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October 7, 2021
2021-6026

OECD: Conference of the Parties of the MLI issues two opinions with respect to MAP implementation and the entry into effect of arbitration rules

Executive summary

On 30 September 2021, the Organisation for Economic Co-operation and Development (OECD) published two opinions of the Conference of the Parties of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The opinions of the Conference of the Parties seek to address questions arising as to the interpretation or implementation of the MLI to ensure its proper interpretation and application.

The first opinion addresses the application of the MLI provisions on the Mutual Agreement Procedure (MAP) where questions were raised on the compatibility of existing treaty rules with those provisions. The second opinion addresses the application of the entry into effect of Part VI (Arbitration) and seeks to clarify when the provisions of Part VI will apply to existing cases in specific situations.

Detailed discussion

Background

The MLI was developed by an ad hoc group of approximately 100 jurisdictions participating in the OECD Base Erosion and Profit Shifting (BEPS) project. It was agreed in November 2016,and it has been open for signature by any interested jurisdictions since then.

To date, 96 jurisdictions have signed the MLI, and 67 jurisdictions have deposited their instruments of ratification, acceptance or approval of the MLI with the OECD. The provisions of the MLI entered into effect for the first time on 1 January 2019.

According to the text of the MLI, the Parties to the MLI may convene a Conference of the Parties to make any decisions or exercise any functions as may be required or appropriate under the provisions of the MLI. Any question arising as to the interpretation or implementation of the MLI may be addressed by a Conference of the Parties. A Conference of the Parties may also be convened to consider amendments proposed by Parties to the MLI.

In March 2021, the OECD announced that the Conference of the Parties of the MLI issued its first opinion regarding the entry into effect of the MLI with respect to taxes withheld at source in specific cases.2 Following, in May 2021, the OECD published another opinion of the Conference of the Parties to the MLI which sets out six principles for interpretation and implementation of the MLI.3

Opinion of the Conference of the Parties of the MLI

Implementation of the MAP

On 30 September 2021, the Conference of the Parties of the MLI issued its opinion to clarify the interpretation and application of Article 16 (MAP). The opinion was approved by the Parties of the MLI on 11 June 2021.

The question addressed is on the interpretation and application of the ‘’in the absence of’’ compatibility clauses in Article 16 of the MLI. Specifically, the opinion considers the situation in which a Covered Tax Agreement (CTA) includes some but not all of the components of the relevant compatibility clauses in Article 16 of the MLI or that provide for additional requirements not in line with BEPS Action 14 (dispute resolution).

A compatibility clause defines the relationship between a provision of the MLI and the relevant provisions of the CTA. The MLI has four different types of compatibility (namely, ‘’in place of,’’ ‘’applies to or modifies,’’ ‘’in absence of,’’ and ‘’in place of or in the absence of’’). Depending on the type of compatibility clause, the operation of the MLI may differ. In the case of ‘’in the absence of’’ compatibility clause, the provision of the MLI will apply only in cases where all Contracting Jurisdictions notify the absence of an existing provision of the CTA.

Article 16 of the MLI has four compatibility clauses using the expression ‘’in the absence of,’’ namely:

  • A provision requiring a competent authority to endeavor, if an objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting Jurisdiction, with a view to the avoidance of taxation which is not in accordance with the CTA.
  • A provision requiring any MAP agreement reached to be implemented notwithstanding any time limits in the domestic law of the Contracting Jurisdictions.
  • A provision requiring the competent authorities of the Contracting Jurisdictions to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the CTA.
  • A provision enabling the competent authorities to consult together for the elimination of double taxation in cases not provided for in the CTA.

The opinion concludes that the expression ‘’in the absence of’’ should be interpreted not only to cover the absence of a provision but also to include provisions that contain some but not all of the components of the relevant sentences in Article 16 of the MLI, or that contain additional requirements. For example, a CTA that contains an existing provision modelled after Article 25 of the OECD Model Tax Convention ([t]he competent authorities of the Contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention), but that does not include the word “interpretation” would be within the scope of the compatibility clause in Article 16 of the MLI and could apply to such provision provided the Contracting States notify the same provision.

According to the opinion, this interpretation of the MLI would allow Article 16 of the MLI to apply as broadly as possible, in particular to CTAs not aligned with BEPS Action 14 (dispute resolution). As a result, Article 16 of the MLI may apply to more CTAs.

