What is the Multilateral Instrument (the MLI)?
What is the MLI's Design and Function?
What is the MLI position of a contracting jurisdiction?
What the OECD Depositary is doing?
How does the MLI work on a covered tax agreement?
What is a covered tax agreement (CTA)?
What is the difference between a signatory and a party to the Convention?
When the Convention enters into force?
Date of entry in effect
Official Texts and Explanatory Statement - MLI
See more on
- MLI Contents and Structure [read]
- Special webpage on the MLI [read]
What is a Multilateral Convention (MLI)?
The MLI stands for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument). Basically the MLI is a global treaty override.
BEPS is a thorny problem for countries around the globe. Many BEPS strategies exploit the gaps and mismatches in the tax rules of different countries, including the abuse of bilateral tax treaties concluded between two countries. Therefore, addressing treaty abuse has been an important part of the BEPS project.
Its objects and purposes
The OECD/G20 initiated BEPS action plan makes recommendations that can only be implemented by putting through changes to the double tax treaties, including the following:
- Neutralizing the effects of hybrid mismatch arrangements that have a treaty aspect (Action 2);
- Preventing the granting of tax benefits in inappropriate circumstances (Action 6);
- Preventing the artificial avoidance of permanent establishment status (Action 7);
- Providing improved mechanisms for effective dispute resolution (Action 14).
The MLI, developed by the OECD and endorsed by the G20, offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation, without creating opportunity for double non-taxation or less-than-single taxation through tax evasion or avoidance.
Structure of the MLI
The MLI consists of the following parts:
- Part I - Scope and interpretation of terms (Articles 1 and 2);
- Part II - Hybrid mismatches (Articles 3 to 5);
- Part III - Treaty abuse (Articles 6 to 11);
- Part IV - Avoidance of permanent establishment status (Articles 12 to 15);
- Part V - Improving dispute resolution (Articles 16 and 17);
- Part VI - Arbitration (Articles 18 to 26);
- Part VII - Final provisions (Articles 27 to 39)
Design and Function of the Multilateral Convention
The Convention has been designed to strengthen existing tax treaties concluded among its parties without the need for burdensome and time-consuming bilateral renegotiations.
Treaty measures that are included in the Convention include those on hybrid mismatch arrangements, treaty abuse and permanent establishment. The Convention also strengthens provisions to resolve treaty disputes, including through mandatory binding arbitration, which has been taken up by 28 signatories as at 7 June 2017.
The OECD Depositary
The OECD is the depositary of the Convention and is supporting governments in the process of signature, ratification, and implementation.
What is the MLI position for a contracting jurisdiction?
The MLI position refers to the choices and options made by a Signatory or Party to the MLI and provided to the Depositary on the listed tax agreements and reservations and notifications of optional provision chosen, and existing treaty provisions.
Recognizing the differences in national economic interests and tax policies, the drafters include flexibility in the MLI so that evey contracting jurisdiction can make choices from the opt-in provisions, opt-out provisions (i.e. the reservations subject to the scope limitation under Article 28(1)) and alternative provisions.
At the time of signing the Convention, a signatory must provide the Secretary-General of the OECD (the depositary) with a provisional list of DTA that it would like to modify or amend using the MLI (the covered tax agreements, the CTA for short), and the provisional provisions of the MLI. The provisional list may be subject to change until it is confirmed upon the date of MLI ratification. That is, the date of deposit by the signatory to the Depositary of the ratification of instrument, acceptance, or approval.
A provision in the DTA that is defined under article 2(1)(a) of the MLI (i.e. the CTA), will be amended by an MLI provision only if both parties to the CTA have made the same selection and notified the Depositary pursuant to article 29(1), with respect to that provision in the MLI. Where the selection of the provisions in the MLI is matched between the parties to the CTA, the provision of the MLI shall modify the application of the CTA. Those selections are the MLI positions of the parties to the Convention.
How does the MLI work on the covered tax treaties?
