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  • Multilateral Instrument

    The Multilateral Instrument (MLI) is a multilateral treaty that enables jurisdictions to swiftly modify their bilateral tax treaties to implement measures designed to better address multinational tax avoidance and more effectively resolve tax disputes. The tax treaties which are covered by the MLI are called 'Covered Tax Agreements' (CTAs).

    These measures were developed as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project.

    Australia signed the MLI on 7 June 2017 and deposited its instrument of ratification with the OECD Depositary on 26 September 2018. The MLI will enter into force for Australia on 1 January 2019.

    The extent to which the MLI will modify Australia’s bilateral tax treaties will depend on the final adoption positions taken by each jurisdiction.

    Australia’s notification of its final adoption positions is available on the OECD website (PDF 1.44MB)External Link

    When the MLI takes effect in Australia

    The MLI was given the force of law in Australia by the Treasury Laws Amendment (OECD Multilateral Instrument) Act 2018, which received Royal Assent on 24 August 2018.

    The date of entry into effect for each of Australia’s CTAs depends on matching jurisdictions' actions, specifically when the MLI has been ratified for their domestic purposes and relevant notifications are lodged with the OECD.

    Subject to these processes, it is expected that the earliest the MLI can take effect in Australia is for:

    • withholding taxes, on income derived on or after 1 January 2019
    • all other taxes, for income years starting on or after 1 July 2019
    • dispute resolution, after the MLI enters into force for each of the parties.

    How the MLI works

    Jurisdictions that sign the MLI are required to identify which of their bilateral tax treaties they want the MLI to apply to and modify.

    Both treaty partners need to identify their bilateral treaty as a CTA in order for that treaty to be modified by the MLI. In the event that only one jurisdiction (or neither jurisdiction) identifies a bilateral treaty as a CTA, the provisions of that treaty will remain un-modified.

    The MLI incorporates flexibility that allows jurisdictions to tailor their adoption to fit their particular national circumstances and accommodate unique aspects of their treaty network.

    Each jurisdiction is required to notify the OECD Secretariat of its set of provisional choices (referred to as that jurisdiction's 'MLI position') at the time of signature (of the MLI), and confirm them at the time of ratification. Jurisdictions' MLI positions are available on the OECD website (PDF 73KB)External Link

    While some MLI articles are mandatory (minimum standards), most are optional. Jurisdictions can choose to adopt the minimum standards only, or they can choose to also adopt some, or all, of the optional articles. If there is a bilateral match, the MLI will modify, but not directly amend, nominated tax treaty clauses. Other unrelated parts of the treaties will remain unchanged.

    Main features of the MLI

    The main features of the MLI and Australia’s final adoption positions – as published on the Treasury websiteExternal Link – are set out below.

    On this page:

    Article 3 – Transparent entities (optional article)

    Treaty benefits will be granted for income derived through fiscally transparent entities, such as partnerships or trusts, but only if one of the two jurisdictions treats the income as income of one of its residents under its domestic law.

    These rules will not prevent either jurisdiction from taxing its own residents.

    Australia has adopted Article 3 but will preserve existing corresponding bilateral detailed rules where appropriate.

    Article 4 – Dual resident entities (optional article)

    Most treaties use an entity’s place of effective management as the key tiebreaker test to determine a dual resident’s jurisdiction of tax residence for treaty purposes.

    This test will be expanded to include other factors and authorise the two tax administrations to agree on a single jurisdiction of residence.

    Australia has adopted Article 4 but not the rule that would allow the two tax administrations to grant treaty benefits in the absence of such an agreement.

    Article 5 – Application of methods for elimination of double taxation (optional article)

    Three options available under this Article will ensure that jurisdictions relieve double taxation by crediting foreign tax against domestic tax rather than by exempting foreign income from domestic tax.

    Australia has not adopted:

    • Article 5 because all of its treaties apply the credit method in relieving double taxation for Australian residents
    • the provisions that would prevent other jurisdictions from applying their chosen positions under Article 5.

    Article 6 – Purpose of a covered tax agreement (mandatory article)

    A new treaty preamble will clarify that tax treaties are not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.

    Australia has adopted Article 6, including the optional text indicating a desire to further develop its economic relationships with other signatories and enhance cooperation in tax matters.

    Article 7 – Prevention of treaty abuse (mandatory article)

    New anti-abuse rules will enable tax administrations to deny treaty benefits in certain circumstances; the Principal Purpose Test (PPT) and the Simplified Limitation on Benefits Rule (S-LOB). The PPT is the default option which enables jurisdictions to satisfy the BEPS minimum standard. The S-LOB is a supplementary and optional rule.

    Australia has adopted the PPT in Article 7, including the discretion not to apply the PPT in certain circumstances. Australia has not adopted the S-LOB.

    Article 8 – Dividend transfer transactions (optional article)

    Shares will be required to be held for 365 days before any non-portfolio intercorporate dividends payable in respect of those shares become eligible for reduced tax rates under tax treaties.

    This holding period will be added to bilateral treaties that do not already include a minimum holding period and replace existing holding periods in treaties that do.

    Australia has adopted Article 8 without reservation.

    Article 9 – Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property (optional article)

    Jurisdictions will be able to tax capital gains derived by foreign residents from the disposal of shares or other interests in ‘land-rich’ entities (where the underlying property is located in that jurisdiction) if the entity was land-rich at any time during the 365 days preceding the disposal.

    Australia has adopted Article 9 but will preserve existing bilateral rules that apply to the disposal of comparable interests (non-share interests) in land-rich entities.

