Introduction to Multilateral Instrument (‘MLI’)

Prepared by Ganesh R

A Report says that Starbucks, Google, Facebook, and Amazon paid less than 1% of their revenue as corporate tax in UK during 2012. Have you ever wondered how these well-established companies were reporting less or no profits in their taxable territory? These MNCs had arranged their corporate structures to erode the tax base of a country (‘Base Erosion’) or artificially shift profits (‘Profit Shifting’) to no or low-tax locations where there is little or no real activity.

Tax Treaty and Avoidance of double taxation

A tax treaty is a bilateral agreement made by two countries to resolve issues involving double taxation of passive and active income of each of their respective citizens. When an individual or business invests in a foreign country, the issue of which country should tax the investor’s earnings may arise. The source country and the residence country may enter into a tax treaty to agree on which country should tax the investment income to prevent the same income from getting taxed twice.

The source country is the country that hosts the inward investment. The source country is also sometimes referred to as the capital-importing country. The residence country is the investor’s country of residence and referred to as the capital-exporting country.


Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules.

“Base erosion” refers to the practice of reducing the taxable base. An example is deducting large interest payments to lower the taxable profits. “Profit shifting” refers to the practice of shifting taxable profits from high-tax countries to low-tax countries. An example is the transfer of ownership of intellectual property and its income from the US (high-tax) to Bermuda (low-tax) / Mauritius etc.

To combat such artificial shifting of profits, the BEPS Project was launched in 2013 and Final report on 15 Action Plans was issued in 2015. BEPS Action plan need to be implemented by way of changes in domestic law and tax treaties. Traditionally, a change in tax treaties can be introduced by way of protocol after extensive bilateral discussions and renegotiations, which is time consuming.

To modify existing tax treaties in an efficient manner to implement BEPS measure,

Action Plan 15“Developing a Multilateral Instrument to Modify Bilateral Treaty” provide a innovative approach that enables jurisdictions to swiftly modify their bilateral tax treaties by introducing Multilateral Instrument (MLI).


The multilateral instrument is a treaty/ standard template, designed to help implement the recommended measures to avoid tax treaty abuse. Countries will be able to use MLI framework to implement some of the BEPS action plans relating to double tax treaties.

Abuse of tax treaties is an important source of BEPS. The MLI helps the fight against BEPS by implementing the tax treaty-related measures developed through the BEPS Project alongside existing bilateral tax treaties in a synchronised and efficient manner.

These measures help combat

(a)    treaty abuse,

(b)    improve dispute resolution,

(c)     prevent the artificial avoidance of permanent establishment status and

(d)    neutralize the effects of hybrid mismatch arrangements.

Important terms

Covered Tax Agreement (CTA)

An existing tax treaty shall be considered as CTA once the following conditions are satisfied by both the countries to the tax treaty:

  • Signed the MLI;
  • Ratified the MLI under their domestic procedures
  • Deposited the ratified copy (along with notifications and reservations) of MLI with OECD
  • Listed each other in its list of treaties which are to be modified by MLI and have submitted the list to OECD


means a country which has signed MLI but for which MLI is not yet in force


means a country which has signed the MLI and for which MLI is in force.

Minimum Standards

  • All countries to meet certain minimum standards (Action 6- Treaty Abuse; Action 14- Dispute Resolution)
  • No leeway to opt out of the minimum standards, except in limited cases


  • Flexibility to opt out of a provision if it is not a minimum standard
  • Either completely or for sub-set of CTAs (to preserve the existing provisions)
  • General : Qua each article and not qua each Country

Optional Provision

  • Option to choose among alternative provisions intended to address the same issue
  • Both the countries to choose the same option in order for it to apply

MLI Implications


Not automatically applicable – will apply only if both the countries notify their treaty as a CTA

Impact on existing treaty

Will not replace the existing treaty, but operate alongside it – supplement, compliment, modify its application

Will it freeze the treaty?

No – subsequent modification to the CTA possible

Changes to MLI positions

Subsequent changes / modifications to MLI positions possible – withdrawal from MLI also possible.



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