Base Erosion and Profit Shifting (B.E.P.S.) refers to tax planning strategies, that exploit gaps and actual mismatches in tax rules that allow the artificial shift of profits to loss or non-tax locations where there is little or no economic activity, which takes to little or no overall corporate tax being paid.
In the attempt to offer concrete solutions for governments to close gaps in existing international tax rules, by transposing results from the O.E.C.D./ G20 B.E.P.S. Project into bilateral tax treaties worldwide, in 2017 over 70 Ministers and other high-level representatives participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Thus, the application of several bilateral tax treaties, in order to eliminate double taxation, is being modified.
The negotiations for the actual text of the Multilateral Instrument (MLI) and its Explanatory Statement have moved more than 100 countries and jurisdictions and were finally adopted in English and in French, its translations in other languages being adopted only for informative purposes.
Therefore, the MLI already has a significant impact on the worldwide network of tax treaties, and additional countries and jurisdictions are actively preparing for signature in the near future. As more countries are joining the MLI, the number of matched agreements will increase rapidly.
The next step will be the enter into force of the convention, on July 1st, 2018, thus marking an important step in the international efforts to update the currently existing bilateral tax treaties, trying to close the open doors for tax avoidance by multinational enterprises.
The signing and enter into force of the Convention is directed to show a strong sense of political commitment to a multinational approach to fighting, shoulder to shoulder, to base erosion and profit shifting (B.E.P.S.) by multinational enterprises. The commitments are being translated into concrete legal provisions, in more than 1200 tax treaties worldwide, driven by the international community and assuring that multinational enterprises pay their fair share when it comes to fulfilling their tax obligations.
The Convention will have effect over existing tax treaties as of 2019, being designed to strengthen already existing tax treaties. The O.E.C.D. is considered to be the depositary of the Convention and is supporting governments in the process of signature, ratification and implementation; the convention being designated to bring more certainty and predictability to businesses, as well as to secure a better functioning of the international tax system.
Early 2019, the first modifications to covered treaties will become effective. The timing of entry into effect of the modifications is linked to the completion of the ratification procedures in the jurisdictions that are parties to the covered tax treaty.
The key features of the MLI include:
- The Convention is opened for signing for any country;
- The measures included in the Convention are against hybrid mismatch arrangements and treaty abuse;
- The Permanent Establishment definition is strengthened;
- Mutual Agreement procedures are made more effective, including the procedure for mutual agreement arbitration.
The Convention allows, though, flexibility with respect to ways of meeting the minimum standards provided by the B.E.P.S., regarding the treaty abuse and dispute resolution. The MLI modifies tax treaties that are “Covered Tax Agreements” (A Covered Tax Agreement is an agreement for the avoidance of double taxation that is in force between Parties to the MLI and for which both Parties have made a notification that they wish to modify the agreement by using the MLI).
The MLI is a flexible instrument which will modify tax treaties according to a jurisdiction`s policy preferences with respect to the implementation of the tax-treaty related BEPS measures.
The Signatories of the Convention will inform the O.E.C.D. of the completion of their ratification procedures. As the Depositary of the MLI, the O.E.C.D. will be tracking ratification procedures completed by the MLI Signatories and will make available to the public all relevant information on effects of the MLI provisions.
The flexibility provided by the MLI is intended to accommodate a variety of tax policies while still ensuring that the tax-treaty related B.E.P.S. measures are effectively implemented, reflecting also the circumstances that certain elements of the BEPS minimum standards on treaty abuse and dispute resolution developed through the B.E.P.S. Project may be implemented in different ways.
So, jurisdictions can choose amongst alternative provisions in certain MLI articles and can also choose to apply optional provisions or to reserve the right not to apply the provisions of the MLI.
The O.E.C.D. secretariat is developing tools and guidance on the MLI.
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