The BEPS Multilateral Instrument: Treaty Matching, Anti-Abuse, PEs and Arbitration

The MLI changes treaties through matching choices

The BEPS Multilateral Instrument (MLI), done at Paris on 24 November 2016 in equally authentic English and French, changes existing tax treaties without renegotiating each one separately. Its seven parts address scope, hybrid mismatches, treaty abuse, permanent establishments, dispute resolution, arbitration and final procedures. This article covers all 39 articles of the 49-page instrument.

A treaty becomes a Covered Tax Agreement only if it is in force and each relevant party lists it, with its amendments or accompanying instruments, in its notification to the OECD depositary. A signatory for which the MLI is not yet in force is distinct from a party. Signature alone does not make every provision operative. Read the bilateral treaty, both parties’ final reservations and notifications, compatibility rules and entry-into-effect dates together. This general instrument does not establish which optional provisions Singapore or a particular partner has currently matched.

Replacement, supplementation and reservations

Each substantive article specifies whether it replaces an existing clause, applies in its absence, or overrides it only to the extent of incompatibility. Some provisions require both parties to notify the same existing clause; some options require matching elections; Article 5’s double-tax methods can apply asymmetrically to each party’s own residents.

Reservations can remove all or specified provisions for identified agreements. Only expressly permitted reservations are allowed, apart from the special arbitration-scope mechanism. A clause appearing in the MLI is therefore not proof that it has amended a given treaty. Conversely, no textual amendment to a published bilateral treaty is needed for a matched MLI provision to operate.

Transparent entities and dual-resident entities

Article 3 treats income through a wholly or partly fiscally transparent entity as income of a treaty resident only to the extent the resident jurisdiction treats it as that resident’s income. It also prevents a double-tax relief obligation based solely on the other jurisdiction considering the income to be its own resident’s income. Article-specific reservations can exclude all or identified existing transparent-entity provisions or the relief rule.

Article 4 sends a non-individual dual-residence case to competent-authority agreement, considering effective management, incorporation or formation and other factors. Without agreement, relief is generally unavailable except as the authorities agree; a permitted reservation can remove even that discretionary exception. The rule does not replace provisions specifically for dual-listed companies, and should not be substituted automatically for an individual residence tie-breaker.

Three alternatives to exemption-method mismatches

Article 5 permits Option A, B, C or none. Option A removes residence-state exemption where the other jurisdiction uses the treaty to exempt the income or capital or limit its tax rate, with capped credit where relevant. Option B removes dividend exemption where the other jurisdiction allows a deduction for that income, replacing it with a capped foreign-tax credit. Option C generally replaces the relevant exemption method with capped income or capital tax credits, while allowing exempt income to influence the remaining-income tax calculation.

Different choices can operate for each jurisdiction’s own residents. A non-electing party can reserve against the article, and a party not choosing C can reserve against the other side’s use of C. Notifications identify the clauses affected, so the menu does not authorise a taxpayer to select its preferred method.

Treaty purpose, principal purposes and discretionary relief

Article 6 adds a purpose of eliminating double taxation without creating non-taxation or reduced taxation through evasion or avoidance, including treaty shopping. An additional economic-cooperation preamble is optional and requires the relevant matching choices.

Article 7’s principal-purpose test (PPT) denies a benefit where it is reasonable to conclude that obtaining it was one principal purpose of the arrangement, unless granting it accords with the relevant provision’s object and purpose. Optional discretionary relief lets the authority grant benefits that would have arisen without the arrangement, with consultation before refusing the other jurisdiction’s resident. The PPT is not a test requiring tax to be the sole purpose, and its relief paragraph does not apply merely because the PPT itself applies.

Simplified limitation on benefits

The optional simplified LOB normally requires matching adoption, with consensual symmetric or asymmetric alternatives. It preserves specified dual-residence, corresponding-adjustment and MAP rights outside the ordinary qualified-person restriction. Qualified persons include individuals, governments and agencies, regularly traded principal-share-class entities, agreed nonprofits, regulated retirement arrangements and their investment vehicles, and entities at least 50% owned by the specified qualifying residents on at least half the days of the relevant twelve-month period.

Alternative routes cover active business income, equivalent-beneficiary ownership and discretionary relief. Active business excludes holding-company activity, group supervision, group finance and investment management unless the specified banking, insurance or securities-dealer business exception applies. A connected foreign activity must be substantial relative to the relevant complementary activity. Equivalent beneficiaries must own at least 75% of beneficial interests on at least half the days of a twelve-month period. They qualify by equivalent or better benefits; dividend comparisons assume the claimant’s same capital holding.

For this LOB, connected persons include at least 50% ownership or actual control. This is different from Article 15’s more-than-50% PE relationship test. Discretionary LOB relief requires evidence that obtaining treaty benefits was not a principal purpose of establishment, acquisition, maintenance or operations, with consultation before either grant or refusal.

