How Brexit Will Affect Treaty Dispute Resolution (Part 2)

The EU Arbitration Convention is currently used, with great effect, to improve how treaty disputes are settled in the EU. However, with Britain poised to leave the bloc, treaty disputes between the UK and the EU stand to become more complex and problematic. Read part 1 of this 2-part series about the new UK/EU business relationship and the issues on the horizon, or continue reading for part 2, in which I discuss how BEPS and the Multilateral Instrument can be used to help solve treaty disputes post-Brexit.

The Multilateral Instrument: centrepiece of the BEPS Action Plan

On 7 June 2017, over 70 Ministers signed the so-called "Multilateral Instrument" (MLI), which offers governments concrete solutions for closing gaps in existing international tax rules by transposing parts of the OECD/G20 BEPS Project into bilateral tax treaties. It also—notably for our purposes in this article—implements minimum standards for improving dispute resolution mechanisms. Both Luxembourg and the UK have signed it.

Set to be ratified within the next months and years, the MLI modifies the application of thousands of bilateral tax treaties that eliminate double taxation. It is a challenge to read because, rather than providing for a consolidated text of the concerned treaties (CTAs), it must be read next to the relevant CTA.

The Tinder approach

The MLI works a bit like the Tinder dating app: if both parties "like" a particular provision it will be included; if not, it won't be. Indeed, the MLI usually starts with a substantive provision of the Convention, i.e. one or more paragraphs reflecting one of the BEPS measures. These paragraphs generally duplicate the language of the provisions of the OECD Model Tax Convention, developed during the BEPS Project. Unlike Tinder, most provisions are "liked" by default; in other words, if neither party objects (technically "enters a reservation") then the provision is accepted. In other cases, both parties must actively "like" the same provision, i.e. opt in, to have it included.

How the MLI will affect tax dispute resolution

Regarding dispute resolution, the relevant substantive provisions of the MLI are articles 16, 17, and 18.

Art. 16 is an application of the "traditional" intergovernmental agreement. In substance, a taxpayer who foresees that he/she will suffer tax in a way that is not in accordance with the CTA can appeal to the competent authority of his/her state of residence. This authority will then examine whether the...