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Inland Revenue

Tax Policy

Chapter 2 - The multilateral instrument and how it will amend our DTAs

2.1 The MLI is a multilateral international treaty that will enable participating countries to quickly and efficiently modify their network of DTAs to address the treaty-specific BEPS concerns outlined in the OECD’s Action 6, 7, 2 and 14 reports.

2.2 While this is a novel approach to modifying DTAs, it is not unprecedented in international law. Experts in both international tax and public international law participated in the OECD Ad Hoc Group that developed the MLI.

2.3 The MLI is a flexible instrument that allows countries to choose:

  • which of their existing DTAs they wish to modify through the MLI;
  • alternative ways of meeting BEPS minimum standards on treaty abuse and dispute resolution; and
  • whether they want to adopt the OECD-recommended provisions for non-minimum standards. Within some of these provisions, there are alternative ways of addressing BEPS concerns and the ability for countries to enter a variety of reservations.

2.4 To ensure the operation of the MLI is clear and transparent, signatories to the MLI must notify the OECD Depository of which DTAs it wishes to cover, which reservations it wishes to enter, optional provisions it wishes to choose and which provisions in its nominated DTAs will be modified by the MLI. The OECD will publish this information online and it will be readily accessible to the public.

2.5 In addition, the OECD has adopted an Explanatory Statement that provides detailed commentary on the operation, and in limited cases, the substance of the MLI. The Explanatory Statement is available on OECD’s website at

2.6 This chapter outlines the structure and high level operation of the MLI. Chapter 3 further explains how the substantive provisions will address BEPS concerns and sets out New Zealand’s position on the MLI. Chapter 4 then sets out the implementation process and next steps.

Structure of the multilateral instrument

2.7 Before describing how the MLI operates, it is useful to understand its broad structure.

Section Relevant Article(s) Description
Title and preamble   Sets out the context and purpose of the MLI.
Part I: Scope and Interpretation of Terms 1 to 2 Governs application of the MLI and defines key terms including Covered Tax Agreement.
Parts II – V: Substantive
BEPS measures
3 to 17 Contains the operative clauses on hybrid mismatches, treaty abuse, PE avoidance, and improved Mutual Agreement Procedure (MAP). Each operative clause has a corresponding compatibility clause, reservation clause and notification clause. Some articles also permit choices between alternative clauses. This structure is explained further below.
Part VI: Arbitration 18 to 26 Contains a framework for independent binding arbitration.
Part VII: Final provisions 27 to 39 Contains mechanical provisions including those governing signature, ratification, amendment, notifications, language, entry into force and entry into effect.

Operation of substantive provisions of the multilateral instrument

2.8 Broadly speaking, the MLI will modify any bilateral DTA[2] to which New Zealand is a party to include the strengthened provisions to the extent:

  • both New Zealand and the other party choose to include that DTA as a Covered Tax Agreement; and
  • both New Zealand and the other party choose to adopt the relevant article in a way compatible with each other’s choice.

2.9 In this way, the MLI could be viewed as a way of facilitating a large scale simultaneous negotiation to modify bilateral DTAs to include treaty-related BEPS measures (and in particular, to enable jurisdictions to meet the OECD’s minimum standards on treaty abuse and dispute resolution).

2.10 It is important to note that jurisdictions cannot generally choose to apply different articles of the MLI to different DTAs. Jurisdictions must decide which DTAs they want to include as Covered Tax Agreements and what their choices of articles will be – those choices will apply for all Covered Tax Agreements.

2.11 For example, New Zealand could not choose for the MLI to apply to the New Zealand-Australia and New Zealand-Japan DTAs, but choose for the new dual resident entity provision in Article 4(1) of the MLI to be included in the New Zealand-Japan DTA, but not the New Zealand-Australia DTA.

2.12 There are limited exceptions to this principle. Some reservations allow jurisdictions to make reservations with respect to the application of specific articles in relation to certain Covered Tax Agreements or provisions within Covered Tax Agreements with certain objectively defined characteristics. For example, jurisdictions can choose for certain MLI provisions not to apply to Covered Tax Agreements that already contain equivalent provisions.

2.13 The OECD will maintain a public list of Covered Tax Agreements, reservations and choices of options and a list of affected Covered Tax Agreement provisions online to make it easy for the public to find out which DTAs are modified by the MLI and to assist in determining how a particular Covered Tax Agreement is modified.

2.14 The following paragraphs explain in more detail the structure of the MLI and how it will operate.

Covered Tax Agreements: Part I of the MLI: Scope and Interpretation of Terms (Articles 1–2)

2.15 In identifying the effect of the MLI on a DTA, the first question to be asked, is whether the DTA in question is a Covered Tax Agreement. This is governed by Part I of the MLI.

2.16 At the time of signature, every adopting jurisdiction must provide the OECD Depository with a list of the DTAs it wishes to modify via the MLI. If a party to a DTA does not list it, then it will not be a Covered Tax Agreement and it will not be modified by the MLI.

2.17 If there is a bilateral match (both parties list the DTA), that DTA is a Covered Tax Agreement for the purpose of the MLI and will be modified in accordance with the choices made by the parties to that agreement.

2.18 New Zealand has 40 DTAs in force and New Zealand’s general approach is to include the majority of these as Covered Tax Agreements. This gives New Zealand the best chance of strengthening our DTAs with as many countries as possible. The only DTAs we propose to omit are ones where we:

  • know the other jurisdiction is not intending to sign the MLI; or
  • are renegotiating our DTA and the other party also agrees that it should not be covered because the provisions are expected to be included in the new DTA.

