The Efficacy of the MLI in Europe

Layne Smith
Vol. 39 Associate Editor

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) is a tax convention drafted by the Organisation for Economic Cooperation and Development (OECD) that sets out several substantive provisions aimed at reducing the loss of tax revenues caused by multinational companies artificially shifting profits to lower-tax jurisdictions.[1] The impact of successful implementation of the measures contained in the MLI would likely be especially pronounced in Europe, which is home to several holding company jurisdictions – that is, jurisdictions with generally favorable treatment of corporate income tax where multinational corporations choose to incorporate in order to artificially reduce their tax liability. Should the various provisions of the MLI be implemented by European countries, it could strongly deter jurisdiction-shopping by multinationals, and serve to more successfully pursue the goals laid out in the MLI, namely the prevention of base erosion and profit-shifting by multinational companies taking advantage of gaps and loopholes in various tax treaties to artificially lower their tax liabilities.

But how much impact will the MLI actually have? More specifically, what impact will the anti-profit-shifting provisions of the MLI have in Europe? A potential obstacle to the MLI’s goals, and the potential efficacy of achieving those goals, derives from the flexibility built into the agreement itself. The ability of signatories to reserve against or wholly opt out of specific provisions of the MLI diminishes the strength of the agreement, allowing signatories to simply choose not to implement provisions that they find disagreeable.[2] Of particular interest, and a particularly salient challenge to the impact the agreement will have in Europe, is the ability of signatories to opt out of Article 12, Paragraph 1, as permitted by Article 12, Paragraph 4.[3]

Article 12 sets out guidelines to reduce the effects of profit-shifting by amending the definition of a “permanent establishment.” A commonly used definition of permanent establishment is found in the OECD Model Tax Convention. Under the OECD definition, a permanent establishment is only formed through the activities of a company’s agent when the agent: a) operates in a jurisdiction separate from the jurisdiction in which the company is located, and b) habitually exercises the authority to sign contracts on behalf of the company.[4]

The new definitions included in Article 12, Paragraph 1 include more qualifying activities undertaken by the agents of a company. Under the new definitions, a permanent establishment would be established in the jurisdiction wherein the agent habitually plays an important role that leads to the signing of a contract with the principal without material modifications by the principal prior to signing.[5] This expansion would prevent companies from avoiding permanent establishment by simply not having the agent execute the contract, even when the agent is, for all intents and purposes, concluding contracts between the company and third parties. Naturally, for this new rule to have effect, the agent and principal must be operating in jurisdictions that are party to the MLI, and the company must be operating under a treaty covered by the MLI.

On its face, Article 12, Paragraph 1 would prevent companies from taking advantage of tax treaties to operate in a jurisdiction while still avoiding tax liability in that jurisdiction. But as parties to the MLI are permitted to opt-out of Article 12, this preventative effect is undermined.

Currently, of the 71 signatories to the MLI, 39 have opted out of Article 12.[6] Among those that have chosen to do so are Ireland, Germany, Malta, the United Kingdom, Luxembourg, Switzerland, Hong Kong, and Singapore.[7] Many of these are, not coincidentally, jurisdictions that are commonly chosen by multinationals as locations to incorporate holding companies, so as to take advantage of a lower rate on corporate income.[8]

That these countries have chosen to opt out of Article 12 indicates a certain unwillingness to part with the benefits they receive from multinational companies incorporating there. A given multinational is reducing its overall tax burden, but the jurisdiction is getting an increase in tax revenues that it would otherwise not have gathered. It’s essentially a win-win situation for the company and jurisdiction in question, and therefore seems unlikely that low-tax jurisdictions will see any incentive to adopt Article 12. To do so would effectively lower their tax revenues with no added domestic benefit to offset the ensuing loss.

Given the unwillingness of several popular European holding jurisdictions to accede to provisions of the MLI, it’s difficult to conclude that the outcome will be anything other than less-than-effective implementation. It seems then that, at least as far as Europe is concerned, preventing the negative effects of profit-shifting derived from jurisdiction-shopping will fall to other bodies within the European Union and Member States governments – though that strategy has not been entirely effective either.

There have been successes in restricting multinationals’ ability to avoid taxes – such as the European Commission’s order to Apple to pay €13 billion in back taxes to Ireland in 2016,[9] or the recent order that Amazon pay €250 million in back taxes to Luxembourg,[10] both deemed to be the result of illegal tax-breaks by already corporate-friendly countries. But there have also been setbacks – for example, the recent decision in Paris that Google’s operations in France were not substantial enough to allow French tax authorities to collect corporate income tax, which saved Google an estimated $1.3 billion in potential tax liability.[11]

Despite the challenges, however, the European Union has seemingly made a priority of combating profit-shifting. And, given the potential weaknesses in the MLI’s ability to actually prevent jurisdiction-shopping, it may ultimately fall to the European Commission to effectively implement the goals set forth in the MLI, at least insofar as the prevention of profit-shifting activities of multinational companies is concerned.

[1] The OECD defines Base Erosion and Profit Shifting (BEPS) as “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.” Base Erosion and Profit Shifting, Org. for Econ. Co-operation & Dev., (last visited Oct. 24, 2017).

[2] Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, art. 28, June 7, 2017, [hereinafter MLI].

[3] Id. at 19.

[4] Org. for Econ. Co-operation & Dev. [OECD], Model Tax Convention on Income and on Capital, at art. 5 (July 15, 2014).

[5] MLI, supra note 2, at 19.

[6]Tax Policy Bulletin: Draft MLI Positions of Different Territories Reflect a Range of Views on BEPS Implementation, PriceWaterhouseCooper (June 13, 2017),

[7] Signatories and Parties to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Org. for Econ. Co-operation & Dev. (Sept. 22, 2017),

[8] Paul Smith, Comparative Analysis of European Holding Company Jurisdictions, Tax J. (Mar. 9, 2011),

[9] Commission Decision 2017/1283 of Aug. 30, 2016, on State Aid Implemented by Ireland to Apple, 2017 O.J. (L 187).

[10] State Aid: Commission Finds Luxembourg Gave Illegal Tax Benefits to Amazon Worth Around €250 Million (Oct. 4, 2017), Eur. Commission,

[11] La société irlandaise Google Ireland Limited (GIL) n’est pas imposable en France sur la période de 2005 à 2010 [The Irish Company Google Ireland Limited (GIL) Is Not Taxable in France for the Period 2005 to 2010], Tribunal Adminstratif de Paris (July 12, 2017),

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