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Mexico signs Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS

Executive summary

On 7 June 2017, Mexico and 67 other jurisdictions signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI) during a signing ceremony hosted by the Organisation for Economic Co-operation and Development (OECD) in Paris.1

At the time of signature, Mexico submitted a list of 61 tax treaties, entered into by Mexico and other jurisdictions that Mexico would like to designate as Covered Tax Agreements (CTAs), i.e., tax treaties to be amended through the MLI. The 61 tax treaties represent all of Mexico’s tax treaties in force as well as certain treaties that have been negotiated and signed but not yet ratified or in force. Of these treaties, however, certain countries such as the United States, have not yet signed the MLI and other countries, including Switzerland, did not include the treaty with Mexico as a CTA at this time. These countries may eventually include Mexico at a later stage or intend to go under bilateral negotiation. The provisions of the MLI would only impact the bilateral treaties listed by both Contracting Jurisdictions as agreements to be covered by the MLI. Accordingly, out of the 61 treaties listed by Mexico, over 40 will be considered CTAs at this time.

Together with the list of CTAs, Mexico also submitted a provisional list of reservations and notifications (MLI positions) in respect of the various provisions of the MLI. The definitive MLI positions will be confirmed upon the deposit of its instrument of ratification of the MLI.

Detailed discussion

Background

On 5 October 2015, the OECD released its final report on developing a multilateral instrument to modify bilateral tax treaties under its Base Erosion and Profit Shifting (BEPS) Action Plan (Action 15). This report was released in a package that included final reports on all 15 BEPS Actions. On 24 November 2016, the OECD released the text of the MLI and explanatory notes.2

On 7 June 2017, 68 jurisdictions3 signed the MLI during a signing ceremony hosted by the OECD in Paris. Eight other jurisdictions have expressed their intent to sign the MLI in the near future.4 Following the signing ceremony, Mauritius and Cameroon signed the MLI.

Together with the list of CTAs, signatories also submitted a preliminary list of their MLI positions in respect of the various provisions of the MLI.5 The definitive MLI positions for each jurisdiction will be provided upon the deposit of its instrument of ratification, acceptance or approval of the MLI.

Structure of the MLI

Recognizing the complexity of designing a general instrument that applies to the CTAs and to the specific provisions included in bilateral tax treaties, the MLI provides flexibility for Contracting Jurisdictions to implement (parts of) the MLI based on their needs.

Many of the provisions of the MLI overlap with provisions found in CTAs. Where the provisions of the MLI may conflict with existing provisions covering the same subject matter, this conflict is addressed through one or more compatibility clauses which may, for example, describe the existing provisions which the MLI is intended to supersede, as well as the effect on CTAs that do not contain a provision of the same type.

Contracting Jurisdictions have the right to reserve certain parts of the MLI (opt-out) and to have these specific articles not apply to their tax treaties.

The different types of provisions

The MLI contains four types of provisions. Depending on the type of provision, the interaction with CTAs varies. A provision can have one of the following formulations: (i) ”in place of”; (ii) ”applies to”; (iii) ”in the absence of”; and (iv) ”in place of or in the absence of.”

A provision that applies ”in place of” an existing provision is intended ”to replace an existing provision” if one exists, and is not intended to apply if no existing provision exists. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that applies ”in place of” shall replace a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision.

A provision that ”applies to” provisions of a CTA is intended ”to change the application of an existing provision without replacing it,” and therefore may only apply if there is an existing provision. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that contain a provision within the scope of the relevant MLI provision, indicating the article and paragraph number of each of such provision. A provision of the MLI that ”applies to” provisions shall change the application of a provision of a CTA only where all Contracting Jurisdictions have made a notification with respect to that provision.

A provision that applies ”in the absence of” provisions of a CTA is intended ”to add a provision” if one does not already exist. Parties shall include in their MLI positions a section on notifications wherein they will list all CTAs that do not contain a provision within the scope of the relevant MLI provision. A provision of the MLI that applies ”in the absence of” provisions shall apply only in cases where all Contracting Jurisdictions notify the absence of an existing provision of the CTA.

