Article: The Effect of Article 6 MLI on Covered Tax Agreements: Fata Morgana or New Reality?

Abstract

Article 6 of the multilateral instrument (MLI) provides all bilateral covered tax agreements (CTAs) with preamble language expressing that it is the purpose of tax treaties to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements). This contribution explores the effect this new preamble language will (realistically) have on the interpretation and application of CTAs. The author begins by discussing the current function of preambles for (tax) treaties, including in decisions of tax courts, then analyses the interaction between Article 6 MLI and CTAs, after which an interpretation is provided of Article 6 MLI itself and the terms used therein. Lastly, several objections against attributing the new preamble much effect in practice are discussed as well as the relationship between Article 6 MLI and the principal purpose test. The author comes to the conclusion that the preamble language of Article 6 MLI deserves a different status than the preambles that typically preceded it. Parties to the MLI will need to heed the working of Article 6 MLI for future questions of interpretation and application of tax treaties and should use caution in order to not dismiss the preamble as either irrelevant or superfluous too quickly. MLI, preamble, CTA, BEPS, abuse, non-taxation, avoidance, interpretation, purpose, treaty