2017

MultilateralInstrumentLaura Gheorghiu, Nadia Rusak

2

Agenda

• History and policy objectives of the MLI

• MLI mechanics

• MLI content

• Concluding remarks

3

HISTORY AND POLICY

OBJECTIVES OF THE MLI

4

BEPS

• BEPS Project – concerted effort by G20 and OECD countries to

address international tax arbitrage and international double non-

taxation of MNE

• Started in February 2013

• First Action Plan released in July 2013

• Final Report issued in October 2015

• Areas covered: digital economy, hybrid mismatch arrangements,

CFC rules, interest deductibility, harmful tax competition, treaty

abuse, artificial avoidance of PE status, transfer pricing principles

and documentation, mandatory disclosure, dispute resolution.

5

BEPS FINAL REPORT RECOMMENDATIONS

Minimum Standards Commitment to implement. Combating treaty shopping;

implementing country-by-

country (CbC) reporting; fighting

harmful tax practices; and

improving dispute resolution.

Common Approaches Agreement on ” general

policy direction” .

Hybrid mismatch arrangements

and interest deductibility.

Best Practices Proposed when negotiators

fail to reach consensus.

Mandatory disclosure and CFC

legislation.

Reinforcing Existing

International Standards

Addressing loopholes in

current international

standards (e.g. OECD

Model Convention).

Revision of existing standards

relating to tax treaties and

transfer pricing.

6

MLI

• Action 15 of BEPS - Proposal to create a single instrument that

addresses treaty-related BEPS measures

• Objectives:

• Enforce the minimum standards and provide guidance on

common approaches/best practices (”optional standards”)

• Achieve a degree of convergence of international tax regimes

without the need to renegotiate bi-lateral tax treaties

7

MLI

• Is neither a treaty amending protocol nor a multilateral treaty

• Applies alongside existing treaties and modifies their application in

order to streamline the implementation of treaty-related BEPS

measures

• Options as to how to implement minimum standards

• Flexibility in relation to provisions that do not reflect minimum

standards

• No obligation for countries to sign MLI or opt-in to all measures

• If there is significant buy-in, could have important consequences on

the current tax treaty system

8

MLI Timeline

• October 5, 2015 – Final BEPS Report Released (MLI is Action 15)

• July 2016 – OECD request for input on the multilateral instrument

• November 24, 2016 – Text of MLI adopted

• December 31, 2016 – MLI open for signing

• June 2017 – High-level signing ceremony / countries will sign and

begin ratification process

9

MECHANICS

10

Signature and Ratification Process

• Entry into force of the MLI in a country (earliest in 2018):

• Five countries must sign and complete domestic legal requirements for

ratification

• Each must advise which provisions of its CTAs are affected by the change, or

express a reservation on the change (i.e., choosing not to adopt it vis-à-vis that

CTA)

• Each must give notice to depositary once ratification is completed

• MLI enters into force for the five countries three calendar months after the last

notice is given

• Entry into effect as between two signatories as follows:

• N/R WHT – on first day of calendar year following entering into force in both

countries

• All other taxes – for taxable periods beginning six months after entering into

force in both countries

• Same delays for subsequent signatories

11

Example

June 2017

Countries A,

B, C, D and

Canada to

sign the MLI

August 2018

Upon

completion of

ratification

process, the

latest of 5

countries i.e.

Canada,

notifies the

depositary

(OECD)

November

2018

MLI to enter

into force

for countries

A, B, C, D

and Canada(3 months after

notice of

ratification)

MLI between country A

and Canada to enter

into effect

January 1,

2020

OTHER

TAXES(for tax period

that starts 6 months

after)

January 1,

2019

WTH

(1st day of next

calendar year)

12

Modifies Specific Article in a Treaty Where:

• Both Canada and the other country are signatories and MLI is in

effect vis-à-vis the treaty

• Both Canada and other country have identified treaty as a Covered

Tax Agreement (CTA)

• Neither country has opted out (reserved) of application of specific

article in relation to CTA

• Minimum standards must apply but opt out possible to extent CTA already

includes a similar provision (e.g. Canada-US Treaty LOB rules)

