Multilateral Instrument

Article 6


Michael N. Kandev, "Taxpayer Wins Treaty Shopping Challenge in Alta Energy Luxembourg", Tax Management International Journal, 14 September 2018, p. 572

Quaere whether Alta Energy suggests a restrictive interpretation of the implications of the MLI-directed preamble or PPT (p. 566)

If the Tax Court decision on this point stands, the fascinating question is what impact it would have on the interpretation in Canada of the minimum standards of the MLI, being the new expanded tax treaty preamble that specifically condemns double non-taxation and treaty shopping and the principal purpose general anti-abuse test (the “PPT”). Under Justice Hogan’s judgment, a treaty’s preamble is too vague in the absence of specific rules that are reflective of the preamble’s statements. Furthermore, if the PPT were seen as very similar to the GAAR, taxpayers may argue, further to Alta Energy, that the wording of Article 4 establishes that treaty shopping is not contrary to the spirit and purpose of the Treaty. In other words, in the absence of either a rule that changes the liable-to-tax test to a subject-to-tax test or a limitation-on-benefits clause, it could still be argued that the clear wording of a treaty would be too powerful an evidence of a treaty’s object and purpose to be overridden by a vague preamble or a subjective PPT.

In conclusion, it is uncertain what impact the reasoning of the Tax Court in Alta Energy would have on MLI-modified tax treaties, but the taxpayer’s victory in this case may explain why the government of Canada indicated in the documents announcing its signing of the MLI that it would, over the longer term, seek to include LOB provisions in relevant treaties. [fn 11: Department of Finance Canada, Backgrounder: The Next Step in the Fight Against Aggressive International Tax Avoidance.]

Article 7


Manal Corwin, Jesse Eggert, "Understanding the Operation, Impact, and Practical Implications of the MLI", Tax Management International Journal, Vol. 46, No. 8, 11 August 2017, p. 407

Breadth of principal purpose test in MLI, Art. 7(1) compared to existing PPT rules (p. 413)

This expression of the PPT is broader than many existing PPT rules in a variety of ways, in particular because it applies where any "one of the principal purposes" is obtaining treaty benefits, rather than focusing on the single principal purpose. The Commentary clarifies that this is intended to make clear that obtaining the benefit need not be the sole or dominant purpose of a transaction, and that it is enough that it is one of those purposes is to obtain benefits. [f.n. 80: ….Action 6 Report, at 58] It also applies to any arrangement or transaction that results "directly or indirectly" in treaty benefits, which is a deliberately broad phrasing intended to sweep in cases in which a transaction entered into for valid commercial reasons is subsequently used for the principal purpose of obtaining benefits. This suggests that operations that might at one time have satisfied the PPT could be deemed, at a later time, to fail the PPT, causing treaty benefits to become unavailable.

Application of MLI PPT to Treaties where there is or is not an existing PPT (p. 413)

The effect of the signing of the MLI will be to incorporate this broad PPT into all of the treaties among the signatory countries (subject to permitted exceptions for treaties already containing a PPT provision). Those treaties fall into several categories:

• Treaties that already contain a PPT that is narrower than the new PPT;

• Treaties that did not contain a PPT, but were between countries with experience applying PPT- type rules to their tax treaties; and

• Treaties that did not contain a PPT, and were between countries without experience applying PPT- type rules.

It is not yet clear as a practical matter how the PPT will be applied in these three situations. While some countries that have experience applying PPT-type rules might be expected to apply the new PPT in line with their past practice, the breadth of the new PPT would permit for substantially more aggressive approaches by countries inclined to take them.

Jack Silverson, Bill Corcoran, "Issues Affecting Investments by Canadian Pension Plans in Private Equity, Infrastructure and Real Estate in Canada, the USA and Europe", 2016 Conference Report (Canadian Tax Foundation),15:1-40

Application of PPT to a Canadian pension fund co-investing in Europe through e.g. a Luxco (pp. 15:32-35)

A pension plan seeking to invest in Europe…will invest in a limited partnership that in turn invests in a Luxembourg corporation ("Luxco"). The Luxco will then invest in EU Co. If EU Co has other shareholders, then generally Luxco will need to acquire at least 10 percent of the capital of EU Co in order to take advantage of the "participation exemption"… .

...[P]ension funds and certain investment vehicles could potentially lose their treaty benefits under the LOB rule or PPT rule if they invest through an entity that is a resident of a third country--for example, when a Canadian pension plan uses a holding company resident in a third country to make an investment outside Canada or makes an investment in a private equity fund that makes use of such holding companies (as depicted in the common investment structure described in figure 9). ...

