The BEPS Multilateral Instrument – symphony or cacophony?

Today was the latest Public Consultation as part of the OECD BEPS process. This particular consultation focused on the BEPS Action 15, the creation of a multilateral instrument to amend the numerous double tax treaties between countries, to reflect the key proposals of the BEPS project.

The draft text of this instrument has not been published yet, and so the discussion today was more about principles.

One key question came up, and is quite fundamental to how the MLI will operate. I have focused here on the discussion of that one point only.

Should the MLI directly amend perhaps 2,000 bilateral treaties, or sit as a multilateral overlay to adopting tax treaties in perpetuity?

This question was first raised today by Philip Baker QC on behalf of the “International Tax Group”, an organization that represents a number of tax law experts around the globe.

Philip spoke in support of the written response submitted by the International Tax Group. This sets out two options for how the MLI might operate.

• The MLI would directly amend the wording of existing treaties, then “fall away”

• An alternative where the MLI continues in perpetuity, as a supplemental to existing treaties, which would be read in conjunction with “modified” treaties. This would bring an element of multilateralism into the world of bilateral conventions.

Jesse Eggert of the OECD Secretariat responded that the reality is somewhere between the two, as the MLI will continue to exist, as further countries may adopt later than the initial wave of adoption.

I’m not sure this is really the middle ground, as in relation to those bilateral treaties that have been “amended”, the MLI does drop away under the current proposal. The fact that it is still available for adoption by others is not what Philip is proposing.

Jesse also expressed concern as to whether an on-going MLI could cope with the complexity of pre-existing variations in treaty articles; the dividend article, for example. Again, I’m not sure I agree.

Mike Williams of HM Treasury and Chair of the Ad Hoc Group on this project said that an advantage of the instrument would be that it could sweep away quirky language and interpretation, although there will be some jurisdictions who are wedded to their quirky language. I think this is right, but there remains a real danger that this will be an aspiration not met by the BEPS project, and against which the success of the project will be measured.

On language, a further discussion was had about how the MLI might modify bilateral treaties in multiple authentic languages.

The MLI will be in two languages, English and French. Treaties are in over 40. There are limits in practical terms how many languages negotiations can cover. A proposed solution could be that the MLI is translated into other languages for adoption by countries, and that translation is made publicly available.

Again, the perpetual supplementary model for the MLI, proposed by Philip, might address this issue.

Clearly there is already significant momentum towards the first of the two options identified by the International Tax Group, and it seems unlikely that the second option will be adopted, however compelling.

However, it does serve to show the real challenge facing the OECD in coming up with a workable solution for the MLI, and the future challenges facing countries looking to adopt the MLI and amend multiple tax treaties.