A Covered Tax Agreement under the MLI is a bilateral income tax treaty that both signatory countries have separately listed as one they want the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting to modify. Signing the MLI is not enough on its own. The treaty becomes “covered,” and the convention’s anti-abuse and transparency rules layer onto it, only when both partners notify the same agreement to the Depositary. Where that match exists, the MLI updates the treaty without a bilateral renegotiation. Where it doesn’t, the original treaty operates exactly as before.1OECD. BEPS Multilateral Instrument
The Definition in Article 2
Article 2(1)(a) of the MLI defines a Covered Tax Agreement as a treaty for the avoidance of double taxation on income that is currently in force between two or more parties to the convention.2Organisation for Economic Co-operation and Development. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – Article 2 The treaty has to already be a working income tax agreement. Investment treaties, trade agreements, and other international arrangements that don’t deal with income tax fall outside the definition.
The label matters because it controls scope. Nothing the MLI says about permanent establishments, treaty abuse, dispute resolution, or dual residence touches a bilateral treaty that isn’t a CTA. The MLI operates as an overlay, and the overlay only exists where both governments have asked for it.
How the Matching Requirement Works
When a country signs or ratifies the MLI, it submits an “MLI Position” to the Depositary, which under Article 39 is the Secretary-General of the OECD.3Organisation for Economic Co-operation and Development. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – Article 39 That position lists every existing treaty the country wants covered, identified by title, the names of the parties, the date of signature, and the date of entry into force.
Matching is strict and independent. Both partners must list the same agreement. If Country A lists its treaty with Country B, but Country B does not list the same treaty, the MLI does not apply to that relationship. This prevents any government from unilaterally rewriting an existing treaty. It also means that a country can be a full MLI signatory while some of its bilateral treaties remain untouched, either because the partner hasn’t signed the MLI or because the partner chose not to include that specific treaty on its list.
How to Check Whether a Specific Treaty Is Covered
The OECD publishes every MLI Position and maintains a public record of matching outcomes through the BEPS MLI Matching Database, first released in 2017 and updated in June 2023.4OECD. BEPS MLI Matching Database The database shows whether a treaty is a CTA for a given country pair, which MLI provisions apply after both sides’ reservations are taken into account, and each jurisdiction’s individual choices.
Reading the modified treaty itself is harder. The MLI doesn’t produce a clean new text; it modifies, supplements, and in some cases replaces specific provisions of the existing agreement. To help taxpayers, the OECD has issued guidance encouraging tax authorities to produce “synthesized texts” that merge the MLI’s modifications with the original treaty into a single readable document.5OECD iLibrary. Guidance for the Development of Synthesised Texts These synthesized texts distinguish the original provisions from the MLI modifications and carry disclaimers that they don’t necessarily represent official government positions. Japan, Singapore, and the United Kingdom are among the jurisdictions that have published them for major treaty relationships. Many jurisdictions have not, which leaves taxpayers to piece together the interaction from the original treaty and the MLI Positions on their own.
What Changes When a Treaty Becomes a CTA
Once a bilateral treaty is a Covered Tax Agreement, the MLI’s provisions overlay it, subject to each side’s reservations. Some provisions are mandatory minimum standards that every signatory must adopt. Others are optional, and jurisdictions can reserve the right to opt out or choose among alternative approaches. Two countries with a CTA can therefore have a slightly different set of modifications between them than either has with any other partner.
Minimum Standards
Three articles are mandatory for every signatory:
- Article 6 updates treaty preamble language to clarify that treaties are not intended to create opportunities for tax avoidance.
- Article 7 introduces the Principal Purpose Test to prevent treaty abuse.
- Article 16 improves dispute resolution by ensuring taxpayers can present their case to the tax authority of either jurisdiction when they believe a treaty has been applied incorrectly.
