News & Views

Introduction of the Multilateral Instrument


On 7 June 2017, the UK signed up to the OECD Multilateral Instrument (MI) designed to implement a raft of changes to tax treaties in response to recommendations coming out of the BEPS project. 

The purpose of the MI is to give immediate effect to changes arising from BEPS without the need for each country to bilaterally agree changes to each individual treaty. The aim is to implement BEPS related changes with reasonably quick effect and counter international cross border tax avoidance.  Leaving it to bilateral agreements to implement all the changes would take years. 

So, on 7 June the UK, along with 67 other countries, signed the MI. But what does this mean in practice and why is the task of interpreting and applying a tax treaty made more complicated? 

Upon signing, the UK were required to indicate which provisions of the MI they would adopt where options were permissible. The key changes are:-

  • Adoption of the Principal Purpose Test (PPT) – This looks to deny the benefit of a tax treaty where a structure/transaction is non-commercial and exists to secure the benefit of the treaty. Although several UK treaties already contain similar provisions, the PPT will apply to a wider range of the UK treaty network and means that existing structures/transactions may be at risk of losing treaty benefits. 

  • Adoption of the competent authority tie-breaker for corporate dual-residents – Where a company is resident in two countries under the domestic rules of those two countries, a tie-breaker in the treaty looks to resolve the issue. In a lot of existing cases, the matter would be resolved by the company reviewing the treaty and essentially self-assessing.

The change in position will result in the need in far more cases for the company to seek the tax authorities of the relevant countries to agree the country of residence. This could be a drawn out process and it is unclear how this will impact on dual residency cases where there was previously no competent authority agreement required. 

In terms of reviewing tax treaties going forward, we will need to consider both the relevant treaty and the MI. Where applicable, the relevant Article of the MI will replace the relevant Article/Provision in the existing treaty. However, it will be necessary to determine whether both sides to the treaty agreed to the same change on signing of the MI. If they did not, then the original Article/Provision remains in force.

As tax advisers, we need to consider whether the UK’s treaty partner was a signatory to the MI and what provisions of the MI the treaty partner adopted. Interpreting and applying a treaty is never easy but it is safe to say it has now got far more complicated. 

Although the purpose of the MI is honourable and aims to clamp down on international tax avoidance, it is clear that, in my opinion, there is going to be increased instances of treaty disputes between treaty partners. Corporates in particular will need to consider their existing group structure and transaction flows to determine whether the implementation of the MI will alter their existing tax position.


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