Multilateral Instrument (MLI)
The Multilateral Instrument (MLI) treaty is the final outcome of OECD project against international tax evasion.
The MLI was introduced by OECD at the end of 2016, during a ceremonial meeting with more than 100 country delegations. The MLI intends to prevent landslide erosion and profit shifting. It is the proud final piece, the hard law, of the BEPS project of the OECD against international tax evasion practices. In a few weeks the parliamentary approval of the MLI is also completed in the Netherlands. The MLI will then enter into force for the Netherlands on 1 January 2020, and will have immediate effect without further transitional arrangements.
Impact on Tax Treaties
The MLI is a very special treaty, it intervenes in existing tax treaties, by amending their rules or adding new rules to them. As far as the Netherlands is concerned, the MLI applies to almost all its existing tax treaties, with the only major exception being the tax treaty with the United States, because that country itself does not want to sign the MLI. The MLI has a multilateral approach but at the same time there is a risk that the impact of the MLI will differ considerably per treaty and even per country – due to the preferences and reservations that the MLI allows, and divergent interpretations of rules. Critics of the MLI already predict numerous implementation problems.
Hardly any precedents in Dutch tax treaties
The MLI contains many measures that have hardly precedents in Dutch tax treaties. They take forms of tax planning that until now were considered reasonably safe and therefore were widely used. The most important example of this is the approach of structures with hybrid bodies and transactions, as in the case of the Netherlands certain limited partnerships, investment funds and trusts. Another important measure concerns so-called agent structures that circumvent the establishment of a taxable permanent establishment (p.e.) for companies. The eye-catcher of the MLI is a general anti-abuse regulation, the ‘PPT’ (Principle Purpose Test). The MLI leaves open how this regulation should work in practice, and what abuse exactly is, with all the uncertainty for practice.
But there are also measures in the MLI that affect the normal business operations of normal enterprises where tax planning is not paramount, in particular the strong expansion of the p.e. concept. There is already a risk, for example, for companies that only hold stocks or deliver goods abroad, or use a foreign commercial agent, or regularly carry out small construction or installation projects. The adoption of a p.e. often entails a lot of extra administrative burden, and lively discussions with both the foreign and the Dutch tax authorities about the size of the taxable profit that can be attributed to the p.e.. The impact of the MLI therefore extends across the full spectrum from large multinationals to SMEs and even companies that only occasionally operate abroad.
International tax disputes
It is generally expected that MLI will lead to an increase in disputes, between taxpayers and tax administrations, and also between countries themselves. It is therefore good that the MLI also provides for an improvement of the procedure in dispute resolution treaties (the mutual agreement, or MAP, procedure). Access to the procedure for taxpayers is facilitated, and mandatory and binding arbitration should ensure a timely resolution of the dispute.
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