Mexico approves the Multilateral Instrument (MLI) to implement Tax Treaty Measures

Mexico approves the Multilateral Instrument (MLI) to implement Tax Treaty Measures

Fri 03 Feb 2023

On 12 October 2022, the Mexican Government approved the Multilateral Instrument (MLI) related to the application rules for double taxation agreements (DTAs) to prevent Base Erosion and Profit Shifting (BEPS). The rules were published in the Official Gazette of the Federation on 22 November 2022.  

Included in the Mexican Government’s reservations and notifications are matters related to fiscally transparent entities and dual residency entities.  These reservations and notifications prevent the abusive use of DTAs and cover tax issues related to capital gains and dividends, among other matters.

Additionally, the MLI includes provisions to modify and clarify the scope of the definition of permanent establishment (PE), in order to counteract strategies used to avoid the existence of such establishments in a jurisdiction inappropriately. These provisions will also allow the addition of a rule to prevent the abuse of the concept of recognising a PE through the fragmentation of activities by the same taxpayer or a related enterprise.

It is essential to mention that the MLI should be applied jointly with the DTAs already in force that Mexico has with OECD member countries.

Jurisdictions with which Mexico has signed a DTA that have also ratified the MLI, means their respective tax treaties will be modified without the need to enter into bilateral negotiations.

Background to the MLI

Action 15 of the BEPS Action Plan aims to develop the MLI to enable countries to implement measures related to modifying  DTAs in an immediate, systematic, and coordinated manner.

The MLI was signed on 7 June 2017 by 68 jurisdictions, including Mexico. This event took place at the headquarters Of the Organization for Economic Co-Operation and Development (OECD) in Paris. The MLI aims to help governments close existing gaps in current tax rules.

The MLI would not modify, replace, or eliminate the DTAs. Rather, it is a tool or protocol for uniform interpretation and introducing concepts and measures to avoid BEPS practices.

Next steps

Once Mexico has deposited the MLI before the General Ministry of the OECD, it will come into force on the first day of the month after the expiration of a three-month period following the date of deposit of the instrument of ratification, acceptance, or approval.

With the adoption of the MLI in Mexico, it would be necessary to examine each international transaction taking into account both the MLI and the DTA. It is also vital to analyse the notifications and reservations stated for each relevant jurisdiction to apply the MLI’s provisions correctly.