OECD: Principles for interpretation and implementation of MLI when incompatible rules in tax treaty

Guiding principles intended to address questions about the interpretation and implementation of the MLI

Guiding principles intended to address questions

The Organisation for Economic Cooperation and Development (OECD) released an opinion approved by the Conference of the Parties to the multilateral instrument (MLI)* containing a set of guiding principles intended to address questions about the interpretation and implementation of the MLI and to resolve situations when there are incompatible rules in an income tax treaty and the MLI.

*The “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” or MLI

The MLI—which has been signed by 95 jurisdictions around the world—implements the tax-treaty related measures developed under the OECD’s base erosion and profit shifting (BEPS) project by modifying existing bilateral income tax treaties. The MLI permits the parties to the MLI to form a “Conference of the Parties” to address questions arising as to the interpretation or implementation of the MLI.

The opinion [PDF 370 KB] approved in May 2021 by the Conference of the Parties sets out the following six guiding principles:

  • Guiding Principle 1: The MLI should be interpreted in light of its object and purpose, which is to implement the tax treaty-related BEPS measures.
  • Guiding Principle 2: Each of the provisions of the MLI should be interpreted and implemented in light of the policy objectives of the relevant tax treaty-related BEPS measure implemented via the MLI.
  • Guiding Principle 3: The MLI applies alongside existing tax treaties, modifying their application in order to implement the tax treaty-related BEPS measures. This follows the general legal principle that when two rules apply to the same subject matter, the later in time rule prevails (lex posterior derogat legi priori). To the extent that they are incompatible, the provisions of the MLI prevail over the provisions of the Covered Tax Agreements. An existing provision of a Covered Tax Agreement is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions.
  • Guiding Principle 4: The MLI should be interpreted in light of the consent given by each Contracting Jurisdiction to modify their Covered Tax Agreement, as expressed in their MLI Positions and with the consequences set out in the relevant provisions of the MLI.
  • Guiding Principle 5: Compatibility clauses set out whether, and to what extent, provisions in the MLI interact with existing provisions of Covered Tax Agreements. In particular, when a substantive MLI provision conflicts with specific existing provisions in Covered Tax Agreements covering the same subject matter, this conflict is addressed through a description in the compatibility clause of the existing provisions which the MLI is intended to modify, as well as the effect the MLI has on those existing provisions.
  • Guiding Principle 6: The notification clauses ensure clarity and transparency about the existing provisions of Covered Tax Agreements that are modified by the MLI. While the notifications sometimes trigger the application of the MLI, the extent to which the MLI modifies existing provisions of Covered Tax Agreements is always as provided in the compatibility clauses. 

KPMG observation

The guiding principles appear intended to ensure that all parties to the MLI share the same understanding of how the MLI will interact with existing tax treaties. The guiding principles and the accompanying explanation were primarily drawn from the Explanatory Statement that accompanied the MLI. While the OECD Secretariat had previously released a legal note [PDF 2.4 MB] explaining its view that similar principles would apply under ordinary rules for treaty interpretation under international law, approval by the Conference of the Parties indicates formally that the parties to the MLI agree that the guiding principles contained in the May 2021 opinion will control interpretation of the MLI.  

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