October 7, 2021
OECD publishes two opinions of the Conference of the Parties of the MLI regarding MAP implementation and entry into effect of arbitration rules
On 30 September 2021, the Organisation for Economic Co-operation and Development (OECD) published two opinions of the Conference of the Parties of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The opinions of the Conference of the Parties seek to address questions arising as to the interpretation or implementation of the MLI to ensure its proper interpretation and application.
The first opinion addresses the application of the MLI provisions on the Mutual Agreement Procedure (MAP) where questions were raised on the compatibility of existing treaty rules with those provisions. The second opinion addresses the application of the entry into effect of Part VI (Arbitration) and seeks to clarify when the provisions of Part VI will apply to existing cases in specific situations.
The MLI was developed by an ad hoc group of approximately 100 jurisdictions participating in the OECD Base Erosion and Profit Shifting (BEPS) project. It was agreed in November 2016,1 and it has been open for signature by any interested jurisdictions since then.
To date, 96 jurisdictions have signed the MLI, and 67 jurisdictions have deposited their instruments of ratification, acceptance or approval of the MLI with the OECD. The provisions of the MLI entered into effect for the first time on 1 January 2019.
According to the text of the MLI, the Parties to the MLI may convene a Conference of the Parties to make any decisions or exercise any functions as may be required or appropriate under the provisions of the MLI. Any question arising as to the interpretation or implementation of the MLI may be addressed by a Conference of the Parties. A Conference of the Parties may also be convened to consider amendments proposed by Parties to the MLI.
In March 2021, the OECD announced that the Conference of the Parties of the MLI issued its first opinion regarding the entry into effect of the MLI with respect to taxes withheld at source in specific cases.2 Following, in May 2021, the OECD published another opinion of the Conference of the Parties to the MLI which sets out six principles for interpretation and implementation of the MLI.3
Opinion of the Conference of the Parties of the MLI
Implementation of the MAP
On 30 September 2021, the Conference of the Parties of the MLI issued its opinion to clarify the interpretation and application of Article 16 (MAP). The opinion was approved by the Parties of the MLI on 11 June 2021.
The question addressed is on the interpretation and application of the ‘’in the absence of’’ compatibility clauses in Article 16 of the MLI. Specifically, the opinion considers the situation in which a Covered Tax Agreement (CTA) includes some but not all of the components of the relevant compatibility clauses in Article 16 of the MLI or that provide for additional requirements not in line with BEPS Action 14 (dispute resolution).
A compatibility clause defines the relationship between a provision of the MLI and the relevant provisions of the CTA. The MLI has four different types of compatibility (namely, ‘’in place of,’’ ‘’applies to or modifies,’’ ‘’in absence of,’’ and ‘’in place of or in the absence of’’). Depending on the type of compatibility clause, the operation of the MLI may differ. In the case of ‘’in the absence of’’ compatibility clause, the provision of the MLI will apply only in cases where all Contracting Jurisdictions notify the absence of an existing provision of the CTA.
Article 16 of the MLI has four compatibility clauses using the expression ‘’in the absence of,’’ namely:
The opinion concludes that the expression ‘’in the absence of’’ should be interpreted not only to cover the absence of a provision but also to include provisions that contain some but not all of the components of the relevant sentences in Article 16 of the MLI, or that contain additional requirements. For example, a CTA that contains an existing provision modelled after Article 25 of the OECD Model Tax Convention ([t]he competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention), but that does not include the word “interpretation” would be within the scope of the compatibility clause in Article 16 of the MLI and could apply to such provision provided the Contracting States notify the same provision.
According to the opinion, this interpretation of the MLI would allow Article 16 of the MLI to apply as broadly as possible, in particular to CTAs not aligned with BEPS Action 14 (dispute resolution). As a result, Article 16 of the MLI may apply to more CTAs.
It is important to note that this opinion brings closer the ‘’in the absence of’’ compatibility clause to the ‘’in place of or in the absence of’’ compatibility clause. However, there is salient difference that remains between these two clauses. The latter type of compatibility clause would apply even in the absence of a notification or in situations where there is a mismatch at the level of the notification (i.e., provision notified by a jurisdiction does not coincide with the notification made by the other Contracting Jurisdiction).
In light of this opinion, jurisdictions will need to assess whether their notifications with respect to Article 16 of the MLI are in line with the interpretation contained in this opinion. If not, it is up to the jurisdictions to update or add their notifications with respect to Article 16 of the MLI.
Application of the entry into force of Part VI (Arbitration)
On the same day as the opinion regarding the implementation of MAP, the Conference of the Parties of the MLI issued its opinion on the application of the entry into effect of Part VI (Arbitration) of the MLI. The opinion was approved by the Parties of the MLI on 11 June 2021.
The provisions of Part VI of the MLI provide a solution for cases that have not been resolved under a MAP by the competent authorities within a period of two (or three where applicable) years. Part VI only applies when the Parties of a CTA explicitly choose to apply it. Article 36 of the MLI provides the entry into effect rules for Part VI and includes the following:
The question clarified by the Conference of the Parties is when would Part VI take effect with respect to those cases where only one jurisdiction has made the reservation in Article 36(2) of the MLI. The Conference of the Parties confirms that the rules on the entry into effect provided in Article 36(1)(b) of the MLI continue to apply to cases within the scope of the reservation in Article 36(2) of the MLI. Hence, when a Contracting Jurisdiction has made a reservation in Article 36(2) of the MLI and the competent authorities have agreed that Part VI applies to a specific existing case, the provisions of Part VI would enter into effect on the date on which both Contracting Jurisdictions have notified the MLI Depositary of their mutual agreement reached under Article 19(10) of the MLI.
The confirmation that Article 36(1)(b) of the MLI applies when a Party has made a reservation under Article 36(2) of the MLI would secure the conclusion of the competent authority agreement before the date on which unresolved issues are first eligible for arbitration. According to the opinion, this interpretation brings greater certainty and facilitates the smooth functioning of the mandatory binding arbitration process.
Given that Parties of the MLI may revisit their notifications with respect to Article 16 of the MLI in light of the opinion, taxpayers are advised to continue monitoring the communications of the Depositary of the MLI.
The opinion on the entry into effect of Part VI of the MLI brings more clarity on the interaction between Articles 36(1)(b) and 36(2) of the MLI. This could be relevant for taxpayers with cases in jurisdictions who have made this election (e.g., Austria, France, Ireland, Italy, Luxembourg, Singapore, Spain) prior to the date on which the MLI entered into force for the relevant CTA.
According to the OECD press release, as of 1 January 2021, the MLI has become effective for approximately 650 tax treaties with an additional 1,200 tax treaties to be modified once the MLI has been ratified by all signatories. As ratification of the MLI continues, additional questions may arise in the future with respect to other elements of the MLI and therefore monitoring developments in this area continues to be important.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Limited (New Zealand), Auckland
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States), Global Tax Desk Network, New York
Ernst & Young LLP (United States), Washington, DC