• Interpretive difficulties (what is “ a principal purpose”, what is the
object/purpose of a treaty provision)
• Appeal to competent authority
31
Example
Canada-UK Treaty – Art. 10(8) Dividend, 11(9) Interest, 12(8) Royalty:
• The provisions of this Article shall not apply if it was the main
purpose or one of the main purposes of any person concerned with
the creation or assignment of [shares/ debt/ rights].... to take
advantage of this Article by means of that creation or assignment
• If Canada and UK sign MLI and do not reserve, Art. 7(1) will replace
existing language
32
Example
• A 22-month construction contract is split into two 11-month
contracts between the customer, the contractor and a corporation
related to the contractor.
• Under the agreement with the customer, the contractor and the
related party are jointly liable for the work
• Reasonable to conclude that:
• one of the principal purposes of the separate contract with the party related
to the contractor is to avoid the construction PE
• Granting the benefit of the treaty would be contrary to the object and
purpose of the construction PE
33
Art. 7(8)-(13) MLI: Simplified LOB + PPT
• Simplified LOB limits availability of treaty benefits to persons that
meet objective “ qualified person” test (genuine connection with
state)
• “Qualified person” : individual, government, publicly trade corporation
(recognized stock exchanges), 50% controlled by qualified persons, “active
conduct of a business”
• Appeal to competent authority
• Can apply:
• to both states, if both elect into it
• to neither state, if one state elects into simplified LOB + PPT and the other
elected PPT only
• unilaterally only, if only one state elects into simplified LOB + PPT and the other
elects PPT only but accepts the application of simplified LOB to the first state
34
Art. 7(8)-(13) MLI: Simplified LOB + PPT
• Interaction between the Simplified LOB and PPT
• First apply the Simplified LOB to test the person: to deny treaty benefits to
persons without sufficient nexus to a contracting jurisdiction based on objective
criteria (if doesn’t qualify, out of the treaty)
• Second apply PPT to test the transaction: to determine whether the
arrangement or transaction meets the PPT (i.e. if abusive,
arrangement/transaction will not receive treaty benefits)
• Concerns with respect to how a PPT or LOB rule will apply to
various collective investment vehicles (e.g. private equity funds)
• OECD Discussion draft: Treaty entitlement of non-CIV funds (Mar 2016)
• OECD Discussion draft: Treaty residence of pension funds (Feb 2016)
35
Art. 7(15) MLI: Detailed LOB + anti-conduit
• Opt-out to allow parties (e.g. US) to negotiate a bilateral agreement
for a detailed LOB
• Plus either a PPT or a specific anti-conduit mechanism
• Specific anti-conduit mechanism for financing arrangements may be present in
domestic law (e.g. B2B rules)
• Canada-US is only Canadian treaty with a detailed LOB rule
36
Art. 8 MLI: Dividend transfer transactions
• Optional standard
• Introduces a minimum 365-day shareholding period for a company
to be entitled to an exemption or reduced rate of dividend WHT
from subsidiary
• Other elements of CTA (i.e. ownership thresholds, taxes rates and
form of ownership) are not modified
• Can opt-out of Art. 8 entirely or only in respect of certain CTAs that
already contain a minimum holding period
37
Example
• Canada-Netherlands Tax Treaty, art. 10(2)(a):
• …dividends may also be taxed in the State of which the company paying the
dividends is a resident … but if the recipient is the beneficial owner of the
dividends the tax so charged shall not exceed 5% of the gross amount of the
dividends if the beneficial owner is a company … that owns at least 25% of the
capital of, or that controls directly and indirectly at least 10% of the voting power
in, the company paying the dividends…
• No current holding period
• Article 8 MLI would require that the 25%/10% ownership thresholds
be met for at least 365-day period preceding the dividend
38
Art. 9 MLI: Capital gains on shares or
interests in real estate holding entities
• Optional standard
• Anti-dilution provision for real estate holding entities
• Introduces a minimum 365-day period for the relevant value
threshold of real estate and expands the rule from shares to
interests in partnerships and trusts
• Can opt-out of all or portion of the provision
• Can opt-out of the entire article in favour of an existing language in
art. 13(1) of the OECD Model Treaty which applies where >50% of
the value of shares or comparable interests be derived from
immovable property during the 365 days preceding the sale
39
Example
• Canada-Barbados Tax Treaty, art. 14(3):
• Gains from the alienation of shares of a company, the property of which consists
principally of immovable property situated in a Contracting State, may be taxed
in that State.
