The most recent element of the ongoing global dispute resolution process is the late November 2016 release of the so-called multilateral instrument (MLI), a cornerstone of the base erosion and profit shifting (BEPS) project. It is an ambitious effort of the Organization for Economic Cooperation and Development (OECD) to impose its will on as many countries as possible. The explanation comprises 85 single-spaced pages and 359 paragraphs. The MLI draft itself is 48 similar pages. The purpose of the MLI is to facilitate implementation of the BEPS Action items without having to go through the tedious process of amending approximately two thousand treaties.
In essence, the MLI implements the BEPS Action items in treaty language. While consistency is obviously an intended result, the MLI recognizes the reality that many countries will not agree to all of the provisions. Accordingly, countries are allowed to sign the agreement, but then opt out of specific provisions or make appropriate reservations with respect to specific treaties. This process is to be undertaken via notification of the “depository” (the OECD). Accordingly, countries will be able to make individual decisions on whether to update a particular treaty using the MLI.
There are a variety of initial questions to be addressed by each country, including:
- Does it intend to sign the MLI?
- Which of its treaties will be covered?
- Will treaty partners agree?
- What provisions will be included or opted out of? If there is an opt out, the country is supposed to advise the depository of how this impacts each of its treaties. This will be a time-consuming process.
- How will it negotiate with specific treaty partners with respect to the various technical provisions of the MLI?
The arbitration provisions are intended to implement the BEPS Action 14 recommendations, focused on mandatory binding arbitration. These provisions would apply to a bilateral treaty only if both parties agree. The arbitration articles provide an outline of arbitration procedures, allowing the competent authorities to vary the procedures by mutual agreement. The form of the proceeding provides a default for “last best offer” (or “baseball style”). The parties may also agree to a “reasoned decision” process, which is stated to have no precedential value. If the parties do not agree on either of these forms of proceeding, the competent authorities should endeavor to reach agreement on a form. If there is no agreement, then the arbitration provisions are inapplicable.
Whether the US or other countries will sign the MLI, it seems apparent that the net result will be a period of chaos in treaty relationships, as there will inevitably be: (1) signers and non-signers; (2) reservations; (3) opt outs; etc.
In a world in which the list of countries zealously seeking to protect their tax bases and making proposals to increase domestic tax revenues (following BEPS and related guidance), continually expands, it seems apparent that dispute resolution processes will need to evolve to resolve the tsunami of disputes that are expected to materialize. If this is not the case, then countries and MNEs alike will incur prejudice to their respective interests.
Accordingly, these dispute resolution issues should be on the agenda for consideration as effective tax rate strategies are revisited in the post-BEPS world.