Modifying provisions: Parts II – VI of the MLI (Articles 3–26)

2.19 Once a DTA is identified as a Covered Tax Agreement, the second question is how it would be modified by the MLI. This is governed by Parts II to VI of the MLI.

Specific BEPS measures: Parts II – V of the MLI (Articles 3 – 17)

2.20 These articles implement the measures recommended in the:

  • Action 2 report – neutralising the effects of hybrid mismatch arrangements that have a treaty aspect (Articles 3 to 5);[3]
  • Action 6 report – preventing the granting of treaty benefits in inappropriate circumstances (Articles 6 to 11);
  • Action 7 report – preventing the artificial avoidance of PE status (Articles 12 to 15); and
  • Action 14 report – improving dispute resolution (Articles 16 and 17).

2.21 Generally speaking, each substantive provision contains an operative clause, compatibility clause, a reservation clause and a notification clause:

  • Operative clause. This is the substantive provision to be read into the Covered Tax Agreement. For example, Article 4(1) contains the new dual resident entity provision recommended in the Action 6 report.
  • Compatibility clause. Explains the operative clause’s relationship with provisions of Covered Tax Agreements. Many of the MLI provisions overlap with provisions found in Covered Tax Agreements. In some cases, they can be applied without conflict with the provisions of Covered Tax Agreements. However, where the MLI provisions conflict with existing provisions covering the same subject matter, this is addressed by the compatibility clauses. The language in, and operation of, the compatibility clauses varies. For example, some clauses use the phrases “applies in the place of”, “applies to”, “modifies”, or “applies in place of or the absence of”. Regardless of the wording used, the compatibility clauses make it clear how the MLI modifies the existing Covered Tax Agreement. For example, Article 4(2) explains that the new Article 4(1) applies “in place of or in the absence of” an equivalent provision in a Covered Tax Agreement.
  • Reservation clause. This defines the specific reservations parties are able to make with respect to the operative clause (for example, Article 4(3) allows parties to make five alternative reservations with respect to Article 4, and choose one optional alternative to the wording in Article 4(1)); and
  • Notification clause. The notification clause requires parties to notify the OECD Depositary of choices of options, reservations and existing provisions in Covered Tax Agreements that are within the scope of the compatibility clause (for example, Article 4(4) requires parties to notify the OECD Depository of articles in its Covered Tax Agreements that are described in the compatibility clause and are not subject to a reservation). Notification is very important. If the notification required by an article is not completed, generally speaking, an article in a Covered Tax Agreement is not modified pursuant to the compatibility clause. The reason for this approach is to ensure clarity and transparency about the application of the MLI. The table below shows how the compatibility clauses and notification process work together.
If the compatibility clause states that the MLI provision… Then the notification provision states that the MLI provision will apply…
applies “in place of” an existing provision of a Covered Tax Agreement, the provision is intended to replace an existing provision if one exists, and is not intended to apply if an existing provision does not exist only in cases where all parties to the particular Covered Tax Agreement make a notification with respect to the existence or absence (as applicable) of a relevant provision of the Covered Tax Agreement.
“applies to” or “modifies” an existing provision of a Covered Tax Agreement, the provision of the Convention is intended to change the application of an existing provision without replacing it, and therefore can only apply if there is an existing provision
applies “in the absence of” an existing provision of a Covered Tax Agreement
applies “in place of or in the absence of” an existing provision of a Covered Tax Agreement in all cases. If both parties to the particular Covered Tax Agreement notify the existence of an existing provision, that provision will be replaced by the MLI provision (to the extent described in the relevant compatibility clause). If the parties to a particular Covered Tax Agreement do not notify the existence of a provision, the MLI provision will still apply. If there is a relevant existing provision which has not been notified by all parties, the MLI provision will override that existing provision if it is incompatible with the relevant MLI provision. If there is no existing provision, the MLI provision will in effect be added to the Covered Tax Agreement.

2.22 For a more detailed discussion on how these provisions operate, see paragraphs 13 to 18 of the OECD’s Explanatory Statement (see paragraph 2.5 for details).

Arbitration – Part VI (Articles 18 to 26)

2.23 This Part of the MLI was developed by a separate OECD Sub-Group on Arbitration. Its structure differs from that described above in respect of Parts II to V. Generally speaking, it allows parties to insert an entirely new framework for dispute resolution through mandatory binding arbitration.

2.24 It requires parties to “opt-in” to the arbitration provisions by notifying the OECD Depository that it wishes to apply Part VI, rather than “opting-out” by making a reservation.

2.25 It has a single compatibility clause for the entire Part in Article 26, rather than article-by-article compatibility clauses. It also allows parties to make bespoke reservations as to the scope of arbitration, subject to acceptance by DTA partners (rather than the set of defined reservations permitted under Parts II to V).

2.26 For Parts I to VI, the OECD will maintain a public list of reservations, choices of options and affected Covered Tax Agreement provisions to assist all interested parties to determine how Covered Tax Agreements are modified.

2.27 Once the MLI comes into effect for a particular Covered Tax Agreement (explained further in chapter 3), the MLI will operate as a stand-alone treaty that modifies the Covered Tax Agreement according to its terms.


2 The MLI only applies to existing, full DTAs, not to future treaties or to treaties such as tax information exchange agreements (TIEAs).

3 Article 4 relates to dual resident entities and, while it relates to a hybrid entity, the new provision originated in the Action 6, rather than the Action 2 report.