Outside the minimum standards, jurisdictions submit reservations through a closed list of permitted opt-outs defined in each article, and a reservation made by one party applies between that party and every other party to the convention.6Organisation for Economic Co-operation and Development. Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS
The Principal Purpose Test
Article 7’s Principal Purpose Test is the single most impactful change the MLI brings to Covered Tax Agreements. Because it’s a minimum standard, every CTA carries it. The rule denies a treaty benefit, such as a reduced withholding tax rate on dividends or interest, if it’s reasonable to conclude that obtaining that benefit was one of the principal purposes of the arrangement or transaction that led to it.7Organisation for Economic Co-operation and Development. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – Article 7 There is an escape valve. Even if obtaining the benefit was a principal purpose, the benefit can still be granted if the taxpayer demonstrates that allowing it would be consistent with the object and purpose of the relevant treaty provision.
Permanent Establishment
Articles 12 through 15 update how CTAs define a permanent establishment, the threshold for when a foreign company becomes taxable in another country. These provisions are optional. Where both partners have adopted Article 12, an enterprise is treated as having a permanent establishment in a country if a person there habitually concludes contracts on its behalf, or plays the principal role in getting contracts that the enterprise routinely finalizes without major changes.8Organisation for Economic Co-operation and Development. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – Article 12 The exception for genuinely independent agents remains, but it no longer applies to agents working exclusively or almost exclusively for closely related enterprises. Article 13 tightens the “specific activity exemptions” for warehouses, purchasing offices, and similar fixed locations, and prevents fragmenting a cohesive business into separate auxiliary pieces.
Dual Resident Entities
Article 4 changes how CTAs resolve the residence of a company that qualifies as a tax resident in both jurisdictions under each country’s domestic law. Older treaties often settled this with a fixed rule, typically the place of effective management. The MLI replaces that automatic test with a case-by-case determination by the two tax authorities, considering where the company is effectively managed, where it was incorporated, and any other relevant circumstances. If the authorities can’t agree, the company loses access to treaty benefits except to the extent both sides consent.
Arbitration
Part VI adds an optional mandatory binding arbitration mechanism. When a mutual agreement procedure between two countries remains unresolved after two years, either the taxpayer or a tax authority can trigger binding arbitration, and the decision must be implemented by both jurisdictions. Roughly 30 signatories have opted in. Where both partners have opted in, taxpayers gain a backstop against disputes that would otherwise have no fixed resolution timeframe. Where either partner has not, the mutual agreement procedure remains the only formal route.
When the Modifications Actually Take Effect
A country must complete its domestic ratification process and deposit its instrument of ratification with the OECD before the MLI enters into force for that country. The MLI entered into force generally on July 1, 2018, but each jurisdiction’s effective date depends on when it completed ratification.1OECD. BEPS Multilateral Instrument
Even after both partners are in force, Article 35 splits the effective dates by tax type:
- For withholding taxes, MLI provisions apply where the triggering event occurs on or after January 1 of the calendar year following the latest date the MLI entered into force for either treaty partner.9Organisation for Economic Co-operation and Development. Multilateral Convention – Entry Into Effect Under Article 35(1)(a)
- For all other taxes, including corporate income tax, MLI provisions apply for taxable periods beginning on or after six months from the latest date the MLI entered into force for either partner.
The gap between the two can produce a period in which withholding on dividends and interest is already governed by the modified treaty while corporate income tax provisions still operate under the old rules. The exact dates vary by country pair.
Treaties That Aren’t Covered: The United States
The United States has not signed the MLI. None of the roughly 60 U.S. bilateral tax treaties are Covered Tax Agreements. The U.S. has historically preferred to address treaty abuse through the detailed limitation-on-benefits provisions already embedded in most of its treaties, which serve a similar purpose to the Principal Purpose Test but rely on objective criteria rather than a purpose analysis. For a business operating between the U.S. and an MLI signatory, the U.S. relationship remains governed entirely by its original bilateral terms, while the same signatory’s relationships with other MLI countries may be modified.
Practical Compliance
For any specific treaty pair, four questions determine what actually applies: whether both jurisdictions have ratified the MLI, whether both listed the treaty as covered, which reservations each side made, and when the modifications took effect for each type of tax. The OECD’s Matching Database is the reliable starting point, and a synthesized text, where the tax authorities have published one, is the readable end point. Where no synthesized text exists, the original treaty read alongside both MLI Positions is what governs.