International tax reform continued moving ahead at the end of last year as the OECD published its multilateral instrument.
Not rendering correctly? View this email as a web page here.

April 4, 2017 

One Step Closer to Worldwide, International Tax Reform

Hi There!,

International tax reform continued moving ahead at the end of last year as the Organisation for Economic Cooperation and Development (OECD) published its so-called multilateral instrument (MLI), along with an explanation of how it will work.  The MLI, formally known as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, is a cornerstone of the OECD’s base erosion and profit shifting (BEPS) project.  

The MLI is intended to supplement existing tax treaties, rather than override them.  With the input of more than 100 jurisdictions, it is expected that more than 2,000 worldwide tax treaties will be updated by the MLI.  These modifications address specific anti-avoidance BEPS provisions, such as:

(1) Treaty abuse measures,

(2) Hybrid mismatch arrangements,

(3) Definitional amendments to permanent establishment rules, and

(4) Dispute resolution mechanisms.

Treaty Abuse

The MLI offers signatory countries three alternative approaches to counter perceived treaty abuses.  The three alternatives are: (1) a Principal Purpose Test (“PPT”), (2) a PPT in combination with a Limitation on Benefits (“LOB”) article, and (3) an LOB in combination with an anti-conduit rule.

Hybrid Mismatches

The OECD has previously acknowledged concerns that hybrid entities and instruments have been utilized to gain improper treaty benefits.  As such, the MLI contains provisions to address fiscally transparent entities, dual resident entities, and the application of an exemption, deduction or credit relief mechanism to eliminate double taxation.

A provision on fiscally transparent entities isn’t required in order to meet a minimum standard. The reservation clauses indicate that a party may opt out of this entirely. If either party to a tax treaty adopts a reservation, the existing provision will be preserved.

It’s also possible for a party to reserve the right to retain existing provisions that would deny benefits in the case of transparent entities established in third jurisdictions. Parties may also reserve the right to retain existing provisions that provide more detail about the treatment of factual situations and entities to which the provision is intended to apply.

Permanent Establishment Status

The MLI effectively expands the scope of what constitutes a permanent establishment (“PE”) by offering three optional rules.  These rules address: (1) agency and commissionaire arrangements, (2) exemptions for preparatory and auxiliary activities, and (3) splitting of contracts.

Improving Dispute Resolution

A section of the MLI includes provisions for the mandatory binding arbitration of cases in which the competent authorities are unable to agree within a fixed period of time. This work includes the development of the substantive content of a mandatory binding arbitration provision.

Implementation of the MLI

The signing parties of the MLI are granted some flexibility in implementing the recommended provisions.  Some details about the implementation of the MLI are below.

  • The convention specifies the tax treaties to which the MLI applies. There may be circumstances in which a jurisdiction prefers not to include a specific treaty in the scope of application, such as when the treaty has been recently renegotiated to implement the outcomes of the BEPS project.
  • If a provision reflects a BEPS minimum standard, opting out of that provision is possible only in limited circumstances, such as when the treaty already meets that standard. Jurisdictions may also adopt a different approach to meeting a minimum standard. Whether a treaty meets the minimum standard would be determined in the overall review and monitoring process by the BEPS Inclusive Framework.
  • There may be circumstances in which a party may have policy reasons for preserving the application of specific types of existing provisions.
  • In cases where the provisions of the MLI conflict with existing provisions covering the same subject matter, the conflict is addressed through one or more compatibility clauses, which may describe the existing provisions that the MLI is intended to supersede.
  • Parties are permitted to opt out of applying particular provisions to their tax treaties based on objective criteria. This is accomplished through one or more paragraphs in the articles of the convention that set out a list of permitted reservations.
  • If a provision supersedes or modifies specific types of existing provisions of a tax treaty, parties are generally required to make a notification specifying which treaties contain provisions of that type. The effect of these notifications varies depending on the type of compatibility clause that applies to the provision.

Timing on Next Steps

A formal signing ceremony is scheduled to take place in June 2017.  In general, the MLI will enter into force for each party within three or four months of that party’s ratification.  

For more information on the impact of the MLI on your business, contact the international tax advisors at Moore Stephens Doeren Mayhew.





Carrie Koshkin, JD

Twitter: @MooreStephensDM

With nearly 15 years of experience in international tax law, Carrie’s international tax services background includes implementing tax-efficient organizations and helping clients enter new jurisdictions. Additionally, she focuses on inbound/outbound tax issues, U.S. tax implications of international restructuring, and more. Contact her at or +1.713.860.0219.



 Unsubscribe from all future emails