In depth
The entry into force of the modification of each of the affected DTCs will depend on whether the two countries have completed their ratification process. As such Mexico, being observant of the international commitments reached under BEPs, in particular, in connection with the compromises adopted within the context of Action 15 of BEPS, has ratified the Instrument and will deposit it before the OECD in the near future, with the effective date still unknown. Once the Instrument is deposited, it will become effective as of the first day of the following three calendar months. Some provisions of the MLI are expected to become effective in 2023, whereas others in 2024, the latter specifically in connection to withholding taxes.
The main objective of the MLI is to guarantee the implementation of BEPS measures regarding DTCs in a fast, synchronized and efficient manner by skipping the need to re-negotiate each DTC on an individual basis. The Instrument is intended to align and facilitate the understanding and application of a number of DTC provisions mainly related to the substance and purpose of the specific cross-border transactions in order to prevent abusive behaviors by taxpayers and ultimately to challenge the entitlement taxpayers may have to secure DTC benefits.
The Instrument incorporates a number of general anti-abuse rules, including guidelines related to hybrid mismatches, treaty abuse within the context of the “principal purpose test”, permanent establishments, mutual agreement procedures, and arbitration (Mexico did not adhere to the latter). As of today, out of the 60 DTCs Mexico has in effect, more than 90% are considered Covered Tax Agreements (“CTAs”) under the Instrument, that is to say, DTCs that will be amended. As mentioned before, the current drafting of those treaties will be amended by the Instrument accordingly. While the United States did not sign the MLI, US multinationals utilizing non-US structures connected with Mexico will most likely be affected by the provisions of the MLI.
Actions 2, 6, 7 and 14 of BEPS will be the ones affected by the implementation of the MLI. As such, the MLI provisions will neutralize the effects of hybrid instruments, prevent the abusive utilization of DTCs and the artificial utilization of measures aimed to avoid the existence of a permanent establishment, and will enhance the utilization of alternative dispute mechanisms, respectively. Also, specific provisions are included in connection with tax transparency and the transfer of shares.
Upon adopting the MLI or in advance, the parties choose which treaties in their network will be CTAs and will be entitled to elect between different options to comply with the BEPS Action Plan without being able to make exceptions other than the ones allowed by the MLI. The MLI is integrated by three different types of provisions, namely: the ones that are mandatory as they represent a minimum standard that the signatory states must observe, for instance, the "Principal Purpose Test" under the MLI; the ones that are optional (negative), which are those that are included in the Instrument unless a reservation is made eliminating its application; and the ones which are also optional (positive) that require the express acceptance of their application by the signatory states.
In closing, Mexican taxpayers and US multinationals doing business in Mexico through corporate platforms located in a different country should analyze the potential effects triggered by the MLI. The MLI requires a review of any impacted structures and, if any, a revision of such structures to secure and properly reflect and document the desired levels of substance that multinationals should maintain in relevant jurisdictions. The Mexican tax authorities will be having more tools and mechanisms to conduct more sophisticated audits.