Article 7(1)

Administrative Policy

16 May 2018 IFA Roundtable Q. 2, 2018-0749181C6 - Principal Purpose Test in MLI

CRA will not provide quick and crisp PPT guidance

What weight will CRA to the examples in paras. 182 and 187 of the Commentary on Art. 29 of the 2017 OECD Model respecting whether a structure or transaction satisfies the object and purpose clause within the PPT of the MLI; and what additional guidance will it provide, particularly respecting private equity and other collective investors (e.g., expedited rulings)?

CRA noted that Canada has not placed a reservation on Art. 29 of the Model, which contains a principal purpose test that is almost identical to the PPT in the MLI, nor has it placed an observation on the related Commentary, and also noted that Commentary bearing on the above examples emphasized the importance of the facts and circumstances of each case. CRA then indicated that whether it will apply the PPT to situations similar the examples will turn on an examination of the facts and circumstances of each case, the relevant authorities and the wording and object of the relevant covered treaty. Respecting the PPT’s application to CIVs issues, CRA will give consideration to matters such as other articles in the particular covered treaty, e.g., para. 7(a) of the Canada-France Treaty, any relevant competent authority agreement, e.g., the Canada-Netherlands agreement regarding closed funds for mutual account and previous rulings, e.g., on Switzerland contractual investment funds and Ireland common contractual funds.

Similarly to GAAR rulings, there may be consultation with various areas before any ruling on the issue is issued.

21 November 2017 CTF Roundtable Q. 8, 2017-0724151C6 - Principal Purpose Test

central CRA committee may review PPT assessments/rulings available/uncertain relevance of GAAR jurisprudence
(a) GAAR Committee

Will the GAAR Committee review all situations where an auditor proposes to apply the principal purpose test in MLI Art. 7(1) PPT so as to ensure it is consistently applied and enforced?

CRA responded that it is exploring methods of promoting consistency in the application of the PPT within the Agency and that, in this regard, the GAAR Committee may offer a useful model. The Income Tax Rulings Directorate will entertain PPT rulings once the rules are in effect.

(b) GAAR/PPT interrelationship

How will CRA apply the PPT relative to the GAAR?

After noting that s. 4.1 of the Income Tax Conventions Interpretation Act states that the GAAR applies to any benefit provided under a tax treaty, CRA indicated that it continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit accorded by a tax treaty and that the GAAR Committee has approved the application of the GAAR in certain treaty-abuse arrangements. Furthermore, in appropriate circumstances, the PPT and the GAAR could apply as alternative assessing positions.

(c) PPT relevance of GAAR jurisprudence

Will the “object and purpose” PPT test be interpreted consistently with the GAAR jurisprudence?

CRA indicated that given the differences in wording between the PPT (whose object and purpose test must be read in conjunction with the added preamble language of Art. 6) and the GAAR, it was premature to assess how the case law on s. 245(4) will inform the PPT’s application.

(d) OCD Commentary examples

What weight will the CRA give to the examples set out in paras. 182 and 187 of the draft 2017 OECD Model Commentary in determining whether a particular structure or transaction satisfies the object and purpose clause within the PPT?

CRA noted that the draft Model and Commentary had not yet been approved, and would refrain from commenting at this juncture.

Article 8

Article 8(1)

Administrative Policy

27 November 2018 CTF Roundtable Q. 3, 2018-0779891C6 - MLI Issues

overview of removal of provisional reservations

General overview of the introduction of the MLI including statement that:

On May 28, 2018, the Minister of Finance tabled a Notice of Ways and Means Motion in the House of Commons formalizing the Government’s intention to introduce legislation that would enact the MLI. The Minister also issued a press release that indicated Canada’s intention to remove its provisional reservations on a number of the MLI’s optional provisions. These include the provision to impose a 365-day holding period for certain shares of Canadian companies held by non-resident companies, the provision to impose a 365-day test period for non-residents who realize capital gains on the disposition of shares or other interests that derived their value from Canadian immovable property, and the provision dealing with dual resident entities.