• Asymmetrical application of certain provisions

• Compatibility clauses – describe how existing provisions in CTA are superseded

by MLI or how new sections are inserted

• Can withdraw reservations over time

13

MLI CONTENT

14

MLI Article BEPS Action Goal of BEPS Actions

3 to 5 2 Neutralize the effects of hybrid mismatch

arrangements

(optional standard)

6 to 11 6 Prevent the granting of treaty benefits in

“inappropriate circumstances”

(minimum standard)

12 to 15 7 Prevent the artificial avoidance of PE

status

(optional standard)

16 to 17 14 Set out ways to make dispute resolution

mechanism more effective

(minimum standard)

15

Hybrid Mismatch

Arrangements (ACTION 2)

16

Hybrid Mismatch Arrangements

• Article 3 MLI: Fiscally transparent entities

• Article 4 MLI: Dual resident entities

• Article 5 MLI: Application of methods for elimination of double

taxation

17

Fiscally transparent entities

• ”Fiscally transparent entities” – entities treated by one or both states

as flow-through, i.e. income is taxable in hands of the entity

participants and not of the entity itself (e.g. partnership, ULC, LLC,

trust)

• Such entities are used by MNE to generate double non-taxation or

excessive double taxation relief (e.g., deduction/non-inclusion,

multiple deductions, multiple FTC)

18

Example

A

B

C

Royalty

payment

D

NI

Country I

Country II

Hybrid Entity

A

B

C

Interest

payment

D

D

Country I

Country II

Double Deduction

Interest

payment

19

Article 3 MLI

• Income derived by/through a fiscally transparent entity is treated as

income of a resident of a state only if it is treated as income of a

resident of that state for domestic tax purposes

• Clarification that a jurisdiction does not have to grant exemption,

deduction or credit for taxes paid in the other jurisdiction if the other

jurisdiction has the right to tax solely because income is also

income derived by its resident

• Optional provision – countries may opt-out of the whole or part of

Article 3 or identify specific scenarios to which the article may apply

20

Dual resident entities

• Treaties apply to “ resident” of a state per domestic laws

• Contain dual-resident tie-breaker rules

• Key tie-breaker rule for persons other than individuals : place of

effective management (PEM) (e.g. art. 4(3) OECD Model

Convention)

• Thus, an entity can shift tax residence to a low-tax jurisdiction by

relocating PEM

21

Article 4 MLI

• Competent authority tie-breaker -- expands criteria for determining

dual-resident entity’s treaty residence to include other factors in

addition to PEM (e.g. place of incorporation or constitution, and

similar criteria)

• Competent authorities need to reach agreement on residence,

otherwise entity not entitled to treaty benefits

22

Elimination of double taxation

• Treaties include an exemption method that allows the residence

jurisdiction to exempt prescribed foreign income from taxation

• This may result in double non-taxation if income is not taxed in the

source jurisdiction

23

Article 5 MLI

Options To Deal With The Exemption Method In Treaties

Option A

(switchover

clause)

No exem pti oni n Country A wher e Country Ba ppli es t he trea ty

to exem pt or reduce ra te of ta x. Country Asha ll off er a forei gn

tax credit on the basis of net income.

Option B No exem pti on i n Country A f or di vi dends t ha t a re ta x

deducti bl e i n Country B. Country A sha ll off er a forei gn ta x

credit on the basis of net income.

Option C If income is taxed under the treaty in Country B, Country A

shall offer a foreign tax credit on the basis of net income. If

income is exempt from tax in Country A, Country A may still

give a foreign tax credit for taxes paid in Country B.

24

Example

A

BTax-deductible

interestD

NI

Country I

Country II Hybrid

instrument

Exempted

dividend

25

Article 5 MLI

• Optional standard

• Asymmetrical application is possible (e.g. one jurisdiction chooses

Option A and the other Option B).

