Understanding Compatibility Clause

Do you wonder how Multilateral Instruments amend the Covered Tax Agreements? Compatibility clauses define the relationships between the Multilateral instruments and the Covered Tax Agreements. The impact of the MLI provisions on the Covered Tax Agreements is determined by the compatibility clause used in the respective articles of the MLI.

Can the countries change the compatibility clause defined under each MLI provision? No. They cannot. Compatibility expression for each MLI Article is prefixed in the MLI text, which the signatories of the MLI cannot change.

Types of Compatibility Clause.

“In place of”

This clause will replace existing provisions of a CTA with the provisions of the MLI.

If the CTA does not contain any provisions dealing with the subject matter, then the relevant provisions of the MLI will not be applicable.

“Applies to” or “ Modifies”

Here, the MLI “applies to” or “modifies” an existing provision of the CTA. The provisions of the MLI will not be applicable if there are no provisions in the CTA.

“In the absence of”

In provisions of the MLI shall apply only in the absence of existing provisions in CTA. If the CTA contains the existing provisions dealing with the subject matter, then the relevant MLI provisions will not apply

Note: Under the above three types of compatibility clauses, the MLI provisions apply only if both the Contracting Jurisdictions of the CTA make a notification concerning the existing provision of the CTA as described under MLI. IF either or both the Contracting Jurisdictions do not make such notifications, MLI provisions cannot be applied.

“in place of or in absence of”

This type of compatibility clause makes the MLI provisions applicable irrespective of the existence or non-existence of subject matter provisions in the CTA.

The general rule for its applicability:

When both the Contracting Jurisdictions to a CTA notify the existence of provision:

Then provision of CTA will be replaced by the requirements of the MLI.

In case there is an existing provision in CTA that is not notified. The MLI provisions will supersede to the extent the existing provisions of CTA are incompatible with the relevant provisions of the MLI. 

In case there are no existing provisions in CTA, the provision of the MLI will be added to the CTA.