Multi Lateral Instrument (MLI)
History of the MLI
The Multi Lateral Instrument, in short MLI, is one of the results out of the BEP project (Base Erosion and Profit Shifting), which was introduced to prevent tax evasion. Outcome of the BEPS project was that the introduction – implementation of measures against tax evasion in the different tax treaties on short term is practically impossible. Such a bilateral tax treaty is the result of comprehensive (and time consuming) negotiations between the treaty partners.
Worldwide there are over 3.000 bilateral tax treaties. The Netherlands themselves have concluded 94 of such treaties. If all these treaties should be renegotiated one by one this would take years.
Because the allied countries have the intention to make big steps on a relatively short time a one by one renegotiation was considered not desirable. This led to the introduction of the Multi Lateral Instrument which as per today has been signed by 71 countries. The participating countries have the choice, for each of the treaties concluded by them, to put those under the scope of the MLI, which is called notification. The Netherlands have notified 82 of their 94 tax treaties. For instance the Double Tax Treaty with Belgium was not put under the scope of the MLI.
How does it work out
At the end the MLI will only be effective if both treaty partners notified the treaty and its designed in such a way it contains binding multilateral standards of international law which must be applied as both beside as well as in addition to existing treaties.
The MLI interprets instead of implements different tax treaty texts. The consequences of the MLI, at the end, depend upon the (mis)matches between the two Treaty Partners involved.
An important absentee in signing the MLI are the United States. They didn’t sign the MLI yet and it doesn’t look like they will do so in the near future.
Basically the Netherlands accept all material determinations with only some small reservations, of which the Saving Clause is probably the most important one. Based upon that Saving Clause a country reserves its right to tax its residents according to its national tax laws.
It seems the participating countries especially use the instrument to apply the minimum standards in the treaties which they notified. Most eye catching example is the Principle Purpose Test which is designed to prevent treaty abuse.
The MLI will enter into force on the first day after a 3 month period starting when the 5th country formally ratified and approved the instrument.
For tax advisory issues the MLI means an extra dimension to keep in mind. Besides the current bilateral tax treaties the MLI and its possible outcome should be checked before a proper advice can be provided. In this not only the choices and reservations made by the Netherlands should be taken into account, but also those made by their treaty partner.
We will keep you updated on this website. For questions please contact our advisors.