The Multilateral Instrument – 2 – Structure and Implementation


Structure and Implementation of the MLI

The Organization for Economic Co-operation and Development (‘OECD’) together with the G20, a bloc of 20 developed and developing countries, jointly undertook a project to address tax leakage due to base erosion and shifting of benefits (‘BEP’). As discussed in a previous article, the result of the BEP Project was the identification of 15 Action Plans to be implemented by countries in their national tax laws and Double Taxation Avoidance Agreements (DTAA).

Action Plan 15 called for a Multilateral Instrument (‘MLI’) that would be used to enable countries to expedite the implementation of BEPS treaty measures. The following Action Plans required changes to the more than 3,000 existing bilateral DTAAs and the consent of the nations that are part of these DTAAs:

  • Action Plan 2: On Hybrid Mismatch
  • Action plan 6 – on preventing the misuse of treaties
  • Action Plan 7 – On the Avoidance of Permanent Establishment Status
  • Action plan 14: on how to make dispute resolution more effective

Changing each of the more than 3,000 existing DTAAs would be time consuming and subject to renegotiation. The MLI is a convention that seeks to modify all the DTAA of the signatory countries at once. It acts as a modifying instrument that supersedes the DTAA to the extent of a conflict of provisions in the DTAA and the MLI. The DTAAs must now be read in conjunction with the MLI.

Structure of the MLI

To draft the MLI, OECD and G20 countries formed an expert group in 2015. Participation was opened to members and non-members of OECD/G20 countries for further participation and implementation. The text of the MLI and its Explanatory Statement were completed in November 2016, and the documents were open for signature as of December 31, 2016. A formal signing ceremony was held in June 2017 in which 70 countries they signed the instrument in a single day.

The MLI comprised VII Parts and 39 Articles, as follows:

Part I – Scope and Interpretation of terms

  • Article 1: Scope of application of the Convention
  • Article 2: Interpretation of the terms

Part II – Hybrid Mismatches

  • Section 3: Transparent Entities
  • Item 4: Dual Resident Entities
  • Article 5: Application of Methods for the Elimination of Double Taxation

Part III – Abuse of the Treaty

  • Article 6: Purpose of a Covered Tax Agreement
  • Article 7: Prevention of abuse of the Treaty
  • Section 8: Dividend Transfer Transactions
  • Article 9: Capital Gains from Disposal of shares or participations in entities whose value is derived mainly from Real Estate
  • Article 10: Anti-Abuse Rule for Permanent Establishments located in Third Jurisdictions
  • Article 11: Application of Tax Agreements to restrict the right of a Party to tax its own residents

Part IV – Avoidance of Permanent Establishment Status

  • Article 12: Artificial Circumvention of Permanent Establishment Status Through Commissioner Agreements and Similar Strategies
  • Article 13: Artificial suspension of the condition of Permanent Establishment through Specific Activity Exemptions
  • Article 14: Fractionation of Contracts
  • Article 15: Definition of Person Closely Related to a Company

Part V – Improving Dispute Resolution

  • Section 16: Mutual Agreement Procedure
  • Section 17: Corresponding Settings

Part VI – Arbitration

  • Article 18: Option to apply Part VI
  • Section 19: Mandatory Binding Arbitration
  • Article 20: Appointment of Arbitrators
  • Article 21: Confidentiality of the Arbitration Procedure
  • Article 22: Resolution of a Case before the conclusion of the Arbitration
  • Article 23: Type of Arbitration process
  • Article 24: Agreement on a different Resolution
  • Article 25: Costs of the Arbitration Procedure
  • Section 26: Compatibility

Title VII – Final Provisions

  • Article 27: Signature and Ratification, Acceptance or Approval
  • Article 28: Reservations
  • Article 29: Notices
  • Article 30: Subsequent Modifications of the Covered Tax Agreements
  • Article 31: Conference of the Parties
  • Section 32: Interpretation and Implementation
  • Article 33: Modification
  • Article 34: Entry into force
  • Article 35: Entry into force
  • Article 36: Entry into Force of Part VI
  • Item 37: Withdrawal
  • Article 38: Relationship with the Protocols
  • Article 39: Depositary

Implementing the MLI

To implement the MLI in a particular jurisdiction, it must be signed, ratified, deposited with the Depositary, and then comes into force. The MLI has specific provisions (Article 35) to determine when the MLI comes into force with respect to “Covered Treaties”. Ratification is the process in which the government of a country obtains the approval of its legislative body to the terms of the treaty. Therefore, the government consents to be bound by the treaty.