• Can reserve the right with respect of the entire Article 5 not to apply

to CTAs

• If not choosing Option C, can prevent the other jurisdiction from

applying Option C

26

Preventing Treaty Abuse

(Action 6)

27

Minimum Standards for Preventing Treaty Abuse

Article 6 Purpose of a CTA

Article 7 Prevention of treaty abuse

Optional Standards for Preventing Treaty Abuse

Article 8 Dividend transfer transactions

Article 9 Ca pi ta l gai ns from a li ena ti on of sha res or i nt erest s of enti ti es

deriving their value principally from immovable property

Article 10 Anti-abuse rule for PEs located in third jurisdictions

Article 11 Application of agreements to restrict a party’ s right to tax its own

residents (“ saving clause” )

28

Art. 6 MLI: Purpose of a CTA

• Include in preamble : “ purpose of tax treaty is to eliminate double

taxation without creating opportunities for non-taxation or reduced

taxation through avoidance and evasion (including treaty-shopping

arrangements aimed at obtaining ... [treaty benefits for] residents of

third jurisdictions)”

• Minimum standard but option not to include where CTAs already

contain similar preamble language

• Tax treaties interpreted in their context and in light of their object

and purpose – preamble will guide interpretation

-Treaty integrity rules –e.g. beneficial ownership etc. (can still abuse the rule)

29

Art. 7 MLI: Anti-Treaty Abuse Standards

• Anti-avoidance rules to prevent benefits being used in unintended

circumstances (treaty-shopping and other abusive arrangements)

• One of three provisions to curb treaty abuse

• Principal Purpose Test (PPT)

• PPT + Simplified LOB

• Detailed LOB supplemented by an anti-conduit rule

• Default option is Principal Purpose Test (PPT) (minimum standard)

• Limitation on benefits (LOB) is a supplemental and optional rule

• Based on conclusions of Finance’s domestic anti-treaty shopping

consultation, Canada expected to adopt PPT

30

Art. 7(1) MLI: PPT

• Denies treaty benefits when obtaining benefit is one of the principal

purposes of the arrangement, unless granting the benefit would be

in accordance with purpose of provision

• General anti-abuse rule (like GAAR)

• Default provision / minimum standard

• Interpretive difficulties (what is “ a principal purpose”, what is the

object/purpose of a treaty provision)

• Appeal to competent authority

31

Example

Canada-UK Treaty – Art. 10(8) Dividend, 11(9) Interest, 12(8) Royalty:

• The provisions of this Article shall not apply if it was the main

purpose or one of the main purposes of any person concerned with

the creation or assignment of [shares/ debt/ rights].... to take

advantage of this Article by means of that creation or assignment

• If Canada and UK sign MLI and do not reserve, Art. 7(1) will replace

existing language

32

Example

• A 22-month construction contract is split into two 11-month

contracts between the customer, the contractor and a corporation

related to the contractor.

• Under the agreement with the customer, the contractor and the

related party are jointly liable for the work

• Reasonable to conclude that:

• one of the principal purposes of the separate contract with the party related

to the contractor is to avoid the construction PE

• Granting the benefit of the treaty would be contrary to the object and

purpose of the construction PE

33

Art. 7(8)-(13) MLI: Simplified LOB + PPT

• Simplified LOB limits availability of treaty benefits to persons that

meet objective “ qualified person” test (genuine connection with

state)

• “Qualified person” : individual, government, publicly trade corporation

(recognized stock exchanges), 50% controlled by qualified persons, “active

conduct of a business”

• Appeal to competent authority

• Can apply:

• to both states, if both elect into it

• to neither state, if one state elects into simplified LOB + PPT and the other

elected PPT only

• unilaterally only, if only one state elects into simplified LOB + PPT and the other

elects PPT only but accepts the application of simplified LOB to the first state

34

Art. 7(8)-(13) MLI: Simplified LOB + PPT

• Interaction between the Simplified LOB and PPT

• First apply the Simplified LOB to test the person: to deny treaty benefits to

persons without sufficient nexus to a contracting jurisdiction based on objective

criteria (if doesn’t qualify, out of the treaty)

• Second apply PPT to test the transaction: to determine whether the

arrangement or transaction meets the PPT (i.e. if abusive,

arrangement/transaction will not receive treaty benefits)