    Article 10 – Anti-abuse rule for permanent establishments situated in third jurisdictions (optional article)

    Treaty benefits will be denied where an entity that is a resident of one jurisdiction derives ‘passive’ income from the other jurisdiction through a permanent establishment located in a third jurisdiction, and that income is both exempt in the entity’s home jurisdiction and subject to reduced taxation in the third jurisdiction.

    Australia has not adopted Article 10.

    Article 11 – Application of tax agreements to restrict a Party’s right to tax its own residents (optional article)

    A tax treaty will not generally restrict a jurisdiction’s right to tax its own residents. This rule will replace existing bilateral rules that give effect to this principle, some of which have more limited application.

    Australia has adopted Article 11 without reservation.

    Article 12 – Artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies (optional article)

    Where an intermediary plays the principal role in concluding substantively finalised business contracts in a jurisdiction on behalf of a foreign enterprise, that arrangement will constitute a ‘permanent establishment’ of the foreign enterprise in that jurisdiction. Genuine independent agency arrangements will not be affected.

    Australia has not adopted Article 12. Australia will consider adopting these rules bilaterally, however, in future treaty negotiations to enable bilateral clarification of their application in practice.

    Pending this, the Multinational Anti-Avoidance Law will continue to safeguard Australian revenue from egregious tax avoidance arrangements that rely on a ‘book offshore’ model.

    Article 13 – Artificial avoidance of permanent establishment status through the specific activity exemptions (optional article)

    Most tax treaties include a list of exceptions to the definition of permanent establishment if a place of business is used solely for specifically listed activities such as warehousing or purchasing goods.

    Only genuine preparatory or auxiliary activities will be excluded from the definition of permanent establishment. In addition, related entities will be prevented from fragmenting their activities to qualify for this exclusion.

    Australia has adopted Article 13 but will preserve existing corresponding bilateral rules.

    Article 14 – Splitting-up of contracts (optional article)

    Most tax treaties include rules that deem building or construction projects that exceed a specified time period (for example 12 months) to constitute a permanent establishment.

    Related entities will be prevented from avoiding the application of the specified time period by splitting building or construction-related contracts into several parts.

    Australia has adopted Article 14 but will preserve existing bilateral rules that deem a permanent establishment to exist for offshore natural resource activities.

    Article 15 – Definition of a person closely related to an enterprise (optional article)

    A ‘person closely related to an enterprise’ will be defined for the purpose of establishing whether or not a permanent establishment exists under Articles 12, 13 and 14.

    Australia has adopted Article 15 without reservation.

    Article 16 – Mutual agreement procedure (mandatory article)

    New rules will ensure the consistent and proper implementation of tax treaties, including the resolution of disputes regarding their interpretation or application. This will provide taxpayers with a more effective tax treaty-based dispute resolution procedure.

    Australia has adopted Article 16 without reservation.

    Article 17 – Corresponding adjustments (mandatory article)

    Transfer pricing adjustments can result in double taxation when one jurisdiction makes an adjustment to an entity’s profits and the other jurisdiction does not make a compensating adjustment to the profits of the relevant related entity.

    A jurisdiction will be required to make a downward adjustment to the profits of a resident entity, as a result of an upward adjustment by the other jurisdiction to the profits of an associated entity which is a resident of that other jurisdiction (provided both jurisdictions agree that the upward adjustment is justified).

    Australia has adopted Article 17 but will preserve existing corresponding bilateral rules.

    Articles 18–26 – Arbitration (optional article)

    Taxpayers will be able to refer mutual agreement procedure disputes that remain unresolved after two years to independent and binding arbitration.

    Australia will adopt independent and binding arbitration subject to all the following conditions:

    • disputes which have been the subject of a decision by a court or administrative tribunal will not be eligible for arbitration, or will cause an existing arbitration process to terminate
    • breaches of confidentiality by taxpayers or their advisers will terminate the arbitration process
    • disputes involving the application of either of the following will be excluded from the scope of arbitration    
      • Part IVA of the Income Tax Assessment Act 1936, or
      • section 67 of the Fringe Benefits Tax Assessment Act 1986.

    Which bilateral treaties will the MLI affect?

    Based on other jurisdictions’ known adoption positions, the MLI is expected to modify (to varying degrees) 31 of Australia’s  bilateral tax treaties.

    These treaties are with the following jurisdictions: Argentina, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Fiji, Finland, France, Hungary, India, Indonesia, Ireland, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Norway, Poland, Romania, Russia, Singapore, the Slovak Republic, South Africa, Spain, Turkey and the United Kingdom.

    The number of affected treaties could change if more of Australia’s bilateral tax treaty partners sign and ratify the MLI and nominate their treaty with Australia. The extent to which the MLI will modify these treaties will depend on the final adoption positions, in relation to the MLI articles, taken by each jurisdiction.

    Supporting material

    ATO guidance

    To help stakeholders understand the effect of the MLI on Australia’s bilateral tax treaties, we will produce guidance.

    This guidance will include synthesised texts for the majority of modified CTAs. The synthesised texts will present the following in a single document:

    • the text of the CTA (including the text of relevant amending instruments such as protocols)
    • the elements of the MLI that have an effect on the CTA as a result of the interaction of the MLI positions of the Contracting Jurisdictions
    • information on the dates on which the provisions of the MLI have effect on the CTA.

    OECD MLI information

    See also:

      Last modified: 30 Nov 2018QC 56703