New MLI and what it means for NZ businesses

Tax Alert - July 2017

By Melanie Meyer and Evan Tuck

On 7 June 2017, the New Zealand Minister of Revenue signed the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) alongside ministers and high level officials from over 60 other countries and jurisdictions. 

The MLI is an international tax treaty designed to offer signatory governments an efficient and swift means of implementing the tax treaty related measures arising from the OECD’s base erosion and profit shifting (“BEPS”) project, which was undertaken to close the gaps in existing international tax rules. The MLI operates by giving signatories the ability to update a worldwide network of several thousand existing bilateral tax treaties to adopt the recommendations, without the need to re-open and negotiate each tax treaty on a treaty by treaty basis. 

The MLI itself contains 39 provisions relating to BEPS actions on treaty abuse, permanent establishment avoidance and dispute resolution. To offer signatories a level of flexibility, the MLI provisions are characterised as either minimum standards or optional provisions. The minimum standards are those articles that are agreed as part of the BEPS actions relating to treaty abuse and dispute resolution that are required to be adopted (in the absence of similar provisions in existing treaties). Optional provisions are not obligatory for signatories but instead are intended to represent OECD best practice and offer a more substantive approach to implementing BEPS related actions on treaty abuse, permanent establishment avoidance and dispute resolution. Further, to assist in the practical application of the MLI, signatories are required to expressly provide any conflicts or overlaps that may exist between MLI existing tax treaties, and where applicable, notify any reservations against the optional MLI provisions. Any comparability comments or reservations must be notified to OECD to ensure that the MLI is modified and provide transparency for Government and businesses.

While signatories are given various choices on whether provisions are adopted, exactly what provisions are included in each treaty, and to what extent, will ultimately depend upon the position taken by each signatory. Between considering minimum standards, comparability issues, and reservations, we expect that the MLI will add another layer of complexity to treaty analysis and application. 

New Zealand implementation

The extent to which the MLI articles are to be incorporated in New Zealand will turn on the final position of both the New Zealand Government and its treaty partners. We note that with the exception of Malaysia, Papua New Guinea, Philippines, Samoa, Taiwan, Thailand, United Arab Emirates, United States of America and Vietnam, all countries that New Zealand have treaties with (or are negotiating treaties with) have signed up to the MLI.  It is likely that New Zealand will look to negotiate separate side agreements with some of these jurisdictions. We understand for example that a bi-lateral agreement has been signed with the US. 

New Zealand’s current positon, as indicated in the Officials’ issues paper released in March this year (which is still under public consultation), provides details on the affected treaties and proposes MLI adoptions (see our March Alert). In addition to the issues paper, the New Zealand Government has also released a provisional list of expected reservations and notifications as at the time of signing the MLI, including the tax treaties it wishes to be covered by the MLI. 

Our expectation is that once public consultation on the Officials’ issues paper has closed, the New Zealand Government will begin the formal treaty ratification process, which is required before the MLI will have legal effect in New Zealand. Once ratified the MLI will have the effect of modifying each bilateral treaty on a phased in basis, as both parties sign and ratify the MLI locally. It is likely that New Zealand’s tax treaties will begin to be modified from 2019 onwards.

Potential considerations for New Zealand businesses

While the effect of the MLI on New Zealand business cannot be confirmed until the MLI is formally ratified and the New Zealand Government publish further guidance, it is certain that New Zealand based businesses can expect increased uncertainty and additional complexities, at least in the short term. Businesses with international operations that may be affected by the MLI provisions should begin to appreciate how these changes may impact their international tax obligations within the wider context of BEPS. Specifically, New Zealand based businesses may be impacted by the following:

  • Businesses that are considered dual tax residents (i.e. treated as resident for tax under domestic law in two countries) will be affected by the change in the tax residence tie-breaker test under the MLI. Existing tax treaties generally seek to decide tax residence and allocate respective taxing rights using the “effective management” test. The MLI intends to remove this test and instead proposes that tax residency is determined by the Competent Authorities of the treaty parties, meaning that dual tax residents will have to apply to Competent Authority to have residence determined. This may cause particular issues in relation to New Zealand and Australian entities operating in both counties, as under domestic legislation in both jurisdictions the tax residency rules are drafted broadly with wide capture. Those affected may face uncertainty as to the application of the treaty for double taxation relief. We also expect that use of a Competent Authority may result in a long wait time (current average time frame for mutual agreement procedure is approximately 20 months), prove costly and burdensome and may lead to denial of treaty relief in instances where residency is not determined. Reflecting these concerns, we understand that the Australian Tax Office and IRD are intending to work together on guidance on this issue.
  • Treaty analysis will become more complex for businesses that utilise tax treaties in determining their tax affairs. The MLI does not operate in the same way as amending protocol to an existing bilateral treaty because the MLI does not directly change the underlying text of the treaty, instead it is read alongside the existing treaty to modify its application. In the absence of a publically consolidated version of a tax treaty, treaty analysis will be more difficult as taxpayers will be required to read the MLI alongside the treaty to determine its application. At this stage there is no proposed requirement for New Zealand to amend the publically available treaties, however, it is hoped that Inland Revenue will produce some form of consolidated treaty once the final positions are finalised to assist in understanding where treaties have been modified.
  • Businesses with international operations should be aware of the updated definition of permanent establishments (“PE”) contained in the MLI. The MLI proposes to broaden the tax treaty definition of a PE to implement BEPS Action 7 on Preventing the Artificial Avoidance of Permanent Establishment Status. Specifically, the MLI proposes to broaden the definition to capture commissionaire type arrangements, narrow the specific activity exemptions (i.e. only exclude activities considered to be “preparatory or auxiliary”) and counter contractual splits. This may result in existing structures and supply chains previously not considered to fall within the PE definition, to now be characterised as one by virtue of the updated definition. In addition to updates to PE rules via the MLI, there is also proposed domestic legislation on PEs in New Zealand, which is currently also under public consultation.


    The MLI is a powerful tool for BEPS implementation, both globally and in New Zealand, and will have a far reaching impact New Zealand businesses that utilise the tax treaty network. However, we envisage the practical application for taxpayers trying to reconcile the MLI with existing tax treaties during the early stages to be a road of complexity and uncertainty. Between considering minimum standards, comparability issues, and reservations, businesses impacted by changes to the tax treaty network should evaluate their positions in light of MLI and the wider BEPS framework to identify any potential implications and mitigate any risks for their global businesses going forward.
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