• Concerns with respect to how a PPT or LOB rule will apply to

various collective investment vehicles (e.g. private equity funds)

• OECD Discussion draft: Treaty entitlement of non-CIV funds (Mar 2016)

• OECD Discussion draft: Treaty residence of pension funds (Feb 2016)

35

Art. 7(15) MLI: Detailed LOB + anti-conduit

• Opt-out to allow parties (e.g. US) to negotiate a bilateral agreement

for a detailed LOB

• Plus either a PPT or a specific anti-conduit mechanism

• Specific anti-conduit mechanism for financing arrangements may be present in

domestic law (e.g. B2B rules)

• Canada-US is only Canadian treaty with a detailed LOB rule

36

Art. 8 MLI: Dividend transfer transactions

• Optional standard

• Introduces a minimum 365-day shareholding period for a company

to be entitled to an exemption or reduced rate of dividend WHT

from subsidiary

• Other elements of CTA (i.e. ownership thresholds, taxes rates and

form of ownership) are not modified

• Can opt-out of Art. 8 entirely or only in respect of certain CTAs that

already contain a minimum holding period

37

Example

• Canada-Netherlands Tax Treaty, art. 10(2)(a):

• …dividends may also be taxed in the State of which the company paying the

dividends is a resident … but if the recipient is the beneficial owner of the

dividends the tax so charged shall not exceed 5% of the gross amount of the

dividends if the beneficial owner is a company … that owns at least 25% of the

capital of, or that controls directly and indirectly at least 10% of the voting power

in, the company paying the dividends…

• No current holding period

• Article 8 MLI would require that the 25%/10% ownership thresholds

be met for at least 365-day period preceding the dividend

38

Art. 9 MLI: Capital gains on shares or

interests in real estate holding entities

• Optional standard

• Anti-dilution provision for real estate holding entities

• Introduces a minimum 365-day period for the relevant value

threshold of real estate and expands the rule from shares to

interests in partnerships and trusts

• Can opt-out of all or portion of the provision

• Can opt-out of the entire article in favour of an existing language in

art. 13(1) of the OECD Model Treaty which applies where >50% of

the value of shares or comparable interests be derived from

immovable property during the 365 days preceding the sale

39

Example

• Canada-Barbados Tax Treaty, art. 14(3):

• Gains from the alienation of shares of a company, the property of which consists

principally of immovable property situated in a Contracting State, may be taxed

in that State.

• Gains from the alienation of an interest in a partnership or a trust, the property

of which consists principally of immovable property situated in a Contracting

State, may be taxed in that State

• No current period for maintaining the value threshold

• Article 9(1) MLI would require that shares/interests derive their

value principally from immovable property during the 365-day

period preceding the sale

• Can opt out with respect to partnerships/trusts because already

covered by the treaty

40

Art. 10 MLI: PE located in third jurisdictions

• Optional standard

• Triangulation provision for low-tax branches exempt from tax in the

head-office state

• No treaty benefits are available if income received from one state is

treated by the other state (“ head office state”) as attributable to PE

in the third state and the tax in the third state is less than 60% of tax

that would otherwise be payable in the head office state

• Exception for active trade or business PE

• Discretionary relief by competent authorities

41

Example

A

B

Country B

Country A

• Royalty/ Interest

• Treaty-reduced WHT

PE

Country C

(low-tax)

42

Art. 11 MLI: “Saving clause”

• Optional standard

• Preserves the right of a state to tax its own residents, except with

respect to certain treaty provisions that expressly allocate the taxing

right to the source state (e.g. business profits of PE, gains from real

property, government service, students/teachers, credit and

exemption methods, MAP, pensions etc.)

