In November of 2016, The Organization of Economic Co-Operation and Development (OECD) released a Multilateral Convention to Implement Tax Treaty Measures to Prevent Base Erosion and Profit Shifting (BEPS). BEPS Action 15 proposed a multilateral instrument (MLI) as an alternative to renegotiating existing tax treaties between contracting countries. The MLI would run along the existing treaty network. This article discusses the MLI and  addresses four main areas of concern under BEPS.

BEPS Action 15 proposed a multilateral instrument (MLI) as an alternative to renegotiating existing tax treaties between contracting countries. The MLI would run along the existing treaty network. Contracting countries are able to implement portions of the MLI that address areas where their current treaties do not reflect the minimum standards set forth in the MLI.

The MLI addresses four main areas of concern under BEPS:

  • Action 2 – Hybrid Mismatch Arrangements;
  • Action 6 – Preventing Treaty Abuse;
  • Action 7 – Permanent Establishment;
  • Action 14 – Dispute Resolution.

The first signing ceremony took place on June 7, 2017 where 68 jurisdictions signed the MLI.

Action 2 – Hybrid Mismatch
Action 2 addresses income earned through entities that are deemed transparent in one or both of the contracting countries. In which case, the MLI states that income earned by a transparent entity would be considered the income of a resident of a contracting country, to the extent that such income is treated, for tax purposes of that contracting country, as income of a resident of that country.

The MLI sets forth three methods for elimination of double taxation which may arise from inclusion of an exemption in treaties with respect to income that is not taxed in the country of source. The contracting parties may choose any of the methods set forth in the MLI or not select any. Contracting countries may also choose different options, in which case, each country’s choice would apply with respect to its own residents.

Option A
Exemption would not apply in one contracting country, with respect to income or capital that, pursuant to the tax agreement, is exempted or taxed favorably by the other contracting country. In the case of a rate of favorable taxation, a deduction may be allowed on the income or capital in an amount equal to the tax paid in the other contracting country.

Option B
Exemption would not apply to dividend income in one contracting country where such dividends are deductible in the other contracting country.

Option C
Where an investor derives income or owns capital which, pursuant to the tax agreement, is taxable in one contracting country, then the other contracting country would allow a credit in the amount of tax paid in the other contracting country.

The MLI focuses on tax treaties. Recommendations under BEPS Action 2 regarding changes to domestic laws are not addressed.

BEPS Action 6 – Treaty Abuse

The MLI provides three methods to address treaty abuse:

  • The Principal Purpose Test (PPT)
  •  A simplified Limitation on Benefits (LoB) provision
  • A detailed LoB provision

Countries are expected, at a minimum, to implement the PPT rule; or a PPT rule with either simplified or detailed LoB provision; or a detailed LoB provision supplemented by a mechanism dealing with conduit arrangements that are not already provided for in the treaty.

The Principal Purpose Test
The MLI implements the BEPS Action 6 minimum standard by setting forth a PPT provision, which denies treaty benefits where one of the principal purposes of an arrangement or transaction is to directly or indirectly benefit under a tax treaty.
Countries may also choose to apply an optional provision, whereby a competent authority, that would have otherwise granted the benefit, may do so, if in the absence of the transaction or arrangement in question, the benefit would still have been granted. The competent authorities of the contacting countries would need to consult each other prior to denying such request.

This provision may address treaty accessibility issues that investors into investment funds may experience as a result of the PPT provision, when a fund invests in a contracting country.

PPTs included in current tax treaties may cover all benefits provided for by the tax treaty or only benefits provided for in certain articles, such as the dividends, interest and royalties articles. The intention of the PPT pursuant to the MLI, is to have it apply to all articles of the agreement.

Simplified Limitations on Benefits Provision
In addition to the PPT, contracting countries may choose to apply a simplified LoB provision, which would replace any existing LoB provision. The simplified LoB provision sets forth several categories of tests that residents of contacting countries would need to meet in order to secure treaty benefits.

The provision defines benefit entitlement with respect to investors meeting the “qualified person” criteria, as well as sets forth entitlement in certain situations where the qualified person criteria is not met, but the investor is engaged in “active conduct of trade or business,” provided certain additional criteria is met.

The simplified LoB also allows for benefits, where the qualified person criteria is not met, but where persons that are “equivalent beneficiaries” own directly or indirectly 75% of the beneficial interest of the resident pursuing the benefit. Equivalent beneficiaries are investors that would have been granted benefits similar to those that the resident is pursuing, had they invested directly in that market.

By virtue of this paragraph, funds domiciled in contracting countries that adopt a simplified LoB provision, in addition to the PPT, can pursue a treaty benefit by looking though the fund to determine whether at least 75% of its investors are equivalent beneficiaries, in which case, the investors in the fund are not deemed to be using the fund structure to achieve better tax results.

Detailed Limitations on Benefits Provision
The MLI does not provide a detailed LoB, instead, countries choosing to implement a detailed LoB, can either do so in addition to the PPT, or can opt out of the PPT and agree to negotiate an agreement that satisfies the minimum standard.

