Multilateral Instrument (MLI) is an instrument that implements tax treaty-related measures of BEPS. Article 7 of MLI is made by the recommendations of OECD and G20 in the BEPS Action 6 Report.
- Structure of Article 7 of MLI
- Paragraph 1 of Article 7
- Paragraph 2 of Article 7
- Paragraph 3 of Article 7
- Paragraph 4 of Article 7
- Paragraph 5 of Article 7
- Paragraph 6 of Article 7
- Paragraph 7 of Article 7
- Paragraph 8 to 13 of Article 7
- Paragraph 14 of Article 7
- Paragraph 15 of Article 7
- Paragraph 16 of Article 7
- Paragraph 17 of Article 7
Structure of Article 7 of MLI
Paragraph 1 of Article 7
Paragraph 1 of Article 7 covers the principal purpose test, where the treaty benefits will be granted only if the arrangements are not made with the sole purpose of obtaining the treaty benefits. As the Principal Purpose Test (PPT) requires a detailed post on its own, the same can be read here.
Paragraph 2 of Article 7
Paragraph 2 is a compatibility clause that describes the interaction between Article7(1) and provisions of Covered Tax Agreements. This paragraph states that the PPT in paragraph 1 replaces existing provisions of Covered Tax Agreements that deny all or part of the benefits otherwise provided when the transaction fails PPT.
Paragraph 3 of Article 7
Paragraph 3 permits countries opting for PPT under Article 15(a) to include the additional provision in Covered Tax Agreements.
Paragraph 4 of Article 7
Paragraph 4 reflects the additional provision with minor changes (to conform terminology and avoid cross-references to a particular article by number). Paragraph 4 is an optional provision and will apply to a Covered Tax Agreement only where all Contracting Jurisdictions have chosen to apply it by making a notification.
Paragraph 5 of Article 7
Paragraph 5 is a compatibility clause that describes the interaction between paragraph 4 and provisions of Covered Tax Agreements. When both the parties to the CTA opt to apply Article7(4), it will be applicable to the PPT of a CTA. An existing PPT will be modified by paragraph 1, and paragraph 4 will apply in conjunction with paragraph 1.
Paragraph 6 of Article 7
Paragraph 6 allows Parties to choose to apply the simplified LOB provision contained in paragraphs 8 through 13 (the “Simplified Limitation on Benefits Provision”) as a supplement to the PPT in paragraph 1 by making the notification
Paragraph 7 of Article 7
Where one Party chooses to apply the SLOB Provision under Article7(6) and the other does not, the SLOB Provision would not apply, and the PPT in paragraph 1 would apply symmetrically.
Article7(7) provides two optional ways for Parties that do not choose to apply the SLOB to remove the risk that this interaction would result in Article 7 not applying for a given bilateral relationship.
Option 1: Article 7(7)(a)
A country that has chosen only PPT agrees to apply SLOB provisions symmetrically for the purpose of granting the treaty benefits if the other Party to the CTA has chosen SLOB provisions.
Option 2: Article 7(7)(b)
A country that has chosen only PPT agrees to apply SLOB provisions asymmetrically for the purpose of granting the treaty benefits if the other Party to the CTA has chosen SLOB provisions.
Paragraph 8 to 13 of Article 7
Paragraph 8 to 13 of Article 7 covers the provisions for Simplified Limitation of benefits rules. An in-depth analysis of the provisions can be read here.
Paragraph 14 of Article 7
Paragraph 14 is a compatibility clause that describes the interaction between the SLOB and provisions of CTA. The SLOB Provision would replace existing provisions of Covered Tax Agreements that limit the benefits of the Covered Tax Agreements only to a qualifying resident who qualifies as per its categorical tests. It intends to apply in place of or in the absence of existing LOB provisions. It does not intend to restrict the scope or application of other types of anti-abuse rules in Covered Tax Agreements
Paragraph 15 of Article 7
Paragraph 15 defines the reservations that are permitted from Article 7.
A country has three options for reservations:
Option 1: Article 7(15)(a)
A country may reserve the right not to apply Paragraph 1 of Article 7 to its CTA, as it intends to adopt a combination of Detailed limitation of benefits provisions and address the rules to address either conduit financing structures or principal purpose test. Such countries shall try to reach a mutually satisfactory solution to meet the minimum standards provided under BEPS Action 6 Report.
Option 2: Article 7(15)(b)
A country may reserve the right not to apply Paragraph 1 (and Paragraph 4) of Article 7 to its CTA, if it already contains the Principal Purpose test. This would apply in case of a preexisting comprehensive PPT in the CTA and not limited to specific articles.
Option 3: Article 7(15)(c)
A country may reserve the right not to apply for the SLOB Provision not to apply to its Covered Tax Agreements that already contain the provisions of Article 7(14).
Paragraph 16 of Article 7
Where one country to a Covered Tax Agreement prefers to apply the PPT in paragraph 1 alone, and the other prefers to apply the PPT combined with the SLOB Provision, the SLOB Provision would not apply. In such cases, Parties that prefer to apply the SLOB may prefer to apply nothing under Article 7 and leave the issue to bilateral negotiations.
Where the country has chosen SLOB under Article 7(6) and not opted for either option under Article 7(7), they may reserve the right for the SLOB provisions not to be applicable when other parties CTA has opted out of SLOB.
Paragraph 17 of Article 7
Paragraph 17 describes notifications that are required in order to ensure clarity as to the application of Article 7.
Article 7(17)(a)
Requires Parties that have not opted out of the application of Article 7(1) under Article 7(15)(a) to notify the Depositary of each of its Covered Tax Agreements that is not subject to a reservation under paragraph 15(b). And that contains an existing PPT, along with the article and paragraph number of each such provision.
Article 7(17)(b)
Each Party that chooses to apply Article 7(4) shall notify the Depositary of its choice. Paragraph 4 shall apply to a Covered Tax Agreement only where all Contracting Jurisdictions have made such a notification.
An existing provision of a Covered Tax Agreement would be replaced by the provisions of paragraph 1 (and paragraph 4, where applicable) where all Contracting Jurisdictions to that Covered Tax Agreement have made such a notification with respect to the existing provision. In other cases, paragraph 1 (and paragraph 4, where applicable) would apply to the Covered Tax Agreement, but would supersede the existing provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with paragraph 1 (and where applicable, paragraph 4).
Article 7(17)(c)
Each Party that chooses to apply the Simplified Limitation on Benefits Provision under Article7(6) shall notify the Depositary of its choice.
Article 7(17)(d)
Each Party that does not choose to apply the Simplified Limitation on Benefits Provision under Article7(6) but chooses to apply either subparagraph a) or b) of Article7(7) shall notify the Depositary of its choice of subparagraph.
Article 7(17)(e)
Where all Contracting Jurisdictions have made a notification under Article 7(17)(c) or Article 7(17)(d) to a provision of a Covered Tax Agreement, that provision shall be replaced by the Simplified Limitation on Benefits Provision. In other cases, the Simplified Limitation on Benefits Provision shall supersede the provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with the Simplified Limitation on Benefits Provision.