Tax treaty changes with MLI

It is likely that over the coming years a large number of tax treaties will be changed. The changes will come as a result of the multilateral instrument (hereinafter referred to as MLI) developed by OESO (Organisation for Economic Cooperation and Development).

The OESO have proposed changes to address profit shifting between affiliated companies and base erosion. The OESO wants one part of these measures to be included in tax treaties. Changing treaties takes a lot of time. MLI means that treaties can be changed efficiently and flexibly. MLI formulates the conditions to combat moving profits around and base erosion. For example the conditions include:

  • a general misuse measure
  • hybrid mismatches
  • artificial avoidance of permanent establishment
  • efficient regulations on disputes

With respect to the general misuse measure, an assessment must be made to see whether treaty benefits form the most significant factor for choosing a specific structure or transaction.  If this is so, and taking account of all the facts and circumstances of the case in question, then the envisioned treaty benefits will be refused.

Some of the conditions, such as artificial avoidance of permanent establishment, include a range of variations from which countries can make a choice.

It is expected that around 90 participating countries will have to say which tax treaties will be put under MLI (notifying the OESO) and also which conditions they have selected. The ones selected then have to be ratified by the parliaments of the various countries. Where two countries share a tax treaty, both must notify the treaty, both must make the same choice(s) and both must ratify the MLI and then the shared tax treaty will be adjusted accordingly.

The Netherlands has notified 84 tax treaties and will ratify MLI and the choices they have made by 2018. It is expected that many tax treaties will be changed over the coming years.