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BEPS 5 Years Later: Practitioners Give MLI’s Effectiveness Mixed Reviews

Posted on Oct. 5, 2020

Five years after the OECD presented the final measures for its base erosion and profit-shifting project, reactions to the multilateral instrument are mixed, with some practitioners giving it a lukewarm evaluation.

“I would say that the MLI could be regarded as a modest success in an extremely difficult process of international consensus building. And that process is made all the more difficult because it could encroach on the independent taxation authority that countries have historically exercised,” David R. Hardy, a partner with Osler, Hoskin & Harcourt LLP, told Tax Notes in an email. 

In October 2015 the OECD published a package of final reports from its BEPS project to combat abusive corporate tax avoidance. The 13 reports covered 15 action items, including the development of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the multilateral instrument).

The finalized MLI was adopted by the OECD in November 2016 and signed by 68 jurisdictions in June 2017. It aims to provide signatories with a quick way to implement the antiavoidance recommendations of the BEPS project by updating their bilateral tax treaties.

Action 6 of the BEPS project addresses treaty shopping, and the MLI provides jurisdictions with the tools to implement binding arbitration and to fight tax avoidance by multinational enterprises. According to the OECD, the group that worked on the MLI intended it to enable all signatories to meet the minimum treaty-related standards agreed on as part of the final BEPS package, including the minimum standard for the improvement of dispute resolution under action 14.

As of June 2019, the MLI had modified about 60 tax treaties, and that number has climbed to 180 since the beginning of 2020, according to a March 24 OECD report. Jessica Di Maria, adviser in the tax treaty unit of the OECD's Centre for Tax Policy and Administration, said the MLI is expected to be effective for more than 500 tax treaties by January 1, 2021. She said 1,200 more treaties will be modified by the MLI once it has been ratified by all the signatories.

The OECD has created a web page containing a list of the signatories as of September 29. The document is updated regularly.

“Outside the U.S., many countries did sign the MLI, but with differing reservations to opt out of one provision or another," Hardy said, adding that the MLI is "a worthwhile step in [a] process that will certainly take time.” 

Mary Bennett, a partner in Baker McKenzie's tax practice group, noted that because the United States chose not to join the MLI, U.S. taxpayers may not be too keen on the agreement’s impact.

For countries that did join, “the implementation of the BEPS treaty recommendations through the MLI has been fairly patchy,” aside from the agreed minimum standards, Bennett said. She said participation in the MLI will likely continue to grow, however, with countries' adoption of individual MLI provisions in their treaty networks.

Sol Picciotto, coordinator of the independent BEPS Monitoring Group, said that because the MLI is designed to allow signatories to pick and mix provisions, it has failed to simplify and standardize tax treaties. “The result is that instead of simplifying tax treaty networks, the MLI has added a new layer of complexity," he said. "The tax treaty network is now even more of a patchwork quilt. This benefits only the legions of international tax advisers who comb through treaties to find loopholes and arbitrage opportunities.” Picciotto suggested that governments and tax authorities use the MLI to implement the principal purpose test under BEPS action 6 to thwart treaty shopping.

In its March 24 report, the OECD said many countries are making good on commitments to use the MLI to implement action 6.

Francis Weyzig, tax program leader at the central planning bureau of the Netherlands' Bureau for Economic Policy Analysis, said the use of the MLI by non-OECD countries has been disappointing so far. “As a result, it did not generate a big bang, and some of its potential remains unused,” he said. Weyzig referred to developing countries that have treaties with the Netherlands — such as Egypt, Nigeria, and Pakistan — that signed the MLI years ago but have yet to ratify it. “Therefore, they do not benefit from the stronger antiabuse provisions and lower [permanent establishment] thresholds, despite the Dutch commitments,” he said.

Digital Economy Agreement Unlikely to Mimic MLI

On August 3 the Centre for Tax Policy and Administration and the OECD's Committee on Fiscal Affairs submitted a draft report to the inclusive framework on BEPS. According to the report, members of the inclusive framework considered using the MLI to implement pillar 1 (the revision of profit allocation and nexus rules) of the OECD's plan for updating global tax rules for the digital age, but agreed that the instrument would not be appropriate for that purpose.

"The MLI will be a source of inspiration in the sense that it was the first treaty of its kind,” Di Maria said, adding that it could be a point of reference for pillar 1. “We could look at the MLI, look at the experience, and see what could be improved or see what could be built on,” she said.

The MLI is not a clear template for the type of instrument needed to implement pillar 1, which would require the creation of "a truly multilateral convention," Bennett said. Unlike the MLI, which allows countries to tailor its provisions, a BEPS 2.0 multilateral convention would have to be standardized, she said.

Picciotto agreed. “I think the MLI is not a model for a possible future convention, except for being multilateral,” he said.

The MLI "was revolutionary . . . in the devising of a process which enabled multiple treaties to be updated simultaneously. This involved a huge effort from the OECD and a large number of countries. Whether they will be willing to put in the same effort to use the process again remains to be seen," said Heather Self, a partner at London-based Blick Rothenberg. "Personally, I am skeptical that it will be used for digital services tax matters; there is still a long way to go before the OECD’s proposals for pillar 1 and pillar 2 gain final approval.”

“If implementation of pillar 1 relies on a multilateral treaty, the U.S. would need to sign and ratify it, too. This would be a major step,” Weyzig said, adding that the United States has not signed or ratified several other OECD instruments, including the Multilateral Convention on Mutual Administrative Assistance and the Common Reporting Standard Multilateral Competent Authority Agreement.

U.S. involvement in the BEPS project has been unclear since Treasury Secretary Steven Mnuchin — in a June 12 letter to the finance ministers of France, Italy, Spain, and the United Kingdom — called for a delay in pillar 1 negotiations. While the United States has signaled its openness to an agreement on pillar 2 (global corporate minimum taxation), several countries are divided over whether the pillars should be decoupled.

“Such a treaty would need to be rolled out in time to enable a synchronized start of profit reallocation. It took five years for the MLI to be ratified by 50 jurisdictions; for digital economy taxation, that pace needs to be much quicker,” Weyzig said. He said that would be possible only if the application of a new multilateral treaty’s provisions is more straightforward and countries apply it to their entire tax treaty networks.

Di Maria said the OECD is focused on helping jurisdictions that need to ratify the MLI, working with countries that are about to sign it, and working on the synthesized texts of the relevant tax treaties, among other things. Perhaps with more resources, the OECD could carry out work to ensure that antiabuse measures are being implemented properly, she said. “It's work that we can think about in the future, when we will be maybe a bit less busy with digital,” she added.

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