Dividend holding periods and property-rich shares

Article 8 adds a 365-day ownership period including the dividend-payment day to reduced-rate or exempt corporate dividend holdings; direct ownership changes from mergers or divisive reorganisations are ignored in counting that period. Reservations can protect all or specified existing holding-period rules, and the notifications must match.

Article 9 can add a 365-day look-back before disposal for existing property-value thresholds and extend them to comparable partnership or trust interests. Its optional paragraph 4 instead provides a more-than-50% direct-or-indirect immovable-property value test at any time in those 365 days. Separate reservations and matching notifications control the period, interest extension and replacement option. The instrument does not itself impose the same capital-gain rule on every covered treaty.

Low-tax third-jurisdiction PEs and resident taxation

Article 10 targets income from the other treaty jurisdiction assigned to a third-jurisdiction PE and exempt in the residence jurisdiction. Benefits can be denied where third-jurisdiction tax is below 60% of the residence-jurisdiction tax that would apply if the PE were there. Active PE business can escape the rule, excluding own-account investment activity except ordinary banking, insurance or securities dealing. Discretionary relief is available on justified reasons after consultation, subject to matching and reservations.

Article 11 preserves a jurisdiction’s ability to tax its residents but lists exceptions for corresponding adjustments, specified government service, students and teachers, double-tax relief, non-discrimination, MAP, diplomatic functions, source-only pensions, annuities, alimony and other express source-only or resident-tax limitations. It is not a blanket permission to ignore every resident’s treaty protection.

Contract-conclusion roles and independent agents

Article 12 extends an agency PE to someone habitually concluding contracts or playing the principal role leading to contracts routinely completed without material modification. Covered contracts can be in the enterprise’s name, transfer or permit use of its property, or provide its services. An ordinary-course independent agent remains excepted, but exclusive or almost exclusive work for closely related enterprises negates that independence for those enterprises. Relevant existing agency and independent-agent clauses require matching notifications, and the article can be reserved out.

Activity exemptions and anti-fragmentation

Article 13 offers Option A, B or neither. A requires all listed exempt activities to be preparatory or auxiliary. B preserves specified categorical exemptions unless the original provision expressly imposed that condition, while imposing it on other activities and combinations. The same option must be matched for replacement.

The anti-fragmentation rule can remove an exemption where the enterprise or a closely related one operates at the same or another local place and a PE already exists or the combined activity is not preparatory or auxiliary, provided the functions complement a cohesive business operation. It has separate reservation and notification rules, so adopting an activity option and applying anti-fragmentation are distinct questions.

Contract splitting and the close-relationship test

Article 14 aggregates project periods solely to test the treaty’s project-PE time threshold. The first enterprise’s periods at the project exceed thirty days but remain below the treaty threshold; closely related enterprises’ connected activities there during different periods each exceed thirty days. Those periods are added. It does not replace every project threshold with thirty days, and natural-resource provisions can be separately reserved.

Article 15 defines close relationship by control facts and, in any event, more than 50% beneficial ownership or corporate aggregate vote and value/beneficial equity, including a common owner. The distinction between more than 50% here and at least 50% for the simplified LOB matters.

MAP access and corresponding adjustments

Article 16 generally permits presentation to either competent authority within three years of first notification, regardless of domestic remedies. Authorities endeavour to resolve justified cases, implement agreements despite domestic limits and address interpretation or unprovided-for double taxation. A reservation can preserve residence/nationality-state presentation with a bilateral notification or consultation process instead. Other reservations address existing time limits and alternative commitments on adjustment periods; a longer existing filing period is not automatically shortened to three years.

Article 17 provides an appropriate corresponding adjustment where the other jurisdiction taxes profit properly adjusted to arm’s length. Existing provisions, an undertaking to make adjustments or use MAP, and specified bilateral negotiation commitments can support reservations. This is not an automatic acceptance of an unsupported primary adjustment.

Arbitration is separately opted in

Part VI applies only where both jurisdictions opt in under Article 18 and relevant reservations and objections permit it. Article 19 normally allows written-request arbitration of unresolved issues after two years from the information-based start date, not simply two years after a taxpayer first sends a letter. A reservation can use three years, and authorities may agree a different period for a case before expiry and notify the applicant.

Pending court or administrative proceedings and agreed MAP suspensions pause the clock. Late provision of requested material information can extend it by the agreed delay. A reservation can bar previously court-decided issues and terminate arbitration if a court decides them before the panel’s decision.

How the arbitration start date is established

The initial authority acknowledges and sends the request to the other within two calendar months. Each authority has three calendar months after receipt to confirm sufficient information or request more. After additional information arrives, the requesting authority has three months to confirm receipt or missing items.

If no more information was requested, the start is the earlier of both confirmations and three months after notifying the other authority. If more was requested, it is the earlier of the latest requesting-authority confirmation and three months after both authorities received all requested information; a missing-information notice restarts the request process. Authorities must agree application procedures and minimum information before the first case becomes eligible.