• Gains from the alienation of an interest in a partnership or a trust, the property
of which consists principally of immovable property situated in a Contracting
State, may be taxed in that State
• No current period for maintaining the value threshold
• Article 9(1) MLI would require that shares/interests derive their
value principally from immovable property during the 365-day
period preceding the sale
• Can opt out with respect to partnerships/trusts because already
covered by the treaty
40
Art. 10 MLI: PE located in third jurisdictions
• Optional standard
• Triangulation provision for low-tax branches exempt from tax in the
head-office state
• No treaty benefits are available if income received from one state is
treated by the other state (“ head office state”) as attributable to PE
in the third state and the tax in the third state is less than 60% of tax
that would otherwise be payable in the head office state
• Exception for active trade or business PE
• Discretionary relief by competent authorities
41
Example
A
B
Country B
Country A
• Royalty/ Interest
• Treaty-reduced WHT
PE
Country C
(low-tax)
42
Art. 11 MLI: “Saving clause”
• Optional standard
• Preserves the right of a state to tax its own residents, except with
respect to certain treaty provisions that expressly allocate the taxing
right to the source state (e.g. business profits of PE, gains from real
property, government service, students/teachers, credit and
exemption methods, MAP, pensions etc.)
• Typical in U.S. treaties
43
Art. 11 MLI: “Saving clause”
• E.g. Canada-US Tax Treaty – Art. XXIX (2)
• Except as provided in paragraph 3, nothing in the Convention shall be construed
as preventing a Contracting State from taxing its residents … and, in the case of
the United States, its citizens … and companies electing to be treated as
domestic corporations, as if there were no convention between the United
States and Canada with respect to taxes on income and on capital…
44
Artificial Avoidance of PE
Status (action 7)
45
Action 7: Expanding the PE Definition
Where PE status is circumvented through:
a. Article 12 and 15 MLI: agency arrangements
b. Article 13 MLI: specific activities exemption (preparatory and auxiliary)
c. Article 14 MLI: fragmentation of activities (e.g., splitting up contracts)
•Not minimum standard - each party chooses measures to adopt
• Applies to CTA if both Parties adopt
• Possible for Parties to adopt only fragmentation of activities rule
•Profit attribution rules also to be clarified
46
Current Dependent Agent PE Definition
1. the agent has, and habitually exercises, the authority to conclude
contracts in the name (on behalf) of the non-resident in Canada
• “contracts” relating to the business proper of the enterprise
2. the agent is not an independent agent acting in the ordinary
course of his business
3. the agent does not engage solely in activities of a preparatory or
auxiliary character (e.g. purchase of goods, advertising)
See para. 49 of Knights of Columbus v. R. (2008 TCC 307)
47
Current Dependent Agent PE Definition
Treaty Dependent
Agent PE
Independent
Agent Exception
Auxiliary Services
Exception
OECD Model Ar. 5(5) Art. 5(6) Art. 5(4)
Canada – US Art. 5(5) Art. 5(7) Art. 5(6)
Canada – UK Art. 5(4) Art. 5(5) Art. 5(4)
only purchase of
goods
Canada – France Art. 5(5) Art. 5(6) Art. 5(4)
48
Example 1 - Commissionnaire Arrangement
From BEPS Final Project – Action 7 p. 15
• XCO and YCO are members of the same multinational group.
• XCO is resident of US and sells medical products.
• Until 20XX, these products are sold in Canada by YCO, a resident of Canada.
• In 20XX, the status of YCO is changed to that of commissionnaire.
• YCO transfers to XCO its fixed assets, its stock and its customer base and
agrees to sell in Canada the products of XCO in its own name, but for the
account of and at the risk of XCO.
• Since YCO does not own the products that it sells, it cannot be taxed on the
profits derived from such sales and is therefore only taxed on the remuneration
that it receives for its services (usually a commission).
