Globalization has enabled multinational companies to structure their operations efficiently, but it has also facilitated profit-shifting to tax havens. Accordingly, the OECD and G20 launched the BEPS (Base Erosion and Profit Shifting) Action Plan in 2013.
Within this framework, two instruments are key:
- The Multilateral Instrument (MLI) aimed to update double taxation agreements (DTAs) quickly.
- Transfer Pricing (TP) rules ensure that related-party transactions are at the Arm’s Length Principle.
Although different by nature, both mechanisms converge in ensuring the taxation of profits where value is actually generated.
What Is the MLI?
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) is an international convention developed under Action 15 of the OECD/G20 BEPS Plan, aimed at simultaneously and coordinately amending a large number of double taxation agreements (DTAs) without the need to renegotiate each treaty individually.
According to the OECD, “the MLI implements treaty-related tax measures resulting from the OECD/G20 BEPS initiative, enabling jurisdictions to update their treaties to avoid double taxation and prevent tax avoidance” (OECD – MLI).
Adopted in 2016 and in force since 2018, the MLI is a unique tool in international tax law, as it facilitates states to incorporate BEPS minimum standards on treaty abuse prevention, permanent establishment definition, and dispute resolution into their bilateral treaties, without the need for complex country-by-country negotiations.
What Is Transfer Pricing?
Transfer Pricing regulates the appraisal of related-party transactions of multinational group members. The Arm’s Length Principle stipulates that such transactions must be agreed upon under conditions similar to those of independent parties.
The OECD Transfer Pricing Guidelines constitute the international reference framework, reinforced by Actions 8 to 10 of BEPS, which aim to:
- Align the allocation of profits with economic substance.
- Prevent manipulation in transactions involving intangibles and risks.
- Prevent artificial profit shifting.
Linkage Between the MLI and Transfer Pricing
Although the MLI does not directly modify the Transfer Pricing Guidelines, their interaction can be seen in three main areas:
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Article 9 ofDTAs – Associated Enterprises
Article 9 of the agreements establishes the legal basis for Transfer Pricing adjustments. The MLI reinforces the interpretation and application of this article by introducing provisions that enable the elimination of double taxation resulting from such adjustments.
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Mutual Agreement Procedure (MAP)
One of the areas where the MLI is most relevant is the MAP. When two jurisdictions adjust an intra-group transaction differently, there is a risk of double taxation.
The MLI strengthens the MAP by:
- Establishing minimum access standards for the procedure.
- Reducing deadlines and improving transparency.
- Promoting arbitration mechanisms for disagreements.
It is critical for Transfer Pricing disputes, which are often the principal triggers of international conflicts.
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International Regulatory Consistency
The MLI creates a uniform environment that provides legal certainty for businesses and tax administrations. Ensuring that amendments to DTAs are consistent across countries facilitates the application of Transfer Pricing adjustments and the resolution of disputes.
Practical Example
A multinational company headquartered in Country A provides consulting services to its subsidiary in Country B. The subsidiary pays the parent company a fee for these services.
- Initial situation: The tax administration of Country B reviews the transaction and concludes that the fee paid is too high compared to market value, thus adjusting transfer prices and increasing the taxable income in its jurisdiction.
- Problem: The parent company in Country A had already declared that income and paid taxes on it. If Country A does not recognize the adjustment made in Country B, the multinational would end up paying double taxation on the same income.
MLI Intervention
Because both countries are signatories to the MLI and their DTAs have been amended by this instrument, the company can resort to the Mutual Agreement Procedure (MAP) more quickly. The MLI requires both states to cooperate and seek a coordinated solution, allowing Country A to recognize Country B’s adjustment and eliminate double taxation.
Indeed, the MLI acts as a safeguard framework. Although Transfer Pricing rules generate the adjustment, the MLI ensures that the final result does not hinder international operations, providing legal certainty for both companies and tax administrations.
Practical Implications for Companies and Advisors
- Greater legal certainty: Multinationals have more specific and faster procedures for resolving Transfer Pricing adjustments.
- Review existing treaties: It is essential to analyze how the MLI has amended the DTAs applicable to each transaction.
- Greater tax scrutiny: With the broadening of the concept of permanent establishment, companies must be more careful in justifying their operating structures.
- Solid documentation: In the context of greater international cooperation, both transparency and robust Transfer Pricing documentation are essential.
Conclusion
The MLI and Transfer Pricing rules are complementary tools within the BEPS framework. While TP guidelines establish how to appraise related-party transactions, the MLI ensures that these rules can consistently apply internationally and that conflicts arising from adjustments are resolved effectively.
In short, the MLI does not replace the Transfer Pricing guidelines, but it strengthens their practical application by providing a more robust and reliable international legal framework.
Source: https://www.oecd.org/en/topics/beps-multilateral-instrument.html