The Multilateral Instrument: Development and Impact

William Yau
Vol. 39 Associate Editor

As an innovative development in the area of international tax treaties, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) will provide a method to strengthen existing tax treaties to protect against tax avoidance strategies without the burden of bilaterally renegotiating each individual treaty.[1] With the treaty poised to enter into force in the coming months, it could also help address other international treaty issues by serving as a basic framework model. Tax treaties have been in existence since the late nineteenth century, having been found essential to avoid or mitigate double taxation.[2] These treaties can cover a wide range of taxes and typically reduce taxes of one treaty country for residents of the other treaty country.[3] Unfortunately, these treaties now clearly show their age, with international tax standards no longer reflective of changes in global business practices, particularly with regard to development of intellectual property and the digital economy.[4] These gaps have created opportunities for multinational corporations to be increasingly aggressive in using strategies designed to reduce their tax liability.[5] For example, multinational corporations based in high-tax regimes can create numerous off-shore subsidiaries to take advantage of tax breaks from other jurisdictions, or claim losses and expenses in high-tax jurisdictions and declare profits in countries with low or no tax rate.[6] The MLI was developed to meet the challenge of modifying more than 3000 international tax treaties in order to shore up these gaps while still preserving the treaties’ basic objective of avoiding double taxation.[7] The end result of the negotiations was a flexible instrument that sits alongside and modifies the existing tax treaties.[8] In applying the MLI, jurisdictions can choose among alternative provisions in certain MLI articles, whether to apply optional provisions, to reserve the right to not apply MLI provisions, and whether to opt out of non-minimum-standard provisions.[9] With the exception of a few key terms, the MLI will in large part incorporate the language of the existing treaties in order to accommodate a variety of tax policies, while still applying minimum standards with regard to treaty abuse and dispute resolution.[10] Currently the MLI has seventy signatories, covering 1136 existing treaties, with more expected in the coming year.[11] The MLI is expected to enter into force by early 2018 once it has acquired the five necessary ratifications.[12] A question to consider is whether the MLI can serve as a model for other multilateral instruments: Bilateral investment treaties, for example, have faced criticism, particularly with regard to the current system of investor-state dispute settlement (ISDS), which involves each party choosing an arbitrator, and a third neutral chair being appointed by either both the arbitrators, both the parties, or some other appointing authority.[13] Critics argue that the existing system is deeply flawed in that it leads to either the appearance of a conflict of interest or an actual conflict of interest by arbitrators. Specifically, these critics are concerned that arbitrators are inclined to find for the party that appointed them.[14] Alternately, there is also the worry is that arbitrators are inclined to always find for investors, the thought being that arbitrators want to rule in a way that will not discourage investors from continuing to choose arbitration as their method of dispute resolution.[15] Critics also question the expertise of the arbitrators, arguing that the majority are business lawyers with little to no background in other areas of law relevant to the disputes such as public international law, human rights law, environmental law, anti-corruption law, etc.[16] The third concern is that the current system does not have an appellate mechanism, which has led to bad and inconsistent case law.[17] These concerns have prompted a push to develop a multilateral instrument for ISDS, with essentially two proposed options for the end goal: the establishment of an appellate body to review international investment dispute arbitration, or the replacement of arbitration with a permanent international court for all investment treaty disputes.[18] Investment law, similar to tax law, is characterized by a network of over 3000 bilateral treaties, which results in many of the same challenges, such as having to facilitate different policy preferences over a massive number of different treaties.[19] Moreover, investment treaties, while usually having the same general guarantees, can vary significantly in their definitions of key terms such as “investment,” “fair and equitable treatment,” and “expropriation,” as well as provisions specifying what investments are covered and circumstances permitting international arbitration.[20] The MLI’s ability to effectively amend existing treaties while preserving their core language would certainly prove indispensable in the road ahead.[21] The effort to develop a multilateral instrument for ISDS is still in the preliminary stages of discussion, with the United Nations Commission on International Trade Law (UNCITRAL) discussing it for the first time at its November 2017 meeting.[22] In looking forward, however, the MLI’s flexibility makes it an attractive option as a potential model for the basic framework of a multilateral instrument addressing the concerns about the current ISDS system.   [1] Org. for Econ. Co-operation and Dev. [OECD], Addressing Base Erosion and Profit Shifting, at 6-11 (Feb. 12, 2013) [hereinafter BEPS Report]. [2] Maikel Evers, OECD Ctr. for Tax Policy and Admin., Address at the University of Michigan Perspectives on the Multilateral Instrument Symposium: The Multilateral Instrument: Continuity and Innovation (Oct. 13, 2017). [3] Evers, supra note 2. [4] BEPS Report, supra note 1, at 7; OECD urges stronger international co-operation on corporate tax, Org. for Econ. Co-operation and Dev. (Dec. 2, 2013), [hereinafter BEPS Article]. [5] BEPS Article, supra note 4. [6] Id. [7] Evers, supra note 2. [8] Id. [9] Org. for Econ. Co-operation and Dev. [OECD], Frequently Asked Questions on the Multilateral Instrument (MLI), at 4 (July 2017), [hereinafter FAQ]. [10] Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting art. 2, 6-7, 16, June 7, 2017, Org. for Econ. Co-operation and Dev.,; FAQ, supra note 9, at 4-5. [11] Evers, supra note 2. [12] Id. [13] Steve Ratner, Professor of Law, Univ. of Mich. Law Sch., Commentary at the University of Michigan Perspectives on the Multilateral Instrument Symposium (Oct. 13, 2017). [14] Id. [15] Id. [16] Id. [17] Id. [18] Id. [19] Evers, supra note 2; Ratner, supra note 13. [20] Ratner, supra note 13. [21] Id. [22] Id.