Dutch Parliament agrees with Multilateral Instrument (MLI)

17/02/19

The MLI is one of the Action Plans of the so-called BEPS project of the OECD. With this project, the OECD aims to prevent tax avoidance by combating base erosion and profit shifting by multinational enterprises. Some recommendations of the BEPS project may have consequences for the application of existing bilateral tax treaties that countries have concluded. The MLI should enable a smooth transition from the tax treaty-related components of the BEPS project to these bilateral tax treaties. In this way, not every change resulting from the BEPS project needs to be agreed bilaterally in an existing tax treaty.

The OECD BEPS project

The OECD BEPS project consists of fifteen Action Plans combating base erosion and profit shifting. These Action Plans include the design of a tax system that is also suitable in a digitizing economy, the combating of hybrid mismatches, introducing controlled foreign company (CFC) regulations, interest deduction limitations, countering treaty abuse, permanent establishment problems, improving Transfer Pricing-regulation, improving transparency, improving dispute resolution and arbitration, and thus the introduction of an MLI.

Multilateral Instrument (MLI)

Of the fifteen Action Plans of the OECD BEPS project, some relate to the application of bilateral tax treaties. The introduction of the recommendations from these Action Plans may result in the need to adjust existing bilateral tax treaties. In order to avoid having to renegotiate some 3,500 to 4,000 bilateral tax treaties individually in order to adapt them to the outcomes of the OECD BEPS project, the OECD has developed the MLI. With the MLI, existing bilateral tax treaties can be adjusted at once to the OECD BEPS project. This only happens if the countries concerned have reached agreement on this.

The MLI contains regulations in these areas

Hybrid mismatches;
Treaty abuse;
Avoidance of permanent establishment status;
Improving dispute resolution; and
Arbitration.

The Netherlands must first ratify the MLI in order for the Netherlands to be able to apply the MLI to the existing tax treaties that the Netherlands has concluded with other countries. With the adoption of the legislative proposal by the Dutch Parliament on 12 February 2019, the first step was taken of this ratification procedure. However, the Dutch Parliament has adopted one amendment. This amendment concerns the measures proposed by the OECD to combat the avoidance of permanent establishment status. The amendment aims to prevent international double taxation arising as a result of these measures. Furthermore, the amendment advocates adequate dispute resolution in the event of a qualification conflict.

What does this mean for your organisation?

The MLI can have consequences for you if your company is part of a multinational group, and this group has to deal with one or more of the aforementioned topics of the BEPS project and / or the topics of the MLI. It is also important for you when the MLI will apply to the Netherlands exactly. In this respect, a distinction must be made between two concepts: at what moment enters the MLI into force for the Netherlands, and at what moment enters the MLI into effect for the Netherlands. The answer to both questions is described in general terms in the MLI, and is extremely complex. We will explain this.

Now that the Dutch Parliament has approved the MLI, the Senate has to vote the bill introducing the MLI. As soon as the Senate has approved the MLI, the Netherlands can ratify the MLI. A few months after the Netherlands has ratified the MLI, the MLI enters into force for the Netherlands.

The moment at which the MLI will enter into effect for the Netherlands, depends entirely on the answer to questions such as: have other countries ratified the MLI and, if so, when? Does your business receive foreign dividend, interest or royalty income? Or does your company receive profits from a foreign permanent establishment? In view of the complexity of this future legislation, we advise you to contact your PwC advisor if your company now invokes the application of tax treaties.