Article 13


Manal Corwin, Jesse Eggert, "Understanding the Operation, Impact, and Practical Implications of the MLI", Tax Management International Journal, Vol. 46, No. 8, 11 August 2017, p. 407

Potential uncertainty under existing PE Articles created by MLI Art 13 (p. 414)

MLI Article 13 is intended to address artificial avoidance of PE status through the use of the specific activity exemptions, which explicitly permit certain activities to be carried on at a location without creating a PE, provided that they are the sole activities carried on at that location. Signatories are permitted to choose to apply one of two options (or neither option). Option A would provide that existing activity exceptions in CTA's would apply only where the activity is of a "preparatory or auxiliary" character. Option B would do the opposite, and would provide that the existing activity exemptions are per se exceptions. Option B reflects a minor change to the existing wording of many PE provisions, which includes a drafting ambiguity that had led to questions about interpretation. [f.n. 96: See OECD, Revised Proposals Concerning the Interpretation and Application of Article 5 (Permanent Establishment) (2012), at 24, available at] Although the OECD had appeared to conclude that existing provisions already provided per se exceptions for locations at which only a single listed activity was conducted, Option B would permit countries to revise existing provisions to remove any doubt. This might cause some uncertainty with respect to the positions of countries that choose not to adopt either Option A or Option B.

Anti-fragmentation rule (p. 414)

Options A and B are supplemented by an anti –fragmentation provision, which would cause the specific activity exemptions not to apply to a fixed place of business if the same enterprise or a closely related enterprise carries on complementary functions in one or more places in the same state as part of a cohesive business, and either (1) one of those places is a PE for one of the enterprises, or (2) the overall activity of the combined business is not preparatory or auxiliary in character. [f.n. 98: See MLI, art, 12(4).] …

Principal purpose test can be applied to avoidance of permanent establishment even if only one Treaty (“CTA”) adopts MLI Art. 13 (pp. 414-5)

[E]ven where only one party to a CTA adopts provisions expanding the PE article, it may have effect under the domestic law of a source country if that country invokes the PPT to deny treaty protection. For example, if a source country adopts the expanded PE standard of Article 12 under its domestic law, it may view a structure that does not rise to the level of a PE under an existing unmodified treaty, as having as one of its principal purposes the obtaining of treaty benefits in a manner that is not in accordance with the object and purpose of the PE article.

Article 19


Gerrit Groen, "The Nature and Scope of the Mandatory Arbitration Provision in the OECD Multilateral Convention (2016)", Bulletin for International Taxation, November 2017, p. 607

Only cases where taxes have been charged are covered (p. 611)

Under the wording of article 19(l)(a) of the MLI, only cases where taxes have actually been charged can be submitted to arbitration….

Case must be accepted by both competent authorities (p. 611)

[O]nly those MAP cases that have been accepted by both the competent authorities and have moved to the international stage of the MAP have to be resolved, either in the MAP or through arbitration. Cases that have been rejected by one or both of the competent authorities and never made it to the international stage of the MAP cannot be resolved through arbitration….

Article 20


Gerrit Groen, "The Nature and Scope of the Mandatory Arbitration Provision in the OECD Multilateral Convention (2016)", Bulletin for International Taxation, November 2017, p. 607

Nature of specific case mutual agreement procedure under OECD Model (p. 609)

Once the taxpayer has filed an application for a specific case MAP under article 25(1) of the OECD Model … [t]he procedure…consists of two stages. The first stage is purely domestic between the taxpayer and the competent authorities, in which the competent authorities should try to resolve the case unilaterally if they consider the case to be justified. If the competent authorities consider the case to be justified and they cannot resolve the case unilaterally, only then may the case move to the second international stage. In this stage, the competent authorities endeavour to resolve a case in a bilateral manner, but are under no obligation to come to a resolution.

The taxpayer has hardly any role to play in the second stage of a MAP….

Low taxpayer involvement in arbitration procedure (p. 610)

[T]he mandatory arbitration provision in the MLI functions as an extension of the specific case MAP … . Mandatory arbitration, like the specific case MAP, is therefore construed as a procedure that takes place almost exclusively between the two disputing competent authorities with very limited involvement of the affected taxpayer. On the basis of article 19(10) of the MLI, the competent authorities themselves decide on the procedural rules of the arbitration proceedings, to the extent these have not been proscribed by the MLI, and on the basis of article 20 of the MLI, each of the competent authorities appoints a member to the arbitration panel….

[T]he arbitration procedure is designed in a way that as little control as possible is transferred to the taxpayer, the arbitration panel or any other third party.

Appointment of panel member by CTPA (p. 611)

[T]he only substantial improvement over the mandatory arbitration procedure of article 25(5) of the OECD Model is that, if one or both of the competent authorities fail to appoint a member of the arbitration panel in the manner and timeframe specified in article 19(2) of the MLI, a member is appointed by the highest ranking official of the Centre for Tax Policy and Administration (CTPA)….

