Multilateral treaty – what does it mean?

Australia along with over 60 other countries signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in Paris on 7 June 2017. While the text of the BEPS treaty, commonly known as the Multilateral Instrument or MLI, has been public since last November (see our earlier Tax Brief), we now have more insight into what it means as the detailed lists of treaties covered, reservations and notifications for signing countries have been published. These lists are not final – the binding lists only need to be provided on ratification of the treaty – but they are unlikely to change significantly.

So far as treaty coverage is concerned, Australia has notified 43 of its 44 comprehensive treaties. Of those 43 treaties, nine treaty partners did not sign the MLI (Kiribati, Malaysia, PNG, Philippines, Sri Lanka, Taipei, Thailand, US and Vietnam) and so their treaties with Australia will be unaffected by it. It was widely anticipated that the US would not sign, and the US has already indicated that its treaties contain extensive protections against BEPS such as the limitation on benefits provision, the saving clause and the fiscally transparent entity rule, so that signature of the MLI was unnecessary. That may not be the only reason for the US reluctance.

The only comprehensive treaty not nominated by Australia for the MLI is the 2015 Germany treaty which is thoroughly BEPSed anyway. It is understood that German constitutional rules about certainty of law require German language versions of all treaties as revised by BEPS to be produced as part of the German ratification process, and this may have led Germany (and some other European countries in similar positions) to reduce coverage, but there may be other reasons. For example, although Australia has nominated its treaty with Austria for coverage, Austria did not nominate Australia so that the Australia-Austria treaty will not be amended by the MLI. Other countries which signed the MLI but did not nominate their Australian treaties are Korea, Sweden and Switzerland. Korea and Sweden each nominated over 60 of their treaties while Switzerland only nominated 14 of its treaties for MLI coverage.

Which leaves 30 effectively covered Australian treaties as announced by the Minister for Revenue after the signing of the MLI. To find out how the treaties are affected it is then necessary to work through Australia’s reservations and notifications, together with similar information for the 29 of the other 30 countries which have lodged their information (Norway being the sole exception). These documents are available on the OECD website.

Generally it is only where there is a matching position between the two countries that the treaty will be affected by the MLI. The OECD is working through the development of a spreadsheet/program to simplify this process but as reservations etc will not be finalised until ratification, reliance on the current lists can only be indicative.

To understand the complexity of the problem, Australia has lodged 12 reservations and 19 notifications while the UK has lodged 7 and 17 respectively. The documents lodged by Australia’s treaty partners for the potentially affected treaties range from 20 to 70 pages (Australia’s being 35 pages long). The notifications in particular often contain long lists of provisions affected which need to be matched.

On a sample of two important provisions of the MLI, Article 12 on agency permanent establishments and Article 18 on electing into arbitration, none of Australia treaties will be changed by Article 12 as Australia has reserved entirely on the article, while 14 of the 29 treaties will potentially introduce arbitration into the treaty – “potentially” because there are further reservations and notifications on arbitration which may lead to the match under Article 18 not being fully effective. The countries involved are Belgium, Canada, Fiji, Finland, France, Ireland, Italy, Japan, Malta, Netherlands, New Zealand, Singapore, Spain and UK. Arbitration is only possible for New Zealand among these countries under existing treaties.

It is surprising in particular that Australia and 14 of its treaty partners to potentially affected treaties elected not to apply the agency PE changes, given the attention the issue received in the BEPS process, including the enactment of the MAAL in Australia. Perhaps that is why Australia has made its reservation – with the one sided MAAL in operation (for inbound avoided PEs only) we can have our cake and eat it too by not expanding outbound PEs under the MLI.

It is understood that Treasury wants to have the MLI before the Parliamentary Joint Standing Committee on Treaties in the second half of this year and a bill to give effect to the MLI introduced in the first half of next year. Treasury has previously indicated 2019 as the likely start date for the MLI in Australia.

For now clients will need to have regard to potential treaty changes under the MLI when putting cross border transactions and structures in place, and then to recheck when the MLI rubber hits the road sometime down the track.



Professor Richard Vann