Approval by the Senate of the Multilateral Agreement to Implement the Measures Related to Tax Treaties to Prevent Base Erosion and Profit Shifting (MLI), developed by the Organization for Economic Cooperation and Development (OECD). This according to official information from the Senate of the Republic.
Background that led to the approval of the agreement
Derived from Action 15 of the BEPS Report, which consists of developing a Multilateral Instrument (MLI) to amend tax treaties in order to effectively apply the measures to combat base erosion and profit shifting contemplated in tax treaties, the MLI was created to include in existing bilateral tax treaties measures to prevent treaty abuse by multinational companies and the artificial use of permanent establishment status, as well as to improve the dispute resolution mechanism of such treaties.
In this regard, it should be noted that Mexico signed the MLI in 2017 and on October 12, 2022 the Senate ratified the MLI, so it must be sent and deposited with the OECD for its signature and subsequent entry into force, with the expectation that it will be effective as of 2024.
The MLI will be included in each tax treaty entered into by Mexico (except for the United States of America and Germany) to form part of it, functioning as a protocol to interpret and execute the treaty in question and the MLI as a single document.
The entry into force of the MLI will have effects on transactions with foreign residents, so it is important to comply with its provisions in order to have access to the benefits of the treaties and at the same time not have contingencies to deduct the respective payments.
Objectives of the Multilateral Convention
- To clarify the concepts of the treaties for a better application and to avoid abuse, among others, in matters of residence, benefits and permanent establishment.
- Efficient mechanisms for disputes that may arise between governments.
- Simplify benefits
- Establish mechanisms to avoid treaty shopping, or the search for structures whose sole purpose is to benefit from the treaty without any justification of the need for the operation or without a business reason.
Highlights of this document
- Establish requirements for people to be able to apply for treaty benefits, under the concept of "eligible persons", so that residency will not be sufficient.
- It may involve changes in domestic legislation regarding methods to avoid double taxation.
- It may involve planning constraints for people who have investments abroad.
- Addresses issues of dual residence, beneficial ownership, related third parties, split contracts for permanent establishment issues.
- The principle of good faith is maintained, but this does not prevent the analysis of income that is not taxed at source (business profits), in order to review whether or not the benefits of the treaties are applicable.
- Each country may establish its own reservations, and information exchange and information sharing agreements between authorities should be considered.
- It incorporates sections for arbitration in case of disputes.
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