The OECD recently released guidance on synthesized texts for the MLI. Countries are encouraged use the guidance when preparing texts that show how their MLI positions are incorporated into tax treaties.
To date, 15 jurisdictions have ratified the MLI. It will impact approximately 50 treaties in January of 2019. Going forward, thousands of treaties will be impacted as the rest of the 84 signatories ratify the MLI within their legislatures.
OECD’s BEPS Action Plan
The MLI is part of the OECD’s 15-point Action Plan on BEPS. It was developed through negotiations with over 100 countries. The U.S. has not signed the MLI, and does not intend to sign, but was involved in the negotiations.
The MLI is designed to prevent treaty shopping and other base erosion and profit shifting tax strategies. The MLI incorporates changes from four of the BEPS Actions:
- Action 2 – hybrid mismatches
- Action 6 – prevent treaty abuse
- Action 7 – preventing the artificial avoidance of PE status
- Action 14 – dispute resolution
MLI Prevents Renegotiation of Tax Treaties
The MLI is intended to enable countries to incorporate BEPS-related amendments into their tax treaties. Without the MLI, jurisdictions would need to renegotiate their bilateral treaties to include these amendments. This renegotiation process would take more than a decade to achieve. Instead, the MLI allows for the incorporation of BEPS-related amendments to happen relatively quickly.
Simplifying Tax Treaty Interpretation
Once a treaty is impacted by the MLI, interpreting that treaty becomes significantly more complicated. Each of the articles of that treaty, plus any in-force protocols, must be read in conjunction with each treaty partner’s MLI positions.
Because of this added complication, the OECD encouraged jurisdictions that have ratified the MLI to release synthesized texts. These texts show exactly how the MLI positions of each treaty partner are incorporated into each treaty.
Current MLI Synthesized Texts
Several jurisdictions have already started preparing synthesized texts on the basis of the OECD’s guidance, taking into account their own publication requirements and practices. The OECD’s guidance is intended to ensure that governments can prepare these texts in a consistent manner.
In September, Poland was the first jurisdiction to publish synthesized texts. Since then, the UK and Japan have also released synthesized texts. It is expected that more jurisdictions will follow the guidance and release these texts prior to January 2019.
By Joy Hail, J.D., L.L.M.