The Relationship between Tax Treaties and the Multilateral Instrument: Compatibility Clauses in the Multilateral Instrument

The OECD Multilateral Instrument (MLI) is unique to the extent that it is not self-standing, but only modifies the application of tax treaties entered into by its signatories. As acknowledged in the ‘Toolkit’ annexed to the final report on BEPS Action Plan 15, this raises significant questions in public international law as regards the relationship between the MLI and the treaties that it seeks to modify. The present chapter focuses on these questions. Although the Toolkit considered the use of general interpretive rule of lex posterior as well, it recommended the use of specific compatibility clauses to govern this relationship. Accordingly, the MLI follows this format and contains specific compatibility clauses for each provision along with a separate compatibility clause for the part dealing with arbitration. These compatibility clauses define how the application of each tax treaty provision would be modified by the provision in the MLI. This is achieved through language allowing insertion of the MLI provision where absent in the treaty, replacement of existing similar provisions, or modification of existing treaty language depending on the provision. The language used is also broad enough to allow modification of the application of tax treaty provisions irrespective of different numbering, titles or language being used in the treaty in respect of the same concept. The chapter covers various issues. First, general principles of public international law, including rules under the VCLT on conflict of norms, are analyzed to determine whether specific compatibility clauses are in fact required in the MLI. Second, the nature of compatibility clauses are examined in detail and the compatibility clauses within the MLI are measured up against ideal clauses as prescribed by commentators on the subject. Third, specific issues that arise from the wording of the compatibility clauses in the MLI are pointed out. Finally, the relationship between the MLI and future tax treaties and treaties on other subjects such as the EU treaties and investment and trade treaties are also dealt with.