The Convention operates to modify tax treaties between two or more Parties to the Convention. The MLI will not function in the same way as an amending protocol to a single existing tax treaty, which would directly amend or modify the texts of the tax treaty; instead, it will be applied alongside existing tax treaties, modifying their applications to order to implement the BEPS measures. [Paragraph 13 of the Explanatory Statement to the Convention, OECD]
See how contracting jurisdictions have adopted the MLI provisions in the application of their bilateral tax treaties. [here]
What is a covered tax agreement (a CTA)?
Article 2(1)(a) provides that a covered tax agreement refers to an agreement for the avoidance of double taxation with respect to taxes on income (whether or not other taxes are also covered),
(i) that is in force between two or more parties to the DTA, and/or jurisdictions which are parties to an agreement described above and for those international relations a Party is responsible ## ; and
(ii) with respect to which, each such party has, pursuant to article 29(1) of the Convention, made a notification to the OECD Depositary listing the agreement as well as any amendment or accompanying instruments thereto as an agreement that it wishes to be covered by the Convention.
What is difference between a Signatory and a Party to the Convention?
A state/jurisdiction becomes a Signatory after signing the Multilateral Convention. The Signatory becomes a party to the Convention after the Signatory deposits to the Secretary-General of the OECE (the depositary) the instrument of ratification, acceptance or approval.
How the MLI enters into force for a jurisdiciton?
Date of entry into force
Article 34(1) of the Convention provides that, the Convention entered into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification.
After signing the MLI on 7th June 2017, 5 jurisdictions, the Republic of Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017), and Poland (23 January 2018), and Slovenia (22 March 2018), deposited their instruments with the OECD. Consequently the Convention came into force on 1st July 2018. That is, the 1st day of the month following the expiration of a period of 3 calendar months beginning on 22 March 2018 on the date of deposit of instrument of ratification by Slovenia (the fifth state).
Article 34(2) of the Convention provides that for each Signatory ratifying, accepting, or approving this Convention after the deposit of the fifth instrument of ratification, acceptance or approval, the Convention shall enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by such Signatory of its instrument of ratification, acceptance or approval.
In June 2018, 4 more signatories, New Zealand, Serbia, Sweden, and the UK, deposited the instrument of ratification to the OECD depositary on 27th June, 5th June, 22nd June and 29th June respectively. The Convention should enter into force for these 4 contracting jurisdictions on the first day of the month after the expiration of a period of 3 calendar months beginning on the date of deposit of instrument of ratification on 1st Oct 2018.
When will the Convention take effect in a contracting jurisdiction?
Entry into effect
Article 35(1) of the Convention (the MLI) provides that the provisions of this Convention shall have effect in each Contracting Jurisdiction with respect to a Covered Tax Agreement:
a) with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement; and
b) with respect to all other taxes levied by that Contracting Jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months (or a shorter period, if all Contracting Jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which this Convention enters into force for each of the Contracting Jurisdictions to the Covered Tax Agreement.
(A) Examples showing asymmetrical application of Article 35(1)(a) and Article 35(2) with respect to withholding tax, and symmetrical application of Article 35(3) with respect to other taxes
(B) Examples Showing symmetrical application of Article 35(1)(a) with respect to withholding tax, & Article 35(1)(b) with respect to other taxes
(C) Examples showing symmetrical application of Article 35(1)(a) with respect to withholding tax, and asymmetrical application of Article 35(1)(b) and Article 35(3) with respect to other taxes
(D) examples showing symmetrical application of entry-into-effect provision under Article 35(2) with respect to withholding tax, and asymmetrical application of entry-into-effect provision under Article 35(1)(b) and Article 35(3) with respect to other taxes
- (A1) Malta-Israel CTA
- (B1) Japan-Singapore CTA
- (B2) Japan-United Kingdom CTA
- (C1) Malta-Singapore CTA
- (C2) Malta-United Kingdom CTA
- (D1) India-Israel CTA
## China represented Hong Kong to sign the MLI on 27th June 2017.
More on the MLI at this website [here]; at OECD website [here]
The Official Texts and Explanatory Statement - [the Multilateral Instrument, also known as the MLI]
The multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (the multilateral Instrument, the MLI), developed by the OECD and endorsed by the G20, offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation without creating the opportunity for double non-taxation.
Official texts of the MLI [read]
Explanatory Statement [read]
Legal notes on the functioning of the MLI under Public international law [read].