[T]he author assumes that, if the affected taxpayer notifies the CTPA of the fact that the arbitration process has been improperly stalled by the competent authorities, the CTPA must take appropriate action and appoint a member….

Article 28

Article 28(2)


Gerrit Groen, "The Nature and Scope of the Mandatory Arbitration Provision in the OECD Multilateral Convention (2016)", Bulletin for International Taxation, November 2017, p. 607

Arbitration reservations are subject to other CTA party’s acceptance (p. 611)

Article 28(2)(a) permits the parties to the MLI to formulate one or more reservations with regard to the scope of cases that should be eligible for arbitration under Part VI. Such reservations are, under article 28(2)(b) of the MLI, subject to acceptance by the other contracting state to the CTA in question….

18 states with reservations re anti-abuse (p. 612)

[O]f the 26 states that have signed up for mandatory arbitration, only eight states have not made any reservations with regard to the scope of the arbitration. [fn 33: That is, Belgium, Fiji, Liechtenstein, Luxembourg, the Netherlands, Malta, Switzerland and the United Kingdom.]…

Eighteen states have made reservations to the scope of the arbitration provisions in Part VI. The most common reservation involves the exclusion of cases concerning the application or interpretation of anti-abuse provisions from arbitration. [fn 34: That is, Australia, Austria, Finland, Germany, Ireland, Italy, Mauritius, New Zealand, Portugal, Singapore, Slovenia and Spain.] Most states only exclude disputes over the interpretation or application of domestic anti-abuse provisions from the scope of arbitration, but some of these jurisdictions also exclude disputes over the interpretation or application of tax treaty based anti-abuse provisions from the scope of arbitration.

Reservations re no double taxation, dual residence or both authorities’ agreement (p. 612)

Certain states exclude cases that do not involve double taxation from the scope of arbitration. [fn 36: That is, Finland, France, Germany, Italy, Portugal, Slovenia and Spain….] It is unfortunate that these reservations have been made, as cases of double non-taxation or low taxation may be entirely legitimate under a tax treaty and not be the result of aggressive tax planning. For instance, many tax treaties apply a 0% withholding tax rate on dividends paid to jurisdictions that apply a participation exemption….

Certain states also exclude from arbitration cases involving dual resident persons, i.e. individuals and entities while others limit the scope to dual resident entities only. [fn 37: Italy and Slovenia exclude cases involving dual resident persons from the scope, while Japan and Sweden only exclude cases involving dual resident entities…]…

Some states exclude cases from arbitration where both competent authorities agree that the case is not suitable for arbitration. [fn 39: That is, France, Spain and Sweden.]…

Cdn and Portuguese limitation to factual disputes (p. 612)

Certain states do not exclude certain cases from arbitration, but, instead, list the types of cases that can be submitted to arbitration. Canada, for example, indicates that only those issues arising from a provision similar to article 4 of the OECD Model (Residence, but only with respect to individuals), article 5 (Permanent establishment), article 7 (Business profits), article 9 (Associated enterprises), article 12 (Royalties, but only insofar as between related parties to which a provision similar to article 9 applies) and any other provisions subsequently agreed by the contracting parties through an exchange of diplomatic notes, can be submitted to arbitration. Portugal adopts a similar approach…

Both of these states, therefore, limit arbitration to more factual transfer pricing cases and the question of the existence of a permanent establishment (PE).

Manal Corwin, Jesse Eggert, "Understanding the Operation, Impact, and Practical Implications of the MLI", Tax Management International Journal, Vol. 46, No. 8, 11 August 2017, p. 407

Vagueness of some free-form reservations to MLI Art. 28 (p. 416)

While the provision applies by default to existing MAP inventories (subject to mutual agreement about the start date for such cases for purposes of the two-year time limit), 12 of the countries that signed up opted to exclude existing cases from arbitration. In addition, unlike with other MLI provisions, parties are permitted to craft their own reservations with respect to the scope of cases that will be subject to arbitration. Those reservations will then control the scope of arbitration as between the reserving parties and other parties to the arbitration provision. [f.n. 126: … art, 28(2)(a).] Such "free form" reservations are subject to objection by other parties, and if a party objects, Part VI will not apply at all between the reserving party and the objecting party. Of the 26 countries that chose to adopt Part VI, 16 made such "free form" reservations. While a full analysis of those reservations is beyond the scope of this article, many of the reservations involve carving out broad, and often vague, categories of cases, including, for example, all cases involving the application of domestic anti-avoidance rules, or all cases involving serious penalties. [f.n. 1 128: See, e.g., MLI positions of Australia, Canada, Finland, France, Ireland, Italy and Singapore... .]