A provision that applies ”in place of or in the absence of” provisions of a CTA is intended ”to replace an existing provision or to add a provision.” This type of provision will apply in all cases in which all the parties to a CTA have not reserved their right for the entirety of an article to apply to its CTAs. If all Contracting Jurisdictions notify the existence of an existing provision, that provision will be replaced by the provision of the MLI to the extent described in the relevant compatibility clause. Where the Contracting Jurisdictions do not notify the existence of a provision, the provision of the MLI will still apply. If there is a relevant existing provision which has not been notified by all Contracting Jurisdictions, the provision of the MLI will prevail over that existing provision, superseding it to the extent that it is incompatible with the relevant provision of the MLI (according to the explanatory statement of the MLI, an existing provision of a CTA is considered “incompatible” with a provision of the MLI if there is a conflict between the two provisions). Lastly, if there is no existing provision, the provision of the MLI will, in effect, be added to the CTA.

Mexico’s Covered Tax Agreements

Mexico has submitted a list of 61 tax treaties that it wishes to designate as CTAs, i.e., to be amended through the MLI. For details, see the list in Appendix I.

Accordingly, Mexico has chosen to include all of the jurisdictions that form its tax treaty network. Some of the countries in Mexico’s CTA list, however, have not yet signed the MLI (for example, Brazil, Panama, Peru, Philippines, Saudi Arabia, Ukraine, United Arab Emirates and the United States) and others have not listed Mexico in their CTA list (such as Switzerland).

Mexico has not excluded any tax treaty currently in force.

MLI provisions

Hybrid mismatches

Part II of the MLI (Articles 3 to 5) introduces provisions which aim to neutralize certain of the effects of hybrid mismatch arrangements based on the recommendations made in the BEPS Actions 2 and 6 final reports released in October 2015. The provisions cover hybrid mismatches related to transparent entities, dual resident entities and elimination of double taxation. These provisions are all not minimum standard provisions and therefore Contracting Jurisdictions have the right to opt to not apply these provisions to their CTAs.

Article 3 - Transparent entities

This provision addresses the situation of hybrid mismatches as a result of entities that one or both Contracting Jurisdictions treat as wholly or partly transparent for tax purposes.

Under Article 3(1), “for the purposes of a CTA, income derived by or through an entity that is treated as wholly or partly transparent under the tax law of either Contacting Jurisdiction shall only be considered income of a resident to the extent that the income is treated, for purposes of taxation by that Contracting Jurisdiction, as the income of a resident of that Contracting Jurisdiction.”

Article 3 of the MLI applies “in place of or in the absence of” an existing provision addressing this kind of situations. Article 3 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 3, and, in effect opted to apply the article that addresses the treaty entitlement of and treatment of income earned by a fiscally transparent entity or arrangement.

In the case of Mexico, this is actually a beneficial rule which may provide access to treaties for transparent entities or partnerships that would otherwise not be entitled to treaty benefits (since they are not regarded as a “person” from a pure Mexican point of view). Some of Mexico’s treaty partners also adopted this rule on the application of this provision, including Belgium, Ireland, Japan, Luxembourg, the Netherlands, Spain and the United Kingdom.

Article 4 - Dual resident entities

Article 4 modifies the rules for determining the treaty residency of a person other than an individual that is a resident of more than one Contracting Jurisdiction (dual resident entity). Under this provision, treaty residency of a dual resident entity shall be determined by a mutual agreement procedure (MAP) between Contracting Jurisdictions. Under the MAP in Article 4, Contracting Jurisdictions are not obligated to successfully reach an agreement and in absence of a successful mutual agreement, a dual resident entity is not entitled to any relief or exemption from tax provided by the CTA except as may be agreed upon by the Contracting Jurisdictions.

Article 4 of the MLI applies “in place of or in the absence of” an existing provision. Article 4 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make any reservation with respect to the MLI article on dual resident entities which establishes a mutual agreement tie breaker process for entities resident in both jurisdictions under a bilateral treaty. Certain of Mexico’s treaty partners did coincide with that position, resulting in the adoption of this measure in the CTA with these countries, such as China, Ireland, Japan, the Netherlands and the United Kingdom. Note that Mexico has already included this type of provision in some of its recent treaties (even before the implementation of the BEPS project).

Article 5 – Application of methods for elimination of double taxation

Article 5 includes three options for Contracting Jurisdictions for the methods of eliminating double taxation. Option A provides that provisions of a CTA that would otherwise exempt income derived or capital owned by a resident of a Contracting Jurisdiction would not apply where the other Contracting Jurisdiction applies the provisions of the CTA to exempt such income or capital from tax or to limit the rate at which such income or capital may be taxed (switch over clause). Instead, a deduction from tax is allowed subject to certain limitations. Under option B, Contracting Jurisdictions would not apply the exemption method with respect to dividends if those dividends are deductible in the other Contracting Jurisdiction. Option C includes language to the credit method rule making clear that the corresponding credit should be restricted to the net taxable income. Contracting Jurisdictions may choose different options resulting in an asymmetrical application of this provision. Contracting Jurisdictions may also opt not to apply Article 5 to one or more of its CTAs or to apply none of the abovementioned options.

