The MLI convention was set up in 2018 in an effort to reduce the opportunity for tax avoidance and set a worldwide standard for tax rules.
What is BEPS?
The MLI was put into force to prevent base erosion and profit shifting or BEPS, which refers to the process by which multinational corporations use weaker tax law models such as those in developing countries to avoid paying taxes. BEPS has caused multiple problems including companies gaining a significant advantage over their smaller competitors, as well as other corporate firms following suit due to the economic benefits enabled by BEPS. It is estimated that BEPS causes an annual loss of revenue at 100-240 billion USD, thus immediate action needed to be taken.
The Multilateral Convention to Implement Tax Treaty Measures
In an effort to mitigate the disadvantages due to BEPS, over 100 jurisdictions signed the MLI convention (as part of the OECD/G20 inclusive framework.) This means that a standardized set of rules will be put into place on an international scale, enabling a smaller scope for tax avoidance, as well as reducing the amount of disputes as a result of lack of clarity and contradictions across tax systems.
With over 100 signatories on a global scale, international involvement will also facilitate the elimination of double taxation through modification of bilateral tax treaties.
Examples of countries who have signed include Australia, Belgium, Canada, Finland, Israel, Norway, Saudi Arabia, Singapore and Uruguay, which illustrates the cross-continental involvement and the success of the treaty, as countries are willing to participate in order to ensure fairness and greater clarity.
Monitoring of the treaty as well as success?
The OECD/G20 inclusive framework on BEPS provides annual reports on the progress made, as well as a peer review process in order to constantly adapt, update the terms to meet global needs and ensure efficacy. In addition, Countries are able to look to their own tax systems and see where improvements need to be made. This process allows for greater communication and a collaborative effort, building a stronger foundation against BEPS.
Transparency
Thanks to the OECD there has been greater transparency regarding information exchange between financial centers, which can be demonstrated by the increase from only 40 exchange of information agreements to over 4500. This level of transparency enables a greater chance for tax avoidance detection and at a faster rate. In addition, since 2015 over 250 regimes which were being used to facilitate tax avoidance have now been abolished or amended. The OECD has helped developing countries raise USD 470 million in additional tax revenue to date.
Overall achievements
Overall the main achievements of the MLI agreement have been; directly combatting harmful tax practices and abolishing those which are found to go against the treaty terms, countering tax treaty abuse through the fact that with more and more signatories, more loopholes (over 1500) have been closed, ensuring transparency such as the fact that over 21,000 tax rulings have been exchanged and improving dispute resolution, for example over 85% of mutual agreement procedures cases in 2017 were able to be resolved.
It is now more important than ever that other countries get on board and that the jurisdictions who have not yet committed to the agreement do so. In terms of individual jurisdictions, it is recommended that these companies consult with international tax experts, such as Nimrod Yaron & Co. to obtain a comprehensive understanding of taxation systems worldwide.