49
Other Examples – Agency Arrangements
Example 2:
• YCO substantially negotiates contracts in Canada but contracts are for formally
concluded in the US because they are finalised/signed or authorised in the US
Example 3:
• YCO habitually exercises the authority to conclude contracts on behalf of XCO
but is an “independent agent” even though it is closely related to XCO
50
Dependent Agent PE
Current – Dependent Agent
The agent [1] has, and habitually exercises, authority to conclude
contracts [2] in the name (on behalf) of the non-resident in Canada
51
Dependent Agent PE (cont’d)
Art. 12(1) MLI – Dependent Agent
•[1i] habitually concludes contracts, our [1ii] habitually plays the
principal role leading to the conclusion of contracts that are
routinely concluded without material modification by the
enterprise, AND
•contracts are:
• [2i] a) in the name of the enterprise; or
• [2ii] b) for the transfer of the ownership of, or for the granting of the right to
use, property owned by that enterprise or that the enterprise has the right to
use; or
• [2iii] c) for the provision of services by that enterprise
52
Dependent Agent PE (cont’d)
OECD Model Commentary Article 5 para. 32.5:
•“concludes contracts” = a contract is considered concluded under the
relevant law governing contracts
• “plays the principal role leading to the conclusion of contracts” = a
contract is concluded as a direct result of that person’s actions
• acts as the sales force of the enterprise/ convinces the third party to enter into a
contract with the enterprise
• E.g. YES: solicits and receives (but does not formally finalise) orders which are
sent directly to a warehouse from which goods belonging to the enterprise are
delivered and where the enterprise routinely approves these transactions.
• E.g. NO: only promotes and markets goods or services of an enterprise (e.g.
pharma representatives actively promotes company’s drugs by encouraging
doctors to prescribe these drugs)
• E.g. NO: acts as distributor (because owns the property it is selling)
53
Independent Agent Exception
Current – Independent Agent Exception
The agent is an independent agent acting in the ordinary course of
its business (as agent).
•legally and economically independent from the principal
• Not subject to detailed instructions or to comprehensive control
• Bears the entrepreneurial risk
54
Independent Agent Exception (cont’d)
Art. 12(2) MLI – Independent Agent Exception
Paragraph 1 shall not apply where the person … carries on business
… as an independent agent and acts for the enterprise in the ordinary
course of that business. Where, however, a [1] person acts exclusively
or almost exclusively on behalf of one or more enterprises [2] to
which it is closely related, that person shall not be considered to
be an independent agent
OECD Model Commentary Article 5 para. 38.8 “ exclusively or almost
exclusively” means 90% or more
55
Definition – “Closely Related” (Art. 15 MLI)
• [De facto control by one or by a third person]: based on all the
relevant facts and circumstances, one has control of the other or
both are under the control of the same persons/enterprises.
• [De jure control by one of the other]: one possesses directly or
indirectly more than 50 per cent of the beneficial interest in the
other (or, more than 50% of the aggregate vote and value of the
company’s shares or of the beneficial equity interest), or
• [De jure control of both by a third person]: if another person
possesses directly or indirectly more than 50 per cent of the
beneficial interest (or more than 50 per cent of the aggregate vote
and value of the company’s shares or of the beneficial equity
interest) in the person and the enterprise
56
Specific Activity Exemption
• Specific activities are excluded from PE definition (both fixed place
of business PE and dependent agent PE) even if not of a
preparatory or auxiliary nature
• use of facilities to store, display or deliver goods of the non-resident
• maintenance of stock of goods for purposes of processing by another enterprise
or for storage, display or delivery
• maintenance of a fixed place of business solely for purchasing goods or
collecting information
• Maintenance of a fixed place of business solely for an activity of a preparatory
or auxiliary character
• E.g. e-commerce warehouse structure: N/R stores goods in owns in
Canadian warehouse. Goods are sold online and orders fulfilled
from the warehouse. Warehouse management and delivery is
through own employees.
57
Specific Activity Exemption (cont’d)
• OECD Model Commentary Article 5 para. 32.3:
• Fixed place of business solely for the purposes of preparatory or
auxiliary activities is deemed not to constitute a PE
• a person whose activities are restricted to such purposes should
not create a PE either
• E.g., where a person acts solely as a buying agent for an enterprise and, in
doing so, habitually concludes purchase contracts in the name of that
enterprise, even if that person is not independent of the enterprise
58
Specific Activity Exemption (cont’d)
• Art. 13(2) MLI: all specific activity exemptions are contingent on the
activity being of a preparatory or auxiliary character
• prior language only applied to fixed place of business exemptions
• Art. 13(3) MLI: Option not to include (position that activities are by
their nature strictly preparatory/auxiliary) and to adopt anti-
fragmentation rule instead
59
Fragmentation of activities
• Art. 13(4) MLI: Fragmentation of complementary functions that are
part of a cohesive business operation:
• same enterprise or a closely related enterprise has a PE at that location or
another in Canada OR
• combined activities of two enterprises are not of a preparatory or auxiliary
character
60
Specific Activity Exemption (cont’d)
Final Report – Action 7 Proposed Changes to Commentary para. 21.2
• “Preparatory character” : carried on in contemplation of the carrying
on of essential/significant part of the enterprise’s activity (e.g.
