MLI

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) was developed as part of Action 15 of the OECD BEPS Action Plan to quickly implement a series of tax treaty measures to update international tax rules and reduce the opportunity for multinational enterprises to avoid taxes.

The OECD/G20 Base Erosion and Profit Shifting (BEPS) project released a 15-point action plan addressing BEPS, tax avoidance, and promoting tax transparency and automatic exchange of information. BEPS are tax avoidance activities carried out by taxpayers that take advantage of differences in tax rules between countries to reduce tax payments to a bare minimum or even to zero in any country.

MLI is an international mechanism that aims to modify the provisions of the Agreement on the Avoidance of Double Taxation (Tax Treaty) simultaneously, synchronously, and efficiently without the need for a lengthy bilateral negotiation process.

On June 7, 2017, Indonesia, represented by Finance Minister Sri Mulyani, signed the Multilateral Convention to Implement Tax Treaty Related to Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly referred to as a Multilateral Instrument, along with 67 Ministers of Finance from Tax Jurisdictions (MLI).

The Government of Indonesia ratified MLI on November 13, 2019, through Presidential Regulation (Perpres) Number 77 of 2019 concerning Ratification of the Multilateral Convention to Implement Tax Treaty Related to Measures to Prevent BEPS.

MLI Indonesia becomes effective (enters into force) on August 1, 2020, and goes into effect on January 1, 2021.

Each jurisdiction member who has signed the MLI will propose a Tax Treaty, known as the Covered Tax Agreement, to the OECD for further synchronization and harmonization (CTA). The synchronized and harmonized tax treaty will then be followed by each jurisdiction to be ratified by the provisions of its domestic legislation.

When implementing the CTAs matching mechanism, the articles chosen by Indonesia must match the articles chosen by the Tax Treaty partner countries, in addition to the Tax Treaty partner countries/jurisdiction. However, if a country/jurisdiction expresses a reservation about the application of the MLI provisions, those provisions are not applicable and do not change the CTA.

To ensure clarity and transparency in its implementation, MLI requires Parties to notify the OECD of existing provisions that will be amended by MLI provisions.

Indonesia proposed a modification to the 47th Tax Treaty utilizing MLI. As of 7 July 2020, however, only 39 nations/jurisdictions had selected Indonesia as their MLI partner country. This means that Indonesia can only alter the Tax Treaty through its Tax Treaties with 39 other nations and/or jurisdictions.

The following describes the 47 CTAs that the Indonesian government has proposed:

So far, it is known that 21 CTAs have been ratified by domestic regulations in each jurisdiction and will become effective on January 1, 2021. Australia, the Netherlands, Belgium, Denmark, Finland, India, the United Kingdom, Japan, Canada, Korea South, Luxembourg, Poland, Portugal, France, Qatar, Russia, New Zealand, Serbia, Singapore, Slovakia, and the United Arab Emirates are P3B partner countries. The provisions in the CTAs can already be applied to withholding taxes on January 1, 2021, while other taxes, such as the application of Permanent Establishment profits, will be effective in 2022. (1 January 2022).

Furthermore, there are 17 CTAs that have been matched but are not yet valid. This could be due to these countries' unfulfilled domestic procedures or other factors. Malaysia, Croatia, Egypt, Hungary, and Pakistan are expected to complete the ratification process by 2022.

The MLI Convention consists of 39 articles which are divided into seven parts.

Article 6. “Purpose of a CTA”, Article 7. “Prevention of Treaty Abuse”, and Article 16. “Mutual Agreement Procedures” are the MLI's minimum standards.

Indonesia adopted the MLI's minimum standard as well as several additional provisions to amend Indonesia's Tax Treaty with the countries/jurisdictions on the Indonesian Covered Tax Agreement (CTA) list.

Article 3. Transparent Entities, Article 6. Elimination of Double Taxation, and Article 10. PE in Third Jurisdiction have all been reserved by Indonesia. In the Part VI Arbitration, Indonesia does not take a position on the article.