The MLI does not address concerns of how a PPT or LoB provision would apply to collective investment vehicles, although in March of 2016, the OECD issued a discussion draft resulting in commentary indicating that participants continue to have concerns over these issues.

Dividend withholding Tax Reduction – Minimum Holding Period (Article 8)
Oftentimes, tax treaties provide a further reduced withholding tax rate where the dividend recipient holds a certain percentage of the dividend paying company. The MLI contains an optional provision which additionally would require a minimum 365 day consecutive holding period, including the day of the payment of the dividend.

Capital Gains on Real Property – (Article 9)
The MLI contains an optional provision that would allow taxation of gains realized from disposition of shares that derive their value principally from real property, if the real property threshold is met at any time during the 365 day period preceding the sale.

Action 7 – Permanent Establishment
The MLI seeks to amend existing tax treaties to prevent artificial avoidance of permanent establishment (PE) through three optional rules. Of most relevance are:

  • Commissionaire exemption
  • The specific activity exemption.

Commissionaire Exemption
The wording of the OECD Model Tax Convention was changed to state that where a person is acting in a contracting state on behalf of an enterprise and habitually concludes contracts or habitually plays a principal role leading to the conclusion of contacts that are routinely concluded without material modification, and the contracts are (a) in the name of the enterprise; or (b) for the transfer of ownership of, or for granting of the right to use property owned by the enterprise; or(c) for the provision of service by that enterprise, then the enterprise is deemed to have permanent establishment in that state as it relates to these activities.

However, PE is not established where the person carries on business in the contacting state as an independent agent, provided they don’t act exclusively or almost exclusively on behalf of one or more enterprise to which it is closely related.

The MLI significantly expands the scope of PE creating activities, from the traditional threshold of having an employee or agent in the source country that habitually exercises the authority to conclude contracts, to a broader scope of “…habitually playing a principal role leading to the conclusions of contracts that are routinely concluded without material modifications…” which leads to a broader spectrum of situations that may create PE though contract negotiations.

Specific Activity Exemption
The OECD Model Tax Convention provides a list of activities that are deemed exempt from PE status. However, Action 7 led to revisions of the Convention, whereby, such activities would need to also be of preparatory or auxiliary nature. Some countries, however, consider the listed activities to be inherently preparatory or auxiliary.

Two options are available to contacting countries. Option A lists out certain exempt activities and adds that each of such referenced activities must be preparatory or auxiliary in nature, as well as the overall activities must be of preparatory or auxiliary nature. Option B lists out the same exempt activities but does not apply the preparatory or auxiliary in nature requirement to each such activity, only the overall activities must be preparatory or auxiliary in nature.

A party to an agreement may choose to apply Option A or B, or neither option, since these are not required to meet the minimum standards set forth in the MLI.

BEPS Action 14 – Dispute Resolution
The MLI implements the minimum standard set forth in Action 14 for resolving treaty based disputes. All tax agreements would include mutual agreement procedures (MAPs).

Implementation Timeline

One June 7, 2017, 68 jurisdictions participated in the first MLI signing ceremony hosted by the OECD in Paris.

At the signing ceremony, signatories submitted a list of tax treaties currently in force that they would like to amend through the MLI, along with a list its reservations and notifications with respect to provisions of the MLI. The OECD has noted that based on the current list of signatories, the PPT will apply to 1,100 treaties currently covered by the MLI and 12 signatories will supplement the PPT with the simplified LoB.

Provided that a minimum of five countries ratify the MLI and notify the OECD, the agreements will enter into force on the first day of the month that begins at least three months after the OECD receives notification. With respect to nonresident withholding taxes, the provision of the MLI will become effective on the first day of the calendar year after the MLI entered into force. This implies that the MLI provisions could become effective on January 1, 2019 and some as early as 2018.

Signing could have taken place at the first signing ceremony or at any time thereafter. Eight additional jurisdictions have expressed their intention to sign the MLI.


Of particular interest are the MLIs provisions on treaty abuse, which may result in additional hurdles for investors seeking treaty benefits, especially with respect to investors domiciled in countries whose tax treaties with other countries currently do not contain an LoB or PPT type of provision. Additional hurdles may materialize in the form of modified documentation requirements seeking proof that the LoB or PPT provisions of the MLI are met.

The treaty abuse provisions may also create a hurdle for collective investment vehicles seeking treaty benefits in countries where the current tax treaties only require that the Residence Article of the treaty be met. The addition of an LoB or PPT clause or a combination of both, without further clarification by the OECD of its application to collective investment vehicles, could prove problematic.

BBH actively monitors implementation and revisions of tax treaties and notifies its clients of potential impact resulting from newly executed or revised treaties. The MLIs will run parallel to existing tax treaties among jurisdictions, implying that investors would need to be vigilant of changes with respect to both treaties, once implemented.

For more information,  please contact your relationship manager or the Global Tax Services Group.

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