MLI impact on cross-border treaties | KPMG | UK

M&A Matters - MLI impact on cross-border treaties

MLI impact on cross-border treaties

The signing in June of the OECD’s Multilateral Instrument (MLI), by representatives from 68 countries and jurisdictions, is a major landmark for tax treaties worldwide. We explain what the MLI is – and its likely implications for multinational businesses.

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What is the MLI?

The Multilateral Instrument (MLI) is being introduced as part of the OECD’s base erosion and profit shifting (BEPS) project, in order to implement a number of tax treaty measures recommended by the BEPS. These relate to treaty abuse, permanent establishments, dispute resolution and hybrid mismatches.

The MLI is the output of the final BEPS workstream (Action 15) and will update an existing network of around 1,100 bilateral tax treaties.

It will put in place:

  • measures to prevent treaty abuse (BEPS Action 6);
  • changes to the definition of permanent establishment (PE) (BEPS Action 7);
  • neturalising the effects of hybrid mismatch arrangements (BEPS Action 2); and
  • mutual agreement procedures and mandatory binding arbitration (BEPS Action 14).

As part of the signing procedure, the OECD provided countries with templates to allow them to file a list of their agreements that are covered by the MLI. A document containing this information, with links to the official statement for each jurisdiction (in terms of covered tax agreements, and provisional options and reservations) has now been published by the OECD on their website, along with a matching database

The OECD does not plan to prepare consolidated texts of treaties (a document that combines the MLI components). They are expecting local governments to handle this on a domestic basis, if they choose to do so at all.

The changes in the MLI apply only if both parties to a double tax treaty have designated it as a ‘Covered Tax Agreement’ (CTA). Not all countries have designated all their treaties as CTAs, although it is likely that, once the MLI is ratified by each country, more agreements will be added. 

Parties to the MLI have the freedom to opt-out of certain parts of the instrument, and some such opt-outs have already been announced:

  • Minimum standard anti-treaty abuse rule: the MLI allows opt-out only where the CTA already has an equivalent anti-abuse rule. 
  • The anti-abuse principal purpose test (PPT) will be adopted by all current signatories, with some countries also intending to supplement the PPT with a limitation on benefits clause (either through the MLI itself, or through subsequent bilateral negotiation with treaty partners). 
  • The mandatory binding arbitration provision will be signed by 25 jurisdictions, with further signatories expected, once appropriate carve-outs are agreed. 
  • The various changes to the PE definition will each be adopted by between 35 and 65 countries. The provisions on anti-fragmentation and the specific activity exceptions will be more widely adopted than the provisions for dependent agent.

Key dates for the MLI

The MLI will enter into force once five countries have deposited instruments of ratification to effect implementation under their domestic legislation. The OECD currently believes that this threshold will be reached by 30 September 2017. At that point, the MLI will enter into force for treaties between those countries which both contracting states have designated as a CTA. 

However, the date the MLI enters into force is not the same as that from which it takes effect. If the threshold of five countries depositing instruments of ratification is reached in September 2017, the MLI changes relating to those CTAs apply, for withholding tax purposes, from 1 January 2018 (unless the contracting state in question opts for them to apply from the start of the next following taxable period). For all other purposes, changes will apply for taxable periods beginning on or after 1 July 2018 (unless the contracting states agree on an earlier date).

What will the MLI mean in practice?

Given the range of tax areas that the MLI covers – and the large number of signatories – the MLI represents a major change in the tax landscape for many companies. That’s especially true for those with cross border activity. At the very least, the changes to treaties thanks to the introduction of the MLI will alter the approach that companies need to take in assessing the availability of treaty relief. That, in turn, is likely to increase process and administration, especially in the early years of implementation. 

For those groups engaging in M&A activity, it will be critical that the impact of the MLI is included within the scope of due diligence reports, both in terms of potential tax liabilities and to obtain an understanding of the potential additional tax administrative burden. 

In addition to the administration aspects, the MLI may also impact the structure of financing for transactions, for example, in relation to the availability of treaty relief for financing costs. Post-acquisition, companies may also wish to review their legal, financing and operational structures in light of the MLI, to proactively manage the impact. 

How do you find out more?

For more information on the MLI, various KPMG resources are available to clients:

  • KPMG International published a Global Tax News Flash, which provides a more detailed explanation of the MLI. It includes a number of links to both OECD documents and the Tax News Flash alerts from local KPMG offices. 
  • In addition, a client webinar was held on 13 June 2017. A copy of the slides and the playback recording are available here. The webcast set out details of the MLI in overview, including the mechanics of operation, and then went on to explore the impact on a region by region basis. In Europe this included a specific focus on the UK, Ireland, the Netherlands, Germany and Switzerland. 
  • The OECD has released a tool which matches the MLI positions put forward by the different signatories. Alongside this, KPMG International is in the process of developing additional content for KPMG member firms to use in their conversations with clients; this will help multinationals to check the potential impact of the MLI on their fact pattern. 

The MLI is relevant to a number of areas of international tax. KPMG in the UK’s specialist teams covering corporate structure effectiveness, value chain management and dispute resolution are collaborating closely to provide a co-ordinated approach to assisting clients. 

MLI and your business

There is no doubt that the MLI will significantly change the tax operating landscape for multinationals. Whilst it inevitably introduces a number of administrative changes, groups may also consider where it might open up opportunities for streamlining business structures and proactively managing cross border transactions. 

If you have any questions about the MLI, including its potential impact on your business, please get in touch with your usual KPMG contact or:

Robin Walduck - Partner

Mark Hutton - Director

James Sia - Director

Sarah Beeraje - Senior Manager

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