Article 5 of the MLI is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this option entirely.

In this regard, Mexico did not elect any of the options above and did not opt out of the provision. This would result in asymmetrical application of these rules by Mexico treaty partners on their own tax residents, according with the option selected by them (i.e., options A, B or C). Since Mexico did not elect any particular option, Mexico will not be entitled to apply any of these rules to its own residents. Mexico domestic rules rely on the credit method for elimination of double taxation.

Treaty abuse

Part III of the MLI (Articles 6 to 13) contains six provisions related to the prevention of treaty abuse, which correspond to changes proposed in the BEPS Action 6 final report (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). In particular, the report contains provisions relating to the so-called “minimum standard” aimed at ensuring a minimum level of protection against treaty shopping (Article 6 and Article 7 of the MLI).

Article 6 – Purpose of a CTA

Article 6 contains the proposal described in the Action 6 final report to change the preamble language of a CTA to ensure compliance with one of the requirements of the minimum standard consisting of expressing the common intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. Article 6 also includes optional wording that may be added to the preamble of a CTA referring to the desire to develop an economic relationship or to enhance cooperation in tax matters.

Article 6 of the MLI applies “in place of or in the absence of” an existing provision. Article 6 is a provision required to meet a minimum standard and therefore jurisdictions cannot opt out of this article, unless they reserve the right for this article not to apply to its CTAs that already contain preamble language within the scope of the reservation.

Mexico decided to include in the preamble to its CTAs the MLI’s express statement that the common intention of the parties to a tax treaty is the avoidance of double taxation without creating opportunities for double non-taxation. As a minimum standard, Mexico’s CTA partners also should have accepted the provision as well.

Article 7 – Prevention of treaty abuse

This article contains the provisions to be included in a CTA to prevent treaty abuse. As concluded in the Action 6 final report, the prevention of treaty abuse should be addressed in one of the following options:

  • Option 1: A principal purpose test (PPT) alone (Article 7, paragraph 1 of the MLI)
  • Option 2: A combination of a PPT and a simplified limitation on benefits (LOB) clause (Article 7, paragraph 8) of the MLI)
  • Option 3: A combination of a detailed LOB and an anti-conduit rule, based on bilateral negotiations (Article 7, paragraph 15 subparagraph a of the MLI)

Specifically, Article 7 articulates the PPT which denies treaty benefits when considering all relevant facts and circumstances, obtaining that benefit was one of the principal purposes for entering into a specific transaction or arrangement that resulted directly or indirectly in that benefit, unless if granting that benefit is not contrary to the object and purpose of the relevant provisions of the CTA.

Given that a PPT is the only way that a Contracting Jurisdiction can satisfy the minimum standard on its own (according to Action 6), it is presented as the default option in Article 7. Parties are allowed to supplement the PPT by electing to also apply a simplified LOB provision.

In this sense, Mexico elected to supplement the PPT with a simplified LOB provision in terms of meeting the minimum standard of Action 6. However, most of Mexico’s treaty partners did not elect to apply the simplified LOB provision and as such, the PPT rule, without the simplified LOB, would apply as the default position. Canada for example elected the PPT as an interim measure with the intention to negotiate an LOB provision in its CTA with Mexico (as well as other treaty partners) in the future.

The MLI allows the possibility for countries that opted for the PPT to accept the application of the simplified LOB provision asymmetrically and allows countries that prefer the LOB provision to make a reservation to the entire article (if treaty counterparties do not allow the application of the simplified LOB), forcing bilateral negotiation outside of the MLI. Mexico did not make either of these types of elections or reservations and as such, in effect, has agreed to the PPT in all instances.

As a general rule, most countries signing the MLI opted for the default provision of the PPT, however, various countries in Latin America including Argentina, Chile, Colombia, and Uruguay joined Mexico in opting for the simplified LOB provision along with the PPT.