• Typical in U.S. treaties

43

Art. 11 MLI: “Saving clause”

• E.g. Canada-US Tax Treaty – Art. XXIX (2)

• Except as provided in paragraph 3, nothing in the Convention shall be construed

as preventing a Contracting State from taxing its residents … and, in the case of

the United States, its citizens … and companies electing to be treated as

domestic corporations, as if there were no convention between the United

States and Canada with respect to taxes on income and on capital…

44

Artificial Avoidance of PE

Status (action 7)

45

Action 7: Expanding the PE Definition

Where PE status is circumvented through:

a. Article 12 and 15 MLI: agency arrangements

b. Article 13 MLI: specific activities exemption (preparatory and auxiliary)

c. Article 14 MLI: fragmentation of activities (e.g., splitting up contracts)

•Not minimum standard - each party chooses measures to adopt

• Applies to CTA if both Parties adopt

• Possible for Parties to adopt only fragmentation of activities rule

•Profit attribution rules also to be clarified

46

Current Dependent Agent PE Definition

1. the agent has, and habitually exercises, the authority to conclude

contracts in the name (on behalf) of the non-resident in Canada

• “contracts” relating to the business proper of the enterprise

2. the agent is not an independent agent acting in the ordinary

course of his business

3. the agent does not engage solely in activities of a preparatory or

auxiliary character (e.g. purchase of goods, advertising)

See para. 49 of Knights of Columbus v. R. (2008 TCC 307)

47

Current Dependent Agent PE Definition

Treaty Dependent

Agent PE

Independent

Agent Exception

Auxiliary Services

Exception

OECD Model Ar. 5(5) Art. 5(6) Art. 5(4)

Canada – US Art. 5(5) Art. 5(7) Art. 5(6)

Canada – UK Art. 5(4) Art. 5(5) Art. 5(4)

only purchase of

goods

Canada – France Art. 5(5) Art. 5(6) Art. 5(4)

48

Example 1 - Commissionnaire Arrangement

From BEPS Final Project – Action 7 p. 15

• XCO and YCO are members of the same multinational group.

• XCO is resident of US and sells medical products.

• Until 20XX, these products are sold in Canada by YCO, a resident of Canada.

• In 20XX, the status of YCO is changed to that of commissionnaire.

• YCO transfers to XCO its fixed assets, its stock and its customer base and

agrees to sell in Canada the products of XCO in its own name, but for the

account of and at the risk of XCO.

• Since YCO does not own the products that it sells, it cannot be taxed on the

profits derived from such sales and is therefore only taxed on the remuneration

that it receives for its services (usually a commission).

49

Other Examples – Agency Arrangements

Example 2:

• YCO substantially negotiates contracts in Canada but contracts are for formally

concluded in the US because they are finalised/signed or authorised in the US

Example 3:

• YCO habitually exercises the authority to conclude contracts on behalf of XCO

but is an “independent agent” even though it is closely related to XCO

50

Dependent Agent PE

Current – Dependent Agent

The agent [1] has, and habitually exercises, authority to conclude

contracts [2] in the name (on behalf) of the non-resident in Canada

51

Dependent Agent PE (cont’d)

Art. 12(1) MLI – Dependent Agent

•[1i] habitually concludes contracts, our [1ii] habitually plays the

principal role leading to the conclusion of contracts that are

routinely concluded without material modification by the

enterprise, AND

•contracts are:

• [2i] a) in the name of the enterprise; or

• [2ii] b) for the transfer of the ownership of, or for the granting of the right to

use, property owned by that enterprise or that the enterprise has the right to

use; or

• [2iii] c) for the provision of services by that enterprise

52

Dependent Agent PE (cont’d)

OECD Model Commentary Article 5 para. 32.5:

•“concludes contracts” = a contract is considered concluded under the

relevant law governing contracts

• “plays the principal role leading to the conclusion of contracts” = a

contract is concluded as a direct result of that person’s actions

• acts as the sales force of the enterprise/ convinces the third party to enter into a

contract with the enterprise

• E.g. YES: solicits and receives (but does not formally finalise) orders which are

sent directly to a warehouse from which goods belonging to the enterprise are

delivered and where the enterprise routinely approves these transactions.

• E.g. NO: only promotes and markets goods or services of an enterprise (e.g.

pharma representatives actively promotes company’s drugs by encouraging

doctors to prescribe these drugs)

• E.g. NO: acts as distributor (because owns the property it is selling)

53

Independent Agent Exception

Current – Independent Agent Exception

The agent is an independent agent acting in the ordinary course of

its business (as agent).

