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Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) General MLI is an Organisation for Economic Co-operation and Development (OECD) document. MLI is not a document signed by two states. It is a convention signed by various countries providing guidance in the interpretation and implementation of the bilateral tax treaties. Unless introduced in the bilateral treaty the status is not more than an opinion, having no binding effect. In that sense MLI is not a legal document. The purpose of MLI is to provide guidance to various member countries especially and fundamentally with respect to tax treaties. A country who is a signatory to MLI undertakes that appropriate actions as laid down under the MLI will be undertaken between two jurisdictions with respect to bilateral treaty between two countries, which is a legal document, to ensure that there is no BEPS under the treaty mechanism. There is no obligation on the member country however it is highly recommended that international best practices as laid down in the MLI be adopted by all the jurisdictions. There is a methodology laid down in the MLI for the enforcement of those provisions. Pakistan signed MLI on June 7, 2017. SRO 405(I) 2021 dated April 1, 2021 is the official implementation of MLI provisions. It lays down wherever, and in which manner, a particular bilateral treaty will be implemented in relation to MLI convention. This SRO came into force on April 1, 2021 however actual implementation date is to be dealt through the manner laid down in MLI. In general the effective date lies in 2022.

It is our view that MLI is not an interpretation of the treaty in all cases. In some cases it represents a position different if MLI is not applicable. It is not fit for all situations. Each particular aspect has to be applied accordingly.

Purpose of MLI and BEPS

Treaties are made for the benefit of tax residence. However, there are many provisions where concessions have been provided. Over the time it has been observed that various treaty provisions have been abused in the manner stated below. The purpose of MLI is to stop that abuse. The objective of MLI and BEPS is explained in the preamble of MLI as under:

  1. Governments lose substantial corporate tax revenue because of aggressive international tax planning that has the effect of artificially shifting profits to locations where they are subject to non-taxation or reduced taxation;

  2. Profits are taxed where substantive economic activities generating the profits are carried out and where value is created;

  3. The need to ensure that existing agreements for the avoidance of double taxation on income are interpreted to eliminate double taxation with respect to the taxes covered by those agreements without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in those agreements for the indirect benefit of residents of third jurisdictions);

  4. There is a need for an effective mechanism to implement agreed changes in synchronized and efficient manner across the network of existing agreements for the avoidance of double taxation on income without the need to bilaterally renegotiate each such agreement;

Topics covered

Appropriate understanding of first two objectives fully explains the matter under discussion. These subjects are further classified as under:

  • Avoid aggressive tax planning;

  • Substance over form for location in a jurisdiction;

  • Cohesive interpretation of agreement; and

  • Ease in across the board changes.

In short, it can be stated that MLI has completely changed the manner in which fiscal world will operate now. There is going to be one law and one manner of interpretation. This is the objective for non-discriminative economic development.

Practical result

The practical result of MLI once fully implemented will be that there will be one synchronized document of treaty provisions around the world. In other words, effectively in an indirect manner there will be only one treaty.

It is accordingly stated that after this MLI no opinion or implementation will be made with respect to any bilateral treaty provisions without taking into account the MLI and the reservations of Pakistan if any.

Manner of implementation

MLI are not official document. In order to make these provisions implementable certain procedures would have to be followed. These procedures are briefly discussed in the following paragraphs.

Addition to the preamble of the bilateral agreements

The following preamble will have to be added to the bilateral treaty to give effect to the provisions of MLI:

“Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),”.

The sequence of implementation procedure of MLI is very simple as is as under:

  1. Article 27 – Signature and Ratification, Acceptance or Approval;

  2. Article 28 – Reservations;

  3. Article 29 – Notifications

  4. Article 30 – Subsequent Modifications of Covered Tax Agreements;

  5. Article 31 – Conference of the Parties;

  6. Article 32 – Interpretation and Implementation;

  7. Article 33 –Amendments;

  8. Article 34 – Entry into Force;

  9. Article 35 – Entry into Effect;

  10. Article 36 – Entry into Effect of Part VI

  11. Article 37 – Withdrawal;

  12. Article 38 – Relation with Protocols; and

  13. Article 39 – Depositary 1. The Secretary-General of the Organization for Economic Co-operation and Development shall be the Depositary of this Convention.

The aforesaid steps are the sequence of the process through which MLI convention and its provisions come in force.

Illustration of reservation

Reservation is a declaration by a contracting state that a particular provision will not be applicable with respect to any particular tax treaty or all the treaties.


Under the said SRO Pakistan has reserved the right not to apply Article 3 of MLI for all agreements entered by it. This Article relates to ‘Hybrid Mismatch’. What is Hybrid Mismatch is briefly described as under in Article 3 of MLI as under:

HYBRID MISMATCHES Article 3 - Transparent Entities 1. For the purposes of a Covered Tax Agreement, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting Jurisdiction shall be considered to be income of a resident of a Contracting Jurisdiction but only to the extent that the income is treated, for purposes of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction. For Example Roosevelt Hotel Inc. is a pass through entity in the US law.

  1. Provisions of a Covered Tax Agreement that require a Contracting Jurisdiction to exempt from income tax or provide a deduction or credit equal to the income tax paid with respect to income derived by a resident of that Contracting Jurisdiction which may be taxed in the other Contracting Jurisdiction according to the provisions of the Covered Tax Agreement shall not apply to the extent that such provisions allow taxation by that other Contracting Jurisdiction solely because the income is also income derived by a resident of that other Contracting Jurisdiction.

  2. With respect to Covered Tax Agreements for which one or more Parties has made the reservation described in subparagraph a) of paragraph 3 of Article 11 (Application of Tax Agreements to Restrict a Party’s Right to Tax its Own Residents), the following sentence will be added at the end of paragraph 1: “In no case shall the provisions of this paragraph be construed to affect a Contracting Jurisdiction’s right to tax the residents of that Contracting Jurisdiction.”

This is a very important concept as many jurisdictions provide special legislation for pass through entities. Pakistan’s corporate laws do not provide for the same therefore the reservation has been correctly made.

By making this reservation Pakistan has decided that provisions relating to Hybrid Mismatch will not apply to any of its bilateral treaty. In these notes the purpose is not to discuss the concept of Hybrid Mismatch. The purpose is to identify the conceptual framework for reservations.

Matters covered under MLI

MLI is an outcome of Base Erosion and Profit Shifting Treaty (BEPS). It does not cover subjects in bilateral treaty. The matters covered in MLI are listed below:

  • Hybrid Mismatches;

  • Treaty Abuse;

  • Avoidance of Permanent Establishment especially with reference to:

o Specific Activity;

o Splitting of Contracts;

o Person closely related;

  • Improving Dispute Resolution;

  • Arbitration; and

  • Manner of Implementation.

Whole MLI is attached as Annexure A however for the sake of clarity it is stated that if these chapters are read with the whole concept of purpose then a proper understanding can be developed.

(To be continued)

Copyright Business Recorder, 2021


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