On May 3, the Parties of the OECD Multilateral Convention (known as an MLI, or Multilateral Instrument) approved a written procedure for the application of measures relating to tax treaties to prevent base erosion and profit shifting (BEPS).
The principles have been agreed to deal with the problems that may arise on the interpretation and application of the Multilateral Convention, which serves as a basis for amending bilateral international treaties. The Multilateral Convention is concerned with moving from bilaterality to multilaterality in the negotiation and execution of double taxation conventions, establishing standardisation in the terms of the Conventions, and equal conditions between its Member States.
Like any international agreement, the basic principle for the provisions of the MLI is that it must be interpreted in good faith, in accordance with the ordinary meaning given to the terms of the treaty in context, and taking into account their object and purpose, which is “to apply the BEPS measures relating to tax treaties.”
These BEPS measures seek to address problems already identified as hybrid mismatches, treaty abuse, and permanent establishment status, as well as conflict resolution – helping different jurisdictions deal with excesses included in treaties, or ensure the elimination of double taxation within the international framework. These are measures which must either be added to the Tax Agreement or are intended to amend the provisions already existing in the Agreement.
In order to strengthen legal certainty in tax matters, the Convention will improve the provisions relating to the resolution of disputes arising from issues of treaty interpretation, including binding arbitration.
This Multilateral Instrument will be applied together with the existing tax treaties, modifying their application so these BEPS measures are implemented. However, to the extent that the MLI and the Agreement are incompatible, the provisions of the MLI shall prevail over the provisions of the Tax Agreements – following the legal principle of lex posterior derogat legi priori (“a later statute repeals an earlier”) – that where two rules are applicable to the same subject matter, the most recent rule shall prevail.
The MLI also aims to be respectful of the sovereign autonomy of contracting jurisdictions, leaving room for different positions and political preferences. It is accepted that the jurisdictions involved decide what measures and alternatives related to BEPS they want to implement in their bilateral treaties, using a system of reservations and notifications of choice of alternative and optional provisions (“MLI Positions”) which incorporate the limits of consent of each Party to modify its Agreements.
These principles aim to solve the regulatory gaps and legal vacuums that many tax treaties suffer, giving greater legal certainty to those investors who want to invest in countries with a Dual Taxation Treaty.
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