•legally and economically independent from the principal

• Not subject to detailed instructions or to comprehensive control

• Bears the entrepreneurial risk

54

Independent Agent Exception (cont’d)

Art. 12(2) MLI – Independent Agent Exception

Paragraph 1 shall not apply where the person … carries on business

… as an independent agent and acts for the enterprise in the ordinary

course of that business. Where, however, a [1] person acts exclusively

or almost exclusively on behalf of one or more enterprises [2] to

which it is closely related, that person shall not be considered to

be an independent agent

OECD Model Commentary Article 5 para. 38.8 “ exclusively or almost

exclusively” means 90% or more

55

Definition – “Closely Related” (Art. 15 MLI)

• [De facto control by one or by a third person]: based on all the

relevant facts and circumstances, one has control of the other or

both are under the control of the same persons/enterprises.

• [De jure control by one of the other]: one possesses directly or

indirectly more than 50 per cent of the beneficial interest in the

other (or, more than 50% of the aggregate vote and value of the

company’s shares or of the beneficial equity interest), or

• [De jure control of both by a third person]: if another person

possesses directly or indirectly more than 50 per cent of the

beneficial interest (or more than 50 per cent of the aggregate vote

and value of the company’s shares or of the beneficial equity

interest) in the person and the enterprise

56

Specific Activity Exemption

• Specific activities are excluded from PE definition (both fixed place

of business PE and dependent agent PE) even if not of a

preparatory or auxiliary nature

• use of facilities to store, display or deliver goods of the non-resident

• maintenance of stock of goods for purposes of processing by another enterprise

or for storage, display or delivery

• maintenance of a fixed place of business solely for purchasing goods or

collecting information

• Maintenance of a fixed place of business solely for an activity of a preparatory

or auxiliary character

• E.g. e-commerce warehouse structure: N/R stores goods in owns in

Canadian warehouse. Goods are sold online and orders fulfilled

from the warehouse. Warehouse management and delivery is

through own employees.

57

Specific Activity Exemption (cont’d)

• OECD Model Commentary Article 5 para. 32.3:

• Fixed place of business solely for the purposes of preparatory or

auxiliary activities is deemed not to constitute a PE

• a person whose activities are restricted to such purposes should

not create a PE either

• E.g., where a person acts solely as a buying agent for an enterprise and, in

doing so, habitually concludes purchase contracts in the name of that

enterprise, even if that person is not independent of the enterprise

58

Specific Activity Exemption (cont’d)

• Art. 13(2) MLI: all specific activity exemptions are contingent on the

activity being of a preparatory or auxiliary character

• prior language only applied to fixed place of business exemptions

• Art. 13(3) MLI: Option not to include (position that activities are by

their nature strictly preparatory/auxiliary) and to adopt anti-

fragmentation rule instead

59

Fragmentation of activities

• Art. 13(4) MLI: Fragmentation of complementary functions that are

part of a cohesive business operation:

• same enterprise or a closely related enterprise has a PE at that location or

another in Canada OR

• combined activities of two enterprises are not of a preparatory or auxiliary

character

60

Specific Activity Exemption (cont’d)

Final Report – Action 7 Proposed Changes to Commentary para. 21.2

• “Preparatory character” : carried on in contemplation of the carrying

on of essential/significant part of the enterprise’s activity (e.g.

training employees)

• “Auxiliary character”: carried on to support without being part of

essential/significant part of activity (does not use significant

resources)

• Look at core function of the business

• Warehouse e.g. (para. 22 and 22.3):

• if sells online and fulfills from own warehouse (or one over which has control)

• exception does not apply since warehouse represents important asset and use

of employees and is an essential part of sale/distribution business

61

Splitting up of contracts

• Construction site PE/ Exploitation of Natural Resources PE: to

determine whether the 12-month period has been exceeded

• PPT could apply or

• Art. 14 MLI: aggregate connected activities of closely related

enterprises at the same site during different periods (each

exceeding 30 days)

