The Multilateral Instrument: Moving from Policy to Reality

Panelists

• Mike Williams, Director, Business and International Tax, HM Treasury

• Henry Louie, Deputy to the International Tax Counsel (Treaty Affairs), U.S. Treasury

• Mary Bennett, Partner, Baker & McKenzie• Jesse Eggert, Senior Advisor, OECD Centre for

Tax Policy and Administration

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Overview

• Background

• Tax Treaty-Related BEPS measures

• Technical Issues

• Arbitration

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Background

• The report under Action 15 of the BEPS Project concluded that it would be both feasible and desirable to develop a multilateral instrument to swiftly amend tax treaties to implement the tax treaty-related BEPS recommended

• An Ad Hoc Group for this purpose was established on 27 May 2015, and currently includes: • 96 countries participating on an equal footing• Several non-State jurisdictions and international

organizations participating as Observers.

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Background

• The work on the multilateral instrument has two key purposes:• Developing an instrument to modify existing tax

treaties to implement the tax treaty measures developed through the BEPS Project without changing their substance

• Developing a provision on mandatory binding MAP arbitration

• The Ad Hoc Group aims to conclude its work by the end of 2016, after which the MLI would be opened for signature

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Tax Treaty-Related BEPS Measures

• Action 2 (Neutralising the effects of hybrid mismatch arrangements), including provisions related to:• Fiscally transparent entities• Application of exemption method

• Action 6 (Preventing the granting of treaty benefits in inappropriate circumstances), including:• Minimum standard on treaty abuse• Specific anti-abuse rules related to

• Dividend transfer transactions• Transactions involving immovable property holding companies• Dual-resident entities• Treaty shopping using 3rd country Pes

• Saving Clause

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Tax Treaty-Related BEPS Measures

• Action 7 (Preventing artificial avoidance of PE status) including measures:• Addressing commissionnaire arrangements and similar

strategies• Modifying the specific activity exemptions under Article 5(4)

and adding an anti-fragmentation rule; and• Addressing the splitting-up of contracts to abuse Article 5(3)

• Action 14 (Making dispute resolution mechanisms more effective) including:• Changes to Article 25(1) to (3) • Inclusion of Article 9(2) • Provision on mandatory binding MAP arbitration

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Technical Issues

• A number of technical issues have arisen in connection with using a multilateral instrument to modify bilateral treaties, including:• Providing for the appropriate relationship between the

provisions of the MLI and existing tax treaties• Providing flexibility to accommodate differing policy

preferences• Reflecting minimum standards appropriately• Ensuring consistent application and interpretation• Issues related to language

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Technical Issues: Relationship between MLI and existing treaties

• Existing treaties vary widely from model treaties and each other

• MLI needs to be able to accommodate these variations, by:• adding a new provision where none exists• modifying/replacing some existing provisions, while

leaving others in place• “Compatibility clauses” will describe in detail which

approach is intended to be used in specific circumstances

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Technical Issues: Flexibility

• In some cases, multiple alternative provisions were developed during the BEPS work, e.g:• Minimum standard for treaty abuse under Action 6• Changes to Article 5(4) under Action 7

• Also need flexibility to accommodate differing preferences for provisions that do not relate to a minimum standard

• Need a system to match preferences for alternative provisions

• Targeted reservations can be used to allow opting out of provisions under defined circumstances

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Technical Issues: Minimum Standards

• The minimum standards on treaty abuse (Action 6) and dispute resolution (Action 14) can be implemented through bilateral negotiations or through the multilateral instrument• Need to determine how much flexibility there should be to mix

and match approaches• E.g., should a country that decides to join the MLI be able to opt

for bilateral negotiation of provisions that are part of a minimum standard?

• Some existing provisions may already go beyond the minimum standard• Countries may wish to preserve these provisions• Who decides whether a treaty meets the minimum standard?

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Technical Issues: Consistent application and interpretation

• Detailed Commentary was produced during BEPS work, and should be used to interpret the provisions of the MLI

• In addition, the provisions of the MLI cannot be as detailed as those of a protocol

• Considering tools to ensure consistent application, including:• Explanatory statement or commentary• Production of consolidated versions of treaties

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Technical Issues: Language

• The MLI is being negotiated in English and French, and will be concluded in those two languages

• Bilateral treaties are concluded in many authentic languages

• Need to ensure consistent application to bilateral treaties despite those differences of language

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Developing a MAP Arbitration Provision

• Work to develop a provision on mandatory binding MAP arbitration is being carried out through a sub-group consisting of 20 countries committed to arbitration and a number of other interested countries

• A number of issues must be addressed, including:• Scope of arbitration: all MAP cases or a subset?• Form of arbitration: independent opinion or baseball?• Flexibility: Allowing competent authorities to agree to

procedures while ensuring default rules that prevent delays

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Next Steps

• July 2016: • Public consultation on technical

issues (7 July)• Meeting of Sub-Group on

Arbitration• September 2016: Meetings of Ad Hoc

Group and Sub-Group

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