Article 8 – Dividend transfer transactions

Article 8 of the MLI specifies anti-abuse rules for benefits provided to dividend transfer transactions consisting of exempting or limiting the tax rate on dividends paid by a company resident of a Contracting Jurisdiction to a beneficial owner or recipient that is resident of the other Contracting Jurisdiction, provided certain ownership requirements are met. Under the anti-abuse rule provided for by the MLI, such ownership requirements must be met throughout a 365 day period that includes the day of payment of the dividend. The 365 day holding period will apply in place of or in the absence of a minimum holding period contained in the provisions described above.

Article 8 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 8, and in effect, opted to apply the provisions of the article.

Article 9 – Capital gains from alienation of shares or interests of entities deriving their value principally from immovable property

Article 9 incorporates an anti-abuse rule with respect to capital gains realized from the sale of shares of entities deriving their value principally from immovable property. In this respect, Article 9(1) provides two new rules to be incorporated into a CTA. The first rule would cover within the scope of the immovable property company any entity whose value derive principally from immovable property at any time during the 365 days preceding the sale (addressing strategies designed to dilute the equity proportion of immovable property during a certain period of time prior to the sale of the shares). The second rule would expand the scope of the aforesaid rule to shares or comparable interests such as interests in a partnership or trust.

The article provides that the 365 day period will replace or add such minimum period in CTAs, unless a Party wishes to preserve the minimum period specified in its CTAs.

In addition, Article 9(4) allows Parties to apply Article 13(4) of the OECD Model Tax Convention as included in the Action 6 final report that provides a 365 day holding period prior to the alienation of shares, and requires that the shares or comparable interests derive more than 50% of their value directly or indirectly from immovable property.

Rules contained in Article 9 of the MLI apply “in place of or in the absence of” an existing provision. Article 9 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 9, and, in effect opted to apply the provisions of the article.

Article 10 – Anti-abuse rule for permanent establishments situated in third jurisdictions

Article 10 contains the anti-abuse rule for permanent establishments (PEs) situated in third jurisdictions, the so-called “triangular provision.” The article provides that treaty benefits will be denied if an item of income (obtained in the source state) derived by a resident of the other Contracting Jurisdiction (residence state) and attributable to a PE in a third jurisdiction, is exempt from tax in the residence state and the tax in the PE jurisdiction is less than 60% of the tax that would be imposed in the residence state if the PE were located there. The article makes an exception for cases where the income is derived in connection to or incidental to an active trade or business carried out through the PE, and allows discretionary relief to be requested when treaty benefits are denied under this article.

Article 10 of the MLI applies “in place of or in the absence of” an existing provision. Article 10 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 10 and, in effect, opted to apply the provisions of this article. Moreover, Mexico has not made any specific notification in connection with this article, which seems reasonable since Mexico does not have this anti-abuse rule in its CTAs, and therefore, cannot notify a specific list of CTAs with this provision. In this sense, Mexico has elected to apply this provision to all of its CTAs.

Article 11- Application of tax agreements to restrict a party’s right to tax its own residents

Article 11 contains a so-called “saving clause” rule that preserves a Party’s right to tax its own residents.

Article 11 of the MLI applies “in place of or in the absence of” an existing provision. Article 11 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 11 and, in effect, opted to apply the provisions of this article (except for the treaty with the United States, which already contains a rule with the same terms).

Avoidance of PE status

Part IV of the MLI (Articles 12 to 15) describes the mechanism by which the PE definition in existing tax treaties may be amended pursuant to the BEPS Action 7 final report to prevent the artificial avoidance of PE status through: (i) commissionaire arrangements and similar strategies (Article 12); (ii) the specific activity exemptions or the fragmentation of activities (Article 13); and (iii) the splitting-up of contracts (Article 14). Article 15 of the MLI provides the definition of the term “closely related to an enterprise,” which is used in Articles 12 through 14.

Article 12 - Artificial avoidance of PE status through commissionaire arrangements and similar strategies

This article sets out how the changes to the wording of Article 5 of the OECD Model Tax Convention to address the artificial avoidance of PE status through commissionaire arrangements and similar strategies can be incorporated in the CTAs specified by the parties. In particular:

  • In Article 12(1), the concept of Dependent Agent PE is broadened so as to include situations where a person is acting in a Contracting Jurisdiction on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually exercises the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.
  • In Article 12(2), the concept of Independent Agent is restricted to exclude persons acting exclusively or almost exclusively on behalf of one or more enterprises to which it is “closely related”, e.g., certain situations of control, such as an enterprise that possesses directly or indirectly more than 50% of the interest in the agent.

