Jose Bustos of EY answered the following questions for BEPS Global Currents on August 21, 2017 regarding the OECD BEPS Multilateral Instrument (MLI):
Q: The U.S. has decided not to sign the BEPS MLI for now. What impact may that have, if any, on U.S. tax treaties overall?
A: First, it is important to emphasize that jurisdictions are not obliged to use the MLI to implement their commitment to the minimum standards. Some countries may already have met their minimum standard commitments. Others may prefer bilateral negotiations to fulfill their commitments. Peer reviewing will ensure that the committed jurisdictions will meet their obligations.
As expected, the U.S. did not sign the MLI as the U.S. treaties already contain many of the provisions included in the MLI and the detailed Limitation of Benefits clause in combination with the domestic anti-conduit rule would meet the minimum standard.
In any case, we should be careful in assessing the impact of countries not signing the MLI or making reservations. This does not necessarily mean that Multinational Groups that are headquartered in those countries will not be affected by the MLI or the minimum standards, since these enterprises may have regional holding companies in other jurisdictions on which they rely to get certain treaty benefits. Besides that, all BEPS members need to meet the minimum standards, whether they use the MLI or not.
Q: The OECD says that the MLI will create more certainty and predictability for taxpayers. Do you agree?
A: The first complexity we need to face with the MLI is tracking the treaty provisions amended by the MLI. Then we have the issue of interpreting the new provisions amended or included through the MLI. In this respect, I think it is a positive development that countries will have to use the same language that is included in the MLI to amend their treaties, and that would clearly help the interpretation of the provisions going forward. In other words, having all countries relying on the common interpretation of these provisions coming from the BEPS reports and the OECD commentaries will also be a positive element.
But on the other side, some of these provisions, in particular the Principle Purpose Test provision, allow for an important degree of flexibility in its interpretation, and we will see significant divergence in interpretation that could lead to uncertainty and increased controversy.
Q: Will the PPT provisions in the MLI adopted by all signatories lead to additional tax disputes?
A: The fundamental issue that we have is that the plethora of domestic anti-abuse approaches has led to uncertainty and inconsistency in the application of tax treaties. In some cases, the domestic approach had led to legitimate arrangements being denied treaty benefits.
The hope is that a PPT will eventually bring more consistency in the application of treaties and some more certainty. However, we are already seeing significant divergence in interpretation. Therefore, the expectation is that while more certainty may happen eventually, until the interpretation becomes more settled through actual cases, uncertainty is likely to increase, and, as the OECD has indicated, controversy is likely to increase.
The guidance on how to interpret the PPT is very light. I therefore do expect differences in interpretation and controversy. I suspect this is also the reason why the minimum standard on Action 14 says that access to MAP should be provided if a country wants to deny treaty benefits based on a domestic or treaty anti-abuse provision.
In making the transition, it is of key importance to assess how tax structures relate to the commercial, economic and managerial reality of the MNE. The more alignment, the lower the tax risk. But even in cases of alignment, it is important to consciously document the tax policy and the alignment with the commercial and managerial reality to prevent and address disputes.
Q: The MLI will not directly amend the text of the Covered Tax Agreement, but instead will be applied alongside existing tax treaties, modifying their application. Do you think this approach complicates the interpretation of these treaties?
A: The first complexity we need to face with the MLI is tracking the treaty provisions amended by the MLI. Every jurisdiction is eligible to sign the MLI and all tax treaties are in principle eligible to be amended by the MLI. However, the jurisdiction signing the MLI needs to provide a list of the treaties it wants to be covered and state its position before each of the clauses of the MLI, indicating whether it opts to include a provision or not and whether it will use any of the reservations. And countries can also decide to apply the provision to just a set of treaties, but it does not give countries much opportunity to be selective in the implementation of the minimum standards.
So it seems to me that all this flexibility required will make it difficult to track the amendments to the treaties. This will potentially increase the complexity of interpreting modified treaties. Countries may develop guidance to help identify how the MLI modifies individual [treaties] and commentators proposed having consolidated versions of the amended treaties to help in tracking these developments. Importantly, the OECD will in any case maintain publicly available lists of the Covered Tax Agreements, any reservations made, as well as any notifications made.
Q: The purpose of the MLI is to swiftly implement the tax treaty-related BEPS measures. Do you believe that implementation will be “swift” as each treaty partner must ratify, accept or approve the MLI based on its domestic requirements?
A: The text indicates that the MLI will enter into force after 5 jurisdictions have signed it and have notified their ratification of the MLI. For a specific bilateral tax treaty, the measures will enter into effect after both parties to the treaty have notified the ratification of the MLI and a specified time has passed. The specified time differs for different provisions. For example, for provisions relating to withholding taxes, the entry into force date is the 1st of January after the last party has notified the ratification.
The impact on the treaty network will then depend on when countries actually sign the MLI, because they don’t have a specific deadline for this and it may vary significantly from country to country. But the short answer is that we expect most of the impact on the tax treaty network to be in 2019 and 2020. It is possible, though, that some tax treaties may be affected sometime in 2018.
If we look at the average time required to ratify bilateral treaties, I would not say that the MLI will improve the time required in the ratification process, but it does shorten the time usually spent in the “negotiation” process, since the provisions included in the MLI have been already agreed by the signatories.
Another clear improvement in terms of swift implementation comes with the number of treaties that will be amended. During the signing ceremony on June 7, 2017, 67 jurisdictions signed the MLI, covering 68 jurisdictions and it is it is expected that by the end of 2017, around 90 jurisdictions will have signed the MLI. According to the OECD, it is expected that at least 2,000 [treaties] will be amended in the next 2 or 3 years, and that is something that could have never been done without the MLI.
The views expressed are those of the author and do not necessarily represent the views of Ernst & Young LLP or any other member firm of the global Ernst & Young organization.