Jurisdictions then submit their ratified instrument to the Depositary along with notifications and reservations about their positions on each Article of the treaty. The Depositary in this case is the Secretary General of the Organization for Economic Co-operation and Development (OECD). Each party to the Agreement may choose to apply the Agreement to only some of the DTAAs, or make amendments to the Agreements with respect to all or only a few DTAAs. Article 29 of the Convention lists the matters in respect of which notifications are required. These are the notifications that must be submitted at the time of signing the Agreement or at the time of deposit of the ratified instrument. Reservations are positions on an Article(s) that the party chooses to interpret differently and reserves the right to make a change at a later date. Article 28 of the Convention lists the matters on which a reservation may be formulated; no other reservations are permitted under this convention. Depositing the ratified instrument with the Depositary is equivalent to making an international announcement that Jurisdictions are bound by the Convention in accordance with its notifications and reservations.

The MLI then becomes effective “on the first day of the month following the expiration of 3 calendar months from the date of deposit of the instrument” with the Depositary.

You can find a list of countries that have agreed to be bound by the MLI, along with the date of signature of the Convention, the date of deposit of the ratified instrument and the date of entry into force in the OECD

To date, the United States of America has not signed the MLI. The main reason is that the US has a treaty policy that is consistent with BEPS MLI. This includes existing provisions on safeguard clauses, taxation of transparent entities, and limitation on benefits clauses. There are also concerns regarding the arbitration provisions in the MLI. While the US primarily agrees with these arbitration provisions, it believes that they are missing from the MLI. The position of the US is primarily revealed in its Model US treaty, the most recent version of which was updated in 2017. However, it is possible that the US will sign and then ratify the document in the future next.

Entry into force

After the MLI becomes effective for a Jurisdiction, each of the DTAAs must become effective for that Jurisdiction with the modifications set forth in the MLI. Article 35 of the Conventions determines the Entry into Force while Article 36 establishes the Entry into Force for Part VI, namely Arbitration. According to the Convention, the Effective Date has a different date for the tax withheld at source and for other taxes. For tax withheld under a bilateral DTAA, the effective date is the first day of the calendar year following the last effective date of the MLI for either party to the DTAA. In other words, if the MLI for country A comes into effect on September 1, 2020 while for country B it is on February 2, 2021, the provisions of the MLI will come into effect on January 1, 2022.

The parties may choose to substitute “taxable period” for “calendar year” and must notify the Depositary of this change. In this case, if the MLI for the country becomes effective on September 1, 2020 and Country A chooses a taxable period, for example, the fiscal year beginning on April 1 of each year, the effective date will be produces from April 1, 2021 in the context of India. This tends to create a mismatch since in the example above, in Country A the MLI provisions come into effect on April 1, 2021 while for Country B the date would be January 1, 2022. However, this mismatch is relevant only in the first year of enforcing the MLI.

For all other taxes, the MLI will be effective for all tax periods beginning six calendar months after the later of the Effective Dates. In the example above, that would be tax periods after August 2, 2021.


With a large number of countries that have signed the MLI but have not yet ratified it or deposited it with the Depositary, the applicability of the MLI provisions would continue to create confusion. In addition, it is now necessary to read and interpret the provisions of a DTAA together with each party’s notices and reservations to the DTAA as filed with the Depositary. This could also complicate the interpretation of the DTAA.

Disclaimer: This article is for information only and readers are advised to seek professional advice before acting on the information provided in this document.

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