Binding decisions, acceptance and panel appointments

Decisions are implemented through MAP and are final and binding subject to non-acceptance, a final court invalidity decision, or subsequent litigation of resolved issues. Non-acceptance includes failure within sixty days after notification to withdraw the resolved matters from court or administrative proceedings; it ends further authority consideration. Court invalidity can permit a new request unless the authorities agree otherwise.

The default panel has three international-tax experts. Each authority appoints one within sixty days; they appoint the chair within sixty days of the later appointment. The chair cannot be a national or resident of either jurisdiction. Independence extends to administrations, finance ministries, affected people and advisers. An eligible senior OECD tax-policy official supplies missed appointments.

Confidentiality and arbitration methods

Article 21 treats arbitrators and at most three staff per member as authorised recipients under treaty confidentiality rules; they must agree in writing before participating. Prospective arbitrator disclosure is limited to checking eligibility. Article 22 terminates both processes if the authorities settle or the applicant withdraws before the decision.

Article 23’s default final-offer method selects one authority’s proposed monetary or maximum-rate resolution for each issue or threshold question by majority, without reasons and without precedent. A reserved alternative is a reasoned legal decision under the treaty and domestic laws; normally no information unavailable to both authorities before the arbitration request is considered. Incompatible method choices require agreement before arbitration operates. An optional applicant/adviser non-disclosure agreement can terminate the case on a material breach, subject to its reservations.

Alternative settlement, costs and other arbitration

Article 24 can allow both authorities to replace a decision by a different resolution of all unresolved issues within three calendar months, only with the required mutual choices and any limitation to reasoned arbitration. Under Article 25, costs follow authority agreement; otherwise each bears its own and its appointed arbitrator’s costs, sharing the chair and other proceeding costs equally.

Article 26 prevents duplicate arbitration where a panel or similar body already exists under another mandatory-binding instrument. It preserves wider obligations and permits reservations for treaties already providing mandatory arbitration. A general opt-in therefore does not erase every existing arbitration regime.

Reservations and their later withdrawal

Articles 27–29 govern signature, ratification and formal choices. Signature opened on 31 December 2016 to states, the named Crown Dependencies and other unanimously authorised jurisdictions. Reservations normally operate reciprocally. Signature-stage choices need confirmation on deposit unless expressly definitive, and provisional lists are required if not made at signature. Specified agreement-specific reservations need lists and clause references and do not cover unlisted agreements.

Arbitration-scope reservations can be objected to within twelve calendar months after depositary notification or by the objector’s instrument deposit, whichever is later; an objection prevents all Part VI between those parties. A party can withdraw a reservation or replace it with a narrower one, not freely expand it later. Existing-party changes generally wait for the next 1 January after six months from communication for withholding events and relevant taxable periods; later entrants follow the specified latest-entry rule, subject to internal-procedure reservations.

Additional treaties, conferences and interpretation

Article 29 permits adding listed treaties with related reservations and notifications, and later notifications for substantive choices. Added agreements follow Article 35’s special dates; other additional notifications use the six-month/next-1-January framework for existing parties or the specified later-entry rule.

Article 30 preserves later bilateral amendments. Articles 31–33 provide party conferences, treaty-specific interpretation through the treaty’s MAP and MLI interpretation through a conference, and amendment proposals. A party conference request proceeds if supported by one-third of parties within six calendar months. An individual taxpayer cannot amend a notification or treaty by making an election under these state-level procedures.

Entry into force differs from tax effect

Article 34 starts the convention on the first day of the month after three calendar months from the fifth ratification/acceptance/approval deposit. Later signatories follow the same three-month calculation from their own deposit. Article 35 ordinarily starts withholding changes at the first day of the next calendar year beginning on or after the latest party entry-into-force date, and other taxes for taxable periods beginning after six calendar months from that date, unless the permitted shorter period or party-specific calendar/taxable-period choices apply.

MAP normally covers cases presented from the latest entry date regardless of the tax period but does not revive cases already ineligible under the old treaty. A later-listed treaty normally uses the next calendar year on or after thirty days from notification communication for withholding and a nine-month period for other taxes. Internal-procedure reservations can replace triggers with thirty days after the latest required completion notification and apply to all jurisdictions to that treaty. Calculate each tax and jurisdiction rather than assigning one universal MLI effective date.

Arbitration effect, withdrawal and depositary records

Article 36 has separate arbitration dates: cases presented from the later party entry date can qualify; earlier cases need the specified joint agreement and notifications or, under a reservation, individual-case consent. Added treaties, removed arbitration reservations or objections and later opt-ins have their own communication-based replacements, subject to internal-procedure reservations.

Article 37 allows withdrawal on depositary receipt but preserves MLI modifications where all treaty jurisdictions’ MLI entry into force preceded withdrawal. Articles 38–39 permit protocols only binding parties that join them and name the OECD Secretary-General as depositary. The depositary communicates signatures, instruments, reservations, notifications, amendments, withdrawals and other communications within one month and maintains public treaty, reservation and notification lists. Those records, alongside the bilateral original and this instrument, are the evidence needed to establish an actual matched modification.