training employees)
• “Auxiliary character”: carried on to support without being part of
essential/significant part of activity (does not use significant
resources)
• Look at core function of the business
• Warehouse e.g. (para. 22 and 22.3):
• if sells online and fulfills from own warehouse (or one over which has control)
• exception does not apply since warehouse represents important asset and use
of employees and is an essential part of sale/distribution business
61
Splitting up of contracts
• Construction site PE/ Exploitation of Natural Resources PE: to
determine whether the 12-month period has been exceeded
• PPT could apply or
• Art. 14 MLI: aggregate connected activities of closely related
enterprises at the same site during different periods (each
exceeding 30 days)
62
Profit Attribution
• Attribution of profits: per Article 7(2) of Model Convention
• E.g. Agency PE results in the rights and obligations resulting from the contracts
being allocated to the agency PE
• not all profits from the performance of the contracts will be attributed
• only those that the PE would have derived if it were a separate and independent
enterprise performing the activities and dealing at arm’s length with the head
office and others in the corporate group
• Consider functions performed, assets used and risks assumed by PE
• activities performed by other enterprises and by the rest of the enterprise to
which the PE belongs must be properly remunerated
• Head office State must eliminate double taxation on profits attributed to PE (Art.
23A or B of Model Treaty)
• BEPS Action 8-10 : Revised Guidance of Profit Slips – second
revised discussion draft expected June 2017 (transactional profit
split method)
63
Dispute Resolution
Mechanisms (Action 14)
64
Minimum Standards for DISPUTE RESOLUTION
Article 16 Mutual Agreement Procedure (MAP)
Optional Standards for DISPUTE Resolution
Article 17 Corresponding Adjustments
Article 18-26 Arbitration
65
Art. 16 MLI: Mutual Agreement Procedure
• Where a person considers that actions of one or both states result
in taxation not in accordance with the treaty, the person may
present the case to competent authorities of either state within 3
years from the notification of the action
• Competent authorities shall work to resolve the case by mutual
agreement
• Any agreement shall be implemented regardless any time limits in
the domestic laws
• Can opt-out of MAP if there is an existing MAP clause in the
treaties
• Can opt-out if the existing time period for presenting the case is at
least 3 years
66
Art. 17 MLI: Corresponding Adjustments
• Best practice
• Allows unilateral adjustment to tax in transfer pricing disputes
• Where States A and B both tax profits of an MNE, and such profits
would have accrued to the enterprise in State A had the conditions
made between two enterprises were those of independent parties,
then State B shall make a corresponding adjustment to tax charged
on those profits
• Can opt-out if there is an existing clause in the treaties or if a state
agrees to make an adjustment in the absence of the clause or its
competent authority commits to resolve the case on the basis of
MAP
• Can opt-out if a similar clause will be added through bi-lateral
negotiations
67
Art. 18-26 MLI: Arbitration
• Option for mandatory binding arbitration
• Applies if competent authorities fail to reach an agreement pursuant
to MAP within 2 years
• However, can be submitted earlier than 2 years if competent
authorities agree
• Launched by the person that requested MAP
• Decision is binding with certain exceptions
• Decision is implemented through mutual agreement
• Detailed rules on appointment of arbitrators and arbitration process
• Arbitration clause only applies if both parties opt-in; however, can
formulate reservations to limit the scope of eligible cases
68
CONCLUDING REMARKS
69
Interpretation
• Only 2 official languages (English and French)
• No requirement for consolidated texts
• Basis of interpretation of MLI provisions are:
• General treaty interpretation rules: provisions of treaty interpreted in good
faith in accordance with the ordinary meaning to be given to the terms of
the treaty, in their context and in light of the treaty’s object and purpose
• Reliance on BEPS Final Report and OECD Model Tax Convention
Commentary
• MLI Commentary only assists with operation of MLI to modify CTAs
• Impact of modifications determined between parties based on MAP
provisions in CTA (MLI Art. 32)
• MLI Art. 30: subsequent modifications to CTA agreed to between
the Parties
• MLI Art 37: ability to withdraw
70
Current Status
• 2017 February OECD speed dating meeting to allow countries to
discuss implementation of MLI to bi-lateral treaties
• OECD expects 60-70 countries to sign on June 7, 2017
• Canada will sign and may be in force as early as 2018/2019
• US not excepted to sign (no treaties with tax heavens, has strong
LOB)
• EU: mandatory and binding arbitration directive (may lead them to
adopt MLI)
• UK: will sign the MLI in June. Will introduce the PPT to implement
minimal standard. Will not adopt the PE changes except for the
anti-fragmentation rule because it is a HQ country.