62

Profit Attribution

• Attribution of profits: per Article 7(2) of Model Convention

• E.g. Agency PE results in the rights and obligations resulting from the contracts

being allocated to the agency PE

• not all profits from the performance of the contracts will be attributed

• only those that the PE would have derived if it were a separate and independent

enterprise performing the activities and dealing at arm’s length with the head

office and others in the corporate group

• Consider functions performed, assets used and risks assumed by PE

• activities performed by other enterprises and by the rest of the enterprise to

which the PE belongs must be properly remunerated

• Head office State must eliminate double taxation on profits attributed to PE (Art.

23A or B of Model Treaty)

• BEPS Action 8-10 : Revised Guidance of Profit Slips – second

revised discussion draft expected June 2017 (transactional profit

split method)

63

Dispute Resolution

Mechanisms (Action 14)

64

Minimum Standards for DISPUTE RESOLUTION

Article 16 Mutual Agreement Procedure (MAP)

Optional Standards for DISPUTE Resolution

Article 17 Corresponding Adjustments

Article 18-26 Arbitration

65

Art. 16 MLI: Mutual Agreement Procedure

• Where a person considers that actions of one or both states result

in taxation not in accordance with the treaty, the person may

present the case to competent authorities of either state within 3

years from the notification of the action

• Competent authorities shall work to resolve the case by mutual

agreement

• Any agreement shall be implemented regardless any time limits in

the domestic laws

• Can opt-out of MAP if there is an existing MAP clause in the

treaties

• Can opt-out if the existing time period for presenting the case is at

least 3 years

66

Art. 17 MLI: Corresponding Adjustments

• Best practice

• Allows unilateral adjustment to tax in transfer pricing disputes

• Where States A and B both tax profits of an MNE, and such profits

would have accrued to the enterprise in State A had the conditions

made between two enterprises were those of independent parties,

then State B shall make a corresponding adjustment to tax charged

on those profits

• Can opt-out if there is an existing clause in the treaties or if a state

agrees to make an adjustment in the absence of the clause or its

competent authority commits to resolve the case on the basis of

MAP

• Can opt-out if a similar clause will be added through bi-lateral

negotiations

67

Art. 18-26 MLI: Arbitration

• Option for mandatory binding arbitration

• Applies if competent authorities fail to reach an agreement pursuant

to MAP within 2 years

• However, can be submitted earlier than 2 years if competent

authorities agree

• Launched by the person that requested MAP

• Decision is binding with certain exceptions

• Decision is implemented through mutual agreement

• Detailed rules on appointment of arbitrators and arbitration process

• Arbitration clause only applies if both parties opt-in; however, can

formulate reservations to limit the scope of eligible cases

68

CONCLUDING REMARKS

69

Interpretation

• Only 2 official languages (English and French)

• No requirement for consolidated texts

• Basis of interpretation of MLI provisions are:

• General treaty interpretation rules: provisions of treaty interpreted in good

faith in accordance with the ordinary meaning to be given to the terms of

the treaty, in their context and in light of the treaty’s object and purpose

• Reliance on BEPS Final Report and OECD Model Tax Convention

Commentary

• MLI Commentary only assists with operation of MLI to modify CTAs

• Impact of modifications determined between parties based on MAP

provisions in CTA (MLI Art. 32)

• MLI Art. 30: subsequent modifications to CTA agreed to between

the Parties

• MLI Art 37: ability to withdraw

70

Current Status

• 2017 February OECD speed dating meeting to allow countries to

discuss implementation of MLI to bi-lateral treaties

• OECD expects 60-70 countries to sign on June 7, 2017

• Canada will sign and may be in force as early as 2018/2019

• US not excepted to sign (no treaties with tax heavens, has strong

LOB)

• EU: mandatory and binding arbitration directive (may lead them to

adopt MLI)

• UK: will sign the MLI in June. Will introduce the PPT to implement

minimal standard. Will not adopt the PE changes except for the

anti-fragmentation rule because it is a HQ country.