It is important to note that this opinion brings closer the ‘’in the absence of’’ compatibility clause to the ‘’in place of or in the absence of’’ compatibility clause. However, there is salient difference that remains between these two clauses. The latter type of compatibility clause would apply even in the absence of a notification or in situations where there is a mismatch at the level of the notification (i.e., provision notified by a jurisdiction does not coincide with the notification made by the other Contracting Jurisdiction).

In light of this opinion, jurisdictions will need to assess whether their notifications with respect to Article 16 of the MLI are in line with the interpretation contained in this opinion. If not, it is up to the jurisdictions to update or add their notifications with respect to Article 16 of the MLI.

Application of the entry into force of Part VI (Arbitration)

On the same day as the opinion regarding the implementation of MAP, the Conference of the Parties of the MLI issued its opinion on the application of the entry into effect of Part VI (Arbitration) of the MLI. The opinion was approved by the Parties of the MLI on 11 June 2021.

The provisions of Part VI of the MLI provide a solution for cases that have not been resolved under a MAP by the competent authorities within a period of two (or three where applicable) years. Part VI only applies when the Parties of a CTA explicitly choose to apply it. Article 36 of the MLI provides the entry into effect rules for Part VI and includes the following:

  • Article 36(1)(b) of the MLI provides that the provisions of Part VI will take effect on the date when all Parties of a CTA have notified the Depositary that they have reached mutual agreement on the mode of application of Part VI pursuant to Article 19(10) of the MLI (a competent authority agreement), along with information regarding the date or dates on which the existing cases shall be considered to have been presented. Article 36(1)(b) of the MLI allows competent authorities to delay the eligibility of existing cases to Part VI and to spread out the dates on which such cases become eligible for arbitration, so all existing cases do not become eligible for arbitration on the same day.
  • Article 36(2) of the MLI provides that Parties may reserve the right for Part VI to apply to an existing case presented to the competent authority of any of the Parties prior to the later of the dates on which the Convention enters into force for each of the Parties only to the extent that the competent authorities of both Parties agree that it will apply to that specific case. This reservation is intended to narrow the scope of existing cases eligible for Part VI. In essence, where a Party has made this reservation, its existing stock of MAP cases would not be covered unless the competent authorities both agree that a particular existing case may be submitted to arbitration.

The question clarified by the Conference of the Parties is when would Part VI take effect with respect to those cases where only one jurisdiction has made the reservation in Article 36(2) of the MLI. The Conference of the Parties confirms that the rules on the entry into effect provided in Article 36(1)(b) of the MLI continue to apply to cases within the scope of the reservation in Article 36(2) of the MLI. Hence, when a Contracting Jurisdiction has made a reservation in Article 36(2) of the MLI and the competent authorities have agreed that Part VI applies to a specific existing case, the provisions of Part VI would enter into effect on the date on which both Contracting Jurisdictions have notified the MLI Depositary of their mutual agreement reached under Article 19(10) of the MLI.

The confirmation that Article 36(1)(b) of the MLI applies when a Party has made a reservation under Article 36(2) of the MLI would secure the conclusion of the competent authority agreement before the date on which unresolved issues are first eligible for arbitration. According to the opinion, this interpretation brings greater certainty and facilitates the smooth functioning of the mandatory binding arbitration process.

Implications

Given that Parties of the MLI may revisit their notifications with respect to Article 16 of the MLI in light of the opinion, taxpayers are advised to continue monitoring the communications of the Depositary of the MLI.

The opinion on the entry into effect of Part VI of the MLI brings more clarity on the interaction between Articles 36(1)(b) and 36(2) of the MLI. This could be relevant for taxpayers with cases in jurisdictions who have made this election (e.g., Austria, France, Ireland, Italy, Luxembourg, Singapore, Spain) prior to the date on which the MLI entered into force for the relevant CTA.

According to the OECD press release, as of 1 January 2021, the MLI has become effective for approximately 650 tax treaties with an additional 1,200 tax treaties to be modified once the MLI has been ratified by all signatories. As ratification of the MLI continues, additional questions may arise in the future with respect to other elements of the MLI and therefore monitoring developments in this area continues to be important.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Limited (New Zealand), Auckland

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United States), Global Tax Desk Network, New York

Ernst & Young LLP (United States), Washington, DC

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Endnotes

  1. See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016.
  2. See EY Global Tax Alert, OECD publishes Arbitration Profiles of 30 countries under the MLI and a clarification regarding entry into effect, dated 1 April 2021.
  3. See EY Global Tax Alert, OECD: Conference of the Parties of the MLI approve opinion for MLI interpretation and implementation, dated 26 May 2021.
 
 

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