Initial analysis of OECD discussion draft: Development of multilateral instrument

Development of multilateral instrument

The Organisation for Economic Cooperation and Development (OECD) on 31 May 2016, released a discussion draft on BEPS Action 15: “Development of a multilateral instrument to implement the tax treaty-related BEPS measures.” The discussion draft requests comments on technical issues related to the development of the multilateral instrument, which is anticipated to be finalized and open for signature by 31 December 2016.

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In the discussion draft, the OECD: (1) summarizes the provisions that are expected to be included in the multilateral instrument; and (2) describes and requests comments on technical issues arising from its development, including issues to be considered in the context of the optional provision on mandatory arbitration. 

Summary of provisions expected to be included in the multilateral instrument

Action 2: Neutralizing the effects of hybrid mismatch arrangements

  • These provisions are intended to address the treaty entitlement of fiscally transparent entities and issues with the application of the exemption method to relieve double taxation (a so-called “switchover clause”).


Action 6: Preventing the granting of treaty benefits in inappropriate circumstances 

  • These provisions include the minimum standard on treaty abuse—namely a principal purposes test and a limitation on benefits provision.  
  • These provisions also include the introduction of a “saving clause” to make explicit that treaties do not restrict a State’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) dual-resident entities; and (4) treaty shopping using third-country permanent establishments.


Action 7: Preventing the artificial avoidance of PE status

  • These provisions include measures to address commissionnaire arrangements and similar strategies and modifications to the specific activity exemptions. The changes also include measures to address the splitting-up of contracts to abuse the exception in Article 5(3) of the OECD Model.


Action 14: Making dispute resolution mechanisms more effective

  • These measures include changes to facilitate access to and resolution of mutual agreement procedures (MAP), as well as paragraph 2 of Article 9 of the OECD Model (which requires transfer pricing adjustments in a Contracting State if the other Contracting State has made a transfer pricing adjustment in accordance with Article 9).
  • The discussion draft also indicates that an optional provision on mandatory binding arbitration will be included, noting that a number of countries declared their commitment to provide for mandatory binding MAP arbitration as a mechanism to guarantee that treaty-related disputes will be resolved within a specific time frame.

KPMG observation

In a 15 February 2016 letter, the United States Council for International Business (USCIB) expressed its support for the adoption of mandatory binding arbitration to Robert Stack, Deputy Assistant Secretary for International Affairs, U.S. Treasury Department, with a preference for a “short form” or “last best offer” format, indicating that this format reduces the length of time to decision, thereby minimizing uncertainty and cost of arbitration while at the same time protecting and encouraging business investment.

KPMG observation

The list of provisions to be included in the multilateral instrument is similar to the list that was provided in the final report on BEPS Action 15 in October 2015.  

Technical issues open for public commentary

The discussion draft makes clear that the OECD only seeks comments on technical issues regarding the development of the multilateral instrument and provides examples, including:

  • The relationship between the provisions of the multilateral instrument and the existing tax treaty network
  • Consistent application and interpretation of the multilateral provisions to diverse bilateral tax treaties 
  • The approach to be taken in developing the optional provision on mandatory binding MAP arbitration, taking into account that it would need to serve the needs of the countries that have already committed to implement mandatory binding arbitration, as well as countries that are considering committing in the future 

KPMG observation

The types of technical issues identified in the discussion draft are fundamental issues that likely were identified previously and about which substantial discussions probably have taken place.  


For more information contact a KPMG tax professional:

Stephanie Robinson | +1 (202) 533 4049 |

Mari White | +1 (617) 988 5453 |

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