What is the MLI?The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the Multilateral Instrument (the “MLI”) is a multilateral treaty that was developed by the Organisation for Economic Co-operation and Development (the “OECD”) as a part of its Base Erosion and Profit Shifting (BEPS) study. The measures in the MLI are aimed at preventing multinational companies from misusing tax treaties to inappropriately shift profits in an effort to reduce their overall tax burden. Some of the MLI measures consist of minimum standards which must be implemented, and other measures are optional.
Over 70 jurisdictions around the world signed their intent to implement certain key measures (i.e. the minimum standards and possibly a few optional provisions) from the MLI into their respective bilateral tax treaties. The one notable exception from the signatories was the United States, which believes its tax treaties contain sufficient safeguards to prevent taxpayers from taking advantage of treaty-shopping. Once a jurisdiction deposits its instrument of ratification with the OECD, the MLI acts as a supplement that sits on top of a jurisdiction’s bilateral tax treaty, with another jurisdiction that has also deposited its instrument of ratification with the OECD.
On August 29, 2019, Canada deposited its instrument of ratification with the OECD, which means that, at the time of writing, the MLI will modify its tax treaties currently with Australia, the United Kingdom, the Netherlands, Luxembourg, Israel, Ireland, India, Singapore, the United Arab Emirates and at least 14 other countries. These changes are effective January 1, 2020 in respect of withholding taxes and effective for taxation years beginning after May 31, 2020 for all other taxes. It will not impact Canada’s tax treaties with Germany and Switzerland as new tax treaty negotiations with these countries have already begun or are expected to commence shortly. It is important to note that for an optional provision to apply to a specific bilateral tax treaty, both Canada and the participating jurisdiction must have agreed to apply that particular optional provision in their ratification process.