On March 27, 2017, Mexico’s Taxpayer Advocate Attorney General’s Office (Procuraduría de la Defensa del Contribuyente or PRODECON) announced its issuance of a Spanish translation of the OECD BEPS multilateral instrument (“BEPS MLI”) explanatory statement. While PRODECON did not say what Mexico’s position is on each BEPS MLI provision, it did say that the Spanish translation of the explanatory statement encourages Mexico’s study of the BEPS MLI measures.
The BEPS MLI is intended to update more than 2,000 worldwide tax treaties and modify them to include specific BEPS provisions, such as the minimum standards to counter treaty abuse (Action 6) and improve dispute resolution mechanisms (Action 14).
The first BEPS MLI signing is scheduled to take place in Paris on June 7, 2017.
BEPS MLI Background
Under BEPS Action 15, the OECD has analyzed the possibility of developing a BEPS MLI to allow countries to amend their tax treaties swiftly to implement the tax treaty-related BEPS recommendations, and concluded that such a document is not only feasible, but also desirable, and that negotiations for the instrument should happen quickly. As a result, the OECD Committee on Fiscal Affairs established a mandate to set up an ad hoc group for its development.
Work on development of the BEPS MLI to implement the tax treaty-related aspects of the BEPS project began in May 2015. Substantive work started at an inaugural meeting of the ad hoc focus group in November 2015. On November 24, 2016, the members of the ad hoc group concluded the negotiations on the BEPS MLI and corresponding Explanatory Statement.
The BEPS MLI has been open for signature as of December 31, 2016. It will require ratification, acceptance, or approval according to the domestic requirements of each jurisdiction. The BEPS MLI will apply in addition to a jurisdiction’s existing tax treaties and any amending protocols. It is anticipated that jurisdictions will produce consolidated versions of their treaties; however, they are not required to do so.
The BEPS MLI may modify tax treaties (also referred to in the Explanatory Statement as “Covered Tax Agreements”) between two or more parties to the agreement. It will modify a treaty’s application to implement BEPS measures, as opposed to an amending protocol, which would amend the text of the treaty directly. It is possible for jurisdictions to agree subsequently to different modifications to their tax treaties.
A uniform approach would be the ideal outcome. However, the OECD has recognized that not all provisions will be acceptable to, or even feasible in the context of, certain tax regimes. Flexibility is key, so several of the BEPS MLI provisions contemplate that jurisdictions may opt out of certain provisions or include one of various options. Parties must notify these individual outcomes to the “depositary” (defined as the Secretary-General of the OECD). When flexibility is permitted in relation to any particular provision, the general position is that each contracting jurisdiction to a relevant tax treaty (i.e., Covered Tax Agreement) must choose the same option. However, certain provisions envisage that contracting jurisdictions may choose different options.
The following provisions are implemented in the MLI:
- The provisions of the OECD Model Tax Convention, developed under Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements) to address fiscally transparent entities, and the measures to address issues with the application of the exemption method to relieve double taxation.
- The provisions developed under Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) including the minimum standard on treaty abuse (e.g., treaty shopping); introduction of a “saving clause” to make explicit that treaties do not restrict a state’s (i.e., country’s) right to tax its own residents; and the specific anti-abuse rules related to (1) certain dividend transfer transactions; (2) transactions involving immovable property holding companies; (3) situations of dual-resident entities; and (4) treaty shopping using third-country permanent establishments (PEs).
- The provisions developed under Action 7 (Preventing the Artificial Avoidance of PE Status) including (1) measures to address commissionnaire arrangements and similar strategies; (2) modifications to the specific activity exemptions under Article 5(4) of the OECD Model Tax Convention and the addition of an anti-fragmentation rule; and (3) measures to address the splitting-up of contracts in Article 5(3) of the OECD Model Tax Convention.
Measures included in the minimum standards and best practices produced under Action 14 (Making Dispute Resolution Mechanisms More Effective), including the changes to paragraphs 1 through 3 of Article 25 (Mutual Agreement Procedures) of the OECD Model Tax Convention, as well as the inclusion of paragraph 2 of Article 9 (Associated Enterprises) of the OECD Model Tax Convention.