The MLI: Canada Signs and Presents Its Choices

On June 7, 2017, Canada and 67 other jurisdictions signed the OECD's Multilateral Convention To Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the multilateral instrument, or MLI). The MLI is a component of the OECD's BEPS initiative, parts of which remain to be implemented through changes in domestic law. The idea of the MLI is to implement those parts of BEPS that otherwise would have required bilateral treaty negotiations, which could have taken years. The MLI is not a stand-alone treaty, but rather a treaty that sits on top of and modifies bilateral tax treaties.

The MLI allows jurisdictions to opt in or opt out of various provisions, apart from the anti-treaty-shopping rules and the dispute resolution measures, which are the minimum standard (required) provisions. Countries opt out by means of reservations. Canada chose to reserve the right for the entirety of the other MLI provisions not to apply, except for mandatory arbitration (discussed below). This rather conservative approach can be explained by Finance's concern, expressed at an April 2017 IFA conference, that a country can expand its commitment to the MLI but cannot reduce it.

The MLI is far-ranging: 75 out of Canada's 93 tax treaties could be affected. Excluded are the Canada-US tax treaty (because the United States did not sign) and, surprisingly, Canada's treaties with Switzerland and Germany (presumably because bilateral treaty negotiations are currently taking place).

For the anti-treaty-shopping rule, countries were able to choose the principal purposes test (PPT), the limitation-on-benefits (LOB) provision, or a combination of both. Under article 7, Canada has declared that it accepts the PPT as an interim measure, with the intention that bilateral negotiations will replace or supplement it with an LOB provision (which is already part of the Canada-US treaty). The PPT generally provides that treaty benefits will be denied when one of the principal purposes of an arrangement is to obtain a treaty benefit in a way that is not in accordance with the purpose and object of the relevant treaty provisions. Unfortunately, because of the broad wording of the PPT and the limited guidance provided by the OECD, the tax community may face some interpretation difficulties. (Note that GAAR already applies to tax treaties.) The LOB provision, which requires that a series of conditions be satisfied, is a more objective provision. For example, it can make treaty benefits unavailable to an entity that is otherwise a resident of a contracting state but that may not be a "qualified person."

The other minimum standard is the mutual agreement procedure (MAP), which is a form of dispute resolution mechanism by which residents in either contracting state can request assistance in resolving a particular taxation issue covered by a tax treaty. If the dispute is not settled (generally within two years), Canada and 24 other jurisdictions have agreed that the dispute will move to mandatory binding arbitration (provided that both states have chosen it in the MLI and the taxpayer requests it). Two sub-choices were available—the final-offer approach and the independent-opinion approach:
  • Canada and 17 other jurisdictions, including the Netherlands, Ireland, Luxembourg, and Belgium, chose the final-offer (or "baseball") approach (familiar to taxpayers from the Canada-US treaty). Under this approach, each competent authority submits a proposed resolution for the issues under review. An arbitration panel selects one of the proposed solutions; no additional reasons are provided.

  • Seven jurisdictions chose the independent-opinion approach, in which each jurisdiction submits all the necessary information and the arbitration panel delivers a decision indicating the sources of law and the reasoning that led to its result. Canada reserved its right to negotiate the type of arbitration process that should apply with jurisdictions that chose the independent-opinion approach.

Regardless of the type of arbitration, the arbitration decision is final and binding on both contracting states, except in three specific situations described in the MLI (subparagraph 19(4)(b)), one of which is the taxpayer's refusal to accept the decision.

The earliest possible effective date of the MLI is January 1, 2019 for withholding taxes and for taxable periods beginning after June 1, 2019 with respect to all other taxes. This scenario will apply if Canada and another country both ratify the MLI through their respective domestic procedures and give notice to the OECD at the end of August 2018 that their ratification procedures are complete.

Anna Szuminski
Barsalou Lawson Rheault, Montreal
a.szuminski@barsalou.ca

Canadian Tax Focus
Volume 7, Number 3, August 2017
©2017, Canadian Tax Foundation