On 24 November 2016, a group of over 100 jurisdictions decided on a Multilateral Instrument (MLI) that will modify the application of existing bilateral tax treaties to implement the tax treaty measures developed through the OECD/G20 BEPS project. Depending on the ratification process, the potential impact on over 2,000 existing bilateral tax treaties will be substantial. Jan Hein Geertsma, Senior Tax Counsel, and Steffan Galesloot, Head of Services Innovation, share all you need to know about the MLI.
The MLI will modify existing bilateral tax treaties through the following provisions:
The MLI introduces optional treaty provisions to address hybrid mismatches arising from differences in the tax classification of an entity or an arrangement under the laws of two or more countries. According to these provisions, no tax treaty benefits shall be granted in case income isn't considered to be income of a resident of one of the countries.
Preventing treaty abuse
To counter treaty shopping, the MLI introduces a principal purpose test (PPT), optionally supplemented with a simplified limitation on benefits (LOB) provision. Countries can opt out of this rule, as long as they agree on an alternative provision that meets the minimum Base Erosion and Profit Shifting (BEPS) standards on anti-treaty abuse, such as a detailed LOB provision together with other measures. In addition, the MLI implements several specific anti-abuse provisions to target forms of treaty abuse, such as the exclusion of treaty benefits for income attributable to low taxed private equities in third states.
Preventing the artificial avoidance of private equity status
The MLI provides optional provisions to lower the private equity threshold in tax treaties and the bar for establishing taxable presence of non-resident enterprises in the source country.
Improving dispute resolution
The MLI intends to strengthen the effectiveness and efficiency of the mutual agreement procedure (MAP) in accordance with a minimum standard. In addition, the MLI provides an optional provision on mandatory binding MAP arbitration as a way of guaranteeing that treaty-related...