Article 12 of the MLI applies “in place of” an existing provision. This article is intended to replace an existing provision if one exists, and is not intended to apply if an existing provision does not exist. Article 12 of the MLI will apply only in cases where all Contracting Jurisdictions (i.e., parties to a CTA under the MLI) make a notification with respect to the existing provision of the CTA. Article 12 has two notification clauses. One for the definition of dependent agent and another for the definition of independent agent. Further, Article 12 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico did not make a reservation on Article 12 and, in effect, opted to apply the provisions of the article. Therefore, Mexico has elected to apply the dependent agent provision related to commissionaire arrangements and similar strategies. Some of Mexico’s treaty partners including France, Japan, the Netherlands, and Spain coincided with Mexico’s election, resulting in the incorporation of this MLI provision into the respective CTA with these countries.

Article 13 – Artificial avoidance of PE status through the specific activity exemptions

This article addresses the artificial avoidance of PE status through the specific activity exemptions included in Article 5(4) of the OECD Model Tax Convention. Action 7 recommended that this exemption should only be available if the specific activity listed is of a preparatory or auxiliary character. The MLI provides two options for implementing the changes. Option A is based on the proposed wording in Action 7 (i.e., this exemption should only be available if the specific activity listed is of a preparatory or auxiliary character), while option B allows the Contracting Jurisdiction to preserve the existing exemption for certain specified activities.

This articles applies “in place of” an existing provision and therefore the first part of this article is intended to replace an existing provision if one exists, and is not intended to apply if an existing provision does not exist.

Mexico did not make a reservation on this article and, in effect, opted to apply the provisions of the first part of Article 13. Further, Mexico has chosen to apply option A.

Article 13(4) contains a second substantial provision: the anti-fragmentation clause, pursuant to which exemptions included in Article 5(4) will not apply in situation where the business activities may constitute complementary functions that are part of a cohesive business operation.

Article 13(4) “applies to” provisions of a CTA. This type of provision is intended to change the application of an existing provision without replacing it, and therefore can only apply if there is an existing provision. For this reason, the notification provision of Article 13 states that the provision of the Convention will apply only in cases where all Contracting Jurisdictions make a notification with respect to the existing provision of the CTA. The anti-fragmentation clause is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this option entirely.

Mexico did not make any reservation to this second part of the article and therefore opted to include the “anti-fragmentation of activities rule.” Countries such as Belgium, France, Ireland, Italy, Japan, The Netherlands, Spain, and the United Kingdom coincided with Mexico’s election.

Article 14 – Splitting-up of contracts

Under the Action 7 final report recommendations on Preventing the Artificial Avoidance of PE Status, the splitting-up of contracts is a potential strategy for the avoidance of PE status through abuse of the exception in Article 5(3) of the OECD Model Tax Convention, governing the situations where building sites, construction or installation projects may constitute a PE.

The Action 7 final report further noted, however, that the PPT provision could still address BEPS concerns related to the abusive splitting-up of contracts in these types of cases.

Article 14 of the MLI applies “in place of or in the absence of” an existing provision. Article 14 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely.

Mexico made a full reservation on this article and, as a consequence, Mexico’s CTAs would not be changed with respect to this provision.

Article 15 – Definition of a person closely related to an enterprise

Article 15 describes the conditions under which a person will be considered to be “closely related” to an enterprise for the purposes of Articles 12, 13 and 14 of the MLI. Among other relevant elements, a person is closely related if having regards to all the relevant facts and circumstances one has control of the other (or both are under common control of a third one). A person owning (whether directly or indirectly) more than 50% of the average vote and value of another is considered to be closely related.

Jurisdictions that have made the reservations under Article 12(4), Article 13(6)(a), Article 13(6)(c) and Article 14(3)(a), may reserve their right for the entirety of Article 15 to apply.

Mexico did not make a reservation on this article and, in effect, opted to apply the provisions of Article 15. As such this definition of closely related persons will apply to the corresponding new rules introduced by the MLI.

Dispute resolution

Article 16 – MAP

Part V of the MLI (Articles 16 and 17) introduces provisions which aim to introduce the minimum standards for improving dispute resolution (the BEPS Action 14 minimum standards) and a number of complementing best practices.

Article 16 of the MLI requires countries to include in their tax treaties the provisions regarding the MAP of Article 25 paragraph 1 through paragraph 3 of the OECD Model Tax Convention, including certain modifications of those provisions.

Mexico has accepted to improve its MAP procedure in all of its CTAs (although the majority of Mexico’s CTAs already include a MAP in compliance with the minimum standard). As a minor deviation, Mexico has opted to negotiate bilaterally a period of time after which no adjustments to PE profits or to intercompany transactions should be made. This deviation comes from the fact that Mexico has opted out of the second paragraph of the new MAP provision which establishes that MAP agreements should be implemented “notwithstanding any time limits in domestic legislation.”

Article 17 – Corresponding adjustments

This provision is meant to apply in the absence of provisions in CTAs that require a corresponding adjustment where the other treaty party makes a transfer pricing adjustment.

Article 17 of the MLI applies “in place of or in the absence of” an existing provision. Article 17 is not a provision required to meet a minimum standard and therefore jurisdictions can opt out of this article entirely. However, BEPS Action 14 minimum standard requires that jurisdictions provide access to the MAP in transfer pricing cases and implement the resulting mutual agreements regardless of whether the tax treaty contains a provision dealing with corresponding adjustments. In light of this, a Party may reserve the right not to apply Article 17 of the MLI on the basis that in the absence of a corresponding adjustments provision, either (i) the Party making the reservation will make the corresponding adjustment as described in Article 17 of the MLI or (ii) its competent authority will endeavor to resolve a transfer pricing case under the MAP provision of its tax treaty.

Where one Contracting Jurisdiction to a CTA makes such a reservation and the other Contracting Jurisdiction does not, Article 17 of the MLI will not apply to the CTA, and there is no expectation created under the MLI that the Contracting Jurisdiction that has not made the reservation will make a corresponding adjustment.

Mexico did not make a reservation on this article and, in effect, opted to apply the provisions of Article 17. In addition, Mexico has agreed that the improved rules would apply both to future as well as past cases. Mexico already includes this type of provisions in most of its CTAs.

Mandatory binding arbitration

Part VI of the MLI (Articles 18 to 26) enables countries to include mandatory binding treaty arbitration (MBTA) in their CTAs in accordance with the special procedures provided by the MLI.

Unlike the other articles of the MLI, Part VI applies only between jurisdictions that expressly choose to apply Part VI with respect to their CTAs. Of the 70 jurisdictions that have signed the MLI, 26 opted in for mandatory binding arbitration.6

Mexico at the moment has not opted in for mandatory binding arbitration.

Implications

Mexico wishes to apply the MLI provisions to all 61 tax treaties in its treaty network. This certainly constitutes an unprecedented moment for Mexican international taxation and the implementation of the treaty-based BEPS.

The provisional reservations and notifications made by Mexico at the MLI signature seems quite balanced and consistent with the double tax treaty negotiation policies followed by Mexico during the past years.

The MLI will enter into force after five jurisdictions have deposited their instrument of ratification, acceptance or approval of the MLI. During the ratification process the choices made by jurisdictions may still change. With respect to a specific bilateral tax treaty, the measures will only enter into effect after both parties to the treaty have deposited their instrument of ratification, acceptance or approval of the MLI and a specified time has passed. The specified time differs for different provisions. For example, for provisions relating to withholding taxes, the entry into force date is the 1 January of the following year after the last party has notified of its ratification. It is possible that the changes made as a result of being a party to the MLI would be effective in 2019, though some tax treaties may be affected as early as sometime in 2018.

Endnotes

1. For more background on the global significance of the MLI signature, see EY Global Tax Alert, 68 jurisdictions sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, dated 7 June 2017.

2. See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016, for a more detailed analysis of the MLI related BEPS measures.

3. Andorra, Argentina, Armenia, Australia, Austria, Belgium, Bulgaria, Burkina Faso, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Monaco, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Russia, San Marino, Senegal, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and Uruguay.

4. See EY Global Tax Alert, Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider, dated 14 June 2017.

5. For more detail on the MLI Positions taken by the signing jurisdictions on 7 June 2017, see EY Global Tax Alert, Signing by 68 jurisdictions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS highlights impacts for business to consider, dated 14 June 2017.

6. Andorra, Australia, Austria, Belgium, Canada, Fiji, Finland, France, Germany, Greece, Ireland, Italy, Liechtenstein, Luxembourg, Malta, Mauritius, the Netherlands, New Zealand, Portugal, Singapore, Slovenia, Spain, Sweden, Switzerland and the United Kingdom.

EYG no. 04281-171Gbl

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